Written By Syed Md. Rakeen, Team MBR

The economic turmoil has disrupted Bangladesh’s GDP growth rate in recent years, while inflation levels have spiked to near double-digit figures. In response to reaching stability in the economy, Finance Minister AHM Mustafa Kamal presented a national budget of BDT 7,61,785 crore for FY2023– 24, which was eventually passed by the Parliament on June 26, 2023. The budget size accounts for 15.2% of the Gross Domestic Product (GDP), as reported by the finance minister. Additionally, the monetary policy statement (MPS) has been released ahead of schedule this year on June 18, 2023, for the first half (July–December) of FY2023- 24, with the Bangladesh Bank maintaining a contractionary monetary policy stance to combat inflation and restore stability in the economy amidst growing economic instability.

The GDP growth rate has been set at 7.5%, while the annual inflation rate target has been kept at around 6%. Here is a breakdown of the percentage allocation of the BDT 7,61,785 crore budget for FY2023–24.

The total revenue from the National Board of Revenue (NBR) and non-NBR sources is estimated at BDT 5,00,000 crore. Out of this, BDT 4,30,000 crore will be collected by the National Board of Revenue and BDT 70,000 crore from non-NBR sources. The projected revenue collection for the fiscal year from the NBR includes an estimated amount of BDT 154,000 crore to be collected by the direct-tax wing and BDT 116,000 crore to be collected by the customs wing of the revenue board. The most significant portion of the funds, totalling BDT 159,000 crore, is designated to be mobilised by the value-added tax (VAT) division.

According to current data, Bangladesh has a relatively low tax-to-GDP ratio. To align with the stipulations set forth by the International Monetary Fund (IMF), the National Board of Revenue (NBR) is tasked with increasing the tax-to-GDP ratio by 0.5 during FY2023–24 and FY2024–25 and by 0.7 in fiscal year FY2025-26. The proposed budget includes a significant adjustment to the tax-free threshold for individuals, which has been raised to BDT 3.5 lakh. It is stated that a progressive tax system will be implemented. Under this system, a 5% tax rate will be applicable for the subsequent BDT 1 lakh, followed by a 10% tax rate for the subsequent BDT 3 lakh, a 15% tax rate for the subsequent BDT 4 lakh, a 20% tax rate for the subsequent BDT 5 lakh, and finally a 25% tax rate for the remaining amount.

Development and Social Safety Net Programmes

The focal point of attention once again revolved around the development plans, as a substantial rise of 15% from the revised budget for FY2022-23 resulted in an allocation of BDT 2.78 trillion. There has been a notable decline of 17% in the allocation of funds towards the development budget. Conversely, there has been a corresponding increase of 24% in the distribution of funds towards the non-development budget.

The allocation for social safety nets has increased, rising from BDT 1,17,634 crore in the revised budget for the fiscal year 2023 to BDT 1,26,272 crore in the budget for the fiscal year 2024. The allocation for pension has witnessed a notable increase, rising from BDT 22,010 crore in the revised budget for the fiscal year 2023 to BDT 27,414 crore in the fiscal year 2024. While the social security and welfare budget has experienced a marginal increase in total expenditure, it has also witnessed a reduction in its percentage allocation.

Annual Development Programmes

According to the planning commission, it has been reported that for the upcoming fiscal year 2023– 24, a total budget of BDT 263,000 crore has been allocated for the Annual Development Programme (ADP). Notably, approximately BDT 94,000 crore, which accounts for 35.74% of the total budget, will be sourced from foreign entities in the form of project loans. The annual growth rate of the ADP for the fiscal year 2024 exhibits a notable increase of 6.88% compared to the preceding year. The Annual Development Programme for the fiscal year 2023-2024 encompasses a comprehensive range of 1,309 projects. These projects can be categorised into various types, including 1,118 investment projects, 22 survey projects, 80 technical assistance projects, and 89 projects currently implemented by autonomous institutions or corporations.

Healthcare

The proportion of the development budget allocated to the overall health budget has experienced a decline, decreasing from 51% in the fiscal year 2023 to 41% in the fiscal year 2024. The budget allocation for the health sector has experienced a modest increase of 3%, from BDT 36,864 crore in FY2022- 23 to BDT 38,050 crore in FY2023-24. The analysis reveals a notable decline in the allocation of funds to the Health sector in the Annual Development Plan (ADP) for the fiscal year 2024. Specifically, the share of the Health sector in the ADP has decreased from 7.8% in the previous fiscal year, ADP FY23, to 6.2% in ADP FY24. This reduction signifies a significant 16% decrease in monetary terms.

Education

The budgetary allocation of 1.76% of the Gross Domestic Product (GDP) for the education ministries in the upcoming fiscal year of 2023–24 represents the lowest percentage observed in the past 15 years. The allocation of funds for the sector falls significantly below the recommended range of 4%-6% of the GDP, Source: Ministry of Finance 35.9% 27% 37.1% Direct Tax Customs VAT NBR Revenue Sources 15 of 40 as suggested by UNESCO. The education sector has experienced a slight decrease in its share of the total Annual Development Programme (ADP) from 11.8% in FY23 to 11.4% in FY24.

