Falling investment: a big worry

The current government has limited control over budget implementation that may tempt it to instil commitments beyond its capacity and competence, said Dr Debapriya Bhattacharya, economist and distinguished fellow of Centre for Policy Dialogue (CPD).

The budget for fiscal 2013-14 that is going to be announced today in parliament will be implemented in an atypical manner, involving three governments — the pre-election government will prepare the budget, the election time government will manage it shortly, and the post-election government will inherit it.

But that was not Bhattacharya’s major concern; the lowest level of credit disbursement and investment for the private sector in the outgoing year are the main issues for him, he said on Tuesday at the CPD office.

“One wonders what kind of fiscal incentives would be available to prop up slowing investment,” said Bhattacharya. The government has already announced a refinancing scheme at a subsidised interest rate for small investors in the stock market. A number of controversial fiscal incentives with insignificant development consequences are to continue to make ‘so-called’ black money white.

He said private sector credit growth of 12 percent in April was the lowest in 10 years. The private investment to GDP ratio — 19 percent — is also the lowest in 6 years.

Domestic savings have also stagnated, dropping to the lowest in 10 years. Although inflation has slightly moderated, consumers have lost 38 percent of their purchasing power since January 2009.

The economist said investment was initially impeded by low energy supplies and later by the capital market crash. Growing weakness of the banking sector, particularly due to unscrupulous transactions by the state-owned entities, could not give adequate support to private sector development. The share of non-performing loans at about 11 percent is the highest in the last five years.

“However, the inability to operate the much hyped public-private partnership is the most critical factor that affected private investment expansion,” he said.

He sees solution lies in the enhanced volume and improved quality of public expenditure.

According to him, the scope to extend tax rebates is quite narrow in an economy like Bangladesh. So the major incentive for private sector investment would come through enabling capacity with public investment in the areas of physical and social infrastructure.

“Given the context of the election year, one should not expect the government to go for totally new revenue collection measures, even if it sets an ambitious target,” said Bhattacharya. It might at best do some tariff harmonisation, particularly to support the emerging domestic industries.

As the budget will be the last one for the present government, it will be its last opportunity to reflect its electoral pledges, even in a symbolic way, he said. So, 250 odd development projects earmarked for completion may not get adequate allocation, he feared. There will also be pressures if a hefty block allocation is made, he added.

The economist said every budget by a political government should be an election budget as it is voted to deliver promised services.

“But this budget will be more political than any other in the previous years.” So, he does not expect economic rationale and realities to be fully respected in making projections of key targets of resources and expenditures.

For example, the GDP growth projection at 7.2 percent for the coming year is too high compared to the estimated 6.03 percent achieved in the outgoing year. He said the mid-term projections of the economy have not been aligned to reality.

Amid this critical economic and political situation, Finance Minister AMA Muhith is going to present a Tk 222,490 crore budget for fiscal 2013-14, with a deficit set at Tk 55,000 crore or 4.6 percent of GDP.

“Bangladesh always had a manageable deficit, essentially by default, as we have never been able to spend the full allocations and consequently, did not need the full budgeted resources,” Bhattacharya said.

The only change observed in the recent period is that the government now relies more on bank borrowing than on foreign grants to finance the deficit, he added.

The economist suggested the government take a hard look at subsidy allocation, especially for the rental power plants. Bhattacharya said there is a lack of coordination between those who are responsible for installing the power generation capacity and those who should be assessing the fiscal implications.

On financing Padma Bridge from domestic sources, he said one does not need to be an economist to understand that it cannot be built exclusively by domestic resources without giving less to other competing priority sectors, such as health and education. The allocation for Padma Bridge will be up by about 56 percent of the increment in the upcoming annual development programme.

“We should not shy away from accessing concessional loans from international and bilateral partners,” said Bhattacharya. He criticised the government for not taking measures to augment efforts to raise funds through the capital market and bonds for the non-resident Bangladeshis. Indeed in a pre-election budget it may not introduce a “Padma levy”.

The economist strongly backs expansion of social safety net programmes as the poor and destitute in the country are still many. However, he said there is a definite need to institutionally harmonise and stop pilferage in those programmes.

On exports, particularly for apparel, he advised the government to help the industry, not so much on the revenue side, but by public expenditure on infrastructure development and workers’ welfare promotion.

Bhattacharya feels political uncertainties are eating up the country’s growth potential.

“The impacts of political uncertainties do not show up so much in the short term, it gets exposed in a much bigger way in the medium term,” he said. Quoting a study, he said countries that suffered political uncertainties, needed at least 4-5 years to recover their benchmarks.

“These uncertainties may take away new opportunities that are beckoning Bangladesh in terms of trade, investment and connectivity.”

In a brief assessment of the government’s performance, he said the major negative episodes include loss of Padma financing, capital market debacle, spat with Grameen Bank, discontinuation of meeting with development partners, scams in the banking sector and multilevel marketing, and debates over new bank licences.

Bhattacharya has credited the government for achieving 6 percent plus growth, higher public investment, better implementation of development programmes, revenue expansion, enhanced electricity supply and higher sensitivity to social safety nets.