The pandemic budget has to be based on realistic assessment | The Daily Star
12:00 AM, April 12, 2021 / LAST MODIFIED: 12:45 AM, April 12, 2021

The pandemic budget has to be based on realistic assessment

After suffering for more than a year since March 2020, when we were just about to have some respite following the decline in infection and death rates, the second wave of the Covid-19 pandemic has returned with greater vengeance. With the virus spreading fast, uncertainty is looming large. And the concerns are compounded by the inadequacy of health infrastructure and economic opportunities. There is uncertainty about health and treatment. Uncertainty also prevails in case of livelihoods, income and overall economic situation of the country. Bangladesh economy, like the global economy, is still struggling to recover from the adverse impacts of the pandemic. About two thirds of the fiscal year (FY) 2021 has passed. Economic indicators are not showing much promise. A number of macroeconomic and sectoral indicators have performed below the expected level compared to a normal year. We were happy to see that Bangladesh economy had done far better than other countries in FY 2020 in terms of economic growth. And after about halfway through FY 2021, we started to discuss whether the economy is on its way towards a recovery and what strategies should be taken to make the recovery happen for all sectors.

Unfortunately, that discussion for the time being has taken a back seat as the world is once again struggling to deal with the health crisis. After a somewhat relaxed lockdown for seven days from April 5, the government now plans a week-long stricter lockdown from April 14. In view of the sufferings of the people and consequences for the economy of the lockdown in 2020, the government has been mindful this time and is taking steps in a measured way. While the health crisis seems to be unstoppable, the economic crisis is no less serious.

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Indeed, the government had to undertake a large amount of expenditures in 2020 due to the outbreak of the pandemic which was unforeseen and unplanned. These were to mitigate the economic losses of the people and the businesses in various sectors. The government announced a number of stimulus packages equivalent to 4.4 percent of the country's gross domestic product (GDP) for the large businesses, export-oriented industries, small enterprises, agriculture sector, and social safety net programmes. Since the stimulus packages were mostly in the form of liquidity support through commercial banks, the government had also introduced expansionary monetary policy measures to create liquidity for the banks.

However, these support measures were not adequate compared to the losses incurred by people. Exports  are yet to rebound, employment has not been regained, and many micro,  small and medium enterprises (MSME) have not received stimulus packages even though the allocation remains undisbursed. As for the poor, allocation under the social safety net programmes has been inadequate and distribution remains flawed.

In this context, the Ministry of Finance (MoF) is preparing to chalk out the national budget for FY 2021-22. The task is a daunting one. During the ongoing fiscal year, the MoF had the difficult task to generate additional resources to finance higher government expenditure on the one hand, and utilise those resources efficiently for employment generation without creating inflationary pressure, on the other. Unfortunately, this challenge will continue to exist in the upcoming fiscal year also. This job could be more difficult since the government had limited success in achieving this objective. During July-December of FY2021, growth in revenue collection was 8.6 percent. However, this growth is far too low if the targets have to be met. Thus, in order to meet the target for FY2021, revenue collection has to grow by more than 74 percent during the next six months (January-June 2021). This seems unachievable, if the past records are considered. Growth of income tax has been negative (-) 5.2 percent during July-December of FY2021. So, income tax has to grow by more than 80 percent during the last six months of FY2021. Of course, lower tax collection during the ongoing fiscal year could be due to some tax exemptions to a few sectors in view of the pandemic. But without strengthening institutional capacity of the National Board of Revenue, the revenue mobilisation effort will continue to fall short of the targets even during the post-pandemic period.

The other side of the fiscal framework is even more ironical. As opposed to the constrained fiscal space, the government could not also spend whatever was allocated. We have not seen any expansionary fiscal policy even though this was one of the crucial ways to energise the subdued economy. Rather, public expenditure during July-February of FY2021 was lower compared to the pre-pandemic period. The Annual Development Plan (ADP) has been downsized by Tk 7,502 crore in the current fiscal year.

The target budget deficit in FY2021 has been set at six percent of GDP. However, till now the trend in fiscal balance indicates lower deficit. As of December 2021, a deficit of Tk 8,408 crore was observed compared to Tk 35,751 crore in December 2020. Lower deficit in fiscal balance is due to a fall in the public expenditure. This is opposite to the suggestions of stimulating domestic demand and strengthening supply response by expansionary fiscal policy.

So, the MoF will have to take a more realistic approach in estimating the numbers for the upcoming budget. The need for a stronger fiscal framework is felt more than ever before. While the revenue targets will have to be met for more resources to tackle the fallout from the pandemic, the reform of the tax system should be initiated and continued parallelly. The budget must also make higher allocation in a number of priority sectors such as health, education and skills development, rural infrastructure, and social protection. Sadly, the budget for FY2021 did not see much increase in these areas. For example, despite a pandemic year, allocation for health sector as a share of GDP increased from 0.84 percent in FY2020 to only 0.92 percent in FY2021. The reason for low allocation is often attached to utilisation capacity of resources by the respective ministries. Moreover, despite low allocations, the numbers are revised downwards toward the end of the fiscal year due to the lack of spending capacity. Therefore, the allocation will have to be utilised in an efficient manner.

Finally, in order to formulate a "pandemic budget" which will plan and implement higher public expenditure targeting larger population and with higher efficiency, the MoF should review the effectiveness of the measures announced in the ongoing budget. The MoF must not focus too much on growth, but on protecting the livelihoods of people and helping the economic sectors and enterprises survive. It does not matter much if we have lower growth in a pandemic year. But what matters is to have a hospital bed for the Covid patient, a job for the youth, cash in people's hand and food to feed themselves and their family. Budgetary measures should be focused towards achieving these objectives.

 

Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.Views expressed in this article are those of the author and do not necessarily reflect the position of her organisation.

 

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