Grappling with Bangladesh’s budget deficits

Bangladesh’s government has experienced a slight rise in budget deficits, particularly since 2016. However, in accordance with the Public Money and Budget Management Act of 2009, the government has been successful in keeping the deficit at or below 5% of gross domestic product. Still, the actual budget deficit in fiscal year 2019-20 stood roughly at 5.5% of GDP.

To address the health crisis and economic problems brought on by the Covid-19 pandemic, which significantly burdened the national treasury as it did in all other economies around the world, the government provided 1.28 trillion taka (US$12.37 billion) as a stimulus package (4.4% of GDP).

This was mobilized through investing in health infrastructure, making loans available at reduced interest rates, funding social-security programs, and expanding monetary and fiscal policies.

Even though the government’s overall spending in 2020-21 was lower than it was before the pandemic, at 17.46% of GDP as opposed to 17.87% and 18% in 2019 and 2018, the muted value-added tax (VAT), import, custom, and supplementary duties as a result of trade mobility restrictions and a decline in consumer demand, decreased the tax earnings from the National Board of Revenue (NBR) sources by an estimated 2.73% in fiscal year 2019-20 as compared with the year before.

However, Bangladesh’s revenue mobilization in FY 2019-20 climbed by 5.53% as a result of a remarkable increase in non-tax revenue.

One primary concern for Bangladesh is that it has one of the lowest tax-to-GDP ratios in the entire region, which could jeopardize its medium-to-long-term revenue mobilization goals. This is quite concerning, even though mainstream economic theory suggests that lower taxes could increase disposable incomes and money circulation in the economy, thereby promoting economic growth.

Bangladesh has the second-lowest tax-to-GDP ratio of the seven BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) countries, at 7% in 2020. That compares, for example, with Sri Lanka’s 8.1% in the same year.

Additionally, during the past few decades, Bangladesh has faced threats of illicit money flows, particularly due to crimes related to tax evasion. The leading causes of the economy’s problems with tax collection are attributed to widespread corruption, the politicization of tax authorities, and a shortage of trained workers in the NBR.

Infrastructure development

The significant infrastructure investments made by Bangladesh are evidence that physical capital production is necessary for any economy to diversify, expand, and build long-term economic resilience. With an impressive growth rate of 6.94% in 2021, Bangladesh understands the need to remove infrastructure barriers to boost economic growth.

According to the Dhaka Chamber of Commerce and Industry, up to 2030, the government will need to invest roughly US$25 billion annually to address the country’s needs for physical infrastructure. However, allegations of public-sector corruption, lofty vanity projects, and exorbitant infrastructure costs have increased the load on government spending, significantly adding to the nation’s current macroeconomic precarity.

The amount spent on development in Bangladesh has climbed from 880.90 billion taka (4.46% of GDP) to 2,079.88 billion taka in just five years, from 2016-17 to 2020-21 (6.74% of GDP).

Despite some of the earlier advancements, Bangladesh’s transportation infrastructure is still regarded as one of the worst in the world. Since the Sheikh Hasina government took office in 2009, several connectivity projects have been launched, including the Dhaka Metro Rail, the Padma Multipurpose Bridge, and the Dhaka Elevated Expressway.

However, a large majority of these projects have been running late in terms of their deadlines. While some of these have been put on hold because of the pandemic in 2020, other factors like rising raw-material costs, administrative bottlenecks, and issues with land acquisition have significantly added to their delay, increasing government expenditure.

In addition, from 2010 to 2021, subsidies to the oil and gas industry surged sharply. Moreover, the conflict between Russia and Ukraine has pushed up prices of oil, raw materials and food. As a result, many government-funded infrastructure projects have been put on hold, increasing expenses, slowing development, and widening fiscal deficits.

While Bangladesh’s private-sector investment as a share of GDP has increased by 5 percentage points over the past 20 years, its share of total investment has decreased while the public sector’s share has increased.

The private sector has also been hampered by poor transport infrastructure, low asset returns, and high transaction costs brought on by corruption and a lack of effective scale economies.

In addition, Bangladesh’s banking industry has long been plagued by financial fraud and non-performing loans. The International Monetary Fund disputed the central bank’s estimate of the total amount of defaulted loans in 2019 and asserted that it might be more than twice the estimated value of US$11.11 billion.

Given Bangladesh’s economic vulnerabilities, frictions in resource mobilization and a sharp increase in pandemic-related costs for various welfare initiatives have led to expanded fiscal deficits and exacerbated Bangladesh’s reliance on external debt.

To address these budgetary issues in the near future, the nation must promptly focus on effective strategies for increasing and mobilizing revenue and rationalizing expenditures simultaneously.

The author acknowledges Tushar Katiyar at the National Law School of India University in Bangalore for his research assistance on this article.