SANEM Reflections on the Proposed National Budget for FY 2024-25
8 June 2024 | BRAC Centre Inn, Dhaka
South Asian Network on Economic Modeling (SANEM) held a press conference on June 8, 2024, at the BRAC Centre, Mohakhali, Dhaka, to present their observations on the proposed national budget for FY 2024-25, which was proposed by the Finance Minister on June 6, 2024, during the budget session of the National Parliament. The presentation of SANEM’s observations was delivered by Dr. Sayema Haque Bidisha, Research Director of SANEM and Professor of Economics at Dhaka University. The event was chaired by Dr. Selim Raihan, Executive Director of SANEM and Professor of Economics at Dhaka University.
At the beginning of the press conference, Dr. Selim Raihan stated that three fundamental questions need to be addressed in the proposed budget. The first question is whether we have a proper understanding of the current economic crisis and if this understanding is reflected in the budget. The second question is whether the measures proposed in the budget are sufficient to address the crisis. The third question is what actually should have been done. He mentioned that SANEM’s presentation attempts to answer these questions.
Presenting the observations, Dr. Sayema Haque Bidisha highlighted several challenges currently facing the economy. Among these challenges, high inflation is the foremost issue. Additionally, there are several macroeconomic challenges such as the negative trend in foreign exchange reserves and the overall depreciation of the Taka against the dollar. Furthermore, past experiences in revenue collection have not been satisfactory, and there is stagnation in private sector investment. Challenges in poverty alleviation, reducing inequality, and creating employment also remain significant. Among these challenges, bringing inflation to a tolerable level is the primary challenge. For several months, we have seen a continuous surge in inflation. Compared to last year, the budget has increased by about 5%. There is a tendency to keep the budget size and deficit somewhat smaller. Efforts towards austerity are noticeable in some areas. A positive initiative is the reduction of source tax on opening letters of credit for some products, which is expected to yield some benefits. In addition, various measures have been taken in the social security sector to protect people from high inflation through programs like the Family Card Ration and OMS Program. The budget has forecasted inflation at 6.5%. However, questions remain about whether the measures taken to reduce inflation are sufficient. Additional steps could have been taken to curb inflation. SANEM believes that considering the macroeconomic situation and inflation, the budget size could have been smaller. For instance, the plan to borrow from the central bank is still in place, which could further fuel inflation. Reducing the budget deficit and internal financing could have relieved the general public from inflationary pressures. The Value Added Tax (VAT) could have been reduced further. VAT is an indirect tax that affects everyone equally. Reducing it and expanding the direct tax net could have compensated for the shortfall. Every year we see that more emphasis is placed on the tax rate rather than on expanding the tax net, which results in budget deficits being financed, adversely impacting the economy. Increasing the tax-free income limit could have provided some relief to the middle class, which we have not seen. Overall, we do not see sufficient measures in the budget to bring inflation down to 6.5%.
Regarding the macroeconomy, the foreign exchange reserves have now fallen to around $25 billion, which, considering various liabilities, is less than $20 billion. Steps are urgently needed to increase this reserve amount. The prolonged maintenance of the dollar exchange rate has not had a positive impact on the market. Now, the sudden increase in the dollar price has put pressure on the economy. In this regard, we have seen a continuation of what was in the previous budget. The incentives given to exports need to be more carefully considered. It is crucial to consider which exports play a positive role in employment generation, as increasing export earnings is essential. Our overall business environment is linked to foreign investment. We are not seeing any significant leaps in foreign investment. Effective measures were needed in this area, which we do not see in the proposed budget. As long as the difference between the open market rate and the bank rate remains, the tendency for Hundi among people will continue. However, in the long term, to bring positive changes in remittances, strict measures need to be taken against Hundi and the circulation of black money. Providing incentives to farmers for locally producing imported food items will bring long-term benefits.
Creating employment requires specific and well-thought-out measures. We do not see any major initiatives in the budget to create employment. Long-term planning is needed to stimulate employment. Investments in labor-intensive industries and the creation and support of new labor-intensive industries are required. In this regard, small incentives to small, cottage, and medium industries would have been effective, but we do not see significant initiatives in this area. Initiatives were also needed to increase private sector investment. In this regard, we do not see any notable initiatives. In the case of social security programs, it is notable that although 17% of the budget is allocated to social security, if pensions, scholarships, and savings certificate interest are excluded, it stands at 11%. Proper categorization of our social security sector is needed to increase allocations in the main social security sector. Considering the current inflationary pressures, the allocation in the social security sector is insufficient. The allocation to the TCB needs to be increased. The number and quantity of TCB products need to be increased. Initiatives were needed for urban poor. Inequality has increased in our country. According to the eighth five-year plan, at least 11% of the allocation for the health sector is needed for one year. More emphasis has been placed on infrastructural development in the budget. Instead, emphasis should be placed on increasing capacity and training in the health sector. The agricultural sector has been providing us with regular protection from various economic troubles, but more than 3-4% of the budget is not allocated to it. We want to emphasize agricultural innovation, farmer training, and making them more capable to strongly counter climate change. There are no measures in the budget to reduce non-performing loans in the banking sector. We need to reduce our operating costs.
