Balancing economic revival, inflation prime promise

Nearly 10 months after inheriting a faltering economy marked by institutional collapse, many near-empty banks, fastest-depleting forex reserves and inflation running high, the interim government on Monday unveiled its maiden budget prepared taking ground realities into cognizance.

The interim administration has succeeded in calming some nerves of the economy and the administration. But the core afflictions remain: unemployment lingers at worrisome levels, inflation still high, private investment remains sluggish, and the revenue authority faces unrest that poses a threat for mobilising resources.

It is against these tense, and uncertain backdrops that Finance Adviser Dr Salehuddin Ahmed, wearing black blazer and white shirt, stood before the nation to roll out his maiden budget-a sober and restrained document crafted not in the heat of political ambitions.

There was no fanfare, no grand political chorus but with some breaks-only the finance adviser's calm, clinical voice, carried over the quiet airwaves of state-owned Bangladesh television and Bangladesh Betar, and a scattering of private channels.

Presenting the Tk 7.9 trillion worth of national budget for the forthcoming fiscal year 2025-26, Dr Ahmed admits that there are many risks still associated with attaining stability and reviving the economy back to its normalcy.

It comes out for him as an act of balancing economic revival and persistently high inflation in the first place.

Inflation-neutral pivot of the budget from traditional growth-centric budgeting, in the context of July changeover: The fiscal posture of the proposed budget appears to tread a cautious line-inflation-neutral at best-but much hinges on how taxation is structured and how the yawning deficit is financed.

While a deficit of Tk 2.26 trillion may not be alarming in isolation, any sharp upward trajectory could ignite inflationary pressure, especially if borrowing spirals out of control.

Curiously absent from the finance adviser's address was any reference to supply-chain bottlenecks or the grip of middlemen and cartels over the food-distribution system, both widely acknowledged as drivers of food inflation.

Instead, the custodian of exchequer in the interregnum attributes recent moderation in inflation-hovering above 9.0 per cent in May-to the twin deployment of contractionary monetary policy and a tighter fiscal stance.

He projects that inflation would ease further to around 8.0 per cent this June, citing stability in the exchange rate under a market-based regime and expectations of an uptick in imports.

The adviser also mentions fiscal measures such as subsidies to the agricultural sector, though these are long-established and offer little in the way of innovation.

Crowding-out concerns: But deeper in the budget lies a potential hazard. A significant share-55 per cent of the fiscal deficit-is projected to be financed from domestic sources, with over 83 per cent of that through the banking system. Though this amounts to just Tk 50 billion more than the target for the outgoing fiscal year, the implications seem profound.

Without tangible deposit growth to counterbalance the financing burden, the risk of a crowding-out effect in financing lurks.

Banks, drawn to the relative safety of government borrowing instruments, may divert resources away from the private sector, stifling entrepreneurship and productive investment.

Employment and investment--still on shaky ground: Bangladesh's economy is grappling with stubbornly high unemployment, and the budget's promises do little to assuage those concerns.

Both public and private investments are needed to jumpstart job creation and catalyze economic momentum.

While the budget attempts to send policy signals to spur private investment-including a commitment to favourable interest rates and a stable inflation outlook-the practical enablers appear limited.

One-stop service and NBR's single-window initiative, while laudable, remain insufficient in overcoming structural hurdles to doing business.

"We are committed to identifying the existing obstacles to investment and removing them as soon as possible," the finance adviser assures. But rhetoric must now meet reform.

Youth, startups, and entrepreneurial spirit: A silver lining in the budget is a renewed emphasis on entrepreneurship. There are modest but promising allocations aimed at fostering a new generation of business leaders.

Dr Ahmed proposes the creation of a Tk 1.0-billion fund for new entrepreneurs, complemented by another Tk 1.0-billion one for startups-a continuation from previous budgets. An additional Tk 1.0 billion is earmarked for a youth festival, intended to encourage engagement and innovation among the younger demographic.

Moreover, the proposed Annual Development Programme (ADP) worth Tk 2.3 trillion may offer some employment opportunities for the poor, though the extent of its impact is likely to be limited.

