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Interest allocation to go up 27%, incentives and subsidies 35%

Hasan Arif
28 Mar 2023 00:00:00 | Update: 28 Mar 2023 00:08:05
Interest allocation to go up 27%, incentives and subsidies 35%

Four national and international economic shocks will drive Bangladesh’s allocation for interest payments up by 27 per cent in FY24.

At the same time, the government is planning to increase the incentives and subsidies by 35 per cent in the coming fiscal year, according to sources at the Finance Division.

The information is expected to be disclosed at the next meeting of the finance ministry’s coordination council on budget management and finance and currency exchange rate scheduled for April 5.

According to the working paper of the meeting, Finance Minister AHM Mustafa Kamal will preside over. The meeting is expected to be attended by the secretaries of each ministry and department.

The working paper outlines four monetary policy shocks feared to hit Bangladesh in the next fiscal year – the recent devaluation of the taka against the US dollar, the rise in the LIBOR rate, the rise in interest rates on US treasuries, and the increase in US treasury bonds.

Due to these, the total amount of interest payments in the upcoming budget is estimated to increase by 27 per cent or Tk 21,701.25 crore to Tk 1,02,076.25 crore. In the current budget, the amount of foreign and domestic interest is Tk 80,375 crore.

“The total interest payments will increase due to foreign shocks stemming from the Ukraine-Russia war that has been going on for more than a year. There is nothing we can do about it,” a senior official of the Finance Division told The Business Post on condition of anonymity. Speaking to The Business Post in this regard, Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, said international lending institutions have not increased the interest rate of their current loans as these interests are fixed through contracts.

“However, due to the devaluation of taka, there will be additional expenditure in this sector. So, the amount of interest payment will definitely increase.”

Meanwhile, the government is planning to increase the size of incentives and subsidies by 35 per cent in the next financial year despite the strict conditions set by the International Monetary Fund (IMF) for reaching zero subsidies in the next few years under a $4.7 billion loan programme.

If the rate is approved, the total allocation for incentives and subsidies in FY24 will increase by Tk 28,960.75 crore to Tk 1,11,705.75 crore from Tk 82,745 crore in the current financial year.

“Due to the conditions of the IMF, we had to increase the prices of fuel oil, gas, and electricity. From next year, fuel prices in the country should be determined by adjusting with the international market,” said a senior Finance Division official.

“According to the IMF conditions, the budget subsidy will need to become zero in 2026. But the subsidy in agriculture will continue in the future because its contribution to the country’s economy is much higher than other sectors. Our agriculture has saved the country during the Covid-19 pandemic,” the official added.

According to economist Zahid, there will be no disruption to the government’s agreement with the IMF if the government provides subsidies in other sectors, except for energy.

He said, “The government has increased the prices of fuel as per the IMF formula. Now fuel prices should be adjusted for two to three months following the formula.”

According to the working paper, the budget allocation for the next fiscal year will increase by 13.5 per cent compared to the budget size of FY23. Accordingly, the size of the next budget stands at Tk 7,69,591.29 crore, up by Tk 91,537.29 crore from the budget for FY23.

Besides, the development budget is also expected to increase by 6 per cent to Tk 2,60,829 crore in FY24. The development allocation in the current fiscal year is Tk 2,46,66 crore.

Sources in the Finance Division said the national budget for the upcoming financial year is going to focus on reducing subsidies in the energy sector while also increasing domestic production to control inflation. There will also be a focus on expanding social security coverage and supply chain management.

In the first six months of the current fiscal year, the demand for subsidies doubled compared to the original allocation in the budget due to rising global commodity prices.