Challenges of the Budget 2023-2024
The annual National Budget arguably is the most prominent reflection of the government’s perception of the state of the economy and the main short-to-medium-term economic challenges it is facing. The Budget is then seen as an indication of the way the government seeks to respond to those challenges.
From my perspective, I see the FY2024 Budget facing 4 key challenges: a) Restoring Macroeconomic Stability; b) the Challenge of Revenue Mobilisation; c) Prudent Financing of the Budget Deficit; d) Protecting Social Sector Spending.
A. Restoring Macroeconomic Stability
Few would debate the contention that restoring macroeconomic stability is the foremost and immediate policy challenge facing Bangladesh today. This challenge emerged last fiscal year at around the time when the FY2023 Budget was adopted. The record shows that the FY2023 Budget failed to anticipate the depth of the macroeconomic crisis and ended up without securing any sustained progress with macroeconomic stability.
Inflationary pressures that showed its ugly head since April 2023 spiked at 9.5% in August 2022 and has remained roughly unchanged at 9.24% in May 2023. Blaming this sustained inflationary spike on global inflation and the Ukraine War is politically convenient but not entirely based on facts. While the origins of the domestic inflationary pressures lay in those external sources, they have been sustained for so long owing to the absence of adequate demand management policies.
Evidence shows that countries that adopted demand reduction policies through hikes in interest rates have all succeeded in reducing inflation substantially. For example, inflation decelerated by 65% in Thailand, falling from 7.7% in June 2022 to 2.7% in April 2023. In USA inflation plunged to 4.9% in April 2023, down 46% from its peak of 9.1% in June 2022. In EU, inflation came down to 7% in April 2023, declining by 34% from its peak of 10.6% in October 2022. In India inflation fell by 40% between April 2022 (7.8%) and April 2023 (4.7%). In Vietnam inflation rate spike has been successfully curbed and contained in the 2−3% range.
The pressure on the balance of payments was lowered substantially by reducing imports through higher tariffs and a range of import control measures. But as imports fell and the current account balance improved, the flip side was a substantial slowdown in GDP growth, which is now estimated at 6% for FY2023 as compared with 7.1% in FY2022 and the Budget target of 7.5%. Global experience shows that import controls can at best be a temporary measure and not a sustainable way to manage the balance of payments.
Additionally, these measures could not prevent a substantial worsening of the capital account as foreign direct investment did not expand as projected, short-term trade credit dried up and MLT credit also slowed down. Furthermore, there is evidence of significant capital flight. The signal value of import and exchange controls was highly negative for FDI, suppliers of trade credit, and the confidence of private investors.