Stymied awhile, Bangladesh trying to make a rebound

Reflections on FY24 budget

Finance Minister AHM Mustafa Kamal has authored a Taka 7,61,785 crore budget for the new fiscal year (2023-2024) with the vision of building a developed ‘Smart Bangladesh’ by 2041. The budget that was proposed in parliament in 1st June is 15.33 per cent higher than the revised budget of the outgoing financial year (Tk. 6,60,507 crore). “The budget Taka 7,61,785 is 15.2 per cent of the GDP (gross domestic product),” he said while reading out 248-page budget speech. He proposed allocation of a total of Tk 4,36,247 crore for operating expenditures and Tk 2,63,000 crore as the Annual Development Programme (ADP). The target of attaining GDP growth was fixed at 7.5 per cent and containing inflation at 6 per cent. The overall deficit in the budget would stand at Tk 2,61,785 crore, which is 5.2 per cent of GDP. Out of the total deficit, Tk 1,55,395 crore would be financed from domestic sources and Tk 1,02,490 crore from external sources. The finance minister set an estimated revenue earning target of Tk 5 lakh crore for the fiscal. “Out of this, Tk 4,30,000 crore would be collected through the National Board of Revenue and Tk 70,000 crore from other sources.” The Tax-GDP ratio is now only 7% and is proposed to be raised to 10% in the new budget. The finance minister wants to increase the percentage of direct tax to 45 per cent from 35 per cent. However, the budget practically depends more on indirect tax. The finance minister said that commission-based private collectors would be appointed for tax collection. The most talked about issue regarding the budget is meeting the conditions of International Monetary Fund (IMF), which granted a loan of US$ 4.7 billion at the beginning of this calender year. The global agency has put forwarded 38 conditions that have to be met in the next three and a half years for access to the loan. Nearly half of the conditions have to be implemented by the new fiscal year 2023-24. Budget meant for all – rich and poor : Kamal Finance Minister Mustafa Kamal said that the proposed budget has been awarded to all sections of people, including the rich and the poor, while all the projections made in the budget would be attained as like the previous years. He, however, categorically mentioned that the proposed budget had not been framed in line with the IMF suggestions. Kamal said the IMF usually gives suggestions to its member countries on maintaining balance sheet as well as properly maintaining income and expenditure accounts, which he thinks, is a good thing. He added that the IMF not only helps the member countries with credit support, but also extends support in project delivery in a flawless manner. “We can only take their (IMF’s) suggestions which we feel necessary.” The minister proposed imposing environmental surcharges on multiple vehicles. In the budget, the annual tax-free income threshold raised from Tk 300,000 to Tk 350,000 would give some relief to individual taxpayers. Some 50 types of fees would increase that include travel tax. The government estimated that private sector investment would increase to 27.4% of GDP in FY24 while it remains at 21.8% in FY23, meaning that an additional Tk 4,04,097 crore or 41.8% growth is required. Tk 2.63 lakh crore earmarked for ADP The size of the Annual Development Programme (ADP) for the fiscal year 2023-24, is Taka 2.63 lakh crore with the highest allocation of Taka 75,945 crore (29% of allocation) for the transport and communication sector. The ADP for the fiscal year was approved at a meeting of the National Economic Council (NEC) earlier. Out of the original ADP allocation of Taka 2,63,000 crore, an amount of Taka 1,69,000 crore would come from local loan sources while Taka 94,000 crore from foreign loan and grants. Considering an allocation of Taka 11,674 crore for autonomous bodies and corporations, the overall ADP size has stood at Taka 2,74,674 crore. The overall ADP size include an allocation of Taka 8087 crore as foreign development assistance. The number of projects in the new ADP totaled 1,309. – 1,118 investment projects, 22 survey projects, 80 technical assistance projects and 89 projects from the autonomous bodies and corporations. According to the new ADP, the highest 10 allocation recipient ministries and divisions are the Power and Energy Division (Taka 44,393 crore or 17% of allocation), the Road Transport, Highways and Bridges Division (Taka 43,126 crore or 16.5%), the Railways Ministry (Taka 14,960 crore or 5.5%), the Local Government Division (Taka 40,503 crore or 15.5%), the Secondary and Higher Education Division (Taka 14,086 crore or 5%), the Ministry of Primary and Mass Education (Taka 12,018 crore or 4.5%), the Science and Information Technology Ministry (Taka 12,980 crore or 5%), the Health Services Division (Taka 12,209 crore or 4.5%) and the Ministry of Agriculture (Taka 10,707 crore or 4%). Ten projects with the highest allocations in the new ADP are the Rooppur Nuclear Power Plant Project (Taka 9,707 crore) followed by the Matarbari 2×600 MW Ultra Super Critical Coal Fired Power Project with Taka 9,081 crore, fourth Primary Education Development Programme (PEDP-4) with Taka 8,586 crore, Dhaka-Ashulia Elevated Expressway Construction project with Taka 5,870 crore, the Padma Bridge Rail Link project with Taka 5,500 crore, Hazrat Shahjalal International Airport Expansion with Taka 5,499 crore, Dhaka Mass Rapid Transit Development Project Line-1 with Taka 3,911 crore and Line-6 with Taka 3,425 crore, Bangabandhu Sheikh Mujib Railway (Jamuna) Bridge Construction project with Taka 3,778 crore. Some industries may be affected The country’s businessmen are paying the price of the government’s policy on energy, said the deputy leader of opposition in parliament, former minister and industrialist Barrister Anisul Islam Mahmud. The business leaders are not generally viewing the budget in general as business-friendly. Taxes or duties on imports of raw materials and VAT in some sectors are increased, that may affect the prices of some products and these sectors may not attain the capacity to boost, they said. However, the gains tax

