Between austerity and bold expansion, Bangladesh budget looks to middle ground

A pandemic budget is a hard choice between two options: a submissive retreat into austerity, or a bold fiscal expansion to find a faster way out of the coronavirus blues. Stuck in these tumultuous times, governments struggle between a rock and a hard place.

Finance ministers need to pull out many rabbits out of their hats, trying to balance stimulating the economy whilst starting the process of repairing the public finances.

It seems the Bangladesh finance minister will find the middle ground as he prepares to roll out a Tk 6 trillion budget, about 17.3 percent of GDP, on Thursday for a dismal fiscal year. The number is large, but not eye-popping. It doesn’t match the scale of the pandemic’s effects on lives and livelihoods, a key theme in the budget, but nor is it too a timid step. The outlay is just enough to build resilience against the COVID shocks. It’s like creating an enclave of temporary protection to tide over the rough weather out there.

As the coronavirus pandemic continues to upend people's lives, the choice for Bangladesh, like many countries, is an all-out battle with whatever resources it has. The upcoming budget for fiscal 2021-22 will show how the government goes about this struggle. Economists say the road ahead is not smooth.

“The focus of the budget must be the government’s allocation to deal with the coronavirus,” said Ahsan H Mansur, executive director of Dhaka-based Policy Research Institute.

Then there is slow implementation, a chronic problem in Bangladesh. Pessimism takes hold as economists note the slow pace of essential programmes. Only 42 percent of the national budget has been implemented in the first 10 months of this fiscal year, compared to 43.9 percent a year earlier, according to the Centre for Policy Dialogue. “I believe the biggest challenge is to implement the budget," Mansur said.

The budget, a third by Finance Minister AHM Mustafa Kamal, will be the biggest in the history of Bangladesh. The upcoming proposed budget will be about 12 percent bigger than the revised outlay.

The government has set a revenue target of Tk 3.89 trillion, about an 11 percent increase over the current fiscal year. Tk 3.3 trillion of this will be collected by the NBR, a 9.7 percent rise over the revised estimate in the current fiscal year, while the remaining Tk 590 billion will be collected through other means.

Finance Minister AHM Mustafa Kamal delivering the budget speech for 2020-21 fiscal year in parliament on Thursday. Photo: PID

While the jump is not unexpected, there are doubts as to whether the new tax collection target will be met. As of March, the NBR had only collected 53.6 percent of its revenue target set for fiscal 2020-21.

Even if the target is met, the budget deficit -- more than Tk 2 trillion -- will be the widest in at least 10 years, crossing 6 percent of GDP and going beyond the conventional 5 percent. The sheer size of the deficit is due to a Tk 1.28 trillion outlay needed for the government’s aid efforts. To plug the massive hole, the government plans to borrow more from foreign sources than in the past.

“I don’t think the deficit is a problem,” said Mansur. “I suggested a deficit target somewhere between 7-8 percent. The government’s tax revenue is going to fall, so the deficit would have risen anyway. And the government must spend more in the current climate.”

Bangladesh, commended as a “standout star” in South Asia, looks to settle for a 7.2 percent GDP growth target in the new fiscal year, less than earlier projections, as it is expected to focus more on saving lives in the second wave of infections that swept across Bangladesh with a new fury.

“The aim is to save the people, including the businessmen. We want to move forward while taking people from marginal groups with us,” Kamal said at an event on May 27.

Some believe keeping the pandemic in check with all-out efforts is also the only way to save livelihoods as well. "For the 2021-22 budget, we should completely focus on curbing the spread of the coronavirus, and its eradication. I don't see any long-term strategy from the government to ensure this. Rather, we're working on an ad-hoc basis," said Mohammed Farashuddin, a former governor of Bangladesh Bank.

Policy researcher Mansur agrees.

“We all know that as long as coronavirus prevails in Bangladesh, wave after wave will come. It will slow down investment. And without investment, there will be no growth and employment,” he said. “We must eradicate the coronavirus. It is the No. 1 challenge, and the government must back the effort with money.”

