A modestly incremental annual budget of Tk 7.97 trillion for Bangladesh runs in right direction to contain inflation but targeted higher borrowing and taxes on some goods may keep the inflationary pressure on the economy prevalent.
Economists think the higher bank borrowing may create a problem in financing businesses, especially the SMEs, in a knock-on impact technically termed "crowding-out effect".
Economists and analysts see such paradoxical situation in the budget proposals although the budget outlay for the fiscal year 2024-25 is only less than 5.0-percent up.
Finance minister, Abul Hassan Mahmood Ali, presented the budget in in the Jatiya Sangsad (JS) on Thursday as the government of Prime Minister Sheikh Hasina began its fourth straight term, with a substantial deficit funding.
The government estimates aggregate revenue earning worth Tk 5.45 trillion to be pooled from taxes and non-tax sources. The arithmetic leaves a deficit of Tk 2.56 trillion, which has to be managed by borrowing mainly from banking system.
In the meticulously calculated new budget the government pledges to pull down inflation from a near-double-digit high to 6.5 per cent while maintaining a modest economic growth.
As the gross domestic product (GDP) growth is set at 6.75 per cent-higher than the cut-down revised rate in the passing financial year-economists believe it will be a hard task for the new finance minister to steer to the goal as he, in his budget speech in parliament, set forth government plan to maintain the crisis-time austerity in public spending and imports in particular.
Many believe that under such big dependence on domestic sources, the central bank may print the money which pushes up the inflation hitting hard limited- income group of people.
Foreign funding has been drying up in recent times in the context of lingering global crises which shrank then receipt to Tk 762.93 billion, down by around 25 per cent from the original budget of FY 2023-24.
The finance minister in his budget speech said they prioritized inflation control as number one. "To control inflation various steps are being taken to make the monetary policy a successful one.
"At the same time, supportive policies are being implemented in the fiscal sector as well. Government support like Family Card and OMS Programmes are being strengthened to protect the common people from adversities arising from high inflation," he told the lawmakers.
Economists welcomed the conservative budget but were critical of a plan to increase the price of electricity four times a year over the next three years to withdraw all subsidies from the power sector, which the IMF recommends in a lending package.
"Once there be four times increase in prices of power, it will affect consumers and producers and further fuel up the inflation," says Dr M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh.
He thinks subsidy cut could be for the capacity payment to private power producers, rather than ensuring interest of the retail users.
The finance minister said that power production increased six times to 30,277 megawatts.
"Actually there is no clear-cut outline on how to reduce the inflation in the budget speech," says Dr Monzur Hossain, director (research) of Bangladesh Institute of Development Studies (BIDS).
Finance Minister Mr Ali unveiled his first budget with the claim that it has been crafted in addition to controlling inflation, allocating necessary funds to the government's priority sectors like poverty alleviation, job creation, social-security programmes, education, health, agriculture, and climate change.
"The budget for this financial year has been formulated with the authority of confirmation and future development plan."
Economists were critical of the GDP target amid the ongoing higher inflation persisting for long on the economy. They see some "unrealistic" numbers in the budget speech: 6.75-percent GDP growth, 6.5-percent inflation and tax-GDP ratio up at 10 per cent.
In the country's annual fiscal blueprint, styled 'March Towards Smart Bangladesh Following the Path of Sustainable Development', he said: I propose to exempt from tax the income arising from any of the following business activities of a resident individual or a non-resident Bangladeshi natural person, for three years, on the condition that all business activities of such person are cashless, namely:- AI- based solution development; blockchain-based solution development; robotics process outsourcing; software as a service; cyber-security service and so on"
It also says under initiative to develop 'Smart Bangladesh,' two digital banks aim at providing information and technology-based banking services to the people.
The minister stressed the need for ensuring good governance in the banking system.
The budget speech reads: "To address the challenges of the Fourth Industrial Revolution, the finance minister said the government goal is to create at least 1.0 million smart jobs in the information technology sector and attract foreign investment of US$ 1.0 billion over the next five years."
On resource mobilisation, the finance minister said reforms are being implemented for enhancing revenue collection.
Administrative capacity building of the National Board of Revenue (NBR), expansion of tax base, automation in revenue collection and management system and programmes for automation to reduce the human interface have been undertaken to raise the tax-GDP ratio to 10 per cent.
He said the pace of revenue mobilisation will be increased through proper implementation of the Income Tax Act 2023, introduction of the Customs Act 2023 and seeking co-operation from private sectors.
There are some tax impositions on popular goods. They are ice-cream, by raising to 10 per cent from 5.0 per cent, mango bars, mango, pineapple, guava and tamarind juices. The tax on carbonated beverages which are much consumed due to extreme hot weather is raised by 5.0 percentage points to 30 per cent, mobile- phone SIM to 15 per cent.
Local air-conditioner maker VAT imposition will be 7.5 per cent from zero per cent. VAT on local refrigerator and fridge making will increase by 2.5 percentage points to 7.5 per cent.
The tax-free income thresholds of individual taxpayers and firms remained unchanged for the financial year 2024-25.
But the budget proposes to increase the existing maximum tax rate from 25 per cent to 30 per cent for natural individual taxpayers and firms with tax-slab adjustments, in a bid for narrowing yawning disparity created through wealth concentration.
On course of transition from LDC to a developing country, the finance minister stressed the need for maintaining consistency with the regulations of the World Trade Organization (WTO) and consequently need to rationalize tariffs gradually to ultimately fit in a competitive trading regime.
"One of the conditions for tariff rationalisation is to phase out minimum value, tariff value, regulatory duties and supplementary duties."
The allocation for social-security programmes (SSP) has been augmented marginally. A sum of Tk 1.36 trillion has been earmarked for the social-safety-net recipe, nearly 8 per cent up from the current fiscal year.
Out of 115 social-safety-net programmes, 34 are cash-based, and 19 of these programs are currently disbursing funds directly into beneficiaries' bank accounts or mobile banking accounts via G2P system.
The finance minister said steps have been taken to update the policies related to green bonds with the aim of financing from the domestic sources the activities undertaken to deal with the impact of climate change.
He said the government has laid emphasis on taking advantages of Blue Economy including deep-sea fishing, extracting mineral resources from seabed in this budget and an allocation of Tk 1.0 billion for the same.
In conclusion, the finance minister said taking into account the ongoing global political context and domestic macroeconomic conditions, timely reforms in the revenue sector and towards digital transformation, tax-net growth, non-tax revenue collection and administrative capacity building will be undertaken to ensure adequate resource allocation.
"Dependence on foreign sources will be reduced in managing the deficit by keeping the budget deficit at a sustainable level."
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