As we draw towards the end of Fiscal Year (FY) 2017, we have once again reached the month which charts out the government’s plans for progress and the development of the nation in the upcoming fiscal year. The national budget for FY 2018 was presented by the Finance Minister to the Bangladesh Parliament on June 1, 2017. Budget FY18, upheld the recent trend and once again rendered the population in awe by its sheer size, which remains historically unmatched. The budget FY18 stands at a massive Tk 4.0 trillion, growing by 17.6% and 35.6% over the budgets of FY17 and FY16, respectively. The government has clearly taken an ambitious stance and proper implementation of the budget could potentially lead to a massive turnaround in the development of the country. It is therefore, with lofty hopes, that the population received the budget and its actualization is the ultimate prayer for the upcoming fiscal year.
Much has been discussed, argued and actively debated about the budgetary provisions, taxations, and expenditure avenues, all over the country from the media to households. By now, most of the concerned population are well-versed in the various allocations and have also devised the potential repercussions and impacts of some steps. After all, a national budget is more than just the accounts of the government and has a real impact on the income, the standard of living, social welfare and overall prosperity of the country and its population. Therefore, with an aim to steer away from the mundane repetition of the month-long discussions, this report will be focused on highlighting factors and issues that shed light on various other aspects of the budget.
This report will be presented in two parts, the first part focusing on macroeconomic impacts and indications of the budget – starting with a macro analysis of the development trajectory of the country as it is about to embark upon the third year of the Seventh Five Year Plan (7FYP). Fiscal and financing issues of the budget will also be discussed with a brief look at the changes in the subsidy basket. Overall, the analysis is expected to provide some plausible ideas about the feasibility of budgetary provisions and the budget itself.
The second part of the report, zooms into the micro-level implications of the budget, with a particular focus on social and physical infrastructure initiatives and allocations which impact the households and individuals at the grassroots level. A closer look at the incentives and initiatives will attempt to assess the stance of the government on various social and environmental issues. Analysis and impacts of taxation measures, the social safety net budget and coverage and foreseeable changes in prices of goods and services will be covered. Finally, a short assessment of the initiatives undertaken to address climate change issues, increase resilience and preparedness of the vulnerable population and the efficacy of the measures will be made.
MACROECONOMIC PURVIEW AND IMPLICATIONS OF THE NATIONAL BUDGET FY18
Macroeconomic Performance in light of 7FYP Targets and Budget FY18
FY18 marks the beginning of the third year of the Seventh Five Year Plan development trajectory of the country, and therefore essentially indicates that we are closing in on the halfway point of the 5-year period. The performance so far, in comparison to the targets have been a mixed basket with some sparks of excellence and some pockets of failures. Table-1 shows the actual performance compared with 7FYP targets for some key macroeconomic indicators for FY16 to FY18 budgets, expressed as a percentage of GDP. Table-2 uses the same indicators and calculates the cumulative shortfall/surplus in contrast to targets for the same period. These indicators provide insights into the economic health of the nation as well as assess the performance of the government in terms of managing its own finances.
To start off, the GDP growth rate and Inflation performance of the country is evidently following the planned curve. The country finally broke out of the 6% growth rut it had been stuck in and is expected to grow by 7.4% in FY18. The World Bank, however, continued to maintain its stance of much lower growth figures and reiterated that the Bangladesh economy grew by 6.8% in FY17 and projected a growth of 6.4% in FY18, despite the government already announcing a 7.2% growth for the current FY while setting an even higher target for the next. This issue is a waiting game till the growth figures for this year are finalized around September.
In terms of the inflation rate, the economic performance has been laudable with the government maintaining a low level in FY16. The performance till Q3 of the current fiscal indicates a high possibility of the final inflation rate being lower than the target of 6%. This means sound monetary management by the central bank and the government for successfully combating detrimental price hikes.
In terms of real sector indicators, we can see slight shortfalls to targets throughout the comparison period, particularly concerning Investments and Consumption in Table-1 which eventually results in a cumulative shortfall of over Tk 1 billion and Tk 8 billion for total investment and consumption, respectively, over this period. The investment figures fall short owing to shortfalls in private investment which has been persistently affected by security concerns and hence, lower business confidence. The cumulative private investment shortfall amounts to Tk 478 billion which is covered somewhat by public investment surpluses, but not completely.
Consumption is an important indicator as it is a major determinate of the aggregate demand in the economy. The consumption rates have also been falling short of 7FYP targets, and while the decline may seem marginal, it could potentially account for a cumulative shortfall of Tk 832 billion by FY18. This does not bode well for the aggregate demand in the economy and some taxation measures included in the budget is set to deeply impact domestic savings, investments and could have a harmful destabilizing effect.
