Analysis of CPD Recommendations for FY2025-2026 Budget

Inflation Control and Fiscal Stability

• Key Focus Areas: Controlling inflation, restoring exchange rate stability, reforming revenue sector, and ensuring macroeconomic stability through prudent fiscal policies.
• Inflation Concerns: CPD warns that proposed gas price hikes could exacerbate inflation, making Bangladesh Bank's target of 7-8% inflation by June 2026 unattainable.
• Global Tariff Wars: Ongoing global tariff conflicts may worsen inflationary pressures.

Tax Reforms and Revenue Mobilization

• Proposed Tax Changes:
  • Raise tax-free income limit to Tk4 lakh.
  • Reduce VAT rate from 15% to a uniform 10%.
  • Introduce a comprehensive national VAT system under one roof.
  • Modify Income Tax Act for biannual source tax deductions and reduce audit burdens on NBR.
• Revenue Challenges:
  • Revenue deficit could reach Tk105,000 crore by end of FY25.
  • Reliance on domestic banks to meet budget deficit due to reduced foreign aid.

Energy Sector Reforms

• Key Recommendations:
  • Remove capacity charge clause from power purchase agreements (PPAs).
  • Renegotiate electricity prices with IPPs at market rates to reduce subsidies.
  • Eliminate retail-level gas and electricity price hikes.
  • Address Tk29,000 crore arrears for Bangladesh Power Development Board (BPDB) and $800 million arrears for Adani Group by June 2026.
• Energy Crisis Solutions:
  • Explore gas wells using Petrobangla's gas development fund instead of foreign bidders.
  • Welcome USA-based companies for offshore gas exploration.

Support for SMEs and Social Security

• SME Support:
  • Propose regulatory relief by withdrawing advance income tax and advance tax for SMEs in FY26.
  • Increase corporate taxes on tobacco companies to 55%.
• Social Spending:
  • Extend scholarship program to an additional 2 crore students, incurring extra cost of Tk121 crore.
  • Enhance social security spending for the poor.

Education and Healthcare Reforms

• Education Sector:
  • Exempt VAT on tuition fees for English medium schools.
  • Eliminate taxes on imported foreign books from FY26.
  • Invest in elevating top universities to global standards through financial programs and reforms.
• Healthcare Sector:
  • Propose VAT exemption on medicines starting FY26.

Renewable Energy Development

• Policy Recommendations:
  • Reduce customs duties to 5% for renewable energy equipment and components.
  • Eliminate all taxes on renewable energy goods.
  • Establish a dedicated renewable energy development fund.

Long-Term Strategic Considerations

• LDC Graduation Preparation:
  • Adjust bound tariffs and minimum import prices due to LDC graduation.
  • Implement policy reforms in revenue management for sustainable economic growth.
• Global Economic Context:
  • Address inflationary pressures and external shocks from global tariff wars.
  • Strengthen food security through irrigation and fertiliser availability during Boro season.

Competitive Dynamics

• Domestic Market Impact:
  • Tax reforms may alter business operating costs and consumer prices.
  • Regulatory changes in energy sector could shift market dynamics for IPPs and state-owned enterprises.
• International Trade:
  • Reduction in customs duties on renewable energy equipment may attract foreign investment in green technologies.

Regulatory and Policy Implications

• Revenue Collection Challenges:
  • High inflation and rising bank interest rates may reduce government revenue from savings certificates.
  • Prudent fiscal policies are critical to avoid revenue shortfalls.
• Policy Implementation:
  • Effective implementation of tax reforms and energy sector policies will be crucial for achieving macroeconomic stability.

Conclusion

The CPD's recommendations aim to address immediate economic challenges while laying the groundwork for long-term sustainable growth. The focus on inflation control, fiscal prudence, and structural reforms highlights the need for a balanced approach to meet both short-term corrective measures and medium-term development goals.