Macro & fiscal perspectives of budget FY23

The national budget for FY23 has been placed at a time when the economy is facing considerable challenges. Indeed, the macroeconomic stability has significantly weakened amid negative developments both on domestic and external fronts.

The finance minister has acknowledged the challenges and mentioned the following six points: (i) Containing inflation and enhancing domestic investment; (ii) financing additional subsidy required for the increased price of gas, power and fertiliser in international markets; (iii) utilising funds available through foreign assistance and ensuring timely completion of high priority projects of ministries/divisions; (iv) ensuring timely completion of projects in education and health sectors; (v) increasing collection of local Value Added Tax and raising the number of individual tax-payers; and (vi) maintaining stability in the exchange rate of taka and keeping foreign exchange reserves at a comfortable level.

The Centre for Policy Dialogue (CPD) has earlier emphasised the need for protecting the low and limited earners in the country and focusing on inflation management and restoration of macroeconomic stability by coming out of Gross Domestic Product or GDP growth obsession. To this end, use of appropriate fiscal policy supported by complementary monetary policy has been emphasised. In view of this, CPD has recommended for: (a) tax concession to essential commodities at both import and domestic stages; (b) tax reliefs to middle income groups; (c) adequate resources for subsidies for keeping the administered prices of petroleum products, electricity, gas, and fertiliser; and (d) expanded social safety net provisions both in terms of coverage and the amount of per capita allocation.

TRANSPARENCY: It is to be noted that according to the Open Budget Survey 2021, Bangladesh has a (i) Transparency score of 30 out of 100 (lower than Afghanistan); (b) Public participation score of 13 out of 100 (lower than Nepal); and (c) Oversight by legislature and supreme audit institution score of 39 out of 100.

Bangladesh's budget transparency has decreased over the years due to fewer number of budget documents being publicly available. A transparency score of 61 or above indicates a country is likely publishing enough material to support informed public debate on the budget. Bangladesh's low public participation score is due to the fact that there are few opportunities for public participation during the formulation and approval of the budget, and no opportunities for public participation in the implementation or audit processes of the budget. Bangladesh has also weak legislative oversight and limited audit oversight in the budget process.  The budget documents of FY23 have failed to publish data on how much funds were disbursed through the fiscal support measures launched in response to the Covid-19 pandemic. Such lack of transparency and accountability threatens to reduce the effectiveness of the government's Covid-19 response. Disaggregated data on the implementation status of all liquidity support packages should be published on a monthly basis.

MACROECONOMIC PERSPECTIVE: For FY23, GDP growth target has been set at 7.5 per cent which is 7.7 per cent the 8th Five-Year Plan (8FYP). The budgetary framework, prepared by the Ministry of Finance (MoF), projected a 7.3 per cent GDP growth in FY22. The figure is almost similar to the provisional estimates by Bangladesh Bureau of Statistics (BBS).

GoB's growth projection is higher than the forecasts by World Bank (6.7 per cent in January 2022), International Monetary Fund (IMF) (6.7 per cent in April 2022) and Asian Development Bank (ADB; 7.1 per cent in April 2022).

Public investment-GDP ratio in FY23 has been assumed to be 6.7 per cent which was 7.6 per cent in FY22. Private investment has been estimated to be 24.8 per cent of GDP in FY23. In FY23, approximately Tk 1.47 trillion will be additionally required for private investment (15.4 per cent increase in nominal terms) based on the MoF estimates for FY22 (Tk. 9.56 trillion).

Incremental Capital Output Ratio (ICOR) is also expected to be 4.2 in FY23 as productivity of capital is projected to increase. The ratio was 4.4 in FY22 and 4.5 in FY21.

Growth of credit to private sector has been set at 15.0 per cent in FY23 - almost same as the revised targets for FY22. As of April 2022, growth of private sector credit was 12.5 per cent.

The budget assumed that inflation would be stable at 5.6 per cent in the next fiscal year. Question is, how? Inflationary trends have exhibited an upward tendency in the closing months of FY22 (5.8 per cent in April 2022. Both food and non-food inflation also appears to be creeping up - 5.5 per cent and 6.3 per cent respectively in April this year.

FEW OBSERVATIONS ON ADP: There is no significant change in the structure of Annual Development Programme (ADP) allocation in FY23. Physical infrastructure-related sectors have continued to dominate the ADP. Utilisation of foreign aid will be critical for ADP implementation. The problems of 'carryover' and 'time-overrun' projects will persist in FY23. Progress of mega projects implementation is unsatisfactory. The wait may continue with consequent adverse impacts on public service delivery and crowding-in private sector investment. The delay in implementing mega projects will also have repercussions in the form of cost escalation. The prioritisation exercise of ADP projects is confusing. 269 completing projects have been tagged as "low priority". 17 of the 20 mega projects in the ADP for FY23 are marked as "low priority" but have received significant allocations. However, most of the unapproved new projects (633 and another 150 seeking foreign funds) have been tagged as "high priority". ADP for FY23 again marked with high number of projects with 'symbolic allocations.'

