How govt will expand safety net in a time of financial crunch in next budget

After three years of focus on helping businesses and people overcome Covid-19 shocks through generous stimulus loans, waivers, and handouts, the making of the next year's financial plan is going to be more challenging.

Financial planners, who are already at work to craft the budget for the fiscal year 2023-24, will have to fight the number one enemy – inflation, induced by the Russia-Ukraine war and widen the social safety net to protect people from further shocks from repeated energy price hikes.  

They will have to help industries, hit hard by soaring input costs and the deepening dollar crisis, and continue production to cater to both export and local markets.

This will be a tough trade-off for them to prepare the budget under the shadow of time-bound reforms agreed with the International Monetary Fund while keeping the next general elections in mind.

If import restrictions are to continue to save dollars and rebuild reserve holdings to the level desired by the IMF, then revenues from customs will fall as reflected in the latest revenue data. To make up for the shortfall, both direct and indirect tax revenues need to be raised to bankroll a Tk7.5 trillion budget for FY24 with a bigger allocation for social protection to offset energy cost "pass-through" shocks.  

Even though phasing out energy subsidies by hiking electricity, gas, and fuel prices will be a short breather, financial planners will require herculean efforts to balance the budget book Finance Minister AHM Mustafa Kamal will present in parliament on 1 June.

According to finance ministry officials, the national budget for the forthcoming fiscal year 2023-24 is going to give thrust on increasing domestic production, expanding the scope of the social safety net, and supply chain management to control inflation besides cutting back on subsidies and passing the burden of increasing prices of gas, electricity, and fuel oil on to the people.

This is a completely opposite picture of the current FY23 budget in which the government has tried to rein in inflation by increasing subsidies in various sectors including power, energy, and agriculture. In spite of enhanced government subsidies, consumers have had to go through a decade-high inflation pressure this year.

In the wake of a surge in global commodity prices, the demand for subsidies jumped over two-fold in the first six months of the current fiscal year when compared to the original subsidy allocation in the budget for the year.

In such a situation, the government has kept raising gas and electricity tariffs from time to time to meet the condition of getting $4.7 billion in loans from the International Monetary Fund, adding to the woes of consumers who are already ravaged by soaring inflation.

And now if the government imposes further curbs on imports to comply with the IMF-set floor in the foreign exchange reserves and leaves the exchange rate to the market, the inflation situation might turn worse in the forthcoming fiscal, officials of the Finance Division feel.

Zahid Hussain, former lead economist of the World Bank's Dhaka office has issued a warning that the price shock will increase if the dollar rate is left to the market.

Power tariff hikes- about 16% in the past three months, will fuel inflation in the coming days, observed the economist.

If the subsidies are reduced and the dollar crisis is not resolved, there is no possibility of inflation coming down if global commodity prices stay high, he continued, recommending contractionary policy in the next financial year with an emphasis on increasing production and supply and reducing demand to tame inflation.

The National Board of Revenue (NBR) has continued budget discussions with various stakeholders with business bodies asking for tax cuts to help them cope with energy price hikes and soaring input costs.
 
Challenges ahead 

The FY24 budget – the last budget ahead of the next general election expected in early 2024 – is being formulated with an emphasis on increasing the social safety net and stabilising the exchange rate by boosting the forex reserves through enhanced exports and remittances, officials engaged in budget making told The Business Standard.

They see a ray of hope in the recent decreasing trend in global commodity prices, estimating 6% inflation in the new budget, down from 7.5% in the revised budget for this fiscal, but higher than 5.6% as estimated in the original budget.

In order to increase domestic food production to keep inflation under control, the government has decided to provide subsidies on fertilisers based on demand. A decision on whether or not subsidies will be given to diesel used in irrigation will be made in a meeting to be chaired by the prime minister in May.

Mahbub Ahmed, the former senior finance secretary, also found preparing the budget for FY24 very challenging. "The international situation, including the Russia-Ukraine war, was not taken into account during the formulation of the current year's budget and there were no conditions from the IMF back then. Therefore, next year's budget cannot be formulated in the same method.

"During the budget making exercise last year, there was an attempt to control inflation by increasing subsidies. But this time the subsidies have to be reduced and inflation has to be controlled. Spending on social safety nets must be increased. The international situation must also be taken into consideration."

In order to increase social safety spending, revenue income should be increased, he mentioned, adding, "But due to import curbs, the revenue income at the import level will decrease. In that case, income from direct taxes should be increased, which is not possible instantly."

Noting that the exchange rate is extensively related to inflation, he asked for measures to boost exports and remittance to help taka gain strength against the US dollar. "At the same time, to increase the income of the government, the GDP growth should also be increased in the new financial year."
 
GDP growth estimated at 7.5%

Unlike in the current budget, attaining a higher GDP growth--7.5%-- will remain a top priority for the next fiscal year as the government needs more local revenue, finance officials said, acknowledging that the targets of high growth and low inflation would be very tough to keep. 

The tax administration needs reform to significantly increase revenue generation from direct taxes, they maintained.
 
5% budget deficit

Of the Tk7,50,195 crore total outlay to be proposed for FY24, Tk4,70,195 crore will be the operating budget and Tk2,80,000 crore for development, officials said

The budget deficit is going to be kept at 5% as usual, an official of the Finance Division said, adding, "According to the IMF's calculations, our foreign debt will remain under control until 2041. By that time our debt curve will be below the 45 degree angle." 

But, if the government suddenly embarks on many mega projects, meeting the foreign debt obligations will become challenging, said the official.
 
Wider social safety net

Officials of various ministries including Finance who are engaged in budget formulation told TBS that the government will increase food aid, relief, and assistance for farmers in the next year to lessen the price shocks on marginalised people.

There will be additional allocation for job creation and education stipend.

At the same time, the budget will also incorporate initiatives to prevent wastage of social security allocations. Management Information System (MIS) has been established under the Cabinet Division with the assistance of the World Bank so that the handouts do not fall in wrong pockets. Already, the beneficiaries of social security programmes under various ministries including the Ministry of Social Welfare, and the Ministry of Disaster Management and Relief have been included in this database.

KM Abdul Wadud, additional secretary of the Ministry of Disaster Management and Relief, told TBS that the employment programme for the ultra-poor will be extended in the next financial year.

According to the poverty map, his ministry has sought additional allocation to extend this programme in five districts including Gaibandha, Kurigram, and Jamalpur, said Wadud.

Salma Momtaz, additional secretary (Budget) of the food ministry, said 62.50 lakh people are benefiting from the government's food-friendly programmes.

The prime minister has given instructions to conduct open market sale (OMS) through cards, she mentioned, adding that a meeting has been called under the chairmanship of the food minister next week to determine how many people will get OMS benefits.

In the FY23 budget, an allocation of Tk1,720 crore has been earmarked for OMS beneficiaries estimated at 37.35 lakh. The allocation may increase further in the revised budget.

A senior official of the agriculture ministry said that the amount of subsidies on fertilisers and irrigation will be decided by the high-up of the government. The agriculture ministry has sought an allocation of Tk16,000 crore for this sector for the next financial year as in the current financial year, he added.

Md Moktar Hossain, director (Social Security) of the Social Services Directorate involved with the implementation of significant parts of social security including old age allowance, widow allowance, and disability allowance, told TBS that the plan of the government was to gradually bring all the elderly people under the allowance benefits.

According to the Directorate of Women Affairs, the number of beneficiaries of women and child support programmes will also be increased in the next budget.