Bangladesh’s new budget ignores economic alarm bells

Bangladesh is grappling with an economic crisis of unprecedented magnitude. Since mid-2022, the foreign exchange reserve has been under significant strain, compelling the government to impose import restrictions. This has precipitated a shortage of essential items such as foodgrain, soaring inflation, and a slowdown in economic activities. 

The government’s domestic and foreign debts have risen rapidly in recent years. A substantial portion of the government’s budget is now set aside for interest payments, further burdening an already stressed foreign exchange reserve.

Bangladeshi Taka has lost more than one-third of its value against US dollar in little over two years. In response, the government has sought to restrict foreign investors from repatriating dividends. That, in turn, significantly constrained the flow of foreign direct investment. Other than an increase in remittances from expatriate workers, there’s little to celebrate on the economic front.

Abul Hassan Mahmood Ali, a former diplomat tapped as the new finance minister, was expected to find ways to tame inflation. However, his proposed budget — while curtailed — falls short of addressing the core issues. An analysis by the Australia-based think tank, Sydney Policy and Analysis Centre (SPAC), suggests that the proposed budget will continue to exacerbate the budget’s deficit — a financial gap created when the government spends more than it generates in revenue. 

Since the 2010s, the deficit has only widened with each successive budget, and it now stands at more than 4% of the entire budget. To address this shortfall, a government typically needs to increase revenue through measures such as higher taxes or borrowing from other sources.

For years, experts have criticised the government for failing to generate sufficient revenue. And as it happens, Bangladesh’s total revenue relative to its annual economic output is among the lowest in the world. 

But the SPAC’s analysis points out that the government has, in fact, steadily increased its revenue collection over the years. The problem lies elsewhere: the skyrocketing costs of running a bureaucratic government, subsidies and tax breaks offered to large businesses, and ballooning interest payments to foreign lenders. These are collectively known in Bangladeshi budgetary nomenclature as “non-development” expenditures — as opposed to development spending on infrastructure projects, for example.

SPAC analysts argue, it is this unproductive non-development spending that’s been driving up Bangladesh’s deficit. Yet, the finance minister does not pledge to curb such spending. And that’s because he can’t.

Tax collection is unlikely to improve significantly, in part, due to pervasive corruption. Recent social media sleuthing and news reports have identified two mid-level tax officials owning wealth reportedly exceeding $85 million. Structural issues are harder, if not impossible, to resolve: a large swath of the economy is informal. How does one force sales tax on a small-town shop owner whose business doesn’t exist on paper? 

Furthermore, the Bangladeshi ruling order is propped up by civil servants, police and military, each vying for the largest slice of the pie. That makes it improbable that the government will tamper down its operational budget, which includes salaries, benefits, defence and security spending.

The other viable option to address the shortfall is borrowing from domestic and international sources, which will, in turn, exert further pressure on inflation. External debt carries exchange rate risks, which can drain up precious dollar reserves in a moment of crisis. To conserve its stockpile of dollars, the government is likely to maintain import restrictions, which risk further economic slowdown.

In the 2010s, budget deficits were financed by selling National Savings Certificates, but that option proved costly. The government then resorted to borrowing more from domestic banks, which could crowd out private investment. The banks, meanwhile, are struggling with rapidly rising non-performing loans, stressed assets and rampant corruption. 

A prudent government would have drastically cut back on operational expenses and broadened the purview of the revenue base by targeting the wealthy, rather than imposing blanket indirect taxes on the public. 

But having lost its popular legitimacy, this government prioritises its own survival by appeasing its cronies in businesses, civil and military bureaucracies. The Bangladeshi public is, thus, unlikely to find any respite soon.●