Budget (FY2022-23) Analysis and its implications on the Capital Market

The government of Bangladesh has announced the national budget for the Fiscal Year (FY) 2022–23, with an estimated expenditure of BDT 6,780.6 billion (14 percent YoY growth) depending on expected revenue collection of BDT 4,330.0 billion (64 percent of total expenditure) and borrowing the deficit of BDT 2,450.6 billion (36 percent of total expenditure) from internal and external sources. The total allocation for the Annual Development Program (ADP) is expected to be BDT 2,460 billion, which will be 5.5 percent of the total GDP.

Real GDP and Inflation Growth

The targeted GDP growth rate has been set at a staggering 7.50%, while the targeted inflation rate has been set at 5.50%. The government also proposed a tax reduction for the listed companies from 22.5% to 20.0% and the non-listed companies from 30.0% to 27.5% for FY22.

Possible challenges in implementation

The implementation of the budget will be a big challenge for the government. The real GDP growth target of 7.50% seems challenging due to increased inflationary pressure, a rising current account deficit, a decline in remittance growth, pressure on the US dollar exchange rate, declining foreign exchange reserves, and a continual challenge of job creation. But it is still attainable, subject to a faster economic recovery through effective strategies to combat global geopolitical and economic headwinds. The inflation rates may also significantly deviate from the target of 5.6% due to an increase in money supply in the economy.

Tax Revenue Plan (FY2022-23)

The targeted total tax revenue for FY2022-23 is expected to be BDT 4.33 trillion, which is 11% higher than the revised budget for FY2021-22; the figure looks ambitious due to the slower private sector growth. Besides, about 55% of the budget will be financed by NBR tax revenue, which is challenging due to the lack of proper tax culture. As a result, the actual budget deficit may exceed the estimated BDT 2.45 trillion due to lower revenue receipts. Moreover, the additional expenditure in ADP of BDT 360.9 billion in FY2022-23 compared to the previous year may be challenging to implement due to the uncertain global geopolitical crisis.

Domestic Debt Sources

The borrowing from banking sources to spike by 22% which will dictate the excess liquidity to the financial system ultimately. About 73% (BDT 1063 billion) of the domestic debt will be sourced from the banking sector, which is 22% or BDT 190 billion higher than the revised budget 2021-22 figure. This will somewhat slower down the private sector credit growth.

Capital Market Implications

The corporate tax rate of listed companies will be reduced to 20% from 22.50%, depending on the fulfillment of two conditions:

  1. More than 10% of its capital must be raised through IPO
  2. All receipts must be collected through the banking channel, and cash expenses and investments cannot exceed BDT 1.2 million.

* If the listed companies fulfill condition 1 but not condition 2, the tax rate will be 22.5%

** If those listed companies do not fulfill both conditions 1 and 2, the tax rate will be 25%

This corporate tax cut will eventually boost capital market performance for the potential increase in earnings and cash flows of the listed companies. However, the imposition of the two conditions will also create hurdles for many companies to avail this benefit. Besides, the tax gap between the listed and unlisted companies remained the same which will eventually make it difficult to attract the non-listed companies to enter into the capital market.

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