Bangladesh Cuts Budget Deficit Target to Lowest Since 2015

(Bloomberg) -- Bangladesh plans to cut the budget deficit to the lowest in more than a decade as Prime Minister Sheikh Hasina’s government slows spending and raises taxes amid a steady erosion of foreign reserves.

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The government plans to lower the deficit to 4.6% in the new fiscal year starting in July — the lowest since 2015, from a 5.2% target currently, according to Finance Minister Abul Hassan Mahmood Ali.

To achieve this, Bangladesh wants to raise income taxes for the wealthiest, increase a value-added tax for some goods and services and rein in government spending to the slowest pace in 15 years.

“We will follow fiscal consolidation as well as the reduction of the budget deficit, and will continue budget belt-tightening measures, even if on a limited scale in the budget for the upcoming fiscal year,” Ali said in his presentation to parliament on Thursday.

These measures also pay heed to the International Monetary Fund’s advice to Bangladesh to shore up revenues as foreign reserves fell to $18.7 billion, covering less than three months of imports. Fitch Ratings last month cut the country’s credit score deeper into junk territory, citing a continued weakening of these external buffers.

Bangladesh has proposed increasing the government revenue target by 8% to 5.41 trillion taka ($46 billion) for the new fiscal year, equivalent to 9.5% of GDP. The nation also plans to raise spending by 4.6% year on year to 7.97 trillion taka — the slowest pace since Hasina’s Awami League returned to power in 2009.

Increased external vulnerability due to a decline in forex reserves and higher fiscal deficits could lead to a further negative action, Fitch has said. Government revenues have underperformed budget targets due to tax exemptions, weak tax collection and the challenges in carrying out reforms, the rating company said.

Bangladesh has one of the lowest tax-to-GDP ratios in the world at 8.2%. Ali said the government plans to increase the maximum rate to 30% from 25% for individual tax payers in order to “distribute the burden equitably so that higher-income individuals pay a larger share.”

The South Asian country will shift from a retrospective tax system for companies and individuals to one that lets them know beforehand how much they have to pay for the following year. The “prospective tax system” will help taxpayers do proper planning and help boost tax compliance, Ali said.

Bangladesh raised the duty for mobile phone services and increased the value-added tax, or VAT, on SIM cards, capitalizing on one of the fastest-growing mobile phone markets in the world. The government doubled the VAT for locally-produced cigarettes to 15% — the maximum rate in the country.

Bangladesh’s policy actions since 2022 have been insufficient to stem the fall in foreign exchange reserves or resolve the tight supply of dollars, according to Fitch.

Earlier this month, Bangladesh’s central bank introduced a crawling peg to keep the taka stable. The nation is looking to allow the currency to float freely for the first time in the country’s history, a key demand from the International Monetary Fund to keep its $4.7 billion loan program on track.

Ali also addressed growing concerns around inflation, which annually rose 9.89% in May — the fastest pace in seven months.

“Inflation is one of our main challenges at present,” Ali said. “In this context, to achieve macroeconomic objectives, supportive fiscal policies, such as reducing budget expenditure, discouraging less important expenditures and various austerity measures have been adopted.”

The measures suggest Hasina’s government is struggling to rein in price gains, particularly for food staples. She had pledged to control consumer price increases after she won a fourth straight term earlier this year.

The central bank in May made interest rates market-based to curb inflationary pressure. While analysts have commended the interest rate change from a treasury bill-linked formula as a “forward looking policy,” they say more needs to be done.

“The present crisis is due to poor economic management,” said Sadiq Ahmed, vice-chairman of Dhaka-based Policy Research Institute. “The challenge for Bangladesh is to restore macroeconomic stability with proper attention to the consistency of policies.”

(Updates throughout)

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