The proposed budget has not prioritised the issues that demande special attention during the ongoing dollar crisis and high inflation rate in the country. The budget also lacks the scope to bring in reforms. Overall, the budget is expansionary in nature, as the deficit is about Tk 2.62 trillion, which is more than the deficit of the ongoing financial year. The budget deficit is almost equal to the allocation in the annual development programme (ADP). Both the ADP and budget deficit are huge.
Whether to term expansionary budget as good or bad depends on the condition of the economy. This proposed budget would have been propitious and helpful to growth if we had US $48 billion as forex reserves like before. But right now, it is the opposite. For months on end the inflation rate is over 9 per cent and the dollar exchange rate is gradually rising.
Bangladesh Bank has sold $7 billion in the last fiscal and $13 billion in the ongoing fiscal. If the calculation are accurate, the usable sum of dollars could be $20 billion, which is much less than the amount IMF (International Monetary Fund) put forth as a loan condition. The current economic situation does not even hint at the normal increase in forex reserve. In such a context, expansionary budget cannot be propitious.
Whether or not the budget would put pressure on inflation rates and reserves depends on the source to be used for financing the deficit. A large amount of the deficit was financed by printing money by Bangladesh Bank.
If this trend continues in the next fiscal, that would be extremely dangerous for the inflation rate. The pressure on the inflation rate would be less if the government borrows the money from commercial banks. Currently, the interest rate for short-term treasury bill is also about 8 per cent. Banks would like the measure since this is a safe investment. The demand for investment is low now due to the dollar crunch but it is as if the demand is not there at all.
If the bank’s funds were injected into businesses, that would have created jobs, which would have played a role in the growth rate. At the same time, the amount of defaulted loan is also increasing in the banks. The loans are not returning to the banks. As a result, the deposits in many banks have decreased. Huge funds have returned to the Bangladesh Bank as many have bought dollars. If the government finances the budget deficit of Tk 800 billion from the banks, then the money remains outside of investment.
It was necessary to bring structural reforms in the revenue system but it is not being done. The government has been saying for long that it wants to move towards direct taxation method instead of relying too much on indirect taxation. The finance minister wants to raise the percentage of direct tax to 45 per cent from 35 per cent. But the budget that has been presented depends more on indirect tax. As a result, actions do not match the words.
The tax revenue plan in the proposed budget does not even go with the 8th five year plan. Since the amount of tax collection in the ongoing financial year was less than projected, there was no alternative but to impose taxes on mobile phones, pens and such other products. The pressure of inflation rate would be more because of this. There are very few initiatives in this proposed budget that would work to curb the inflation rate. This is not a budget suitable for bad times.
It has been said in the finance minister’s budget speech that there were losses equivalent to 3.5 per cent of GDP due to providing benefits to direct tax in 2022. Though IMF sees this as an opportunity to increase revenue and the finance minister sees this as subsidy. The tax rebate on direct tax is against the tax justice. IMF is in favour of cancellation or decreasing this. Steps to collect the revenue that is not being realised due to rebate on direct tax would have been better.
* Dr Zahid Hussain is former lead economist of the World Bank’s Dhaka office
** This analysis was originally published in the print edition of Prothom Alo and has been rewritten for English edition by Shameem Reza