NATIONAL BUDGET 2020-21

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An Ordinary Budget for Extraordinary Times

The National Budget was placed before the parliament on June 11th for the 2020-21 fiscal year by the Finance Minister, AHM Mustafa Kamal. With an ambitious title, “Economic Transition and the Future Pathway”, the TK 568,000 crore budget has been prepared in combination with both the past achievements of the government and the current situation caused by the Covid-19 pandemic. Given the severity of the pandemic and to get a much better-informed understanding of the situation, the announcement of the budget could have been delayed until the end of the year as is the case with some other countries. But the Bangladesh government appears to have felt confident enough in getting the full grasp of the Covid-19 crisis and its economic and financial consequences enabling it to present the budget. Hence without further ado, let’s delve into the bad, the ugly and the worst of the budget 2020-21.

Do you want the bad news first?
The fundamental objective of the budget for the next financial year (FY21) should have been to resolve the unparalleled threats to health, social protection and economic sector raised by the Covid-19 pandemic, and to restore economic stability. Though the budget has acknowledged the context, it falls short to be a Covid-19 responsive budget. In his budget speech, the finance minister said: “The budget for FY 2020-21 has been prepared to bear in mind the strategies required to be undertaken to meet the emergencies in the health sector of Bangladesh and recover from the damages caused in various sectors of the economy. Sufficient allocation has been made in the proposed budget to satisfy the needs of all Ministries and Divisions to address the impact of Covid-19 outbreak”. But to what extent the proposed budget has responded to tackle the health and economic challenges?

Health is Wealth
For decades, the health sector, especially the public health system, has been overlooked. While in the private health sector, there is a lack of transparency and accountability. Against this backdrop, the total allocation for health budget increased by 14 percent to Tk 292.47 billion in FY21 from Tk 257.33 billion in FY20. The proposed increase in health budget is necessary but seems inadequate given the ongoing health hazard. However, there is a provision of a block allocation of Tk 100 billion, which is proposed to fulfil emergency requirements. This allocation should be used judiciously. Allocation of Tk 1 billion to finance the activities for the development of research in health-education and science and technology is commendable and the allocation should be increased quite significantly in coming years.

Along with increased allocation, despite inadequate, the management of the health sector must also be improved. Without the improvement of management, effective usage of the increased allocation will come under question. Dr. Selim Raihan of SANEM, in an article for the Financial Express said, “The health ministry lacks capacity in implementing the budget moreover there are questions regarding corruption and mismanagement in the health sector. In the budget, claims have been made that hospitals have been transformed into specialized hospitals for Covid-19. However, the question remains whether these hospitals are actually in operation, as media reports indicate a huge gap between announcement and implementation. Most of these hospitals lack doctors, nurses and supply of essential medical equipment.”

Other economists have shared similar sentiments regarding the health budget. Dr. Wahiuddin Mahmud was quoted saying, “In allocating funds, as expected, the budget has rightly focused on strengthening public health facilities particularly to deal with the pandemic, providing safety nets including food security for the poor, and providing various kinds of incentives and subsidies to agriculture and enterprises of various kinds who have incurred losses due to the lockdown. The question is whether these allocations will be enough to achieve the intended goals, even if the usual misuses and leakages of funds can be minimized. More than ever, the effectiveness of the budget will depend more on the management of implementation than on financial allocations, in respect of the relief, rescue and recovery measures.”

How about a rescue mission?
There is no clear direction on the public health front about how to cope with the ongoing Covid-19 pandemic, which makes any plan for the rescue and recovery of the economy merely speculative. One cannot but sympathize with the finance minister for seeming to grope in the dark in preparing a budget.

Social Protection Budget
The budget proposes increasing the coverage of the social security programs and the allocations have been increased to some extent; but these expanded programs may fall short in terms of identifying and supporting those who have lost their livelihoods because of the economic disruptions and have now joined the ranks of the poor.

How much does the FY21 budget proposal to spend on social protection? The official claim is that this will increase from 16.3% of the total revised budget in FY20 to 16.8% in FY21, equivalent to 2.9% and 3% of GDP respectively. The budget share will be increasing by 0.5 percentage point and the GDP share by 0.1 percentage point. Given the rapid deterioration in the state of poverty and vulnerability in the aftermath of Covid-19, increases in the social protection budget is among the top two priorities, the other being health.

Some studies have shown that providing for the minimum subsistence of the needy people including these new poor may require minimum public spending of up to 4 percent of GDP, depending on the length and severity of the various social distancing measures and the extent and speed of economic recovery. The challenge of managing the new social protection programs have exposed the problem of the of representative credible local governance. This compels the government to rely on the centralized bureaucracy with very little local knowledge to manage things at such times of crisis.

