Subsidies to go up 35% in next budget

Despite hiking the prices of gas and electricity to meet the International Monetary Fund's conditions to cut back on subsidies, the government may have to increase the subsidy and incentive allocation by 35% for the forthcoming fiscal year 2023-24 compared to this year.

Besides, the devaluation of the taka against the US dollar, increases in global interest rates, and rise in interest rates on treasury bonds and other related factors are expected to lead to a 27% rise in the interest payment burden next fiscal year, according to a finance ministry estimate.

Finance ministry documents show that allocation on subsidies and incentives will exceed Tk1,10,000 crore in the FY24 budget, up from Tk81,490 crore in the original budget for the current fiscal year. However, the Finance Division has allocated an additional Tk16,812 crore on subsidies for agriculture, electricity, and food assistance in the revised budget of the current financial year.

Infographic: TBS

On the other hand, interest payments will rise above Tk1,00,000 crore in the forthcoming budget from Tk79,530 crore this year, according to the documents. 

As such, the government's expenditure on interest payments will see almost a three-fold hike in FY24 when compared to Tk35,691 crore in FY17. In FY22, the figure was Tk68,213.

Finance ministry officials involved in the preparation of the budget told The Business Standard that despite the decision to increase the size of the new budget by 13.5% compared to that of the current fiscal year, the size of the Annual Development Programme (ADP) will increase by only 6% or Tk14,000 crore to Tk2,60,100 crore for next year.

The size of the national budget for FY24 will climb to Tk7,69,000 crore from the current fiscal year's original outlay of Tk6,78,064 crore. While the budget size will increase by around Tk90,000 crore, about Tk57,000 crore from it will be spent on interest payments and subsidies, and incentives, the Finance Division estimates.

This Finance Division's budget estimates for the upcoming financial year will be presented in the meeting of the technical committee on budget projection to be held on 2 April with the division's Senior Secretary Fatima Yasmin in the chair. 

After its approval in the meeting, the estimate will be presented in the budget management and resources committee meeting to be held on 5 April under the chairmanship of Finance Minister AHM Mustafa Kamal. Later, after being finalised in a meeting chaired by the prime minister, it may be presented to the National Parliament on 1 June.

Finance Division officials told TBS that even though the prices of gas and electricity have been increased as per the IMF conditions, there is no scope to increase the prices much in the election year. 

Reducing subsidies in these two sectors is one of the IMF loan conditions. Keeping that in mind, subsidy allocation should be increased to stabilise the economy and keep inflation under control in the election year. Because, it will take time for prices of fuel oil, gas, and coal to return to the pre-pandemic level in the global market, although the prices have already cooled down to the pre-war period.  

The Centre for Policy Dialogue has recommended that electricity and fuel subsidies be reduced in the next budget. 

The organisation said yesterday that it is necessary to adjust the price of fuel oil with the international market from next July and it should be adjusted once every month.

Golam Moazzem, CPD research fellow, said that the government's subsidy in the power sector is due to overcapacity as capacity charges are being paid even without consuming electricity.

In this situation, he recommended the government to go for a 'no electricity, no pay' system.

As the import of LNG at the international market rate has started, CPD fears subsidies will increase here as well. Budget allocation should be provided on a priority basis for domestic gas exploration and promoting clean energy could ultimately help the power and energy sector out of the subsidy burden.

Mahbub Ahmed, former senior secretary of the Finance Division, also thinks it is very challenging to prepare the budget for the next fiscal year.

"Last time around, the Ukraine war situation was not taken into account that seriously while formulating the budget. Besides, there were no conditions from the IMF. So, the budget cannot be formulated in the same formula as last year," he told The Business Standard.  

"Last year there was an attempt to control inflation by increasing subsidies. But this time subsidy needs to be reined in while inflation must be controlled at the same time. Spending on social safety nets should be increased and the global situation must be taken into consideration," said Mahbub Ahmed.

"To increase expenditure on social security, revenue earnings must increase. But due to import curbs, revenue at the import level will decrease. In that case, earnings from direct tax should increase, but it will not happen overnight just because we want it," he added.

Pointing out that the exchange rate is largely linked with inflation, he said, "To tame inflation, the value of taka must be strengthened against the dollar. For this, we will need exports and remittances to increase. At the same time, to increase the government's earnings, GDP growth should also be boosted in the new fiscal year."

Finance Division officials said that reducing subsidies, controlling inflation, increasing revenue, strengthening foreign exchange reserves, and increasing the scope of the social safety net are the key budget policies for the next fiscal year.

The same policies are also laid out in the IMF $4.7 billion loan conditions.