Originally posted in The Daily Star on 15 May 2023
On June 1, 2023, the finance minister is set to present the national budget for the 2023-24 fiscal year in parliament. This particular budget poses significant challenges – arguably the most challenging in recent times – for economic policymaking in Bangladesh. The current geopolitical and geoeconomic situations are unfavourable, and the world is still grappling with the aftermath of the pandemic and the fallout of the ongoing Russia-Ukraine war.
The multifaceted challenges have resulted in an overall lower economic growth around the world, with some economies facing recession-like situations. In April, the International Monetary Fund (IMF) updated its projection of global growth, showing a rocky recovery. The IMF projects that in 2023, the global economic growth will fall to 2.8 percent from 3.4 percent in 2022, and eventually settle at 3 percent in 2024.
Bangladesh’s economy is also going through several challenges. These include the burden of high prices, pressure on the external sector, fluctuating foreign exchange rates, and a decline in foreign exchange reserves. Additionally, the country continues to face long-standing issues such as insufficient domestic resource mobilisation, low and stagnant private investment, inadequate public expenditure capacity, youth unemployment, and socioeconomic inequality. Even though the poverty rate has been declining over the past decade, as per the Bangladesh Bureau of Statistics (BBS), the recently published Household Income and Expenditure Survey (HIES) 2022 revealed that inequality has increased. For example, in the HIES 2010, the Gini coefficient was 0.458, which increased to 0.482 in HIES 2016. In HIES 2022, the Gini coefficient has gone up to 0.499.
Given the current global and domestic circumstances, the upcoming annual budget must incorporate strategies to tackle immediate challenges while also addressing medium-term issues. The persistence of a global economic downturn and inflationary pressures, compounded by the ongoing war, necessitates a comprehensive response from the government. To effectively confront this crisis, it is imperative for the government to coordinate fiscal and monetary policy measures. Additionally, specific measures tailored to combat these challenges should be implemented.
First, the government should eliminate various taxes – such as advance income tax, advance tax, and regulatory duty – imposed on all imported essential items. Social protection programmes should be expanded to include direct cash support for the impoverished. To cater to the needs of low-income groups, there should be an abundant supply of essential items in the open market, available at reduced prices through operations such as open market sale (OMS). Moreover, the tax-free income threshold should be increased to Tk 3.5 lakh for the low-income households.
Second, although the government is committed to eliminating subsidies, as per the IMF conditionalities for the $4.7 billion loan, this measure needs careful thinking. Subsidy management has to be in a targeted manner so that poor and low-income households are not affected. For example, agriculture subsidies for fertilisers and pesticides need to be sustained to avoid food insecurity. Given the global price and supply constraints, and limited fiscal space in the country, the government must adopt a rational policy measure to feed its large population. Furthermore, it is crucial to ensure fair prices for farmers in the agricultural sector, which will incentivise increased production and subsequently lead to a greater supply in the market. The government should strengthen its market monitoring mechanism to identify and penalise hoarders who create artificial crises. They should also ensure enough supplies in the market to avoid domestic market crises.
Third, to meet the growing demand for increased and affordable supply in the market, financial support is essential. Therefore, policymakers must focus on creating sufficient fiscal space by implementing strategies for domestic resource mobilisation. Understandably, reduction of taxes on essential items will subsequently lower import taxes. To compensate for the potential revenue loss, higher taxes on luxury goods can be imposed. The government is already imposing higher taxes on many luxury items. However, while this may serve as an immediate solution to generate additional revenue and meet the increased financial requirements, the ultimate objective should be to enhance revenue through the collection of income tax. Reforming the existing revenue collection system is the pre-condition for achieving this objective. The government should prioritise the establishment of an independent and fully automated tax system, supported by adequate and efficient human resources.
Fourth, the government should exercise caution while attempting to reduce expenditure, ensuring that it does not result in a drastic decline in government spending, a contraction of domestic demand, or a negative impact on investment. This is crucial because a combination of high inflation and weak economic growth can worsen the current situation. It is imperative for the government to increase its expenditure in crucial areas such as healthcare, education, and social protection. The social sector has been chronically neglected due to insufficient efforts in revenue generation and competing priorities, particularly in physical infrastructure. Consequently, these sectors receive minimal budgetary allocations as a percentage of GDP. However, if economic growth is not accompanied by an appropriate allocation of resources to the social sector, the sustainability of this growth will be jeopardised. Insufficient allocation of public resources to these sectors will further exacerbate societal inequality.
Fifth, while the national budget has certain limitations in addressing medium- and long-term issues, it plays a crucial role in determining resource allocation and generation for each financial year. Although the budget tends to follow an incremental approach, it has the ability to make choices and decisions within the broader national policy frameworks that are designed with medium- to long-term objectives in mind. Consequently, the annual budget is expected to not only devise short-term fiscal measures, but also allocate resources towards medium-term objectives, ensuring a continued focus on long-term goals. The budget should be formulated keeping these perspectives in mind.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author’s own.