FY25 budget aims to curb rising food costs, cut deficit

The government's upcoming budget outlines key initiatives to curb food inflation and deficits, bolster revenue streams, and ensure food security for all through investment in the rural economy and support programmes for farmers.

With a focus on cost-saving measures considering global and local macroeconomic factors, the finance ministry in a meeting yesterday finalised the outline of the Tk7,96,900 crore budget for the fiscal 2024-25, which is 14.20% of GDP. This marks the smallest budget as a proportion of GDP in the past decade.

The forthcoming budget, scheduled for unveiling in June, outlines a GDP growth projection of 6.75% and targets a 6.5% inflation rate, which is ambitious, especially considering the current inflation rate, which remains slightly below 10%, according to officials present at the meeting. 

Top policymakers endorsed the draft outline in the meeting of the Budget Monitoring and Resources Committee and the Economic Coordination Council on Fiscal, Monetary, and Exchange Rate Policy. The meeting was chaired by Finance Minister Abul Hassan Mahmood Ali. 

The next budget aims for an ambitious income target of Tk5,46,500 crore, an increase of over 14% compared to the revised budget of the current fiscal year. Within these income targets, the National Board of Revenue (NBR) aims to collect Tk4,76,500 crore.

Former finance minister AHM Mustafa Kamal prepared a budget outline for FY25 last December with a projected size of Tk8,05,000 crore but the current finance minister wanted to downsize it amid challenges in meeting revenue collection targets and the government's policy to continue austerity measures to control surging inflation.

Inflation control is top priority

According to Bangladesh Bureau of Statistics data, the inflation rate in the country stood at 9.67% in February, comprising a 9.44% food inflation and a 9.33% non-food inflation rate.

During the meeting, the Bangladesh Bank governor, the finance secretary, and other policymakers acknowledged that achieving this fiscal year's target of reducing inflation to 7.5% by June would not be feasible.

Despite efforts including market raids, importing goods from India through special arrangements, and holding multiple meetings involving ministers and officials, attaining this target has remained elusive.

State Minister for Finance Waseqa Ayesha Khan told TBS, "Global inflation rates are elevated, with Turkey's rate exceeding 60%. Despite this, our rate remains below 10%. For the upcoming financial year, our budget preparation is geared towards controlling food inflation at any cost."

He said, "Under the prime minister's directives, top priority will be given to boosting the country's domestic production. There has been a rise in bank loan interest rates and the taka has stabilised against the dollar. We anticipate a decline in the inflation rate soon."

The state minister also said that emphasis is being placed on increasing revenue collection in the new financial year. Various strategies are being implemented to restore order in the financial sector including the banking sector, the benefits of which we have started reaping.

The social safety net will be expanded to protect the impoverished from food inflation, with increased allocation. Currently, one crore families receive subsidised food items through the Trading Corporation of Bangladesh. Plans are underway to increase both the number of beneficiary families and product variety, with a decision anticipated by 9 April, said sources present at the meeting.

Ambitious revenue target

As concerns rise among businessmen about potential closures of industries due to factors such as gas and electricity shortages, increased bank interest rates, and rising costs due to the strong dollar, the NBR has raised its collection target for the upcoming financial year.

The projected collection target of Tk4,76,500 crore represents a more than 16% increase from the revised target of the current fiscal year. In the revised budget of FY24, NBR's target was set at Tk4.10 lakh crore.

According to the finance division, NBR's revenue collection for the first seven months (July-January) of FY24 stands at Tk191,496 crore. 

The Center Policy Dialogue (CPD) has analysed revenue trends and predicts NBR's collection for this fiscal year to be around Tk3.50 lakh crore.

During another meeting at a Dhaka hotel yesterday, attended by the finance minister and NBR chairman, Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association, urged for the implementation of an exit policy to assist traders who are grappling with factory challenges and facing imminent closure.