Regarding the inability to reduce inflation, Dr. Selim Raihan commented that the conventional method of reducing inflation, i.e., monetary policy, is not fully effective in reducing inflation. When it was realized that the fixed interest rate policy, i.e., the 9/6 policy, was not effective, efforts were made to adopt market-based interest rates. However, even with this method, it is not possible to control inflation. One reason is that the policy was taken too late. The main reason for adopting a contractionary monetary policy is to reduce overall demand. However, due to the delayed adoption of the policy, it had diminished effectiveness. At this moment, further changes in interest rates would collapse the financial sector. Therefore, the effectiveness of raising interest rates was lost due to not adopting the policy at the right time. Another question remains, how realistic are the measures taken for private sector investment? There are coordination issues with our financial and monetary policies. Unjustifiable price hikes are suddenly imposed in the market. Even after such anti-competitive actions, no measures are taken. Although the budget’s intention is good, there is no coordination.
The second point is that where emphasis was needed on direct tax collection, more emphasis has been placed on indirect taxes because it is comparatively easier to do so. On the other hand, if we cannot collect taxes from the ultra-wealthy, then the tax will not be fair. We strongly condemn the 15% tax on whitening black money. Specific measures should be taken, and we hope that this will be removed in the revised budget. There has been a significant shock in macroeconomic balance, and it has not yet stabilized. In the future, our debt burden will increase. The mega projects undertaken with loans need proper evaluation. The loan repayment period is also short. However, we have to repay the loans in foreign currency. On the other hand, the amount of defaulted loans in banks is increasing. Why can’t we take measures against them? The Perspective Plan, the Eighth Five-Year Plan, do not seem to align with the budget. The government seems to be contradicting itself. He questions why the budget for the health and education ministries is not increased even after so many years. Our pathway for transitioning to renewable energy in the energy sector is not yet specific in the budget.
On behalf of SANEM, we propose that a two-year economic plan is needed for economic recovery to increase business confidence and private sector investment. Additionally, measures should be taken to ensure that those who deposit in banks regain their confidence. Moreover, proper investigations and steps should be taken against corruption through parliamentary committees. The burden of corruption is being borne by low- and middle-income people. We want to see zero tolerance towards corruption.
In response to a question, Dr. Bidisha said that in addition to financial incentives, non-financial incentives are also needed for remittance providers. Measures can be taken for social recognition, such as special facilities for them at the airport, special recognition for them in their villages, among other non-financial incentives.
Regarding the effective expenditure, she questioned whether 22% allocation in public administration is necessary. Various luxury items, such as importing luxury goods, foreign travel, hospitality, need to be reduced, and more emphasis should be placed on the relief and benefits of the general low- and middle-income people.
Regarding the value of the Taka against the dollar, Dr. Selim Raihan said that the crawling peg should be allowed to work more smoothly. If the administrative exchange rate is maintained or the band is not cleared, then a gradual move towards a market-based exchange rate will be necessary. The longer it takes, the more shocks the economy will face. Therefore, we want to know how much the crawling peg can actually crawl? Measures should be taken on how black money is being generated, rather than whitening black money. To address the question of whether Bangladesh is becoming like Sri Lanka, it can be said that compared to a year ago, the situation in the macroeconomy has deteriorated significantly. In the coming years, this concern will increase further. There is a risk of further increase in inflation.
Regarding the opportunity to legalize black money, Dr. Bidisha said, “This step is against the principles of our economic philosophy. It will discourage those who conduct their business honestly.”
In response to a question, Dr. Selim Raihan said, “The burden on the lower and middle-income people is continuously increasing. Mobile phones are now essential items, and increasing the tax on them will place a greater burden on low-income people. On the other hand, a large portion of the wealthy remain outside the tax net.”
Dr. Raihan highlighted several important points: We often equate budget implementation with how much of the allocated funds have been spent. However, it should actually be about how much of each project has been completed. The measures for foreign reserves are neither clear nor realistic. The budget targets are not entirely feasible. The initiatives to control inflation are insufficient. If proper measures are not taken by the end of the upcoming fiscal year, the economic situation in Bangladesh will worsen. Additionally, the burden of foreign debt is increasing. We must also remember that we are about to graduate from LDC status soon. This will bring additional challenges on top of the existing ones. Therefore, emphasis must be placed on diversifying investments.
Dr. Raihan reflected on the period from 2010-2019, which was a golden era for Bangladesh. Even during that time, issues in the financial condition and banking sector were discussed. However, these issues were overlooked due to an upward growth trend, and now we are facing the consequences. He emphasized two crucial points: the need to bring the economy back on track and to strengthen its foundation. Our economy was running on a track, but it has deviated, and without strengthening the economy, we will face more problems. What we primarily need is reform—institutional reform. For this, a specific roadmap for reform is necessary.
The budget research team from SANEM included Dr. Selim Raihan, Executive Director of SANEM; Dr. Sayema Haque Bidisha, Research Director; Senior Research Associates Ms. Israt Hossain, Ms. Eshrat Sharmin, and Ms. Afia Mubasshira Tiasha; Research Associates Ms. Khandakar Iffah and Ms. Shafa Tasneem; and Research Assistant Ms. Nafisa Zaman.
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