Contain risks from external, internal ‘storms’
The budget for the next fiscal year should target containing risks stemming from global turbulence and the absence of discipline in macroeconomic management, good governance and reforms, said the Centre for Policy Dialogue (CPD) yesterday.
Fahmida Khatun, executive director of the think-tank, described Covid-19 and the Russia-Ukraine war as the external storms while a lack of good governance as the internal storm. She also termed the absence of reforms and weak institutions as storms.
"Because of the storms, project implementation has become slower, jobs are not being created, corruption is rising and adequate revenue is not generated. If the risks can't be contained, the foundation of the economy would be weak."
She suggested strengthening the foundation in the budget to ensure macroeconomic stability and discipline.
Fahmida made the comments while speaking at an event titled "CPD's Recommendations for the National Budget FY2023-24" at her office in the capital.
Towfiqul Islam Khan, a senior research fellow of the CPD, said storms can't be stopped but preparation should be taken to face them strongly.
He said the government has ignored undertaking reforms and did not ensure good governance thinking that storms would never come.
Khondaker Golam Moazzem, research director of the CPD, called for massive reforms since the storm is getting stronger. "Only implementing the conditions of the International Monetary Fund would not be enough to mend the economy."
He pointed out that the government is giving subsidies in the fuel and power sector mostly due to structural weakness.
For instance, most of the subsidy is being given in the form of capacity charge, he said, questioning the logic of raising in the power generation capacity sharply.
He said the prices of fuel and power should be market-based so that people bear the high prices when they rise globally.
"At the same time, when the price falls in the international market, the prices should drop in the domestic market as well."
About the recent macroeconomic situation, the CPD said the government's fiscal space shrank due to lower revenue collection so it went for restraining public expenditure.
Net foreign financing was lower and saving certificate sales also dropped, forcing the government to increase its dependence on the central bank for the financing of the budget deficit.
Overall liquidity in the banking system declined by Tk 66,581 crore as the currency circulation outside banks increased by 24 per cent by the end of January of 2023.
In Bangladesh, inflationary pressure is still deepening though international prices of major imported commodities have recorded significant declines.
"The sharp deterioration in the balance of payment is resulting in a drastic decline in foreign exchange reserves and a significant depreciation of the local currency against the US dollar," said Fahmida, while presenting a paper.
Exports grew more than 9 per cent year-on-year in the July to February period of the current financial year. But non-RMG exports declined 9.9 per cent. Remittance inflow grew by 4.3 per cent.
And the central bank will not have much room to pump foreign exchange and may not have any other option but to allow the local currency to depreciate as the ongoing pressure on the balance of payment is likely to continue, according to the CPD.
It said the government in the past tried to blame the war in Ukraine and the subsequent volatility in the global economy for the current economic situation. However, the crises accumulated over the years and were rooted in the weakness in domestic policies, lack of good governance, and inability to implement much-needed reforms.
The CPD projects that the revenue shortfall at the end of FY23 could reach Tk 75,000 crore and it may impact the implementation of development projects.
The ADP expenditure recorded a negative growth of 4.9 per cent in July to December.
"This is concerning," said the CPD.
The ministries that fell behind in implementing projects included the education and health ministries. So, the think-tank suggested the government emphasise revenue mobilisation and implementation of development projects.
Given the increased pressure of the commodity price hike, the tax-free income threshold should be increased to Tk 3.50 lakh, Fahmida said, adding that the second slab of the personal income tax, which is 5 per cent for an additional Tk 1 lakh, should be raised to Tk 3 lakh.
To give comfort to the fixed-income people, the minimum wage should increase and the volume of essential commodities sold through the open market system should be increased, she said.
According to her, the subsidy expenditure of the government has skyrocketed within a short period of time, becoming a major concern in view of limited fiscal space.
"The largest subsidy is given to the power sector and it should be rationalised by reducing the burden of capacity payments and launching a market-based price-setting mechanism for power and energy."
"Fiscal incentives for the export sector should not be provided for years. But it can be given to infant industries and new sectors."
The CPD said a market-based exchange rate would be more effective for inward remittances instead of cash incentives. However, incentives in the agricultural sector should not be reduced in order to ensure food security.
It called for increasing the budget allocation and utilisation in the sector and implementing a number of fiscal measures to promote improved public health.
The budget allocation for the health sector has been less than 1 per cent of GDP for more than a decade.
"The budget allocation for the education sector also needs to be raised," it said.
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