Without bold reforms to unblock private-sector investment, address structural inflation triggers, and inspire entrepreneurial dynamism, the economy may struggle to turn its cautious optimism into real, equitable progress.

Ambitious revenue target faces tough realities: a test of reform and resolve: The upcoming fiscal year's total resource-mobilisation target has been set at an eye-popping Tk 5.64 trillion, with the lion's share-Tk 4.99 trillion or 9.0 per cent of GDP-expected to come from the National Board of Revenue (NBR).

But this towering ambition raises eyebrows across the board, as the NBR has never before achieved a target of such magnitude.

This underscores an urgent need for deep-rooted reforms, not just cosmetic adjustments.

Yet the NBR itself remains embroiled in internal road protests, over creating two distinct wings. If this institutional uncertainty persists, it could seriously undermine revenue-collection efforts, dragging down the lofty aspirations set out in the budget.

Despite these tensions, Finance Adviser Dr Ahmed reaffirms the government's intention to pursue reforms at the NBR. He stresses the significance of direct taxation-a sustainable and equitable source of revenue that also plays a critical role in reducing income inequality.

Efforts to modernize tax administration are underway. Mandatory online-return filing for all individual taxpayers is in the pipeline for the coming year, with similar digital systems envisioned for corporate entities in the near future.

Tax policy adjustments: a balancing act: In a nod to inflation-weary citizens, the tax-free income ceiling for individuals has been raised to Tk 375,000 from Tk 350,000-a modest adjustment but a meaningful gesture toward relief amid rising living costs. However, to offset the revenue implications, the lowest tax slab has been hiked from 5.0 to 10 per cent.

In a bid to instill a broader culture of tax compliance, a minimum tax of Tk 1,000 has been introduced for first-time taxpayers-an approach that may build discipline from the ground up.

Reforms beyond revenue: cleaning the institutional slate: The finance adviser acknowledges the necessity of sweeping structural changes, referencing 11 proposed reform commissions covering anti-corruption efforts, judicial independence, land-law modernization, and election commission reforms. These, he argues, are essential to restoring faith in public institutions.

In one of his most pointed remarks, Dr Ahmed laments the collapse of financial governance over the past 15 years, saying, "Millions of taka has been siphoned off from banks."

He decries the culture of "hide-and-seek" around non-performing loans (NPLs), suggesting past administrations obfuscated the true scale of the banking sector's malaise.

Social safety nets: missing efficiency: While the adviser underscores plans to increase both the number of beneficiaries and per-capita allocations under social-safety-net programme, he remains notably silent on efficiency reforms.

Past programmes have often suffered from poor targeting and political manipulation, allegedly dominated by cadres of the ousted Awami League government. No clear blueprint was offered for plugging leakages or improving targeting mechanisms.

Relief for the commoners: Still, the budget does offer some relief for the middle class and consumers. The threshold for excise duty on bank balances has been raised to Tk 300,000 from Tk 100,000-a move expected to reduce the burden on savers.

Moreover, several VAT exemptions have been announced-on LNG, packaged liquid milk, sanitary-napkin production, ballpoint pens, and computer monitors up to 30 inches-all of which may help ease cost pressures on households and small businesses.

Restoring investor confidence and governance: Efforts to revive capital- market participation have also been woven into the budget. The corporate-tax differential between listed and non-listed firms has been widened by 7.5-percentage points, a signal meant to lure local and multinational firms into the capital market.

The source tax on brokerage transactions has been cut to 0.03 per cent from 0.05 per cent.

But these incentives come at a precarious time-many listed companies are trading below their face value, and a large number have failed to declare dividends for years. The reforms must, therefore, be matched by stronger oversight and accountability in market operations.

A budget framed by upheaval: This is, in many ways, an acid test for the finance adviser, who assumed office in the wake of the July Mass Uprising. Rather than chasing high growth figures, the current administration is opting to rebuild the foundational scaffolding of the economy-an approach long overdue.

"Our core objective," Dr Ahmed concludes, "will be to ensure a better quality of life for all, and to build a system free of discrimination at all levels."

jasimharoon@yahoo.com