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As Bangladesh stands on the verge of becoming a developing country amid multi-faceted economic pressure, Finance Minister Abul Hassan Mahmood Ali’s budget proposes to raise more than 17 per cent of its deficit by borrowing from domestic banks.
The finance minister presented this budget proposal of Tk 7.97 trillion for the fiscal year 2024-2025 in parliament on Thursday, reports bdnews24.com.
Of this, he seeks Tk 5.41 trillion from the tax sector, which is a major challenge for tax collectors to implement.
Still, the overall deficit – the difference between its expenditure and tax revenue - will be over Tk 2.51 trillion, 8 per cent higher than the revised budget for the 2023-24 fiscal year.
However, the deficit is 4.6 per cent of gross domestic product (GDP), the lowest in a decade.
Usually, attempts are made to keep the budget deficit within 5 per cent. However, since the 2013-14 fiscal year, the deficit has been above 5 per cent due to the need to inject money into the economy. This time, however, Mahmood Ali is bucking the trend.
The overall deficit for the budget in the outgoing 2023-24 fiscal year was estimated at Tk 2.58 trillion. It came down to about Tk 2.33 trillion in the revision.
The original budget for FY 2023-24 was prepared with a deficit equal to 5.2 per cent of GDP, but in the revision, it came down to 4.7 per cent. This year’s deficit to GDP ratio is similar.
If the government’s expenditure is more than its income, the deficit has to be met by borrowing. The government can meet the deficit by taking foreign grants and loans, borrowing from the country’s public and private banks, selling savings certificates to the public and borrowing from the central bank.
In order to spend the Tk 7.97 trillion outlay in this year’s budget, the finance minister has to raise more than 36 per cent of that money by borrowing.
Mahmood Ali says that he plans to borrow Tk 1.27 trillion from abroad and about Tk 1.61 trillion from domestic sources.
In recent years, Bangladesh has increasingly borrowed from abroad to fund major infrastructure projects. However, the government has to spend dollars from its reserves to pay interest on foreign loans. In the context of the Ukraine war, reserves are already under pressure due to the increase in the price of the dollar in the world market.
Two years ago, the government adopted a policy of discouraging the import of luxury goods as well as delaying financing of less urgent projects to save dollars. The plan to borrow more from domestic sources instead of abroad in this upcoming budget also hints at a strategy to cut down on dollar spending.
Within the domestic sector, a record Tk 1.38 trillion is being sought from banks, which is 17.25 per cent of the total expenditure.
Though this bank borrowing target is 11.82 per cent lower than in the revised budget of the outgoing fiscal year, it is slightly higher than the original budget.
Then finance minister AHM Mustafa Kamal had set a target of Tk 1.32 trillion in borrowing from the domestic banking sector in the budget for the outgoing fiscal year. The amount jumped by 18 per cent in the revised budget to Tk 1.55 trillion.
In addition, Mahmood Ali plans to raise Tk 154 billion from savings certificates and another Tk 80 billion from other sectors.
The budget for FY 2023-24 planned to raise Tk 180 billion from savings certificates, but only Tk 73.10 billion in savings certificates were finally sold.
The amount of money raised from foreign grants has been estimated at Tk 440 billion, Tk 9 billion more than in the revised budget for FY 2023-24.
Finance Minister Mahmud Ali showed these foreign grants alongside the government’s revenue. Explaining this, he said in the budget speech, “Since foreign grants do not have to be paid back, they have been grouped together with government revenue.”
When the amount of debt increases, money is added to the economy from outside. This increases the risk of inflation. Moreover, the government has to later pay interest on that loan.
This year, Tk 1.14 trillion – or 22.39 per cent of total non-development spending – will go to paying interest on the government’s domestic and foreign debt.
Analysts say that the country’s economy is under pressure as the trend of debt-dependent budgets has continued for years. Liquidity crises have occurred from time to time as the government borrows more and more from banks. This has become an obstacle to increasing investment in the private sector.
Dr Salehuddin Ahmed, former governor of Bangladesh Bank, said: “Running a deficit budget is unsustainable. Spending more than we earn will only widen the gap. A bigger budget means squeezing businesses for more money, but that burden ultimately falls on consumers through higher prices. We need to control spending and focus on raising income. Printing more money won’t solve inflation; it will just make things worse.”
Banks are facing an ‘image crisis’ due to the liquidity crises caused by government borrowing, he said.
“Loss of public trust in banks due to the liquidity crisis creates a double whammy. We can’t fix this economic mess if people don’t believe in the banks. Good governance in the banking sector is crucial. The government relies on banks for loans, but how can they borrow without liquidity?
“We need to prioritise strengthening the banks. Stopping loan defaulters from getting away with it will bring money back into the banks, improving liquidity and overall stability.”