A tough budget calls for tough measures

Key priorities

• Restoring macroeconomic stability
• Stabilising foreign exchange rate and reserve
• Taming import-induced inflation
• Achieving revenue target
• Clearing subsidy arrears in energy and fertiliser

By all counts, it is going to be the toughest task in recent times to chalk out next year's budget to be placed today for the new finance minister, AH Mahmood Ali.

The economy is on a slippery slope. The macroeconomic stability that prevailed for quite some time is battered from all sides. To get out of the shambles, it will need to take a raft of unpopular decisions, especially to find money to foot the bill to let the show go on. How the already smarting lower- to middle-class will cope with the higher expenditures if more taxes are slapped on, is something to bug any finance minister at such a crossroads.

Inflation is hitting high and a contractionary budget to contain it is on the cards to be traded with growth and employment. At such an urgent time, any further loss in employment – already squeezed by slowdown of private investment – can spell trouble.

Bold decisions needed

But contraction should not necessarily mean a loss of growth or employment, and here the government will need to make bold decisions – more political and economic – to make better use of every taka spent. In simpler terms it means an iron-fisted check on wasteful ballooning of projects – Bangladesh no longer can afford to build the costliest roads, or any infrastructure for that matter, in the world. In other words, a fight on corruption is on the cards now, signs of the intention are already visible.

Deficit budget has always been a reality; and much-less-than required revenue, poor show of development projects have also long been deeply ingrained in Bangladesh's economic landscape. But the dollar was not so scarce and costly, the exchange market was never so volatile, debt burden was not so heavy and fast skyrocketing, and inflation was not so high and stubborn in recent history as they are today. Banks were never more efficient but never were so empty and errant either.

Even in pandemic years, when the world economy as a whole was sinking, Bangladesh managed to stay afloat, the central bank boasted its biggest dollar reserves in history. Today, forex reserves have dipped to historic low, the quarterly GDP growth and 10 months' ADP implementation have tumbled to its lowest in three years.

Things have turned worse, or the worst in cases, and for the finance minister, it will not be smooth sailing from here to the next fiscal year and beyond.

Chronic failure in project implementation in time can be cited as a root cause for cost escalation and subsequent external debt burden. Interest payments for foreign loans exceeded the full fiscal year's budget allocation in 10 months, marking a 102% increase from the same period last fiscal year. As revenue earnings fall short, the government's borrowing from banks surged in July-April period of the current fiscal year to over Tk65,000 crore, 12 times the amount taken in the year-ago period.

Borrowing from both external and internal sources is much costlier now, making interest payment the second largest expenditure in the budget. Had foreign-aided projects been completed in time, Bangladesh's external debt sustainability would not have been at stake. Similarly, if long-felt revenue reforms were done, huge internal borrowing might not be needed.

Finance minister has a list of doables

Now it has been nearly five months since Finance Minister AH Mahmood Ali stepped into his office with pressing economic and financial challenges demanding immediate attention. The period coincides with the second half of the current fiscal year and the finance minister had adequate time to diagnose the wounds and devise best possible remedies – well articulated in the brief presented at a meeting with the prime minister last month.

He short-listed his key priorities: restoring macroeconomic stability, stabilising foreign exchange rate and reserve, taming import-induced inflation, achieving revenue target and clearing subsidy arrears in energy and fertiliser. Other challenges he spotted include gradually exiting from three years of austerity, dropping less-essential projects to fund priority projects for timely completion, expediting foreign-aided projects in health and education, and continuing structural reforms and creating business-friendly environments to enhance domestic and foreign investment.

The finance minister listed doables too. On the revenue front, he highlighted the urgency of enhancing capacity and strengthening automation of tax administration, widening coverage of income tax and VAT, and departure from tax exemptions.

To create enough fiscal space for social spending, he prefers to continue fuel oil and electricity price adjustment with the market and clear the subsidy arrears in instalments.

He wants to strengthen monitoring to full implementation of ADP.

He recalled the 2008 election pledge of the Awami League, repeated in the party's 2024 manifesto, to implement a universal pension scheme which will include people in private and informal jobs as well.

The finance minister also has not forgotten about the impacts of climate change.

But none of the priorities will appear in the national budget for the first time. All these were told and retold in each budget speech. What is missing is to get those done.

A path lined with past failures

Unveiling the budget for the next fiscal year today at the Jatiya Sangsad, which will in fact spell the Awami League government's roadmap for next five years, the finance minister will have to steer clear the hurdles that caused repeated failures in previous years.

He has set his bars even higher – to earn Tk5.41 lakh crore revenue, 14% higher than this year's revised target – to finance the Tk7.97 lakh crore budget next year. To make this happen, he has to switch to a new script than the NBR's age-old practice to prey on easy targets only and expand its reach to unexplored sources of direct tax.

He takes the challenge to achieve a feat in the next year which now appears impossible – raising GDP growth to 6.75% from 5.82% as officially projected for this year, lowering inflation to 6.5% from 9.74 now, keeping budget deficit within 4.6% of GDP and fetching Tk90,700 crore from external sources to finance the Tk2.65 lakh crore development budget.

He will need more money to pay Tk1.20 lakh crore as subsidy and cash incentives for exports and remittance, to include eight lakh new beneficiaries in the social safety scheme. He will have to pay Tk1.13 lakh crore as interest payment.

Where is the money?

So, the NBR will have to take the onus – to earn as much revenue from income tax (Tk1.77 lakh crore) as it collects as VAT to achieve the target of Tk4.80 lakh crore. There are plans to make high-income groups pay more income tax and strip some businesses of tax exemptions. Sugary food, beverages, tobacco, mobile phones are to see higher taxes, while some industries such as steel and health services may see import tariffs lowered for raw materials.

State minister for finance Waseqa Ayesha Khan told The Business Standard that the next year's budget would target to tame food inflation at any cost. "Domestic resource mobilisation will get emphasis in the new budget," she said.

Economist Dr Sadiq Ahmed, vice chairman at Policy Research Institute, says policy reforms can help increase revenue substantially. He suggests instituting an effective self-assessment tax system by digitalising tax assessment and collection thereby eliminating the interface between taxpayer and tax collector. Besides, simplifying tax filing by eliminating the income, expenditure and wealth reconciling, selective and productive audits done by professional auditors, implementing the 2012 VAT Law (which was heavily distorted later while at the implementing stage), and introducing a modern property tax system can give a boost to revenue collection, he believes.

Private investment needs stable policy

Private investors want predictability and consistency in fiscal, monetary and trade policies. They want better logistics and less hassles at ports and government offices to make investment decisions. After a meeting with a group of potential American investors, Salman F Rahman, advisor for private industry and investment to the prime minister, said they (US investors) want to make big investments in Bangladesh if they get assurance that the tax regime remains stable for the next 5 to 10 years. "If taxes go up abruptly, no one will come to invest here," he was quoted as saying.

Bangladesh badly needs foreign investment to diversify export and graduate from LDC effectively. The new budget needs to make the way clear for FDI.

Making a budget is a tough test for any finance minister. For AH Mahmood Ali, the job is even tougher as he has to set the five-year economic journey in motion aiming to achieve ambitious goals – LDC graduation in 2026, upper middle-income status in 2031 and a developed nation in 2041. An uphill battle indeed, for himself and the Awami League government.

With inputs from Abul Kashem and Reyad Hossain