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Propositions for the Next Fiscal Year – Towfiqul Islam Khan

Published in Ice Business Times on Wednesday, 1 June 2016

Propositions for the Next Fiscal Year

Towfiqul Islam Khan

Over the past several years, social sectors were marginalized regarding receiving budgetary allocations. A restructured public expenditure stance needs to be formulated favoring the social sectors and programs to support the marginalized people.

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The national budget for the upcoming fiscal year 2016-17 is on our doorsteps. In the run-up to the budget, a few discussions were organized; some through official processes while an overwhelming number was initiated by other stakeholders including think tanks, civil society organizations along with media and business communities. Formulating the national budget in a country like Bangladesh to reflect the expectations of a large population with various socio-economic backgrounds is not an easy task. This is largely due to scarcity of resources, high level of development ambitions and limited administrative capacities. This piece is a small attempt at contributing to the ongoing policy debates. The following policy recommendations are mostly evolved from the broad macroeconomic context. The specific microeconomic fine-tunings are of course important, but that is a discussion for another day. Also, this is in no way a comprehensive list thus, it does not imply that other pertaining issues should not be prioritized.

Keeping the macroeconomic developments in 2015-16 under purview

The budget for 2016-17 needs to be based on the macroeconomic performance of the ongoing fiscal year. There are some takeaways, however. Recently released provisional GDP growth data, by the national statistical organization, indicates strong GDP growth in 2015-16 backed by substantial public expenditure. To this end, export is expected to beat the annual growth target. Macroeconomic stability is largely in place, thanks to declining inflation, a stable nominal exchange rate of the Bangladeshi Taka against United States Dollar and positive balance of payments leading to augmenting foreign exchange reserves. At the same time, during the fiscal year 2016-17, movements of several macroeconomic variables will need to be carefully monitored, particularly rising non-food inflation and persistent weaknesses in the financial sector’s performance indicators. However, the biggest concern was the poor job creation rate despite the reported GDP growth being strong. It is particularly surprising to know that despite attaining a double-digit value addition growth rates in the manufacturing sector in last two years, (in net terms) more than 12 lac jobs were lost in this area. As such, the forthcoming budget should be built around enhancing private investment and the creation of decent jobs.

Keeping provisions for mid-term corrections in fiscal framework

In 2015-16, implementation of the national budget was one of the weakest areas from the perspectives of macroeconomic management. Weaknesses became apparent in a number of areas including revenue mobilization, implementation of the Annual Development Programme (ADP) and maintenance of the balance in the financing of the deficit. Income tax collection rose at its slowest pace in recent history. Overall, ADP implementation was weak, while the special ADP projects – the fast track projects – did not progress at the expected pace. Implementation of foreign aided projects was as usual below par. Over the past years, gaps between budgetary targets and actual outcomes of various fiscal correlations (e.g. revenue collection, public expenditure and financing of the deficit) have increased significantly. Early indications in regards to the fiscal framework targets for 2016-17 suggest that the envisaged growth targets will be set at ambitious levels with growth rates being around 30-40%. Also, sub-par performances in attaining the revised budgetary targets for 2015-16 will push the objectives higher. It is unlikely that planned figures for the fiscal framework for 2016-17 will be rationalized further. Keeping the above concerns in cognizance, the government must keep a provision as soon as the final outcomes of 2015-16 are available, and the early trends of 2016-17 are observed.

Utmost prioritization of resource mobilization

Reclaiming the lost momentum of domestic revenue collection – particularly under the income tax head – will be crucial. The next budget should not over rely on the implementation of VAT and SD Act 2012. Implementation of the Act is already under dispute. Diverse approaches that continue to inform the discourse will need to be reconciled without delay, while perspectives of small entrepreneurs need addressing in a prudent manner. If necessary, a staggered implementation plan may be developed. Adequate capacity enhancement of concerned government agencies and businesses along with other preparatory measures to operationalize the forthcoming VAT and SD Act 2012 will be critical. Plugging the loopholes to curb tax evasion and leakages through illicit financial outflows should be a part of the policy. Also, possible adjustments of the duties on imports need to be carefully crafted with consideration to the interests of domestic industries.

Restructuring public expenditure in favor of health, education and social security to implement the targets of the Seventh Five Year Plan and sustainable development goals

Over the past several years, social sectors were marginalized regarding receiving budgetary allocations. A restructured public expenditure stance needs to be formulated favoring the social sectors and programs to support the marginalized people. The fiscal space created by lower subsidy requirements should be best utilized through reallocation of resources to critical sectors (e.g. agriculture, education, health, social protection) which received scant attention in recent years.

Accelerating ADP implementation

To deliver the public investment on time and within affordable cost, administrative capacities of the government agencies need to be enhanced. Alongside, the ‘mega-projects’ (for the future), important ongoing ADP projects, which are close to completion, should receive heightened attention from the policymakers. It has been observed that some past policy initiatives including appointing project directors through direct interviews by the line ministries and divisions; assigning a dedicated official in each government agency for monitoring and evaluating respective projects and delisting the longstanding ‘non-operational’ projects from the ADP were not followed up later. One can only hope that the upcoming budget will report progress on these issues.

Correcting the administered prices of diesel and kerosene

It was disheartening to see the overdue rationalization of administered petroleum prices was carried out in a way that favored the richer sections of the society. Administered prices of diesel and kerosene need to be readjusted so that the benefits are shared between the entrepreneurs and poor people. Also, as of now, there is no clear reporting on the part of BPC as to the amount of profit being made and the way this profit is being distributed (e.g. repayments of past debt, dividend to government, profit accumulation, etc.). To this end, the disclosure and transparency in regards to BPC finances should be discussed as part of the forthcoming national budget.

Prioritizing reform agenda for effective implementation

The reform agenda should not be seen outside the discussion of the national budget. The relationship between these two areas is symbiotic. Slow progress for the program for change is creating obstacles in the implementation of the state budget. The government will need to pursue some institutional and policy reforms in areas of revenue mobilization, public expenditure management, budget transparency and the financial sector.

Can these issues be tackled in a short span of time? If planned appropriately, it should be possible. The discussions regarding the national budget for 2016-17 should not end after the budget has been passed in the national parliament. The budget for any fiscal year should be regularly analyzed, monitored and debated for its effective and fruitful implementation, both within and outside the government.

The writer is a Research Fellow at the Centre for Policy Dialogue (CPD). He can be reached at: towfiq.khan@gmail.com. The views of this article do not necessarily reflect the views of the aforesaid organization.

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