Govt plans to curb operating expenditures amid economic challenges

The government has initiated measures to cut operating expenditures in the coming years, aiming to curb the rising trend witnessed in recent years due to various global and domestic challenges.

The operating expenditures are projected to account for 58.7% of public expenditure in the 2025-26 fiscal year and 58.4% in 2026-27, according to an official document from the Ministry of Finance.

The government has targeted operating expenditures at 59% of total public expenditure for the current fiscal year.

Operating expenditures include wages, salaries paid to the government employees, purchase of goods and services, subsidy and transfer payments, interest paid for domestic and foreign loans and expenditures on 'food account operation'.

According to the document, operating expenditures increased from 55.6% in FY19 to a peak of 62.6% in FY23, driven by the twin crises of the Covid-19 pandemic and the Russia-Ukraine war which required significant government spending.

Key drivers of increased spending

Interest payments have risen steadily, reflecting growing debt servicing obligations.

Subsidies and transfer payments have also expanded from 2.9% of public expenditure in FY19 to an estimated 4% in FY24, emphasising social welfare and economic stabilisation measures, said the document.

The operating expenditure, spanning from FY19 to FY23, maintained an average of 7.6% of GDP.

With the revised budget for FY24, this figure has surged to 8.6%.

This marginal leap arises from the increase in domestic interest rates and the volatility of exchange rates in the global economy, which together elevate interest payment expenses.

Despite these challenges, the government anticipates stabilizing operating expenditure at 8.3% of GDP in the medium term, driven by strategic adjustments and fiscal discipline.

The food subsidy has increased by 14.1 % in FY24 compared to the previous FY23, which also contributes to this escalation.

Managing Salaries and Goods Expenditures

The share of salaries and allowances as a percentage of GDP decreased from 1.8% in FY19 to 1.4% in FY23, not due to salary cuts but reflecting broader economic growth.

The share of expenditures on pays and allowances is projected to be 1.5% of the GDP by FY25, still lower than the 1.8% of FY19.

The government is committed to optimising expenditure on pay and allowances while also ensuring efficient public service delivery, the document stated.

While the proportion of expenditures on salaries and allowances compared to the GDP has decreased from 1.8% in FY19 to 1.4% in FY23, this change is not due to a reduction in salary amounts.

The share of expenditures on pays and allowances is projected to be 1.5% of the GDP by FY25, still lower than the 1.8% of FY19, reflecting a broader economic development rather than cuts in salaries.

The reallocation of resources to more pressing areas during the Covid-19 years and the austerity measures adopted since 2022 caused the expenditure on goods and services to fall from 7.3% in total expenditure in FY19 to 5.9% in FY23.

The revised estimates of FY24 show that expenditures on goods and services in FY24 were 6.1% of total expenditures.

The Finance Division has projected that expenditure on goods and services will remain around 6% in the medium term.

Rationalising subsidies and strengthening social support

The government is pursuing a strategic approach to rationalise subsidy allocations, prioritizing livelihood support programs for vulnerable populations.

Subsidies for agriculture, energy, and power sectors remain a focus amid rising essential costs.

Energy subsidies are set for a gradual reduction, supported by systematic price adjustments and the implementation of formula-based fuel pricing mechanisms.

However, lingering subsidy arrears from previous fiscal years will require ongoing attention.

Promoting growth and sustainability

To drive economic growth, the government plans to provide fiscal incentives for export diversification, remittance growth, agricultural development, and the adoption of green technologies in the RMG sector.

Emphasis is also given on hybrid technologies, electric vehicles, and ICT service exports.

Special attention will continue to be given to agriculture and exports, which are regarded as the backbone of the country's economy, said the document.