Anticipate a budget for inflation management, budget consolidation and growth arbitration
Each national budget is framed in a certain context. Three distinct issues set the backdrop for Bangladesh’s budget for the financial year 2022-23 (FY23). First, the national economy has not yet fully recovered from the consequences of the Covid-19 pandemic and has not recovered the benchmark of the 2019 financial year. In fact, the fragmented recovery that has been observed during the first half of the past financial year, was reversed thereafter.
Second, the global economy is going through a turbulent period and its short-term outlook remains rather uncertain. As a result, broken supply chains, rising commodity prices (especially food and fuel), rising shipping costs, etc. are expected to continue in FY23.
Third, due to a multitude of internal and external factors, the macroeconomic stability of Bangladesh is currently under severe strain. This is expressed, among other things, by the rise in inflation, the widening of the trade and current account deficits, the weakening of the Taka and the increase in the pressure on the budget deficit. Never in the past twelve years has Bangladesh’s macroeconomic situation been so challenging.
Certainly, the next national budget must be sensitive to these three essential questions.
There is now a broad consensus among the professionals concerned on the fact that controlling the rise in the prices of food and non-food raw materials, as well as that of services, must be in the budget for the next financial year. However, there is less unanimity on methods to contain the current inflationary trend in the country.
Despite various policy pronouncements, the government of Bangladesh has in reality been unable to pursue an expansionary fiscal policy (e.g., growth in public spending and private sector credit flow) to stimulate domestic demand for the post recovery. -pandemic. Therefore, there is little room to exercise fiscal restraint in order to contain inflation. Consequently, the government had to content itself with discouraging the importation of “luxury goods” (for example, by increasing tariffs and duties as well as the margin on letters of credit) and at the same time returning certain consumables ( including food and cooking oil) cheaper due to lower import duties. These interventions will have limited relevance to market stabilization as the country’s three main import categories – i.e. the three “Fs” – food, fuel and fertilizers will experience a further rise in prices. world prices. This implies that inflation driven by imported commodities may be here to stay, if not not to come.
Dr Debapriya Bhattacharya/TBS Sketch
Dr Debapriya Bhattacharya/TBS Sketch
The situation is further aggravated by the growing mismatch between export and import growth, fluctuating remittance income flows, stagnant foreign direct investment (FDI) and rising debt servicing (foreign ). The robust flow of foreign aid in the recent past has so far been an important contribution to counter the weakening of the national currency. Once a matter of pride, our foreign exchange reserve is now experiencing a dwindling fortune. The easing of the exchange rate was driven by market realities, with the central bank being forced to supply an increasing amount of foreign currency to retain the value of the taka. It is quite plausible to apprehend that the value of Taka could fall further.
Under these circumstances, monetary and trade policy tools will have limited relevance in managing rising prices in local markets. With regard to tax measures, the government’s decision to opt for an upward adjustment in the prices of energy products (gas and possibly petrol/diesel) will further fuel the rise in non-food prices.
Given the above, the main means of protecting people with low or limited income would be to provide direct financial support by expanding safety net programs in terms of their number of participants and their rights. For the middle income group, raising the taxable income threshold from Tk3 lakh to Tk3.5 lakh would leave them with additional disposable income. The sale of products through the Trading Corporation of Bangladesh (TCB) and the family credit card scheme should be effectively expanded and implemented.
Ultimately, alongside efforts to contain the rise in market prices, the government would be well advised to undertake direct measures to protect the purchasing power of the underprivileged sections of society.
The main route to stabilizing commodity prices, protecting the purchasing power of the poor, and strengthening Bangladesh’s foreign trade and current account balances in the current juncture lies through fiscal consolidation. Fiscal consolidation must take place on both the revenue and expenditure sides of government.
Still, despite the (suspiciously) high growth in domestic income, the tax-to-GDP ratio has not crossed double digits over the past decade. This has created a resource constraint, especially in the face of the government’s high level of development ambition. It will therefore be very interesting to see how the next budget plans to improve its tax room. Hopefully, the demand for resources will not be used as an excuse to grant extraordinary concessions to money launderers and other holders of black money. Indeed, alongside some downward streamlining of corporate tax, as mentioned earlier, this level of tax exemption from personal income tax needs to be improved in line with the principles of tax justice.
The major fiscal consolidation in the FY23 budget must take place in public expenditure management. As is known, the revenue budget is dominated by three heads, viz. provisions for salaries and allowances, payment of debt service, and subsidies and transfers. These three heads represent more than half of the total revenue expenditure. In FY23, the government will be looking for as much money as possible to underwrite an increased allocation for grants and transfers. At the same time, the sectoral composition of grant allocation should be considered, prioritizing food and fuel.
From the above point of view, a moratorium should be imposed beyond the necessary increase in the allowance for civil servants’ salaries and allowances. Moderation of domestic borrowing, which constitutes the bulk of public debt, clearly needs to be exercised. It will also mean withholding resources for megaprojects, which have not yet started.
It should be recalled in this regard that government operating expenditure is increasing at a faster rate than development expenditure. This trend is reflected in the availability of a smaller share of the revenue surplus for the financing of the Annual Development Program (PAD).
Regarding the budget deficit, public finances remain in a comfortable zone. This happened due to the government’s inability to spend available resources in a timely manner. However, a closer look will reveal that the budget deficit is creeping up. The key to limiting the increase in the budget deficit is linked to greater absorption of domestic revenues, in particular through taxes on income and assets.
Given the growing pressure on the main macroeconomic indicators, notably on the inflation rate and the exchange rate, the easing of the interest rate ceiling also becomes inevitable. Admittedly, the improvement in the bank (base) rate will limit the money supply and could have an impact on the growth of private investment. However, national currency devaluation can stimulate export-oriented investment and employment and attract more remittance income through official channels.
On the other hand, the increased demand for grants and transfers as well as debt service will leave a limited revenue surplus for financing ODA. If ongoing foreign funding disbursements, including newly contracted budget support from the World Bank, do not increase significantly, it is quite possible that the size of ODA from FY23 will not increase significantly. sees only a modest increase.
Restricted public and private investment absorption could lead to reduced GDP growth in the coming year. Indeed, most international sources predict a below-trend GDP growth rate for FY23 and FY24 in Bangladesh. However, after noting all the well-known criticisms of GDP estimates in Bangladesh, it is safe to say that the government will not lower its GDP growth target for FY23, especially for political reasons in a year pre-election.
We must remember in this respect that the arbitrage of GDP growth is a more plausible policy alternative than the increase in food and non-food prices. Effective control of inflation will improve growth prospects. A skillful management of the exchange rate and the interest rate can bring a certain synergy to moderate the slowdown of the economic growth and to slow down the level of well-being of the underprivileged part of the population.
To that end, policy coordination, evidence-based monitoring, and a transparent feedback loop will be particularly needed for public financial management in FY23. Otherwise, the achievements of the past decade could be threatened.
Debapriya Bhattacharya, Emeritus Fellow, Center for Policy Dialogue (CPD)