2023-05-31 18:09:03 BdST
Budget to address inflation, crisis
A larger national budget is going to be announced for the fiscal year 2023-24 amid external economic shocks, which aims for maintaining a healthy growth along with low inflation and poverty reduction.
The upcoming budget will also look to meet the International Money Fund (IMF) loan conditions and address the pre-election demands with austerity.
Finance Minister AHM Mustafa Kamal is expected to announce a Tk 7.64 trillion national budget for the 2023-24 fiscal year on Thursday, an amount Tk 818.91 billion higher than the previous year’s budget.
The proposed budget for FY 2022-23 was Tk 6.78 trillion.
The budget will represent 15.20 percent of the estimated gross domestic product (GDP). With the increased spending plan, the GDP growth target is being set at 7.5 percent while arresting inflation within 6.5 percent.
Meanwhile, a Tk 2.63 trillion Annual Development Programme (ADP) has been approved for the next fiscal year, prioritising transport and power sectors.
It is also 6.8 percent higher than the current fiscal year’s original ADP of Tk 2,460.66 billion.
The finance ministry in a draft identified budget priorities aimed at maintaining GDP growth and low inflation.
The budget priorities include keeping the supply chain strong to attain the maximum possible GDP growth.
They include tackling the imported high inflation, expanding the social safety net programme and distributing food among the poor at a low price or for free, and putting emphasis on subsidies on electricity, gas and agriculture considering fuel and fertiliser price hike in the global market and slump in the exchange rate.
Other priorities are continuation of the subsidy on fertiliser and mechanising agriculture, human resource development and employment generation, and rural development.
The government has to strike a balance between IMF loan conditions for raising revenues and cutting subsidies, and election-time priorities, according to the finance ministry officials.
"The government is preparing the budget keeping all these things in mind," said a finance ministry official involved with the budget preparation process, seeking not to be named.
To realise this ambitious spending plan, the government must collect Tk 5 trillion in revenues, which includes $4.3 trillion from the National Board of Revenue (NBR) collection.
The remaining Tk 2.60 trillion budget deficit will be addressed through local and foreign credit and grants.
For the next fiscal year, the NBR tax, non-NBR tax, and non-tax revenue targets are being set at 15 percent higher compared to the current fiscal's original target of Tk 4.33 trillion in order to comply with an IMF condition associated with its $4.7 billion loan.
The government must increase the tax-GDP ratio by 0.5 percentage points in FY 2023-24 to meet the IMF loan condition.
Private estimates suggest that Bangladesh needs to collect an additional Tk 450 billion in revenues.
However, some finance ministry officials claimed that despite the ensuing national polls, the government was not picking up a populist budget to woo voters as a safeguard against the war-induced external economic shocks.
They said that the increased spending would be for payments of the loan interest and the outstanding subsidies.
The Ministry of Finance recently informed Prime Minister Sheikh Hasina that they would consider inflation, subsidy and extra interest payment on domestic and foreign loans as new challenges.
“So, there is a little room for the election-targeted populist steps in the new budget. The ongoing efforts for austerity will continue in the next fiscal year as well,” said a high official at the finance ministry requesting anonymity.
“The possibility of new schemes in the new budget for wooing voters before elections like previous years is very low,’ the official added.
There will be no steps in the new fiscal policy other than safeguarding poor people from high inflation under the existing social security schemes. The finance ministry is fully depending on monetary policy to keep inflation under control.
In total, the government loan interest payment may rise 27 percent to Tk 1.02 trillion or nearly GDP’s 2 percent in the next fiscal year, which was Tk 803.75 billion or GDP’s 1.8 percent in the FY 2022-23.
Interest payment on foreign loans will soar by 41 percent in the next fiscal as loan repayment for some mega projects will begin.
More money will be required for loss in taka’s value, rise in LIBOR rate and increase in US treasury interest rate.
Moreover, the government expenditure will rise for domestic loan interest payment as well as interest rate for treasury bonds will rise and the upper limit for bank loan interest will be lifted from July in line with IMF loan conditions.
Allocation for social security as a whole is being increased by nearly Tk 50 billion to Tk 1.18 trillion next year, which was Tk 1,135.76 billion in the outgoing fiscal.
A portion of the allocation will go to government servants’ pension payments.
The government decided to include 7.35 lakh new beneficiaries for allowances for aged people, widow and handicapped people, including 5.35 lakh disabled persons and 1 lakh aged persons and widows.
Monthly allowance for the aged people will rise to Tk 600 from the existing Tk 500 from the next fiscal year while other two allowances will increase by Tk 50 to Tk 550.
Despite the hike in gas, electricity and fertiliser prices and potential further rise in line with IMF prescription, allocation for subsidy and cash incentives will rise to Tk 1.10 trillion in next fiscal year, which was Tk 1.02 trillion this year.
Allocation for power subsidy is being raised to Tk 330 billion from the current fiscal’s original allocation of Tk 170 billion which was later revised to Tk 230 billion.
After a Tk 5 increase per kilogram in fertiliser price, the finance ministry thinks that the government has to spend Tk 70 billion less on agriculture subsidies. An amount of Tk 170 billion is being set aside for agriculture subsidies.
This fiscal’s original allocation was Tk 160 billion, which was later revised upward to Tk 250 billion.
“Apart from the IMF pressure, reform initiatives for raising revenues or plugging loopholes in subsidies should remain high on the agenda in the upcoming budget,” said Prof. Mustafizur Rahman, Distinguished Fellow of the Centre for Policy Dialogue (CPD).
"The IMF suggestion for increasing the tax-GDP ratio should be taken into account for our own interest as it only helps increase our fiscal space," he said.
At the same time, he reminded that the government should not go for any populist steps targeting the next general elections.
"It may have a negative impact on the economy. Given the present situation, the best poll-time budget should focus on keeping macro-economic stability and avoiding wastage of public resources," he added.
CPD distinguished fellow Dr. Debapriya Bhattacharya said that the government’s liberty in budget preparation went with the IMF’s $4.7 billion loan. He termed the budget an “orphan”, saying the global lender had been like a “foster father.”
Prof Mustafizur Rahman advised, “In the present context when income and wealth inequality is growing in the country, the government’s priority should be ensuring equity in wealth distribution while promoting economic recovery from the present crisis.”
Given the high inflationary pressure, the government aims to raise the minimum tax-free income ceiling in the next fiscal year to give breathing space for the middle-income people.
At the same time, the highest income tax rate may be increased to 30 percent from 25 percent to levy more tax on wealthy people. Prior to the coronavirus pandemic, the rate was 30 percent.
"The budget will be extremely challenging to fund, realistically," said Dr. Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
He said that the government became central bank-dependent for funding, “which is not right as it increases inflationary pressure.”
“The government has to come out of this practice as inflation will get worse otherwise,” he warned.
The economist pointed out that the IMF condition for raising the tax-GDP ratio to 11 percent from about 8 percent at present would be difficult for the government to implement in the upcoming budget.
"It is not possible to implement in this budget but you can try in future. However, there must be some sort of announcement of the planned tax reforms in the budget,” Dr. Mansur said.
“How will we modernise the tax system and administration? How will our tax-GDP ratio rise to 11 percent? In this budget, we want to see some tax exemption withdrawal," the economist said.
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