In his presentation of the national budget for the fiscal year 2024-25 in the Jatiya Sangsad (Parliament), Finance Minister Abul Hassan Mahmood Ali acknowledges the complexity of the current economic landscape, signaling the need for prudent financial measures. While the budget reflects a clear intent for fiscal discipline, its execution faces challenges amidst economic uncertainties.
Central to the budgetary agenda is the imperative to curb inflation. However, the roadmap for achieving this goal remains obscure, lacking robust policy underpinnings. The dynamics involving importers, domestic producers, and sellers of essential goods introduce further unpredictability, potentially undermining governmental efforts.
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Complicating matters, a faction of self-serving bureaucracy often undermines initiatives aimed at broad societal benefits. Moreover, the interplay of monetary policies and exchange rates adds another layer of complexity to the inflationary trajectory. Without alignment with fiscal strategies, these policies risk being ineffectual in combating inflation.
Risks and Realities of Increased Borrowing and High-Powered Money
The budget sets an ambitious target of reducing near double-digit inflation to 6.5% while maintaining modest economic growth at 6.75%. However, achieving this amid the prevailing economic challenges presents a formidable task.
The looming budget deficit, amounting to Tk2.56 trillion, stands as a primary concern. While financing this deficit may proceed as planned, any significant shortfall due to decreased foreign investments or tax collections by the National Board of Revenue (NBR) could lead to increased reliance on borrowing from the banking sector or the utilization of high-powered money. Such measures, while addressing immediate needs, risk exacerbating an already delicate economic situation.
In the face of these challenges, the government must navigate a precarious path to lower inflation and ensure adequate resources for both recurring and non-recurring expenditures. While the budget exhibits certain vulnerabilities, proactive measures and strategic adjustments could mitigate potential pitfalls. Thus, effective implementation and prudent fiscal management will be paramount in steering the economy towards stability and growth.
In the fiscal blueprint unveiled by the National Board of Revenue (NBR), significant revisions to tax exemptions and rates promise a substantial boost in revenue. Yet, the precise impact of these alterations remains shrouded in ambiguity within the proposed budget. While optimistic projections envision enhanced revenue mobilization through diligent tax administration, historical precedent casts doubt on such expectations.
NBR’s Amnesty for Illicit Assets: Will It Rein in the Black Economy?
A contentious facet of the budget—the provision for black money whitening—stirs renewed public discourse. The efficacy of the NBR’s endeavor to reintegrate illicit assets into the legal economy by offering amnesty for their disclosure remains uncertain. Despite recurrent offerings of similar opportunities in the past, the actual revenue generated has paled in comparison to the vast expanse of the black economy. Although the incorporation of corporate taxpayers into this scheme marks a departure from convention, its efficacy remains speculative.
Furthermore, the ambitious growth target of 6.75% under prevailing economic conditions warrants scrutiny. While the government demonstrates a semblance of fiscal restraint through its allocation for the Annual Development Program in the FY 2024-25, the stagnant state of private sector investment looms ominously. Structural constraints impeding private sector expansion persist unabated, with proposed budgetary measures unlikely to effectuate substantive change.
Given the current economic constraints, a leaner budget might be a prudent choice, especially as the government struggles to mobilize adequate resources. Though such an approach might temper economic growth slightly, it would significantly bolster efforts to combat inflation, which remains the government’s primary focus.
Current vs. Target Inflation Rates
- Current (9.73%)
- Target (6.5%)
A Tale of Economic Contrasts
Factors like the availability of foreign currency, exchange rates, domestic and international funding to cover the budget deficit, and subsequent bank borrowing will critically influence inflationary trends. Emphasizing domestic production and supply, particularly in agriculture, is essential. Additionally, robust inward remittance flows and strong export earnings will serve as vital economic buffers, necessitating careful governmental oversight.
In recent times, the government has tentatively embarked on a path of overdue reforms, possibly under external pressure. However, delayed implementation of these reforms exacerbates their impact on the populace. Past financial sector reforms in the 1990s yielded positive outcomes, but subsequent neglect has compounded current challenges. Policymakers must avoid repeating these mistakes.
The fiscal narrative culminates in a sense of urgency and the need for decisive action. Addressing banking sector woes, implementing effective reforms, and maintaining economic stability amid inflationary pressures and resource constraints are paramount. The government’s success in these endeavors will determine the resilience and growth trajectory of the economy.
Acknowledging the tangible suffering caused by soaring inflation, the government’s measures to counteract the price surge have been deemed inadequate. Despite the fiscal challenges, such as maintaining the unchanged tax-free income threshold for the upcoming fiscal year and targeting a 12 percent increase in VAT revenue, concerns persist regarding their impact on the populace, regardless of income levels.
Prioritizing Social Safety Nets Amidst Inflation Concerns
Budget allocations for social safety net programs have not kept pace with rising needs. While the growth of the budget has been curtailed to mitigate deficit financing and rein in inflation, the modest reduction in the targeted budget deficit for FY25 fails to exert substantial control over inflationary pressures. Economists suggest increasing the tax-free income level to ease inflation’s impact. However, the government’s decision to maintain the status quo, coupled with marginal adjustments in tax brackets, falls short of addressing the escalating cost of living.
Although there’s a slight increase in social safety net funding, it’s insufficient to counteract inflation and is largely absorbed by pension costs. Reliance on the banking sector to cover the deficit could worsen inflation without careful monetary policies. Inflation averaged 9.73% in the first 11 months of the fiscal year, highlighting the need for robust economic measures.
Factors Influencing Inflationary Trends:
- Availability of Foreign Currency
- Exchange Rates
- Domestic and International Funding for Budget Deficit
- Bank Borrowing
Despite these challenges, the reduction in source taxes for essential food items offers a glimmer of hope for alleviating consumer burdens. However, the efficacy of this measure hinges on the willingness of suppliers and producers to pass on the benefits to consumers, thereby translating into tangible relief amidst the prevailing economic uncertainties.
The macroeconomic necessity for the current budget is clear: tighten fiscal measures, particularly in the area of domestic financing. The targeted domestic borrowing of Tk 160,900 crore is likely to strain both taka and dollar liquidity within the banking system, thereby hampering efforts to achieve the ambitious GDP growth target of 6.75% and failing to ease inflationary pressures.
On the matter of LDC graduation, the budget reiterates past achievements such as a preferential trade agreement with Bhutan, but offers little insight into future strategies for securing GSP Plus status in Europe or improved market access in China and India. While some tariff rationalization measures are introduced, they fall short of the comprehensive overhaul needed.
In conclusion, while the budget acknowledges existing economic challenges and promises future changes, it commits to very little in terms of immediate, impactful reforms. The strategy seems to be one of cautious recognition without substantial commitment, leaving many critical areas of the economy, particularly in structural reform, inadequately addressed.
