Budget challenge: economic discipline | The Daily Star
12:00 AM, June 08, 2012 / LAST MODIFIED: 12:00 AM, June 08, 2012

Budget challenge: economic discipline

Fahmida Khatun

The strategic focus of the budget for fiscal 2012-13 has been set in line with the overall objective of achieving development to take Bangladesh to middle-income status by 2021. With the aim of accelerating growth, increasing investment, reducing poverty through employment generation, establishing social justice, the budget has made fiscal measures for various sectors. Bringing public finances under control has been a tough task for all governments. This year, it has been even tougher in the context of lower than projected growth of the gross domestic product, slow pace of investment, higher inflation and low development spending in fiscal 2011-12.
The challenge is to bring financial discipline back to economic management. The discussion on the size of the budget is irrelevant, given the country's needed development effort and the rate of inflation. The budgetary framework reveals that the major source of income will be NBR tax revenue -- an increase to 10.8 percent of GDP in fiscal 2012-13 from 10.1 percent in the revised budget of fiscal 2011-12; borrowing from the banking sources has been set at 2.2 percent of GDP, lower than the revised figure of 2011-12 that is 3.3 percent of GDP. As in the previous year the major finance of the deficit budget which is set at 5 percent will come from domestic sources. That is domestic source will provide 3.2 percent and foreign aid will support only 1.8 percent of the deficit budget.
On the other hand, the size of the annual development plan will be 5.3 percent of GDP in fiscal 2012-13 as opposed to 4.5 percent in fiscal 2011-12. The finance minister has probably tried his best to get the numbers right.
The next and real challenge will now be the implementation of the budget. Unfortunately, though the problem and issues have been rightly diagnosed in the budget, the targets and allocations are not -- in some cases. Just to refer to a few, allocation for agriculture is lower even though the government is committed to ensuring food security. Similarly, the issue of ensuring fair price to producers has been ignored as no active measure has been mentioned in the budget speech. The same is the case with social safety nets. The allocation for social welfare schemes as a percentage of both total budget and GDP is lower than the previous fiscal year. At a time when there is a need for increasing the outreach of safety nets and ensure social protection for the vulnerable and the poorest, this declining trend is not encouraging.
The much-talked-about issue of rationalising subsidy through upward adjustment of fuel prices to reflect the full pass-through of international prices on the domestic prices is a sensitive issue, particularly as the national election is approaching. The increase in fuel prices is likely to increase the pressure of inflation on the common people with limited income. The increased price can only be justified if there is guaranteed supply of electricity. Prices can be maintained at a reasonable level through efficient production and distribution of electricity.
Excessive borrowing from the banking sector was another weak link of the economy in the last fiscal year. This has added to the slow investment trend in the private sector. Higher public investment by way of higher implementation of the annual development programme (ADP) is also instrumental for higher private investment. There is a need to increase capacity for both increased collection of revenue to finance public investment and to fully implement ADP.
The investment scenario risks to be dampened, also due to the monetary policy being pursued currently in an attempt to contain inflation. Such monetary policy does not match with the GDP growth target which has been set ambitiously at 7.2 percent. There have been some positive measures announced in order to expand the tax net. Tax receipts will depend on how efficiently the tax department can utilise its manpower and technology.

Dr Fahmida Khatun is the head of research at Centre for Policy Dialogue.

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