Besides a robust allocation for the health sector, the heart of pandemic attention, Bangladesh will also need to buy COVID-19 vaccines with an aim to immunise 100 million people in the new fiscal year, for which the government may allocate a separate amount in the budget.

Prime Minister Sheikh Hasina led Finance Minister AHM Mustafa Kamal to parliament as he presented the budget for 2020-21 fiscal year. Photo: PID

But with huge allocations, the fear of large-scale corruption, negligence and other sorts of irregularities come along. “If the allocated budget is not spent properly due to unbridled corruption, why is there no strategy to prevent it?” asked Farashuddin, who had been long been a part of the government's policymaking team.

“The media reported many cases of corruption in the health sector, and the authorities didn’t deny them. In light of the ongoing corruption in the health sector, we don’t see any way to break free from the coronavirus menace without a long-term strategy; this is the first and foremost issue,” he said.

MIXED PICTURE

The pandemic calls for sweeping gestures, but some of the government’s efforts may remain more word than deed if the implementation of the current budget is anything to go by.

The GDP growth target for the current fiscal year was 8.2 percent, but it was later revised down in two phases to 6.1 percent.

The government said it would obtain Tk 644.14 billion in foreign loans to finance the 2020-21 budget, but, as of the first 10 months, it has only managed to get Tk 72.17 billion, or just 10.55 percent of its target.

The government borrowed Tk 179.74 billion from domestic banks against the Tk 822.49 billion plan in the first 10 months of the fiscal year, less than a quarter of its target.

The sales of savings certificates, however, have surged to Tk 361.27 billion within the first 10 months, surpassing the target by 19 percent.

The inflation target for the budget may be set at 5.3 percent, down slightly from the 5.4 percent target in the current fiscal year. The 12-month moving average of consumer prices from May 2020 to April 2021 is 5.6 percent.

Meanwhile, in order to increase spending, the government will also have to raise the amount it takes in as tax revenue. Those involved have long stressed the importance of increasing the tax-to-GDP ratio.

The closure of the dockyard at Itakhola in Dhaka’s Demra left 500 workers jobless. Photo: Mahmud Zaman Ovi

Bangladesh has one of the lowest tax-to-GDP ratios in South Asia, with the target for FY 2021-22 set at 11.2 percent, up from the 11.3 percent in the revised budget of the current fiscal year.

The average tax-to-GDP ratio of most developed countries is 36.2 percent, while that of emerging economies in Asia is around 26.7 percent.

Bangladesh’s ratio is lower than the average for Asian countries overall, which is 18.5 percent, and even lower than the average 17.8 percent in Sub-Saharan Africa.

“The finance minister says that our tax-to-GDP ratio is low and that means our tax collection is low,” Farashuddin said. “But what steps has he taken to increase tax revenue? We need to raise the amount.”

The relatively high growth target set in the budget is, in part, due to the continued resilience of remittances sent by migrant workers. Bangladesh’s inward remittances, a critical lifeline for the poor and vulnerable families, soared to a record $22.84 billion in the first 11 months of this fiscal year. That’s largely in line with the global trend.

Remittance flows to low- and middle-income countries surpassed the sum of FDI ($259 billion) and overseas development assistance ($179 billion) in 2020. The main drivers for the steady flow included fiscal stimulus that resulted in better-than-expected economic conditions in host countries, a shift in flows from cash to digital and from informal to formal channels, and cyclical movements in oil prices and currency exchange rates, according to the World Bank.

But, according to several government and independent calculations, the number of migrant workers who left Bangladesh and went abroad since the start of the pandemic is only a quarter of the number who returned to Bangladesh during that time.

The 7th Five-Year Plan had 700,000 migrant workers going abroad every year, but this initiative has nearly ground to a halt during the pandemic and is putting further pressure on the domestic labour market, said CPD researcher Professor Mustafizur Rahman.

But domestic demand will continue to grow as remittance payments remain high, supporting the recovery of the services sector and leading to an increase in growth despite the length of the pandemic.

