“For the fiscal year 2024-25, the government plans to digitize public services, optimize marine resource use, and establish financial sector discipline,” announced State Minister for Finance, Waseqa Ayesha Khan. Emphasizing the role of technology, the government aims to create a conducive environment for industries and investments. State Minister Khan articulated a robust vision for ‘Smart Bangladesh 2041,’ focusing on economic stability, scientific education, and innovation.
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Speaking at the American Chamber of Commerce luncheon in Dhaka, she outlined key strategies such as strengthening the agriculture sector for food security, improving basic health services, and providing targeted training for youth and the self-employed. During the program, experts highlighted significant economic milestones for Smart Bangladesh, including a projected per capita income of at least $12,500, reducing poverty to below 3%, eradicating extreme poverty, and maintaining inflation at 4-5%.
Fiscal Prudence and Governance Key in FY2024-25
The fiscal landscape will see a budget deficit under 5% of GDP, a revenue-GDP ratio exceeding 20%, and investments making up 40% of GDP. Highlighting financial inclusion as a pillar for poverty alleviation and e-commerce growth, the government is aiming for 30% cashless transactions by 2025 and full cashless transactions by 2031.
Fiscal Landscape and Economic Goals
- Budget Deficit: Under 5% of GDP.
- Revenue-GDP Ratio: 20% (+).
- Investment: 40% of GDP.
Bangladesh Bank has embarked on the ambitious National Financial Inclusion Strategy 2021-2026, aiming for universal financial access by 2026. Innovations like bKash and Nagad have been pivotal, extending financial services to rural areas previously excluded from formal banking. Currently, the country boasts 22.4 crore mobile financial service accounts, surpassing its total population.
Key infrastructure such as ATMs, debit and credit cards, POS terminals, and internet banking are crucial in expanding branchless and cashless services, noted the state minister. A network comprising 11,295 bank branches, 3,656 sub-branches, 21,613 agent outlets, 1.77 million MFS agent points, 25,336 MFI branches, and 9,886 post offices is actively promoting financial inclusion nationwide.
However, the disconnection between fiscal and monetary policies in Bangladesh hampers their effectiveness. Contractionary monetary policies raise costs for the private sector, hindering business operations and lifestyles.
Analysis reveals declining employment elasticity of GDP, signaling insufficient job creation despite economic growth. Amid the FY2024-25 budget, experts stresses fiscal prudence, prioritized expenditure, governance improvements, and support for vulnerable groups in public finance management. Addressing illicit financial flows and intensifying efforts against tax evasion are crucial steps.
Moreover, enhancing productivity in labor and capital, integrating technology into exports, and improving the business environment are essential to boost competitiveness. However, growing pressures on the external sector from rising loan repayments and interest payments is posing significant challenge, underscoring the need for robust measures to manage capital flight effectively.
Key Financial Infrastructure
- Bank Branches: 11,295.
- Sub-Branches: 3,656.
- Agent Outlets: 21,613.
- MFS Agent Points: 1.77 million.
- MFI Branches: 25,336.
- Post Offices: 9,886.
Tackling Bangladesh’s Economic Pressures: A Roadmap for Stability
Bangladesh’s economy faces significant pressures: persistent near-double-digit inflation, a $24 billion drop in foreign reserves over two years, acute fiscal constraints due to reliance on borrowing, and challenges in the banking sector affecting government borrowing and loan defaults.
To address these issues, the government must implement stringent contractionary demand management, including tighter fiscal and monetary policies to limit the budget deficit to 3-4% of GDP. Enhancing fiscal capacity is crucial, which involves eliminating tax exemptions, increasing direct taxes, modernizing property taxes, rationalizing administrative expenses, and freezing public sector employment.
Causes of Inflation:
- Supply Chain Disruptions
- Exchange Rate Depreciation
- Sharp Energy Price Adjustments
Despite initial contractionary measures, improving fiscal capacity is essential due to Bangladesh’s low tax-to-GDP ratio and heavy reliance on costly debt. Effective implementation of monetary policies and avoiding excessive market interventions are key for macroeconomic stability. Strategic reforms are necessary for Bangladesh to transition to an upper-middle-income country and achieve sustainable growth.
Toward Inclusive Growth: Budget Priorities for Bangladesh’s Future
In the current economic context, Bangladesh faces critical decisions in public investment prioritization. High returns and employment generation potential must guide project continuations, given substantial financial losses from excessive payments to independent power plants, amounting to a subsidy burden of 1.9% of GDP. The allocation of subsidies, except for agriculture linked to food security, needs stringent review to optimize resource utilization.
A key priority for the FY2025 budget is bolstering spending on the social sector, historically underfunded compared to physical infrastructure like transportation and energy. In FY2024, education received 1.76% and healthcare 0.76% of GDP, reflecting the urgent need for greater investment in human capital and social development alongside physical infrastructure.
Social Sector Funding (% of GDP):
2024 2025
- Education: 1.76% 1.69%
- Healthcare: 0.76% 0.70%
To achieve a prosperous and inclusive society, higher allocations to education, healthcare, and poverty alleviation are essential, requiring careful fiscal management in a constrained budgetary environment. A strategic focus on properly using of budget for the green economy transition is crucial, necessitating increased allocations for climate adaptation and mitigation measures.
The next priority for Bangladesh’s FY2025 budget is institutional strengthening for effective implementation. The low utilization rate of the Annual Development Program (ADP), only 42.3% until March 2024, highlights the government’s limited capacity to execute development projects. With the ADP target often revised downwards, the current trend of public investment, which has declined to 6.77% of GDP in FY2023 from 7.53% in FY2022, undermines private and foreign investments, which have remained stagnant and below 1% of GDP, respectively.
Contributing Factors to Inflation:
- Fixed Interest Rates (6-9% band)
- Prolonged Exchange Rate Stability
- Unsterilized Monetary Stimulus Post-Covid
- High-Powered Money Printing
- Emergency Funds Injection into Troubled Banks
Insights from Recent Monetary Moves
Amid persistent inflationary pressures, the Bangladesh Bank attributes these to supply chain disruptions, exchange rate depreciation, and sharp energy price adjustments. However, other factors such as fixed interest rates, prolonged exchange rate stability against the US dollar, unsterilized monetary stimulus post-Covid, high-powered money printing, and emergency funds injection into troubled banks have compounded inflation. The central bank’s initial underestimation of inflation’s persistence has delayed appropriate policy responses.
The recent adoption of a tighter monetary stance by the Bangladesh Bank marks a positive shift. Abandoning the six to nine percent interest rate band, ceasing central bank borrowing for budget financing, and rising interest rates on treasury bills and bonds signal a commitment to macroeconomic stability. The early signs of stabilization include a surplus in the external current account, stabilization of foreign exchange reserves of around $18-20 billion, a stable exchange rate, and improved banking sector outlook as noted by Moody’s.
Early Signs of Economic Stabilization:
- Surplus in External Current Account
- Stabilization of Foreign Exchange Reserves ($18-20 billion)
- Stable Exchange Rate
- Improved Banking Sector Outlook (Moody’s)
To solidify these gains, the central bank must continue tightening monetary policy. Incremental increases in the policy rate, unification of the exchange rate in the interbank market, and significant cuts in non-essential fiscal spending are crucial. The government should refrain from central bank financing of the budget deficit to maintain fiscal discipline.
In summary, prioritizing high-return public investments, enhancing social sector funding, supporting small businesses, and committing to green economic transitions are pivotal to giving importance to implementing the budget beyond just delivering it in parliament. With firm political will and adherence to proven policy measures, Bangladesh can navigate its current economic pressures and pave the way for sustainable growth.