Mohammad Hatem, executive president of Bangladesh Knitwear Manufacturers and Exporters Association highlighted the crisis in the export sector and said, 'Interest rate is increasing, dollar rate is increasing. In such a situation, many factories will be closed. We need a safe exit policy."

During the meeting, the NBR presented various strategies to enhance revenue collection. Among these initiatives is the decision to mandate VAT e-payment or Automated Challan system for transactions of Tk10 lakh or more in the upcoming financial year, compared to Tk50 lakh in the current fiscal year.

In efforts to boost VAT collection at the district level, plans are underway to install 60,000 electronic fiscal device management systems in Dhaka and Chattogram.

The NBR said the Income Tax Act, 2023 will be implemented. Collaborations are underway with the Bangladesh Road Transport Authority (BRTA), Dhaka Power Distribution Company (DPDC), the Election Commission, and city corporations to identify new taxpayers. This involves initiatives to collect income tax from car owners, individuals with higher electricity usage, candidates in elections with declared assets, and those holding trade licences from city corporations.

For the past few years, the government has faced challenges in subsidising various sectors such as gas and electricity due to insufficient revenue collection to meet the targets. This year, the Ministry of Finance disbursed Tk6565 crore to independent power producers through the issuance of interest-bearing bonds. However, the government still owes approximately Tk22000 crore to private power companies.

Additionally, the government has settled the subsidy for fertiliser imports by issuing bonds. Despite high inflation, the government has resorted to borrowing from the central bank to cover its routine expenses, consequently leading to an increase in the government's bank loans.

In the current fiscal year's budget, the allocation for interest payments on loans stood at Tk 94,376 crore. However, this was raised to Tk1,05,300 crore in the revised budget due to borrowing from banks at higher interest rates. An additional Tk7500 crore is being earmarked for interest expenses in the upcoming financial year's budget.

Deficit to reduce further

The budget deficit for the current fiscal year was initially projected at 5.2% of GDP. However, it decreased to 4.6% of GDP after the budget was revised to Tk7.14 lakh crore. The finance ministry anticipates further reducing this deficit to 4.5% of GDP in the next fiscal year. Due to constraints in accessing foreign loans, the government resorts to borrowing from banks at high interest rates as a convenient borrowing option.

During the budget meeting, the Governor of Bangladesh Bank expressed optimism that the exchange rate would remain stable, citing the recent increase in export and remittance income over the past two months. However, he refrained from predicting when the financial account, currently in a deficit of approximately $8 billion, would return to balance.

A finance division official, speaking anonymously to TBS, revealed that the Bangladesh Bank stated that the financial account deficit will persist until interest rates on international loans, including those from the United States, decrease.

"Once international loan interest rates decline and there's an upsurge in business confidence among Bangladeshi entrepreneurs, they'll be more inclined to borrow foreign currency from overseas. As borrowing surpasses repayment, the financial account will gradually turn positive," he added.

Finance division officials indicated that the upcoming fiscal year's budget lacks significant initiatives aimed at boosting private sector investment. Nonetheless, efforts will focus on sustaining growth through supply-side management, particularly by swiftly implementing fast-track projects and advancing infrastructure development. 

They said the anticipated private sector investment has been hindered over recent years, attributed to factors such as the pandemic, the Ukraine-Russia conflict, and the dollar crisis. It is anticipated that private investment will remain stagnant over the next two years, primarily due to concerns surrounding the potential loss of duty-free export privileges as the country graduates from LDC status in 2026.

Officials said despite recurrent increases in fuel oil, gas, and electricity prices, the subsidy allocation for these sectors will not decrease in the upcoming financial year. 

They explain that the subsidy allocation in the next fiscal year's budget will primarily be utilised to settle arrears from the current financial year. Consequently, the subsidy amount is expected to remain around Tk84,000 crore in the next financial year. The government has decided to phase out subsidies. 

Furthermore, the upcoming budget will prioritise efforts to mitigate the impacts of climate change, introduce smart education and healthcare programmes, and enhance agricultural mechanisation.