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Bangladesh perhaps never faced such a financial situation in decades, and in her consecutive fourth tenure as the prime minister, Sheikh Hasina gave responsibility of the country’s economic revival to Abul Hassan Mahmood Ali, who recently celebrated his 81st birthday.
Finance Minister Mahmood Ali presented a Tk 7,97,000 crore proposal for FY25 to the nation in Parliament on Thursday, intending to build a prosperous, developed and smart Bangladesh. To meet the expenditure, he has to borrow Tk 2,56,000 crore from local and international lenders.
The budget speech and relevant documents indicate that the minister prepared the budget in line with the International Monetary Fund (IMF) prescription, and Mahmood wants to increase revenue if possible, whatever consumers and businesses put into hot water.
The minister, however, could have shown more concern for the middle and lower-middle-income people and business leaders, as Poet Gajanan Mishra said in his Economic Crisis poem, “Think nothing about this economic crisis, no need to blame anybody.
“Go on working, and go on taking risks, like the farmers, and see it would set things right.”
That is why Mahmood Ali, in his budget proposal for FY25, included many items into the tax net, even consumer goods, increased tax and VAT for many products, reduced facilities for most of the goods, reduced cash incentives, and unchanged income tax limit despite high inflation.
He also plans to borrow over $7 billion from international lenders and development partners despite over $100 billion in existing foreign debt.
Interestingly, despite the government’s zero-tolerance slogan, Mahmood offered a controversial facility, allowing the whitening of undisclosed wealth on a “no questions asked” basis by paying only a 15 per cent tax, while the regular taxpayers pay up to 30 per cent.
For the first time in a decade, however, the size of the proposed budget is only 4 per cent higher than the preceding FY24 budget. Usually, such size is 13 per cent – 14 per cent larger.
It is clear that Mahmood, a former foreign minister as well, wants to prove himself. In his budget speech, Mahmood is optimistic that all clouds of the country will be removed, and Bangladesh’s economy will recover soon.
During his budget speech, Mahmood said, “Bangabandhu's Bangladesh is a country of immense potential. With the aim of building a smart, prosperous, and happy Bangladesh by 2041, we are moving forward without any respite under the leadership of Prime Minister Sheikh Hasina.
“Considering the economic problems and opportunities, the policy strategies for building smart Bangladesh have been detailed in the Medium-Term Macroeconomic Policy Statement. This policy statement has been presented alongside the budget speech.”
The experts however find a lack of proper guidelines in the budget proposal, and they are hesitant to keep faith in the minister.
Critics, businesses, and consumers say the proposed budget did not meet their expectations. Instead it increased costs of doing business and essential expenditures.
They also say that the 53rd budget proposal of Bangladesh’s 18th finance minister is actually prescribed by the International Monetary Fund (IMF).
Commenting on the matter, former lead economist of World Bank Dhaka Office Zahid Hussain said, “The proposed budget could be compared to a dream, and it could not defy as pressure.
“To implement the budget, the government will have to borrow a big amount from banks, which will severely impact private sector investments. The finance minister also did not take any initiative to reduce capacity charge in the electricity sector.”
This budget may facilitate dishonesty for a honest setting,” he said.
In his proposed budget, Mahmood reduced almost all facilities for industries, cut subsidies, and focused on increasing revenue, although he followed his previous two finance ministers AHM Mustafa Kamal and Abul Maal Abdul Muhith to continue funding ambitious mega projects.
Thanks to these measures, business costs will go up, and goods prices will go up further, which is likely to make lower and lower-middle-income people's livelihood more difficult.
But Mahmood is keeping the tax-free income limit threshold unchanged, though he is expecting that the inflation will be reduced to 6.5 per cent, which was 9.7 per cent in May.
Not only that, but Mahmood also aimed to achieve 7.5 per cent Gross Domestic Product (GDP) growth in FY24, while the Bangladesh Bureau of Statistics (BBS) estimated FY24 growth likely to be 5.82 per cent due to the ongoing economic headwinds.
No shortage of crises
Persistent high inflation has been testing the lower and lower-middle-income consumer’s limit of living hand-to-mouth, and the rate has been hovering at 9.5 per cent – 10 per cent for a long time.
Bangladesh has just $18.72 billion forex reserves as per the BPM6 method, and its net reserves are hovering below $14 billion. The country witnessed five single months of negative export earnings growth year-on-year out of 11 months of this FY24.
Importers failed to open letters of credit (LCs) smoothly due to the USD shortage, and as of December last year, foreign debt exceeded $100 billion.
Officially the USD exchange rate exceeds Tk 117, but in the informal market it goes to Tk 124. Besides, lending rates have gone up 14 per cent, and the government is also facing a liquidity shortage due to less revenue collection than the target.
In order to stabilise the macro economy, the government has sought $4.7 billion from the International Monetary Fund (IMF) to improve forex reserve stock, and in response, the international lender is playing the role of saviour with a bunch of prescriptions.
Many prescriptions have already been implemented, such as floating market-based lending rates, crawling peg for exchange rates, reduced export development fund size, and cash incentive percentage and area.
The rest are visible in the FY25 budget proposal.
Earnings goal
Mahmood plans to earn Tk 5,45,400 crore in revenue in FY25 to meet his demand, and the National Board of Revenue (NBR) will be responsible for generating almost the full amount of revenue.
The NBR will directly generate Tk 4,95,000 crore, Tk 15,000 crore will be generated from non-NBR sources, Tk 46,000 crore from non-tax sources, and foreign grants have been fixed at Tk 4,400 crore for the FY25 proposed budget.
