Identifying 'imported inflation' as the main culprit for the economy, the finance ministry has prepared a list of eight challenging tasks to do in the new financial year from July to tame price shocks, continue productive development works and protect livelihoods.
Mobilising fund for higher subsidies for fuel, gas and fertiliser, and expanding social safety net schemes are among the priorities of the new budget not to pass the full brunt of price shocks on to consumers, finance officials aware of the budget process have told The Business Standard.
Checking import to maintain a stable foreign exchange reserve, delaying less important projects, keeping interest rates within 9% are among the strategies, increasing revenue income to reduce budget deficit and supporting private sector investment to create jobs are also included in the to-do list incorporated in the 9 June budget speech of the Finance Minister AHM Mustafa Kamal.
An official of the finance ministry told TBS, "The government will be very tactful in tackling these challenges. But the key strategy would be to increase supply keeping existing domestic demand intact. That is why, in the case of allocation of operating budget, productive activities will be prioritised by cutting down luxury and less important expenses including foreign travels, car purchases, and constructions of new buildings.
Imports of luxury goods and products that are also produced domestically will be discouraged in order to keep import costs at a reasonable level, he said, adding that implementation of development projects that will increase employment and production will get priority and additional funds will be allocated for them if required. Besides, the government will continue to provide necessary policy support to increase private investment, he continued.
Finance officials said that the government has no plan to hike the prices of fuel oil, gas, and electricity at the outset of the financial year, which is why subsidies on these three sectors as well as on fertiliser are going to increase.
However, if the Ukraine-Russia war is prolonged and the import-export trade of these two countries does not normalise, the government may opt for chopping off the subsidies and raising the prices, they added.
They fear that rallying commodity prices on the global market in the wake of the Ukraine war coupled with several rounds of depreciation of the local currency taka against the US dollar are likely to further push up the prices of major consumer goods in the country.
The Russia-Ukraine war has led to a price hike of all of the nine "strategic commodities" for Bangladesh – fuel oil, LNG, wheat, chemical fertilisers, palm oil, soybean oil, coal, maize, and rice – in the international market.
Bangladesh's imports of these products this year have been similar to that of last year, but this time the country has to pay an additional $8.2 billion just because of the rise in prices, which is responsible for escalating inflation in addition to causing the foreign exchange reserves to shrink, official data showed.
According to the finance ministry's data, crude oil prices have soared to over $113 a barrel following the breaking out of the Ukraine-Russia war this February. Prices of natural gas have increased by at least 12 times on the international market. Prices of fuel oil on the international market have increased by about 70% year-on-year in April this year, while prices of urea fertiliser have tripled.
Moreover, soybean oil prices have risen by 40%, wheat prices by 80%, and sugar by about 25% since the beginning of the Ukraine war. Prices of industrial raw materials and shipping costs have also gone up sharply.
According to official estimation, the inflation rate in the country has exceeded 6% but private research organisations estimate that the rate is at least 12%.
In this situation, the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) have appealed to the government not to hike the prices of gas and electricity. They fear hikes in prices of these commodities will further shoot up inflation and disrupt industrial production.
In this situation, the finance ministry is considering taking steps to keep commodity prices under control by boosting supply, and increase the income of the people by raising allocations for production-oriented projects that will create more employment opportunities. Also, various incentives announced during the Covid pandemic will continue in order to attract new investments in the private sector.
Officials involved in the preparation of the budget also told TBS that Prime Minister Sheikh Hasina has instructed them to continue subsidising oil, gas, and electricity until the inflation is brought under control.
Against this backdrop, government subsidies are estimated at Tk82,745 crore for FY23, which is 1.9% of the country's gross domestic product (GDP). In the revised budget for the current FY22, subsidies and incentives were estimated at Tk66,825 crore, which is 1.7% of GDP.