Generally speaking, the budget is one of maintaining the status quo. The budget speech is a reflection on the economic achievements and trends of the past ten years, covering a wide range of areas and macroeconomic parameters.
In this sense the speech was rather backward looking. In a sense this is possibly to be expected, given that the budget is being presented in the backdrop of the upcoming election at the end of this year.
The speech regrettably evinces a lack of sensitivity in view of the challenges that the economy inherited and the challenges that are emerging in the horizon. To recall, CPD has recently, in its review, drawn attention to the significant pressure on the external balances. The trade balance could exceed 17.0 billion USD and significant deficits in the current account is also an emerging concern. Price of oil, food commodities and fertilisers are on the rise. The budget fails to appreciate the possible implication of imported inflation, exchange rate and the reserves, particularly if pace of export earnings and remittance flows is not accelerated.
There is no concrete focus in the budget on addressing problems that are endemic, and the reforms that are needed, if there is to be a breakthrough in the status quo. For example, there is no mention of the crisis that the banking sector is facing; rather some of the budgetary measures indicate to the country. Neither is there talk of the preparatory steps towards preparing for implementation of the VAT and SD Law.
The Rohingya crisis is undoubtedly a major challenge facing Bangladesh. The Finance Minister mentioned about the Rohingya issues twice in his speech, rightfully mentioning that the financial burden may not be very high at present but is likely to increase significantly in future. But he did not for once mention the amount of money that has been spent till now on providing food, shelter and security of Rohingyas. There is no mention of the financial assessment of the services provided by the administration and the military in supporting the Rohingyas, how this could escalate in the coming days and what budgetary initiatives this calls for.
As the budget proposals reveals, non-development revenue expenditure is increasing while ADP is not as ambitious as it had been in the last few years.ADP is about 6.1% of the GDP. This may perhaps be because the MEGA projects have already been financed. Because there is no private investment is stagnating, there is only so much that public investments alone can do to improve the overall share of investment in the GDP? A number of budgetary proposals are not geared to serving the best interests of the economy and the cause of inclusive growth.
Thus, overall the FY2019 budget reflects old thinking, old framework and adherence to the status quo.
The budget, regrettably, has followed the old trend of setting improbable targets, both in terms of revenue collection and expenditure. The ultimate fate of low resource mobilisation and low public expenditure will be repeated in FY2019. While this will keep the budget deficit within reasonable limit, it will also mean resources not being tapped, and socio-economic benefits not being reaped. There has been no structural change in the budget and the positives and negatives remain as they have been in the past years.
Some of the positive signals emanating from the FY2019 budget are:
- The pace of increase in revenue collection is somewhat higher than the rate of increase in expenditure. This has kept the deficits within limit.
- Share of direct taxes is rising, albeit not at the desired pace.
- The larger share of the deficit of 4 – 5% (of GDP) will be met more from foreign loans and grants. This will help reduce the pressure on domestic resources. One hopes that this will arrest the growing pressure on domestic debt and debt-servicing liability originating from the ballooning domestic debt.
- A long time demand from CPD has been, considering the current food situation in Bangladesh, to discourage import of foodgrains, CPD has proposed imposition of duty on import of rice. The government has now imposed 25 per cent customs duty and 3 per cent regulatory duty on rice imports. It is good to see that this policy suggestion put forward by the CPD has finally been accepted.Although we think the decision was a delayed one and should not have waited till the budget was announced.
- The increase in the number of beneficiaries of the various safety nets in terms of allowance, expansion of geographicregions is to be appreciated. Although the Rohingyas have not been directly mentioned,it is good to see that the number of beneficiaries in Ukhiya and Teknafhave been increased.
- A number of taxes has been increased,customs duties, supplementary duties and regulatory duties. We support the increase in duty on polythene, tax on health service providers who do not have proper facilities for the disabled people.
- Tax on bidi, helicopter rides, perfume, cosmetics, cigarette papers are to be welcome. Similarly, tax cuts on motorcycles, local mobile production will help domestic production and import substitution activities.
- Measure to protect domestic industries are commendable. Since the external sector scenario is not encouraging, giving attention to domestic industries and social sectors is a positive stance.
Weak Points:
- While the pressure from saving certificateswill be reducedthrough increased borrowing from the banking sector, this will likely put pressure given liquidity situation facing the banks. The government may have to resort back to selling saving certificates with a return to high domestic borrowing leading to high debt servicing liability.While the deficit itself will not a major problem, the framework proposed to finance the deficitcould be difficult to sustain.
- The structure of the incremental amount in the supplementary budget reveals that additional money has been sought for a number of heads, two sectors make up for about half the additional budget requested. The expenditure hasincreased by about 21 per cent because of the PDB allocation, which is about 26 per cent of the total additional amount that is being sought permission for. The amount increased for the PMO is 230 percent which is almost 22 percent of the additional amount requested.
Three things to draw attention on:
- Corporate tax rates on registered banks, insurance companies have been reduced from 40 percent to 37.5 percent,and on unregistered ones from 42.5 to 40 percent.There is no logical, economic or administrative justification that inform such reductions.This incentive no circumstances will impact the interest rates in the banking sector which could have positive implications for private sector investment. It will only increase profit margins for the owners. Neither lenders nor borrowers of the banks will benefit from this tax cut. Moreover, in view of the inefficiencies, corruption and malgovernancein the banking sector, offering these incentives without any reform or disciplinary measures will only send wrong signal. If this is to benefit liquidity of the banks, then how is the government making such high estimations of borrowing from the banking sector in the first place? This measure will prove to be counterproductive.
- CPD has earlier recommended that the minimum limit for the tax exemptedincomebracket be raised considering the increase in living costs and to protect real income. However, the budget has kept the thresholds unchanged. Instead, the perquisite benefits have been raised from 475 thousand Tk to 550 thousand Tkadvantage of which will only accrue to people in high income brackets. From the perspective ofequity and fairness this is a contradictory step and ought to be reviewed.
- In the housing sector, the vat on purchase of space measuring up to 1100 sqfeet previously was 1.5 percent and the vat for space between 1100 and 1600sqfeet was 2.5 per cent. In the new budget it has been proposed to be 2 per cent for all space upto 1600 sq feet. This means that for low income and lower middle income groups the vat has been increased by 0.5 per cent and for the better-off middle class and upper middle class groups, the rate has actually been decreased by 0.5 per cent. This is also contradictory from the perspective of social equality.
- The budget does not come up with a well-crafted action plan which is required to implement the budget, improve revenue collection, raise public expenditure and expenditure efficiency and financing the deficits in a prudent manner. A reform package to raise the efficacy of budget implementation is also missing.
- The budget does not speak of any contingency measures to maintain stability in a year of emerging global tension and also domestic uncertainties ahead of theelections.
There has not been the no mention about the problems afflicting the banking sector which are serious and needs urgent attention. One would have thought that more stringent fiscal measures will be put in place to discipline the banks with low performance efficiency. However, instead of taking measures they were rewarded by reducing corporate tax rate by 2.5 per cent. The economy will bear the adverse consequences of such bad policies. Rather some of the budgetary measures mentioned above are contradictory and pointed the opposite direction.