Originally posted in The Business Standard on 8 June 2022
Every national budget is framed within a certain context. There are three distinctive issues which define the backdrop of the budget for Bangladesh in the fiscal year 2022-23 (FY23). First, the national economy is yet to fully recover from the aftermath of the Covid-19 pandemic and reclaim the FY19 benchmark. In fact, the fragmented recovery which was observed during the first half of the elapsing fiscal year, got thwarted later.
Second, the global economy is undergoing a turbulent period and its near-term prospect remains rather uncertain. Accordingly, the breakdown of supply chains, rise in commodity prices (particularly food and fuel), enhanced maritime transportation costs etc. are possibly set to continue in FY23.
Third, due to a host of internal and external factors, the macroeconomic stability of Bangladesh is currently under severe stress. This is expressed through, among others, rising inflation, widening of trade account and current account deficits, weakening of Taka, and building up of pressure on budgetary shortfall. Never in the last twelve years, has Bangladesh’s macroeconomic situation been in such a demanding situation.
Admittedly, the upcoming national budget had to be sensitive to these three critical issues.
Managing the Inflation
There is now a widespread agreement among the concerned professionals that controlling the rise in the prices of food and non-food commodities, as well as that of services has to be in the bullseye of the next fiscal year’s budget. However, there is less unanimity of views regarding methods to contain the present inflationary trend in the country.
Notwithstanding various policy pronouncements, Bangladesh’s government could not pursue, in reality, an expansionary fiscal policy (e.g., growth of public expenditure and private sector credit flow) to boost domestic demand for post-pandemic recovery. Accordingly, there is little space for exercising fiscal restraint to contain inflation. Consequently, the government had to fall back on discouraging import of “luxury goods” (e.g., by increasing tariff and duties as well as letter of credit margin) and at the same time by making certain consumables (including food and cooking oil) cheaper through a cut down of import duties. These interventions will have limited relevance for market stabilisation as the three major categories of imports of the country – i.e. three “Fs” – food, fuel and fertiliser are going to experience further rise in global prices. This implies imported commodity induced inflation is possibly there to stay, if not more to come.
The situation is further aggravated by the growing mismatch between growth of exports and imports, fluctuating remittance income flow, stagnating foreign direct investments (FDI) and increasing (foreign) debt servicing liabilities. The robust flow of foreign aid in the recent past had been till date a strong input in counteracting weakening of the national currency. Once a matter of pride, our foreign exchange reserve is now experiencing a depleting fortune. Relaxation of the foreign exchange rate was prompted by market realities as the central bank was constrained to supply an increasing amount of foreign currency to hold back the value of Taka. It is quite plausible to apprehend that the value of Taka may fall further.
Under the circumstances, monetary and trade policy tools will have limited relevance in managing the price rise in local markets. Regarding fiscal measures, the government’s decision to go for an upward price adjustment of the energy products (gas and possibly petrol/diesel) is going to feed into non-food price rise further.
In view of the above, the major way of protecting the low- and limited-income people would be to provide direct financial support by expanding the safety net programmes in terms of the number of their participants and their entitlements. For the middle-income group, enhancing the taxable income threshold from Tk3 lakh to Tk3.5 lakh would leave them with some additional disposable income. Sale of commodities through the Trading Corporation of Bangladesh (TCB) and Family Credit Card system has to be effectively expanded and implemented.
In fine, along with the efforts to subdue the price rise in the market, the government will be well advised to undertake direct measures towards protecting the purchasing power of the disadvantaged sections of the society.
Fiscal Consolidation
The major pathway towards stabilising the commodity prices, protecting the purchasing power of the disadvantaged people and strengthening the external trade and current account balances in Bangladesh in the current juncture lies in fiscal consolidation. Fiscal consolidation has to take place in both income and expenditure sides of the government.
The fact remains that notwithstanding the (suspiciously) high domestic income growth, the tax-GDP ratio fails to cross the double-digit figure over the last decade. This has created a resource constraint particularly in the face of the government’s high level of development ambition. Thus it will be of great interest to see how the next budget plans to enhance its fiscal space. Hopefully the demand for resources will not be used as an excuse to provide extraordinary concessions to the money launderers and other black money holders. Indeed, along with some downward rationalisation of the corporate taxes, as mentioned earlier, that tax-free level of personal income tax needs to be enhanced in line with principles of tax justice.
The major fiscal consolidation in the budget for FY23 has to take place in public expenditure management. As is known, the revenue budget is dominated by three heads, viz. provisions for salary & allowances, debt servicing payments, and subsidies and transfers. All these three head accounts for more than half of the total revenue expenditures. In FY23 the government will be on the lookout for as much money as possible for underwriting increased allocation for subsidy and transfer. Concurrently, the sectoral composition of subsidy allocation needs to be scrutinised by prioritising food and fuel.
From the above perspective, one has to put a moratorium beyond necessary increase in allocation for pay and allowances for public employees. Restraint in domestic borrowing, which constitutes the larger part of public debt, has to be visibly exercised. This will also mean holding back resources for mega projects, which are yet to start.
We need to recall in this regard that the operating expenditures of the government are increasing at a faster rate than the development expenditures. This trend is resulting in availability of a smaller share of revenue surplus for financing the Annual development Programme (ADP).
Regarding budget deficit, public finance is still in a comfortable zone. This has happened due to the inability of the government to spend available resources timely. However, a closer scrutiny will reveal that the budget deficit is creepingly increasing. The solution to restraining the increase of budget deficit relates to higher uptake of domestic revenue, particularly through taxes on income and assets.
Growth trade-Off
In view of the mounting pressure on the core macroeconomic indicators, particularly on the inflation rate and exchange rate, the easing of the cap on the interest rates is also becoming inevitable. Admittedly, enhanced bank (base) rate will restrain money supply and may impact private investment growth. However, devaluation of national currency may spur export-oriented investment and employment as well as attract greater remittance income through official channels.
On the other hand, increased demand for subsidy and transfer as well debt servicing liabilities will leave a limited revenue surplus for ADP financing. If the disbursements of foreign finance in the pipeline, including the newly contracted budget support from the World Bank, do not increase significantly, there is a high possibility that the size of the ADP from FY23 will experience only a modest increase.
Restrained uptake of both public and private investment may result in a reduced GDP growth in the upcoming fiscal year. Indeed, most of the international sources are predicting a below the trend GDP growth rate for FY23 and FY24 in Bangladesh. However, having noted all the well-known criticisms of the GDP estimates in Bangladesh, it may be safely said that the government will not reduce its GDP growth target for FY23, particularly for political reasons in a pre-election year.
We need to recall in this regard that the GDP growth trade-off is a more plausible policy alternative than higher food and non-food prices. Effective control of inflation will improve growth prospects. A dexterous management of exchange rate and interest rate may bring some synergy in moderating the slowdown of economic growth and holding back the welfare level of the disadvantaged section of the population.
To this end, policy coordination, evidence-based monitoring and transparent feed-back loop will be particularly necessary for public finance management in FY23. Failure to do so, may put the achievements of the last decade under potential threat.
Debapriya Bhattacharya, Distinguished Fellow, Centre for Policy Dialogue (CPD)