Published in The Daily Star on Tuesday, 14 June 2016
IMPLEMENTING BUDGET FY2017
Time to Walk the Talk
The FY2017 budget has been announced in the backdrop of the manifold challenges carried over from the past years, but also by taking advantage of the comfort zone provided by the relative macroeconomic stability experienced in recent years. In this backdrop, the key challenge for FY2017 will be to attain the envisaged GDP growth rate of 7.2 percent by translating the stability into higher investment that spurs growth, generates additional employment opportunities in the economy and raises living standards of the common people. Higher growth rate and a move from factor-driven to efficiency and productivity-driven pathways of development will call for greater strategic role of the public sector, both in terms of resource deployment as well as policy and reform initiatives. Bangladesh’s budget size, at about 17 percent of the GDP, is still low when compared to many other developing countries, not to speak of some of the developed countries such as the UK, in which case this is equivalent to about 42 percent of the GDP. Thus, per se, the size of the budget is not the issue. What is, however, of concern is the implementation capacity of the Bangladesh state, both in terms of mobilising the needed resources by raising tax effort, broadening the tax base and maintaining distributive justice, and using the mobilized resources appropriately by ensuring allocative efficiency and by raising the efficacy of resource-use. It is reckoned mitigating these concerns will entail addressing formidable challenges in five key areas.
Firstly, as is known, resource mobilisation targets have once again been set at rates which are unlikely to be attained under the business as usual scenario. One would recall that revenue mobilisation target for FY2016 was revised downward in April this year by about Tk. 31 thousand crore (14.9 percent of the original budget). It may be pertinent to mention here that when the FY2016 budget was announced, CPD drew attention to the weaknesses in the fiscal framework and observed that there would be a likely revenue shortfall of about Tk. 40 thousand crore. Indeed, the realised budget for FY2016 will likely be lower than the revised one. In this backdrop, the revenue growth rate planned for FY2017, set at 33 percent higher than the revised budget for FY2016, will turn up to be even higher if compared to the likely actual revenue collection in FY2016. Attaining the ambition of mobilising the significant additional resources will call for more emphasis on direct tax, further broadening of the tax net, raising tax effort, strengthening of the NBR capacity, a more revamped transfer pricing cell and closer coordination involving the central bank, commercial banks and the tax authorities to address issues of tax avoidance and tax evasion. From the medium-term perspective, adequate preparations will need to be undertaken, both on the part of the demand side (relevant government institutions) and supply side (entrepreneurs, business and commercial entities), for implementation of the VAT and SD Act 2012, in a manner that addresses genuine concerns of small businesses but also enables to move gradually towards implementation of this modern and progressive taxation tool.
The second challenge concerns attracting adequate private investment to attain the GDP growth target. Both additionality and productivity will be the key issues here. Whilst commercial banks are saddled with excess liquidity, it will not be easy to translate this fund into the additional Tk. 80 thousand crore of private sector investment to take the private investment-GDP ratio to the planned 23.5 percent. FY2017 is likely to experience negative real interest rate on savings if nominal interest rate trends and prevailing downward-sliding inflationary trendspersist. Attracting savings to capital markets through appropriate incentivisation will assume greater importance in view of this. More concrete budgetary measures were expected in this regard, particularly to attract good companies and large institutional investors to the share market. Availability of unencumbered land, quality electricity and gaswill be crucially important to attract investment, both domestic and foreign. Speedy setting up of special economic zones (SEZs) will be important in this connection. The budget has rightly put emphasis on technology upgradation and skills enhancement; these are critical to raising productivity and reducing the incremental capital-output ratio. Strengthening technical education and incentivising the vocational stream in education will be needed to this effect. One hopes that the welcome emphasis on public sector expenditure on education in FY2017 budget will be tuned towards addressing these needs. There is also a need to incentivise entrepreneurs to invest in R&D and replenish skills endowment at the enterprise level. In the backdrop of some of the signals transmitted by the recently conducted labour force survey (July-September, 2015), showing a declining labour force participation in the manufacturing sector, the twin challenges of raising productivity and avoiding job-less growth have assumed heightened urgency for Bangladesh.
The third challenge concerns weak implementation record of the ADP where emphasis tends to be put more on monetary expenditure rather than quality aspects,outputs and impacts. Time and cost escalation in implementing public sector projects have been appropriately identified through diagnostic studies carried out by the IMED of the Planning Commission. It was found that average implementation time for projects was about 75 percent higher than is originally envisaged; average project cost ended up being higher by about 51 percent. Projects earmarked for completion in FY2017 ought to receive priority attention. It needs to be ensured that adequate budgetary allocations have been made in the FY2017 budget towards this. The aforesaid review’s recommendations as regards parallel initiatives (particularly with respect to land acquisition), appropriate sequencing of implementation plans and right placement and incentivisation of project directors ought to be followed up with concrete measures. In view of the large number of infrastructure projects being implemented at present, issues of good governance, timely completion and cost-effective implementation demands urgent attention. There should be adequate allocation in the budget for maintenance of the implemented infrastructure projects in the coming years.
Fourthly, the issue of financing of the budget deficit should receive due attention of policymakers. Debt as percentage of GDP (33.9 percent) and debt-servicing as percentage of total public expenditure (11.7 percent) is not as yet a major concern for Bangladesh. However, what is of concern is that an increasingly larger part of deficit financing is being incurred at present on account of the high interest-paying domestic financing sources, and not through low-cost foreign financing. Domestic debt-servicing now accounts for 19.2 percent of the revenue budget; in contrast, foreign debt servicing accounts for only about 3.4 percent of earnings from export of goods. For this desirable shift to take place, more emphasis should be put on negotiating soft-loans, particularly for capital intensive investment projects. Keeping budget deficit within stipulated limits (of less than 5 percent of GDP) through scaling down of public expenditurehas now emerged as the new normal. This practice undermines fiscal-budgetary discipline, weakens fiscal framework and speaks of the weak capacity of the GoB, both to earn as also to spend. The issue of greater use of foreign loans is also gaining increasing relevance in view of the fact that in future Bangladesh will have to go more for blended financing as distinct from soft loan since she has now been graduated to lower-middle income status and will likely reach the threshold for IDA (soft-window) financing in near-term future.
Last but not the least, one should not forget that a key objective of the government budget is to ensure distributive justice favouring the relatively less-endowed citizens. Both fiscal measures and resource allocation should be geared to ensure this. The proposal in FY2017 Budget to allocate proportionately higher amount of resources in favour of education, health and social safety net programmes is thus welcome. However, it will be important to ensure that the allocations are spent appropriately so that marginalized households could benefit from quality education that will ensure social mobility of their children andcommon citizens have access to health services provided by community health clinics. Social safety-net programmes need to be appropriately targeted and should be able to address the strategies and priorities articulated in the National Social Safety Strategies (NSSS).
One observes that the government’s appetite for taking the needed reforms, urgency of which was recognised earlier, has weakened over time, although these are critically important from the perspective of enforcing good governance, accountability, transparency and for raising institutional performance capacity. Successive CPD reviews have highlighted the need for public services reform, public expenditure reforms and financial and banking sector reforms that are long overdue; there is also an urgent need to setup a permanent agriculture price commission and undertake a review of incentive and subsidy structure, to name only a few. Institutional and policy reforms will be key to enhancing public sector capacity to address many of the challenges noted earlier. What will not help attain FY2017 budget targets, one can justifiably foretell, is conducting the business of development under the business as usual scenario. Time has come to walk the talk.
The writer is Executive Director, Centre for Policy Dialogue (CPD).