Garment worker Amina (not her real name) carefully counts her taka. Prices at the market seem to rise faster than the pile of bills in her hand. News of the upcoming budget buzzes around her like the cicadas in the Dhaka heat. Will there be relief, or will the rising costs continue to squeeze her family’s budget?

Across town, Abdur Rahim, a rickshaw puller, wipes his brow after a gruelling day.  He worries about the next fare, the rising cost of fuel, and the whispers of higher taxes. Will the budget offer any solutions, or will his struggle to make ends meet become even harder?

Meanwhile, at a busy tea stall, conversations turn to the nation’s finances.  Everyone has an opinion, a hope, a fear. Will the budget address the rising cost of living, or will their daily lives become even more strained?

Finance Minister Mahmood Ali knows the weight of these hopes rests on his shoulders as he is set to present his maiden national budget – 53rd for Bangladesh and 25th by the Awami League government in six terms – to the parliament today, with the occasion being clouded by pressing economic and financial challenges that demand careful and strategic solutions.

This year’s budget is not just about numbers on a page; it is about putting food on the table, keeping a roof overhead, and offering a glimmer of  a brighter future for everyday Bangladeshis.

Economic reality check

Despite Bangladesh’s tremendous economic growth over the past two decades or so, Mahmood Ali took the helm of the finance ministry earlier this year amid a rather harsh economic reality marked by a myriad of weaknesses.

The country grapples with stubborn inflation and a rising debt burden. Tax collection remains low, foreign exchange reserves are dwindling, and private sector investment is tepid due to lending rate concerns. Remittances and export growth are sluggish, the foreign exchange market is volatile, and energy shortages persist.

Besides, tackling money laundering, recovering huge non-performing loans, enhancing revenue generation, creating sufficient job opportunities for the ever-increasing number of educated youths, and ensuring transparency in project expenditures have all remained significant challenges for the government.

Meanwhile, the fixed expenditures i.e. subsidies, interest payments, salaries and allowances of government employees, etc growing at a much faster pace compared to revenue generation every passing year is limiting the government’s ability to spend on vital sectors, such as health and education, and enhance the scope and benefits of social safety nets.

What is more, rising commodity prices in the global market, regional and geopolitical factors, and adverse weather conditions are there to make the task of achieving macroeconomic stability by weathering the prevailing challenges more difficult for the government.

To make matters more complicated, there are the many conditions and recommendations put forward by the International Monetary Fund (IMF), which the government is pledged to comply with because of its involvement in a loan programme of the Washington-based global lender.

Striking balance between growing fixed expenses and development budget – A daunting task

Finance Minister Mahmood Ali would definitely have faced a significant challenge in balancing the budget for FY25.

Finance ministry sources say that the government is going to allocate around Tk3,22,000 crore for subsidies, interest payments, and salaries from the total budget of approximately Tk7,97,000 crore.

This includes Tk1,13,500 crore for interest payments, Tk1,20,600 crore for subsidies and incentives, and Tk88,000 crore for government salaries. Over the past five years, these non-discretionary expenditures have grown faster than revenue, narrowing the government’s fiscal space.

Although the upcoming budget will be the smallest in the last decade as a proportion of GDP (14.2%) and will be termed contractionary, operational expenditure is estimated to increase by about 7% to Tk506,971 crore. Thus, providing necessary funds for the Annual Development Programme (ADP) after meeting operating expenses is a big challenge for the next financial year.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told the media, “If the non-discretionary expenditures eat up most of the budget allocation, then not much is left.”

Mansur suggested that the country needs to address the problem through reform initiatives, reducing domestic borrowings, subsidies, and other unnecessary expenditures, and increasing revenue.

Revenue boost or more inflationary pressure on people?

The overall revenue generation target for the new fiscal year, beginning on 1 July, will be Tk5,41,000 crore. Of this, the National Board of Revenue (NBR) will be tasked with raising Tk4,80,000 crore, including Tk1,77,600 crore from income tax, Tk1,77,600 crore from VAT, and Tk1,24,000 crore from import duty.

While finance ministry officials claim that the revenue earnings target is conservative and closer to reality compared to previous budgets, many economists argue that the $4.8 billion NBR revenue target, aiming for a 17% growth from the revised target of the current fiscal year, is still ambitious.

And, achieving this target will be challenging, given the slow economic growth, import restrictions, and high inflation.

Economists warn that higher tax rates and unchanged tax-free income limits will increase the burden on people already struggling with rising prices. The depreciation of the taka and high inflation rates are expected to drive revenue growth through increased import duty and VAT collections, ultimately affecting the public.

An inflation target of 6% was set for the current fiscal year, but in reality, inflation averaged 9.72% from July to May of FY24. According to Bangladesh Bank data, Bangladesh imported various products worth $45.62 billion from July to March of FY24, 15.42% lower than the $53.94 billion imported in the same period of the previous fiscal year.

Inflation is projected to be 6.5% in the next fiscal year, but experts believe controlling inflation will be very difficult until economic conditions improve.

Increasing debt servicing burden a concern

Debt servicing remains a significant concern, with the government’s total net debt from domestic and foreign sources growing. The budget deficit, traditionally around 5%, is going to be set at 4.5% for the upcoming fiscal year due to high inflation and limited fiscal space. The government is heavily borrowing from the banking sector, which increases interest payments and pressures the economy.

