The nation’s leading economists have issued a crucial call to the government, urging a cautious approach in crafting the upcoming fiscal year’s budget. With the economy besieged by both external and internal pressures, they counselled against the temptation of an expansionary budget, advocating instead for measures to restore macroeconomic stability.
In a recent pre-budget gathering for FY25, luminaries in the field such as Professor Rehman Sobhan, Dr. Salehuddin Ahmed, Professor Mustafizur Rahman, Dr. Fahmida Khatun, and Binayak Sen convened with Finance Minister Abul Hassan Mahmood Ali. Their collective wisdom echoed a clarion call for prudence, cautioning against the pursuit of mega-projects with prolonged returns and the disproportionate burden placed on the impoverished by reliance on direct taxes over value-added tax (VAT).
A voice of urgency marked their discourse as they underscored the imperative of broadening the tax base and combatting the specter of default loans haunting the banking sector. Furthermore, they implored immediate action to curb inflation, a relentless force exerting immense strain on the populace.
Tax base broadening refers to the expansion of the scope or coverage of taxable items or activities in order to increase the tax revenue collected by the government. This can involve including previously untaxed sources of income, assets, transactions, or economic activities within the purview of taxation.
Finance Minister Ali Charts Course for Economic Reforms
In articulating the government’s forthcoming budget priorities, Finance Minister Ali astutely recognizes the paramount importance of employment generation, cognizant of the imperative for reform across multifaceted sectors. This alignment with expert consensus signals a proactive approach toward addressing systemic deficiencies and fostering sustainable growth.
The recent rendezvous with the Vice President of the Asian Infrastructure Investment Bank heralds promising avenues for international cooperation. Minister Ali’s adept negotiation secures assurances of steadfast support, bolstering Bangladesh’s financial resilience amidst the storm of economic uncertainties.
Eminent economist Dr. Salehuddin Ahmed, in delineating the blueprint for fiscal prudence, emphasizes the paramount importance of macroeconomic stability. His advocacy for heightened investments in education and healthcare resonates with Minister Ali’s commitment to holistic reform while streamlining project timelines underscores a pragmatic approach toward maximizing efficacy.
In a harmonious vision of fiscal stewardship, Dr. Mustafizur Rahman underscores the imperative of exchange rate stability and inflation control amidst inflationary pressures. His insights align with Minister Ali’s broader agenda of fortifying the fiscal architecture to withstand external shocks and internal pressures, ensuring a resilient economic trajectory for Bangladesh.
Macroeconomic stability is when key economic relationships are in balance, such as between domestic demand and output, the balance of payments, fiscal revenues and expenditure, and savings and investment.
In the arena of expert deliberations, Dr. Fahmida Khatun, the esteemed Executive Director of the CPD, emerged as a vocal advocate for fiscal prudence. She asserted that the paramount objective of the forthcoming budget must be the preservation of macroeconomic stability, transcending the conventional fixation on growth. Her clarion call reverberated with urgency, emphasizing the critical imperative of fostering employment opportunities, augmenting private sector investments, and attracting foreign direct investment (FDI) to fortify the economic bedrock.
In her impassioned address, Dr. Khatun underscored the necessity of coherence between governmental policies and operational modalities. Furthermore, she issued a bold demand for transparency and accountability in financial affairs, urging for the public disclosure of loan defaulters’ lists.
Inflation Battle Rages On
In the not-so-distant past, Bangladesh reveled in the glow of its robust macroeconomic indicators, basking in the near attainment of a USD 50 billion reserve threshold in the Bangladesh Bank coffers. Overseas remittances poured in, and the export sector flourished, while the local taka stood as a symbol of resilience against the mighty US dollar. It was a time of relative economic prosperity.
Then came the seismic shocks of the Covid-19 pandemic and the Russia-Ukraine conflict, unleashing a cascade of economic setbacks that shook the very foundation of the nation’s economy. As we step into the uncharted territory of 2024, we inherit a mantle burdened with challenges demanding urgent attention, chief among them being the menacing specters of high inflation, foreign transaction imbalances, and the precarious state of the financial sector.
The scourge of default loans has entrenched itself as a chronic affliction upon the banking sector, spiraling out of control throughout the preceding year and now threatening to suffocate any hopes of financial stability in the new year.
Once the bedrock of Bangladesh’s economic prowess, the export sector now finds itself ensnared in a web of uncertainty, oscillating between fleeting moments of growth and unsettling downturns. While December’23 offered a glimmer of hope with a commendable 9.03% surge in exports, the overarching volatility continues to cast a pall over the accumulation of foreign exchange reserves.
