The FY 2020-21 Budget presented yesterday represents an unimaginative response to an economic crisis that calls for boldness and creativity. It is an example of poorly-conceived budgeting based on delusional growth, revenue and financing projections. A budget should be more than a set of financial accounts of a Government. It should define the future direction of Government policies. This Budget fails miserably in this regard. In the face of the worst global economic downturn in centuries, fiscal policy must take the lead in fostering a recovery. Monetary stimulus is less effective when consumer and investor confidence have collapsed. Restoring confidence will be one of the most difficult challenges facing those managing the economy.
For a poor country like Bangladesh the coronavirus pandemic presents enormous economic challenges. Decades of progress in poverty reduction have been swept away and the percentage below the poverty line has more than doubled to 40 percent. Globalization suddenly seems like a liability for a small open economy as world output is expected to contract by at least 6 percent this year. Projections are lagging behind the emerging reality, as economic modelling on the basis of recent financial crises or economic cycles may simply not work this time. The Managing Director of the IMF has said that even the most negative forecasts may be too optimistic.
A delayed and half-hearted attempt to slowdown the spread of the coronavirus through a “general holiday” completely disrupted the economy while failing to achieve public health objectives. Unemployment has soared as commerce, industry and trade virtually ground to a halt. A poorly managed and corruption-plagued relief distribution system has largely failed to ameliorate the suffering of vulnerable groups now facing hunger and worse. The fate of the millions of our workers employed overseas (4 out of 5 of them in the Middle East) is worrisome, as the collapse of oil prices has caused severe economic stress in the oil-exporting countries. The recent strong remittances figures need to be analyzed carefully to see whether they partly reflect the repatriation of savings of overseas workers who have lost their jobs. Garments exports are also likely to suffer as orders have declined by almost one-half.
External reserves remain comfortable at around US $33 billion (5.9 months’ import cover) but if the decline in earnings from remittances and garments is sustained the reserves position can change quite quickly. It would be prudent to protect reserves by minimizing interventions in the exchange rate market.
Real GDP growth statistics in recent years are a source of pride for the Government, which points to them as a justification for the acceptance of authoritarian one-party rule. Leaving aside problems with the calculations of real GDP growth and manipulation of sectoral deflators, overstating the likely growth figure for FY 2020 and inflating the FY 2021 figures is ill-advised. At the Press Conference to announce the coronavirus “Relief Package” on April 5, the Finance Minister, Governor and Finance Secretary indicated that the 8 percent growth target for this year was within reach. Even the projected 5.2 percent real GDP growth for FY 2020 is unrealistic in view of the catastrophic decline in economic activity in the last quarter. The projected growth figure of 8.2 percent for FY 2021 shows a lack of understanding of the implications of the global downturn due to the coronavirus and the likely lingering impact on our economy. The situation is so fluid that China has not set an official target growth target for this year and Canada has not announced its growth projections for the year.
On the expenditure side the Government should have used this opportunity to completely restructure the budget to cut out wasteful and corruption-plagued spending programs and shift resources to the social sectors to address the problem of widening inequality. In the development budget (205 thousand crores) some effort should have been made to scale back or defer large infrastructure projects in favor of employment-generating labor intensive public works programs. There is no indication of any initiatives to tackle implementation problems. There is a very appropriate increase in Social Safety Net Programs (about 74 thousand crores, excluding civil servants’ pensions), which should transfer some purchasing power to vulnerable groups. The increases in education, health and agriculture are welcomed. However, no attempt seems to have been made to cut down waste in the recurrent budget (363 thousand crore). The current crisis calls for more than incremental budgeting, but perhaps the detailed review of spending needed for this is too much to expect from the current economic management team.
Revenue projections are far too optimistic at 378 thousand crores. The decline in private and corporate incomes associated with the coronavirus may have been underestimated. By using an unrealistically high real GDP growth estimate for FY 2021 the Government has sought to justify these inflated revenue projections. The subsequent revenue shortfall (which could be as much as 130 thousand crores according to some sources) will lead to a financing crisis by mid-year. This “unanticipated” shortfall will be met by unplanned borrowing from a banking system already weakened by massive willful defaults by political cronies over the past decade. The percentage of stressed loans (defaulted, rescheduled and renegotiated loans) was about one-quarter of total lending even before the onset of the coronavirus.
The budgeted deficit of 190 thousand crores (6 percent of GDP) is in itself not exceptionally high under the circumstances and in reference to comparable countries. The concern is that it is likely to be significantly higher due to expenditure overruns and likely revenue shortfalls. The deficit represents shifting the fiscal burden to the future, but our debt levels are not high and much of the debt is on concessional terms. If the money could be spent in a cost-effective manner with low levels of misappropriation and waste even a higher deficit level would have been acceptable. The problem is that at least one-fifth (a conservative estimate) of budget outlays in Bangladesh are lost through corruption.
Financing the deficit has been a serious problem in recent years, with large shortfalls in nonbank borrowing. The planned borrowing from the central bank – essentially, printing money – may have undesirable inflationary consequences. The 5.4 percent rate of inflation for FY 2021 is therefore likely to be exceeded. In this context it would be useful if the experience of the 1943 Bengal Famine is kept in mind. Despite comfortable food stocks, a combination of high inflation (associated with the war) and a rise in income and wealth inequality can have devastating consequences for the poor. An effective system to ensure that vulnerable groups do not suffer food deprivation could prevent this from happening. The estimated number of relief beneficiaries (9.1 million) is perhaps on the low side. The real issue is whether this relief will ever reach this group. The decision to give Awami League party functionaries the responsibility for relief distribution will one day be seen as a terrible error of judgement.
Improving financial governance and tackling corruption are given lip-service in the Budget Statement but the people of Bangladesh know whether such statements from this Government can be taken seriously. The effort to encourage banks to raise their exposure to a poorly-regulated stock market will have the result of further weakening the financial sector. The effort to encourage banks to raise their exposure to a poorly-regulated stock market will further weaken the financial sector.
The critical issues facing the people are inadequately addressed in this Budget. What is important is protecting both the lives and livelihoods of our citizens. There is a trade-off and this Government has proven inept in handling the difficult balancing act that is needed. The Budget statement seems to be premised on a belief that the Government has successfully tackled the coronavirus and can now turn its attention to supporting an economic recovery. The next three months will show whether this belief is justified. What is clear is that the sacrifices and hardships imposed by the coronavirus are being shared very unequally. A sustained economic recovery can only take place once we have ensured the health and well-being of all, including the less-advantaged sections of our society.
(Dr. Reza Kibria is an economist).
