What should be the focus of the upcoming budget? | The Daily Star
12:00 AM, June 06, 2020 / LAST MODIFIED: 01:28 AM, June 06, 2020

What should be the focus of the upcoming budget?

This year's budget clearly needs to focus on addressing the emerging issues and challenges of the current pandemic. In addition, priorities in continuity with previous budget exercises should also cater to addressing the structural and operational constraints that exist, to better achieve targeted objectives of inclusive growth and economic efficiency. Despite strong and viable economic progress made over the past decade, currently the key economic indicators reflect a downward trend. Taking present circumstances into account, it may be necessary to temporarily shift away from the conventional approach of budget as an annual exercise, and concentrate more towards the mid-term perspective. 

This year's budget should be based on a three-year framework with six-monthly components. For better implementation within the current constraints, structure and size of the budget may not exceed that of last year's. The budget, on the one hand, needs to prioritise critical challenges due to Covid-19, and on the other, support growth momentum and development sustainability.

The three core objectives of this year's budget could be: Recovery, stabilisation and sustaining economic growth. Recovery will include short and medium-term initiatives to meet deficits arising from weakening of the key drivers of growth—readymade garments and overseas remittances. Recovery will also relate to increasing aggregate demand (through increased access to income and credit) as well as efficient retention of supply. Stabilisation will relate to addressing urgent priorities such as implementing stimulus packages, cash transfers, and broadened social safety nets. Sustained economic growth will cover mainly medium to long-term programmes for increased resource mobilisation, financial sector improvements, strengthened monetary and fiscal instruments, and fostering potential growth sources through economic diversification.

Our development partners have projected a moderate slide in the GDP growth for the current year. However, based on the trends as of now, our projection expects GDP growth to be in the range of 5-6 percent. Assuming reactivated performance of the current growth drivers, GDP growth is expected to pick up and move towards normal level by 2022. Having new growth drivers, even from a medium-term perspective, would not only enable double digit GDP growth by 2023/2024, but also expedite Bangladesh's transition to middle income and high income levels within the envisioned timeframe.

The anticipated decline in GDP growth this year would be a common phenomenon for almost all countries due. A well-managed economy can adequately steer itself, despite reduced growth in the short to medium-term (like the Southeast Asian countries did during the Asian Economic crisis in 1997-2000).

RMG exports and overseas remittances are currently struggling due to structural and functional constraints and the Covid-19 impact. Budget 2020 should have provisions to provide significant support to these sectors. Current growth stimulants could be reinvigorated through several measures such as enhancing skills, expanding demand and supply linkages and access to new markets. Deriving gains from potentially new growth drivers would require extensive policy support, fiscal incentives, as well as enhanced entrepreneurship and skills broadening. Strategies and programmes that can push GDP growth forward through efficient expansions in agriculture and infrastructure, ICT products and services, small and medium enterprises and pharmaceuticals, should be prioritised. In addition, mega-projects that are currently being implemented and expansion of the manufacturing base through planned special economic zones and other logistical development would also stimulate growth, and facilitate diversification and competitiveness.

Resource mobilisation has always been a critical challenge for countries at different stages of development. For Bangladesh, the current tax-GDP ratio (around 8.6 percent) is expected to slacken to around 6 percent this year. Corporate taxes as well as personal income tax will reduce further in the current year. Similarly, revenues from VAT, customs and supplementary duties will be lower due to reduction in overall trade volume. Despite these constraints, the  budget should support a strong fiscal framework and try raising the tax-GDP ratio within the proposed three year mid-term budget period.

Enhanced revenue in the medium-term and beyond would also depend on tax reforms, and on the pace of diversifying the economy. The government needs to assess its options on curtailing portions of non-development related spending, rationalise expenditure, and divert more funds to priority sectors. The government may resort to bank borrowing, incentives as savings certificate, and activating the informal sector. Whitening undeclared money or funds from undeclared sources aimed at obtaining additional resources to meet current resource deficits (as on previous occasions), could be an option.

However, the effectiveness of these processes could be further reviewed based on past experiences to ensure more efficient outcomes. As regards to external resources, the government may ask its development partners for priority lending on extremely concessional terms outside the ambit of country partnership.

The health sector should be given the highest priority and adequate resources to combat the virus. In past years, despite moderate numerical increases, the share of the health sector as a proportion of GDP continued to decline. The proposed increased allocation for health should cover expansion of health infrastructure and improved health management. Special provisions should be in place for public-private partnerships (PPPs) in the health sector to facilitate and promote massive private investments for improved health infrastructure and healthcare. This should be followed by increased allocations in the following sectors: social protection and safety net, agriculture and food security, education and skills enhancement, infrastructure, ICT and energy. In addition, enhancing government stimulus packages and cash transfers could also be considered with priority, in order to mitigate income erosion and unemployment and contraction in economic activities. Social protection and safety nets could be broadened to transform these into "protection and welfare net".

ADP implementation for the current year is about 40 percent. That tells us that the government should focus on efficient implementation of priority projects, as well as clear up pending backlogs from previous ADPs. Side by side, new programmes under the umbrella of safety nets and food security should aim at meeting deficits in income and losses in employment. For food security and prevention of food scarcity, the budget should focus on increasing the volume of food availability, storage and distribution.

The government had earlier projected fiscal deficit for FY2020 to stay within 5 percent of GDP. This may be difficult to ensure. The government needs to strengthen its effort to avoid higher fiscal deficit in the next few years to ease recovery and efficient expenditure.

As compared to several countries in South Asia, Bangladesh has managed it's external debt with significant success. Improved debt management (overall debt being less than 15 percent of GDP) and reasonably reduced proportion of overall external assistance to GDP (currently 3-4 percent of GDP) adds to the momentum of Bangladesh's economic resilience and development sustainability. Retaining and strengthening these gains would propel growth prospects both in the medium and long-term.

 

Dr Mohammed Parvez Imdad is an economist and governance specialist. Email: mpinayefmimdad@gmail.com

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