ON FISCAL MEASURES: Personal Income Tax (PIT) structure remains unchanged in FY23 as tax exempted threshold for PIT remains the same at Tk. 300,000. Wealth Surcharge free limit also remains unchanged at Tk 30 million. Changes were not introduced in the other slabs as well. This is perhaps a missed opportunity to introduce more progressive tax measures.

Rate of investment tax rebate has been fixed at 15 per cent on eligible amount.  This would mean higher taxpayers i.e. top earners will get higher tax rebate benefits whereas those with annual income below Tk 15 lacs will not get any additional tax benefits.

The allowable ceiling of perquisite has also been raised from Tk 5.5 lacs to Tk. 10 lacs in FY23. This would mean those with annual income between Tk 16.5 lacs to Tk 30 lacs will get additional tax benefits of up to Tk 112,500 in a year  This is another instance where the proposed tax measures would benefit the high income group.

Reduction in Corporate Income Tax (CIT) was observed for three successive years. This cut was provided under the condition that receipts and income must be transacted through bank and all expense and investment over Tk. 12 lacs must be made through bank transfer.

CIT rates for banks, insurance and financial institutions (both listed and unlisted), merchant banks, tobacco item producers, mobile operators (both listed and unlisted), and private educational institutes (college and university level) remained unchanged from FY22 Given the uncertainties prevailing in the domestic and global arena, and without other measures to improve business environment, whether the reduction in CIT will stimulate investment remains a question.

Reduction in CIT, without any upward adjustment in the tax exemption threshold for personal income tax, also raises questions as regards tax justice.

The dependence on indirect tax has continued in FY23. Fiscal proposals to raise the share of direct tax in total tax was wanting. For example, the highest tax slab which was reduced to 25 per cent from 30 per cent in view of Covid should have been reinstated at the earlier 30 per cent.

The Budget FY23 did not offer any significant respite through fiscal measures from the inflationary pressure originating from high import prices and recent significant BDT depreciation, particularly as far as the low-income people were concerned.

There was no strong move to go for import duty reduction of essential commodities to signal a lessening of imported inflation burden on low- and fixed-income groups.

 There was, however, a welcome attempt to provide support to domestic import-substituting industries through (a) imposition of import duties and supplementary duties on import of finished goods and (b) reduction of duties on imports of raw materials and intermediate inputs.

While the government has continued with corporate tax rationalisation in FY23, CPD analysis shows that without parallel initiatives in areas of reforms, ease of doing business, implementation of one stop service and improving business environment, such measures do not translate into enhanced investment. The move to make proof of submission of income tax return mandatory for availing of certain services is, however, a welcome measure. 

A new provision added in the Income Tax Ordinance 1984 with a view to mainstreaming money earned and asset acquired abroad into the economy. According to the proposed provision, no authority, including the income tax authority, shall raise any question as to the source of any asset located abroad if a taxpayer pays tax on such asset. Such an initiative is ethically unacceptable, will discourage honest taxpayers, unlikely to generate the intended revenue, and politically not wise. CPD strongly urges for removal of this provision

END NOTE: The budget for FY23 needed to be innovative in approach, flexibility in allocative priorities and target specific in terms of budgetary measures to address the attendant challenges. Though the budget speech could diagnose the symptoms, it failed to prescribe the required medication.

The budget does have some welcoming measures: (a) Better identification of contexts and challenges; (b) Expressing accountability by delineating the progress of past promises; (c) Continuation of fiscal measures to protect domestic industries; (d) Harmonization of tax structure in case of export-oriented industries; and (e) Relatively less election-focused.

The budget, however, comes short in terms of: (a) Addressing inflationary issues; (b) Assuring citizens regarding keeping the administered prices at the same level; and (c) Expanding social safety net allocations in view of rising demand.

The budget is worse in terms of (a) Welcoming illicit/illegal income and capital flight; and (b) Providing more support to higher income group while keeping the low and middle income groups at bay.

Overall, with its current structure and proposed measures, the budget appears to be insufficient in terms of needed measures, incomplete in terms of outlining strategies and inadequate in terms of addressing the present macroeconomic challenges.

Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD. [email protected]; [email protected]

[The article is abridged and edited version of power-point presentation made by the authors at the CPD Media Briefing on CPD's Analysis of the National Budget FY2022-23 on Friday.]