Inflation, huge bank borrowing, forex situation major factors to implement budget

Economists, experts and business leaders in a post budget meeting on Wednesday termed inflation, huge bank borrowing, forex situation and tax administration as the major factors ahead of the country’s economy.

“Total domestic financing requirement of the budget will be about Tk. 1.6 trillion and since nonbank financing in the form of National Savings Certificates is very negligible or negative almost the entire amount would need to come from the domestic banking system,” noted economist Dr Ahsan H Mansur told the meeting organised by the American Chamber of Commerce (AmCham).

He noted that since the schedule banks are already suffering from liquidity shortage and very slow deposit growth (7.5 per cent till April), government borrowing from the schedule banks will lead to crowding out of the private sector and push up the lending interest rates sharply.

Banks total capacity to expand credit will be less than Tk. 1.5 trillion, which would barely be adequate for the private sector requirements, he said adding that thus budget financing inFY24 would need to be primarily from the cent bank in the form of high power money creation.

“Bangladesh will need to mobilize about $10 billion in net financing from external sources for budget financing which is equivalent to about Tk. 1trillion” he said.

“Given the need to pay back about $2 billion in principal repayments, the gross financing requirement will be about $12 billion. Bangladesh has never borrowed such a high amount in the past.”

“Limited or no access to the international capital market, and the recent downgrading of Bangladesh’s sovereign rating by Moodys will not allow exploration of new sources in FY24,” he said highlighting the challenges.

“Inflation is almost 10 per cent and accelerating while global commodity prices are declining and down to below pre-Ukraine Russia war level.” he said noting that no monetary policy measure has been taken to fight inflation, as of now.

“Concern over interest payment -- both foreign and domestic is increasing over time. It is projected to surpass Tk 1,000 billion in FY24 which is about 30 per cent of the NBR revenue of FY23,” he added.

Key Macroeconomic Developments and Concerns in FY23

• Much lower growth (6 per cent +) compared to the original target of 7.5 per cent. The growth estimate is likely to be lowered once data for the final quarter of FY23 are taken into account.
• Much higher inflation (9.9 per cent in May) than the target of 5.6 per cent set in the FY23 budget.

• Much lower tax collection than the budget target.
• Significant fall in imports ($58.3 billion during Jul-Mar FY22 to $52.2 billion of July-Mar FY23 from (with negative implications for economic activities)

He said the external current account deficit significantly declined due to import compression resulting from the ongoing dollar crisis.

The newly emerged deficit in the Financial Account of the BOP is a matter of serious concern, said Dr Mansur.

Dwelling with the inflation situation Planning Minister  MA Mannan said inflation is caused by a lot of factors, many of which are beyond the control of the government. A different matter is not all in our control.

He explained that in the wake of the twin shock of Covid and the Ukraine war, country does not have enough dollars to intervene to keep supply situations normal.

But he said that the government is taking measures to ensure sufficient stock of very essential commodities like rice, salt, onion etc in different points across the country so sufficient supply can be insured to prevent market manipulation.

He mentioned that though in the media the IMF has become a big player, in reality they do not.

“There is no pressure from them and that is beyond their mandate,” Mr Mannan said adding that there is no point in considering the IMF as ’a pressure machine’.

The planning minister said that the national budget for the next fiscal was formulated against the backdrop of the fall out of the Covid pandemic, and the ongoing Ukraine war.

On the advance income tax, he said that personally he is against such measures but this types of step was taken to mobilise revenue.

On the proposed income tax law, Dr Ahsan Mansur said, though the country needs new income tax law, the government needs not to rush to pass it.

We also need to be careful not to rush it.

He suggested that the new income tax law should be formulated in line with the best international best practices.

“It should not be quote unquote homegrown no I don't believe in that,” adding that consultations with internal experts must be done before finalising the law.

“Otherwise, I'm afraid of our tax administration people with very limited knowledge about international tax laws.”

AmCham President Syed Ershad Ahmed presented some recommendations to the government in his speech.

On the issue of Foreign Exchange Reserve the AmCham president said, “Instead of gross import ban, the country should speed up the foreign-funded projects’ implementation and reconsider own funded projects having a sizeable import component to ensure safeguard against economic shocks caused by volatile energy inputs price and help finance balance-of-payments deficits.

He also noted that instead of traditional heavily RMG dependent export basket, policy support should be extended towards business/industry for effective implementation of existing policy, create a user-friendly process and further allocation national funds to enhance this potential source.

The Chamber recommends more allocation in Energy and power and expect focus on offshore explorations as well as investments in renewable energy.

This will not only benefit us environmentally but also contribute to economic growth through job creation, market expansion in related industries supporting clean-energy technologies.

On the issue of Import Duty and minimum tax, Mr Ershad said considering the advance tax as minimum tax paid by an industrial undertaking at import stage on raw materials in certain industries and the fixed 5 per cent minimum tax on the gross receipt would be detrimental for the existing investors, hence request to revisit this proposal for the best outcomes for businesses and consumers alike.

Prescribing reforms in the National Board of Revenue, the AmCham President said, policy formulation and administration both should not be entrusted with NBR.

“In addition, we suggest adopting automation in all possible levels at the same time to focus more on expanding Tax net. We specially suggest the full-fledged VAT automation which is on the card for last 12 years” he added.

Suggesting strengthening of the Digital Economy, he said, “We understand the government’s vision to have a cashless society. Toward the effective implementation of this initiative ensuring accountability and transparency throughout the process, we propose to introduce the Digital or e-payment incentives to encourage the systematic strength.”

The AmCham expressed deep concerns over the newly increased tax burden on Information and communication equipment and operating software which is ‘inconsistent with Smart Bangladesh objective’.

To ensure banking sector stability he the Chamber recommends adoption of prudent central bank management strategies that promotes transparency, accountability and fiscal discipline in this sector.

He also stressed the need for improved logistics infrastructure to raise competitiveness.

Former NBR chairman Muhammad  Abdul Abdul Mazid said that the authority of policy-making and enforcing the same policies should not be given to the same bunch of people.

He said the NBR people should act as facilitators not as rulers.

[email protected]