An Economic Health Check

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In a conversation, Dr Mohammad Abdur Razzaque, Chairman, Research and Policy Integration for Development (RAPID), shares his take on the National Budget 2023-24

The National Budget 2023-24 is highly crucial as Bangladesh faces several critical economic challenges and realities like the extreme shortage of power and ‘hyperinflation.’ Have the challenges been appropriately addressed in the proposed budget?

Formulating this budget was a formidable task. The macroeconomy has been under a lot of strain – initially with rapidly declining foreign reserves followed by stabilisation at a less-than-desirable level, coupled with an upward trend in inflation. While there has been an upward trend in price levels, it is important to note that the current situation does not meet the criteria for hyperinflation. Hyperinflation is characterised by uncontrolled and rapid price movements, often resulting in prices doubling monthly or within even shorter timeframes.

The power supply was disrupted by curtailed imports of fossil fuels used in power plants, owing to dwindling reserves. The power sector grapples with a structural issue, wherein the reliance on rental power plants continues to impose substantial capacity charges that strain the already limited fiscal capacity of the government. The global economic landscape has not been supportive either, as inflationary pressures and sluggish economic growth in Western developed nations have contributed to lacklustre export growth in many developing countries, including Bangladesh.

Given this backdrop, the difficult task for the government in an election year was to come up with a budget that will portray a robust state of the economy, which is often best perceived through high GDP growth. 

In the budget speech, due recognition has been given to such burning issues as tackling inflation and maintaining an adequate level of foreign reserves. However, the necessary trade-offs needed to achieve these objectives were overlooked, resulting in an awkward policy direction. 

For example, the budget aims to achieve a high economic growth rate of 7.5%. However, it remains unclear how such lofty growth can be realised while simultaneously curbing the historically high inflation rate. Sustaining the usual practice of deficit-financed public spending may be perceived as conducive to growth but will not aid in containing inflation. Furthermore, a significant portion of the deficit financing is planned through borrowing from the central bank, which has the potential to exacerbate inflationary pressures. Conversely, the stringent import controls currently in place can stifle growth prospects due to restricted supplies of capital goods and intermediate inputs.

Hence, there appear to be gaps between the identification of challenges and the implementation of appropriate measures to address them. Given the prevailing circumstances, the budget may be seen as relying more on luck than on sound policies to tackle the critical challenges at hand.

In the budget speech, due recognition has been given to such burning issues as tackling inflation and maintaining an adequate level of foreign reserves. However, the necessary trade-offs needed to achieve these objectives were overlooked, resulting in an awkward policy direction

Many have termed the budget ambitious. How would you evaluate it?

The crux of the matter lies not in setting ambitious targets, but rather in establishing realistic ones. There are certain concerns in this regard. According to the budgetary figures, for achieving a growth rate of 7.5%, the private sector would need to elevate its investment-GDP ratio from the current level of around 21% to 27.4%. For an economy like Bangladesh, a private investment range of 21%-24% of GDP is remarkably commendable. In fact, only a limited number of countries worldwide boast such a high level of private investment. The objective of increasing the private investment-GDP ratio by 6 percentage points within a year is virtually unattainable. This is particularly true considering the existing import restrictions. If capital goods and intermediate inputs cannot be freely imported, the private sector will encounter difficulties in maintaining the same level of investment. Conversely, constrained imports can impede economic activities, further dampening private investment sentiment.

In absolute terms, the overall budget size represents around 15% of GDP. If we look at past performance as an indicator, only about 80% of this public spending is likely to materialise. Consequently, the government spending to GDP ratio would be approximately 13%, significantly lower than that of many comparable countries, such as Cambodia (24%), India (30%), Nepal (27%), Malaysia, Thailand, and the Philippines (25% each), and Vietnam (22%).

In terms of public spending on health (as a proportion of GDP), it amounts to a mere 0.76%, whereas the 8th Five-Year Plan aims to raise it to 2% by 2025. Based on a wide range of evidence and international comparisons, it is widely accepted that government spending on health should be at least 5% of GDP. The allocation for education in our budget is estimated at 1.76% of GDP. UNESCO’s Education 2030 Framework for Action sets a target of at least 4% of GDP for public spending on education. Thus, when measured against international standards, our budgetary allocations to basic social requirements are far from being ambitious.

The low level of public spending in Bangladesh is largely attributable to the limited tax effort. Presently, the country exhibits one of the lowest tax-GDP ratios, hovering around a meagre 8%, among global economies. This inadequate tax base restricts the fiscal space available for the government to allocate more resources to education, health, and other areas.

Perhaps, one of the most discussed topics on the budget this fiscal year is about meeting the conditions of the International Monetary Fund (IMF) stipulated during the disbursement of a USD 4.7 billion loan. How have the conditions impacted this year’s budget?

