Moody’s, a global rating agency, said Bangladesh’s budget for the next fiscal year might face greater challenges than projected as new revenue measures were limited.
In its latest outlook on Bangladesh issued on Saturday, it said the budget is set against a backdrop of political strife and slowing economic growth.
“Given that this is the government’s last budget before parliamentary elections scheduled for the end of this year, new revenue measures were limited.”
However, it added, headline deficit numbers have been based on an optimistic GDP growth outlook, thus posing a risk to the continued meeting of fiscal projections under the International Monetary Fund (IMF) support program, which has been successful so far.
“Therefore, greater revenue mobilisation or even greater expenditure restraint will likely be needed if GDP growth is not as strong as that projected by the government.”
Following a deficit of 3.7% of GDP in FY12 (including grants), the deficit in FY2013 widened to 4.2% of GDP, slightly narrower than the target, which was set at 4.4% of GDP.
While revenue projections were met, expenditures undershot targets owing to lower development spending; a common characteristic of Bangladesh’s public finances, but the Ministry of Finance explains that cutbacks this year were the result of a reduction in project aid.
“We think targets may be difficult to achieve, given that they are based on optimistic GDP growth projections,” said Moody’s. “The government’s estimates appear ambitious, given that weakening domestic demand and political tensions and strikes could take a toll on the country’s economic activity.”
Moreover, industrial accidents, such as the building collapse at a garments factory in April which tragically claimed more than 1000 lives, could dampen demand from large Western apparel purchasers, which might adversely affect export performance, as well as indirectly affect economic growth and fiscal performance.
The FY2014 budget provides little clue towards the outlook on some key fiscal issues. Although the targets point to fiscal consolidation, the pace is much slower than that projected by the IMF as part of its framework for Bangladesh’s ECF program.
Bangladesh has a structurally low revenue/GDP ratio – at 12.8% it is amongst the lowest in our rating universe – but revenue-raising measures proposed in the budget are sparse.
Instead, the government has taken a number of milestone initiatives outside of, and prior to, the budget; these include amendments to the VAT law, as well as steps to improve the taxpayer identification system to strengthen compliance.
Budgetary measures centre around raising income tax exemptions, tax rebates on individual investments, a reduction in customs and supplementary duties and a rationalisation of exemptions on VAT rates. The budget also proposes an ‘amnesty’ scheme for undisclosed income through investments in real estate.
However, the budget does not fully address the containment of total subsidy expenditure, which is a reform area central to the IMF program. Although headline subsidies and transfers are slated to rise only marginally in FY2014, and in line with IMF targets, the budget does not voice how subsidy-related losses are to be settled.