Budget deficit to go through the roof
Bangladesh's budget deficit may shoot to as high as 10 per cent of the GDP in the current fiscal year as the government would have to keep spending more to tackle the brunt of the coronavirus pandemic amid a drastic fall in revenue generation, the World Bank said.
The Washington-based multilateral lender has projected the fiscal deficit to increase to 7.9 per cent of the country's gross domestic product in fiscal 2019-20 and 10 per cent in fiscal 2020-21 for pandemic-related expenditure.
The government, however, says the budget deficit would be 5.5 per cent in fiscal 2018-19 and 6 per cent in fiscal 2019-20, from the historically comfortable level of 5 per cent maintained by the government.
The overall budget deficit will be Tk 190,000 crore in fiscal 2020-21, up from Tk 153,508 crore in fiscal 2019-20, according to official documents.
Recurrent expenditure is projected to rise sharply, as the government seeks to mitigate the fallout of coronavirus through interest rate subsidies, social protection and food aid schemes and fertiliser subsidies.
Low revenue mobilisation and higher spending on the coronavirus response is creating the budgetary pressure for the country.
The government has unveiled various stimulus packages amounting to Tk 103,117 crore, which is 3.7 per cent of the country's GDP, to help people, businesses, entrepreneurs, farmers, industrialists and exporters counter the impact of the pandemic.
The stimulus packages are the second-highest among the peer countries in Asia and the highest in South Asia.
Revenue collection dropped 2.26 per cent to Tk 218,406 crore in the just-concluded fiscal year against the revised target of Tk 300,500 crore.
This was the first-ever negative growth in Bangladesh's history.
Revenues underperformed owing to lower import tax collections, complex new VAT legislation and stagnating tax administration reforms.
Bangladesh's revenue-to-GDP ratio is one of the lowest among comparator countries.
Efforts to increase low tax revenue collection, including the launch of the modernised VAT in fiscal 2019-20, have so far not been successful with lower preferential rates of the indirect tax applied to many items.
In fiscal 2019-20, the situation became more challenging even before the outbreak of coronavirus. Between July last year and January this year, revenue increased only about 2 per cent.
Expenditure dropped along with earnings, helping the government keep the deficit at 5.5 per cent.
For example, the government managed to spend Tk 161,000 crore of the annual development programme against the revised target of Tk 192,921 crore in fiscal 2019-20.
The figure may even go down further when the Office of Comptroller and Auditor General releases the final calculations.
Similarly, another Tk 20,000 crore to Tk 25,000 crore might have remained unspent in the revenue budget segment.
Because of the low demand caused by the pandemic, the government did not have to spend its subsidies set aside for electricity generation and import of liquified natural gas.
The recent decline in oil prices will reduce expenditure on energy subsidies, including liquefied natural gas and petroleum products.
Bank borrowing gave another indication about the lower spending. It was Tk 72,246 crore at the end of the fiscal year against the revised target of Tk 82,421 crore.
The fiscal year has just begun and it would take at least six months to give an idea about the budget deficit, said a finance ministry official.
Government debt is likely to increase in the medium term and financing options need to be assessed prudently, the WB document said.
Public debt is likely to increase to 39.3 per cent of GDP in fiscal 2019-20 and continue rising over the next three years reaching 58.4 per cent of GDP in fiscal 2022-23.
Because of the stimulus packages, the total outstanding debt expanded by 1.7 percentage points of GDP in the revised budget for fiscal 2019-20 from the original one.
The debt level would go up by another 1.2 percentage points to Tk 117,000 crore in fiscal 2020-21 when most of the stimulus packages would be implemented, according to a paper of the International Monetary Fund.
The relatively high level of the total public debt service to revenue ratio underscores the need to boost revenues over the longer term.
International support on concessional terms will continue to be essential, even more so in the context of the Covid-19 pandemic, the WB said.
With increased financing needs, the government will need to maximise external concessional borrowing so that the coronavirus response package can be implemented through domestic banks.
A temporary increase in the fiscal deficit is necessary, and it will be important to ensure transparency and accountability in the use of all emergency spending, the IMF said in June.
The risk of debt distress remains low.
The joint World Bank-IMF Debt Sustainability Analysis completed in August 2019 reaffirmed the previous assessment that the risk of both external and overall debt distress continues to be low.
External and domestic debt indicators are below their respective thresholds under the baseline and stress test scenarios.
A gradual fiscal consolidation, which is defined as concrete policies aimed at reducing government deficits and debt accumulation, is expected over the medium-term, starting in fiscal 2021-22, although deficits are projected to continue to exceed 9 per cent of GDP.
Specifically, expenditure on interest rate subsidies, food aid, and fertiliser subsidies are projected to moderate, the WB document said.
Revenue mobilisation is expected to strengthen through reforms to expand the tax base and improve tax administration.