FY23 budget: Govt eyes higher growth despite global gloom

The government is going to raise its economic growth target to 7.5% for the forthcoming fiscal 2022-23, even amid fears of hikes in commodity prices and a forecast of an economic slowdown in the European Union – Bangladesh's key export destination – in the wake of the ongoing Russia-Ukraine war.

At the same time, the overall inflation rate in the next fiscal year is expected to be significantly lower than the current level, officials at the finance ministry said, adding the government, therefore, is going to set the inflation rate target at 5.5% in the upcoming national budget.

Finance ministry officials involved in the formulation of the next budget told The Business Standard that the country would be able to attain the growth target if the Ukraine war ends shortly and the Covid situation in the country does not deteriorate.

In addition to pursuing an expansionary fiscal policy, they are planning to increase spending in the annual development programme (ADP) to achieve the growth targets.

The government in its budget for the current financial year has set the GDP growth target at 7.2%, which remains unchanged in the revised budget.  The finance ministry thinks the target will be achieved mainly because of high growth in imports and exports, recovery in manufacturing and services, sustained growth in agriculture, and increased revenue.

Finance ministry officials feel the growth trend of the export trade will continue in the new fiscal year as well, while the industrial and agriculture sectors will also continue growing. Besides, they are expecting high growth in remittance inflows soon, as manpower exports have increased by 373% year-on-year in the current financial year.

However, if the war continues, the implementation progress of big projects such as the Rooppur Nuclear Power Plant is likely to be slower than the target, and the overall expenditure of the government, including development expenditure, is expected to increase in the coming days, fears the finance ministry.

Nonetheless, the finance ministry in the revised budget for the current fiscal year has raised the inflation target to 5.7% -- which was initially estimated at 5.3% -- in the wake of the hike in fuel prices in the country in November last and the outbreak of the Ukraine war this February.

Economists have, however, expressed disagreement with the finance ministry's projections.

They say a peaceful solution to the Ukraine war would certainly boost Bangladesh's GDP growth in the next fiscal year, but even then it would not be possible to achieve a 7.5% growth.

It is very unlikely that the 7.2% growth target set for the ongoing fiscal will be achieved, they said, adding the GDP growth in the first 10 months of the last fiscal year was 5.4% and how that increased to 7.94% only two months later is questionable.

The average overall inflation for the past 12 months hovered around 5.69% at the end of February. Economists say year-to-year inflation rate must be below 6% to log the price gains at 5.7% at the end of the current fiscal year, insisting that the international rates of fuel, industrial machinery and raw materials would not come down anytime soon.

There are some domestic strategic items in Bangladesh such as petroleum products, gas and electricity that play a key role in pushing up inflation. There have already been public hearings on raising gas prices and there are proposals to raise power tariffs too.

In the regard of cooling off inflation, the economists raised questions about the plan to raise the power tariffs.

Noting that growth could be around 6% and 6% in the next fiscal year, Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Standard that external trade is unlikely to contribute to the growth exponentially since the import cost is on the rise alongside the export earnings.

Credit growth also slowed in February. Given the current international situation, it is unlikely that there will be a significant increase in investment next year, said Zahid Hussain.

He commented that actual consumption has not increased as the consumer spending is rising mainly due to inflation.

"Government spending has not increased much. Remittance inflow has slowed down too compared to the previous year, which is controlling consumer spending. Growth in the current fiscal year could be around 6%.

"If the global situation normalises, growth in the next fiscal year could be more than 6%," the economist added.

Although the Russia-Ukraine war seems to be heading towards a peaceful solution, the economist talked about the potential risk of a recession in Europe, which eventually would hamper Bangladesh's export.

"The remittance flow will increase in the new year as the manpower export has already back on track. There are doubts whether the amount of investment required to achieve a 7.5% growth would be available owing to the global situation," he added.

Talking about an inflation estimate for the next fiscal year, he said further devaluation of taka against dollar may be needed in the future, which will drive inflation up. 

A peaceful solution to the Russia-Ukraine war will reduce fuel prices. But in the past, the government had not adjusted oil prices in the country despite a significant fall in the international market, he noted.

But, if prices of goods in the country's market will come down in line with a decrease in the global market, he also said.

"Whether inflation will come down to 5.5% in the next fiscal year depends on the interbank exchange rate and what policy decisions the government makes," he said.

Asked about the finance ministry's GDP growth estimate and inflation, Ahsan H Mansur, executive director at the Policy Research Institute, told TBS, "There is still a lot of time. We do not know what will happen in the future. The target can be achieved only if the situation normalises; otherwise, not."  

Except for war impact, an overall positive picture ahead 

All economic indicators, except for the volatile commodity market caused by the Russia-Ukraine war and a slowdown in implementation of major development projects, such as the Rooppur nuclear power plant, are expected to be positive, finance ministry officials say.

The Finance Division has described rising global inflation because of the ongoing war as "worrying".

"If the Russia-Ukraine crisis is prolonged and a fourth wave of Covid-19 hits the world, our export-import trade, and the labour market may encounter challenges," according to a recent report by the Finance Division.

Highlighting the potential for high GDP growth, the division said there is positive progress in terms of demand among the growth drivers, including export-import activities, disbursement of agricultural credit, and opening of letters of credit for import of industrial raw materials.

Besides, there is significant growth in private sector credit flows, imports of capital machinery, and foreign direct investment, which will benefit the economy in the long run, it said.

According to the Finance Division, industrial production was severely disrupted during the first wave of Covid infections in the country (April-May 2020), which made a quick turnaround from July that year.

When the second wave made inroads in May-July 2021, industrial production was somewhat stagnant but it was still above the pre-pandemic level. Now, the manufacturing sector has recovered from Covid-induced losses and returned to normal growth, leading to a significant jump in the industrial production index in recent times.

With the economy in the recovery lane, the uptrend in GDP growth will continue in the current fiscal year and in the future, the ministry report said.

Exports registered a 30.86% growth till February of FY22, while imports increased by 46.21%. Finance ministry officials are expecting further growth in the future due to an increase in imports of petroleum and industrial raw materials.

During July-December, imports of capital machinery increased by 42.81% and in July-January, the number of letters of credit opening for imports of industrial raw materials increased by more than 51%.

As of last February, exports to the US market increased about 48% and to the European Union about 28%. The finance ministry thinks that the trend of export growth in the two major markets will continue for the rest of the current fiscal year.

Highlighting the recent trend in the exchange rate, the Finance Division said taka somewhat depreciated against the US dollar during July-March of the current fiscal year as compared to the same period last year. At the end of March, the rate was Tk86.20 per dollar, up from Tk84.80 in the same period last year, which is not alarming.

But, the money is getting stronger against the euro in the current fiscal year. At the end of March, the exchange rate of taka was Tk94.65 against the euro, which was Tk101.06 at the same time last year.