IMF calls for smaller budget amid low revenue receipts

As Bangladesh continues to underperform in revenue collections, the visiting mission of the International Monetary Fund (IMF) has suggested the government formulate a smaller-than-usual national budget to minimise the deficit.

The recommendation came as an eight-member delegation, led by Chris Papageorgiou, began the second review of the multilateral lender's $4.7 billion loan programme yesterday. The release of the third tranche of the credit support in June will rely on the positive outcome of the visit.

The mission will hold several meetings with several key government institutions, including the finance division, the Bangladesh Bank, and the National Board of Revenue (NBR) till June 8.

Yesterday, the finance division presented its projection on the upcoming budget and the revised budget for the current fiscal year before the IMF team.

According to the projection, the size of the budget for 2024-25 will be Tk 7,96,900 crore, which is 4.6 percent bigger than the current budget.

Usually, the budgetary allocation is swelled by 12 to 13 percent every year. The budget for 2023-24 is 12.35 percent higher than the previous one.

The IMF mission suggested that the upcoming budget, which will be unveiled in the first week of June, should be smaller than the projection, citing a low revenue collection, according to a number of finance ministry officials who attended the meeting.

In the current context, the budget deficit should be narrowed to contain inflation and meet the IMF targets. More spending control measures are also required, IMF officials said.

There is a scope to reduce the budget size by cutting expenditures on subsidies, they said.

Finance ministry officials told the IMF that they were preparing the national budget in line with the government's political vision, the election manifesto, and the 8th Five-Year Plan. The targets of the loan programme will be monitored separately, they said.

They added the government has already cut the size of the budget for FY25 and spending measures would be tightened.

The budget deficit has been targeted at 5.2 percent of GDP for FY24. It is projected at 4.6 percent for the next year.

At the meeting, the IMF officials expressed their disappointment over the slow reform in the revenue sector and voiced concerns that Bangladesh may not be able to achieve the collection target set by the lender for FY24.

The government will have to raise Tk 3,94,530 crore in tax revenue by the end of June.

The receipts may stand at Tk 3,80,000 crore in FY24. Collection by the NBR rose 15 percent year-on-year to Tk 259,866 crore in the July-March period of the current fiscal year.

The government initially tasked the NBR with the goal of collecting Tk 430,000 crore in FY24 before revising it down to Tk 410,000 crore. For the 11th consecutive year, the state agency missed its tax target in FY23 amidst economic slowdowns and ambitious goals set by the government.

Finance ministry officials admit that although the government attained the IMF targets set for December and March, it may not be able to achieve the June target and fall behind slightly.

The IMF mission will hold a meeting with the NBR during the visit when it is expected to discuss in detail the revenue sector reform and collection.

Since it approved the loan in January last year, the multilateral lender has released $1.16 billion in two tranches.

In 2022, Bangladesh turned to the global lender after its foreign currency reserves plunged to a critically low level amid higher import bills, leading to a sharp depreciation of the taka and an unprecedented level of inflation, hurting the poor and derailing the economic growth trajectory.

The reserves have not improved since the loan programme was rolled out.

The government was given a target to keep a minimum net international reserves (NIR) of $17.78 billion for December 2023. The country fell short of the target by $58 million. The goal for June last year was $23.74 billion. However, the country had a reserve of $19.56 billion at that time.

Yesterday's meeting also discussed the NIR targets for March and June. The country may not fulfil the targets as well since there is no sign that the forex reserve situation will see a significant improvement any time soon.

IMF asks why inflation is not falling

The IMF mission yesterday sought explanations from the central bank about why the monetary policy is yet to rein in higher inflation, said a number of central bankers.

The query came at the mission's meetings with the senior officials of the Bangladesh Bank, especially deputy governors, executive directors and directors of different departments.

In March, inflation rose 9.81 percent following a 9.67 percent spike in February. The central bank has targeted to limit it to 7.5 percent in June.

To curb the elevated level of consumer prices, the policy rate, the rate at which the central bank lends to financial institutions, has been increased to 8 percent since the tightening cycle began in May 2022.

The mission suggested the monetary policy committee explore whether there is any scope for additional monetary policy moves to control the runaway inflation.

In response to the queries, central bank officials said the banking regulator has taken steps to bring down inflation and if needed, it will take further initiatives.