The Not-So-Good News
But even the good news about the boosted social protection budget comes with a catch. World Bank senior economist, Dr. Zahid Hussain, talks about the ‘creative accounting’ in composing the social protection budget.

Social protection programs include expenditures targeted at reducing poverty through interventions aiming to enhance the capacity to manage economic and social risks. In particular, unemployment, exclusion, sickness, disability and old age. However, the social protection budget also includes expenditures unrelated to addressing poverty and vulnerability such as interests paid on National Saving Certificates, agricultural subsidies, public pensions, stipends to secondary and higher education, subsidies to interests on bank loans to provide relief to borrowers, subsidies to interests on loans as well as the amount of loan to the financially excluded households and enterprises.

Dr. Hussain, in his column for The Business Standard, thus breaks down the math to say, “Total allocations to social protection excluding the pension and subsidies, has in fact declined. The total decline is about Tk1,700 crores—from TK 45,086 crores in the revised FY20 budget to TK 43,386 crores in the FY21 budget, equivalent to 1.8% and 1.4% of GDP respectively. The budget share has declined from 9% in FY20 to 7.6% in FY21.”

Budget Deficit
The overall budget deficit in FY21 will be TK 1,900 billion which is 6.0 percent of GDP. In FY20, the revised budget deficit is estimated at 5.5 percent of GDP. The government plans to borrow TK 706.04 billion from external sources to fund the next year’s deficit and hopes to secure TK 40.13 billion as foreign grants. In addition, the government wants to have TkK1,099.83 billion from domestic sources, of which TK 849.83 billion would come from bank borrowing and TK 250 billion from non-bank sources like national savings certificates. Though, it seems that the budget deficit in FY21 is likely to increase further if the revenue target is not met and the pressure to spend high escalates.

Needless to say, this adds to the precarious situation of the banking sector of Bangladesh. Not only will there be a crowding-out effect from the government borrowing but this also means having to service the high-interest rates offered on the saving certificates.

In the proposed expansionary budget, the government will spend whatever needs to be spent and worry about financing later. This essentially means that the Bangladesh Bank will have to pick up the tab if there is no other financial institution to honour the cheque issued by the government. Dr. Zahid Hussain has rightfully said, “In extraordinary situations like this pandemic, money is the way out. Yet there never is a free lunch, pandemic or no pandemic. The worry is not about Bangladesh Bank buying government bonds, the worry is about buying too much of them and for the wrong reasons.”

Shooting for the Moon while running low on gas
In the latest report published by the Asian Development Bank on June 18, 2020, it predicted that emerging Asian economies (i.e., developing countries in Asia) would grow by 0.1 per cent this year (2020), slowest since 1961. Next day (June 19, 2020), the ADB published another study which warned that Covid-19 threatened top 10 percent off global output. The study further indicated that the disaster was likely to be even more devastating than previously expected.
Similarly, the International Monetary Fund (IMF) projected a negative growth outcome for the global economy, shrinking by 3 per cent this year (2020). OECD chief economist Laurence Boone expressed the view that economic activity across OECD countries collapsed and by 20 to 30 per cent in some member countries. GDP in OECD countries is expected to decline by 7.1 per cent this year. Therefore, it remains a surprise how Bangladesh can achieve the projected growth of 8.2 per cent in the next financial year.

To further question this inflated growth figure, we need to add in the problem of falling remittances and RMG export rates and the vexing problem of poor domestic private investment and one wonders whether there is an estimation error!

Another Year, Another disappointment?
Dr. Debapriya Bhattacharya of Centre for Policy Dialogue stated in an article, “I am afraid that the budget has shied away from doing a hard introspection and scoping of the evolving landscape. This has deprived it of identifying innovative sources of finance, imaginative spending programme and taking a “whole of society” approach in dealing with the scourge of COVID19. Regrettably, it ended up being an ordinary budget in an extraordinary time”.
Such a feeling of disappointment is shared by many who have read the budget. Dr. Selim Raihan has even said, “What we needed was a mid-term “recovery plan” under which the proposed budget for the FY21 should have been formulated. There was a need for undertaking out-of-the-box measures, go beyond the usual thinking and a strong political will. Though some reflections of political will are visible in the proposed budget, there is a lack of coherence and a clear guideline on how such will can be translated into proper actions”.

While the budget has prioritized health and social sector programs, any lack of actions to match intentions will result in further misery for the population.

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