Priority on fighting inflation, funding projects
While challenges like tackling "imported" inflation and boosting revenue earnings persist, funding priority projects to spur investment and growth emerges as a new concern for the next fiscal year beginning on 1 July, according to a Finance Division document.
Meeting escalating subsidy demand is also among the key eight challenges identified by the Finance Division in the budget summary for fiscal 2023-24 prepared for the Cabinet, sources at the division told The Business Standard.
Additionally, the slow implementation of education and health sector projects poses further obstacles.
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These challenges and possible ways out will be incorporated in the budget documents to be presented in parliament by Finance Minister AHM Mustafa Kamal on 1 June.
The summary titled "2023-24 Fiscal Year Budget and Appropriation Bill, 2023 Approval" also highlights achieving the desired revenue collection target as one of the foremost challenges for next year.
Furthermore, the Finance Division acknowledges the difficulties in sustaining infrastructure reforms to attract domestic and foreign investments, as well as accelerating the post-Covid economic recovery process by fostering a more business-friendly investment environment.
Some of the challenges are the same as identified for the outgoing fiscal year, and most others are new. Controlling import-induced inflation, boosting revenues, widening social safety net and higher subsidy spending for pricier fuel oil, gas and fertiliser were among the key challenges identified for the outgoing fiscal year. As inflation surged, revenue growth slower than expected and subsidy requirements surpassed the current year's allocations, these remain among the key challenges for the next fiscal as well.
Deferring low-priority projects was a key challenge for the current fiscal year, but insufficient allocations for priority projects have been seen as a major challenge for the next fiscal year that sees big infrastructures as a catalyst for big investments. Although widening of the social safety net is a priority for the current fiscal year, it remains the same for the next fiscal year as people are hard-pressed by soaring inflation.
Strengthening infrastructure, improving power, energy and technology sectors, expanding export markets and improving business atmosphere have been listed among key challenges for the next fiscal year to spur economic growth.
On 1 June, Finance Minister AHM Mustafa Kamal is set to present a budget proposal of Tk7,61,785 crore for the fiscal year 2023-24 in the Jatiya Sangsad, following the summary's approval in the cabinet meeting chaired by the prime minister. This will mark the fifth budget during Prime Minister Sheikh Hasina's present tenure.
Despite belt tightening, subsidy pressure mounts
Since the outbreak of Covid, the finance ministry has imposed conditions on the allocation of development projects immediately after the budget announcement to cover urgent essential expenses such as subsidies, salaries, and loan interest.
Despite allocating funds for many projects in the budget, the Finance Division issued notifications in the last three fiscal years stating that no money could be spent on these projects due to a lack of funds.
In the current fiscal year's original budget, Tk74,000 crore was allocated for subsidies. However, due to increased demand, this amount was revised to approximately Tk1 lakh crore.
Nonetheless, there is still an outstanding subsidy of around Tk60,000 crore in the power and agriculture sectors, which will need to be addressed in the next fiscal year's budget. Consequently, an allocation of Tk1,10,000 crore has been proposed for subsidies in the upcoming financial year.
The finance ministry anticipates that if revenue collection falls short of the target, it will remain challenging to circulate the necessary funds for development projects after addressing the government's emergency expenditures in the next financial year.
Political stability expected in election year
The Finance Division believes that positive changes in private investment, satisfactory growth in agriculture, political stability, coordinated action in infrastructure development, and public investment could lead to an increase in the size and implementation of the Annual Development Program (ADP) in the election-year budget.
In line with the goal of transforming Bangladesh into a developed and prosperous nation by 2041, the finance ministry, in the summary prepared for the Cabinet, emphasised that the macroeconomic and budgetary structures for the fiscal year 2023-24 have been designed while considering the aforementioned challenges and the continuation of the development process.
Stress on expanding social safety net
The draft budget for the fiscal year 2023-24 focuses on expanding the coverage of social security programmes, increasing allowances to mitigate import-induced inflation, and extending free or low-cost food distribution programs for low-income individuals.
