Lower budget deficit planned as foreign financing seen slowing

The finance ministry is estimating a significantly lower overall deficit for the fiscal 2024-25 compared to the current fiscal year, while formulating a contractionary budget amid high inflation, volatile dollar exchange rates, and sluggish import-export growth.

The budget deficit is likely to decrease both in terms of the amount in taka and as a percentage of GDP – primarily due to the unavailability of foreign loans as expected, finance ministry officials with knowledge of the matter told The Business Standard.

However, economists believe that the government's reliance on high-interest bank borrowing will increase in the new fiscal year. Essentially, the government will exceed the current budget target for borrowing from the banking sector.

Both the government and economists had anticipated an increase in low-interest foreign borrowing amid economic strain. However, contrary to these expectations, the finance ministry has projected a decrease of Tk11,790 crore in net foreign borrowing for the new fiscal year compared to the current budget.

Due to lower-than-expected foreign borrowing, the deficit financing target has also been reduced by Tk26,197 crore to Tk76,293 crore in the current revised budget.

The target of additional borrowing of Tk5,105 crore from banks compared to the current fiscal year's goal has been set. However, economists believe the size of bank borrowing may increase further if the ambitious revenue collection plan is not achieved.

In the current budget, the finance ministry estimated the target of borrowing from banks at Tk1,32,395 crore. However, due to the failure to collect the desired revenue, the finance ministry has increased the amount of bank borrowing to Tk1,55,935 crore in the revised budget.

No significant growth in new financial year

Former senior finance secretary Mahbub Ahmed told The Business Standard that since the budget size has been relatively reduced, the deficit appears lower after setting ambitious revenue collection targets for the National Board of Revenue (NBR). However, he emphasised that, in the current economic reality, NBR may not achieve these targets.

He said, "There will be no significant economic growth in the new financial year. The Bangladesh Bank will adopt a contractionary monetary policy to control inflation, which will reduce financing and investment in the private sector. Consequently, the prospect of increasing revenue collection is also diminished."

"In this situation," he continued, "the finance ministry will have no choice but to increase the deficit in the new financial year to meet operational and development expenses. Therefore, the government will be compelled to borrow additional funds from banks compared to the target."

Govt's bank loans will shoot up

Mahbub Ahmed further noted that the finance ministry's expectation to raise Tk15,000 crore from savings certificates to finance the deficit may not materialise. Currently, the interest rate on savings tools is much lower than that on Treasury bills and bonds. Hence, during the revision of the budget for the next financial year, the amount of bank loans may increase significantly, similar to the current fiscal year.

Although some outstanding subsidies on electricity and fertiliser have been paid with credits from banks, there is still a huge amount of subsidy outstanding on gas, electricity, and fertiliser. Additionally, the government has to keep the export incentive money in arrears.

Due to high interest charges, the government has paid off Tk7,210 crore of old loans instead of borrowing from savings certificates in the current financial year. However, it plans to borrow Tk15,400 crore from savings certificates next financial year to meet the deficit financing.

Due to the high interest rates and the fear of reduced credit flow to the private sector, economists have advised borrowing less from the banking sector. However, the government is unable to reduce its dependence on the sector as the target for revenue collection has not been met. Currently, the government is borrowing through Treasury bonds at 12% interest. As a result, the interest cost of domestic debt is also increasing.

Interests on foreign loans increasing

On the other hand, due to the devaluation of the taka and the end of the grace period for loans taken for some mega projects, the government's expenditure on interest for foreign loans is also increasing.

In the next budget, Tk113,500 crore has been earmarked for interest payments – Tk93,000 crore on domestic loans and Tk20,500 crore on foreign loans.

The government plans to take a long-term loan of Tk72,682 crore and a short-term loan of Tk64,818 crore from the banking system. In the current revised budget, the finance ministry targets borrowing Tk95,743 crore in long-term and Tk60,192 crore in short-term loans from banks.

Difficult tax target

While planning to keep the budget deficit at 4.6% of GDP amid a reserve crunch, rising bank lending rates, and sluggish industrial growth, the finance ministry expects an additional collection of Tk70,000 crore from the NBR-controlled tax system compared to the current revised target, which economists believe will be difficult to achieve.

The National Board of Revenue has set a target of Tk4,80,000 crore, about 17% higher than the revised target for the current fiscal year, even though the government's expenditure in the new fiscal year will not increase much. If it is not possible to collect revenue according to the target, government bank borrowing may exceed the target,  people concerned believe.

