We are currently facing many challenges. As a result of the shortage of foreign exchange reserves, electricity, gas, etc., the life of common people has become miserable, a deadlock-like situation has been created in trade and commerce. The unemployment rate is gradually increasing and the overall economic condition is deteriorating. Finance Minister AHM Mustafa Kamal presented a budget of Tk 7.61 trillion for the fiscal year 2023-24, setting a target of achieving 7.5 per cent GDP growth while keeping the average inflation at 6.0 per cent.
The proposed expenditure is 15.33 per cent more than the revised budget of the outgoing fiscal year. That volume is equal to 15.21 per cent of the total GDP of Bangladesh. The deficit between income and expenditure in the budget remains a record which is 5.2 per cent of GDP. The government wants to get a loan of Tk 1.02 trillion (1 lakh two thousand 490 crores). The rest of the gap will be met with internal financing.
While giving the budget for the current fiscal year (2022-23), the global situation and the domestic shocks cited were to be there. Yet we assumed the GDP growth rate and inflation at 7.5 per cent and 5.4 per cent respectively. We assumed that our foreign exchange reserves of US$ 46 billion and exchange rate would not change. But the assumptions in the budget did not match the reality. This happens when budgeting is done based on desire rather than reality.
The proposed 2023-2024 fiscal year budget in terms of inflation, GDP, etc. is not very similar to the reality. The goals are quite ambitious which may not be achieved due to weaknesses in assumptions.
International credit rating agency Moody's downgrading the credit rating of Bangladesh sparked the fear that foreign investment in the private sector would decrease. This will not only reduce private investment, but also will have a major negative impact on import-export trade. Analysts fear that the supply of foreign currency will further decrease as per Moody's rating.
As the country's credit quality has decreased in Moody's rating, the rating of the country's banks would deteriorate, against which the guarantee of a third foreign bank is required to be conditional to open an import LC. This will increase business costs, and erode the price competitiveness in local and international trade that would trigger inflation. The foreign investment in the private sector may be at stake as foreigners will be skeptical about getting their money back by investing.
Many foreign investments have already been withdrawn from the capital market. All those investments are far from coming back. Due to the dollar crisis, the raw materials needed to keep the factories running cannot be imported as required. In this situation, private investors are trying to bring dollars through buyers' credit in various ways. It will now be hampered by Moody's rating. Thus, it has given rise to many fears in the economy, especially in view of high exposure to foreign exchange and liquidity risk.
Foreign debt repayment is an important aspect of Bangladesh's debt management. In the fiscal year 2021-2022, the government repaid foreign debts equivalent to over USD 2.0 billion. In the fiscal year 2023-2024 foreign debt repayment will cross 4.0 billion dollars. Apart from the government, the loans taken by government companies and the private sector at this time also have to be repaid with interest. Hence efficient debt repayment management is essential to ensure financial stability and avoid any liquidity crisis.
There are also three major challenges facing our economy today: such as inflation, macroeconomic management and internal market management. The average inflation was 6.15 per cent in FY 2021-22 compared to 9.24 per cent in last April, which hit hard a large section of the population, especially the low-income earners. But what strategies and initiatives will be taken to deal with inflation have not been discussed that much in the budget documents.
During the high inflation regime, the government should be cautious about spending money on development projects. Spending more money at this time is like adding fuel to the fire. The budget deficit needs to be reduced to avoid depending on bank loans. During the ongoing economic crisis, more emphasis should be placed on controlling inflation rather than achieving a high growth rate of 7.5 per cent. Bringing stability to the macro economy should be the prime goal.
If we look at monetary policy, we see that forced interest rates have been pegged for a long time. It has not helped in controlling inflation in any way. Efforts could be made to bring down the cost of goods by adjusting the taxes and other fees that exist in the revenue sector. Such initiative was not seen. An example is fuel. When the price of fuel increased a lot in the international market, the price was also increased in the domestic market. At that time it was advised to adjust the tax to keep the price affordable. That was not done. The high price of fuel affects every sector of the country's domestic economy.
Secondly, there is no guidance on what should be done to deal with the crisis in the management of our macro economy, especially revenue collection, mismanagement of the financial sector and other areas of the economy. The budget is not clearly targeted and its focus seems to be lacking. IMF conditions such as publication of updated GDP account every three months, interest rate or exchange rate adjustments, etc. are discussed outside the budget.
Only less than 0.5 per cent of annual revenue comes from wealth tax. That is, the tax structure here does not force the rich to pay taxes. Instead, taxes are collected at the same rate from the rich and the poor through customs and VAT. A major consequence of policy failure to tax the rich is a persistent decline in the tax-GDP ratio.
On the one hand, taxation creates poverty because the wealth owned by the rich is not taxed, and on the other hand, allocations for poverty alleviation are low. The country's current Gini coefficient is around 0.5, indicating deep inequality. As a result, income inequality has increased, with 16.3 per cent of the national income being held by the top 1.0 per cent indicating clear discrimination.
Now economists say that without human resource development, physical infrastructure is just a skeleton. The proposal to increase the wealth tax limit by Tk 1.0 crore while setting a minimum tax of Tk 2,000/- to get government services will increase the inequality in the country which is contrary to fairness.
Third, no strong action was taken against traders involved in market manipulation by creating any artificial crisis. There has been no effective initiative in monetary policy, fiscal and market management for over a year.
The budget seems to automatically reduce inflation. In reality it is not possible. The government expects private investment to reach 22 to 27 per cent in a year. But for a decade we see it fluctuating at 21-22 per cent. Thus, the sudden leap in investment is absolutely impossible. In the past history of Bangladesh, private investment has not seen such a dramatic jump in one year. Instead of fixing this ambitious target of investment in these circumstances, this year's budget should have tried to address the fact that our economy is spinning like a vicious circle.
The crisis will increase - the ongoing crisis of the economy will not pass in this unbalanced budget, but will increase. Keeping in mind the revenue shortfall, a smaller budget was needed to overcome the crisis. There are weaknesses in assumptions. In this way, such an ambitious budget will neither lead to growth nor reduce inflation. A 6.0 per cent growth rate in the current situation seems to be very good which will ensure a sustainable economy.
Today there is degradation all around. The intolerance among people, lack of mutual respect, etc. erode love towards individuals, socio-cultures and common people. The reason for this is absence of humanity, morality as well as diversion of daily living and lifestyle. Despite the balanced budget demanded every year, increasing unequal distribution of wealth is leading the society towards anarchy as well as creating a humanitarian crisis and moral decay. In such a context, the government cannot avoid its responsibility.
Md. Abdul Jabbar is Managing Director, Aviva Finance Ltd & researcher and economic analyst
jabbar20095@gmail.com