The policy guidelines on Bangladesh’s budget FY2024-25 is based on anecdotes and the ongoing current macroeconomic challenges arising from both internal and external factors. Under the leadership of Honorable Prime Minister Sheikh Hasina since 2009, Bangladesh’s economy achieved an average growth rate of around 6.5 percent, implying the country’s development consistency and economic resilience as well. Such kind of strengths contributed to the consistent increase in the country’s GDP growth rate and per capita income over the same period. For example, in FY2023-24, the country’s per capita income is estimated to be raised to USD 2,961 and GDP’s growth rate to be 7.5 percent
However, later on, it was decided in the meeting to downsize the current fiscal year’s original budget to BDT710,000 crore from BDT761,785 crore, annual development programme (ADP) allocation to BDT245,000 crore from BDT263,000 crore and growth target of GDP to 6.5 percent from 7.5 percent. The factors that contributed to such downsize of the overall budget expenditure and the GDP growth target include stagnant revenue collection, limited foreign borrowing capacity, rising domestic interest expenses, stagnant capital stock of the country, and limited foreign investment opportunities.
BUDGETARY ADJUSTMENTS AND INFLATION DYNAMICS
Based on the facts, the core budget for the FY2024-25 is planned to set at BDT805,000 crore assuming a significant slower growth rate (5.67 percent) compared to the current year’s budget (around 12 percent), implying a noticeable departure from the usual growth practices of exceeding 10 percent over the last decade except for the COVID period. It is noteworthy to mention here that the FY2021-22 witnessed the lowest budget growth rate of 6.28 percent in the last decade.
However, this was followed by a significant increase of around 12 percent for the following two fiscal years, but it is projected historically low growth rate for the FY2024-25.
Despite undertaking the measure of contractionary monetary policy by the central bank and the austerity measure by the government, inflation remains at a high level and Bangladesh has so far failed to contain it. For instance, Bangladesh’s economy faced around 10 percent inflation in 2023.
The major broad categories of items that contributed to high inflation include food and nonalcoholic beverages (12.6 percent), housing utilities (9.1 percent), clothing and footwear (8.2 percent) and recreation (15 percent), etc. However, the projected inflation target is set at 6.5 percent in the forthcoming budget, implying a great challenge for the Bangladesh economy to downsize the inflation rate. In this regard, it is important to look at the inflation scenarios of our neighboring countries such as Sri Lanka and India. Sri Lanka has well-managed to cool down its inflation and achieved the lowest inflate rate of below 4 percent since 2021. Similar evidence is also found for India, which has eased its retail inflation (i.e., below 5 percent in 2023) measured in terms of the Consumer Price Index (CPI).
For the effectiveness of contractionary monetary policy, Bangladesh Bank should critically feature the external dimensions such as terms-of-trade (ToT) shocks, net financial flows into the country, changes in global interest rates, changes in the exchange rate, and the capital account openness. Moreover, internal factors such as credit-constrained especially for the cottage, micro, small, and medium enterprises (CMSMEs), underdeveloped financial markets mismanagement of the food supply chain or lack of traceability throughout the food supply chains, fragmented food markets and unfair business practices etc. contribute to the persisting high food inflation, implying that the government should put more weight to the output stabilization to make the monetary policy effective. Last but not least, the issue of fiscal dominance in Bangladesh economy plays a critical role in the effectiveness of monetary policy. Therefore, it urges for better coordination or interactions between the fiscal and monetary authorities to make the monetary policy effective.
ANTICIPATED ECONOMIC TRENDS AND CHALLENGES AHEAD
The GDP growth for FY25 is estimated at 6.75%, which is marginally higher than the revised growth rate of 6.5 percent in the current FY2023-24. Based on the anecdotes, it is assumed that achieving this projected growth rate would be hard to realize. For example, rising interest rate would put an extra cost burden to the producers and the aggregate supply will contract to the left pushing the price level up. Due to higher price level, real income of the consumer will fall, i.e., the less purchasing power of the consumer and this, in turn, will result in contraction of the aggregate demand.
Due to less aggregate demand, the price level might get back to the initial level, but it seems possible at the cost of growth. Moreover, reduced personal savings due to inflation would slow down the growth of the real sectors. In addition to this, rising cost of dollars pushes up the costs of raw materials and machineries imported from outside the country and this restricts supply of those.
This might have an impact on reducing growth if Bangladesh fails to stabilize the foreign exchange market. Due to a mismatch in the balance of payment, the depletion of the foreign exchange reserve has become an obvious and unavoidable economic circumstance for Bangladesh’s economy. Stabilization of the forex market would depend on stabilizing export growth and ensuring imports of necessary productive machineries and raw materials. Unified foreign exchange rate might help to reduce the transaction of dollar in the informal channel.
However, to some extent, it is still optimistic that the revenue collection is revised upward at BDT555,000 crore for the FY2023- 24, implying an increase of 11 percent over the main budget.
TAX REFORMS AND DEBT MANAGEMENT FOR SUSTAINABLE GROWTH
The main weakness lies in the domestic resource mobilization. Strengthening NBR is inevitable to make Bangladesh competitive with our neighboring countries. Bangladesh has the lowest taxGDP ratio and the tax net is very negligible. Revenue generation of the government is highly dependent on VAT, which is converse compared to other competing countries. Too much less revenue generation put an extra burden to the country as the government needs to borrow a lot from either domestic or foreign sources.
The government’s too much borrowing from the banking sector reduces the loanable fund for the private investor and retards the growth progress of the country. Similarly, the cost of debt from outside the country becomes too much costly due to the devaluation of BDT against the Dollar. Based on the few facts explained above and realizing the concurrent thoughts on the forthcoming budget, the government may undertake some measures to bring stability in the major macroeconomic indicators. The government should cut her clothes according to her coat. This would help the government to devise strategies of mobilizing more revenue for more spending.
As strategy, the government should put more emphasis on VAT collection and exemplary punishment of VAT evaders. Similarly, tax net need to be broadened so that we could reach to an average standard of competing countries in terms of the revenue collection from direct tax, which is relatively persisting at a low level.
The default loan culture pushes the cost of doing business up and therefore, strict measures in this regard ahead would help bring down the cost of production and stabilize the price level. Unified exchange rate as an immediate measure should be introduced to stabilize the forex market. Initiatives regarding rationalizing subsidies are inevitable for justifying the value for money.
