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Weighing pragmatism against optimism

  • Published at 07:45 am June 6th, 2013
Weighing pragmatism against optimism

Any budget should tread a fine line between harbouring ambitions and being reasonably realistic. This year in particular, the challenges are more daunting because the overall economic situation is not good.

We have noticed the growth rate and government revenue earnings stand at 80% of what was announced as a target during the last budget, while overall revenue collection has also fallen.

This gloomy economic scenario could continue for the next fiscal year, the reason being that private sector investment is displaying downward trends, seen in the declining import of capital goods, which is currently in the negative.

Credit growth in the private sector has drastically slowed down. Until March this year, growth declined drastically, so the Bangladesh Bank’s monetary policy of a private sector credit growth rate of 18.5% is unlikely to be achievable. The current political scenario makes businessmen disinclined to invest in the country.

The fall in private sector investment will slow economic growth and likely slow down government revenue earning. If this happens, obviously the next fiscal year budget cannot be over ambitious. Questions will arise about how the government will manage the situation in the next fiscal year budget. We have to maintain expenditure and a budget deficit in the election year.

If the government prepares a big and ambitious budget for next year, questions of how the budget will be financed will arise, and we have to maintain a budget deficit of 5% of GDP, so the government cannot go over that limit. In fact, the International Monetary Fund’s conditions on budget deficit will probably be 4.3% of GDP.

 How will the government finance the next fiscal deficit? So far I have seen in the media that external resources are estimated at $3bn billion for next fiscal year, which will be ambitious. Usually, the government will only receive $1.2 to $1.3bn in foreign assistance a year. The difference will have to be made up by internal borrowing.

As far as I know, internal borrowing comes from savings instruments. In the last budget there was a provision to collect Tk70bn through saving certificates, or instruments, and non-banking financial institutions. Only Tk7bn was collected in 2012-13 fiscal year. Going by this, the next fiscal fund drawn from savings instruments will definitely be below the previous amount because of the current economic situation, high inflation and slow GDP growth.

The only other option is to borrow from the banking sector. We have seen borrowing from the banking sector increase significantly in 2011-12, But a private sector credit flow will become costly as the interest rate will increase. How to balance these conflicting considerations will be the main challenge for next year’s budget.

ADP discussion

The next fiscal years annual development programmes (ADP) will cost Tk650bn, which is 25% higher than the current fiscal year amount.

In the proposed ADP for the upcoming fiscal year, the government has estimated $3bn from foreign sources, which is an unlikely amount under current circumstances. What the proposed budget has projected with regard to future earnings is uncertain.

Despite the difficulties of preparing a budget in an election year, I think the government will prepare a realistic budget and some expenses related to the large size of the ADP will not be incorporated in the revenue budget that is proposed. One area that needs to be addressed is subsidies that will be provided by the upcoming budget. This is an area that may benefit from restructuring. Most subsidies are generalised in nature; this means that beneficiaries are universal. Both the poor and the rich receive benefits from subsidies in consumption of goods and services such as electricity, fertiliser, petroleum products etc.

If subsidies are restructured so that the government chooses not to increase the total amount of subsidies we will see a shift in who benefits from them. The government can restructure the current amount and gear them towards the poorer sections of society so that they may find some relief from high energy prices. This may be a good step as a third of the people in the country live below the poverty line.

Another area that the government must address is state-owned enterprises. As things stand, the government is running enterprises, which are not economically viable. The decision to continue with these industries is political and is in no way based on economic realities.

The country now has a large privatisation commission even though none of the state-run companies that are not economically viable have been privatised in the last four years. Although privatisation of state-owned companies is not politically convenient, it is a step that would strengthen Bangladesh’s economic foundations. The decisions to allow state-run companies that are not economically viable to continue business should be put to an immediate stop.

Given the timing, it is unlikely that the government will take any political risks and look to privatise any state-owned firms. The decision to privatise organisations should be taken in the first year of the government’s tenure when political considerations can theoretically take a back seat to economic issues. Once the second year of the term comes around, and all stakeholders have benefitted from privatisation, it will be considered a positive development. Unfortunately, at the end of the government’s tenure, considerations will be political and non-economic.