On the other hand, of this total budget size, the deficit amount is Tk 2,56,000 crore, while the foreign borrowing target is Tk 90,700 crore, and the domestic borrowing target is Tk 1,60,900.
The government plans to borrow Tk 1,37,500 crore from the local bank despite liquidity shortages.
Expenses, aim and GDP
Among the nearly Tk 8 lakh crore budget proposal for FY25, Mahmood aims to spend Tk 5,06,971 crore on operational purposes, and Tk 1,13,500 crore to pay debt interest.
Additionally, interest on foreign debt is projected to be Tk 20,500 crore, up from Tk 12,376 crore in FY24.
On the other hand, he proposed to allocate Tk 2,81,453 crore for development programmes. Of this figure, Tk 2,65,000 crore will be allocated to the Annual Development Program (ADP). Outside the ADP, the allocation for special projects in FY25 will be Tk 7,627 crore.
The finance minister had estimated Tk 55,97,414 crore for FY25 as gross domestic product (GDP), with a growth rate fixed at 6.75 per cent. In FY24, the GDP target was set at Tk 50,06,782 crore with a growth rate of 7.5 per cent, but it was later revised to 6.5 per cent.
Focusing on revenue generation
The key challenge of the government is to increase revenue to meet expenditures, and Mahmood thinks the same as well.
In his budget proposal, the minister proposed no changes to the tax-free income thresholds of individual taxpayers, firms and Hindu undivided families. However, he proposed to increase the existing maximum tax rate from 25 per cent to 30 per cent for individuals with tax slab adjustments.
Surcharges for wealthy individuals remain unchanged in the next FY25. If the net asset value exceeds Tk 4 crore, the surcharge is 10 per cent and if the net asset value exceeds the maximum limit of Tk 50 crore, the surcharge amount is 35 per cent.
The proposed budget ends individual investors’ exemption from paying tax on capital gains exceeding Tk 50 lakh on listed stocks and mutual funds in line with the IMF’s prescriptions from FY25.
The current exemption may end in case of any capital gain exceeding Tk 50 lakh, received by a natural individual taxpayer from transfer of shares or units of a listed company or fund.
Mahmood proposed to conditionally reduce the tax rate from 27.5 per cent to 25 per cent for companies that are not publicly traded, and the one-person company tax rate reduced from 22.5 per cent to 20 per cent in case of being compliant.
In such cases, all types of income, receipts of any amount, all types of expenses, investments above Tk 5 lakh in each single transaction, and more than Tk 36 lakh in total per year must go through bank transfers.
The proposed budget to conditionally make the tax rate from 22.5 per cent to 20 per cent for listed companies if shares exceeding a certain amount of paid-up capital are transferred through an Initial Public Offering (IPO), and proposed to increase the tax rate for cooperative societies from 15 per cent to 20 per cent.
Mahmood said, “Revenue income should be increased. On the other hand, tax policy support should be provided and continued for the purpose of protecting the domestic industry, helping diversification of export products, increasing the competitive ability of the domestic industry and implementing the Made in Bangladesh slogan.”
The minister further said, “Agriculture is our priority sector. It is proposed to keep the existing duty rates unchanged on the import of the main inputs of the agricultural sector, especially fertilizers, seeds, pesticides, and on the staple food items and to keep the duty rates on the import of other daily items unchanged.”
Duty for industry raw materials, EZs
In the proposed budget, Mahmood aims to impose duty on industries' raw materials, which are now enjoying duty-free facilities. End of the day, the new duty will increase the cost of production, and consumers will have to pay this.
Besides, the minister also imposed a 1 per cent duty on investment in economic zones’ and hi-tech parks.
From FY25, only the investments in government Hi-Tech Parks may get tax break facility, and the same provision may be applicable in the case of Economic Zones.
The NBR then offered a 10-year tax holiday for investors and a 12-year tax holiday for the developers of economic zones and hi-tech parks, aiming to encourage investments and promote more youth employment.
Exports’ facilities, protection will be cut
As per the IMF direction, the government has been reducing cash incentives and rates for the export sector, while also cutting export development fund size. Besides, the government increased source tax from 0.5 per cent to 1 per cent since FY22.
Considering the ongoing global economic situation, business leaders urged the government for a 0.5 per cent source tax and continuation of cash incentives.
The minister, however, said in his budget speech, “Subsequent to the [LDC] graduation, the rules and regulations related to international trade will be applicable to Bangladesh as they are applicable to the developed and developing countries.
“Preferential tariff and quota-free access to the market in different countries that are being enjoyed by our exporters currently will be abolished. Cash incentives that are currently given for exporting goods have to be withdrawn gradually.”
The finance minister said the government will decrease import duty periodically. As a result, producers who are getting extra benefits for exporting goods will face open competition.
“To survive in the changed realities, our local industries must innovate new strategies and skills,” he added.
The minister, however, set a 1 per cent import duty for polyester (synthetic) staple fiber (psf) and pet chips (textile grade) products, known as a widely used material for the textiles industry, commonly known as non-cotton as per industrialists' demand.
Giving his immediate reaction on the proposed budget for FY25, a Bangladesh Garment Manufacturers and Exporters Association (BGMEA) lead said on condition of anonymity, “We expected cash incentive for non-cotton, continuation of all facilities till LDC graduation, and sought 0.5 per cent source tax.
“But in the budget, our expectations were not met. How will industries survive?”
