Budget FY24: unrealistic forecasts

The proposed budget of Tk 7,61,785 crore (17 per cent of GDP) with a deficit of Tk 2,61,785 crore (5.2 per cent of GDP) has been presented to the country.

The government is planning to finance the deficit from external and internal sources. External sources will supply Tk 1,02,490 crore and internal sources will supply Tk 1,55,395 crore. Of internal sources, Tk 1,32,395 crore will come from the banking sector and only Tk 23,000 crore from saving certificates.

The government can borrow from the Bangladesh Bank and commercial banks to finance the deficit. Between July 1 and May 24 of the current fiscal year, the government took loans of Tk 85,024 crore from the banking sector. Of the sum, Tk 69,208 crore came from the Bangladesh Bank. It can be assumed that this time the government will also depend largely on the central bank.

In the budget, inflation is targeted at 6 per cent whereas the average inflation rate was nearly 9 per cent during the current fiscal year. Inflation in May surged to 9.94 per cent, the highest in the past one decade.

The government has failed to control inflation. In international markets, prices of many products have already declined, but our markets could not respond accordingly. Now it is unreasonable to blame the international markets for the higher inflation.

Other factors like dominance in the market by a limited number of producers and sellers, their strong syndicate, market manipulation, extortion and a lack of market monitoring and supervision are also responsible for high inflation. Without controlling these factors, it is nearly impossible to attain the inflation target.

The GDP growth rate is aimed at 7.5 per cent. A rule of thumb is that investment should be four times the economic growth of a country. Keeping this rule of thumb in mind, private investment is targeted at 27.5 per cent. If the public investment of about 6 per cent is added, the total investment will be 33.5 per cent. But in the current fiscal year, private investment came down to 21 per cent from the targeted 23 per cent.

Increasing private investment is a gigantic task. There must be an excellent flow of credit in the economy from the banking sector. People will borrow more for investment if interest rates are low and banks have the ability to extend the required loans and advances.

But if the government borrows from commercial banks, private borrowing will go down. Consequently, economic growth will be hampered as the quality of private investment is better than that of public investment.

If the government borrows from Bangladesh Bank, injecting high-powered fresh money into the economy, it will increase inflation. If inflation rises, it may lead to an increase in interest rates, reducing the demand for credit.

Banks in Bangladesh play a crucial role in financial markets, owning almost 86 per cent of financial assets. But their lending ability is incapacitated by the piled-up non-performing loans (NPLs), which stood at Tk 1,31,621 crore in March.

Although the official NPL rate is 9 per cent, the actual rate is much higher. If NPLs can't be reduced, it will obstruct the free flow of credit and macroeconomic management. So, there should have been some direction as to how the government is going to recover NPLs to increase the liquidity at banks.

The author is a professor at the Department of Banking and Insurance, University of Dhaka. He can be reached at mainuddin@du.ac.bd