Fitch: Bangladesh Budget Sets Optimistic Revenue, Growth Targets

Bangladesh (BB-/Stable) may struggle to meet some key revenue and growth targets set out in its FY15-FY16 budget, Fitch Ratings says. The targets are highly ambitious, while continued political tensions point to significant implementation challenges.

The budget, presented by Finance Minister Abul Maal Abdul Muhith last Thursday, places a strong emphasis on economic growth. It reiterates the government's stated aim to lift growth rates above the 6% area, making Bangladesh a middle-income country by 2021 and a developed nation by 2041. The government aims to increase growth to 8% by 2019-2020 under the 7th Five-Year Plan.

The budget targets 7% GDP growth in 2015-2016 - an increase of nearly 1pp from the average of the last decade. This is underpinned by various assumptions, including political stability which the Finance Minister has referred to as the "sine qua non" for achieving higher growth. However, the political environment is likely to remain tense and polarised.

There is no fiscal consolidation. The overall 2015-2016 deficit is projected to be 5% of GDP, unchanged from the revised figure for 2014-2015 and higher than the 'BB' category median of 3.6% (Bangladesh's general government debt of 34% of GDP is below the 'BB' median of 39% of GDP).

The budget aims to boost revenues (for example through automation of tax collection and broadening the tax base) by an ambitious 28% in 2015-2016. However, as with expenditure, there is a track record of over-estimating revenues in budget targets. Moreover, the budget contains measures such as reducing corporate tax for publicly traded companies, and increasing income tax exemption thresholds, that could partly offset revenue enhancing moves (such as higher export tax for garments).

Bangladesh's high and stable GDP growth in recent years shows the economy's resilience to political tensions and violence, although the World Bank recently stated this may partly be explained by statistical reasons. The ready-made garments (RMG) sector has been a key component of growth, and a Chinese investment company has agreed to establish 500 clothing factories, according to the budget.

However, the steep rise in net FDI inflows seen in recent years seems to have stopped in 2014, when FDI fell back to bn, from USD1.6bn the previous year. The political crisis following the 2014 general election may have damaged investor confidence, and the unresolved impasse between the governing Awami League and the opposition Bangladesh Nationalist Party present a risks to long-term growth.

The main risk from the ongoing polarisation and repeated outbreaks of violence is the potential impact this could have on long-term foreign investment and procurement decision-making, especially in the RMG sector, as it represents about 80% of exports or 15% of GDP. Since moving factories to other countries and changing big suppliers is not done overnight, it may take some time to get a full picture of the long-term impact of this year's repeated violence.

Successfully implementing policies that raises government revenues (which are the lowest among all rated countries as a proportion of GDP, apart from Nigeria) and boosts sustainable growth would be positive for Bangladesh's sovereign credit profile. However, this may be difficult as long as political risk is high and governance and the business environment are generally weak.