Cut expenditure, adopt market based interest rates

The government should take effective measures to brave the ongoing economic challenges by cutting expenditure, and adopting market-based bank interest and USD rates.

Such moves are crucial for implementing the national budget for FY24, and for preventing skyrocketing inflation from rising further during election year, said Policy Research Institute of Bangladesh (PRI) Executive Director Dr Ahsan H Mansur on Tuesday.

Addressing a PRI-CDRM post-budget press briefing and discussion in Dhaka on Tuesday, he added, “The country is currently facing crises centring on three issues – monetary policy, revenue policy and foreign loans.

“To reduce the budget deficit, the government must reduce its expenditure, particularly in Annual Development Programmes (ADP), adopt market-based bank interest and USD rates to curb the high inflation and boost foreign exchange reserves.”

Urging the government to implement the recommendations, Mansur said, “Kill inflation, do whatever is needed.”

He pointed out, “Many countries across the globe have increased loan interest rates to curb high inflation. Interest rates are usually fixed considering the global economic situation, but the rate is fixed in Bangladesh. This is not the right decision.”

Govt borrowing record high

Dr Mansur continued, “The government borrowed a large amount of money last year from banks, which is the highest in Bangladesh’s 50 years of history. The government took a chance by keeping the interest rate low.

“The 9/6 interest rate cap now hampers our economy. Bangladesh should adopt a market-based bank interest rate.”

He added, “If the government borrows a large amount of money from the banking system, the inflow of funds to the private sector will be squeezed, and it will affect investments in the sector.

“The budget for FY24 has a different context due to economic pressure. So, prudent measures must be taken.”

Mentioning that pension and savings certificates should not be included in the social safety net, Dr Mansur said, “Current allocation in the social safety net should be increased to protect low income people as inflation has gone up by around 10 per cent in the country.

“This may go up further in the coming days. Economists have been warning about the current situation, but the government does not care. We are seeing the results today. The government did not reform the National Bureau of Revenue (NBR), and strengthen its capacity.”

The government can reduce administrative costs, otherwise, macroeconomic management will be tough, he added.

Presenting the keynote, PRI Research Director Dr Abdur Razzaque said, “The government had already borrowed more than Tk 700 billion from the Bangladesh Bank by the end of April in FY23.

“The borrowing amount will accelerate further in the final two months of FY23, taking the total government borrowing from the central bank to more than Tk 1 trillion by the end of June 2023.”

The pace of government borrowing from the central bank is likely to accelerate further in FY24 to Tk 1.3 trillion – Tk 1.4 trillion. With the consequent creation of high-powered money, the pressure on inflation is likely to accelerate, he added.

Bangladesh will need to mobilise about $10 billion in net financing from external sources for budget financing (equivalent to about Tk 1 trillion), Razzaque said.

Growth, investment target unrealistic

Addressing the event, PRI Research Director Dr Abdur Razzaque said, “The growth and investment target in the new budget for FY24 is unrealistic, because the country’s economy is under pressure.

“The government did not take proper steps to tackle the inflation. If proper policy measures are not taken, this situation might worsen.

The economist added, “Borrowing from the Bangladesh bank has increased by Tk 575.61 billion in 10 months (July-March, FY23). The government’s dependence on debt might create a credit crisis for private investment. Giving loans by printing money will worsen the inflation situation.

“Since 2015, total external debt stock has increased nearly 3 times from $37.5 billion to $96.2 billion till December 2023. Historically, it has been proved that NBR has never been able to mobilise revenue of more than 80 percent except for FY22.

He continued, “To achieve the IMF target, NBR needs to mobilise about Tk500 billion in the last month (June).

“Despite IMF’s condition to reduce subsidy allocation in different sectors, the government has increased the subsidy allocation by 14.5 per cent to Tk 840 billion for the next fiscal year. In FY22, the subsidy allocation was

Tk 420 billion, which is going to double in FY24.”

Social safety net won’t help marginalised

Around 52 per cent of the social safety net allocation will be spent on pensions and gratuity, subsidies for SMEs (small and medium enterprises), agriculture, and saving certificate interest, so it will not be of much help to the marginalised population, Dr Razzaque said.

The government has set out a 16 per cent rise in revenue for the FY24 budget, compared to FY23. However, if the PRI revenue projection is considered, the revenue growth should be 36.3 per cent to achieve the IMF target, and 43 per cent to achieve the budget target of FY24.

In the upcoming FY24, more than Tk 3 trillion in total would go into interest payments, subsidies, and salaries and allowances, he pointed out.