In response to the current economic climate, the government has decided on a restrained approach to the national budget and GDP growth forecasts for the next fiscal year prioritising fiscal prudence over ambitious expansion.
The decision was made at a meeting of the Budget Monitoring and Resources Committee and Economic Coordination Council on Fiscal, Monetary and Exchange Rate Policy, chaired by Finance Minister AHM Mustafa Kamal, yesterday.
Additionally, the committee decided to drastically reduce the size of the current fiscal year’s revised budget, the annual development programme (ADP) allocation, and the GDP growth target while revising the inflation target upwards.
Despite initially aiming for a 7.5% GDP growth target in the FY24 budget, it has been revised downwards to 6.5%.
The depth of the economic crisis, fueled by diverse global and domestic factors, was palpable during the meeting of the highest financial policy-making body, according to sources present at the meeting.
Over the past decades, the Finance Ministry has unveiled ambitious budgets marked by consistent growth in size (except during the pandemic period).
Economists concur that reducing the budget size is imperative in the current economic climate due to several factors: Stagnant revenue collection, limited foreign borrowing capacity, rising domestic interest expenses, and limited foreign investment opportunities. Consequently, curtailing government expenditure has become unavoidable.
The country’s foreign exchange reserves have been depleting fast and hovering around $19.52 billion at the end of November.
However, Finance Division officials anticipate a $2 billion increase in forex reserves by the end of this year. This optimism stems from confirmed loans for budget support from various organisations, including the Asian Development Bank (ADB), and the expectation of receiving the second tranche of the $4.7 billion IMF loan on 13 December.
Budget size
For the first time in over a decade, the core budget for the next fiscal year is set to see a significantly slower growth rate with a planned increase of only 5.67% compared to the current year’s budget. This represents a marked departure from the historical trend of exceeding 10% annual growth, excluding the Covid period.
During the Covid-19 period, the 2021-22 fiscal year saw the lowest budget growth rate in the last decade, at 6.28%. To restore key economic indicators like growth, investment, and employment to pre-pandemic levels, the budget size was then significantly increased by over 12% for the following two fiscal years.
Bucking the trend of increasing budget size to tame high inflation and economic crisis, the budget for the fiscal year 2024-25 is estimated at Tk8,05,000 crore.
At the same time, this fiscal year’s budget size will be reduced to Tk7,10,000 crore in the revised budget, which is about 7% less than the original budget.
The revised budget for FY24 projects a revenue collection target of Tk5,55,000 crore, representing an 11% increase over the Tk5,00,000 crore target set in the main budget for the current fiscal year.
Due to the implementation of fiscal austerity measures and the central bank’s contractionary monetary policy since the start of FY24, the inflation target has been revised upwards to 7.5% in the current budget.
The inflation projection for the next fiscal year has been set at a more optimistic target of 6.5%.
Finance Division officials expect inflation to come down to 8% this December and 6% in June next year. Through this, the average inflation for the 12 months of the current financial year will come down to 7.5%, they expect.
The Finance Minister had announced his intention to keep inflation within 6% in the current fiscal year’s budget.
Despite anticipating a lower inflation rate in the next fiscal year compared to the current revised budget target, the finance division has decided to eliminate power sector subsidies in the upcoming budget. This decision carries the risk of increased production costs for various industries. However, the government will continue to provide subsidies for the agricultural sector.
The GDP growth for FY25 is estimated at 6.75%, which, if achieved, will result in a GDP size of Tk55,28065 crore.
The Finance Division anticipates that the current fiscal year’s GDP growth will be retarded by a combination of factors: Austerity measures in government spending, declining import and export activity, reduced personal savings due to high inflation, a slowdown in public-private investment, and negative foreign direct investment growth exacerbated by political instability.
These challenges may persist and negatively impact the next fiscal year as well, said finance division officials.
This projection by the Finance Division will put on hold other long-held plans of the government. The perspective plan 2041 projected the GDP growth rate to be more than 8% in FY25.
In the Eighth Five-Year Plan, GDP growth in the current fiscal year is projected to be 8.51% growth in the next fiscal year.
The GDP growth projection of 6.75% for the next financial year is lower than the IMF forecast. According to the lender, Bangladesh will grow by 7.1% in the next financial year. The IMF made this prediction 11 months ago.
Finance Division officials acknowledged the need to revise the high-growth budget strategy implemented in recent years, given the current domestic and global economic context.
Moving forward, the government plans to prioritise human resource development, potentially leading to a moderate decrease in infrastructure spending. However, both the education and health sectors currently lack sufficient project proposals or the capacity to effectively utilise increased funding, they said.
According to the November data published by the Bangladesh Bureau of Statistics (BBS), the general inflation rate was 9.49%.
A senior finance department official told that the government has implemented several measures to control inflation and stabilise the economy. These include market-based interest rates, replacing central bank borrowing with treasury instruments, policy rate hikes to reduce money supply, increased operations of TCB and OMS to maintain market supply, enhanced market monitoring, and restrictions on luxury item imports.
In the meeting, the allocation to the Annual Development Programme (ADP) was reduced to Tk2,45,000 crore in the revised budget of the current financial year and the budget deficit has been estimated at Tk2,40,000 crore.
In this year’s main budget, the allocation for ADP was Tk2,63,000 crore and the budget deficit was estimated at Tk2,61,785 crore.
Finance Division officials clarified that while no formal austerity policy restricts development projects in the current fiscal year, unforeseen revenue shortfalls have led to project delays and limited spending. Consequently, block allocation-based development expenditures have been suspended.
However, with the upcoming election and the austerity policy implemented in the current fiscal year is expected to save around Tk40,000 crore in the development and management sector. Approximately Tk5,000 crore was saved in the previous fiscal year.
Experts comments
Former finance secretary Mahbub Ahmed told that controlling inflation is paramount to accelerating economic activity.
He explained that the Bangladesh Bank’s adoption of a contractionary monetary policy, including lifting the loan interest rate cap, necessitates a complementary contractionary fiscal policy. While growth may fall below the target, this is an acceptable consequence of stabilising the economy.
The former finance secretary said existing economic challenges are unlikely to disappear in the next year, necessitating a prudent fiscal policy.
He also reiterated the importance of maintaining a budget deficit within 5% of GDP, which may limit the budget’s immediate expansion. However, the budget size can be increased once inflation stabilises.
Policy Research Institute (PRI) Executive Director Ahsan H Mansur told that the size of the budget for the next fiscal year is consistent with the growth in revenue collection in the first three months of the current fiscal year.
“In the current situation, it would not be right to borrow too much from the domestic banking system and the needs of the private sector must be considered. The interest rate on treasury bills has already gone up to 11% due to the government’s heavy borrowing. It may increase further. But this interest rate should not be 18 or 19% by any means,” he added.
