The government is going to formulate the next budget with the intent to keep inflation at a tolerable level by increasing subsidy allocations without resorting to upward adjustments to the prices of gas, electricity, and fertilisers.
The budget for the upcoming fiscal 2022-23 also aims at alleviating poverty by boosting domestic investment all the more and creating more jobs.
Some Tk72,745 crore will be earmarked for subsidies and incentives in FY23, which is 54% higher than the original budget for the current fiscal year and 24% higher than the revised budget. The subsidies for LNG, electricity, and agriculture will stand at Tk46,300 crore, according to finance ministry officials.
The finance ministry fears that if subsidies are withdrawn at the moment, inflation will rise to 9%.
Besides, the finance ministry has decided to give a further edge to exporters over their competitors in the global market by devaluing taka against dollars in the new fiscal year, keeping in mind the deepening financial crises in Pakistan, Nepal and Sri Lanka.
The ministry has also taken up measures to discourage imports.
Moreover, apart from the existing 2.5% incentives, new benefits may come on offer for expatriate workers so they feel more encouraged to send home remittances through legal channels. In this way, the government wants to maintain a satisfactory foreign exchange reserve.
If necessary, the government will cut down allocations for other sectors for additional subsidies, taking into account employment, inflation, and production in industries and agriculture, finance ministry officials involved in preparing the next budget said.
At the same time, allocations under the social safety net will be increased by 5% to Tk1.13 lakh crore while allocating free or low-cost food to low-income people. For this, the allocation for food aid will also go up.
The extent of the food-friendly programme will be enhanced in the next fiscal year. There are 19 lakh tonnes of food stocks, from which distribution will increase. Its main goal will be controlling the market. In the wake of rising food prices on the international market due to the Russia-Ukraine war, the amount of subsidies in the agricultural sector is being increased to Tk15,000 crore.
Basically, subsidies will be given for irrigation and seed incentives, agricultural mechanisation, agricultural rehabilitation, and fertilisers with the aim of increasing food production.
According to sources in the know about the development, the allocation for the agriculture ministry is going to go up by 43.35% from over Tk16,201 crore to a little more than Tk23,224 crore.
In a meeting of the council for the coordination of fiscal, monetary and exchange rate policies held on Sunday, the finance ministry proposed estimating inflation at 5.5% for the next fiscal year. But Bangladesh Bank Governor Fazle Kabir said as prices of foodgrains are increasing in the international market, it will be reasonable to estimate the inflation rate at 5.6%.
The overall inflation rate till February is 6.17%. The revised budget has proposed keeping it at 5.8%. The finance secretary hopes that the inflation rate will come down after Ramadan.
The next budget will also give importance to increasing investment in the new fiscal year to create employment and increase the income of people who have lost their jobs or fallen below the poverty line owing to Covid-19.
Therefore, the finance ministry is expecting the investment to GDP ratio at 31.5% in FY23. At the same time, credit flow to the private sector is being increased to 15%. At the end of February of the current fiscal year, the rate was about 11%.
The ministry thinks that investments in the private sector have not increased in the last two fiscal years owing to Covid-19. Private investment will increase in the new fiscal year as the situation has improved.
Government policymakers hope that the private sector credit growth and imports of industrial goods and capital machinery will go up.
In Sunday's meeting, chaired by Finance Minister AHM Mustafa Kamal, Finance Division's senior secretary Abdur Rouf Talukder said this calculation of subsidy has been made considering the current situation of the international market.
The subsidy will not be enough if the Russia-Ukraine war is prolonged or if the prices of goods on the international market increase for any other reason.
"If the prices of fuel oil, fertiliser, and gas go up further on the international market and the prices in the country are not adjusted, then the subsidy will have to go up further. For this, allocations for some sectors have to be cut."
The finance secretary said the Bangladesh Petroleum Corporation and Petrobangla are spending around Tk40-45 crore in subsidies every day. If the subsidy continues at this rate, the two companies will need an additional subsidy of Tk6,000-7,000 crore by the end of the year.
It would not be possible to reduce subsidies in all sectors, he said, adding, "Power and energy are our priority sectors. Both employment and inflation are related to these two products. In this situation, emphasis is placed on raising funds from foreign sources to reduce the subsidy pressure."
The finance secretary also said more than $4 billion had been spent on importing industrial goods and machinery.
In addition, the next financial year will be the last year for the implementation of the incentive package announced by the government in the wake of Covid, he said, adding as a result, investment and employment will increase in the new financial year.
The finance ministry expects that the e-commerce sector will provide employment to around 5 lakh people in the new financial year, even though the sector has suffered a setback following the Evaly scandal.
$8b extra import cost for nine products, decreasing forex reserves
In the wake of rising prices in the international market, the government this year needs to face an additional expenditure of $8 billion for the imports of nine major products including fuel oil, LNG, and chemical fertilisers when compared to the previous financial year.
The foreign exchange reserves are also expected to fall to $42 billion this financial year because of declining remittance inflows, and decreasing budget support and vaccine support from development partners in addition to higher import costs than exports, according to the Bangladesh Bank.
As the South Asian island nation Sri Lanka is on the verge of bankruptcy, saddled with dwindling foreign reserves and $25 billion in foreign debt due for repayment over the next five years, discussions on foreign debt and foreign exchange reserves are gaining importance in Bangladesh as well.
Even though the Prime Minister's Office recently confirmed that the situation in Bangladesh is not as bad as that of Sri Lanka, the government is worried about the additional expenditure of $22 billion on imports compared to exports.
At the Coordination Council meeting, Planning Minister MA Mannan and Commerce Minister Tipu Munshi wanted to know the reasons for the decrease in the foreign exchange reserves in the country.
