Budget should be more sensitive

There is no denying that the economy of Bangladesh is currently facing significant challenges. Both external and internal factors are contributing to this situation simultaneously. We need to identify the sources of structural problems within our macroeconomics before blaming foreign entities. However, this does not mean we should downplay the multi-faceted geopolitical crises, including global economic instability and the current Iran-Israel arms race.

Our economy is highly globalised, so the simultaneous pressure and intensity of globalisation will inevitably have an effect. In this complex context, the budget proposal for the upcoming fiscal year 2024-25 will be presented in the National Parliament next month. This will be the first budget of the new government.

All in all, it is quite normal for people to have a lot of interest in the budget. To maintain economic balance, experts believe the government will adopt a somewhat contractionary budget, even if it means a slight concession in the growth rate we have seen over the past 15 years. This is what is expected

Even with austerity budgets, there is no way to reduce the focus on people's economic security. Therefore, to protect the overall economy, government investment in the agricultural sector should not be hindered. It is crucial to maintain proper allocation in the budget to increase subsidies for agricultural inputs if possible. Additionally, we must ensure that budget contraction does not create obstacles for export-oriented industries, attracting investment, and employment. Above all, budget makers must consider that public life is under considerable pressure due to inflation. While the Bureau of Statistics reports inflation close to double digits, the latest field survey results from BIDS indicate that food inflation could be over 15 percent. Therefore, to protect people, especially low-income families dependent on the informal sector, from the pressures of inflation, the allocation for social security in the budget needs to be strengthened.

Budget makers must be more sensitive to sectors such as education, health, skill development, and social security for all, including migrant workers, while planning for contraction due to macroeconomic realities. We can expect the budget makers to remain consistent in formulating a mass-oriented budget as they have been for the past decade and a half.

However, it should also be recognized that maintaining macroeconomic balance and ensuring the economic security of the people is not possible solely through the budget or finances.

The role of monetary policy is also crucial. The news that the third tranche of Tk 115 crore from the $4.7 billion loan commitment from the International Monetary Fund (IMF) was released shortly before the budget presentation for the upcoming fiscal year is certainly positive. After the current visit of the IMF delegation, it is known that most of their policy reform suggestions to the Bangladesh Bank and the government have been fulfilled. Earlier, the IMF had released $106 million in two installments.

As mentioned earlier, due to Bangladesh's commendable track record of macroeconomic management and debt repayment, the country enjoys a special level of trust among international development partners, including the IMF. Therefore, it should be possible for us to overcome the ongoing financial strain if we proceed with structural reforms that are sensitive to public interest.

However, if the nearly $50 billion pipeline of foreign aid, which is almost at the point of bursting, had been properly formulated, implemented, and evaluated on time, we might not need to be accountable to the IMF as we are today. Our policy was not to compromise even the slightest bit of sovereignty.

Another significant piece of news is that the IMF welcomed Bangladesh Bank (BB)'s bold move to restore the foreign exchange rate to make it as market-based as possible. BB has adopted a crawling peg system for the exchange rate as a transitional step to restore external stability. Post-liberalization of interest rates at the consumer level and exchange rate reforms will help reduce any inflationary pressures. Monetary policy tightening should be supported by fiscal policy. If external and inflationary pressures intensify, the IMF should be prepared to tighten policies further.

Economists have long advocated moving away from the policy of fixing interest rates. BB has also been somewhat late in making the taka-dollar exchange rate market-based. However, these policy reform initiatives, albeit delayed, are welcome. As a result of these reforms, inflation will begin to decrease due to the reduction in the money supply in the market, and it will be possible to prevent reserve depletion by controlling the demand for dollars. Even if this causes pressure in some areas, we must accept this sacrifice. However, if these reforms had been implemented a year ago, the public would not be under so much pressure.

In light of this comprehensive reform in monetary policy, some issues need to be specially considered in fiscal policy and budget formulation. It may be noted that a formula-based fuel price adjustment process has already been implemented for petroleum products. Along with this, the increase in the dollar price will present some challenges due to the increase in import costs in rupee terms. First, imports for government projects previously received dollars at lower prices, especially from government banks. Now, this import cost will increase significantly.

