Subsidy, interest payment to go high in FY24 budget

Despite the government's plan to raise the prices of gas and electricity and adjust fuel oil prices every three months, the subsidy pressure is going to increase in the budget for the forthcoming fiscal year, the finance ministry has said. 

Additionally, the government will have to spend more on loan interests in the new financial year when interest payments on loans taken for various mega projects, including the Rooppur nuclear power plant, Matarbari coal power plant, and the Mass Rapid Transit start, according to a budget coordination meeting yesterday. 

Infographic: TBS

Recent devaluations of the taka against the US dollar and a surge in the LIBOR and SOFR rates are also contributing factors to a prospective rise in the government's interest payment expenditure in the new fiscal year.

Despite a projected 15% rise in revenue earning, 27% of the Tk7,59,955 crore total outlay – estimated for FY24 – will be required to be spent on interest payments and subsidies, as decided in a meeting of the coordination council on budget management and finance and currency exchange rate yesterday.

This is a significant increase from less than 23% of the total outlay allocated for these two sectors in the original budget for the current financial year.

In addition to subsidies and interest payments, budget allocations are also going to increase for salaries and allowances of government employees and various goods and services, causing the government's operating expenses to increase to Tk4,96,955 crore, which is 9.9% of the country's gross domestic product (GDP). 

The budget allocation for the government's operating expenses for the current fiscal year is 9.7% of GDP.

The significant increase in allocations for subsidies, interest payments, and wages of government employees is expected to cause the size of the annual development programme (ADP) to increase by a paltry 8% in the upcoming budget compared to the original budget for this year. 

Wednesday's meeting was attended by ministers and top executives from various ministries while Finance Minister AHM Mustafa Kamal presided over it.

In the meeting, Finance Secretary Fatima Yasmin presented the revised budget for the current financial year and the outline of the forthcoming budget.

In the FY24 budget, around Tk2,63,000 crore will be allocated for the ADP, of which Tk1,69,000 crore will be allocated from the government's own resources while the remaining Tk94,000 crore will be allocated from foreign aid.

The size of the new budget will be 15.2% of the GDP, with an investment estimate of 33.8% of GDP, including 27.4% percentage points in the private sector and 6.4% in the public sector.

The finance minister noted that the main indicators of Bangladesh's economy are in good condition compared to other countries in the world and are expected to improve in the future, making the implementation of the upcoming financial year's budget easier than the current year's.

Despite huge subsidy allocations, the new budget will not provide much good news about inflation. The inflation target for FY24 has been estimated at 6%, which was 5.6% in this year's main budget. 

According to the latest data from the Bangladesh Bureau of Statistics (BBS), the inflation rate in March this year was 9.33% and the one-year average inflation rate was 8.39%.  

However, an additional allocation of Tk1,200 crore is going to be made in food subsidies for the upcoming fiscal year to control inflation. This additional allocation will be made with a view to providing subsidised food items among one crore families through the Trading Corporation of Bangladesh and maintaining the supply of staples for government-run Open Market Sale and Vulnerable Group Development programmes.

Besides, the number of beneficiaries of old age allowance, widow allowance, and disability allowance under the social safety net is going to be increased by 7.35 lakh in the new budget. The monthly allowances are also going to be increased for the beneficiaries of these schemes. These three programmes combined will see a Tk1,500 crore increase in allocations for the upcoming fiscal year.

In all, about Tk1,30,000 crore will be allocated for the social safety net for FY24, up from  Tk1,13,000 crore in the original budget for the current fiscal year.

After emerging from Wednesday's meeting, an official of the Finance Division told TBS that the ministers and secretaries who attended the meeting cited inflation as a big challenge for the forthcoming financial year.  They also observed that bearing the increased subsidy burden, loan interest payments will also be challenging for the government.  

The official told TBS that the power secretary said in the meeting that the price of electricity was supposed to be increased by 5% every month, but it was not increased last month. 

Electricity prices are unlikely to increase in the next two months, he said.

But, it was decided in yesterday's meeting that the prices of fuel oils will be adjusted in line with the international market trend every three months. 

Although traders have been demanding price adjustments every month, the government may start adjusting fuel prices from July this year, said the Finance Division official.

"The inflation rate is projected at 6% in the upcoming fiscal year's budget, which is less than the current rate. 

But, the Bangladesh Bank has taken the initiative to leave the interest rate to the market, in which case, if the interest on import financing increases, product prices may increase further," said the official.

However, that prices of fuel oils and food items are decreasing in the international market offers some hope. Besides, if the interest rates on deposits increase, people will be interested in saving more money. 

The finance ministry expects inflation to decrease slightly due to supply-side management. 

At the meeting, Bangladesh Bank Governor Abdur Rouf Talukder expressed optimism that the country's foreign exchange deficit would go down in the upcoming fiscal year.

He mentioned that the current account deficit has been on a decline for the last two months. This trend will continue in the future due to several measures taken by the government including import controls.

In addition, the government has taken initiatives to create more overseas job opportunities and facilitate remittance collection through bank apps, which is expected to boost remittance inflows, said the governor.

The governor mentioned that a significant growth of 12% to 14% is projected in remittances, owing to a rise in the number of people seeking overseas employment opportunities. Additionally, exports to global markets beyond the US have shown an upward trend, which will also contribute to the strengthening of foreign exchange reserves.

The projected GDP growth rate for the upcoming fiscal year is 7.5%, with a GDP size of Tk50,06,672 crore. However, the government's top economic forum has cautioned the finance minister that achieving this growth target will be a challenge, even if the foreign exchange reserve crisis is somewhat mitigated.

While the original budget for the current fiscal year projected a growth of 7.5%, the revised budget has decreased it to 6.5%.

According to officials, the global economy has experienced a slowdown, leading to a reduction in project support for the implementation of the annual development programme this year. This trend has raised concerns among the government and policymakers.

The government aims to encourage innovation in sectors such as education, healthcare, and information technology to get project support. It also has plans to address these challenges and support the country's development goals in the next fiscal year.

The finance ministry plans to set a total revenue target of Tk5 lakh crore in the upcoming budget, which is 15% higher than the original target set for the current fiscal year. If this goal is achieved in the next financial year, it will account for 10% of the country's GDP.

Bangladesh currently has the lowest tax-GDP ratio in the world, standing at less than 8%. As a condition for the loan, the International Monetary Fund (IMF) has suggested an increase in revenue collection by 0.5% of GDP in the upcoming fiscal year.

The National Board of Revenue (NBR) has established a revenue target of Tk4.30 lakh crore, which is 8.6% of GDP. This represents a significant increase of 16.2% from the original budget target set for the current fiscal year.

Although the National Board of Revenue (NBR) has fixed a revenue target of 8.3% of GDP for the current fiscal year, recent data shows that it has not been met as of last February.

Ahsan H Mansur, executive director of the Policy Research Institute, said that the National Board of Revenue (NBR) is expected to collect Tk30,000 crore less revenue than the targeted amount for the current fiscal year. However, the Centre for Policy Dialogue (CPD) estimates the revenue shortfall to be even higher.

During the meeting, NBR Chairman Abu Hena Md Rahmatul Muneem expressed confidence in achieving any additional revenue targets that may be set. He suggested that increased use of EFD machines for VAT collection could lead to a boost in revenue collection from this sector.

Furthermore, the finance ministry has set a goal of collecting Tk50,000 crore in non-tax revenue and Tk20,000 crore in non-NBR tax revenue for the upcoming fiscal year.