The concerns deepen further when looking at the fiscal indicators and the deficit financing performance of the economy so far. The shortfall in revenue, particularly tax revenue, seems to be snowballing and could potentially cross Tk 1trillion cumulatively by FY18. Necessarily, a similar shortfall is evident in terms of total expenditure, lower expenditure figures and downward revisions to the Annual Development Program (ADP) allotment.
The NBR revenue shortfall has been persistent in previous fiscal years, with FY16 clocking in a high shortfall of Tk 226 billion. In the current year, the shortfall has amounted to Tk 86 billion till February 2017. Surprisingly, in the budget, the government has already revised the revenue target down by Tk 180 billion, which could indicate that an additional Tk 100 billion in revenue shortfall is predicted. A closer look at the figures reveal some indisputable trends and impacts of this as listed below:
- The tax revenue shortfall for FY15 to FY17 has been mainly owing to the weaker performance of domestic sources of revenue, namely income tax and VAT-domestic. This should raise a red flag for the government since such both of these sources are directly linked to the income and expenditure of the population. Low collection of these taxes indicate a weakening of business morale and aggregate demand, which in turn has affected consumption and hence the domestic VAT collection.
- A highly ambitious budget also requires a highly dynamic financing plan. For FY18, the government is relying on NBR tax revenue to finance 62% of the budget with target of Tk 2481 billion.
- The target is 22.2% higher than FY16 budget and 35% higher than the revised revenue target of FY17. This essentially means that that the revenue targets keeps getting higher, the greater the shortfall in revenue by the end of FY17.
- The NBR has not been able to achieve such growth rates historically and thereby, the achievement of this target also seems highly improbable.
- If revenue collection falters, the planned expenditure/budget also needs to be revised down to affordable limits, and in this case the ADP also is revised down, leading to dampening of development plans.
The deficit financing strategy for FY18 already poses a difficult situation owing to the increased dependence on external borrowing- set at highest target over the last five years. Revenue shortfalls would therefore exacerbate the situation which would inevitably transpire in downward revisions of the budget and development programs.
To summarize, the macroeconomic outlook for the upcoming year does not seem easy and will require extremely disciplined and driven measures to fulfill the huge task the budget poses. If the government finances, consumer and business sentiments and financial sector face difficulties, the growth trajectory will inevitably be affected severely. Therefore, it would be wiser for the government to monitor the economy closely and take swift measures to revise targets, if and when needed. Instead of doggedly pushing through to achieve stated growth targets and potentially failing, it is always wiser to cut back your losses as it becomes evident.
“THE PERFORMANCE SO FAR, IN COMPARISON TO THE TARGETS HAVE BEEN A MIXED BASKET WITH SOME SPARKS OF EXCELLENCE AND SOME POCKETS OF FAILURES.”
BUDGET MEASURES AND THE CITIZENS
The budget FY18, as is the case with every budget, includes several measures which have been welcomed and others which have been scorned by the people of the nation. These measures and there implications are discussed sector-wise in the subsections below.
FISCAL ISSUES AFFECTING MONETARY STABILITY
The fiscal sector has been analyzed extensively in the previous section from a macroeconomic purview. Other than just setting daunting revenue targets, the government has also attempted to introduce new tax revenue sources to help the cause.
- In budget FY18, the government has imposed a 60% hike on excise duties on bank deposits between TK0.1-1.0 million which has left the general population in dismay and economists and the business community flabbergasted.
- The current deposit rates at banks are usually in the range of 3-4% which essential means, when accounting for inflation of above 5.5%, their returns on the deposit are already in the negative.
In addition to that, an advance income tax will be deducted at source by the banks, further lowering the interest income.
- To top that off, an excise duty of 65% would leave small depositors with having to pay out of their pockets instead of earning any return.
Such a policy is extremely detrimental and this could lead to liquidity shortages which would affect investments and also perpetuate capital flight if individuals see arbitrage opportunities abroad.
- This could also lead to money flowing out of the economy through informal channels, increase attractiveness of other credit organizations such as NGOs and even lead to financial scamming of retail savers.
- Despite heavy opposition, the government has approved this measure and its dire impacts are already evident in the resentful retail/small savers who have been bought into formal banking channels.
- There has already been a sharp increase in deposits in Islamic banking which follow profit sharing system and hence are expected to remain unscathed. This poses a acute threat to the already weakening banking sector of the country.
- Uniform VAT imposed on all goods and services except daily essentials – While a blanket tax is an attractive measure to source revenue, the entire concept of Value Added Tax is in question here. VAT essentially means tax collected at every stage of value addition, and imposing one rate for all essentially means skipping the entire value-addition aspect.
The budget has introduced several incentives and benefits for select export sectors, as discussed below:
- Green growth has been prioritized by the government through providing tax benefits to the two largest export sectors – the RMG and leather industries. Businesses practicing environmentally sustainable operations will be provided with tax benefits.