According to data presented by the Centre for Policy Dialogue during its post-budget discussion, it has been observed that Bangladesh’s average education expenditure as a percentage of GDP from 2016 to 2022 ranked as the 5th lowest among a group of 41 least developed countries. As per economists, it is projected that the country will not be able to meet the target set in the 8th Five-Year Plan, which aims to allocate 3% of the GDP towards education by the fiscal year 2024-2025.

Power and Energy

The proposed budget for the fiscal year 2023– 24 includes an allocation of BDT 34,819 crore to the power and energy sectors. However, it is noteworthy that the government has not specified any fresh strategies or solutions to address the prevailing electricity and energy crises. The suggested allocation, which exhibits a 27% increase compared to the revised budget for the fiscal year 2022–23, primarily aims to ensure energy security. However, it also perpetuates the current scenario, which is characterised by prolonged power outages and a scarcity of gas in the industrial sector.

The allocation represents a notable proportion of the overall budget for the fiscal year 2024, amounting to 4.6%. This figure surpasses the corresponding funding in the revised budget for the preceding fiscal year, which stood at 4.1% in fiscal year 2023.

Budget Deficit and Government Borrowings

The projected budget for the fiscal year 2023–24 reveals a significant deficit amounting to BDT 261,785 crore, equivalent to 5.2% of the country’s Gross Domestic Product (GDP). According to the available data, it has been determined that a significant portion of the total deficit, specifically BDT 155,395 crore, will be sourced domestically. Additionally, an amount of BDT 102,490 crore will be obtained from external sources. In the current fiscal year, the government has already procured a substantial amount of funds from the central bank. It is projected that this borrowing pattern will persist in the upcoming fiscal year of 2023– 2024. The government’s intention is to execute various development initiatives in preparation for the forthcoming national election, which is scheduled to occur in the early part of the following year. Figure 4 illustrates the source of funds for implementing the fiscal budget.

Contractionary Monetary Policy to Curb Inflation

Bangladesh Bank has announced through its monetary policy statement that it has decided to remove the interest rate cap of 6%–9% and replace it with a market-driven reference rate to be regulated by the average Treasury bill rate. A revised rate formula has been introduced that entails the calculation of the reference rate using the six-month moving average rate of treasury bills. Banks will be subject to a 3% margin, while non-bank financial institutions will have a 5% margin applied to their reference rate. In accordance with its stringent monetary policy approach, the central bank (referred to as BB) has implemented a 50 basis point hike in the policy rate, commonly referred to as the repo rate, resulting in a new rate of 6.50%. Additionally, the reverse repo rate has been raised by 25 basis points, leading to a revised rate of 4.50%. These adjustments took effect on July 01, 2023. In addition, the central bank has implemented measures to restrict the circulation of money in the private sector. As a result, the projected growth rate for private sector credit has been revised downward to 11% for the fiscal year 2024, compared to the previously set target of 14.1% for the fiscal year 2023. With the timely initiative of the Bangladesh Bank in combating inflation through its monetary policy, economists and business leaders are hoping for a synchronized approach from both fiscal and monetary authorities to combat rising inflation.

Restoring Macroeconomic Stability in Bangladesh

Analysis of various nations that have implemented demand reduction strategies by means of interest rate increases has successfully managed to curb inflationary pressures significantly. In Thailand, the rate of inflation experienced a significant reduction of 65%, declining from 7.7% in June 2022 to 2.7% in April 2023. In the United States, the inflation rate experienced a significant decline to 4.9% in April 2023, marking a whopping decrease of 46% from its previous peak of 9.1% observed in June 2022. In the European Union, the inflation rate experienced a notable decrease to 7% in April 2023, exhibiting a decline of 34% from its previous peak of 10.6% observed in October 2022. In India, the rate of inflation experienced a decline of 40% during the period spanning from April 2022, when it stood at 7.8%, to April 2023, when it registered at 4.7%. In Vietnam, the inflation rate has been effectively managed and constrained within the range of 2%– 3%. These cases suggest that Bangladesh’s recent rate hike policies are aligned with global practices and are expected to follow suit in Bangladesh.

During the initial period of the fiscal year 2023- 2024, the central bank adhered to a stringent monetary policy stance by raising the policy rate to 6.5%, representing a 0.5% increment compared to the prevailing rate. The reverse repo rate underwent an upward adjustment of 0.25%, resulting in its establishment at 4.5%. This will inevitably result in an increase in borrowing costs, thereby discouraging the market from seeking further loans and ultimately constraining CPI inflation.

The key area of focus ultimately lies in reinstating macroeconomic stability. The optimal approach necessitates synchronizing the exchange rate, monetary, and fiscal policies to enhance export performance, mitigate inflationary pressures, augment tax revenues, and curtail budgetary deficits. The most fitting approach to the balance of payments management entails the implementation of a uniform and adaptable exchange rate regime complemented by a reduction in aggregate demand. A dynamic exchange rate regime is expected to enhance the export sector and the inflow of remittances while simultaneously curbing import demand. When coupled with effective demand management, this will contribute to the long-term stabilisation of the balance of payments, surpassing the efficacy of import controls. These measures can help avoid import constraints on private investment and GDP growth. Implementing demand management strategies, such as raising interest rates, increasing taxes, and reducing fiscal deficits, can effectively curb inflationary pressures and prevent excessive fluctuations in the exchange rate.

The author is working as an Industry & Equity Analyst at IDLC Finance Limited and can be reached at rakeen@IDLC.com