Focus on inflation control, fiscal stability in next budget: CPD

Highlights: 

• CPD recommends raising tax-free income limit to Tk4 lakh
• Fahmida Khatun says people breaking into their savings to afford food
• Says BB's plan to bring inflation down to 7-8% by end of June impossible
• Says revenue shortfall could reach Tk1,05,000cr by the end of FY25
• Revenue collection recorded a meagre growth of 4.4% during Jul-Dec in FY25

The Centre for Policy Dialogue (CPD) has recommended that the upcoming national budget focus on controlling inflation, restoring exchange rate stability, reforming the revenue sector, and ensuring macroeconomic stability through prudent fiscal policies.

Additionally, it should prioritise improving social security, education, and healthcare systems, addressing the financial crisis in the power and energy sectors, and developing the SME sector.

At a programme titled "CPD's Recommendations for the National Budget FY2025-2026" today, the think tank recommended raising the tax-free income limit to Tk4 lakh, reducing the VAT rate from 15% to a uniform 10%, and cutting energy sector subsidies to save costs.

It also suggested increasing social security spending for the poor and extending educational scholarships to an additional 2 crore students.

The CPD has emphasised ensuring irrigation and fertiliser availability during the Boro season to strengthen food security.

It recommended preventing wastage by maintaining stable gas and electricity prices at the retail level and reducing costs through renegotiations with independent power producers (IPPs).

Additionally, the think tank urged policy reforms, including changes in revenue management, in preparation for LDC graduation.

CPD Executive Director Fahmida Khatun presented the written recommendations at a ceremony at the CPD office in the capital.

Mustafizur Rahman, a distinguished fellow at the think tank, and members of the research team also attended the event.

Fahmida said the FY26 budget will probably be the only budget formulated by the current interim government under new leadership at the finance ministry. A crucial first step in this process would be the development of a credible and well-structured fiscal framework.

"The upcoming national budget presents a unique opportunity for the interim government to move beyond conventional approaches, implement short-term corrective measures, and establish the groundwork for medium-term reforms in resource mobilisation, public finance management, and expenditure efficiency," she said.

"A crucial first step in this process would be the development of a credible and well-structured fiscal framework."

By taking a pragmatic and forward-looking approach, the government can not only navigate the current economic turbulence but also set the stage for a stronger, more stable economic future for Bangladesh. It is expected that the elected political government will take these measures forward, she added.

The CPD warned that the government's proposal to raise gas prices could further fuel inflation, making Bangladesh Bank's target of reducing inflation to 7-8% by next June unattainable. It also noted that the ongoing global tariff war may worsen the inflation situation.

Fahmida warned that the revenue deficit could reach Tk105,000 crore by the end of the fiscal year ending in June.

She noted that due to LDC graduation, adjustments will be needed in both bound tariffs and the minimum import price.

The CPD said all VAT-related functions need to be under one roof by introducing a comprehensive national system, and NBR may consider reducing the VAT rate from the current 15% to a uniform 10%, by reducing exceptions but at the same time also taking into account CSME interests.

It proposed amending the new Income Tax Act to change the requirement for monthly proof of source tax deductions to a biannual submission.

The think tank said the new act requires the engagement of several tax officials up to seven circles for auditing randomly selected tax files, which is creating problems for both taxpayers and the human resource-constrained NBR.

Fahmida suggested creating an alternative fund instead of increasing the budget allocation to pay the arrears of the power and energy sectors.

She noted that as of February, the Bangladesh Power Development Board's arrears stood at Tk 29,000 crore, while the Adani Group's arrears would reach $800 million by June and the Rooppur Nuclear Power Plant's arrears would total $750 million by 2026. Additionally, Petrobangla's arrears were $722 million as of January.

To address the crisis, the CPD suggested removing the capacity charge clause from power purchase agreements and halting electricity purchases from fossil fuel-based plants.

It stated that this could eliminate the need to increase gas, LNG, and electricity prices at the retail level. To reduce the subsidy burden, the power division should renegotiate the electricity purchase prices from the IPPs, which were contracted unsolicited under the special act at higher prices compared to the market price.

Addressing the energy crisis, Petrobangla should start exploring wells immediately using its gas development fund instead of relying on foreign bidders.

The government may welcome USA-based companies to submit proposals for gas exploration in offshore fields, the CPD suggested.

The CPD recommended reducing customs duties to 5% on equipment and components related to renewable energy supply chains, including generation, transmission, and distribution, and eliminating all other taxes on renewable energy goods.

It also proposed a dedicated renewable energy development fund and recommended that VAT on medicines be exempted starting from FY26. The VAT on tuition fees for English medium schools should be exempted, and taxes on imported foreign books should be exempted from FY26.

The CPD proposed extending the scholarship programme to an additional two crore students in the new fiscal year, which would incur an extra cost of Tk 121 crore.

It recommended withdrawing advance income tax and advance tax for the SME sector in the next fiscal year's budget, while proposing higher taxes on tobacco products, including cigarettes, soft drinks, and energy drinks. It also suggested raising corporate tax on companies producing tobacco products to 55%.

To enhance higher education quality to global standards, the CPD suggested that the government employ a combination of special financial programmes and reforms to elevate a few top universities in Bangladesh to global standards.

The CPD emphasised the need to increase revenue collection in the new fiscal year, noting that financial assistance from foreign sources will decrease.

It highlighted that due to high inflation, people's savings are shrinking and bank interest rates are rising, meaning the government will receive less from savings certificates. As a result, the government will need to rely more on banks to meet the budget deficit.

If the current trend of revenue mobilisation continues, the revenue shortfall could reach Tk105,000 crore by the end of FY25, the CPD warned.