During the July-April period of FY24, the NBR has collected Tk289,377 crore against its Tk410,000 crore target set in the revised budget. To achieve the target, the NBR will have to collect Tk120,623 crore in May and June.

Despite the government's plans to increase various service fees and impose tolls on several highways, the revenue collection targets from non-NBR tax and non-tax sectors for the next fiscal year are being reduced compared to the original and revised budgets of the current fiscal year.

After the government set a target of Tk50,000 crore from the non-tax sector for the current fiscal year, the amount has been reduced by Tk1,000 crore in the revised budget. For the next fiscal year, it is estimated to collect Tk46,000 crore from the non-tax sector.

Similarly, the NBR is estimated to collect Tk20,000 crore from non-taxes in the current fiscal year, but this amount has been reduced by Tk1,000 crore in the revised budget. The revenue collection target for the next financial year has been further reduced to Tk15,000 crore.

Smallest budget in a decade

A budget of Tk797,000 crore has been finalised for the next financial year, which is 14.20% of GDP. As a proportion of GDP, this is the smallest budget in the last decade.

Research organisations and economists have recommended increasing the allocation to education, health, and agriculture sectors, but the allocation to these three will increase by just Tk12,390 crore compared to the current fiscal year.

Although the upcoming budget will be termed contractionary, the operational expenditure of the government has been estimated at Tk506,971 crore, an increase of about 7% compared to the current allocation.

Essentially, Tk120,585 crore has to be earmarked in the new financial year due to increased pressure from subsidy arrears. The interest expenditure of the government and the allocation for salaries, allowances of government employees, and social security are also increasing. As a result, the operating expenditure of the government as a whole has increased significantly.

Tk37,989 crore is being earmarked for capital expenditure, such as land acquisition, construction and works, and investment in shares and equity in the new fiscal year budget, compared to Tk19,170 crore allocated in the current revised budget.

Subsidies would vanish

The government is planning to gradually ease the pressure from subsidies in the new fiscal year. For this reason, the finance ministry plans to gradually increase the price of electricity and gas and withdraw the subsidies completely within the next three years. The International Monetary Fund has also pushed for the withdrawal of subsidies. Additionally, export incentives will be withdrawn by 2026 in view of LDC graduation.

ADP increasing, finding money is a challenge

The annual development programme (ADP) allocation is increasing by only Tk2,000 crore compared to this year's main budget. The finance ministry has mentioned in the budget documents that providing the necessary funds for ADP after meeting the operating expenses is a big challenge for the next financial year.

Apart from ADP, an additional allocation of Tk16,453 crore is being earmarked for the development sector. Out of this, Tk7,627 crore is being allocated for non-ADP special projects and Tk2,884 crore for the food-for-work programme.

To meet revenue targets, tax breaks for industries are being reduced. Meanwhile, bank lending interest rates have become market-based, and the dollar rate has already been increased by Tk7 due to the introduction of the crawling peg regime. There is frustration among industry owners due to unreliable supply of gas and electricity.

Austerity reduced public investment

The Finance Division estimates that the economic uncertainty caused by the Ukraine-Russia war and the Middle East conflict will continue into the new fiscal year. However, in the upcoming budget, private sector investment is estimated at 27.34% of GDP, and public investment is estimated at 6.08% of GDP.

The finance ministry believes that the amount of private sector investment may be 24.5% of GDP in the current financial year. Public investment has also declined due to austerity measures over the past few years, which in turn has reduced GDP growth.

In his budget speech for the current financial year, the then finance minister AHM Mustafa Kamal said a favourable environment for investment would be created. The development of the logistics sector and the reform of financial management will reduce investment and business time, cost, and complexity. As a result, private investment will increase.

Investment in the public-private sector is expected to rise to 33.7% of GDP. Recently, according to the summary of provisional accounts of GDP for the current fiscal year published by the Bangladesh Bureau of Statistics, the rate of investment as a proportion of GDP for the current fiscal year is 30.98%.

Federation of Bangladesh Chambers of Commerce and Industry President Mahbubul Alam told TBS that if the ongoing geopolitical tensions around the world, including the Ukraine-Russia war, are not reduced and an uninterrupted supply of gas and electricity is not ensured, the desired investment in the private sector will not be possible in the next financial year.