WB fears sizeable revenue deficit this fiscal year

Hands in a recipe to govt to offset effect


Syful Islam | Published: August 30, 2017 01:29:31 | Updated: October 25, 2017 05:22:39


The government's revenue shortfall during the current financial year (FY) might range between Tk 400 billion and Tk 450 billion, according to a World Bank (WB) projection.

 

The government, however, fears a revenue shortfall of Tk 200 billion in FY 2017-18 due to non-enforcement of the new VAT law.

 

The WB has recently made available a recipe to the government detailing ways to offset the effect of possible big revenue shortfall.

 

The multilateral lender felt that the government's financing burden could be eased by taking recourse to fiscal discipline without risking impact on the development budget.

 

The Bank feared that the budget deficit could range between 5.4 per cent and 5.7 per cent of gross domestic product (GDP) if 80 per cent of the annual development programme (ADP) is implemented. Most of this deficit will have to be financed from domestic sources.

 

"If non-bank borrowings remain at the same level as of last year, then bank borrowing will have to rise to between 2.4 per cent and 2.7 per cent of GDP. This could create upward pressure on interest rates, risking significant crowding-out of credit to the private sector and enhance inflation risk, particularly if deficit is monetised," it said.

 

The Bank, however, felt that the budget deficit can be managed by some expenditure adjustments and reform measures.

 

The WB said although public expenditure will be lower than the target due to usual implementation shortfall, the budget deficit may still rise and its financing mix may need some redesigning.

 

"Coping with the revenue shortfall would require additional revenue effort as well as tightening of expenditures in FY 18."

 

It said with income and other taxes growing at rates experienced in recent years, the total revenue shortfall in FY 18 can range between Tk 400 billion and Tk 450 billion.

 

Based on recent trends, the revenue growth could range between 10.8 per cent and 13.9 per cent compared to the FY 17 revised budget, according to the Bank's projection.

 

With a 50 per cent cut in loans and advances, 25 per cent cut in non-development capital expenditures and 5.0 per cent cut in government-financed ADP projects, the deficit could be between 4.6 per cent and 4.9 per cent of GDP.

 

The domestic financing could then be between 3.7 per cent and 3.9 per cent of GDP and the bank borrowing between 1.6 per cent and 1.9 per cent of GDP, it noted.

 

The lender also suggested that costly domestic financing can be contained by taking measures to increase mobilisation of external financing.

 

Apart from expenditure adjustments, the government can withhold 50 per cent of Tk 33.27 billion block allocations in the revenue budget, cut internally- financed ADP by 10 per cent instead of 5.0 per cent, and try to extend VAT coverage sufficiently to attain 13 per cent VAT revenue growth.

 

The WB's suggestions also include cuts in internally- financed allocation to low priority ADP projects, non-development capital expenditures like purchase of new vehicles and furniture, and block allocations in the revenue budget.

 

The government, before the last-minute passage of the 2017-18 budget, postponed enforcement of the new VAT law for two more years. This has raised the possibility of a big revenue shortfall.

 

Finance minister AMA Muhith announced an early revision of the budget following the possible shortfall in revenue earnings.

 

Recently, he also had sought suggestions from the World Bank on budgetary adjustments needed to cope with the deficit.

 

E-mail: syful-islam@outlook.com

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