Debt at heart as Kamal strikes balance amid falling revenue, rising expenditure

Between a rock and a hard place is where Finance Minister AHM Mustafa Kamal finds himself in as he is set to unveil his second budget on June 11.

Does the government enforce austerity given the stunning collapse in economic activities for the coronavirus outbreak? Or does it spend his way out of the pandemic-induced recession and preventing it from undoing decades of progress in alleviating poverty and elevating its citizens into the middle-class?

It appears Kamal would go for the latter option and is preparing a debt-dependent budget for next fiscal year, which begins from July 1.

The fiscal year may be one of the most challenging years from the perspective of fiscal management. 

The government is facing pressure on public expenditure to tackle the contagion, strengthen the weak health system, support livelihoods of the millions of people and keep businesses afloat reeling from the pandemic.   

Subsequently, the budget deficit may be set at Tk 183,000 crore in fiscal 2020-21, up from Tk 145,385 crore this fiscal year.

Kamal would look to borrow Tk 80,000 crore from the banking sector to meet the budget deficit, which is way higher than the target of Tk 47,364 crore this fiscal year.

Borrowing through the sales of savings certificates could be lowered to Tk 24,000 crore in fiscal 2020-21 from Tk 27,000 crore this year, as cash-strapped people are showing less interest in buying the instruments.

The trend is expected to continue into the new fiscal year amid the fall in income.

However, the finance minister would find it difficult to meet the bank borrowing target by relying on the banking sector since lenders have long been facing liquidity crisis and would now carry the major burden of implementing the Tk 101,117 crore stimulus packages.

This leaves Kamal with the option of turning to the central bank seeking the injection of fresh money.

Although the quantitative easing, or introducing new money into the money supply by a central bank, entails stoking inflation, the increase in the price level would be welcome this time given the collapse in domestic demand.

Inflation fell 61 basis points to 5.35 per cent in May from a month earlier owing to a drastic fall in food prices. This is the lowest general inflation rate in at least 23 months.

Inflationary pressure is likely to remain somewhat stable in the very near term as consumption demand remains depressed due to deep uncertainties.

The government borrowed Tk 62,000 crore during the first seven months of the fiscal year from bank and non-bank sources, with Tk 50,802 crore coming from banks.

Although exact figures are not available, the overall borrowing and that from the banking sector have accelerated in the last three to four months to meet the country's growing expenditure aimed at tackling the devastation caused by the pandemic.

Until May 12, the government borrowed Tk 78,300 crore, which has already surpassed its revised full-year bank borrowing target of Tk 72,953 crore, according to provisional data from the central bank.

The government aims to borrow Tk 70,502 crore from the external sources to implement its annual development programme (ADP). Another Tk 12,000 crore is being expected in budgetary support for the same purpose.

However, the net foreign borrowing may stand at Tk 71,000 crore if debt servicing is excluded and Tk 5,000 crore extended as grants by the development partners is taken into account.

Due to the increase in the expenditure, the country's budget deficit could go past 6 per cent of the gross domestic product (GDP) in next year from the historically comfortable level of 5 per cent maintained by the government.

The finance minister is facing pressures to expand expenditure, as various groups of the country are seeking stimulus packages, incentives and support to weather the impacts of the pandemic.

The budget size for the next fiscal year may be Tk 569,000 crore, up 8.7 per cent from this year.

In his maiden budget, Kamal had unveiled a 13 per cent higher financial plan than the previous year.

The allocation for the ADP is only 6 per cent higher than fiscal 2019-20's. 

One of the reasons the budget size may see a marginal increase is because of the fall in revenue generation.

Kamal may set a target to generate Tk 379,500 crore in fiscal 2020-21, only 0.44 per cent higher than the current fiscal.

The National Board of Revenue (NBR) may be given a goal to collect Tk 330,000 crore in fiscal 2020-21, up from Tk 325,000 crore this year.

But the NBR has already informed the government that it would not be able to meet the revenue target for this fiscal year as well as the next one given the subdued state of the economy.

The revenue generation by the tax officials may stand at Tk 220,000 crore at the end of fiscal 2019-20, meaning a shortfall of Tk 80,000 crore relative to the target of Tk 300,500 crore.

This will be Tk 15,000 crore lower than Tk 234,684 crore generated in fiscal 2018-19, in what will be the first instance of revenue collection dropping year-on-year since Independence, said Abu Hena Md Rahmatul Muneem, chairman of the NBR, in a letter to Finance Secretary Abdur Rouf Talukder on May 14.

If income-generating activities slow and economic recession sets in, the generation of direct taxes would reduce.

Similarly, if domestic demand goes down, imports would fall. If industrial production declines, the demand for raw materials and machinery would fall. This will have a huge negative impact on the collection of indirect taxes.

"It would be tough to realise Tk 330,000 crore targeted for the upcoming fiscal year," Muneem said.

The non-tax revenue target may also receive a hit.

In the revised budget for this fiscal year, Kamal raised the non-tax revenue target to Tk 57,710 crore, thanks to Tk 20,000 crore coming from the state-owned enterprises (SoEs).

But the new budget can't expect to find anything from the SoEs as their incomes have also fallen owing to the coronavirus-induced shutdown.

So, the target from the non-tax revenue segment could be set at Tk 34,000 crore.

As the government struggles to strike a balance between income and expenditure, Kamal got down to work in the first week of April, writing to all the multilateral development and bilateral partners seeking whatever support they can extend.

He has already received a commitment on budgetary support from the development partners such as the World Bank, the International Monetary Fund, the Asian Development Bank, the Asian Infrastructure Investment Bank and the Islamic Development Bank as well as bilateral donors such as the Japan International Cooperation Agency. 

Despite the increased borrowing, Bangladesh remains at low risk of debt distress.

Public debt in Bangladesh was $105 billion in fiscal 2018-19, which is about 34.9 per cent of the GDP, and the external public and publicly guaranteed (PPG) debt ratio was 14.5 per cent of GDP.

"Both are low," said the ADB recently.

The additional external debt of $2.9 billion, as the government has projected, will increase both the external PPG debt–GDP ratio and public debt–GDP ratio by 0.9 per cent in fiscal 2019-20.

The IMF, which approved $732 million in emergency assistance to meet Bangladesh's balance of payments and fiscal needs on May 29, is also not suggesting belt-tightening because spending is needed to stop people from dying or from falling into a permanent trap of unemployment.