Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
The much awaited budget for 2023- 2024 has been announced. Never before a budget has been anticipated with such intensity by both knowledgeable observers and lay persons. This is because the economy is going through a period of unprecedented stress and strain. On the one hand, there is double digit inflation ( officially 9.3 per cent) impinging on cost of living, on the other is the growing pressure on foreign exchange reserves. To make it worse, the budget has been prepared in the backdrop of a regime of fiscal crisis, public expenditures exceeding earned revenue leading to borrowing. Given these realities, the draft budget would appear as half empty or half full, depending on the perspective of observers. A more balanced view of the budget can be obtained by looking at where it has disappointed and where it appears as reasonable and realistic.
Constructive discussion on the draft budget at this stage may help the government to improve on the draft proposals for income and expenditures. The reactions from stakeholders can be expected to be taken into consideration and reflected in the final budget.
An overview of the economy and the headwinds facing it on the eve of the budget delineates the context for budget preparation in stark terms. This is done with reference to three major challenges that now overwhelm the economy viz., inflation, foreign exchange reserves and exchange rate, and chronic budget deficit leading to borrowing.
There is near unanimity that the biggest challenge for the economy is inflation. According to the official estimate of Bangladesh Bureau of Statisitics it was 9.5 per cent in April this year. This estimate has been questioned by many on the ground that the figure is aggregate of average prices of food and non-food items taken into account for the estimate. It is pointed out that weightage should be given to items like rice which accounts for higher percentage of household expenditures. If this is done, inflation would appear in the range of double digits. As regards the factors contributing to inflation the war in Ukraine has been mentioned in the budget speech. Hiked price of fuel should also have been mentioned as it is the prime mover of price increases across the board. Continuous bank borrowing to meet deficits in budgets should also figure among the list of causes. High import price is beyond control except through quantitative control but there is scope for reducing the incidence of the other two factors.
The second challenge facing the economy over the past year is the volatility in the foreign exchange market resulting from increasing demand for foreign payments on account of imports and debt servicing, including repayment and interest payment. For present payment obligations there is not much that can be done except asking creditors for debt restructuring if the near term situation demands this but the present situation has not come to that pass yet. So, the problem over foreign exchange boils down to rationalising the skittish foreign exchange rate, freeing it from the present chaotic state. A related to-do in fiscal management is to ensure an environment conducive for earning a steady flow of foreign exchange through exports, remittance and foreign assistance for budgetary support. Postponing new mega projects financed with borrowed funds or suppliers credit to ease the pressure on foreign exchange reserves is also called for till the present crunch period is over. The recent downgrading of Moody's credit rating for Bangladesh economy will result in higher LC costs and interest rate for private debt by commercial banks. Pressure on foreign exchange reserve lies behind Moody's recent downward revision. It is not alarming but it serves as a warning for lapse of prudent macroeconomic management. IMF conditionality to keep a minimum reserve of 30 billion US dollar and its implications for payment of short term debt like arrear dues of coal imported for power plant should have been in the budget speech as lot of rumours are flying around regarding IMF's conditions that the government has to meet as the required policy change for the 4.9 billion dollar loan granted recently. If exigent, the condition relating to minimum foreign exchange reserve should be revised so that outstanding payments can be made from the reserves.
The third challenge, fiscal deficits and public borrowing for budget balancing, is a continuing one over the recent past. As it has contributed to rising inflation and increased the debt servicing burden, besides misallocating resources (savings), it can no longer be considered with complacency. Naturally, the draft budget will be judged by what has been proposed to be done to wind down the chronic 'fiscal crisis' of public borrowing.
The draft budget is not silent about the burning issue of rising inflation, the number one challenge identified for the present analysis, rather it has taken pride of place in terms of prioritising the goals of the budget. After pointing out the reasons for inflation for crossing the fixed rate of 5 per cent and reaching 9.5 per cent in August this year, the budget speech has set the annual average rate at 6 per cent. The assumptions behind this low rate is the fall of prices of food items, fertiliser and fuel in the international market as projected by IMF. There is also mention of fuel-price adjustment at home in tandem with international prices. While the reflection of international price movements in domestic market will take time, the decision to adjust the same could be announced for immediate effect in the budget. In fact, it could have been done much earlier if the government was keen on alleviating its impact. Secondly, nothing has been said about manipulation of local markets for essentials by oligarchic groups or so called syndicates who play havoc with their manipulation in the retail market. Expanded sale by TCB to counter the market dominance by syndicates or introduction of rationing of essential food items, replacing the sporadic sales by TCB, could prove the seriousness of the government in helping the majority consumers to cope with the rising cost of living. In the event, the draft budget has made some pious wishes about international price decreases percolating down to domestic market and a vague suggestion of fuel price adjustment in future. The budget was expected to be more forthcoming in addressing the inflationary pressure.
