Does the FY24 budget provide enough support for MSMEs?

The budget's lack of sector-specific strategies for SMEs' unique challenges may limit various growth potentials. Photo: TBS

The geoeconomic crisis and its fallout have caused wide-ranging consequences worldwide, hampering the global trading system. Many developed and developing economies have not been immune to these global shocks, and Bangladesh is no exception. The entire private sector, encompassing large enterprises and Micro, Small and Medium Enterprises (MSME)s, has been severely affected.

The prolonged war between Russia and Ukraine, along with various economic sanctions and the ongoing conflict between Israel and Palestine, have aggravated the global economic order. The world economy has experienced a 2.7% decline in global merchandise trade and a 12% drop in foreign investment, deepening the geoeconomic meltdown significantly. Bangladesh faces macroeconomic challenges, including high inflation, a foreign exchange reserve crunch, declining FDI, and foreign trade, all fueled by geoeconomic uncertainty.

Amidst this challenging economic context, MSMEs have been particularly hard hit. The World Bank previously reported that SMEs contribute 90% of businesses and over 50% of global employment. In Bangladesh, MSMEs play crucial roles as key facilitators of economic growth. They contribute 25% of GDP, provide 80% of industrial employment, and serve as a vital link to many core industries. 

This local and global share of SMEs underscores their indispensability in the world economy. They are also instrumental in foreign trade, attracting investment, establishing private property, fostering innovation, and developing new technologies.

Despite the significant importance of MSMEs in this harsh economic reality, the proposed national budget lacks specific allocations and revival initiatives targeted at MSMEs. The budget, after all, is the most important economic policy tool. 

With a legacy of incremental budgets, the government has declared a budget worth Tk7.97 trillion, 11.56% higher than the revised budget for FY2024. Given the current economic context, the budget size is relatively large, with excessive dependence on the banking sector. 

Ironically, the budget does not set any targets for private sector investment, nor does it include specific agendas to support struggling MSMEs. The absence of investment targets and MSME preferences appears unusual. 

The budget does not include enabling policies or fiscal support to address the challenges facing SMEs and their growth. Given their critical contributions, this omission is a significant concern for the private sector. There should be specific provisions and allocations to help overcome economic difficulties and facilitate desired growth.

The soaring cost of bank lending, failure of the SMART rate, liquidity crunch, double-digit inflation, a 40% hike in exchange rates, and a low import trend have all increased the cost of doing business, making the local business climate more challenging. 

Consequently, private sector credit trends have become slim, reaching the lowest level at 9%, while the private investment-to-GDP ratio has hovered around 23% over the past couple of years. 

The budget's lack of sector-specific strategies for SMEs' unique challenges may limit various growth potentials. The larger banking sector-dependent deficit budget hinders MSME investment lending.

Although the budget does not provide specific funding or fiscal easing processes, several small initiatives identified are likely to facilitate MSMEs' welfare in some sectors. Market expansion support through online platforms, linkage programmes of SMEs with larger enterprises, and increased duties on imported raw materials for certain products for local entities are positive efforts. 

The government has also introduced broader measures to secure a healthy business environment, such as reducing corporate tax on non-listed companies to 25% and OPC business to 20%. Some industry-specific exemptions, especially in the IT sector, may help SMEs embrace digital transformation. Maintaining stable duty rates on essential agricultural inputs and subsidies on importing accessories for electric motors may add value to relevant MSMEs.

However, the higher SD on some foods and beverages may adversely affect SMEs engaged in manufacturing and selling. An SD hike on mobile phones and internet services may impact SMEs reliant on digital communication. A 1% CD on capital machinery imports in EZs is unfriendly for further industrial investment. 

There is no imminent impact from the proposal to develop three more leather industrial parks. The anticipated price rise in furnace oil and lubricants presents significant manufacturing, transportation, and logistics challenges. Higher import duties on compressors and steel sheets may increase infrastructural costs.

On reviewing the policy measures and tariff changes for industrial items, it becomes apparent that the gains for MSMEs fall significantly short, indicating a massive gap between requirements and actual support. Considering the need for rejuvenation of MSMEs during the economic downturn, the government could provide strategies and policy directives to leverage MSMEs. 

The national budget should consider a blended agenda, including low-cost financing, port handling fee reductions, domestic market quotas, technology and skills transfer, and other necessary measures to overcome the economic slump and facilitate digital transformation.

 Simplifying the process for bank borrowing, waiving charges and penalties on tax payments, deferring tax payments, subsidising energy tariffs, offering flexible lending repayment terms, and enhancing IP readiness are necessary to adapt to the new climate following LDC graduation. Since MSMEs face structural and procedural issues in tax compliance and financing, a separate, flexible SME tax code and simplified bank financing access could bring about remarkable changes.

 Above all, the undisbursed Covid-19 recovery MSMEs' stimulus fund and the pending refinancing scheme of Tk62,000 crore should be expedited. The private sector stresses considering these needs in the Finance Bill 2024 amendment. It is worth mentioning that these measures may have multiplier macroeconomic effects, such as industrial mobility, new investment, employment, revenue generation, poverty elimination, and financial sector stability.

These result-oriented outcomes may steer knowledge-backed economic transformation. The economic census of GoB in 2013 reported 21 million businesses countrywide, with the lion's share being CMSMEs. This justifies placing unprecedented importance on MSMEs and a holistic budget approach for inclusive economic growth.

 Incorporating these timely suggestions can create a conducive climate that retains the utmost interest of the private sector.

 Despite significant fiscal constraints, a 17.5% higher public sector budget at the cost of many key avenues appears to be an untimely choice. A little austerity in public expenditure and rational resource allocation could be a saviour for all priority areas, leading to a holistic budget. 

AKM Asaduzzaman Patwary is the Executive Secretary of DCCI. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.