In response, Finance Minister Mustafa Kamal said, "The reserves rose to $48 billion, but we could not retain that. Dollars are now being sold in the market to meet demand, while import costs have increased a lot."
Bangladesh Bank Governor Fazle Kabir said in September 2020, Bangladesh's foreign exchange reserves crossed $48 billion for the first time. "That year, Bangladesh received $7.7 billion in aid, including vaccine assistance and budget support, from development partners. Besides, remittance inflows were on a growing trend in the last financial year. All these factors contributed to the increase in forex reserves. At that time, the Bangladesh Bank collected $7.93 billion from the market.
"But, this kind of assistance has decreased this year and import expenditures have increased. This is the backdrop against which the central bank till last Wednesday has had to release $4.36 billion in the market."
On 31 March this year, the foreign exchange reserves in the country stood at $44.15 billion, which will stand at $42 billion at the end of the current fiscal year, said the governor. He, however, expressed the expectation that the reserves will increase to $43.5 billion next year.
The Bangladesh Bank estimates that the reserves will climb to $62 billion in FY25 after crossing the $50 billion mark in the previous year.
Finance Secretary Abdur Rouf Talukder said, "Even if our balance of payments turns negative, there is no long-term risk. But we have to bring it back to the positive trend, otherwise the reserves will go down further."
He said the current volume of the country's forex reserves is enough to meet the import expenditure for six months, but the governor then reminded him that the government needs to spend $7 billion from the reserves on the Export Development Fund every year.
Commerce Minister Tipu Munshi told the meeting that Bangladesh's exports to the United States are now growing by about 48% and that to the European Union by 28%. Referring to the growing export orders, he said the growth trend will continue for the next six months.
Further depreciation of taka looms
In addition to discouraging imports, government policymakers at the meeting also discussed ways to further devalue the local currency against the US dollar to boost exporters' capacity.
Besides, in order to encourage expatriates to remit money through legal channels, stakeholders concerned emphasised taking up some new initiatives alongside the existing 2.5% incentive.
The budget is being prepared on the assumption that the next fiscal year will see high growth in export earnings and remittance inflows, the Russia-Ukraine war will end quickly, and imports will not increase much because of this year's high base, the finance secretary said. He, however, expressed fear that predictions regarding imports could change if inflation rises in the international market.
Mentioning that Bangladesh's competitors are devaluing their local currencies against the US dollar, Abdur Rouf Talukder told the meeting that the finance ministry also is working with the Bangladesh Bank in this regard to make sure the country retains competitiveness in the export trade by gradually devaluing taka, according to meeting sources.
In this regard, the Bangladesh Bank governor said the demand for dollars is increasing in the money market, while the remittance inflows increased in March which would continue in April as well. Even then, the value of money against the US dollar needs to be adjusted because the price of $1 has already risen to Tk91 in the kerb market, while the interbank exchange rate is Tk86.20, he added.
Expatriate Welfare Secretary Ahmed Munirus Saleheen said during the pandemic, expatriate Bangladeshis were forced to send money home through the formal channel as the illegal channels were not in operation. The unofficial channels are becoming vibrant again, resulting in less remittance inflows through the legal ways.
"Incentives are now being given at the rate of 2.5%. But some more initiatives need to be taken to attract remittances in legal channels. The current gap between the kerb market and the interbank exchange rate cannot be covered by just 2.5% incentives," he added.
Development expenditure won't grow much
Even though the size of the budget for FY23 is going to rise to around Tk6.78 lakh crore, development expenditures against the GDP would not increase much because of a massive increase in allocations for salaries and allowances of government employees, subsidies, and debt interest payments.
The size of the revised budget for the current financial year is Tk5,93,500 crore and the new budget is going to be 14.21% bigger than this.
In the original budget for the current financial year, the allocation for the annual development programme (ADP) was 6.5% of the GDP, but the ratio is going to decrease to 5.6% in the new budget.
In the proposed budget, the ADP allocation is going to be Tk2,46,207 crore.
On the other hand, Tk76,412 crore will be allocated for salaries and allowances, Tk80,275 crore for debt interest payments, and Tk82,745 crore for subsidies and incentives. The total expenditure in these three sectors is going to be 35.32% of the total outlay.
Planning Secretary Pradip Ranjan Chakraborty told the meeting that in line with the government's policy, the ADP for the next financial year has called for an emphasis on the transition from Covid and research projects. There have been talks of discouraging construction projects.
Finance Secretary Abdur Rauf Talukder said in the next budget, only Tk93,000 crore of the Tk246,207 crore ADP allocation has been targeted to be used in foreign aid.
Even though the size of the ADP is going to increase by more than 9%, foreign aid will see a paltry 5% rise, he said, adding that in this situation, spending $4-5 billion a year from the $50 billion foreign debt in the pipeline will reduce the pressure on the budget.
Economic Relations Division (ERD) Secretary Fatema Yasmin told the meeting that foreign loans are still more affordable considering interest rates. More projects could be taken up if the use of foreign loans increases, she said.
The next budget is going to set the total revenue collection target at Tk4,33,000 crore, of which Tk3,70,000 crore will be collected from the NBR tax system, while Tk8,000 crore will be earned from non-NBR tax, and Tk45,000 crore from non-tax revenue.
After the enactment of the law to deposit the surplus funds of government corporations in the government treasury, Tk16,046 crore was deposited in FY20 and Tk15,500 in the following year, but this fiscal year the amount of deposits stands at only Tk3,050 crore so far. The finance ministry also looks to earn $1 billion in the new financial year by selling 5G spectrum.