Regarding key reform indicators, significant efforts have been made to meet the conditions set forth by the International Monetary Fund (IMF). The IMF loan package prescribes specific fiscal reform measures aimed at enhancing the government’s capacity to generate greater revenue from domestic sources. The budget and the new income tax act provide crucial policy directives in this regard. However, effective implementation of these policies is of paramount importance.

Considerable attention has been given to the IMF conditionality of raising the tax-GDP ratio by 0.5 percentage points. Nonetheless, despite the prominence given to this issue in various national five-year plan documents (such as the 6th, 7th, and 8th Five-Year Plans), the efforts to mobilise revenue have remained weak. For instance, the 8th Five-Year Plan outlined a roadmap to elevate the tax-GDP ratio from the current level (around 8%) to 12.3% by FY25, and the tax plus non-tax revenue-GDP ratio to 14.1%. These targets were more ambitious than those specified by the IMF.

In the context of Bangladesh, a loan of USD 4.7 billion over a period of 48 months may not be considered a significantly large amount, given the size of the economy. It is within this context that the objective of raising more revenue from domestic sources should be viewed as part of a domestically driven agenda aligned with our own developmental requirements, as outlined in the national plan document, rather than merely an obligation to comply with IMF conditionalities. The budget for this year has set a domestic tax collection target of BDT 4.3 trillion for the National Board of Revenue (NBR), implying a revenue collection growth of over 30% compared to the just concluded fiscal year will be necessary to achieve this target.

Beyond the scope of the budget, the central bank, through its monetary policy guidelines, has taken steps to increase the interest rate ceiling and aims to unify various exchange rates of the national currency, the taka. These measures are also integral components of important reform initiatives.

The low level of public spending in Bangladesh is largely attributable to the limited tax effort. Presently, the country exhibits one of the lowest tax-GDP ratios, hovering around a meagre 8%, among global economies

 

The 2023-24 budget is poised to increase the allocation of social safety net programmes. Do you think the increase in allocation will improve the lives of vulnerable people across Bangladesh?

Social protection is an area that requires increased public investment. Currently, over 20% of the social protection budget is allocated to pension expenses for government employees. Furthermore, there are other components within the budget that may not genuinely contribute to social security support.

There have been marginal increases in the allowance amounts for beneficiaries of old age, persons with disabilities, and destitute women/widows programmes. Considering the cumulative inflation over the past 5-6 years, during which no allowance increases were implemented, the real value of these benefit schemes has declined to a critically low level.

The number of beneficiaries for the elderly and widows will increase by 0.1 million (1 lakh) each, and the Mother and Child Benefit Programme will see an increase of 0.05 million (50,000) beneficiaries. These initiatives are commendable. However, it is important to recognise that a significant number of eligible individuals still remain outside the scope of social protection coverage due to the extremely limited budgetary allocation for this sector. When not all eligible individuals receive social protection benefits, the system contributes to social injustice among those in need of support. Furthermore, while the overall social protection spending will increase in nominal terms, it will decline as a proportion of GDP.

Currently, over 20% of the social protection budget is allocated to pension expenses for government employees. Furthermore, there are other components within the budget that may not genuinely contribute to social security support

On a positive note, what do you think are the positive factors in the budget that can be used to improve the lives of people across Bangladesh?

I’m glad that you asked this question. Indeed, there are encouraging indications that the necessity for pragmatic measures and interventions is receiving due consideration. Specifically, policies beyond the confines of the budget are gaining prominence in addressing macroeconomic challenges while acknowledging unfavourable developments. The anticipated growth for FY22-23, for instance, has been revised downward to 6.03% (compared to the initial target of 7.5% in last year’s budget). This realistic evaluation of the economy has been well-received by most economic analysts.

While the FY24 budget entails public expenditure with a deficit financing of 5.1% of GDP, separate guidelines for contractionary public spending have been issued. This assumes significance against the backdrop of elevated inflation and constrained fiscal capacity of the government. The budget specifies a 15% growth in private credit, whereas the central bank, in its latest Monetary Policy Statement, sets a more conservative target of 11%. Furthermore, policy initiatives are underway to reform the interest rate and exchange rate regimes. However, the effective implementation of these reforms remains a separate concern.

We must bear in mind that the Bangladesh economy currently stands at a critical juncture, as long overdue reform measures pertaining to revenue mobilisation, interest rate and exchange rate management, fiscal spending review, and institutional capacity building must now be undertaken amidst prevailing macroeconomic challenges. Implementing reform measures, even during periods of favourable conditions, poses significant challenges, and these difficulties are further amplified during unfavourable times. However, if executed effectively, they will enhance our resilience, improve efficiency, and bolster competitiveness – key factors for medium to long-term growth and development prospects.

 

Photographs: Asif Rahat

 

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