Macroeconomic challenges that overshadow FY24 budget
The macroeconomic stability that our economy has enjoyed for a long time has disappeared in the face of multiple challenges – from both external and domestic sources. Due to the inherent weaknesses of the domestic economy, making a turnaround to the previously experienced comfort zone has become tough.
The trends during the first three quarters of the outgoing fiscal year reveal a lacklustre performance in revenue collection that has led to a contraction of fiscal space. During the first eight months of FY2023, the total revenue collection fell compared to the corresponding period of FY2022, as per data from the finance ministry. With such a trend of low mobilisation, reaching the target for total revenue growth for the year will be difficult.
Similarly, utilisation of the ADP budgetary allocation has been less during the first eight months of FY2023 compared to the same period of the previous year. In the midst of a shrinking fiscal space, the budget deficit during the first eight months of FY2023, excluding grants, was equivalent to Tk 21,201 crore, as opposed to the budget surplus of Tk 2,937 crore during the same period in FY2022. The government is covering the budget deficit by borrowing from the Bangladesh Bank, which is high-powered money and could fuel inflationary pressure if continued.
Heavy reliance on borrowing from the central bank to finance the budget deficit has resulted in tightened liquidity for the scheduled banks. To create fiscal space, the government will have to enhance its efforts towards revenue mobilisation. Besides, tax exemptions provided to some sectors should be discontinued and reduced. How much tax is foregone due to such exemptions should be made transparent.
Due to limited fiscal space, the government cannot allocate more resources to support poor and low-income households struggling with high commodity prices. There are several essential items on which various types of duties and tariffs are imposed. If a portion of those duties could be removed for a limited period of time, poor and low-income families could get some relief. However, since our tax system is dependent on indirect tax, there is an unwillingness in undertaking such a measure.
Export earnings during the first 10 months of FY2023 grew by only 5.4 percent compared to the corresponding period of FY2022. In order to meet the strategic target of 11.5 percent in FY2023, exports have to grow by 41.4 percent in the remaining months of the year. In case of remittances, growth was slow during July-April of FY2023, at 2.4 percent, compared to the same period of the previous fiscal year. What's worrying is that even though the number of people going abroad for work has increased, particularly in the Gulf countries, the remittance flow from those countries has not increased accordingly.
Due to a restriction on the import of luxury items, import payments have reduced, which has helped improve the balance of trade significantly – though it is still negative as of March 2023. The current account balance, despite some improvements, is also in the negative. Another worrying sign is the deterioration in the financial account balance. The gross foreign exchange reserves have declined by about $13 billion between March 2022 and March 2023. If the IMF estimate of forex reserves is considered, the reduction is about $20 billion during this period.
Policymakers attempted to address the disquieting situation in the external sector via various measures. The taka was allowed to depreciate significantly as exporters were losing competitiveness significantly in the international market. In view of the declining forex reserves, imports were selectively restricted, and the letter of credit (LC) margins were increased. This reduced import payments, but reduction of import payment for capital machineries should be observed carefully as it has implications for private investment. As it is, private investment has been stagnant at about 24 percent of GDP for many years. Without any breakthrough in this area, employment generation will not be possible.
In response to these difficulties, the government has sought a loan of $4.7 billion from the IMF, which has imposed a series of quantitative benchmarks and qualitative prerequisites that our economy badly needed. The policymakers have taken measures that are detrimental to the welfare of the country. The subsidy issue is a case in point. Partly driven by the need for increased earnings and partly due to the IMF pre-condition, our policymakers have continued to increase energy prices. This has been implemented at a time when global energy prices are on a decline. This has fuelled inflation further and eroded people's purchasing power. Low-income households and small businesses have been severely affected by the energy price hikes. Similarly, if the subsidy is withdrawn from the agriculture sector, it will have serious implications for food security. Therefore, subsidy management requires careful planning.
Unfortunately, our policymakers failed to fully grasp the potential consequences of external shocks to our economy. Hence, they could not anticipate the adverse impacts these shocks would have on the country's overall macroeconomic management. This has been observed in their way of policy formulation. For example, the FY2023 budget was prepared in a business-as-usual scenario where the ongoing politico-economic realities were not considered. The FY2023 budget projected a 7.5 percent GDP growth and set an inflation target of 5.6 percent. Moreover, the potential impact on the external economy – exports, imports, remittances, reserves, and exchange rates – was not accurately appreciated. Since the projected growth was not possible to achieve given the reality, the GDP growth target had to be revised to 6.03 percent. On the other hand, the actual inflation rate has been significantly higher than the projected rate, reaching 9.24 percent in April 2023.
In view of the ongoing economic challenges and the experience of mistargeting major macroeconomic indicators in FY2022-23, the policymakers are expected to have formulated the budget for FY2023-24 in a more practical fashion. Carefully planning and efficiently implementing a budget is crucial in addressing and overcoming the ongoing challenges.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author's own.