Fiscal improvements to lag recovery in Bangladesh: Fitch Ratings

20 Jun '22

2 min read

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Bangladesh’s latest budget shows public finances in the fiscal ending June 2023 (FY23) will remain weaker than in the past even as the country’s economic recovery gathers pace, according to Fitch Ratings, whose forecast for a 6.4 per cent economic growth in FY23 is lower than the government’s. It expects the budget deficit to slightly exceed the government’s target.

However, Bangladesh has a record of posting deficits below those targeted in the budget.

The budget targets a deficit of 5.5 per cent of the gross domestic product (GDP) in FY23, up from a revised estimate of 5.1 per cent in FY22. This 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.

In contrast, the authorities expect the economy to expand by 7.5 per cent in FY23, above the average of the same five-year period.

The deficit could undershoot the government’s target, as has often occurred in the past, Fitch Ratings said in a note. 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, was above the rating agency’s expectations.

Government revenue/GDP is low, at just 9.8 per cent in FY22, compared with a ‘BB’ category sovereign median of 27.3 per cent. This represents a key credit weakness, Fitch Ratings noted.

A failure to return the budget deficit to pre-pandemic levels in the next two to three years is unlikely to pressure Bangladesh’s rating, which the rating agency affirmed at ‘BB minus’ with a stable outlook in November 2021.

Bangladesh’s external metrics are a source of rating strength, Fitch Ratings noted. 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 YoY in the first four months of 2022 to $3.3 billion. However, official foreign-exchange reserves fell to $42.2 billion by end-May this year 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 would over time increase the risk of negative rating action on Bangladesh.

Fibre2Fashion News Desk (DS)