As a result, we will need to make substantial cuts to relatively less useful projects when allocating to the annual development program of the budget. Second, private importers were already importing at prices higher than the Bangladesh Bank's fixed rates even before this latest devaluation of the rupee. Therefore, the impact of the newly increased exchange rate should not affect their import costs significantly. Market supervision needs to be strengthened to ensure that unscrupulous traders do not take advantage of this latest devaluation to make unethical, exorbitant profits by raising prices unnecessarily. Special attention should be paid to the manipulation by some large consumer goods importers. In this case, the Competition Commission and the Directorate of Consumer Rights should be more vigilant.

This latest devaluation of the taka against the dollar will increase import costs. In this situation, proper sensitivity should be shown in the import tax to keep people free from the pressure of increased prices. Not all products can be exempted from import duty; however, consideration may be given to essential commodities (such as drugs and medical supplies), renewable energy-related imports, agricultural inputs, and projects involving substantial employment and foreign exchange earnings. It is true that, with a low tax-GDP ratio, we are under pressure to collect more taxes. More tax collection is also necessary to make the progress of development self-sustaining. There is also an opportunity to increase the number of taxpayers. If certain policy reforms and the use of digital technology, including AI tools in tax collection, are implemented, the amount of tax collected can definitely be increased. However, while collecting additional revenue, we also want to ensure that the productivity of the entire economy is not threatened. It is also important to ensure that there is no sudden instability in society. In some cases, it is possible to easily obtain additional tax revenue by following innovative tax policies.

For example, according to the advice of anti-tobacco civil organizations and local and foreign researchers, increasing the price of cigarettes (especially cheap cigarettes) and imposing an effective tax on them could generate additional revenue of Tk 10,000 crore and significantly reduce the smoking rate in the country.

Due to the devaluation of the taka, some are suggesting the withdrawal of export incentives. It is not unreasonable to consider the withdrawal of incentives now that exporters will benefit from the appreciation of the dollar. However, it should also be remembered that there is a risk that the demand for our export products in the West will decrease due to the slowdown of the global economy and geopolitical instability. By 2026, the benefits we receive in terms of exports to various countries may also be withdrawn due to Bangladesh's graduation from the ranks of least developed countries (LDCs) to developing countries. This reality calls for careful consideration before withdrawing incentives for export-oriented industries. Incentives need to be carefully evaluated, especially for industries that have just entered export markets (e.g., information technology, agro-processing, pharmaceuticals, logistics, etc.).

Taxation on the service charges of Micro Finance Institutions (MFIs) is also being discussed as a means to increase government revenue. MFIs are already facing challenges in raising money from banks in this era of liberalized bank interest rates. In this situation, it would not be right to tax them. Imposing a tax burden on MFIs will force them to adopt corporate-like policies. Marginalized people will suffer the most because MFIs do not just provide financial services; a significant part of their work involves socio-economic development activities. The money they receive as service charges, after meeting operating expenses, is invested in these developmental activities. Tax pressures will force MFIs to become commercial lenders and curtail development activities. They will then focus only on profitable business, disrupting the financial services they provide to poor people at the grassroots level and affecting the employment of many rural educated unemployed individuals. Furthermore, almost half of the loans given by MFIs go directly to the agricultural sector, with the rest in the non-agricultural sector. The development of the non-agricultural sector is closely linked with the progress of agriculture. Therefore, if MFIs are taxed, both poverty alleviation and food security will be at risk.

In the current macroeconomic reality, budget makers should welcome new initiatives to increase revenue. However, it is not right to create additional pressure on those who are already paying taxes or to introduce new taxes on sectors crucial to our socio-economic development. Instead, the focus should be on expanding the tax net as much as possible. Above all, it is particularly important to accelerate the digitization of the tax collection process. Hopefully, the budget makers will show enough sensitivity in these times of high inflation to come up with a realistic budget. They should do so with both short-term and long-term development goals in mind.

Author: Bangabandhu Chair Professor at the University of Dhaka and former Governor of Bangladesh Bank