Anticipated Budget Deficit for Fiscal Year 2024-25: Implications for Inflation Control and Managing Personal Finances

Author: SRCO Business Insights | May 30, 2024

The upcoming fiscal year 2024-25 is projected to witness a budget deficit of Tk 2.50 trillion, as the government plans to implement a slightly expansionary budget amidst ongoing inflationary pressures. Despite the government’s prioritization of inflation control, the budget aims to stimulate economic growth, as per statements from officials.

The proposed national budget for FY 2024-25 is expected to be Tk 7.969 trillion, with approximately one-third of the budget representing a gap between income and expenditure. Economists express concerns about the substantial deficit during an economic slowdown, viewing it as contradictory to the government’s stated goal of controlling inflation.

Bangladesh has been experiencing elevated inflation levels, hovering close to double digits on a point-to-point basis for over a year. The Bangladesh Bureau of Statistics (BBS) reported an inflation rate of 9.74 percent in April.

Officials from the Ministry of Finance (MoF) emphasize the necessity of sustaining economic growth, which justifies the higher expenditure target compared to the current fiscal year. A senior official highlighted the need for borrowing to fund the deficit but assured that controlling inflation remains a top priority for the next national budget.

The government aims to restrict inflation to within 6.5 percent in FY 2025 and hopes to maintain the budget deficit within 5.0 percent of the targeted GDP. For context, the outgoing budget of Tk 7.62 trillion had a deficit of Tk 2.61 trillion, accounting for 5.2 percent of GDP.

Prominent economist Dr. Debapriya Bhattacharya noted the inconsistency between a contractionary monetary policy and a higher budget deficit. He pointed out that financing a higher deficit would necessitate borrowing, either from local banks or foreign lenders. Local borrowing could lead to a crowding-out effect, reducing the credit available to investors and slowing down investment. Increased government spending could also exacerbate inflation.

Dr. Masrur Reaz, Chief Executive of Policy Exchange Bangladesh, echoed these concerns. He argued that the combination of a contractionary monetary policy and expansionary fiscal expenditure is contradictory. To effectively control inflation, Dr. Reaz suggested that the budget should be smaller than previous ones, with reduced deficits. He warned that borrowing from banks to finance the budget deficit could lead to a crowding-out effect, further slowing investment.

Managing Personal Finances in an Inflationary Economy

In light of the projected national budget deficit and ongoing inflationary pressures, individuals must adopt prudent financial strategies to manage their personal funds effectively. Here are some key recommendations:

1. Budget Wisely: Create a detailed budget to track your income and expenses. Prioritize essential expenditures and identify areas where you can cut back to save more.
2. Emergency Fund: Build and maintain an emergency fund that covers at least three to six months of living expenses. This provides a financial cushion in case of unexpected expenses or economic downturns.
3. Debt Management: Pay off high-interest debt as quickly as possible. Consider consolidating loans to secure lower interest rates and manage monthly payments more efficiently.
4. Invest Wisely: Diversify your investment portfolio to mitigate risks. Consider inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), and invest in assets that historically perform well during inflationary periods, such as real estate and commodities.
5. Savings: Increase your savings rate to counter the eroding effects of inflation on your purchasing power. Utilize high-yield savings accounts to maximize interest earnings.
6. Review Insurance: Ensure that your insurance coverage is adequate. This includes health, life, and property insurance, which can protect you from significant financial losses.
7. Seek Professional Advice: Consult with financial advisors to create a robust financial plan tailored to your individual needs and goals. Advisors can provide insights into tax-efficient investment strategies and retirement planning.
8. Stay Informed: Keep abreast of economic developments and government policies that may impact your finances. Being informed allows you to make timely adjustments to your financial strategy.

By implementing these strategies, individuals can better navigate the challenges posed by inflation and economic uncertainties, ensuring financial stability and growth in the long term.