Budget based on ‘unrealistic assumptions’

CPD remarks, says hardest fact of life now is inflation but no tangible tools to tame it

FE REPORT | Published: June 03, 2023 00:01:08

Policy analysts at the Centre for Policy Dialogue (CPD) find the proposed national budget expansionary and framed on some “unrealistic assumptions” far from the reality of Bangladesh’s current economic dynamics.
“When the inflation is unusually high, foreign-exchange reserves are down, fiscal balance not under control, how the government can target 6.0-percent inflation and a 7.5-percent economic growth,” CPD executive Director Dr Fahmida Khatun told journalists at a briefing on the new budget.
The CPD urged the government to scrap the proposed Tk 2,000 tax on the TIN-holders but under the taxable-income threshold.
“This tax imposition is morally and economically unfair, cruel and discriminatory, when the government has cut income tax to 25 per cent from earlier 30-percent rate on the highest income- holders,” she said.
Dr Fahmida also sees the proposed budget as a “shadow of the International Monetary Fund (IMF) conditionalities” although the finance minister did not explicitly mention it in the budget speech.
“In the FY2024 budget, the underlying assumptions pertaining to the key macroeconomic correlates appear to be far from the reality. As a consequence, the budgetary targets set for FY2024 are likely to be missed by substantial margin,” she predicts.
And the think-tank thinks the budget has failed to address the most difficult challenge in the current reality—containing inflation.
“On the whole, the budget failed to fully acknowledge the ongoing macroeconomic challenges, therefore, offered inadequate remedial measures.”
CPD’s distinguished fellow Prof Mustafizur Rahman said this budget is also far away from the reality like the current year’s one as the government had framed both of them based on some unrealistic assumptions.
“Over more than a decade, our economy was doing well. Suddenly, the government has begun to frame the budget over the last two years without considering the reality, the real economic fundamentals. The unrealistic budget has already affected us at the end of the current year. So, the next year, we may again fall into trouble further,” the fellow told the journalists.
If budget is framed based on “utopian dream”, it will ultimately not be executed, Prof Mustafiz said.
Dr Fahmida further said: “The fiscal framework appeared surreal, as the targets for the current fiscal year were not grounded on reality.”
Finance Minister AHM Mustafa Kamal set a revenue-generation target that exceeded the spending rate, she noted, indicating the cuts in the supplementary budget for the outgoing fiscal year.
The CPD’s ED questioned how private-sector investment would be boosted to 27.4 per cent of the GDP from its current level of 21.8 per cent in the FY2023.
“In FY2024, some Tk4.04 trillion additional investments from the private sector, or 41.8-percent expansion, will be required for swelling the investment-GDP ratio to 27.4 per cent,” Dr Fahmida said.
Besides, the private-sector-credit growth up to April in the current FY2023 was only about 11 per cent, falling short of the target at 15 per cent.
The government has proposed to borrow an increased amount from the banking sector to finance the budget deficit which CPD believes would stoke up inflation and create an excessive money supply to the market.
Public borrowing from commercial banks would also reduce growth potential by decreasing private credit availability, it forecasts.
Overall fiscal framework continued to remain “surreal” as revised budget of the current fiscal year’s targets did not take budget-implementation progress into consideration.
Khondaker Golam Moazzem, CPD research director, finds no proper policy guidelines in the budget for taming the inflation.
Although the government has not reflected all the IMF conditions directly in the budget, but after election in January it may go for massive reforms which could affect the people and the inflationary pressure, he told the budget-review meet.
Towfiqul Islam Khan, senior research fellow of the CPD, said the government formed the budget on assumption of nine basic indicators—including revenue target, export target and inflation—all of which are very far from the reality.
The government’s revenue target is around 39-percent higher than the actual collection in the current year, so the government would need to borrow from banks to meet the deficit, he said.
“In the next fiscal year, the government may go for withdrawing the USD from the money market through the local currency. The government will have the only option to go to the central bank for borrowing. Then the central bank may supply high-powered money and reserve money to the market, which will increase the inflation,” he predicts.
As the banking sector remains in a liquidity crisis, so the central bank will be the lender and it may raise the present inflationary pressure.
On top of that, the government assumes that export, remittances and reserves will be boosted thus the taka will not depreciate further.
As these assumptions are also not realistic, so the further depreciation of the currency would create more pressure on the economy, he added.
About the Annual Development Programme (ADP), the CPD ED, Dr Fahmida, said the government allocations to education, health and agriculture sectors have come down compared to GDP, which is contradictory of the economic fundamentals in Bangladesh.
Emphasizing more revenue income, she said the NBR may appoint some agents from the 3rd party which may create a “broker class” in the country.
“The agents …may exert pressure on taxpayers to pay higher amount or accept bribe to reduce tax liabilities,” Dr Fahmida said.
About the imposition of travel tax on air journey, the ED cautioned the government about the possible implication on the expatriate workers who are sending billions in remittance to Bangladesh every year.
The government placed in parliament on Thursday the budget of Tk 7.62 trillion with an estimated aggregate revenue-earning target at Tk 5.0 trillion. The arithmetic leaves a deficit of Tk 2.2 trillion, which has to be managed by borrowing from home and abroad.