Big budget meets political demand
In the face of macroeconomic headwinds arising from inflation and fiscal and external deficits, a large sized budget has been prepared to meet the burgeoning demand for spending. There are political compulsions of fulfilling many promises as the government reaches the midway point of its term. There will be huge additional expenditures on subsidies on fuel and power, in addition to agricultural and food subsidies. The government has also to keep in mind the ambitious targets of the Sixth Five Year Plan, since deviations from the roadmap right at the beginning will call into question the credibility of the Plan. To meet these challenges, one would expect strong cost-cutting measures as well as measures for improving the quality of public spending and the overall public resource management. Such initiatives are not in sight. But these are not matters only for the finance minister to deal with.
No doubt, a large-sized budget has helped in accommodating political demands and in avoiding difficult decisions regarding spending priorities. Even then, allocations for some important sectors like healthcare or environment protection have got squeezed. Fund allocations alone are not of course sufficient for a multi-dimensional problem like environmental protection. The finance minister's budget speech last year mentioned a number of policy and programme initiatives in this respect involving the relevant ministries; but not much has happened since then.
To protect its centre-left ideological image, the government has felt obligated to commit spending on subsidies, agricultural and rural development, and social safety met measures. At the same time, to achieve the goal of economic growth, priority has had to be given to public investment in power, energy and infrastructure. Whether budgetary revisions or course corrections will be needed in the middle of the fiscal year will depend on how things take shape in respect of inflation and macroeconomic balances. For example, restraint on public spending will be needed for macroeconomic stabilisation if the government's domestic bank borrowings exceed the limit.
There are a number of uncertainties. The extent of fuel subsidies will ultimately depend on the trends in fuel prices in the international market. Similar uncertainty is there regarding the extent of power subsidy arising from the government's purchase of power form the rental power plants at high prices and the possibility of future price adjustment at the consumer level. Again, large government-sponsored projects including those under public-private partnership may strain the external balance if these are financed entirely from domestic sources while machinery and other inputs are imported.
The success in overshooting the revenue target in the current fiscal has encouraged the finance minister to go for an ambitious revenue target for the next fiscal year as well. However, continued high growth in revenue from an already high base will require substantial reforms in the revenue collection system. The target set for the external financing of the budget seems modest. The problem here is not aid commitments which are aplenty, but actual disbursements. The increasingly strict conditions set by the donors are responsible in part for slow aid utilisation, but weakness in project implementation also remains a major hurdle.
There are not many changes in the rates of indirect taxes, so there should not be any immediate impact of the budget on market prices. The continued tax exemption for the import of essential foods and certain other raw materials will help in not further fuelling inflation. The proposed support for some industries like pharmaceuticals and furniture manufacturing appear to be in the right direction, but such support measures need to be judged in the context of the entire industrial incentive structure.
OTHER ECONOMISTS' REACTION
Noted economists are split over the size of the annual development programme in the proposed budget but unanimous in suggesting that the government enhance its implementation capacity.
In an instant reaction after the budget announcement, former finance adviser Mirza Azizul Islam said the size of the budget and the ADP is bigger this time.
“The ADP of Tk 46,000 crore is comparatively bigger but it is unlikely that the government will be able to spend more than Tk 32,000 crore. I think the priority sectors are alright.”
The former adviser to caretaker government said the government would face challenges in achieving the revenue generation target.
“Although our performance has been quite good in the last three years, it will be difficult to maintain the same rate.”
He said the government's plan to borrow more from internal sources could squeeze the credit flow to the private sector.
Islam said the economy is under pressure from different fronts such as falling remittances, depreciation in exchange rate, liquidity crisis in the banking sector and serious decline in trade balance that are affecting reserves.
“But I have not seen effective strategies to help the country get out of these crises.”
The government should have been bold about the loss-making state-owned enterprises (SoE), Islam said.
“The finance minister has only spelt out plans about Bangladesh Jute Mills Corporation. But we always see that the SoEs approach the government in the middle of a year, plead for money and get it.”
“The government has already opened two loss-making jute mills. I do not see any clear indication of a reform of the SoEs,” he said.
Mustafizur Rahman, executive director of the Centre for Policy Dialogue (CPD), said the government has rolled out a major investment plan but it has to maintain quality in investment.
“The accomplishment of seven percent economic growth will depend on the country's capacity to implement the budget in terms of money and quality."
He said the government is giving incentives such as tax holiday to decentralise industrialisation.
“If we can give infrastructure facilities including gas and power supply, the plan can be implemented.”
“These are good as policies, but the result depends on our ability to make good infrastructure available, and solve problems that hold back entrepreneurs to invest outside Dhaka and Chittagong.”
“If we can ensure that the incentives will be effective. Otherwise, only tax holiday will not solve any problem and entrepreneurs will not feel encouraged to go and invest there.”
Rahman said it would be challenging to realise tax from non-NBR (National Board of Revenue) sources.
The CPD top official, however, does not think that the size of ADP is bigger.
“Tk 46,000 crore is about five percent of our GDP. I don't think it is too large because we will have a number of major investments in the coming days.
“A number of new major projects will also be added further. The ADP size is not big, but again, its implementation will be challenging.”
He said many projects, most of which are old, are due to be completed this year, and the government has to disburse funds on time.
He welcomed the government move to reduce rate on national savings certificate to five percent from 10 percent. He thinks it will ease pressure on the private sector, as the government plans to borrow more from internal sources.
“The government should even think whether it can be brought down to zero,” he said.
Brac Executive Director Mahabub Hossain said the government's reliance on loan would go up further through the budget.
“It will impact the poor,” he said.
Renowned economist Debapriya Bhattacharya said the budget deficit may increase by 0.5 percent to one percent compared to that of the outgoing fiscal year.
"The income will increase by one percent but the expenditure, more specifically development spending, will also rise. The question is how the government will meet the deficiency," he said.
"Our recent experience shows the government takes more and more loans from banks to meet deficit. This may lead to non-availability of resources for investment from individuals, and interest rate may shoot up.”
Debapriya, also former ambassador to the World Trade Organisation, said another challenge for the government would be to get funds released from foreign sources.
“I have not seen implementation strategy in the proposed budget for any sector.”
Fahmida Khatun, chief of the CPD research wing, said the proposed budget would not be sustainable unless the government enhances employment opportunities or sources of income for the people.
Special attention should be given to financial and revenue sectors to reduce inflationary pressure, she said.
Fahmida said the government would have to take effective measures for quick release of foreign aid to make them available for timely use.