FY'26 Budget: Conventional but rooted in ground reality

As expected, the national budget for the 2025-26 financial year, unveiled by Finance Adviser Dr Salehuddin Ahmed on Monday last, lacked the usual ambience, uproar, and thumping of tables by lawmakers -- whether elected genuinely or otherwise -- in parliament. Yet many listened to the budget speech, concise and pointed, with rapt attention, for the 'Chancellor of the Exchequer' and his associates in the Ministry of Finance had to craft the budget against a very uncertain and difficult backdrop. The interim government was lucky to have nearly 10 months to clear, at least partially, the Augean stables left by the fascist government of Sheikh Hasina before unfurling the budget.

The interim government inherited a near-collapsed economy marked by runaway inflation, many near-empty banks, a collapsing stock market, a higher rate of joblessness and forex reserves that were not enough to meet even a couple of months' import. Most areas of the economy are not out of the woods, though inflation has slowed down and reserves are now in a better shape because of higher inflow of remittances and export proceedings, thanks to the plugging of the leakages. What, however, has handicapped the finance adviser is that his purse is tight. Unlike his predecessors, Dr Salehuddin has taken note of this ground reality while preparing the budget and consciously avoided rhetoric and populist moves. Thus, none would contest his claim that the budget he has presented is an exceptional one, in terms of its size. It is also true that the budget in its core intent is not 'growth-centric'. However, the allocation of resources in the budget does not corroborate the finance adviser's claim that he has emphasised the concept of holistic development. For instance, the allocation of a higher amount of budgetary resources (22 per cent of the total operational expenditures) on payment of salary, allowances and pension of public servants cannot be a part of a holistic development approach, given the quality of service the latter offer. Allocations for a few other sectors do not also conform to the concept in question.

Then again, the success of the measures taken in the budget for the next fiscal in reversing the ongoing trend in inflation and employment remains in doubt. Containing inflation is one of the core objectives of the budget. The central bank has been doing its part to contain the runaway inflation by pursuing a contractionary monetary policy. The government also took a few complementary fiscal measures. Inflation has come down albeit at a very slow pace. Supply-side distortions and law and order issues do play a very crucial role here. Thus, the price situation remains unpredictable. It is unlikely that there would be any notable improvement in the short-term, as threats of floods and excessive rains loom.

A few recent studies, official or otherwise, have highlighted the rising unemployment because of the persistent slowdown in investment, both private and public. The reduced size of the upcoming annual development programme offers little hope of making any notable contribution to the labour market. Naturally, the private sector is not in the mood to boost investment in a situation marked by high lending rate and political uncertainty. The latter, apparently, has gone into hibernation and won't wake up until the takeover by an elected government. So, no silver lining is visible on the horizon as far as the reversal of the employment situation is concerned.

When inflation remains well above the tolerable level, the budget offers no relief for the middle-income taxpayers. The tax-free income ceiling remains unchanged at Tk. 0.35 million in the next fiscal since it was predetermined by the Hasina government last year. However, the tax rates he has proposed for the fiscal years 2026-27 and 2027-28 would prove to be a burden for middle-income taxpayers. The budgetary proposal to levy 1.0 per cent turnover tax on firms, irrespective of their loss or profit, at the end of any fiscal year would surely hurt businesses. Businesses have to pay other taxes, including VAT. Firms in the red at the end of any fiscal year will also have to pay taxes, thus, eating into their capital.

Keeping in view the LDC graduation timeline, the finance adviser has proposed lifting tax exemptions now being enjoyed by some locally produced items. Though the producers concerned would face a few challenges, such exemptions cannot continue unendingly. But this being a piecemeal measure is unlikely to leave any major impact. The government instead should come up with a comprehensive strategic paper to deal with the post-graduation challenges in the manufacturing sector. The measures proposed in the budget are bold but more needs to be done in this particular area.

The tax revenue projection for the next fiscal appears too ambitious, given the situation prevailing in areas of revenue mobilisation during the current year. A large shortfall against the revised target is feared. Tax collection has come to a virtual halt lately because of the unrest among NBR employees centring around the bifurcation of the tax administration. The situation has not yet settled down fully. It is hard to expect mobilisation of the projected tax revenues with this kind of situation in place.

There has been a persistent demand for lowering the corporate tax from businesses. The interim administration instead of going wholesale has decided to benefit the listed companies, apparently, to woo more private companies to the country's bourses. How far this move works remains to be seen, for some other factors have been preventing companies from coming to the stock market. The propensity to maintain the family control is viewed as a major disincentive to listing of private companies with bourses.

Finally, looking at the intent and content of the proposed budget, one might have a feeling that the finance adviser was in two minds while crafting the budget because of the demands of a conflicting nature coming from different quarters and inherent structural deficiencies. Under the prevailing circumstances, he will have to chart a difficult path, as the economic recovery though happening at a snail's pace remains fragile. Many banks are still struggling and inflation is on the higher side. The movement of inflation would largely depend on many internal and external factors, a stable exchange rate being at the top of those.