Economy in the Doldrums with Inflationary Pressure, Dollar Crisis

Bangladesh sees the end of 2023 with a huge deficit in its financial accounts, the widest gap between foreign currency income and expenses in its history. Consequently, the Bangladesh Bank is struggling to arrest the decline in foreign exchange reserves. This has led to a record imbalance in the overall balance of payments. The repercussions of this financial strains have extended to the commoners and made the fiscal year 2023-24 exceptionally challenging. Despite assurance from the Finance Minister in his budget speech that inflation would be contained at 5.6 per cent, average inflation rate was 9.2 per cent, intensifying the economic pressure and exacerbating the burden of soaring commodity prices on the ordinary people.

National Budget Thru Turbulent Waters Ceramic Industry Ignored in Budget

The recently unveiled Tk 7.97 trillion national budget for the 2024-25 fiscal year for Bangladesh aims to bringing a balance between controlling inflation and attaining economic growth. Economists, however, caution that higher borrowing and increased taxes on certain goods may prolong inflationary pressures. The budget’s reliance on domestic borrowing could lead to a “crowding-out effect,” restricting financing for businesses, particularly SMEs. Despite a target of 6.75 per cent GDP growth and plans to reduce inflation to 6.5 per cent, achieving these goals is deemed challenging. The budget proposes revenue of Tk 5.45 trillion with NBR tax amounting to Tk 4.80 trillion, leaving a Tk 2.56 trillion deficit to be primarily financed through bank borrowing, which may prompt money printing by the central bank and further inflation. Economists welcome the conservative approach but criticise the plan to increase electricity prices, potentially exacerbating inflation. The budget also includes initiatives for digital transformation and job creation in the IT sector, aiming to attract foreign investment. However, with foreign funding dwindling and significant tax increases on various goods, the effectiveness of these measures in achieving the stated economic targets remains uncertain. Bangladesh’s economic landscape is currently beset by numerous challenges, including stagnant investment, mounting debt repayment obligations, sluggish external sector growth, dwindling foreign exchange reserves, a fragile financial sector, tepid economic expansion, unemployment woes, and widening inequality, apart from soaring inflation. The proposed budget must confront immediate hurdles head-on through targeted budget allocations and fiscal policies. Although the budget is crafted for a single fiscal cycle, it serves as the conduit for translating the government’s economic strategies and political vision into reality. Hence, the proposed budget assumes paramount importance in tackling pressing issues such as safeguarding the interests of the impoverished, low-income, and lower-middle-income households, as well as addressing short to medium-term challenges such as fostering robust economic growth and curbing inequality. Given the prevailing economic exigencies, the FY2024-25 budget must pivot on four critical areas. Dr. Muhammad Abdul Mazid, a former chairman of the NBR, emphasised that this year’s budget cannot be compared to those announced in the past 8-10 years due to the turbulent global economy and several macroeconomic challenges facing Bangladesh. These challenges include a reserve crisis, dollar devaluation against the Bangladeshi Taka, higher inflation rates, and various governance issues. He asserted that overcoming the hurdles facing Bangladesh’s economy in the national budget will be difficult all of a sudden and in a shorter period. Instead, the government should focus on shaping a roadmap to navigate these crises. Dr. Mazid recommended that the budget should not follow the typical patterns of previous fiscal years; rather, it should include reforms in fiscal and