Fight against inflation: Treading a rugged terrain

The national budget that Finance Minister Abul Hassan Mahmood Ali placed in the Jatiya Sangsad (Parliament) on Thursday for the financial year (FY) 2024-25 recognises that the prevailing economic situation is complex and demands belt-tightening. Except for a few aberrations, that message is loud and clear in most areas of the budget. The size of the budget for the next fiscal year also signals the same message. Containment of inflation is the stated primary objective of the budget. However, the roadmap of this financial strategy is far from clear and given the ground realities here, things often go awry because they are not backed up by the right policy actions. The role of other players, including the importers and domestic producers and sellers of essential goods, is important here. Highly unpredictable and organised, these people can spoil the good intentions of the government.
A section of self-seeking bureaucracy also often torpedoes programmes designed to benefit a large segment of the population. Then again, monetary policy, exchange rate etc., do have a bearing on the inflationary trend. These policies, if not in sync with fiscal measures, are unlikely to contribute to taming inflation. Besides, the target set in the proposed budget to bring down the near double-digit inflation to 6.5 per cent while maintaining modest economic growth at 6.75 per cent appears ambitious.
Given the situation, it might be challenging for the government to lower inflation and arrange enough resources to meet recurring and non-recurring expenditures during the next financial year. The proposed budget has a few fault lines, the first and foremost being the budget deficit, amounting to Tk2.56 trillion. Financing the deficit, if it goes as planned, will be fine. But in the event of a notable shortfall because of reduced foreign fund flow or NBR tax collection, higher borrowing from the banking system or use of high-powered money to meet the deficit will invariably give rise to an unpalatable situation. Hopefully, the problem will not be intractable. The NBR in the budget has done away with some exemptions and raised tax rates for some commodities and services. This could help the Board fetch a sizeable amount of revenue. However, the extent of benefit from the withdrawal of tax exemptions has yet to be explained in the proposed budget. With genuine efforts and proper tax management, the tax inspectors should mobilise the additional revenues. But experience says otherwise.
Another controversial issue---the black money whitening opportunity--- is sure to ignite debate in the public domain again. The success of the NBR's move to increase the 'flow of money into the mainstream economy' by offering an opportunity to 'correct past errors' and disclose the acquired assets such as land and all other immovable property and cash remains in doubt. This opportunity has been offered time and again under different banners. Still, the revenue earned has always been meagre, given the massive size of the black or tainted economy. Except for some harsh comments from critics, the NBR has not got anything tangible from this unpopular move. This time, however, one exception exists in the tax amnesty scheme. For the first time, corporate taxpayers will be free to declare their hitherto undisclosed assets. Such an addition might help mobilise some extra resources.
The 6.75 per cent growth target under the prevailing situation also seems ambitious. The size of the Annual Development Programme for the FY 2024-25 shows that the government, for now, is at least willing to put a leash on its developmental spending. But the state of the private sector investment is known to all. The latter has been stagnant in recent years. The factors that have restrained the private sector from expanding so far and the measures proposed in the next budget are unlikely to bring about any notable change in the situation on the ground.
One particular omission, deliberately or otherwise, in the budget speech of the incumbent finance minister has surprised many. That is the current state of affairs in the country's banking sector. The minister has referred to digital banking, easy and affordable financial transactions, Bank Company Act amendments, etc. Still, he has skipped the issues involving substantial non-performing loans, bank capital shortfall, and loan scams. The banking system of any country remains at the heart of its economy. Unless and until its weaknesses are fixed, the economy will falter at every step. The propensity to bypass the banking sector's ills would only invite more troubles.
Ground realities dictate that a slimmer budget would be the right option, particularly when the government is facing trouble mobilising enough resources. Though such an approach tends to slow down economic growth to some extent, it surely helps the government fight inflation better. And fighting inflation is its top agenda. However, some issues, such as the availability of greenback, exchange rate, and domestic and foreign resources to finance the budget deficit and consequent bank borrowing, will strongly affect the inflationary trend. The role of domestic production and supply of goods, agriculture or otherwise, must be emphasised. Yet a healthy inward remittance flow and export earnings will provide a much-needed cushion for the economy. The government will have to pay careful attention to that area.
Whether from external pressure or not, the government has lately started moving towards a few reforms, albeit slowly. These reforms have been long overdue. The belated implementation makes reforms more painful for the common people. Many financial sector reforms initiated in the 1990s had started giving good results. But neglect of and apathy towards pursuance of those at the later stage have only intensified miseries. Policymakers need to be mindful of such follies.