While the country is experiencing severe inflationary pressure and its foreign reserves are depleting rapidly, the national budget for FY2024–25 was passed by the parliament on June 30, 2024. The budget amounting to BDT 797,000 crore is 4.62% larger than the budget for FY2023–24 amounting to BDT 761,785 crore. The budget aims to achieve GDP growth of 6.75% while stabilising the inflation rate at around 6.5%.

Budget Size Trend

The budget for FY2024–25 is contractionary in nature. While the budget for FY2023-24 was 12.35% larger than the budget for FY2022-23, the budget for FY2024-25 is only 4.62% larger than the budget for FY2023-24. It indicates that the government does not have the appetite for aggressive growth under the prevailing macroeconomic conditions; rather, stabilising the macroeconomic indicators is the goal of the latest national budget.

Budget at a Glance

When it comes to the budget for FY2024–25, a major portion of the revenues is expected to be generated from NBR tax revenues as usual. The proportion is 88.01%, which was 85.33% for the budget for FY2023–24. Increased reliance on NBR tax revenues has reduced the burden on non-NBR tax revenues and non-tax revenues, which are expected to account for 2.75% and 8.43% of the total revenue collection, respectively.

When it comes to the allocation of expenditures, 63.61% of the total expenditures of BDT 797,000 crore have been allocated for operating expenditures. BDT 93,000 crore is to be spent to pay domestic interest, which was BDT 82,000 crore in the budget for FY2023–24, resulting in an increase of 13.41%. In the case of foreign interest, the amount to be spent is BDT 20,500 crore, which was 12,376 crore in the budget for FY2023–24, resulting in an increase of 65.64%. A total increase of 20.26% has been observed in the case of interest payments. Aggregately, 14.24% of the total expenditures are to be allocated for interest payments in FY2024–25. On the other hand, a total development expenditure of BDT 281,453 crore has been projected, of which BDT 265,000 crore has been allocated for annual development programmes. An increase of 1.39% has been observed in the case of development expenditures.

As demonstrated in the table above, the deficit of BDT 251,600 crore will be financed by foreign borrowing of BDT 90,700 crore (net) and domestic borrowing of BDT 160,900 crore (net). Out of the domestic borrowing of BDT 160,900 crore (net), BDT 137,500 crore (net) is to be borrowed from the banking system. Increased borrowing by the government from the banking system may lead to a lesser availability of credit for the private sector.

Broadly, resources will come from six sectors: foreign grants, foreign loans, domestic loans, non-tax revenues, non-NBR tax revenues, and NBR tax revenues. A breakdown has been demonstrated in the following chart.

On the other hand, public administration, interest payments, and education and technology will account for 22.10%, 14.20%, and 14.00% of total resource usage.

Changes in the National Budget for FY2024–25

In the national budget for FY2024–25, the ceiling of tax-free income has been kept the same. However, the upper limit of income for tax of 10% has been raised from BDT 750,000 to BDT 850,000. The highest rate of income tax has increased to 30% from 25%. The measures are expected to balance the disposable incomes of the salaried persons of different slabs to some extent.

Existing 20% supplementary duty on packaged powdered milk up to 2.50 KG has been withdrawn, which is expected to reduce the prices. Prices of air conditioners and refrigerators will go up due to the imposition of a 7.5% VAT. Supplementary duty on ice creams has been increased, and supplementary duty on certain carbonated beverages has been increased. Cigarettes and cigarette paper will experience price hikes due to increased supplementary duty and VAT, respectively. VAT per SIM card has been increased from BDT 200 to BDT 300. VAT will be increased from 5% to 15% on certain locally manufactured juices. The prices of certain energy-saving lights will increase. Some import duties have been revised as well to support the local agriculture, textiles, aviation, and healthcare industries.

Stabilising Inflation and Building Up Foreign Reserves

The rate of inflation has been above 9% throughout the last 12 months. On the other hand, the inter-bank exchange rate was BDT 109.00 per USD on July 24, 2023, whereas it was BDT 118.00 per USD on July 24, 2024. Within a period of two years, the gross foreign exchange reserves have been depleted by USD 12.78 billion. It has been observed that FY2022-23 began with gross foreign exchange reserves of USD 39.60 billion and FY2023-24 ended with gross foreign exchange reserves of USD 26.82 billion.

However, to control inflation and stabilise the exchange rate, a crawling peg system has been introduced for determining the exchange rate, the interest rate has been made market-driven, and the policy rate has been revised. For the first half of FY2024–25, the policy rate will be 8.50%, as mentioned in the Monetary Policy Statement for July 2024–December 2024. It is to be noted that the policy rate was 6% in June 2023, and it has been increasing gradually with the expectation of increasing the cost of borrowing, which is already market-driven, and that is eventually expected to cool down inflation. On top of that, the International Monetary Fund has recommended further increasing the policy rate by 50 basis points by December 2024. As mentioned earlier, the national budget for FY2024–25 aims to stabilise the inflation rate at around 6.50%.

To build up the foreign exchange reserves, regulations for operating resident foreign currency deposit (RFCD) accounts and offshore banking have been made easier. Alongside, banks imposed higher margin requirements for opening letters of credit (LC) and encouraged expats to send remittance earnings through banking channels. The national budget for FY2024–25 targets building up foreign reserves amounting to USD 32.30 billion. Though it is ambitious, the upward trend of remittance inflows is in favour of the projection.

 Challenges

There are roadblocks that may pose challenges in achieving the targets set for the national budget for FY2024–25. The conflict between Russia and Ukraine and the rising tension in the Middle East will keep disrupting the global supply chain, and the resultant global inflation will make it difficult to tame the inflation our economy is experiencing. Stricter policies are on the way to define non-performing loans as recommended by the International Monetary Fund, and that will impact the overall profitability of the banking sector. Borrowing by the government from the banking system will make it challenging for the private sector to avail credit. At the same time, an increased policy rate will increase the cost of borrowing. As a result, small and medium enterprises may find it difficult to enjoy credit facilities unless the central bank keeps supporting them with refinancing and pre-financing schemes. Furthermore, the upward trend of remittance inflows needs to be sustained to achieve the target of foreign reserves.

Though the national budget for FY2024–25 took a smaller leap in terms of size, it has incorporated ambitious targets for economic growth, inflation, and foreign reserves. If the supporting monetary policy measures work as planned, the national budget for FY2024–25 has the potential to stabilise the economy even if the ambitious targets are not achieved.

The author is working as Assistant Manager at IDLC Finance PLC. and can be reached at akhlaqur@idlc.com.