Unnayan Onneshan prepares a rapid assessment of the proposed national budget for the 2018-2019 financial year
Macroeconomic stability is threatened by persistent decrease in exchange rate of local currency, large scale deficit in current account balance and high inflation. In the medium term, rate of poverty reduction has been slowed down while five northern districts of the country have seen declining economic situation. Lack of diversification in real sector, particularly in agriculture and industry, has contributed to sluggish growth in output and employment. On the one hand, inequality has widened due to the growing gap between return on capital and return on labour; on the other hand, the persistent primitive accumulation in the form of looting in different sectors of the economy. State of human capital in the country has been disappointing due to absence of quality expenditure in social sectors.
Institutional fragility has been evident in every sector of the economy which is leading different economic sectors to maintain discipline. Institutional fragility and political uncertainty are contributing to the lack of confidence among investors. In the wake of national parliamentary election, investors are adopting ‘wait-and-see policy’ when making investment decisions since they are fearful about the process of power transition and the subsequent business environment recalling the situation after the national election back in 2014.
The size of the budget for FY 2018-19 is Tk. 4,64,573 crore which is 16.06 per cent higher than the proposed budget for FY 2017-18. In terms of the size of the economy, the budget is not so large. The budget for FY 2018-19 is 18.3 per cent of the Gross Domestic Product while it lies below the budget-GDP ratio of other developing countries including the neighbouring countries. India has a budget-GDP ratio of 26 per cent while Malaysia has budget-GDP ratio of 27 per cent. The Budget-GDP ratio is 31 percent in other developing countries.
Regardless of the size, the implementation of budget has been a major challenge in recent years. The country has seen under implementation of budgets since FY 2011-12 and the rate of implementation has assumed a decreasing trend over the years. In FY 2011-12, budget implementation rate was 93 per cent which decreased to 91 percent in FY 2012-13, 85 per cent in FY 2013-14, 82 per cent in FY 2014-15, 79 per cent in FY 2015-16 and 78 per cent in FY 2016-17. In FY 2017-18, budget implementation is expected to be 74 per cent.
Despite the increasing trend of tax revenue over the years, the tax-GDP ratio is very low in Bangladesh compared to global average. In FY 2015-16, Tax-GDP ratio in Bangladesh stood 8.98 per cent, while it was 16.6 per cent in India, 10.5 per cent in Pakistan, 11.8 per cent in Sri Lanka and 18.4 per cent in Nepal. In FY 2016-17 and FY 2017-18, Tax-GDP ratio in Bangladesh slightly increased to 9.0 and 10.39 respectively.
Bangladesh, however, has a regressive tax structure where people with low income have to share relatively larger share of the tax burden due to different forms of indirect taxes. This contradicts a progressive tax structure which is considered necessary for the economy to redistribute its resources. It is evident that Value Added Tax is a regressive form of tax; because its incidence falls more heavily on the lower income people. In FY 2018-19, only 34 per cent of total NBR revenue would come from taxes on income and profit whereas 53.79 per cent would come from indirect sources including VAT and Supplementary Duty together.
The reasons for lesser collection of direct tax from income and profit include small tax net despite the huge size of population, tax evasion and frequent tax avoidance. Still no action on transfer pricing are taken which could provide huge tax revenue and compensate amount lost due to tax evasion in the country.
The budget has set a target of collecting Tk 3,39,280 crore as revenue receipts. The target seems to fall short since a gap between revenue target and actual collection has been regular. In the first nine months of the FY 2017-18, collection of revenue stood Tk 1,44,000 crore against a target of Tk 1,67,000 crore leaving a shortfall of Tk 23,000 crore. Budget has been prepared with a deficit equal to 5 per cent of the GDP. In budget 2018-19, deficit has been estimated to be 4.9 per cent of GDP.
Every year a huge portion of the government expenditure is going in unproductive sectors; specifically in salary and allowance of the government employees and interest repayment. In the budget for FY 2018-19, a total of Tk 1,12,266 crore has been allocated for salary and allowances and interest repayment which constitutes 24.17 per cent of the total budgetary outlay. This continuing trend of growing expenditure in unproductive sectors might be creating a zero sum game without required growth in real sectors.
Allocation in sectors like education, health and social security has been stagnant for years. In budget 2018-19, education, health and social security sectors consecutively have received 14.6 per cent, 5 per cent and 5.1 per cent of the budget. These sectors would get much higher allocation if the budget management was prudent.
