Bangladesh's latest budget indicates that public finances in the next fiscal year will remain weaker than in the past, even as the country's economic recovery gathers pace, says Fitch Ratings.
Doing the latest anatomy of the country's economic strengths and weaknesses, the US agency mentions that the budget, placed in the national parliament on June 09, targets a deficit of 5.5 per cent of GDP in the financial year 2022-23, up from a revised estimate of 5.1 per cent in FY22.
"This (deficit) remains higher than the norm prior to the outbreak of the covid-19 pandemic: the deficit averaged 3.5 per cent of GDP in FY15-FY19," says Fitch, one of the top three credit-rating agencies internationally, along with Moody's and Standard & Poor's, in its Thursday release.
A failure to return to the budget deficit to pre-pandemic levels in the next two to three years, however, is unlikely to change the Bangladesh's rating, which it had affirmed at 'BB-' with a Stable Outlook in November 2021.
In contrast, the authorities expect the economy to expand 7.5 per cent in FY23, above the average of the same five-year period (FY15-FY19).
The American credit-rating agency feels that the deficit could undershoot the government target, as has often occurred in the past.
The authorities originally projected a deficit of 6.2 per cent of GDP in FY22, but expenditure fell below budgeted levels and growth, at 7.25 per cent, according to provisional estimates, and was above Fitch Ratings expectations.
"Our forecast for economic growth in FY23, at 6.4 per cent is lower than the government's, and we consequently expect the budget deficit to slightly exceed the government's target."
Government revenue/GDP is low, at just 9.8 per cent in FY22, compared to a 'BB'-category sovereign median of 27.3 per cent. This represents a key credit weakness, the rating agency notes.
Measures in the budget risk amplifying the problem, with the authorities cutting corporate-tax rates without offsetting measures, for example, to 27.5 per cent from 30.0 per cent for non-listed companies and to 22.5 per cent from 25.0 per cent for one-person companies.
Value-added tax or VAT exemptions have also been extended or introduced for certain goods categories in the budget.
The global ratings agency thinks the proposed tax amnesty may provide a one-off lift to tax revenue in FY23, although the medium-term impact is uncertain.
"We estimate government debt/GDP at around 38 per cent at FY'21, compared with a 'BB' median of 55 per cent, indicating that Bangladesh has fiscal headroom at its current rating level."
Even so, it notes, a lack of fiscal consolidation while economic growth is strong could increase the sovereign's vulnerability to economic shocks.
The risk of shocks has been highlighted by the pandemic and surging global fuel and food costs stemming from the Russia-Ukraine war.
The latter effects have been relatively muted in Bangladesh so far, and government's move to raise the allocation for subsidies, including those on fuel, gas, electricity and fertilizer, to 1.9 per cent of GDP in FY'23, from 1.7 per cent in FY22, should further cushion the near-term impact.
The authorities also increased funding for physical infrastructure under the annual development programme.
"If implemented effectively, this could alleviate supply-side bottlenecks and ease inflation in the longer run."
Bangladesh's external matrices are a source of rating strengths, Fitch Ratings notes.
The budget retains a 15-per cent preferential tax rate for textiles, a sector that drives export growth. US imports of apparel from Bangladesh rose by 65 per cent, year on year, in 2022 to US$3.3 billion.
However, official foreign-exchange reserves fell to $42.2 billion by end-May 2022, from $46.2 billion at end-2021.
"This reflected rapid growth in goods imports, a slight decline in inward remittances and central bank intervention to slow the taka's depreciation, among other factors."
A continued drop in reserves -- for example, in the context of weaker global growth hitting garment exports -- would over time increase the risk of negative rating action on Bangladesh, says the American agency.