IMF loan deal looms over FY24 budget

For any incumbent government, rolling out an election-year budget proposal is challenging, as anything that may negatively impact voters tends to reflect poorly on ballots.

For any incumbent government, rolling out an election-year budget proposal is challenging, as anything that may negatively impact voters tends to reflect poorly on ballots. 

Proposing a budget in an election year in which the macroeconomy is spinning out of control is somewhat 'Mission Impossible', which Finance Minister AHM Mustafa Kamal attempted to address on Thursday. 

Bangladesh is heading for the general election early next year. 

With that in mind, Kamal and his team had to keep some other facts in mind this year before preparing budget proposals for the fiscal year 2023-2024: 

A raging inflation which brought the people in middle and low-income brackets to their knees. 

A cost-of-living crisis which was exacerbated by skyrocketing energy bills. 

A dipping US dollar reserve forced the policymakers to roll out unprecedented austerity measures, which, in turn, slowed down growth and crippled the private sector.

The crushing blow of downgrading Bangladesh’s credit rating just two nights before. 

The tough conditions of reforms for macroeconomic, banking and taxation sectors set by the International Monetary Fund, or IMF, for extending a credit of $4.7 billion.

Kamal et al somewhat touched all these points in the budget proposal tabled in the parliament on Thursday, especially regarding setting a realistic target for growth and inflation, but with an undercurrent of reforms bubbles below the surface, the overall budget does not seem to recognise the root cause of the ongoing economic crisis and provide a clear path forward.

Hardly any policies or budget allocations were proposed for the people in the low-income bracket, who had hit rock bottom of the ongoing cost-of-living crisis and rising inflation.

One of the IMF conditions was to reduce the subsidies and increase the social safety net proportionally. In the budget proposals, Kamal did cut the subsidies to some extent (not to the thresholds to the IMF’s liking, though), but the size of the social safety net has not expanded substantially, except for some allowances, especially to senior citizens and widows.

This may haunt the Sheikh Hasina-led administration on the campaign trail later this year.

Raising the tax-free income ceiling, a long-awaited decision, is timely, but its benefits are undercut by the minimum tax of Tk 2,000 imposed on those who plan to seek government services.

There are positives of the budget as well.

Kamal, mostly absent in the public domain for quite some time, clearly had the IMF reform conditions in mind as those loomed large on many stages of budget proposals.

He promised an end to tax exemptions, a reduction of subsidies, raising the tax-to-GDP ratio, and a market-based pricing mechanism for fuel.

In his budget speech, there is no strong indication of how the government plans to tackle soaring inflation, which hit over eight per cent by the end of April.

Kamal mostly spoke about a price adjustment formula, indicating the removal of subsidies on fuel oil and electricity to tame inflation, and pledged to bring down the rate to 6 percent in the next fiscal year.

Two other positive approaches the finance minister took in this regard is adjusting the payment of senior citizens and widows under the social safety net programmes, but the overhaul of the programmes has largely been ignored, as prescribed by the IMF. The other one is raising the tax-free income ceiling to Tk 350,000 for individuals and Tk 400,000 for women and senior citizens.

Independent experts, however, cast doubt about the viability of the target against the backdrop of global economic uncertainties.

The average inflation rate has been maintaining a sustained uptick over the last 10 months, with consumer price index hovering around the 9 percent mark, mostly blamed on the war in Eastern Europe, the ripple effects of which have severely dented the Bangladesh economy.

The government planned to cap the key economic index at 5.6 per cent in the budget for the outgoing fiscal year, and the figure was later revised to 6 per cent. But even that goal could not be met.

Bangladesh's consumer market was mired in volatility throughout FY23 as headline inflation soared to a decade-high 9.52 per cent for a single month in August 2022. The average inflation for 10 months until April stood at 8.84 per cent.

Khondaker Golam Moazzem, research director of the think-tank Centre for Policy Research, feels that the goal for inflation in the latest budget is somewhat 'inconsistent with the current economic reality'.

“The government adopted this target in the hope that the war [in Ukraine] could end in the next fiscal year or that the global economic situation would improve. If the government took into account the reality of the situation and set its target now, it could have planned the necessary measures.”

Dr Binayak Sen, director general of Bangladesh Development Research Institute (BIDS), believes that the government's optimistic approach to tackling the issue could end up bringing positive results.

“I like the optimistic, positive attitude of the government. I think the developed world will take the initiative to stop the war in Ukraine in its own interest. Due to this war, the economy of developed countries is suffering -- their markets are suffering. They will take the initiative to stop the war to save their own economies.” 

As a result, Sen does not see anything wrong with the inflation target of 6 per cent and believes it could be attainable if the Ukraine war ends.

Ahsan H Mansur, executive director of the Policy Research Institute, cast a spotlight on the hefty deficit of Tk 2.6 trillion in the latest budget.

He believes that the level of inflation will not be greatly affected if the government borrows from private banks to cover the shortfall.

“But if the government takes money from the central bank again, it will fuel inflation. So, I would say the implementation of this year's budget will be very difficult."