Bangladesh's medium term growth and development aspirations
BANGLADESH government's FY14 annual budget is getting rather more attention than usual. Being the budget for an upcoming election year, it has drawn flak as being 'populist,' 'bloated,' 'over ambitious' and even 'surrealist.' I am not going to use any such passion laden epithet in my brief overview. I shall try to see how well it fits with the economy's immediate context and longer term growth and development vision, hopefully bringing to light gaps and implementation issues, if any.
I intend to round this off with a brief observation on how fiscal and monetary approaches are working together in taking the country's near and longer term growth agenda forward, with support from development partners and, of course, our hardworking entrepreneurs.
To begin with the question of budget size, the FY 14 budget aiming at 7.2% real GDP growth is 16.04% larger in nominal terms than the preceding budget of FY13 during which 6.03% real growth was attained. Though short of the target, this six plus growth rate is higher than those of our regional pears like India and Pakistan.
Moreover, this year's provisionally estimated growth rate may stand higher after finalisation with further data, as hoped for by our honourable finance minister. Even if this does not improve much, the current growth rate is robust enough in the midst of global slowdown and domestic political uncertainties.
The increase in FY 14 budget size is proportionate with the targeted increment in GDP growth rate. Also, against the FY 13 budget size of 18.2% of FY 13 nominal GDP, the FY 14 budget is only modestly larger at 18.7% of the projected FY 14 GDP.
I, therefore, see no ground for terming the FY 14 budget as bloated or over ambitious. The 7.2% FY 14 real GDP growth target is also not over ambitious; the economy has the need and capacity for still higher growth, but being held back inter alia by the pervasive global growth slowdown in the aftermath of the global financial crisis and domestic shut downs.
With the global economy now on recovery path, our broad-based inclusive growth efforts can surely attain or even exceed the 7.2% real growth projected for FY 14 provided our body politique shows its maturity in ensuring a peaceful transition of power. The resilience of investments seen in FY13 is one indication of this growth capacity of our economy.
Private sector investments slackened during the earlier months of FY13 in face of subdued global outlook, but higher public investment more than made up for this slack, raising aggregate FY13 investments to 26.84% of GDP, against 26.54% of FY 12.
Private sector investment activities regained momentum in the latter half of FY 13, evidenced by increasing FDI inflows, industrial term loans and import LC opening for capital machinery; boding well for FY 14 GDP growth.
Revenue growth targeted for FY 14, to 13.5% of GDP from preceding year's 12.84% of GDP may look challenging but is attainable, given the track record of 2.06% increase achieved over past four years, and the raft of tax and non tax revenue administration reforms implemented, including the recent enactment of the new VAT Law.
The FY 14 budget sets total public expenditure outlay at 18.7% of GDP, entailing fiscal deficit amounting to 4.6% of GDP, lower than the 4.8% deficit of FY13. Let us look first at the proposed financing of the fiscal gap before going into the structure of the public expenditure outlays. The narrower deficit projected for FY 14 indicates that fiscal prudence has not been forgotten in the election year budget.
The foreign borrowing component of budget financing is projected to increase from Tk.119.0 billion of FY13 to Tk.144.0 billion in FY14, by around US$300 million. This should be easily attainable, by only modest speeding up of use of huge volume of project financing assistance in pipeline awaiting utilisation.
In the domestic financing part, the small non-bank component is projected to rise nearly two-fold (from Tk.39.7 billion of FY 13 to Tk.79.7 billion) in FY 14. This may prove hard to attain without substantial increase in yields on national savings instruments. The government has made some moves in improving the yields of those instruments.
Shortfall in the projected non-bank financing may partly or wholly offset the projected Tk.25.1 billion net FY14 decline in bank financing. Nevertheless, the bank borrowing moderation attempted in the FY 14 budget is a welcome development, helping ease worries about pressure on banking system liquidity from government's borrowing needs.
Other recent developments like widened windows of short and long-term foreign borrowing by local businesses, and external demand of our Taka Treasury bonds created by abolition of the one year holding requirement in non-resident hands have also helped ease credit demand pressure in the domestic market, imparting downward nudge on interest rates.
