It was beyond anyone's wild imagination that the country's economic growth would fall to less than a half in just one year from 7.88% in FY19, the year AHM Mustafa Kamal took charge as the new finance minister of Bangladesh.
Kamal, like all finance ministers across the world, was caught off-guard at the unprecedented intensity of a virus that invaded the world and ravaged life and businesses.
Then came the Russia-Ukraine war, upending the global supply chains and triggering price hikes for everything – from fuel and food to fertiliser.
When Kamal placed his first budget, four years back, the economy was high-flying and inflation was low, and both internal and external fronts were in favour for him to dream bigger in his first budget.
Now fighting rundown inflation, building reserves, paying subsidy bills, earning more revenue to keep the budget deficit in check appear to be his big tasks before driving growth in the next fiscal year from July.
Inflation has soared above 9%, which was well below 6% till February 2022. Though the gross domestic product or GDP growth recovered from its decades' lowest of 3.45% in FY20, it still remains much lower than its pre-pandemic level.
Even before taking over the finance ministry portfolio on 7 January 2019, Kamal spoke about his plan to thoroughly change the way the ministry works and take the economy to a much stronger position.
He said, with confidence, it was possible to implement the annual development programme fully.
On 11 June 2019, he announced that default loans would not increase "by a single taka". At that time default loans in the banking sector were Tk99,370 crore, which surged to Tk131,620 crore.
A chartered accountant by training, Mustafa Kamal, who was planning minister before taking over his current charge, said problems of the economy were known to him and it would not be difficult for him to fix those.
But time was not in his favour for long.
Today, when Kamal is placing his fifth and last budget for this term in parliament, mounting challenges are confronting the economic landscape, not seen in the past 14 years of the tenure of the Awami League government.
Inherent problems – a fragile financial sector, weak revenue administration and poor capacity of project implementation – were rather worsened by the two devastating events, the Covid-19 pandemic and the Russia-Ukraine war.
Things are now more complicated than ever. Many numbers have faltered in the last four years and many need to be fixed to regain the lost pace of growth.
The budget size grew bigger – from Tk5.23 lakh crore in FY20 to Tk6.78 lakh crore this fiscal year and could be over Tk7.6 lakh crore in the next.
During the budget presentation for the current fiscal year on 9 June last year, the finance minister expressed optimism that the Russia-Ukraine conflict would swiftly conclude, and the economy would rebound to the pre-pandemic levels. However, this prediction has proven to be inaccurate as the war continues to persist with no apparent resolution in sight.
Macroeconomic stability, which had been maintained for two decades, has now begun to deteriorate, reflecting negative trends in various areas such as revenue collection, public debt, deficit, inflation, foreign exchange reserves, financial accounts, and employment.
These challenges have become particularly pronounced since the onset of the Russia-Ukraine war in February 2022. In response to the conflict, the United States and its allies have imposed sanctions on Russian corporates and state-owned firms, impacting sectors such as oil and gas.
Consequently, oil prices surged to nearly $130 per barrel in June the previous year, while LNG prices reached a 13-year high in the Asian spot market during the third quarter of 2022. Additionally, Bangladesh's heavy reliance on imported fertilisers for the agriculture sector has led to increased costs.
These factors have placed significant pressure on foreign exchange reserves, which have declined from $41 billion to $31 billion over the past year. The Bangladeshi taka has also depreciated by approximately 25% against the US dollar.
In response to tightening import measures, the International Monetary Fund (IMF) has provided a $4.7 billion loan package accompanied by a comprehensive set of conditions, including raising the tax-to-GDP ratio by 0.5 percentage points by June, increasing forex reserves, and reducing the subsidy budget.
The devaluation of the taka has significantly increased Bangladesh's interest payment burden on foreign loans, exceeding the allocated Tk7,000 crore for the outgoing fiscal year. Consequently, the government has resorted to borrowing from the banking system and the central bank, which carries the risk of higher inflation and increased financial strain on consumers.
Adding to these challenges, this year is an election year, and the finance minister is tasked with presenting the budget for the upcoming fiscal year. Economists, businesses, CEOs, and analysts are eagerly awaiting the measures the finance minister will introduce to improve the country's economic conditions.
A newly added concern is the new US visa policy for Bangladesh, which ships more than one-fifth of its readymade garment exports to the USA.
Amid these challenging situations, Kamal is expected to chart out his plan for the next fiscal year to hook more taxpayers, put banks aright, build net reserve at a time-bound threshold, and phase out energy subsidy – as agreed with the IMF to access $4.7 billion budget support, needed much for healing the scars the economy got from two back-to-back shocks, Covid and war.
This will be an election year budget and appears to be the toughest test in his career as a finance minister.
Key Fault Lines
High Inflation: The rundown inflation for over a year is eroding people's purchasing power. Prices of electricity, foods and vegetables have increased significantly and there is no sign of a decline while many countries are experiencing a decline in inflation.
Bangladesh's inflation rate stood at 9.24% in April; in March, it was 9.33%. Marginal and low-income people need budget support to cope with the situation as inflation has created an uncertainty, making it difficult for them to plan and budget effectively.
Revenue Collection: The government aimed to collect Tk3,70,000 crore in tax revenue for the outgoing fiscal year. But, only Tk2,50,000 crore was collected in the first ten months until April, leaving the National Board of Revenue (NBR) with the daunting task of collecting over Tk1,20,000 crore in the remaining two months. The decline in revenue collection can be attributed to import restrictions and reduced imports of luxury goods, which are significant sources of revenue.
Budget Deficit: Out of the Tk6,78,064 crore budget for FY23, Tk2,45,064 crore was designated as a deficit, equivalent to 5.5% of the GDP. As the government failed to secure deficit financing from foreign sources, it resorted to domestic borrowing, primarily from the banking system, to cover the gap. The trend in the first ten months suggests that bank borrowing may surpass the annual target of Tk1,06,334 crore, with over Tk82,000 crore already borrowed, of which around 80% was supplied by the central bank. This "high-powered" money injection carries the risk of higher inflation.
Taka devaluation and dollar crisis: In the period just before the Russia-Ukraine war in February 2022, the exchange rate between the US dollar and the Bangladeshi taka was Tk86. However, within a few months, it sharply increased to Tk110 and beyond, adversely affecting both the private sector and the government. The devaluation of the taka by approximately 25% during this short span led to higher prices for raw materials, energy, and foreign loans for both the government and private borrowers. Although the central bank implemented measures to reduce imports and lower average monthly import costs to under $5 billion from over $7 billion the previous year, businesses have reported that the dollar crisis continues and their business is being affected.
Economic Downturn: The government initially set the GDP growth target at 7.5% in the budget for FY23. However, after six months, it was revised down to 6.5%, and most recently, Bangladesh's GDP growth projection for the current fiscal year has been further lowered to 6.03%. The World Bank predicts the GDP growth at 5.2%, while the Asian Development Bank projects 5.3% for the outgoing fiscal year. This economic slowdown has implications for employment generation, leaving over 20 lakh people entering the workforce each year in despair.
Any way out?
Now, fiscal consolidation is crucial for Bangladesh to address its current economic challenges and ensure long-term sustainability. The key reasons for pursuing fiscal consolidation include reducing budget deficits, mitigating the effects of economic downturns, ensuring fiscal sustainability, restoring market confidence, addressing macroeconomic imbalances, and complying with fiscal rules or agreements.
By actively addressing budget deficits, reducing public debt, and demonstrating a commitment to responsible fiscal management, the government can restore investor confidence, stabilise the economy, and create a more resilient fiscal framework capable of withstanding future shocks or challenges.