Revenue, subsidy, inflation: Key fiscal concerns for Bangladesh govt

The finance ministry anticipates a challenging fiscal year ahead with key areas of concern that include meeting revenue targets, addressing subsidy arrears in power, gas, and fertiliser, and controlling imported inflation.

The ministry proposed several strategies to address these challenges, such as gradually transitioning gas and electricity prices to a market-based system and maintaining modest austerity measures to reduce outstanding subsidies.

It also proposed improving the tax administration efficiency via automation, widening income and value-added tax coverage and progressively decreasing tax exemptions.

On 13 May, the Finance Division briefed the prime minister about these challenges and proposed actions to address them, according to finance officials.

Other challenges highlighted by the ministry are the slow implementation of priority projects due to funding shortages, delays in education and health projects and the need for policy reform and better business conditions to boost investment.

Building forex reserves and managing exchange rates are key for controlling imported inflation. However, the ministry did not address these measures in its briefing. 

Terming the challenges identified by the ministry as "valid", Mahbub Ahmed, former senior secretary of the Finance Division, said, "The ministry avoided citing reserve rebuilding and exchange rate as challenges as these are the responsibility of the Bangladesh Bank, which operates independently from the ministry."

"While the ministry mentioned imported inflation, it is important to recognise that numerous internal factors contribute to the current inflation. These factors need to be identified and eliminated to effectively manage inflation," he said.

"The government wants to reduce both inflation and subsidies simultaneously. However, curtailing subsidies could fuel inflation, hence subsidies need to be reduced gradually," he explained.

Welcoming the decision to ease austerity policies, he said, "Prolonged austerity measures [strict control over government spending] could diminish internal consumption and demand, resulting in adverse economic repercussions, including reduced GDP growth."

Infographics: TBS

Subsidies to be reduced gradually

In a meeting with the International Monetary Fund (IMF) last month, the government reported plans to incrementally increase electricity prices every three months and raise gas prices to eliminate energy subsidies gradually.

Finance Division officials said the outstanding subsidies for power, gas, and fertilisers by the end of the current fiscal year might reach Tk70,000 crore, with power subsidies alone totalling Tk40,000 crore. 

To cover these arrears, the government plans to allocate additional funds of nearly Tk10,000 crore in the upcoming fiscal year.

The FY24 budget allocates Tk1,10,672 crore for subsidies and incentives, while the FY25 budget is expected to see Tk1,20,585 crore allocation.

Last week, Finance Minister Abul Hassan Mahmood Ali told reporters that the primary challenges for the next fiscal year include managing inflation, bolstering foreign exchange reserves, and enhancing revenue collection. 

Addressing the economy's existing hurdles necessitates various measures outlined in the upcoming budget, he said.

The current fiscal year's main budget aimed for a 6.5% inflation rate and a revenue collection target of Tk5 lakh crore, both of which are unmet. 

Despite adjustments to a 7.5% inflation rate and a lowered revenue target of Tk4.78 lakh crore in the revised budget, targets remain off the mark. 

For the next fiscal year, the finance ministry sees setting a 6.5% inflation rate and a Tk5.46 lakh crore revenue target as very challenging.

Austerity measures could be eased

The Finance Ministry has enforced expenditure constraints across various sectors since the onset of COVID-19 owing to revenue collection shortcomings. 

There is speculation about a gradual departure from this three-year-long austerity policy in the upcoming fiscal year's budget.

Nevertheless, the ministry plans to uphold a scaled-back version of the austerity policy by lifting restrictions imposed on government employees' foreign travel and vehicle purchases.

ADP funding is another big challenge

Rising costs like subsidies and loan repayments have restrained the FY25 Annual Development Programme (ADP) allocation. It is increasing by just Tk2,000 crore, bringing the total to Tk2.65 lakh crore within a roughly Tk7.97 lakh crore budget.

Given this scenario, the Finance Ministry views it as a significant challenge to balance demands for subsidies in gas, electricity, and fertiliser while allocating necessary funds to the ADP. 

The ADP size has also been reduced by Tk20,000 crore in the revised budget for the current fiscal year.

To boost revenue collection in the new financial year, the Ministry plans to enhance tax administration efficiency and automation. Additionally, there are plans to raise income tax and value-added tax rates, alongside efforts to phase out tax exemptions.

Finance officials said in addition to subsidies and incentives, Tk1.08 lakh crore will be allocated for government debt interest in the upcoming financial year. 

Allocation will also rise for social security and government employee salaries, with no room for reduction in these expenses. 

Consequently, if revenue targets are not met, the government will be compelled to either decrease ADP spending or borrow at higher rates.

The sluggish progress in education and health sector projects, mainly the decline in foreign financing for these sectors, was identified as another challenge. 

To expedite ADP implementation, the upcoming financial year may prioritise enhancing monitoring efforts. The implementation of the development projects to address the impacts of climate change will also be prioritised.

Policy reform is a must to boost investment

Policy reforms and improving the business climate to attract higher levels of domestic and foreign investment are recognised as key challenges for the upcoming fiscal year.

As per the recent provisional GDP calculations released by the Bangladesh Bureau of Statistics, the investment rate for the current fiscal year stands at 30.98% of GDP.

Finance officials said private sector investment, estimated at 26% of GDP in the current fiscal year's budget, may stand at 24.5%.

Social security expansion a priority 

In the upcoming financial year, the government will focus on broadening social security coverage by implementing a universal pension system.

The Finance Ministry anticipates that by incorporating more individuals into the universal pension system, government spending on old-age allowances will gradually diminish over a decade.

Exploring Deeper Challenges

Ahsan H Mansoor, executive director of the Policy Research Institute (PRI), told TBS that while the challenges and strategies outlined by the Finance Ministry are generally accurate, some deeper challenges still persist. 

He said the need to reform the banking sector and revamp tax administration should have been highlighted as challenges. 

"Failure to reform the banking sector will adversely affect not only the private sector but also the implementation of the government's budget. The banking sector mirrors the budget, as it influences the interest on government loans and private sector investments, as well as revenue receipts," he said.

"Revenue targets could not be met with the existing tax administration. A modern tax administration is needed, transitioning from circle-based operations. This necessitates the separation of tax policy and tax administration. However, the National Board of Revenue opposes this, fearing it would undermine their own interests," Mansur said.

Highlighting the pressing need to revise government policies to attract more foreign investment in healthcare and education, he said, "Foreign investment should be encouraged to establish international standard hospitals and universities domestically. With quality medical facilities locally, significant foreign currency is expended annually on treatment abroad."

"Likewise, despite numerous universities, the education is of poor quality, leading many students to pursue studies overseas after completing their undergraduate degrees that costs billions," Mansur added.