What balancing act is needed for FY2021 budget? | The Daily Star
12:00 AM, June 01, 2020 / LAST MODIFIED: 04:49 PM, June 02, 2020

What balancing act is needed for FY2021 budget?

The budget for fiscal year (FY) 2021 is going to be presented in the backdrop of a situation which was previously not experienced in the history of Bangladesh. The upcoming budget comes at a time when the country is fighting to contain the fallout of the Covid-19 (C19) pandemic. Since the outbreak of C19 in China in December 2019, all countries including Bangladesh have been reeling from economic shock due to disruption of production and supply chains both at domestic and global level. C19 has also affected Bangladesh economy due to both domestic disruptions and its interconnectedness with the global economy. Reduced economic activities have led to lower demand as employment and income have been lost. Hence countries across the world are striving to boost both supply and demand in an effort to resuscitate their economies. 

Under such circumstances, there is no reason to set our expectations high to turnaround the economy through an annual budget. However, since the budget also reflects the policy direction and priorities of the government, it can play an important role in stimulating the economy. In that case, budgetary process needs to go beyond the mere exercise of setting targets for expenditure and resource mobilisation. In view of the ongoing Covid-19-induced crisis, the need for the upcoming budget to take that role has become all the more important than ever before. So, this budget for FY2021 should prioritise allocation for the affected sectors and provide directions for economic recovery in the coming days.

What lies ahead

Before the outbreak of C19 in Bangladesh, the key economic indicators were already under stress. Coronavirus hit the country early March 2020 in the midst of economic slowdown which were being manifested in many ways. Except for remittances, other indicators such as exports, import, private investment, foreign direct investment, revenue collection, and balance of payment situation were on the downward trend. With C19 on the horizon all numbers, including remittances deteriorated. Export earnings have fallen further since March 2020, and remittance flow fell substantially in April 2020. Due to country-wide lockdown the last quarter of the fiscal year, which sometimes is termed as the vibrant quarter, will experience lower economic performance. Projections by the international organisations on growth, trade, employment and poverty at the global level are alarming. For Bangladesh, growth has been projected to be 2 percent in FY 2020 according to the International Monetary Fund. Similar projections have been made by other organisations also.

Additionally, the economy is also faced with medium to long-term challenges such as increased unemployment and inequality which blurs much of its shine that was visible due to its high growth.

In such conditions, recovery of the economy requires boosting aggregate demand by putting money into the hands of the people. This will require higher government expenditure on productive activities so that people have employment and income. As the economy has been growing steadily during the past decade or so, demand for higher public expenditure has also risen. In the recent past, much of such expenditures have been allocated for infrastructural development which also created job opportunities. For FY 2021, the government has planned a fiscal budget of about Tk 560,000 crore. This is 7.0 percent higher than the original budget of FY2020 and 11.3 percent higher than the revised budget of FY2020.

Given the higher demand for more public expenditure in view of the ongoing C19 situation this increase is welcome. However, one would like to see its implementation which is not quite optimal in Bangladesh. During the July-February of FY2020, the implementation of Annual Development Programme (ADP) has been only 38.5 percent. Due to lockdown, ADP implementation has been affected since March 2020 which may result in a much lower implementation rate than the previous years. For a growing economy and large population, underperformance of the ADP is worrisome.

While, the government's effort should be to increase public expenditure and expedite its implementation, financing of such expenditures will have to be designed judiciously. One of the challenges that a slowing economy faces is shortage of resources to underwrite its expenditures. With the slowdown in growth, tax revenue growth also slows down unless specific targeted measures are taken to increase tax revenue.

In the current circumstances, global uncertainty combined with domestic depression will reduce revenue mobilisation not only in FY2020 but also in the year ahead. Businesses and individuals with reduced income will not be able to contribute to the government's exchequer as much as they could before C19. This will lead to lower corporate and personal income tax collection. Reduced trade will result in lower customs duties, value added tax and supplementary duties. In FY2020, revenue shortfall of the National Board of Revenue (NBR) could be over Tk 100,000 crore. Meanwhile, the government's stimulus and relief package to support C19 affected people have put some pressure on its exchequer. Hence, fiscal deficit may be higher than the projected 5 percent in FY2020. Depending on the duration of C19 and its associated impacts, further government support may be required in the coming fiscal year. The government will also have to resort to higher fiscal deficit during FY2021 to face the emerging economic shock due to C19.

Balancing the choices

How will the government strike a balance between increased expenditure requirement and low resource mobilisation effort is a matter of concern. C19 crisis has brought the welfare issue at the forefront. Government expenditures will have to be continued and increased for employment generation. But the poor and the vulnerable, the daily wage earners, low income earners and people in the informal sector will need government support for some time.

The government of Bangladesh is committed to achieving Sustainable Development Goals (SDGs) by 2030. The country is also on a journey towards graduating from least developed country (LDC) to developing country category by 2024. For all these ambitions to be fulfilled, social sector development is important. A large section of the population depends on public provisioning for some basic services such as healthcare, education and nutrition. Therefore, adequate public spending on social sectors and efficiency in the delivery systems are critical. The need for more allocation for some of the ever-neglected sectors has come to the fore during C19 crisis. Healthcare, social protection, agriculture and education are the ones which demand more attention in terms of higher allocation and better management. This might also warrant an optimisation of the defence and public administration budget.

The path less travelled

The existing and the C19-induced challenges cannot be resolved overnight. But the Ministry of Finance can formulate a fiscal policy to address these challenges which is close to reality. Instead of following the beaten track of the previous years, budget for FY2021 and beyond should focus on three areas.

First, the revenue mobilisation target should be realistic. There is no need to imagine without a basis. Revenue estimates should indicate clearly how much revenue NBR can mobilise given its existing capacity, and how much will have to be generated from other sources, such as from bank borrowing, savings certificate, and foreign assistance. Second, revenue targets will have to be fulfilled through strong monitoring and enforcement mechanisms. Third, the ministry should also not shy away from undertaking reform measures if it is genuinely interested to maintain a strong fiscal framework and lift the economy out of the ditch.


Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.

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