Originally posted in The Financial Express on 8 June 2024
The budget for the fiscal year 2024-25 (FY25) has been presented by the new Finance Minister of the newly elected government. This budget is also the last budget of the Eight Five Year Plan (8FYP) of Bangladesh. The budget has been prepared amidst significant economic challenges which the country has been experiencing for almost two years. Economic strains are evidenced by subdued revenue mobilisation, resulting in a shrinking fiscal space, a high reliance on government borrowing from commercial banks to finance the budget deficit, tightened liquidity in scheduled banks, elevated prices of essential goods, and a deteriorating external sector balance and foreign exchange reserves.
The immediate challenge of the economy is to tame inflation and improve foreign exchange reserve. At the same time, the government also has to restore macroeconomic stability and adjust to new reality where economic stability will have to be given priority over growth for the time being.
The Centre for Policy Dialogue (CPD) presents an assessment of various proposals made in the budget for FY25 in the context of ongoing economic challenges.
MACROECONOMIC PERSPECTIVES: For FY25, GDP growth target has been set at 6.8 per cent, a recovery from 5.8 per cent (provisional estimates for FY24). Public investment-GDP ratio, likely to decline to 6.10 per cent in the next fiscal year, which was 7.50 per cent in FY24 or Tk 367.63 billion less in nominal terms! Private investment-GDP ratio is expected to improve drastically to 27.30 per cent in FY25 against 23.50 per cent in outgoing fiscal year.
In FY25, Tk 3435,44 billion will be additionally required for private investment which is 28.90 per cent increase in nominal terms. It is a hope for remarkable recovery! Incremental Capital-Output Ratio (ICOR) is also expected to be 4.9 in FY25, implying an improvement in productivity. It seems that no impact of the ongoing macroeconomic policy adjustments (like contractionary monetary policy and restrained fiscal stance) is being considered.
Growth of credit to private sector is assumed to be 9 per cent in FY25 against 10 per cent in FY24. As of April 2024, private sector credit growth was 9.90 per cent. Projection for private sector credit growth may be a reflection of continuation of contractionary policy and rising demand of bank borrowing from the government. The projection for FY25 does not commensurate with the earlier estimation for private sector investment projection.
Inflation is expected to fall drastically to 6.50 per cent in FY25 while 8.0 per cent was projected in FY24 and the entire FY24 experienced higher inflation, over 9.0 per cent. So, the inflation projection for FY25 certainly appears to be overambitious.
Export growth target in the next fiscal year is set at 8.0 per cent, similar to the target for FY24. In July-May period of FY24, the export registered 2.0 per cent growth. The target of import growth is set at 10 per cent in the next fiscal year against a decline by the same rate in the outgoing fiscal year. During the first nine months of FY24, import dropped by 15.40 per cent. Remittance is expected to grow by 7.0 per cent in FY25 against 10 per cent in FY24. Inflow of remittance in July-May of FY24, however, increased by 10.10 per cent.
Foreign exchange reserve is also expected to improve to US$ 32.0 billion in the next fiscal year against US$ 29.1 billion in the outgoing year. As of June 5, 2024, forex reserve stood at US$ 24.2 billion. There is, however, no projection of net forex reserve according to (BPM6) or reporting on accumulated external payments arrears. Exchange rate for FY25 is projected at Tk 114 per US$. Interbank Tk-dollar exchange rate was Tk. 117.9 on June 5, 2024. It seems that Local currency against dollar to appreciate in FY25 while forex reserve is also to grow!
Public debt stock as percentage of GDP is to increase by 0.9 percentage points in FY25 (38.6 per cent in FY25 against 37.7 per cent in the revised budget of FY24). External debt rose in a significant manner in FY24 while foreign debt principal repayment projections are made in a conservative manner as it does not match with the programmed budget allocation to this end (Tk 365 billion or US$ 3.2 bln).
Overall, the targets to be set for the macroeconomic framework for FY25 did not take cognisance of the current realities and are too optimistic! Similar approach was taken in the budget for FY24.
BROAD FISCAL FRAMEWORK FOR FY25: Revenue mobilisation is projected to grow faster, by 13.2 per cent, than public expenditure of 11.60 per cent. Total expenditure is set at 14.20 per cent of GDP (same as the revised budget for FY24). Revenue is expected to be 9.70 per cent of GDP and marginally higher than the 9.50 per cent set in the revised budget for FY24. Development expenditure is programmed to grow slower or 8.20 per cent in FY25 than operating expenditure that is target to increase by 11.90 per cent. Annual Development Programme (ADP) is 33.20 per cent of the total public expenditure outlay and lower than 34.30 per cent of the revised estimate.
For the next fiscal year, budget deficit has been projected at 4.60 per cent of GDP against 4.70 per cent in the revised budget for the outgoing fiscal year. Share of foreign loans and grants will be 37.10 per cent in financing the deficit against 33.80 per cent in the revised estimate. Once again, revised budget for FY24 did not consider budget implementation progress into consideration – creating credibility of fiscal framework proposed for FY25 at risk.
Regarding the revenue mobilisation, the proposed budget for FY25 set a target 13.20 per cent growth over the revised budget for FY24. CPD projects that 27.30 per cent on actual amount of FY24 or approximately an additional Tk 1160 billion may need to be mobilised.
NBR tax is projected to grow by 17.10 per cent. Both non-NBR tax and non-tax revenue to decline by 21.1 per cent and 6.10 per cent respectively. Taxes on Income, Profits and Capital Gains to post strong growth of 48.0 per cent of total incremental revenue; followed by Supplementary Duty by 17 per cent, Import Duty by 15.90 per cent and VAT by 15.60 per cent. Public services sector and Interest payments attained the top two spots
Budget for LGRD and Agriculture sectors declined Within Public Services Sector, Finance Division receives an additional amount of Tk 377.98 billion or 45.80 per cent of total incremental public expenditure.
Some of the high spending areas include: Equity (Tk 323.82 billion); Loan to autonomous bodies (Tk 508.75 billion); and Reserve (Tk 323.84 billion). Together, these three areas received 42.5 per cent of total incremental public expenditure.
Share of domestic financing is set at 62.90 per cent in the next budget against 66.20 per cent in the revised budget. Tk 1375.0 billion or 53.70 per cent of the domestic financing will come from the bank borrowing. The critical question will be how much will be borrowed from the central bank, if the liquidity situation in the banking system does not improve.
Only Tk 154 billion from net sale of NSD certificates is projected in the next fiscal year while the revised budget for the outgoing fiscal year predicts that net paid back to be about Tk 73.10 billion.
Gross foreign aid requirement will be $11.5 billion against US$ 9.7 billion in the revised estimate for the outgoing fiscal year. Much will depend on the implementation of foreign funded ADP projects. Foreign debt repayment to increase to US$ 3.2 billion in the next budget from US$ 2.4 billion in FY24’s revised outlay.
The government’s guarantee or contingent liability is about 2.10 per cent of GDP and 45.70 per cent of the budget deficit in the next fiscal year. The liability has increased by 18.8 per cent over the last one year and driven primarily by the Ghorasal Polash Urea Fertiliser Project. Power sector remains the leading sector in terms of receiving guarantees from the government which is 45.80 per cent of total in FY25. Biman and Energy continue to be leading sectors.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Towfiqul Islam Khan, Senior Research Fellow, CPD, (towfiq.khan@gmail.com); Muntaseer Kamal, Research Fellow, CPD, (muntaseer@cpd.org.bd); and Syed Yusuf Saadat,Research Fellow, CPD.
[The piece is based on ‘An Analysis of the National Budget for FY2024-25’ presented at the media briefing on June 07, 2024.]