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ECONOMY
Dhaka ferrymen eat on a boat on the Buriganga River: Inflation is putting a heavy strain on Bangladesh's public. © Reuters
FAISAL MAHMUD, Contributing writerJune 2, 2023 15:30 JST
DHAKA -- Bangladesh has unveiled a record national budget for the fiscal year starting in July, months ahead of a general election in early 2024. But with the country reeling from high inflation and persistent financial pressure, some experts fear the government may have promised more than it can deliver.
The 7.62 trillion taka ($71 billion) package announced on Thursday marks a 15.3% expansion from the last one. It includes 14.7% more development spending and an 11% larger social safety net program, compared to the current fiscal year.
The problem, analysts say, is that the budget raises a pressing question: Where will the money come from?
Prime Minister Sheikh Hasina's government already resorted to taking a $4.7 billion loan from the International Monetary Fund to alleviate the strain on its foreign exchange reserves, while committing to a number of financial sector reforms. One of those pledges is to expand the tax base and increase the country's paltry 7.5% ratio of tax to gross domestic product, mainly by targeting the middle class or above.
The proposed budget has tasked the country's National Board of Revenue with earning $41 billion from taxpayers in the coming fiscal year. But given that the NBR has failed to meet its tax collection targets for the past 11 years, hitting this proposed amount -- a roughly 16% increase from the previous year's plan -- may be unrealistic, especially when inflation is already eating into incomes.
"Even the taxpayers, which are just 2% of the country's [170 million] population, are experiencing a shortage of money to buy essentials now," said Rashed Al Mahmud Titumir, a professor of development studies at Dhaka University. "How they will foot the bill of the government's increased expenditure?"
Titumir pointed out that in every month for the past year or so, wages have lagged behind inflation. "The wage growth rate was 7.23% in April, against the inflation rate of 9.24%. It is very unrealistic to achieve this revenue target without controlling inflation," he told Nikkei Asia.
While delivering the budget speech to parliament, Finance Minister A.H.M. Mustafa Kamal said the government is devising a strategy to "increase efficiency in expenditure management" and to look for "cost-effective financing sources from home and abroad."
He expressed hope that the "falling trends in global food, fertilizer and fuel prices" will likely bring down inflation to around 6% in the coming year. Bangladesh's average inflation rate over the first 11 months of the current fiscal year stood at 8.04%, well above the government's target of 5.6%.
Bangladesh Prime Minister Sheikh Hasina, pictured during a visit to Japan in April, faces an election in early January. © Reuters
Zahid Hussain, former lead economist at the World Bank's Bangladesh office, called the proposed budget "expansionary" and said the deficit -- projected at $23 billion, up 15% -- is "incongruent with an inflation reduction plan."
He warned that expanding the fiscal deficit spillover would also "increase pressure on foreign exchange reserves, something Bangladesh can ill afford in the midst of large declines in reserves two years in a row."
In May, the country's forex stockpile fell below $30 billion for the first time in seven years, according to official data. The drop has stalled import bills and hindered letter of credit (LC) openings for bringing in essential items.
On Tuesday, global ratings agency Moody's Investors Service downgraded Bangladesh's credit rating to "risky," due to worsening external vulnerability and liquidity risks amid the deterioration in foreign currency reserves.
"This downgrading, which primarily has stemmed from pressure on the external balance, throws Bangladesh into a high-cost regime as both LC opening and foreign loans will be costlier now," said Zia Hassan, a financial analyst and author of the book "Development Mirage," which is critical of Bangladesh's growth narrative.
Hassan said that if the government had adopted a contractionary budget, it could have alleviated the pressure on imports. "Since an expansionary budget was introduced, there is an increased demand for funds, which puts additional strain on the reserves."
Consequently, he added that the value of the nation's taka currency "will be at risk, exacerbating the very conditions that led to Moody's downgrade."
Finance Minister Kamal, in his budget speech, did not elaborate much on how he plans to prevent the taka from losing its value further.
The government looks likely to turn to the banking sector to cover the deficit. In the last five years its borrowing from the central bank has grown by as much as 927%. Yet experts warn that maintaining this approach will only result in further currency devaluation and other issues.
Ahsan H. Mansur, executive director of the Policy Research Institute think tank, said demanding more loans from an already stretched banking sector will reduce private-sector investment, production and jobs. "These factors, in turn, will reduce overall production and ultimately will exacerbate the inflationary pressures."
Still, some experts are not quite so pessimistic. Australia-based economist Jyoti Rahman noted that despite the downgrade, the Moody's outlook for Bangladesh remains "stable," reflecting an assessment that the IMF and other multilateral agencies will continue to offer support.
He also said the budget's aspirations do, in fact, align with many of the IMF's conditions that came with the $4.7 billion loan package -- promises to raise revenue, reprioritize expenditure and change the financing strategy to move away from the costly national savings certificate, an instrument managed by the Finance Ministry that offer savers high interest rates.