Speaking of reserves, their steady decline over the past year, particularly when measured by the IMF’s stringent criteria, paints a stark portrait of fiscal vulnerability. From the conventional calculations of around USD 34 billion at the beginning of 2023, the reserves have dwindled alarmingly, plunging to USD 21.44 billion by December, as per the IMF’s BPM6 method.
The International Monetary Fund’s (IMF) Balance of Payments and International Investment Position (BPM6) manual provides guidance on recording cross-border transactions and positions. It makes the international investment position (IIP) more central to the framework than does BPM5
Debt Demands and Currency Concerns
The reverberations of the dollar exchange rate reverie echo ominously throughout the banking sector, as importers grapple with soaring costs due to the fluctuating exchange rates. The year commenced with a tumultuous exchange rate journey, witnessing a stark increase from Tk 130 to Tk 110 per dollar by the end of 2023, exacerbating the import woes faced by businesses.
Default loans, akin to a persistent thorn in the side of the banking sector, have burgeoned into an ever-present menace, casting a pall over the onset of the new year. The stark escalation from Tk 1,206.56 billion in 2022 to a staggering Tk 1,553.97 billion by September 2023 underscores a disconcerting reality: default loans surged by approximately Tk 350 billion within a mere nine months, unleashing a torrent of financial distress.
As the tide of default loans engulfs the banking realm, a liquidity crisis looms ominously, ensnaring institutions such as Islami Bank, First Security Islami Bank, Global Islami Bank, Social Islami Bank, and Union Bank in its unforgiving grip. The ripple effects of this pitiable state reverberate throughout the broader economy, casting a shadow over the prospects of sustainable growth.
Meanwhile, policymakers find themselves locked in a battle against the relentless specter of inflation, which stubbornly refuses to retreat below the 9 percent threshold. From March to November of the preceding year, inflation remained entrenched above 9 percent, with food inflation persisting above 10 percent for four consecutive months.
The mounting pressure of foreign debt repayment adds another layer of complexity to the economic landscape, with ERD projections indicating foreign debt repayment exceeding USD 3 billion for the first time in the current fiscal year. Against this backdrop, the challenge of bolstering foreign exchange reserves assumes heightened significance, with overseas remittances emerging as a pivotal lifeline.
Contractionary Budget as the Solution
Examining the economic landscape through a statistical lens, Bangladesh witnessed a nuanced trajectory in remittance inflows in the meantime. As per data from Bangladesh Bank, the total remittance stood at USD 21.9 billion in 2023, marking a marginal increase of approximately 3 percent. Contrasting this with previous years reveals a fluctuating trend: USD 22.07 billion in 2021, USD 21.73 billion in 2020, and USD 18.33 billion in 2019.
However, amidst these dynamics, the National Board of Revenue (NBR) finds itself grappling with a formidable challenge in revenue collection. The fiscal year 2023-24 commenced with a glaring deficit, as revenue fell short by Tk 164.59 billion during July-November. Despite a collection of Tk 1323.34 billion during this period, it significantly lagged behind the targeted Tk 1487.94 billion. This underscores the pressing need for robust fiscal management and enhanced revenue mobilization strategies.
Aligned with International Monetary Fund (IMF) stipulations, Bangladesh faces the imperative of augmenting revenue collection to 0.5 percent of the GDP within the current fiscal year. The establishment of a risk management unit within the VAT and customs wing, a prerequisite set forth by the IMF, remains underway, albeit not yet operating at full capacity.
Now, in the corridors of power, decisions echo with the weight of the nation’s destiny. As the government meticulously crafts the blueprint for the next fiscal year, a paradigm shift emerges – a shift towards fiscal austerity, towards prudence over profligacy, towards stability over spectacle.
In a document laden with significance, the contours of a contractionary budget begin to take shape. With a resolute aim to rein in inflation and restore financial equilibrium, the government charts a course guided by pragmatism rather than populism.
GDP growth targets, once lofty aspirations, are recalibrated to a more modest 6.9 percent, a concession to the harsh realities of the economic landscape. The focus shifts decisively towards taming the inflationary dragon, even if it means sacrificing the allure of rapid growth.
As the nation stands poised on the brink of a new fiscal year, the echoes of past missteps reverberate. Lessons learned must not be forgotten, as targets are set and frameworks constructed. Realism must replace optimism, pragmatism must supplant idealism, as Bangladesh charts its course toward economic resurgence.
