THE finance minister, Abul Hassan Mahmood Ali, placed the budget for the 2024–2025 financial year in parliament on June 6. This is his first budget as finance minister and the first for the incumbent government. The total outlay of the budget is Tk 7.97 trillion, with a growth of 4.6 per cent from the outgoing fiscal year. The size of the budget is not significantly larger compared to the growth of previous years. In the proposed budget, the revenue targets have been projected at around TK 5.41 trillion, and a big chunk of revenue around Tk 4.80 trillion will be collected by the National Board of Revenue. The revenue targets of the NBR have been constantly increasing, despite falling short of achieving the previous year’s targets with its existing setup. In the proposed budget, the NBR has imposed various taxes in order to meet budget targets, which have a negative impact on mass populations.
The budget has a deficit of Tk 2.56 trillion, which will be borrowed from both internal and external sources. In the budget, GDP growth and inflation are projected at 6.75 per cent and 6.5 per cent, respectively. However, attaining these goals would certainly be challenging for the government, considering the present scenarios of macroeconomic instability. In the outgoing budget, the government was finally able to achieve a meagre 5.75 per cent GDP growth, which was projected at 7.5 per cent. Achieving GDP growth at 6.75 per cent is tough as the country has been observing a slash in imports due to import restrictions, a negative trend in the import of capital machineries, a nagging crisis in gasoline and erratic electricity supply, a declining trend in reserves, a dollar crisis, etc.
The government has targeted achieving GDP growth of 6.75 per cent for this fiscal year. To materialise that goal, the private sector needs to inject huge funds as investments into the economy. However, in the upcoming fiscal year, the private sector won’t have enough loanable funds from the commercial banks as the government has projected to borrow bulk sums from the banking sector, which is around TK 1.37 trillion. The banking sector has recently been facing a liquidity crunch, and if such a situation persists, it would be difficult for the government to meet deficits from the banking sector. Moreover, ever increasing non-performing loans will increase the cost of borrowing. Besides, the government’s overreliance on the banking sector will curb credit access to the private sector and raise the cost of the fund. Due to the announcement by the central bank of the market-based interest rate, interest rates on loans have gone up, which will help to check inflation a little bit but discourage investment by the private sector. Without access to banking loans, the private sector cannot achieve targeted employment generation, and GDP growth will be hampered to a great extent. On the other hand, the share market is not in a good position to attract long-term capital sources for companies. If the government cannot replenish the deficit amount from the banking channels, it will have to go to the central bank to print money, which will further exacerbate the inflationary scenario.
Furthermore, in the budget, the government is poised to contain the inflation rate at 6.5 per cent, which is not only a lofty goal but also nearly impossible. However, it doesn’t show a roadmap for how to rein in ever-increasing inflation, which has been making the lives of lower-income people miserable. In order to tame the nagging inflation, which has remained high at a staggering 10 per cent, the central bank announced contractionary monetary policy to control the money supply so that inflation can be reined, which seems to have a little effect. However, in fiscal policy, we are observing that the government has increased borrowing from the financial system, which seems contradictory to the contractionary monetary policy measures. This will prompt a money supply in the economy, which ultimately fuels the inflationary burden on commoners. In the outgoing budget, the government set the target to contain inflation at 6 per cent, which didn’t see success, and even in the past month, the inflation rate was around 10 per cent. Although the government reiterates that curbing inflation is its first priority, the budget does not outline how to achieve this daunting task.
The budget has tiny gestures to satiate inflationary pressure. In the upcoming budget, the NBR has reduced the source tax on some essential products from 2 per cent to 1 per cent, and it is expected that it will somewhat reduce the price of essential commodities. On the other hand, NBR has increased its tax bracket for more tax generation. In addition, the government has extended the coverage of the social safety net programme without enhancing the amount for the destitute.
Some macroeconomic indicators are gradually deteriorating, which needs more attention and proactive measures. The dollar crisis and the depletion of our foreign reserves should be checked. In order to mitigate the dollar crisis and dent in foreign currency reserves, the central bank has introduced a crawling peg system following advice from the IMF, which is a good move. Import restrictions should be withdrawn in phases, remittances should be channelled through the banking system, and export growth must be enhanced.
The central bank has adopted contractionary monetary policy and introduced crawling peg exchange rates and market-driven interest rates, which are good moves towards controlling inflation. Offshore banking is another good initiative by the government to boost our foreign reserves. These initiatives will help to gradually increase our reserves, buffer the stock of dollars, and contain inflation. The government should take austerity measures and stop incurring unnecessary expenditures for the sake of taming inflation. The government should create a congenial atmosphere so that investors, both local and foreign, feel confident doing business in the country. Corruption, irregularities and money laundering must be checked. Transparency, accountability and rules of law should be implemented in government offices.
Last but not least, the budget has many lofty targets, but it seems that measures are not enough to attain the goals.
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Mohammad Zonaed Emran is a banker and columnist.