There exist certain misconceptions with regard to the implementation of the ADP. It is not that the process of implementation has been delayed; instead the lack can be attributed to the fact that many ADP projects remain incomplete due to inefficiency and a lack of commitment form the relevant line ministries.

When the caretaker government, of which I was a part, was in power in the 2007-2008 fiscal year, the main problem we faced was in the form of natural calamities that occurred.

The nation faced two consecutive floods in 2007, followed by cyclone Sidr. Fortunately, we were able to mobilise significant resources from development partners, particularly the World Bank and ADB, so the effects felt from those were minimised.

So, one of the major problems of our government was that three major consumer items: food, fuel and fertiliser, skyrocketed during their tenure. Domestic administration is an issue that can be resolved quickly and effectively, given the correct political motivation.

This election budget itself should not be a problem for the regime that comes to power. The aforementioned issues do not necessarily affect the budget to a great extent. If one were to explore the directives, we see that six or seven sectors are potentially allocated 70-80% of national resources. The problem will arise if the economic goals of the country cannot be met.

One way to meet our economic goals is to learn from historical lessons. In the recent past, specifically in the 2008-2009 fiscal year, we have seen that when revenue collection is strong, there is a correlation with GDP growth. There was a strong push in that year to properly collect revenue and this was extremely beneficial for the nation.

Political influence in election year

Political influence will play a role in the upcoming budget. Although its role will not be very large, it will represent a misallocation in the use of resources. An example of this is the reinstatement of the MPO system for schools and colleges. Many of those who will be posted in educational institutions will be under qualified, representing a misallocation of existing resources due to political pressure.

How the government plans to finance the budget deficit will arise as a major issue. If the plan is to finance the deficit through the utilisation of local resources it may have a significant impact on the standard of living for the general public and the price level in the nation.

If more funds are collected from bank and non-bank sources, then it will result in a rise in the rate of interest for loans. As a result, private sector investment may be “crowded-out” by government borrowing, which may negatively affect growth. If some of the deficit is financed through foreign sources, at low rates of 0.2-0.5%, then there will be less of an impact on growth and standard of living. Borrowing locally from non-bank sources such as government-issued savings instruments will have a huge effect on the economy as the government will have to bear the cost of providing interest payments. A result of this will be an increase in the revenue budget.

Right now, foreign sources of financing ie donors, are extremely worried about the Padma Bridge scandal. Luckily, this has not had a huge effect on the disbursement of development funds. This year’s World Bank disbursement to Bangladesh is set to be higher than last years, and there is still a large committed amount that is yet to be disbursed.

The problem with regard to foreign funding is the fact that projects are not implemented properly and seen through to completion.

Subsidies

Businesses cannot run without power. Although the government subsidises energy costs, the larger problem lies in that electricity connections are extremely difficult to get. The government must focus on infrastructural and capital market development if they want to increase employment and grow the industrial sector. The public sector employs people who do not always contribute to the economy efficiently. The resources spent on these people would be better spent on improving other aspects of the economy.

Bangladesh’s macro problems are currently two-fold. The first is infrastructural deficiencies and the second is the poor business environment that currently exists. While the labour issue may be an issue for the garment sector, it does not feature strongly in the overall economy in the nation. Another issue that features to a certain extent is the fact that subsidies are often provided to loss-making industries, this is obviously bad for the economy of any country.

Padma bridge funding

Regarding the Padma funding using local resources, I do not support it for three reasons.  I think without constructing the Padma bridge, Bangladesh can easily get 7-7.5% GDP growth by solving other economic problems. In terms of the timing for the construction of the bridge, it is not a high priority for the country’s economy and therefore the government could reviving the possibilities of constructing it with funds from the World Bank and Asian Development Bank later. The second reason is; every thing has an opportunity cost. We cannot afford to spend $50bn with a budget deficit ceiling in place, so that means our deficit will fall if we give up on the construction of Padma Bridge with our own funds. The final and third reason is, while most of the funds will be collected from local resources, work on the Padma Bridge will be done by the foreign experts and engineers. We do not have enough expertise to construct the bridge ourselves.

 

This article is the outcome of an exclusive interview with AB Mirza Azizul Islam, visiting professor at Brac University and former finance adviser to the last caretaker government. He is also the former chairman of the Securities and Exchange Commission.

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