Dollar rate mismatch in FY25 budget feared to cause fiscal disruptions

The local currency taka was devalued by Tk7 per dollar nearly a month ago, but financial projections in the new budget documents were not adjusted to the new exchange rate, which may cause accounting mismatch in international payments in the fiscal 2024-25, economists fear.

All the projections, including foreign loan receipts and repayments as well as subsidy spending, have pegged the exchange rate at Tk110 per US dollar while the official median rate was set at Tk117 on 8 May when the central bank introduced the crawling peg system.

The big change in exchange rate will make a big difference in balancing the accounts.

For instance, the Economic Relations Division (ERD) estimates that Bangladesh needs to pay $4.2 billion in debt servicing to foreign lenders in FY25. At an exchange rate of Tk110 per dollar, the debt servicing obligation would be Tk46,200 crore. However, if calculated at Tk117 per dollar, it would be Tk2,940 crore higher. This discrepancy in exchange rate calculation will also likely disrupt government expenses for importing fuel oils and fertilisers worth several billion dollars.

Economists are worried about the implications of not adjusting the huge devaluation of taka in budget calculations, which, they said, may disrupt the government's income and expenditure plans for the next fiscal year. 

But finance officials give a cold shoulder.

Finance ministry officials say when the ministry started formulating the FY25 budget, the official exchange rate was Tk110. As a result, the ministry has estimated expenses for foreign loan interest, subsidies for the import of energy and fertiliser, and subscriptions to various international organisations accordingly.

Several Finance Division officials involved in budget formulation told The Business Standard that the amount of money sought by the ERD for foreign loan interest payments for the next financial year is being allocated in the budget at an exchange rate of Tk110.

"Although the dollar rate has already changed, the budget calculations are not being adjusted. Since the foreign loan for projects is available in dollars, the amount of the loan in foreign currency will remain the same even if the exchange rate fluctuates," said an official.

Former finance secretary Mahbub Ahmed said the finance ministry had the time in hand to recalculate their projections at the latest exchange rate since Bangladesh Bank introduced the crawling peg system and set the exchange rate at Tk117 about a month before the budget proposal. 

The finance ministry should have estimated the overall expenditure, including interest payments on foreign loans, and gas, electricity, and fertiliser subsidies, at this rate, he stated.

"If the next financial year's budget is estimated at Tk110 per US dollar, these calculations will be messed up within three months. The allocation for one sector would have to be withheld to ensure the supply of money to another. This will disrupt the overall balance of the budget," he said.

Ahsan H Mansur, executive director of the Policy Research Institute, echoed him, emphasising that it should not take more than two days to prepare the budget at the current exchange rate.

"Failure to do so will necessitate more funds for subsidies, incentives, and payments on foreign debt interest in the future, which may be challenging to secure," he added.

Officials from the Finance Division have prepared the budget under the assumption of potential stability in the global economy for the next financial year.

The Finance Division believes that the economic impact of the Russia-Ukraine war and the Middle East crisis will remain. However, the US Federal Reserve and the European Central Bank will not raise policy rates any further. As a result, the interest rate in the international market will gradually decrease.

Hoping that the introduction of the crawling peg system will stabilise taka against dollar, the Division estimates that the prices of food and non-food products in the international market will come down and inflation will be kept under control due to the increase in policy interest rates.

Finance Minister Abul Hassan Mahmood Ali, while presenting the budget in parliament on Thursday, is expected to forecast the possibility of export growth to Europe and the United States in the next financial year and also express optimism about growth in imports in th e medium term.