Published in The Daily Star on Wednesday, 4 June 2014.
Expectations from the new budget
Dr Fahmida Khatun
THE clock is ticking. Budget for FY 2014-15 is going to be presented on Thursday, the 5th of June. This will be the first budget of the newly elected government. Though the party in power has announced the last five budgets during FY2010-14, people are interested to know what new is there in the upcoming budget. This is because this year’s budget is going to be presented in the backdrop of a situation when political situation, to some extent is relatively calm after a long stretch of political violence during the first six months of FY2014, but political uncertainty continues to be a concern among many people. On the other hand, a number of macroeconomic indicators are yet to pick up, the failure of which may weaken the fiscal framework of the upcoming budget.
The economy is faced with some challenges in terms of meeting its targets in the area of growth in the gross domestic product (GDP), performance of revenue collection by the National Board of Revenue (NBR), remittance, and private investment. Based on nine month’s data, Bangladesh Bureau of Statistics (BBS) has predicted that the GDP growth will be 6.12 percent in FY2014. The growth estimate has created doubts amongst economists as the performance of the sources of growth seems unrealistic. For example, due to political disturbances during the first half of FY2014 the service sector suffered a substantive loss. BBS estimates however, indicate an increase in the service sector during FY2014 compared to FY2013. Though they have provided explanation of higher prices of services during the volatile period last year, this is not enough to explain this growth. Most of the activities in the service sector were mostly halted due to political violence. Even higher prices for services could not make up for the loss incurred during that period.
Private investment scenario is depressed too. Investment has been dampened due to lack of infrastructural facilities, high interest rates in banks and political instability. Low investment is reflected through lower flow of credit to the private sector. During July-March of FY2014 credit to the private sector stood at 11.5 percent as opposed to the target of 16.5 percent. Another disquieting area is the lower flow of remittance which shows negative growth during July-April period of FY2014. This is due to the decline in the number of workers going abroad. This is going to add to the number of people seeking jobs in the domestic labour market.
Among the few positive macroeconomic indicators in the current fiscal year are exports and imports. Exports increased by 13.2 percent during July-April of FY2014 compared to the same period of FY2013 while imports by 11.1 percent. Export growth is in fact higher than the target for FY2014 that was set at 12.9 percent. Due to high exports the balance of payment situation saw a large surplus and foreign exchange reserves got stronger. The import figure has however, created some confusion as there is sudden and huge increase of import shipment in March FY2014.
As far as the expenditure and income pattern of the current fiscal year is concerned, there are a number of issues which need to be taken into consideration. First, revenue generation is unable to keep pace with the increased expenditure during the past few years. Moreover, the lion’s share of increased public expenditure is on account of non-development expenditures. This is worrisome as the nature of expenditure shapes the development outcome to a large extent. A short term view however indicates that during the first nine months of FY2014, public expenditure has increased only by 18.8 percent against the target of 28.4 percent. Lower growth in public expenditure during the recent months is due to low implementation of ADP and lesser requirement for subsidies. While the latter is a good sign as resources will be available for development activities, the lower ADP implementation is not since it is tantamount to lower economic activities due to lower public investment.
In case of financing of the budget, revenue generation by NBR faces some challenges in meeting its targets in recent years. NBR continues to lag behind the target for the second consecutive year. As was observed, in FY2013 NBR could achieve 96.7 percent of the targeted amount. During the current fiscal year, up to April 2014, NBR has been able to experience a growth of 9.2 percent over the period June-April 2013. This is way below the actual target of 25.3 percent set for FY2014. Given the pace of revenue collection in the past few months of the current fiscal year, the growth of revenue of collection is now set at 15.1 percent. Though NBR has revised its target downward to Tk.11,900 crore, a move taken for the first time since FY2009, this will require an increased growth thrust of 34.4 percent during the last two months than the previous ten months of the current fiscal year. This however, seems implausible at the moment.
The financing of the deficit budget in FY2015, which is planned to be set as usual at 5 percent of GDP, will come largely from domestic sources. Utilisation of foreign aid in project implementation has been declining as there has been lower flow of foreign aid. Moreover, the composition of foreign aid has changed and has tilted towards higher loans than grants risking higher debt repayment. The government has requested for budgetary support to the World Bank, which is yet to be agreed upon since it is tagged with certain conditionalities. Due to lower disbursement of foreign aid the government has become increasingly dependent on domestic borrowing at a higher cost. During FY2013 the share of bank borrowing in total deficit rose to as high as 64.7 percent against the target of 44.2 percent. Up to March 2014 of the current fiscal year bank borrowing was equivalent to 47.2 percent of total budget deficit. Non-bank borrowing through national savings schemes has seen an increase which is 1.5 times of the target. During the first nine months of FY2014 interest payment has increased by 18.9 percent against the target of 16.2 percent. This is not desirable as these resources could otherwise be used for productive activities towards poverty alleviation.
Against this backdrop, the planned budgetary framework for FY2015 reveals that total expenditure will be increased by 11.9 percent in FY2015 compared to the budget of FY2014. Total revenue on the other hand, will be 9 percent higher in FY2015 than the previous fiscal year. The NBR thus has a tough job expedite its efforts towards meeting up the gap in revenue generation. Plan for increased reliance on domestic borrowing will once again put the economy under the pressure of high interest payment. Given the demand for higher economic growth the size of the budget needs to be increased. However, over the years, the size of the budget has, to some extent, become immaterial as the implementation remains unmet. The upcoming budget will face the challenge of brining the growth momentum back on track through higher investment and creating employment. A roadmap towards that and its execution are eagerly awaited.
The writer is an economist and Research Director, Centre for Policy Dialogue (CPD)