Regarding the second challenge in the form of taka-depreciation against dollar and volatility in exchange rate in recent months, the budget speech merely mentions the reforms in monetary policy, both actual and potential. With reference to volatility in exchange rate, it has been mentioned that the 'gap between the multiple exchange rates is being brought to a minimum with the aim of making the exchange rate market oriented'. Granted, the resolution of exchange rate falls within the jurisdiction of monetary policy, but a budget document being a policy statement can not remain silent on why it has not been possible to let exchange rare be streamlined through market forces so far. Given the close relation of monetary policy with fiscal policy, it is no mystery that the ministry of finance keeps a close tab on policymaking by Bangladesh Bank. As regards the present state of foreign exchange reserves, the budget speech has mentioned about measures to verify the accuracy of imported items along with the implementation of LC requirements for accurate valuation of foreign exchange earned and payment of 2.5 per cent in incentives and other remitter-friendly measures to augment remittance payment. Satisfaction on decline of imports has been expressed and hope has been pinned on uptick of exports, al to have favourable impact on reserves. No mention has been made about overall foreign indebtedness and debt service liability in the new fiscal impacting on reserves which will make speculation by observers rife. The overall tenor of the budget speech on foreign exchange reserves is one of complacency and not alarm. But the fact that it has figured in the speech indicates that its seriousness is not lost on policy makers. Observers and analysts should keep their fingers crossed and not go making Cassandra-like prophesying.
Regarding the chronic and burgeoning bank borrowing to finance deficit, the budget speech does not appear concerned at all. On the contrary, satisfaction and justification have been sought in the fact that budget deficit is within the internationally prescribed sustainable limit of 5 per cent of GDP. Not only that, it has been declared that budget deficit will remain similarly limited to 5 per cent in the medium term. In normal times, there could be some justification for this bravado but with rising inflation this is sheer recklessness. A more pragmatic approach would have been a inflation-adjusted budget deficit to be set in motion automatically, depending on the magnitude of inflation.
Slapping a mininimum tax on every TIN holder is a step in the right direction as only 31 lakh out of a total of 88 lakh pay income tax at present. Many tax worthy individuals evade payment either wilfully or in cahoots with tax collecting staff. In relying on indirect tax to the extent of 65 per cent, the draft budget is no different from previous budgets. Indirect tax being regressive, is unfair on middle and low income earners. The new budget makes elaborate projections for revenue collection from a variety of taxes which is encouraging. But is the tax collecting machinery adequate in staff and in terms of incentives to collect? The question begs for an answer. As regards the expenditure side, the proposals for widening and intensifying social security net is most commendable, particularly the separation of pension from this head of expenditure. But overall, the allocation of almost 16 per cent of total public expenditures to public administration, law enforcement agency and defence leaves much to be desired, particularly public administration and law enforcement. These heads of expenditures being non-productive and non-trategic, have room for economising. Allocation for education sector is 12 per cent of the total. Positive as it is, the question is : how much of this is for administrative expenses and how much for service delivery? Similar question arises regarding allocation for the heath sector. It is not enough to mention the sectoral allocations in the budget. More important is breaking down the allocations into administrative expenses and development/service delivery expenditures.
The above is a brief analysis of the budget for 2023- 2024 on the basis of the budget speech and in the light of the three important challenges facing the fiscal policy makers as identified in this discussion. The conclusion seems to be, the glass is neither half empty, nor half-full but somewhere in between. A brave face has been put up in the midst of a very difficult time for fiscal policy, reconciling conflicting interests. But it is worth remembering that success in policy making is not won by rhetoric but by substantive decisions and actions.