FY23 budget’s journey begins amid a tempest

The timing could not be worse for the fiscal year to start with. 

The Russian war in Ukraine is raging, cementing worries about the persistence of the commodity price volatility and supply bottlenecks.

Covid-19 infections are re-surging both at home and abroad, in another unpromising sign for the economy.

Like in other countries, higher inflation, which is hitting the poor and low-income groups hardest, is expected to move higher or at least stay at an elevated way for several more months to two years.

Exports are rising but are playing second fiddle to blistering imports. Remittance flow has slowed and revenue generation likely missed the target in the fiscal year that ended yesterday.

Floods have already devastated the Sylhet region and hit some districts in the northern part, and there is a threat that it can inflict damage on other parts of Bangladesh as well.

More people are in need of state support than ever as they are finding it hard to cope with escalated prices of essentials. The government's spending on expensive fuel, gas and fertiliser from the state coffer would remain at a higher level. As a result, subsidy spending could overshoot.

Amid such a distressed scenario and a gloomy outlook, the government today sets out to implement its budget for the new fiscal year of 2022-23.

In a welcoming move, the government has begun enforcing the early closure of shopping malls, markets and kitchen markets.

The argument is it would cut the use of electricity which would go on to bring down the imports of oil and gas, thus cutting the pressures on the foreign currency reserves.

But Zahid Hussain, a former lead economist of the World Bank's Dhaka office is not convinced.

"Why are you imposing it on the private sector when you can do it on your own?" he asked.

First, he explains, the government should focus on cutting expenses.

"There are many projects that, if deferred, would not cause any harm to the economy. If you cut expenses today, it would have an immediate positive impact. This will also set an example."

The closure of shopping malls, markets and kitchen markets earlier than usually done would affect the revenue generation, Zahid argues. 

In another major development, the opening of the Padma Bridge would give a boost to the regional and national economy, as producers in the southwestern region would be able to sell their produce in Dhaka and other parts of the country without facing much delay and wastage.

The government has also cut the tariffs on rice imports.

CHALLENGE AFTER CHALLENGE

The subsidy on fertilizer, whose prices are now almost three times higher than they were a year ago as per the World Bank, would cause a major headache for the government as it would only amplify the subsidy burden.

But there is no way to ignore the agriculture sector. The nation has to be fed.

Food prices are likely to remain high for the foreseeable future and are expected to push more households into acute food insecurity not just in Bangladesh but across the world.

So, if the government can buy enough food from the local and foreign markets before it is too late, it will be in a comfortable position in evading a food crisis, which looms large globally.

To make matters worse, a recession is knocking on the door of the US and the European Union, the two biggest export markets for Bangladesh.

If the recession worries translate into reality and the country's export destinations face an economic downturn, it would deal a blow to exporters and remitters, the two biggest sources of foreign currencies for Bangladesh.

Sorting out macroeconomic challenges would be the biggest task for the government in the new fiscal year.

HIGHER GDP VS LOWER INFLATION

Zahid Hussain does not find an appropriate explanation for setting a GDP growth target of 7.5 per cent while setting the inflation target at 5.6 per cent.

Only two impossibilities can help the government achieve the dual targets: first, if the commodity prices fall drastically in the global markets and return to the pre-pandemic level.

Second, if the productivity of the economy accelerates through an increase in the productivity of workers and factories and improvement in the efficiency of the bureaucracy.

Accelerating GDP growth and bringing down inflation simultaneously are aspirations, according to Zahid. 

"But even for aspiration, there has to be internal logic and there has to be some link with the reality because this is a budget and a concrete operational plan, not a fiction document."

Ahsan H Mansur, executive director of the Policy Research Institute, says Bangladesh does not need 7.5 per cent GDP growth in FY23.

"Rather, our focus should be on tackling inflation and bringing back macroeconomic stabilisation."

He says if the government goes ahead with its GDP growth plan, it will not be able to support the imports that will be needed to pull off the economic expansion given the costlier commodity prices.

HOW TO DEAL WITH EMERGING CHALLENGES

Monzur Hossain, research director of the Bangladesh Institute of Development Studies, says as Covid-19 cases are rising, adequate attention has to be given to the health sector so that economic activities don't come to a halt again owing to the pandemic.

He expects a more proactive role from the government in reducing poverty since the poor are facing a crisis for higher inflation.

"If there is another shock from Covid-19, the employment sector will also face challenges."

Monzur called on the government to take measures to speed up private investment, improve the quality of public investment and ensure timely implementation of projects.

Zahid Hussain says the immediate challenge for the budget would be managing the subsidy budget.

The government has made a major allocation for subsidies. But already there are talks that electricity, diesel and fertiliser prices would be adjusted upwards to reduce pressures on the fiscal management.

"If the prices are increased, it would only add fuel to the fire," said Zahid.

One of the ways for the government to avoid fanning inflation could be moving away from the expansionary plans that have been envisaged in the budget.

"There has to be some austerity. But there is no such proposal," he said.

Zahid says the government has ways to cut expenditures to rein in inflation.

"If the government can do that, it would help cut the demand for US dollars and cool the domestic demand."

Ahsan H Mansur does not want to paint the macro-economy situation as entirely dire.

"But it is mismanaged and the government is not listening to orthodox economics."

He says the government would have to set out for revenue reforms even if there might not be immediate results, since the lack of revenue reforms is responsible for the current situation.

"We are a poor country. Our government is even poorer. It has come up with a small budget. But you can't run a populous country like Bangladesh with a small budget by navigating through the impacts of climate change, salinity, river erosion, and recurrent natural disasters."

Because of the weaker revenue generation, the country is failing to meet the budget deficit comfortably from its own sources, he added.