"Implementation of the announced policies will of course be the key," Rahman said.
asia.nikkei.com
Bangladesh's 'expansionary' $71bn budget raises financing doubts
Analysts warn plan may exacerbate pressures that drove Moody's downgrade
Dhaka ferrymen eat on a boat on the Buriganga River: Inflation is putting a heavy strain on Bangladesh's public. © Reuters
FAISAL MAHMUD, Contributing writerJune 2, 2023 15:30 JST
DHAKA -- Bangladesh has unveiled a record national budget for the fiscal year starting in July, months ahead of a general election in early 2024. But with the country reeling from high inflation and persistent financial pressure, some experts fear the government may have promised more than it can deliver.
The 7.62 trillion taka ($71 billion) package announced on Thursday marks a 15.3% expansion from the last one. It includes 14.7% more development spending and an 11% larger social safety net program, compared to the current fiscal year.
The problem, analysts say, is that the budget raises a pressing question: Where will the money come from?
Prime Minister Sheikh Hasina's government already resorted to taking a $4.7 billion loan from the International Monetary Fund to alleviate the strain on its foreign exchange reserves, while committing to a number of financial sector reforms. One of those pledges is to expand the tax base and increase the country's paltry 7.5% ratio of tax to gross domestic product, mainly by targeting the middle class or above.
The proposed budget has tasked the country's National Board of Revenue with earning $41 billion from taxpayers in the coming fiscal year. But given that the NBR has failed to meet its tax collection targets for the past 11 years, hitting this proposed amount -- a roughly 16% increase from the previous year's plan -- may be unrealistic, especially when inflation is already eating into incomes.
"Even the taxpayers, which are just 2% of the country's [170 million] population, are experiencing a shortage of money to buy essentials now," said Rashed Al Mahmud Titumir, a professor of development studies at Dhaka University. "How they will foot the bill of the government's increased expenditure?"
Titumir pointed out that in every month for the past year or so, wages have lagged behind inflation. "The wage growth rate was 7.23% in April, against the inflation rate of 9.24%. It is very unrealistic to achieve this revenue target without controlling inflation," he told Nikkei Asia.
While delivering the budget speech to parliament, Finance Minister A.H.M. Mustafa Kamal said the government is devising a strategy to "increase efficiency in expenditure management" and to look for "cost-effective financing sources from home and abroad."
He expressed hope that the "falling trends in global food, fertilizer and fuel prices" will likely bring down inflation to around 6% in the coming year. Bangladesh's average inflation rate over the first 11 months of the current fiscal year stood at 8.04%, well above the government's target of 5.6%.
Bangladesh Prime Minister Sheikh Hasina, pictured during a visit to Japan in April, faces an election in early January. © Reuters
Zahid Hussain, former lead economist at the World Bank's Bangladesh office, called the proposed budget "expansionary" and said the deficit -- projected at $23 billion, up 15% -- is "incongruent with an inflation reduction plan."
He warned that expanding the fiscal deficit spillover would also "increase pressure on foreign exchange reserves, something Bangladesh can ill afford in the midst of large declines in reserves two years in a row."
In May, the country's forex stockpile fell below $30 billion for the first time in seven years, according to official data. The drop has stalled import bills and hindered letter of credit (LC) openings for bringing in essential items.
On Tuesday, global ratings agency Moody's Investors Service downgraded Bangladesh's credit rating to "risky," due to worsening external vulnerability and liquidity risks amid the deterioration in foreign currency reserves.
"This downgrading, which primarily has stemmed from pressure on the external balance, throws Bangladesh into a high-cost regime as both LC opening and foreign loans will be costlier now," said Zia Hassan, a financial analyst and author of the book "Development Mirage," which is critical of Bangladesh's growth narrative.
Hassan said that if the government had adopted a contractionary budget, it could have alleviated the pressure on imports. "Since an expansionary budget was introduced, there is an increased demand for funds, which puts additional strain on the reserves."
Consequently, he added that the value of the nation's taka currency "will be at risk, exacerbating the very conditions that led to Moody's downgrade."
Finance Minister Kamal, in his budget speech, did not elaborate much on how he plans to prevent the taka from losing its value further.
The government looks likely to turn to the banking sector to cover the deficit. In the last five years its borrowing from the central bank has grown by as much as 927%. Yet experts warn that maintaining this approach will only result in further currency devaluation and other issues.
Ahsan H. Mansur, executive director of the Policy Research Institute think tank, said demanding more loans from an already stretched banking sector will reduce private-sector investment, production and jobs. "These factors, in turn, will reduce overall production and ultimately will exacerbate the inflationary pressures."
Still, some experts are not quite so pessimistic. Australia-based economist Jyoti Rahman noted that despite the downgrade, the Moody's outlook for Bangladesh remains "stable," reflecting an assessment that the IMF and other multilateral agencies will continue to offer support.
He also said the budget's aspirations do, in fact, align with many of the IMF's conditions that came with the $4.7 billion loan package -- promises to raise revenue, reprioritize expenditure and change the financing strategy to move away from the costly national savings certificate, an instrument managed by the Finance Ministry that offer savers high interest rates.
"Implementation of the announced policies will of course be the key," Rahman said.
Bangladesh's 'expansionary' $71bn budget raises financing doubts
Analysts warn plan may exacerbate pressures that drove Moody's downgrade
asia.nikkei.com