- In order to encourage more remittances, the government has announced its intentions of introducing no cost measures for remitting funds to the country. This is an attempt to discourage informal/illegal channels of remitting money which is usually riskier and costlier than formal channels. Adequate provisions to follow through with this could enable accounting for greater remittances.
SUCH A POLICY IS EXTREMELY DETRIMENTAL AND THIS COULD LEAD TO LIQUIDITY SHORTAGES WHICH WOULD AFFECT INVESTMENTS AND ALSO PERPETUATE CAPITAL FLIGHT IF INDIVIDUALS SEE ARBITRAGE OPPORTUNITIES ABROAD.
SOCIAL SECTORS – HEALTH, EDUCATION & SOCIAL SECURITY
In this section we will focus on three main sectors:
THE HEALTH SECTOR
- The government allocation to the health sector has been notoriously and historically lower than required. FY18 is no different, with increases in allocation in nominal terms which does not necessarily translate to higher allocations when analyzed using comparative statistics. The budget iterates a ‘revamping’ of the sector through the Health, Population and Nutrition Sector Development Program with increased focus on maternal and infant health, contagious diseases and increase in number of community health centers.
- Sadly, this program has been in operation for quite a few years and has had largely the same focus with some additions to diseases covered and overall coverage of services. Therefore, it is evident that the so-called revamping measures are once again just ‘window dressing’ with significant transformations.
THE EDUCATION SECTOR
- The allocation for education sector has increased by 14% in the upcoming budget which is a laudable measure. Expansion and improvement in education is the main and perhaps the most sustainable measure to improve quality of human resources of the country.
- Allocations for both primary and secondary education has been increased and there has been an increase in coverage of education stipends in the safety net budget along with continuation of all education related stipend and welfare programs.
- However, the government has directly disregarded a Supreme Court decision and has in fact increased the VAT on English-medium private schools and private universities. This is extremely discriminatory and raises questions regarding the government’s widely communicated intentions of improving the quality of education. Such selective imposition of taxes can only be termed as punitive and should not be imposed on welfare sector institutions.
SOCIAL SAFETY NET PROGRAMS
The social safety net budget has increased by a healthy rate in the upcoming budget and the government has introduced initiatives to increase coverage and benefits for several key programs as summarized below:
- Increased coverage in the form of a larger beneficiary base for – Old age allowance program, Widow and oppressed women allowance program, Financially Insolvent disabled program, Education stipend for disabled program, Maternal allowance and Allowance for working and lactating mothers.
- Increase in benefits for – Financially Insolvent Disabled program, Education Stipend for Disabled program, Special/Old age allowance for bede and backward communities, Allowances for patients suffering from chronic diseases, Freedom fighters festival bonus and Livelihood of Tea laborers.
- There are block allocations for disaster management and climate change related programs, and the haor regions have now also been bought under the coverage of the SSNPs.
- While all these are great initiatives, there are two major issues that still remain:
- The implementation of the National Social Security Strategy, which would streamline the existing safety net programs into a handful of manageable programs, need to be accelerated.
- The SSNP budget always includes the ‘Pension scheme for retired government officials’, which is one of the largest allocations. Inclusion of this program in the SSNP is incorrect as this has no welfare value for vulnerable population of the country. Additionally, when the allocation for pensions are removed from the SSNP budget, it deflates sharply and becomes extremely meagre.
- Therefore, the government must introduce contributory pension schemes for its retired officials as it is a much more sustainable and effective means of financing pensions rather than direct payouts.
TO SUMMARIZE, THE MACROECONOMIC OUTLOOK FOR THE UPCOMING YEAR DOES NOT SEEM EASY AND WILL REQUIRE EXTREMELY DISCIPLINED AND DRIVEN MEASURES TO FULFILL THE HUGE TASK THE BUDGET POSES.
- Budget FY18 is undoubtedly a bold initiative by the government and has introduced many positive incentives and initiatives which will benefit the population and aid in the development of the country.
- However, its design lacks cohesion as many initiatives provide conflicting ideas about the government’s stance and even several positive incentives include provisions which seem counterproductive.
- The main concerns at this point remain the future of the banking sector and the overall savings and investment climate of the country.
- The revenue scenario is a cause for grave concern as increased pressure on the NBR alone cannot increase collection and the new sources introduced seem to affect the welfare and stability of the people, especially those at the middle and lower income level groups.
- Increased focus on both physical and social infrastructure development is a much needed and welcome aspect.
- The population is expectedly apprehensive about the upcoming fiscal year and the government should definitely take drastic measures to address their concerns and reduce this intimidation they are experiencing.
- Successful implementation of this budget would require vigilant monitoring and swift decisions to address problems and issues as soon as they arise.