Originally posted in The Business Post on 30 May 2023
The articulation of the FY24 budget will be challenging on a number of counts, no less because of the upcoming national elections, Centre for Policy Dialogue (CPD)’s Distinguished Fellow Dr Debapriya Bhattacharya tells The Business Post’s Talukder Farhad in an interview.
What challenges do you see in the FY24 budget?
The national budget for FY24 is going to be announced at a time when the country is facing a multi-layered and multidimensional complex situation concerning international, regional and national contexts. Such a challenging setting for the national budget was not observed in the past one and a half decades.
It is not only because the global economy is experiencing slow growth, volatility in commodity prices, and supply chain pressure, among others. The war in Ukraine has added a sense of unpredictability to the global outlook.
In the regional context, Bangladesh has to consider the palpable geopolitical tensions that have implications for our development prospects and might affect them.
The national economic circumstances are no less challenging as GDP growth has slowed, private and public investments are stagnating, fiscal and current account deficits are yawning, and prices are rising. In addition, there are outstanding reform issues concerning, for example, the banking sector, capital market and energy pricing. The unveiling of the budget for FY24 has to take into cognisance this difficult environment.
Can you elaborate on the challenges on the national side?
On the national side, there is definitely a very difficult macroeconomic situation. The overriding concern is, of course, the stabilisation of the macroeconomic variables.
The stabilisation implies firstly holding back the inflationary trend. We recognise that the ongoing high inflation is not only fuelled by global price rise and depreciation of the taka but also because of problems in the supply side and market management.
But the important thing is that we earlier had a strong external balance to deal with such situations. Due to the deepening of weaknesses in the balance of payment, we are experiencing depleting foreign exchange reserves, leading to import control. Thus, the upcoming budget has to improve the supply of foreign exchanges through expanded exports, enhanced flow of worker remittances, greater foreign direct investment and disbursement of foreign assistance. By strengthening the external accounts, the budget may contribute towards stabilising the exchange rate.
The fiscal balance of our economy had been perennially weak, with a low tax-GDP ratio, poor implementation of public expenditure programmes, and a modest budget deficit. Increasing expenditure pressure is enlarging the fiscal deficit. However, the upcoming budget has to provide for underwriting the fiscal shortfall through a balanced mix of borrowing from the central and commercial banks and foreign sources.
What about the IMF programme?
Yes, that is one of the new dimensions of the upcoming budget as it has to be announced keeping the country’s commitments to the IMF for securing the loan. So, these commitments include robust growth of revenue collection (an additional 0.5 per cent of GDP annually), streamlining of tax exemptions accorded, harmonisation of the subsidies, and reduced debt servicing.
A large part of the commitment relates to institutional reforms, including bringing down the non-performing loans (NPL) in the banking sector, modernisation of the tax collection system, and a number of transparency measures (for example, foreign exchange reserve and debt level estimates). There are also commitments to unify the foreign exchange rate and liberalise the bank interest rate.
I understand that all these requirements will be reflected in the policy statement section of the budget speech. However, the major challenge is to synchronise the fiscal policy measures with the monetary policy measures as well as with the trade policy measures. The upcoming budget has to show a higher degree of policy coherence and coordination. The IMF programme is also about the balance of payment support. Thanks to it, we now have access to budget support. But all the money will not come without strings, and the government has to meet some conditions, including carrying out reforms. The challenge is to synchronise the reform measures committed to as part of the IMF programme and the World Bank with the government’s general development strategy and implementation measures. That is why I said the IMF is the foster father.
What are the other challenges?
Over the last decade, due to the incremental prioritisation of physical infrastructure, the human development sector has received lower allocations. The preponderance of the mega projects did not allow the earlier budgets to allocate more than two per cent of the GDP to the education sector and only one per cent to the health sector. This has created an inter-sectoral imbalance in the economy. One would expect that the budget for FY24 would address this policy lacuna in budgetary support.
Do you want to highlight anything?
Given the circumstances, food security should get the utmost priority. To that end, the fiscal support framework for agriculture has to be sustained and consolidated. So, allocations for electricity, diesel, fertiliser, insecticides, seeds etc., for farmers have to be protected in the upcoming budget.
This will be an election year budget.
Yes, during FY24, the national election is supposed to take place. Usually, in an election year, the government desires provisions of loose money, such as sizable allocation for no-year marked block fund.
Regrettably, such fiscal luxuries may not be available this time around. In fact, it will be difficult for the government to borrow through its way. Indeed, the current government is entering the pre-election phase with the weakest state of the economy of its 15-year regime (excluding the Covid-19 period).
So notwithstanding being an election year, the budget needs to come with a restrained fiscal framework and modest GDP growth target. In view of the upcoming election, the budget will definitely put on record its development achievement during the last one and a half decades.