Bangladesh’s revenue-GDP ratio way lower than peers

Bangladesh's revenue-GDP ratio is a third of the median seen in the countries that have the same credit rating, highlighting the country's weak capacity to finance development and support growth, according to American credit ratings agency Fitch Ratings.   

The budget for the upcoming financial year projects Bangladesh's revenue-gross domestic product ratio to rise from 9.8 per cent in the current financial year of 2022-23 to 10 per cent in 2023-24.

"However, the ratio remains very low relative to other sovereigns that we rate, and we continue to view it as a key credit weakness," said the ratings agency on Tuesday.

Based on Fitch's metric, Bangladesh's revenue-GDP ratio stood at 9.8 per cent in FY22, against a median of 28.5 per cent for "BB" peers.

In statistics and probability theory, the median is the value separating the higher half from the lower half of a data sample, a population, or a probability distribution.

Countries that have the "BB" rating from Fitch include Morocco, Paraguay, Vietnam, Oman, Brazil, South Africa, Uzbekistan, and Jordan.

According to Fitch, the budget initiates a medium-term strategy to raise the revenue-GDP ratio. As part of this, it plans to establish compliance risk-management units under the National Board of Revenue and proposes strengthening compliance and information sharing between the board's income tax, VAT and customs wings.

It also looks to enhance the automation of tax administration and enhance at-source revenue collection.

"We view these moves as positive, but it will take time to assess their effect," Fitch said.

It said the government's projection that the budget deficit will remain broadly stable in FY24 could be vulnerable if growth undershoots the authorities' relatively optimistic target.

Bangladesh's fiscal outcomes have often diverged significantly from budget forecasts, with persistent underspending against targets.

Revised figures for FY23 point to a budget deficit target equivalent to 5.1 per cent of GDP, compared with an original target of 5.5 per cent and Fitch's most recent projection of 5.7 per cent.

"This reflected weaker-than-expected spending on development, but also outperformance on revenue collection," said Fitch Ratings.

These effects more than offset the impact of additional subsidy spending, which rose to 2.2 per cent of GDP against the original budget target of 1.8 per cent amid high global prices for fertilizer, fuel and natural gas.

The government forecasts the deficit to widen marginally to 5.2 per cent of GDP in FY24. This is close to Fitch's current forecast of 5.3 per cent, though its projection was predicated on a significantly wider deficit in FY23.

The official forecasts remain broadly consistent with the projections of the International Monetary Fund under its Extended Credit Facility and the Extended Fund Facility arrangements, which see the deficit stabilising at around 5 per cent of GDP over the medium term.

Risks to the deficit could increase if real GDP growth falls below the authorities' projection of 7.5 per cent in FY24, which could dampen the projected nominal growth in revenue of 15.5 per cent.

"We expect slightly slower economic growth of 6.5 per cent," Fitch said.

The projection is slightly higher than the 6.4 per cent economic growth forecast by the agency in September last year.

On Tuesday, the ratings agency said consumer price inflation, which was 9.94 per cent in May, is high and still rising, which may point to downside risks.

"If spending growth falls short of policymakers' forecasts, as it has done in the past, this could offset potential revenue underperformance or offer enhanced prospects for narrowing of the fiscal deficit if revenue growth meets or exceeds targets."

The government's medium-term policy approach is anchored by the goal of keeping the primary fiscal deficit, including grants, within around 3.3 per cent of GDP to keep public debt below 45 per cent of GDP.

When the ratings agency affirmed Bangladesh's rating at 'BB-', with a stable outlook, in September 2022, it said increased confidence in the sovereign's capacity to deliver fiscal consolidation and debt stabilisation over the medium term, for example, through a sustained improvement in the structure of public finances in terms of a higher revenue base and lower contingent liabilities could lead to positive rating action.

In the medium-term macroeconomic policy statement presented with the budget, the government indicated that the Bangladesh Bank will reverse the temporary margin increases imposed on letters of credit for non-essential imports.

"This may signal an easing of external pressures," Fitch said.

External pressures contributed to a decline in official reserve assets from a peak of $48.1 billion in August 2021 to $29.9 billion in May 2023.

"In September 2022 we said that a sustained drop in foreign-exchange reserves could lead to negative rating action."