Govt scrambles for money ahead of national budget

The government is urgently seeking alternative sources of funding for the national budget. As a result, the finance ministry has adopted the easier way out by increasing VAT to collect revenue.

On Thursday, VAT and supplementary duties were raised on a number of goods and services. Such widespread VAT is being imposed indiscriminately, affecting both the rich and the poor, to support the upcoming budget.

Additionally, initiatives have been taken to attract buyers by increasing the profit rate of savings certificates. A higher profit rate is expected to encourage more people to invest in savings certificates. Due to the fragile state of the banking sector, there is no scope to borrow additional funds from banks.

Furthermore, the government aims to secure USD 1.7 billion in budget assistance from various donors, including the World Bank and the Asian Development Bank (ADB), during the current fiscal year.

However, only one-third of the targeted funds have been received so far. Overall, the government’s pursuit of diverse funding sources is adding financial pressure on the general people.

Government expenditure has not decreased in the current fiscal year; instead, it has increased. Over the past few years, the previous Awami League government significantly raised government salaries, allowances, and other expenses.

Now, the interim government is considering providing dearness allowance to government officials and employees to offset the impact of high inflation. An allocation for this allowance is expected to be included in the revised budget to keep government employees satisfied.

On the other hand, government revenue has not seen a significant increase. Revenue collection is falling short of targets, with the National Board of Revenue (NBR) recording a deficit of Tk 425 billion in the first five months of the fiscal year. At the same time, repayments of foreign debt have risen substantially compared to the previous year, and domestic debt has also increased.

Masrur Riaz, chairman of the non-governmental research organisation Policy Exchange of Bangladesh, told Prothom Alo that the need for funds in the budget is undeniable.

However, revenue from domestic sources has not met expectations, and the pace of business and trade has slowed due to political changes and uncertainty. The government has struggled to meet IMF’s conditions for increasing customs duties and taxes.

Riaz further criticised the timing of the tax increase, stating that it will exacerbate public suffering. He also expressed doubts about whether the higher tax rates will lead to a significant increase in revenue.

According to him, the decision to raise the profit rate of savings certificates reflects a desperate attempt to generate funds. He noted that the previous government had substantially increased operating expenditures in the budget to appease bureaucrats, leaving no room to reduce them now.

The budget for the current fiscal year stands at Tk 7.97 trillion, of which Tk 5.7 trillion is allocated to operating expenses. A large portion of this is spent on government salaries, allowances, and interest payments on domestic and foreign loans, with the remainder allocated to development projects.

The government plans to meet budgetary requirements through a target revenue of Tk 5.45 trillion from customs duties, tax revenues (NBR), non-tax revenues, and foreign aid.

According to estimates from the finance ministry, the remaining Tk 2.51 trillion will be sourced from domestic and foreign loans. Domestic borrowing typically involves selling savings certificates.

However, budget financing has faced significant challenges since the beginning of the fiscal year. Factors such as protests in July and August, a deteriorating law and order situation, and demands for various concessions have slowed business and trade activity, resulting in weaker revenue collection.

The NBR’s revenue shortfall has been increasing month by month. In response, the government has resorted to raising customs duties and taxes to collect additional revenue. Additionally, it plans to increase loans by boosting the sale of savings certificates and obtaining more funds from foreign organisations as budget support.

Under pressure from the International Monetary Fund (IMF), value-added tax (VAT) and supplementary duties were increased on more than a hundred goods and services midway through the current fiscal year.

This hike has led to an increased cost of living, affecting people across all income groups. The rise in VAT means that both the rich and the poor will bear the additional burden. The increase in supplementary duty on mobile phone services has raised the cost of calls and internet usage. The price of clothing is also expected to rise, and restaurant food bills will become more expensive.

According to National Board of Revenue (NBR) sources, the increase in VAT on over a hundred products is projected to generate an additional Tk 100–120 billion in revenue during the remaining six months of the fiscal year. The list of products affected includes tissue paper, sweets, medicines, liquefied petroleum (LP) gas, fruit juices, drinks, biscuits, spectacle frames, and cigarettes.

NBR officials revealed that the IMF set a condition to increase customs duties and taxes as part of the requirements for releasing the fourth installment of the USD 4.7 billion loan. To meet this condition, the government implemented these tax and duty hikes.

The NBR has been assigned a revenue collection target of Tk 4.70 trillion for the current fiscal year. However, in the first five months (July–November), only Tk 1.26 trillion was collected, falling short of the target by Tk 422.38 billion.

The government has initiated steps to increase the profit rate on savings certificates to attract more buyers and secure additional loans through their sale. Depending on the type of savings certificate, the profit rate is expected to rise from 12.25 per cent to 12.55 per cent.

The sale of savings certificates in the country has seen a significant decline. In the first three months of the current fiscal (2024–25), sales dropped by 65 billion taka, representing a 31 per cent decrease during the July–September period. Reports indicate that this downward trend in savings certificate sales has continued since October.

Since the beginning of the current fiscal year, the government has had to pay more in interest on loans than the amount of foreign debt written off each month. As a result, the net foreign debt has become negative. Foreign debt repayments are made from a separate allocation in the budget, classified under the expenditure sector.

According to the Economic Relations Department (ERD), the government received USD 1.54 billion in foreign loans during the July–November period. However, during the same period, USD 1.71 billion was repaid as debt.

Due to unsatisfactory revenue collection, the government is heavily reliant on foreign loans to balance the budget and reduce pressure on reserves. Currently, the government is seeking USD 1.7 billion in budget assistance from donors, including the World Bank and the Asian Development Bank (ADB). However, only USD 600 million has been secured so far.

Meanwhile, commitments for loan assistance from foreign organisations and countries for Annual Development Programme (ADP) projects have also dwindled. Only USD 520 million was pledged during the July–November period—equivalent to just one-tenth of the amount promised during the same period in the last fiscal.

Broadly speaking, there is little scope to reduce budget allocations for the salaries and allowances of government officials and employees or for the repayment of domestic and foreign loans.

Consequently, the government is prioritising reductions in development project expenditures, unlike in previous years. The allocation for the Annual Development Programme (ADP), currently set at Tk 2.78 trillion, may be reduced by Tk 300–350 billion, with foreign assistance alone expected to decrease by Tk 250 billion.

Furthermore, the implementation of the ADP for the current fiscal year is facing significant challenges due to the July mass uprising and ongoing political uncertainty. The ADP implementation rate of 12 per cent during the July–November period is the lowest in the past five years.

If spending on development projects is curtailed further, it will negatively impact the economy. Although reduced budget expenditure might ease immediate financial pressure, it will also hinder economic growth.

The economy has already been sluggish over the past four to five months, with GDP growth contracting to 1.81 per cent during the July–September period. This level of economic contraction has not been witnessed even during the Covid-19 pandemic.

Masrur Riaz, Chairman of Policy Exchange, offered several recommendations for managing the budget effectively. He emphasised the need to expedite the release of budget assistance from donors and foreign loans allocated for development projects.

Additionally, he suggested measures to reduce wasteful government expenditures and unnecessary costs. Riaz also advised against increasing operating expenses, including salaries and allowances for government officials and employees, for at least two years.

*This report, originally published in Prothom Alo print edition, has been rewritten in English by Farjana Liakat