Ongoing policy reforms supported by IMF's ECF are bringing about strong, rapid gains in external sector viability with high BOP surplus, FE reserves buildup, and enhanced debt service capacity. Exports are growing at double digit pace amid global slowdown, and for quite some months now, Taka is under sustained appreciation pressure against USD.
Per capita GNI has risen to US$923 in FY13, propped by decade long spell of six-plus percent average real GDP growth and by rising income inflows from workers abroad, on course to cross the (lower) middle-income country group threshold by FY 15.
Bangladesh's sovereign credit rating remains favourable as a result, opening up another option for fiscal deficit financing, viz. sovereign bond issuance in international markets. Preparatory work in this direction is in progress, but the FY14 budget has prudently avoided attempting recourse to this option in an election year.
Coming now to the structure of the expenditure allocations in the FY14 budget, we can see that these are broadly consistent with the government's development vision of inclusive growth with broad based social and economic empowerment of all population segments. 23.2% of overall public expenditure is allocated to social infrastructure including health, education and social safety net, another 14.5% allocated for agriculture and rural development also has large poverty reduction and socio economic empowerment impact on the disadvantaged.
The allocations for health and education focus particularly on the poorer population segments; much of secondary and tertiary education and health care for the better off are left to be taken care of by the private sector, largely self financed. Job relevant skill development in ICT and other fields, important for benefiting from the demographic dividend of a large crop of tech savvy young, receives due attention in FY 14 social expenditure allocations. While mobile phones, smart cards and other ICT based delivery of financial and other services have already expanded vastly, there is much further to go in skill development to drive growth in various sectors, with ample room for useful support from development partners.
The well ingrained pro-poor stance of Bangladesh's public expenditure is hastening poverty decline by opening up advancement opportunities for the disadvantaged, harness their creative energies into the mainstream of growth and development initiatives. This is what has made Bangladesh's substantial progress with relatively little FDI infusion, something that we often hear outsiders wondering about.
Bangladesh Bank's (BB's) stability focused yet growth supportive monetary and credit policies complement the government's inclusive growth efforts, a BB guided sustained financial inclusion initiative has engaged the entire financial sector in socially and environmentally responsible financing of all underserved and un-served productive undertakings of all population segments, including farm and non-farm rural and urban SMEs generating employment and income on the demand side and output of goods and services on the supply side. Such policy approaches are palpably helping the economy maintain firm footing on steady growth path amid global growth slowdown.
Besides poverty reducing social expenditure, the FY14 public expenditure allocations accord due priority also to physical infrastructure and other facilitations crowding in private sector's investment initiative in various sectors. The cautious frugality in FY 14 subsidy expenditure allocations is heartening. Blanket untargeted user price subsidies are not just wasteful by much of it going to those not in need; but also more seriously injurious in that these inhibit new investments in new output of the subsidised goods and services.
Given severe resource constraints, Bangladesh's social safety net is quite rightly being built up gradually from bottom upwards beginning with transfers to the neediest and most helpless. But it is perhaps also time to begin building up a largely self financed but publicly supervised defined contribution universal pension scheme for the entire working age population, something that neighboring India initiated back in 2003.
BB has recently got some preliminary study done in this respect by engaging external consultant. Kicking off such a pension scheme even on a limited scale to begin with will be a big help in activating and deepening of the longer term end of our money and financial markets, besides being of benefit as financial security umbrella for the pension account holders.
I would look forward to seeing some pronouncement in this direction in the next budget, as also to seeing mention of some concrete progress with introduction of crop insurance schemes for farmers announced in an earlier budget.
The annual budgets, however well meant and well structured, are only as good as their quality of implementation. Endemic governance weaknesses in our social life leave much to be desired, particularly in terms of quality and pace of implementation of budgetary public expenditure.
Of course, sporadic examples of excellence are not altogether absent either, such as in our well reputed disaster management capability, lately again demonstrated in the deft handling of Savar RMG Rana Plaza collapse disaster and the cyclone Mahasen.
Only firm ingraining of good governance with clear role definition, transparency and accountability at all spheres and all stages of public life can ensure high quality implementation of high quality budgets. And for this to happen we all must close our ranks and let Bangladesh continue on the exciting growth journey which is robust, stable and, of course, inclusive.
The writer is Governor, Bangladesh Bank.
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