The national budget has incorporated a financial risk statement for the first time, aimed at curbing mismanagement within the nation's macroeconomic sphere.
Prepared by the Finance Division using technical assistance and toolkits from the International Monetary Fund (IMF), this statement analyzes the risks related to the macroeconomy, state-owned enterprises and climate change.
Finance Minister Abul Hassan Mahmood Ali presented the proposed budget for the 2024-2025 fiscal year, amounting to Tk7,97,000 crore in parliament on Thursday.
In this proposed budget, the Medium-Term Macroeconomic Policy Statement 2024-25 to 2026-27 underscores the significance of the risk statement. It emphasizes that risk analysis is pivotal in addressing potential shocks in the financial management of any government.
The statement delineates four categories of risks.
Firstly, it delves into macroeconomic risks, encompassing aspects such as economic growth, inflation, foreign exchange, interest rates, government expenditure, budget deficits and public debt.
Subsequently, institutional risks are examined, focusing on deviations in financial projections and forecasts.
Thirdly, contingent and accrued liabilities are explored, involving the liabilities of state-owned enterprises and state guarantees.
Lastly, climate change risks are addressed, covering long-term climate risks and short-term natural hazards.
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Expert opinion
Regarding the inclusion of such a statement in the budget, Dr Muhammad Shahadat Hossain Siddiquee, an economics professor at Dhaka University, said prior to the Covid-19 pandemic, the government was unaware of the macroeconomic mismanagement in Bangladesh's economy due to the stability of foreign exchange reserves.
He emphasized that when a country's forex reserves became unstable, it confronted a profound crisis, forcing politicians to recognize the reality of the risk.
"The same scenario unfolded in Sri Lanka. There were no significant changes in the country; it was the depletion of their forex reserves that led the nation into a crisis. However, they are now beginning to bounce back. Given the current state of Bangladesh's reserves, it is natural for such discussions to emerge within political circles," remarked the economist.
"Risks are always taken into account but seldom formally documented. When a country’s macroeconomic instability reaches a critical point—not only in Bangladesh but in any developing country grappling with such challenges—the focus on fiscal management brings these risks into the budget."
“The consideration of these risks primarily aims to address the mismanagement in the macroeconomy. The government has documented this in a structured format, and that is essentially all there is to it,” the expert added.
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According to experts, the Ministry of Finance made the written risk statement on advice from the IMF in light of the dollar crisis in the country. The purpose of this written statement is also to “satisfy” the demands of the global lender.
Dr Ziaul Abedin, additional secretary (macroeconomic subsection) of the Ministry of Finance, said an economic risk analysis had been conducted for the fiscal year 2023-24 too. However, he mentioned that formal financial analysis had started for the first time this year.
"When we conducted the risk analysis last time, there was no formal tool at our disposal. The formal tool for risk analysis has been developed by the IMF, which we have used [this time]. It is worth noting that the IMF did not mandate us to do this; it was our decision. They also provided us with training to ensure its correct use."
According to some experts, the financial risk statement's positive aspect lies in its potential to mitigate budget fluctuations. In cases of insufficient revenue collection, it could curtail the need for borrowing. However, the downside is that the majority of its impact would directly burden the general public with meeting government liabilities. Additionally, the government may decrease subsidies across various sectors in a non-transparent manner.
The financial risk statement includes proposals for risk mitigation policies derived from analysis. It makes eight proposals, including effectively coordinating budget allocation in economic planning to accommodate potential increases in government spending on loan interest, aimed at meeting repayment targets. Additionally, it recommends adopting suitable budget forecasting methods to enhance efficiency in budget allocation and minimize significant revisions in the budget.
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To mitigate the contingent and accrued liabilities of the government and manage a robust national guarantee system, a proposal has been made in the policy framework to update the Sovereign Guarantee Guideline, with the Ministry of Finance recommending the inclusion of certain aspects in it.
The policy framework also mentions the enhancement of productivity in all state-owned enterprises through prudent asset management and continued government encouragement to fund capital markets for enterprises capable of making SOEs more efficient in their management and increasing their capital.
Besides, the government is considering adopting a “fiscal buffer” strategy to mitigate the risk of shocks caused by climate change and disasters and taking out insurance policies for some disaster-prone sectors, as mentioned in the policy.
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Criticism
Senior BNP leader and former commerce minister Amir Khasru Mahmud Chowdhury, describing the economy as "broken," questioned the government's need to address new risks when the country's economy had already collapsed.
He said discussing risks would have been appropriate if there was a possibility of them materializing in the future, but he emphasized that the country was already in dire straits.
Expressing scepticism about the impact of the risk statement, the senior BNP leader said: “No sector has been spared. From forex reserves to the banking sector, from the stock market to revenue collection – everything has been plundered by them.”
Notably, Bangladesh has secured a $4.7 billion loan from the IMF. This loan will be disbursed in seven installments over three years, ending in 2026. The country received $476.3 million on February 2 and $682 million on December 13 last year. The IMF approved the third installment, amounting to $1.15 billion, in May.
