Attaining inflation target will be hard

The government has set a higher fiscal deficit and thus a loftier bank borrowing goal to finance the shortfall in the proposed budget but the targets are inconsistent with the aim of bringing down the average inflation to 6 per cent.

And it is likely to be hard to reach the target given the persistently higher inflation rates, according to the Policy Research Institute (PRI), and the Metropolitan Chamber of Commerce and Industry (MCCI) yesterday.

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At an event jointly organised by the MCCI and the PRI, Sadiq Ahmed, vice-chairman at the PRI, said the outgoing fiscal year of 2022-23 budget is ending up with a substantially higher rate of inflation than budgeted, a significantly lower economic growth, and continued pressure on the external accounts.

And in some way, he said, the FY23 budget contributed to inflationary and balance of payments pressure by running a high fiscal deficit, which surged to 5.1 per cent in FY23 from 3.7 per cent in 2018-19, and resorting to a substantial reliance on bank financing of fiscal deficit.

The experience with the implementation of FY23 budget provides important inputs for instituting corrective measures for the FY24 budget, says Sadiq Ahmed, vice-chairman of PRI

"The experience with the implementation of the FY23 provides important inputs for instituting corrective measures for the FY24 budget. To what extent this is the case? It does not appear that these lessons have been reflected in the FY24 budget."

Once again, the budget has set an ambitious GDP growth target and there are no efforts to reduce demand through lower fiscal deficit or slowdown in the growth of domestic credit by reducing the bank financing of the budget deficit.

"Like in FY23, the proposed budget is focused on boosting growth and not macroeconomic stability," said Ahmed while making the keynote presentation at the post-budget discussion at the MCCI office in Dhaka.

According to Ahmed, Bangladesh can follow countries such as India, Thailand, the US and Vietnam as well as the nations in the European Union to find out how they secured to manage the inflationary pressure by raising the bank interest rate.

"The demand for goods will decrease if the interest rate goes up."

The central bank has maintained a 9 per cent interest rate cap since April 2020, thus preventing itself from using one of the potent tools to rein in inflation, which averaged 8.64 per cent in April.

Ahmed, a former senior official of the World Bank, is opposed to the government's move to borrow Tk 1.32 lakh crore from the banking system.

"If the government takes away such a big amount of money from the banking system, the private sector will face the crunch of money inflow."

He suggested the government reduce the budget deficit to 4 per cent to 4.5 per cent from 5 per cent so that the banking sector does not suffer.

Zaidi Sattar, chairman of the PRI, said inflationary pressure increased also because of the depreciation of the local currency by 25 per cent against the US greenback over the last one year.

"As a result, the import tariff and prices went up at the import stage. This stoked the inflationary pressure."

The cut in the rates of regulatory and customs duties as well as tariff adjustments may help reduce the inflationary pressure, he added.

Planning Minister MA Mannan said the economy is weighed down by the fallout of Covid-19 and the Russia-Ukraine war.

"But the political pressure is higher than the pressure stemming from the pandemic and the war."

He thinks the proposed budget will benefit the people in the rural areas greatly as the allowance for social safety nets has increased.

According to the minister, the proposed budget tried to address import substitution to help local industries thrive further.

If the supply side of commodities is not maintained properly and markets are not monitored, controlling inflation might not be possible, he warned.

"Increasing local production and allowing the import of selective goods may aid in taming higher inflation."

He said the proposal for introducing Tk 2,000 as a minimum income tax might be reviewed.

The budget has proposed the minimum tax for individuals who are required to submit income tax returns to avail various government services even if they don't have taxable incomes.

Kamran T Rahman, senior vice-president of the MCCI, said automation of the tax system and the reduction of system loss in tax collection are needed as part of policy reforms.

"There should also be an interim evaluation of the budget after three months."

The budget deficit has been set at Tk 2.62 lakh crore for FY24, which is 5.2 per cent of the GDP.

"We think this deficit is likely to increase because of the proposed tax conditions by the International Monetary Fund," Rahman said.

"We think the inflation target may be hard to reach."

Adeeb H Khan, a director of the MCCI, said the new Income Tax law, 2023 is expected to be presented in parliament and requested the government to allow sufficient time to stakeholders so that they can examine it properly and give feedback.