Meeting IMF conditions: Focus factors for upcoming budget

With the announcement of the impending budget for FY24, it is evident that the conditions set forth by the International Monetary Fund (IMF) will significantly influence it.

As per the statement given by the Finance Division, the upcoming budget will focus on strategies for a successful implementation of the conditions for the timely disbursement of the IMF funds. 

Considering this context, it raises the question: Which specific areas should receive focused attention based on the conditions outlined by the IMF?

Reduction of Subsidies in Budget

One of the borrowing conditions stipulates the introduction of a periodic formula-based price adjustment mechanism for petroleum products by December 2023.

This mechanism aims to completely eliminate budgetary subsidies on these items. 

The Finance Division has calculated that subsidies for gas and electricity are projected to reach approximately 0.9% of the country's Gross Domestic Product (GDP) in FY23, compared to 0.4% of GDP in FY21. 

In response, the government has already increased petrol and octane prices by nearly 50% and diesel and kerosene prices by 36%.

Adaptation of New Tax Reforms to Boost Budget Revenue

The upcoming national budget will also need to adopt tax revenue measures intended to increase the country's tax-to-GDP ratio to 8.3% from the current 7.8%. 

Furthermore, compliance risk management units will be established in the customs and Value Added Tax (VAT) wings under the National Board of Revenue. 

The IMF has highlighted that Bangladesh has one of the lowest tax-to-GDP ratios globally, citing numerous exemptions, a complex tax code, and weaknesses in revenue administration as factors contributing to low tax productivity. 

Increasing revenue generation is crucial for addressing the budget deficit and facilitating government spending on critical sectors like health, education, and human development.

Meeting Budget Deficit 

The budget deficit, which stands at 5.6% of GDP in the current financial year, must gradually be reduced to 5% in accordance with an IMF condition. 

The government is expected to prepare a Tk7.5 lakh crore national budget for the next financial year, with an overall revenue collection target of Tk4.8 lakh crore. 

To cover the deficit, the government plans to borrow around Tk2.6 lakh crore mainly from local sources.

Reducing Reliance on National Saving Certificates 

The government has a deadline of December 2023, as per IMF's condition to devise a plan aimed at reducing reliance on National Saving Certificates (NSCs). 

This urgency stems from concerns over the high borrowing costs associated with NSCs. It is essential to reduce the reliance on NSCs for pressing other revenue sources.

Other Conditions and the Budget's Scope

While some conditions, such as implementing new interest and exchange rates, are not directly linked to the national budget, the Bangladesh Bank must adhere to them in the new financial year.

The government has committed to implementing a total of 45 conditions by June 2026 as part of the IMF loan program, aiming to increase the net international reserve to cover four months of imports.

On 30 January, IMF approved a loan of $4.7 Billion to Bangladesh under the extended credit facility (ECF) and the extended fund facility (EFF) to help the country preserve macroeconomic stability and foster growth. 

Bangladesh received its first installment of $476 million on 2 Feb and the rest will be disbursed in several tranches over the next three years, with the last tranche to be disbursed on 1 May 2026.