To achieve the target of 7.5% GDP growth, the budget emphasises strengthening the energy and technology sectors, alongside infrastructure development. Priority is also given to clearing subsidy arrears related to electricity, gas, and fertilisers.
The Finance Division proposes setting aside Tk4,000 crore in block allocation in the next fiscal year's budget to address any fiscal risks. In the current financial year's original budget, the allocation for contingencies was Tk3,000 crore, which was reduced to Tk1,000 crore in the revised budget.
Additionally, in order to qualify for the transition from the list of least developed countries, the Finance Division emphasises the need to increase exports, expand markets, improve the business environment, and boost revenue.
Bridging urban-rural gap also in focus
The summary prepared for the cabinet on building a Smart Bangladesh emphasised on bridging the urban-rural gap through holistic human resource development including health, education, and skills development, construction of houses for the homeless, job creation for the unemployed, and rural development.
Besides, the implementation of appropriate programmes and projects to deal with the impact of climate change, strengthening food security, agricultural research, mechanisation, irrigation and seed incentives, agricultural rehabilitation, and creating a women-friendly work environment have been emphasised in the next budget.
Key targets remain unmet in FY23, yet ignored for FY24
As for the upcoming FY24 budget, eight key challenges were identified for the current year's budget. However, there are several challenges from this year's budget that could not be achieved but are not regarded as challenges in the current budget.
In the current budget, the objective was to maintain stable foreign exchange reserves by controlling imports at a tolerable level.
Although the reserves currently stand below the threshold set by the International Monetary Fund (IMF) for March and June, the issue of stabilising reserves is not considered a major challenge in this year's budget. Nonetheless, the ministry is implementing various measures, including import control, to boost reserves, following the advice of the IMF.
In the current fiscal year budget, the finance ministry highlighted increasing credit flow to the private sector as the primary challenge to stimulate job creation.
Although there has been a slight increase in private sector credit flow compared to the same period last year, it has not reached the target announced in the monetary policy. However, job creation is not mentioned as a challenge in the next budget.
In the current budget, maintaining unchanged interest rates for bank loans and deposits was considered a challenge. However, the interest cap needs to be lifted from July in accordance with IMF conditions. Consequently, the ministry has avoided addressing this matter.
What experts say
Mahbub Ahmed, a former senior secretary of the finance ministry, emphasised that controlling inflation is the top challenge for the next budget, followed by increasing revenue collection.
He believes that if revenue earnings are increased, it will become easier to address the remaining challenges and sustain economic growth.
He also mentioned that maintaining export growth, addressing the issue of stagnant remittances despite workers going abroad, and improving bank and financial sector management are additional challenges for the new fiscal year.
Ahsan H Mansur, executive director of the Policy Research Institute (PRI), stated that the main reason behind these challenges is the shortfall in revenue collection.
If sufficient funds were available, other problems would have been easier to tackle or may not have existed. Insufficient reforms in the revenue sector over an extended period have given rise to these challenges.
Mansur believes that increasing revenue is essential to overcome these challenges and recommends initiating and implementing necessary reforms.
He further suggests market-based exchange rates, stopping foreign currency reserve losses, and accepting potential growth slowdown as part of the necessary actions to control inflation and address the macroeconomic balance of payments and foreign exchange reserves.
Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue, emphasised that controlling inflation is the primary challenge for the government.
She added that merely increasing the coverage and allowances of the social safety net is insufficient to address this challenge. In addition to expanding the coverage and allowances, the government can consider providing temporary duty exemptions on the import of essential goods as part of its fiscal policy. Furthermore, the market should determine interest rates under the monetary policy.
However, even with these measures, it is unlikely that inflation control will be achievable in the current situation, Fahmida observed, adding that it is imperative to establish a rigorous monitoring system in the market, as traders are manipulating prices through syndication.
She highlighted the need to take effective steps to enhance revenue collection, given the government's reduced fiscal space.
"The government is facing financial constraints, and relying on borrowing from the central bank may pose risks in the medium term. Therefore, it is crucial to review subsidy management and determine where subsidies should be allocated and where they should be reconsidered," Fahmida told TBS.
Currently, the government is profiting from fuel oils, but their prices should be reduced, she concluded.
