Revenue collection slides, bank borrowing skyrockets

Revenue incomes are set to fall nearly Tk45,000 crore below the target of the just-ended fiscal year, preliminary data shows, forcing the government to almost double its borrowing from the banking system to finance the deficit.

Bangladesh Bank data revealed a significant surge in bank borrowing, reaching a record high of Tk124,000 crore during the fiscal year 2022-23. This amount surpassed the revised target of Tk115,000 crore and nearly doubled the borrowing of the previous year. 

The government's heavy reliance on bank borrowing due to the chronic shortfall in revenue earnings makes fiscal reforms and prudent debt management imperative to reduce further risks of inflation and currency depreciation, analysts have said.

According to provisional data from the National Board of Revenue (NBR), revenue collection in the recently concluded fiscal year 2022-23 stood at Tk325,000 crore, falling short of the target by Tk44,727 crore. The immediate consequence of this shortfall has been an increased reliance on borrowing from the banking system by the government.

NBR officials said the decline in revenue collections can be attributed to the tightening of imports caused by the dollar crisis, as well as a decrease in demand. These factors have adversely impacted the government's ability to generate sufficient revenue.

Experts said to mitigate the effects of this situation, it is crucial to implement fiscal reforms aimed at enhancing revenue collection.

Also, adopting prudent debt management strategies will be necessary to address the rising levels of borrowing. They said these measures will help restore stability and sustainability to the economy, averting the potential risks of inflation and currency depreciation.

The central bank has printed off nearly Tk1 lakh crore of the government's debt for the fiscal year 2022-23.
Dr Ahsan H Mansur, economist and executive director of Policy Research Institute (PRI) told The Business Standard (TBS), "The government is meeting the budget deficit by printing money, which is not expected in a civilised economy. Bankrupt countries might do it but not a middle-income country like us."

"Newly created Tk1 lakh becomes Tk5 lakh by revolving in the economy. Imports will increase and the price of the dollar will increase significantly, which will fuel inflation," he said.

"The government should increase revenue collection by any means. For that, tax collection needs to be reformed which will require three to five years of planning. At the same time, government spending must be reduced by any means necessary," Ahsan H Mansur added.

Effect of import curbs on revenue collection

The various measures taken by the government to control imports due to the dollar crisis during the last fiscal year have affected the revenue collection.

As per initial estimates, the revenue shortfall widened by Tk44,727 crore against the target in FY 23. However, the year-on-year growth in revenue collection was a little over 8%, said sources related to the NBR.

The final data will be available after 15 July, sources said.

The NBR mainly collects revenue from three sectors: income tax and travel tax, value-added tax at the local stage and import duty at the import stage.

Sources said the collection growth in income tax and import duty was single digit in FY23 despite the overall growth crossing double digit compared to FY22. 

The growth in import duty was only 2.56%. The growth in VAT collection was 11.27% and the growth in income tax collection was 9.62% in FY23.

After the Russia-Ukraine war broke out, Bangladesh started to see a shortage of the US dollar due to the increase in the prices of various goods in the international market. The foreign exchange reserves continued to decrease. 

In such a situation, the government increased the regulatory duty to discourage the import of more than 200 products including fruits and cosmetics. The central bank also took some measures which hindered the collection of import duty.

Dr Debapriya Bhattacharya, an economist and distinguished fellow at the Centre for Policy Dialogue (CPD), told The Business Standard (TBS), "Any policy measure has trade-offs. A major example of this is the decrease in import duty and revenue collection. In other words, imports have been controlled to save dollars, but the price has to be paid by collecting less revenue."

However, he said the NBR has performed relatively well in revenue collection towards the end of the year.

Earlier, the Policy Research Institute (PRI) had predicted a revenue shortfall of Tk55,000 crore in FY23's target.

A revenue collection target of Tk4,30,000 crore has been set for the fiscal year 2023-24.

Dr Debapriya Bhattacharya has expressed concern that this growth is not possible. "With the control on import, fall in private sector credit growth and the slowdown of investment, it will be a challenge to keep it [revenue] up this fiscal year (FY24)."

Bank borrowing surging

The government's bank borrowing marked a historic high in the just concluded fiscal year, surpassing the budgetary targets as it had to highly depend on the banking system for financing amid revenue shortage and a slowdown in the inflow of foreign funds.

The total borrowing from the banking system stood at Tk1.24 lakh crore at the end of June 2023, higher than the borrowing target of Tk1.15 lakh set in the revised FY23 budget.

Of the amount, around 80% or nearly Tk1 lakh crore was taken from the Bangladesh Bank through printing new money which experts fear will fuel inflation further in the near future.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, told TBS, "The main source of government expenditure is revenue collection. However, the fiscal year 2023 fell far short of the target due to which the government has to lean on the banking sector."

In reality, expenditure has been reduced slightly. As a result, it did not play an effective role in reducing the budget deficit, he said.

"The lion's share of the government's bank loans from the central bank have fueled inflation and increased the money supply," Zahid Hussain added.

Usually, the government takes a huge loan in the last month of the fiscal year. Similarly, in June, the last month of FY23, the government took a loan of Tk32,000 crore from the bank. However, the loan amount was Tk36,221 crore in the same month of FY22, and Tk7,319 crore in FY21.

A senior official of the central bank, on condition of anonymity, told TBS the government's bank borrowing in FY23 was the highest in the country's history. It had to be taken due to low revenue collection and the liquidity crunch in commercial banks.

He said the liquidity crunch caused the dollar rate to rise to the highest level in a decade. As the banks bought the costly dollar, the money went to the central bank.

Earlier, the government took the largest bank loan of Tk72,000 crore in FY20, followed by Tk68,000 crore in FY22.
Targets of new fiscal

In the monetary policy of the current financial year which began on 1 July, the central bank has targeted to keep inflation at 6%. But inflation was 9.74% in June 2023 and 9.94% in May, which was the highest in the last decade.

The government has set a loan target of Tk1,32,000 crore from the banking sector to meet the deficit of the FY24 budget. If the government's bank borrowing from the central bank increases the year, it will be difficult to control inflation.

According to a central bank report, government domestic borrowing from the banking system increased while government net borrowing from non-banking sources followed a slower growth owing to the reduction in net sales of National Savings Certificates (NSCs).

The central bank says, considering the ongoing inflationary pressure in the economy, the government will have to attach a big emphasis on borrowing from non-banking sources in the coming days.

In this regard, Dr Zahid Hussain said, "It is now clear that the country's inflation is not high due to the international market because global prices have been reducing for several months. So, the central bank's money creation has further increased inflation. While this is a problem for everyone, it is especially difficult for low-income people."

"New money has to be created based on internal and external demand. But the government is printing money based on internal demand only. My advice to the government is to review the steps it has taken recently. Action should be taken after a review," the economist added.