Bangladesh budget reinforces broadly steady fiscal prospects: Fitch Ratings

The government's projection that the budget deficit will remain broadly stable in the next fiscal year, FY24, could be vulnerable if growth undershoots the authorities' relatively optimistic target, Fitch Ratings says in a new report.

Bangladesh's fiscal outcomes have often diverged significantly from budget forecasts, with persistent underspending against targets. Revised figures for FY23 point to a budget deficit target equivalent to 5.1% of the GDP, compared with an original target of 5.5% and Fitch's most recent projection of 5.7%, it said in a report published on 6 June (Tuesday).

According to the report, this reflected "weaker-than-expected" spending on development, but also outperformance on revenue collection. These effects more than offset the impact of additional subsidy spending, which rose to 2.2% of the GDP against the original budget target of 1.8% amid high global prices for fertiliser, fuel and natural gas.

"The government's budget presentation on 1 June forecasts the deficit to widen marginally to 5.2% of GDP in FY24. This is close to Fitch's current forecast of 5.3%, though our projection was predicated on a significantly wider deficit in FY23. The official forecasts remain broadly consistent with the IMF's projections under the Bangladesh's Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements, which see the deficit stabilising at around 5% of GDP over the medium term," reads the report.

Risks to the deficit could increase if real GDP growth falls below the authorities' projection of 7.5% in FY24, which could dampen the projected nominal growth in revenue of 15.5%. We expect slightly slower economic growth of 6.5%, but consumer price inflation - at 10% year-on-year in May - is high and still rising, which may point to downside risks, the report says.

"If spending growth falls short of policymakers' forecasts, as it has done in the past, this could offset potential revenue underperformance or offer enhanced prospects for narrowing of the fiscal deficit if revenue growth meets or exceeds targets. The government's medium-term policy approach is anchored by the goal of keeping the primary fiscal deficit, including grants, within around 3.3% of GDP to keep public debt below 45% of GDP," reads the report.

The report states that the budget projects Bangladesh's revenue will rise from 9.8% in FY23 to 10% in FY24. However, the ratio remains very low relative to other sovereigns that we rate, and we continue to view it as a key credit weakness. Based on Fitch's metric, Bangladesh's revenue stood at 9.8% in FY22, against a median of 28.5% for 'BB' peers.

"The budget initiates a medium-term strategy to raise revenue. As part of this, it establishes compliance risk-management units under the National Board of Revenue, and proposes strengthening compliance and information sharing between the Board's income tax, VAT and customs wings. It also looks to enhance the automation of tax administration and enhance at-source revenue collection. We view these moves as positive, but it will take time to assess their effect," it continued.

When we affirmed Bangladesh's rating at 'BB-', with a Stable Outlook, in September 2022, we said increased confidence in the sovereign's capacity to deliver fiscal consolidation and debt stabilisation over the medium term - for example through a sustained improvement in the structure of public finances in terms of a higher revenue base and lower contingent liabilities - could lead to positive rating action, the report said.

In the medium-term macroeconomic policy statement presented with the budget, the government indicated that Bangladesh Bank will reverse the temporary margin increases imposed on letters of credit for non-essential imports. This may signal an easing of external pressures, which contributed to a decline in official reserve assets from a peak of $48.1 billion at end-August 2021 to $29.9 billion at end-May 2023, reads the report, adding in September 2022, Fitch said that a sustained drop in foreign-exchange reserves could lead to negative rating action.