Stymied awhile, Bangladesh trying to make a rebound

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

Is Bangladesh’s Economy at its Peril

Import dependency in energy sector increasing foreign exchange crisis One persistent issue that continues to affect the Bangladesh’s economic landscape is inflation. Inflation, the rising cost of goods and services over time, poses a significant challenge to both low-income households and industries alike. Recent data from the Bangladesh Bureau of Statistics (BBS) paints a grim picture: Food inflation has rocketed to 12.54 per cent, its highest in 11 years, pushing countless households into financial uncertainty. Concurrently, Bangladesh’s foreign currency reserves have plummeted $1.62 billion within 20 days, a staggering decline from $23.06 billion foreign exchange reserves recorded at the end of August. Fueled by a decline in remittances, stagnant exports and increased import pressures, these economic tremors have created certain economic uncertainties. Understanding Inflation Before examining the effects of inflation, it’s crucial to understand the factors driving it. In Bangladesh, inflation is now driven by cost-push factors such as increased producer spending and rising electricity and gas prices, particularly fuel oil, transport and also corruption cost with volatile exchange rates and dollar crisis. In recent years, Bangladesh has experienced an upward trend in inflation rates, affecting the lives of millions. Disproportionate Impact on Low, Fixed-Income Groups Almost all people of limited income and lower middle class, middle-class families are bearing the brunt of the pinching inflation as their earnings often fail to keep pace with rising prices. These households find it increasingly challenging to afford basic necessities. The burden of inflation extends to housing, education, healthcare, and transport. High inflation has been prevailing in the country for a long time. However, the situation has worsened in recent times, as shows government statistics. Another major problem with the inflation is worker unrest. This in turn increases the pressure on the wages of the workers and consequently increases the cost of production. Which increases the price of the product and ultimately reduces the demand. Surging Food Inflation 11-Year High The Bangladesh Bureau of Statistics issued an inflation update on September 11, revealing that food inflation had surpassed 12.5 per cent. The BBS data indicated that food inflation reached 12.54 per cent in August. The last time food price inflation had risen to such height was in January 2012 when it reached 12.73 per cent. Notably, food inflation entered double digits for the first time in a decade in August of the previous year, according to BBS and Bangladesh Bank data. In BBS’ calculations, headline inflation climbed to 9.92 per cent in August, marking a shift from two consecutive months of decline. This places the inflation rate on the brink of touching 10 per cent. In July, the food inflation stood at 9.76 per cent but surged to 12.54 per cent in August. Non-food sector inflation in August was recorded at 9.92 per cent in the month. Is Bangladesh’s Foreign Currency Reserve in Jeopardy? Bangladesh’s foreign currency reserves continue to face pressure, due primarily to the central bank’s dollar sales to cover essential imports. A decline in remittances has further strained the Bangladesh Bank’s reserves, which dropped $1.62 billion within the last 20 days, as reported on September 21. This decline is notable considering the reserves were over $23.06 billion as of August 31, now decreased to $21.45 billion. During this period, a significant payment of $1.31 billion to the Asian Clearing Union (ACU) for July-August imports played a role in diminishing the reserves. Additionally, a 13 per cent decrease in remittances over July-August, along with the necessity of providing dollars to commercial banks for loan settlements and import bills, has impacted the reserves. The central bank regularly sells dollars to various commercial banks to meet diverse expenses, particularly import costs. Moreover, a part of the foreign currency earned from exports and remittances directly contributes to the reserves. Foreign loans also directly bolster the reserves. However, the recent drop of $1.62 billion in foreign currency reserves can be attributed to these combined factors. How ceramic sector affected by higher inflation? The ceramic sector is grappling with significant challenges due to rising inflation and fluctuations in the exchange rate. Being an actively involved participant in international trade, Bangladesh’s economy is intricately linked with exchange rates, influencing economic activities and inflation by altering the prices of domestically produced goods and services. In the ceramics industry, a substantial portion of raw materials required for production is imported, necessitating heavy reliance on foreign currency. The Bangladeshi Taka has depreciated by 30 per cent against the US dollar since the last quarter of 2021, escalating material costs for the ceramics industry and directly impacting operational expenses. Furthermore, Bangladesh faces a local annual inflation rate more than 10 per cent, compounding challenges for the ceramics business. Increasing costs of imported raw materials, combined with domestic inflation, higher electricity and fuel price, transportation costs, high interest and exchange rate, pose significant hurdles to the sector’s profitability and sustainability. Additional pressures come from a recent 126 per cent increase in gas prices and gas rationing. But it has not been possible to adjust the price of the finished product accordingly. Various disruptions, including raw material price rise, global recession risks, shortages in raw materials and logistics capacities, global labour scarcity, and energy shortages, have disrupted the entire supply chain. Consequently, ceramic industry production has been severely affected.     Md. Mamunur Rashid FCMA Senior Vice President, BCMEA Additional Managing Director X-Index Companies In the light of these challenges, Md. Mamunur Rashid, Senior Vice President of BCMEA and Additional Managing Director of X-Index Companies, suggests that the government should encourage foreign direct investments in the industry in economic zones. He recommends continuing tax holidays for a minimum of five years to support the sector. Additionally, he advocates measures against unfair trade practices such as under-invoicing of imported tiles to safeguard the interests of entrepreneurs in the ceramic industry. Mr Mamun emphasises the need for research and development efforts to economise on energy costs and calls for appropriate and adequate training programmes to develop a skilled labour pool in the sector. These

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.