monetary policy to address inflation, the dollar crisis, and reserve issues. Additionally, he suggested the formation of a banking commission to address loopholes in the banking sector. To curb inflation, the National Board of Revenue (NBR) could reduce duties on certain products, but effective market monitoring and management are essential to realise the benefits of such duty reductions. Strengthening the NBR’s capacity is crucial for enhanced revenue realisation. Moreover, Dr. Mazid stressed the importance of allowing concerned government organisations, such as the Anti-Corruption Commission (ACC), to operate independently to ensure effective governance. Ceramic Industry Overlooked The ceramic industry, part of the private manufacturing sector, has been significantly overlooked in the proposed national budget. Leaders of Bangladesh’s ceramic sector are urging for the removal of the 15 per cent supplementary duty on local tiles and the 10 per cent duty on domestic sanitary products. They point to rising raw material and gas prices, which have increased production costs. By eliminating these duties, they believe consumer prices would decrease. Md Shirajul Islam Mollah, a Member of Parliament and President of the Bangladesh Ceramic Manufacturers and Exporters Association (BCMEA), had previously proposed removing additional duties on raw material imports and increasing tariffs on foreign ceramic products to the National Board of Revenue (NBR) before the 2024-25 fiscal year’s budget announcement. These measures would reduce imports, save foreign exchange, and boost employment in the country. Despite the relevance of these proposals, none were addressed in the budget. The domestic ceramic market, valued at Tk 8,500 crore. Although domestic companies control over 80 per cent of the market, they face tough competition from imports due to high production costs. On one hand, due to the dollar crisis, L/Cs (letters of credit) are not being opened for importing sufficient raw materials and machinery. Additionally, despite high prices, necessary gas for producing finished goods is not being supplied. On the other hand, amidst dollar crisis, the Bangladesh Bank has announced a second term reduction in cash incentives for ceramic exports—from 10% to 6%—within a span of six months. Meanwhile, the cost of doing business continuously increases. Over the past year and a half, Bangladesh has received loans from the IMF in three installments, but despite implementing several conditions attached to the loan, there has been no such improvement; rather than  deterioration. Addressing Fiscal Challenges Economists believe, in the face of daunting economic hurdles, Bangladesh must embark on a prudent fiscal course to steer through turbulent waters. With inflationary pressures mounting and investment stagnating, the budget for the 2024-25 fiscal year demands meticulous attention to fiscal prudence. The government’s traditional reliance on banking sector borrowings to bridge budget deficits exacerbates interest payment burdens amidst constrained fiscal space. Hence, a judicious fiscal consolidation strategy, entailing restrained spending and bolstered tax collection efforts, emerges as imperative. Empowering the Social Sector While substantial investments have buoyed physical infrastructure, the social sector languishes due to chronic underfunding. Education and healthcare sectors, in particular, warrant heightened attention, with allocations in FY2024 falling woefully short of requirements. Fostering human capital development through increased expenditure on education, healthcare, and skills development is indispensable for sustainable growth and inclusivity. Facilitating Small Business Growth Small businesses, the lifeblood of the economy, must be empowered through facilitated access to finance. The banking sector’s burgeoning non-performing loans pose a formidable barrier to lending, stifling entrepreneurial endeavours. Elevating