Bangladesh’s 2014 Budget May Face Greater Challenges Than Projected, Says Moody's

The projected fiscal targets of Bangladesh's proposed 2013-14 budget may be difficult to attain, given that it is based on optimistic GDP growth projection, according to Moody's Investors Service.

 

"We think targets may be difficult to achieve, given that they are based on optimistic GDP growth projections: FY2014 growth is projected at 7.2% versus 6% in FY2013," says Moody's in a report. "Our projection is 6.1%, and the IMF’s is 5.5%. 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."

 

The report said that greater revenue mobilization or even greater expenditure restraint will likely be needed if GDP growth is not as strong as that projected by the government.

 

The report also notes that industrial accidents, such as the building collapse at a garments factory in April which tragically claimed more than 1,000 lives, could dampen demand from large Western apparel purchasers, thereby adversely affecting export performance, as well as indirectly affecting economic growth and fiscal performance, the report said.

 

FY2013 deficit is in line with targets
Following a deficit of 3.7% of GDP in FY2012 (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.

 

For FY2014, the government has targeted a deficit of 4.0% of GDP (including grants). This target is based on revenue growth slowing to 19.9% year-on-year, versus an average increase of 22.5% over the last three years. The increase is primarily expected to come from tax revenues, specifically income tax collections and value-added tax (VAT). Meanwhile, expenditure growth is budgeted to moderate to just 17.5% year-on-year, versus an average of 23.1% over the last three years.

 

According to Moody's, fiscal reform initiatives are critical to the success of the government’s $956million, three-year Extended Credit Facility (ECF) program with the IMF. The IMF’s recently-completed second review as well as progress on several key reforms demonstrate that the government is progressing well so far. But the FY2014 budget provides little clue towards the outlook on some key fiscal issues.

 

Although the FY2014 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. Inclusive of grants, the IMF estimated the country’s FY2014 deficit at 3.7% of GDP. Excluding grants, the deficit was projected at 4.3% of GDP.

 

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 center 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.

 

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