Emphasising budget deficit issue

Abudget deficit occurs when expenses exceed revenue, and it can indicate the financial health of a country.  Tax to GDP ratio in Bangladesh is not impressive. As a matter of fact, in the South Asia region, Bangladesh’s position is substandard concerning the tax to GDP ratio. According to the Bangladesh Bureau of Statistics (BBS), Taka 2,207 billion came as tax revenue in FY 2020 against the target of Tk 3,401 billion set earlier. The government recently announced revenue earnings of Tk 4,33,000 crore for FY 2022-23, which accounts for 9.8 per cent of the Gross Domestic Product ( GDP). The target is 11 per cent higher than FY 2021-22. There is no alternative to increasing revenue earnings to lessen the budget deficit. The issue of budget deficit drew attention to the debt to GDP ratio of the country.

The government aims to see a 5.5 per cent budget deficit for FY 2022-23 which is now above 6.0 per cent. With a set target of achieving 9.8 per cent revenue-GDP ratio, the government plans to place the budget for the next fiscal year in the parliament. With an expected $510 billion GDP size and ambitious growth target of 7.5 per cent, the national budget for FY23 will be announced soon. The growth projection was unveiled at a recently held meeting of the Fiscal Coordination Council. The forecast for inflation rate was made 5.5 percent for FY 23 in the meeting which jumped to 6.17 per cent in February of the running fiscal year.

Though Bangladesh has gained immense attention from worldwide because of its rising economy, it has been experiencing a shortfall in the national budget since emerging as an independent country. The country’s national budget deficit now stands above 6.0 per cent which is the highest. The state has to borrow from domestic and external sources to cover the budget deficit, resulting in an increasing debt to GDP ratio. Bangladesh has been financing most of its fiscal deficit by borrowing domestically for the last couple of decades. Besides, deficit financing was heavily dependent on international borrowings also. There are many reasons behind the phenomenon of budget deficit. Poor fiscal management in Bangladesh is one of the main reasons behind the increasing budget deficit. To keep the budget deficit to a sustainable level, there is a clear guideline in the Public Money and Budget Management Act 2009. In line with the concerned Act, the government has to be alert in keeping the budget deficit within 5.0 per cent of GDP, which is considered a risk-free level.

The budget deficit (excluding grants) in FY 2018-19 was 5.4 per cent, 5.5 per cent in FY 2019-20, 6.0 per cent in FY 2020-21, and 6.2 per cent in the current FY 2021-22. Though the government has planned to keep the budget deficit for FY 2022-23 within 5.5 per cent, the success of the plan heavily depends on fiscal management. The government falls in pressure to address budget deficit. The government budget deficit is mainly financed by two major sources- domestic sources and external sources. Domestic sources include borrowing from banking and non-bank systems, particularly from saving certificates. Foreign loans and grants are external sources. The Bangladesh government takes loans from donor agencies as budgetary support when needed. It has been learned that half a dozen donor agencies came forward with fiscal support during the Covid-19 pandemic. Usually, the debt from donor agencies is taken in three categories. The categories are short-term (due repayment date within one year or less time), mid-term (repayment due date varies between 1-10 years), and long-term (repayment due date is more than 10 years). As a result of borrowing from external sources, the state has to repay the loans indefinitely. According to news report, the government received $1.48 billion from donors as budget support for the corona-induced economic situation in FY 2020-21. The report also said that of the $ 1.48 million, the IMF has disbursed $ 732 million, ADB $500 million, and the WB $ 250 million. Besides, multilateral lending agencies committed nearly $3.5 billion in budgetary support for the financial year 2020-2021. Highly placed officials of the finance ministry, having knowledge about the issue, said that the World Bank has been providing budgetary support of $ 250 million yearly since 2018. The International Monetary Fund (IMF) routinely supports Balance of Payment (BoP).

To keep the country’s economy afloat in the face of coronavirus, the government was obliged to announce fiscal and stimulus packages which were above 4.0 per cent of the GDP. To ensure the revival of the pandemic-hit economy, the government was also looking forward to external loans and grants. The multilateral agencies came forward to keep maintaining economic growth trends during the pandemic period with loan packages.

According to a news report, Bangladesh already placed a proposal to seek $500 million more in budgetary support from the World Bank at the IMF-WB spring meeting in Washington. Recently, the World Bank approved about $ 250 million as budgetary support for Bangladesh from its Development Policy Credit (DPC) for the coronavirus resilience and restoration programme, the report said. Besides the World Bank, the extended budgetary support coupled with loans and grants comes from other multilateral lending institutions. Bangladesh’s debt to GDP ratio has been rising for the last couple of years. The ongoing mega projects and deficit budget are critical reasons for rising debt to GDP ratio. According to International Debt Statistics of the World Bank, in 2012, total external debt stocks were $ 28.28 billion. In 2021, total external debt stocks stood at $ 78.04 billion, showing that the country’s debt is rising for development activities and other purposes. It is important to note that in 2020, holding the 3rd position in South Asia, Bangladesh’s foreign exchange reserve compared to external debt stocks was 62.5 per cent and 140.1 per cent in Nepal (first), 97.3 per cent in India (second) an article said. 

A prudential fiscal policy is to be drafted to reduce the budget deficit. Fiscal policy is the strategic guideline of the government’s overall revenue and expenditure management. Bangladesh has already been branded as the economy with the lowest tax to GDP ratio in the world. The government earnings come from direct tax and indirect tax, where earnings from indirect tax are larger. In FY 2016-17 budget, the government took steps to increase direct taxes. The measures are (1) Fiscal adequacy (2) Equity and fairness (3) Facilitating business and growth (4) Social responsibility (5) Increasing tax compliance and combating tax evasion (6) Adopting international best practices (7) Simplification of tax system and increasing the effectiveness of tax laws. Besides, the indirect tax system measures were undertaken during the fiscal year. Despite taking steps earlier, notable improvement indirect tax system is rarely observed. There are many plans in 8FYP regarding the establishment of a tax-based economy. According to Second Perspective Plan (2021-2041),  the bulk of the revenue is generated by the indirect tax system, mostly value-added tax. The contribution of direct taxes to revenue is about 30 per cent. The government set a target to raise direct taxes to the total tax revenue to over 50 per cent by 2041. 8FYP  hopes that fiscal deficit ( including grants) will be about  5.52 percent in FY 23 and 5.0 percent in FY 24 and FY 25.

When Bangladesh graduates to a developing country in 2026, the government faces many challenges. Then, lending agencies will impose high interest rates on borrowings. Bangladesh may fall in great trouble in respect of addressing budget deficit and repayment of loans taken from external sources for imposing exorbitant interest rates. There needs to be minimal dependency on external sources for addressing the budget deficit. Ahead of experiencing LDC graduation challenges, the government has to move for polishing fiscal management. There are no alternative avenues to increase revenue earnings for keeping the budget deficit within the comfort zone. 

The writer is an economic affairs analyst and a PhD fellow. He can be contacted at : [email protected].