Exports have also continued to rise in line with expectations, despite the pandemic. The garment sector, Bangladesh’s largest exporter, grew by 6.24 percent in the first 10 months of the fiscal year.

JOBS, POVERTY AND SOCIAL PROTECTION

To save jobs by offsetting the effects of the pandemic on the economy, the government in 2020 announced 23 stimulus packages worth Tk 1.28 trillion. Among those, 16 packages had a direct budget allocation of Tk 406.91 billion.

But unemployment has remained a major concern, a factor that appears to be underestimated in several official statistics.

Last year the Bangladesh Bureau of Statistics conducted a survey about unemployment before and after the start of the pandemic. It found that between April and July, the effects of the pandemic raised unemployment to over 22 percent, but the rate fell to about 3.75 percent by September.

A female labourer takes a nap as she waits for work for hours at Natun Bazar in Dhaka’s Badda amid a lockdown over the coronavirus outbreak on Friday, Apr 16, 2021. Photo: Asif Mahmud Ove

But the South Asian Network on Economic Modelling or SANEM claims the unemployment rate is still close to 10 percent, citing several bits of research.

A survey conducted by the organisation during January and February found that 10 percent of people were completely unemployed, with the highest rate of unemployment among the youth. Normally youth unemployment stands at around 10 percent, but the survey found it had risen to 20 percent in the pandemic.

Mustafizur Rahman, a distinguished fellow at the CPD, called for the creation of more opportunities for private sector investment to solve the unemployment issue. “There is very little investment at the moment and we need some strategy to increase it.”

Low-interest loans and subsidies will be covered by the budget to incentivise the agricultural sector, subsidise agricultural inputs and reduce the cost of agricultural equipment, according to officials from the finance ministry.

Under the pandemic circumstances, it would be better to make the social safety net programmes labour market-oriented, which SANEM’s Executive Director Selim Raihan said may help ease the unemployment issue.

Low-interest loans and subsidies will be covered by the budget to incentivise the agricultural sector, subsidise agricultural inputs and reduce the cost of agricultural equipment, according to officials from the finance ministry.

Several surveys indicate the poverty rate has doubled from 21 percent to 42 percent due to the impact of the pandemic. A survey by SANEM and similar surveys by two other institutions indicate about seven million families in Bangladesh have recently fallen below the poverty line.

“We need two strategies to handle this poverty issue,” said Prof Raihan. “The first is an economic recovery programme centred on micro, small, and medium-sized industries and businesses. Most of those who have recently fallen into poverty are involved in those kinds of work and are suffering now. They have not benefited much from the government’s aid packages either.”

“The second strategy is a comprehensive and strong social security programme. The one currently in place has not been able to hit the government’s targets in this fiscal year.”

A worker welding metal at Shmashana Ghat in Dhaka’s Postogola has only glasses for protection from the dangers. Photo: Mahmud Zaman Ovi

Nearly 11 percent of the budget in the current fiscal year was allocated to social protection. This will increase further in the form of greater support for the poor, the marginalised and rural areas, the finance minister indicated.

Experts also feel that the assistance given to the beneficiaries should continue for at least three months instead of being a one-off payment. Ahsan H Mansur said more beneficiaries should be added to the system so they can receive social protection.

“The types of social safety nets laid down in previous budgets will not suffice,” he said. “We need to give money to those who have become poor because of the coronavirus. Many families have become destitute due to the pandemic. Many have lost their breadwinners. Many children have been orphaned.”

The government’s savings certificates are often deemed to be a measure of social protection, as is the pension payments for government employees, but this money will not have a real effect.

As the budget is just half a day away, Finance Minister Mustafa Kamal is expected to set aside a significant amount of money for those who have been hit the hardest by the pandemic. They are the quiet sufferers, unable to have their voices heard over the cacophony of budget numbers.

[Reporting by Reazul Bashar, Zafar Ahmed, Masum Billah, Faysal Atik, Farhan Fardaus and Ruhul Amin Rana; written in English by Sabrina Karim Murshid and Shoumik Hassin.]