A bleak time to draw up budget

In June last year when Finance Minister AHM Mustafa Kamal placed the budget in parliament, inflation had already been creeping up and the foreign currency reserves were on the decline. These two had derailed the full economic recovery from a two-year crisis wrought by the Covid pandemic.

The government mapped out strategies to avoid the impending macroeconomic instability, tackle the cost-of-living crisis and maintain stability in the exchange rate of the taka.

Now, a year later, things have gone from bad to worse. Bangladesh is now facing stiffer challenges owing to both external factors and internal weaknesses.

The reserves have fallen by about 30 percent, inflation is three percentage points higher than a year ago, and the taka has lost its value by about 25 percent against the US dollar, making the realities for the poor and lower-income groups harsher.

In short, the economy has been going through its "worst period" in recent decades.

Tomorrow, Kamal will have to come up with new initiatives to tackle the economic stresses for the second straight year. This is because the measures adopted in the outgoing fiscal year didn't deliver the expected outcome.

Maintaining macroeconomic stability, curbing runaway inflation, initiating reforms, and protecting the reserves are some of the areas that should be in focus in FY24.

Besides, the finance minister will have to initiate some measures in line with the conditions of the IMF's $4.7-billion loan programme for restoring macroeconomic stability.

The budget size is not getting bigger due to a limited fiscal space. The government has correctly targeted securing a higher level of foreign financing to give the economy a much-needed breathing space and create scopes for spending.

Priority should be put on raising export and remittance earnings -- the two biggest sources of foreign currencies for Bangladesh.

There have not been serious tax reforms for nearly a decade, and automation didn't gather pace either. Thus, the government is set to miss the revenue collection target for the 11th consecutive year in FY23.

But generation of a higher level of revenue will depend on whether the government can make the tax administration and the policy taxpayer-friendly.

The next fiscal year should see the withdrawal of the 9-percent interest rate policy. The central bank has maintained the lending rate cap since April 2020. This means it has largely refrained itself from using the interest rate -- a tool that most countries use to tame higher prices -- to rein in rising inflation.

Another much-needed initiative will be to move to a truly market-determined and uniform exchange rate policy for making locally manufactured products cheaper in the global market and redirecting more remittances to the formal channels.

Reducing poverty and inequality, sustaining growth, and creating jobs should get more priority when it comes to allocation of resources.

In FY23, the government has largely relied on borrowing from Bangladesh Bank and commercial banks to meet the state's expenditure. But a business-as-usual approach in meeting budget deficit may stoke inflationary pressures further and deepen the dollar crisis.

"The budget deficit has to be kept as low as possible and there should be elevated efforts to mobilise as much low-cost foreign financing as possible and maximise their utilisation," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

The government has already raised the prices of energy in line with the international markets. So, introducing a formula-based pricing system should not be a problem.

Talking to this newspaper, Selim Raihan, executive director of the South Asian Network on Economic Modeling, said, "The budget for the upcoming fiscal year must address the weakness in the overall economic management that has persisted for a year."

He further said there are various types of market imperfections but the government has not been successful in addressing them.

"There are serious problems at the policy level.

We have not been able to adopt the right kind of policies at the right time. The monetary policy has been kept largely inactive.

— Selim Raihan, executive director of the South Asian Network on Economic Modeling

Today, the economy is at a crossroads and the finance minister faces an uphill battle.

And one can only hope Kamal will assess the performance of his measures adopted in FY23 to know what went wrong and use properly the tools at his disposal so that the economic bleeding stops.