According to finance ministry sources, the allocation for interest payments of domestic and foreign loans will likely increase by 20% to Tk1,13,500 crore in the upcoming budget due to a significant hike in the cost of borrowing from both sources.

The allocation for interest payments of domestic loans may increase by 14% to Tk93,000 crore in FY25 compared to the original allocation of Tk82,000 crore for FY24. Similarly, the allocation for interest payments of foreign loans is going to rise by 66% year-on-year to Tk20,500 crore next fiscal.

At the start of the current fiscal year, the government allocated Tk94,376 crore towards interest payments, which crossed the Tk1,00,000 crore mark for the first time after the budget was revised.

The finance ministry aims to manage external debt repayment within tolerable limits through diversifying funding sources and boosting foreign exchange reserves. However, the increasing debt obligations could negatively impact the economy. Moreover, despite the finance minister’s reassurance, boosting the foreign exchange reserves would be a great challenge for the government.

Data obtained from the Bangladesh Bank show that the country's forex reserves dropped to $19.97 billion in Apr 2024 as per International Monetary Fund (IMF)-prescribed balance of payment manual 6 (BPM6), down from $24.75 billion in June 2023 when the central bank started calculating reserves following this formula.

Meanwhile, the gross forex reserves dwindled to $25.36 billion this April, after recording continuous fall since it reached a record high of $48.06 billion in August 2021.

 Addressing NPLs and achieving financial sector stability

Non-performing loans (NPLs) continue to challenge Bangladesh’s banking sector, affecting profitability and lending capacity.

According to a recent survey report by the Centre for Policy Dialogue (CPD), in 10 years until December 2023, the volume of non-performing loans or NPLs in the country’s banking sector more than tripled to Tk1.45 lakh crore and exacerbated cash crunch in banks.

If another chunk of banks’ liquid asset stuck up as rescheduled loans is added up, the amount of dud money banks are bearing will come to Tk3.78 lakh crore. Also, there is Tk1.78 lakh crore of unpaid debts against 72,543 cases pending with the loan courts. Altogether, the total amount of default loans will be Tk5.6 lakh crore, says the CPD report.

The upcoming budget is expected to implement measures to recover defaulted loans and improve banking sector governance, essential for financial stability and credit flow to productive sectors.

Encouraging private investment

Finance ministry sources revealed that the upcoming budget is going to estimate private sector investment at 27.34% of GDP and public investment at 6.08% of GDP for FY25. Investment in the public-private sector is expected to rise to 33.7% of GDP. However, according to the Bangladesh Bureau of Statistics, the rate of investment as a proportion of GDP for the current fiscal year is 30.98%.

Economists and businesspeople believe that ongoing geopolitical tensions, including the Ukraine-Russia war, high loan interest rates, and the unreliable supply of gas and electricity, hinder the desired investment in the private sector for the next financial year.

Shams Mahmud, president of the Bangladesh Thai Chamber of Commerce and Industry, remarked, "The interest rate on loans is above 14%, which is very high. Despite the increase in exports, not everyone benefits. Small traders are the most affected due to the devaluation of the currency and high prices of imported goods. Cash flow is low in the CSME sector; they should be given benefits."

Mahmud also emphasised the challenges in policy implementation, highlighting the impact of frequent gas and fuel price hikes without stabilising the supply in industrial areas.

Push for banking sector and tax reforms

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), told the Daily Sun that the failure to reform the banking sector would adversely affect the private sector and the government's budget implementation. "Our growth will not come easily because the condition of our banking sector is very bad. That has become a big problem," Mansur said.

The banking sector impacts the budget by affecting interest on government debt, private sector investment, and revenue collection.

Mansur added that achieving revenue collection targets requires a modern tax administration, separating tax policy from tax administration, and automating the revenue collection process.
Dr Mohammed Farashuddin, former governor of Bangladesh Bank, noted that reforming the banking sector is not difficult but requires the implementation of existing recommendations.

He pointed out mistakes such as keeping the taka overvalued and the 9-6 interest rate formula, stressing the need for comprehensive reforms to address issues like money laundering and tax evasion.

Rethinking subsidies and incentives: a strategic necessity

The government plans to gradually reduce subsidies in the new fiscal year. The finance ministry intends to increase electricity and gas prices gradually, aiming to withdraw subsidies completely within the next three years. The International Monetary Fund (IMF) has also pushed for subsidy withdrawal. Additionally, export incentives are set to be withdrawn by 2026 due to LDC graduation.

Dr Mohammad Abdur Razzaque, chairman of Research and Policy Integration for Development (RAPID) and research director of PRI, warned that increasing subsidies would lead to more debt pressure, a reserve crisis, and inflation. He suggested that foreign loans should be given as budget support to boost reserves and emphasised the need for significant reforms in the economic sector.

Razzaque stated, “Agriculture should be subsidised to ensure that the production of agricultural products is not disrupted. The sale of products at affordable prices in the open market should continue to control inflation and provide relief to low-income people.”

He also stressed the importance of evaluating and reducing the cost of subsidies and ensuring careful examination of the rationale behind subsidising rationing programmes.

It will be interesting to see what measures Finance Minister Mahmood Ali outlines in his budget proposal for fiscal 2024-25 to address current weaknesses, tie up longstanding loose ends in the economy, and boost government revenue to meet growing spending requirements.