Budget has been the occasion of increase in price of many necessities, directly or indirectly. This is because in every budget there are measures that raise prices of certain commodities. The measures taken in the budget for FY 2018-19 are likely to increase price of some 19 commodities while reducing price of some 14 commodities. Soon after the budget is announced, price of some commodities goes up while it is very unprecedented that price of the commodities which is supposed to fall, actually goes down.
Moreover, price hike of the commodities does not remain subject to only budgetary measures. In recent times, prices of some essential goods and services like house rent, electricity, water, gas etc. have seen frequent and arbitrary hikes outside the scope of national budget. Yet, there exist widespread problems of load-shedding and gas shortage creating multiplier effects on the economy which adversely affects living standards of poor and fixed income people and productivity growth of the economy.
While national budget is directly linked to the living standard of the mass, they have little stake in budget making process. The current structure of budget formulation that follows simple arithmetic in balancing income and expenditure and that maintains a rigid time-bound schedule for approval does not allow participation by numerous stakeholders in the final outcome of the budgetary process. As a consequence, lack of participation in budget making process leads to over-centralisation which, in turn, results in corruption, patronisation and poor implementation of budget.
Macroeconomic challenges
THERE are a number of macroeconomic challenges that would pose difficulty for implementing the proposed budget. Persistent decrease in exchange rate of local currency, large scale deficit in current account balance and prevailing high inflation are threatening macroeconomic stability in the economy.
The local currency taka has become weak against the US dollar in recent times. In May 2018 Taka per USD rose to 83.70 from 82.98 in April. Rising pressure on local currency is undermining the growth potential of the domestic economy due to persistent current account deficits.
Deficit in the country’s current account increased to USD 6.32 billion in July-February of the current fiscal year 2017-2018 from USD 963 million in the corresponding period of the previous fiscal year. Despite the sharp increase in import payments against moderate growths in export earnings and remittance inflow deficit increased. As a consequence, the total balance of payment undergoes a deficit of USD 978 million in July-February of FY 2017-18 compared to a surplus of USD 2449 million in July-February of FY 2016-17. On top of that, the country’s trade deficit hit all-time high of USD 11.732 billion in July-February of FY 2017-18, rising by 92.67 per cent from USD 6.089 billion in the same period in the fiscal year 2016-17.
These prevailing trends put high inflationary pressures on the economy. Inflation has risen alarmingly in the current fiscal year creating much pressure on the limited income people. Twelve-month average food and general inflation stood at 7.17 per cent and 5.70 per cent respectively in December 2017 compared to 4.51 per cent and 5.52 per cent in December 2016.
While the recent official data shows a decline in inflation, recent data of Consumers’ Association of Bangladesh on market price shows that price of all the necessary food items have seen a sharp rise not reflected by the official statistics. The problem of high food inflation is largely institutional. Lack of effective supply chain management and necessary market supervision are not only making people spending more on necessary food items but also depriving the producers of getting adequate returns.
Institutional fragility
INSTITUTIONAL fragility has been evident in all sectors of the economy while the banking sector and the capital market have been the worst victims. Turmoil in banking sector and capital market is discouraging private investment by raising interest rate on the one hand and lowering return on capital and investors confidence on the other.
The recent crises in the banking sector, reflecting the poor risk management ability of the central bank, has made the financial sector in Bangladesh worst among the emerging Asian countries. Continuous default loans, scams, and heist cause increased cost of fund and shortfall in capital in the banks. Bangladesh Bank data shows that as of September 2017, total defaulted loan stood at Tk. 80307 crore gone defaulted representing 10.67 per cent of the total loan. This amount reaches Tk. 1,25,307 crore (equal to 13 percent of GDP) when adding the amount of written-off loan. Additionally, non-performing loan as a proportion of outstanding loan which was 7.2 per cent in 2010, reached 10.7 per cent in September 2017. These numbers, however, understate the magnitude of the problem because these exclude the amounts rescheduled or written off loans. As of September 2017, an amount of Tk 45,000 crores was written off.
This situation is more upsetting for the State Owned Commercial banks and Development Financial Institutions. Persistent plundering has left the banking sector in a state of capital shortfall. At the end of September 2017, nine banks fell short of capital amounting near a total of Tk 19,467 crore. Of them, the state-owned six banks have the lions’ share of Tk 17,442 crore. Of the defaulted loan six state-owned bank share Tk 38,517 crore with a default rate of 29.25 per cent while domestic private banks share Tk 33,973 crore with default rate of 5.97, two specialised bank share Tk 5,518 crore with default rate of 23.79 per cent and the foreign banks share Tk 2,298 crore with default rate of 7.89 per cent. The government recapitalises the shortfall with taxpayer’s money from budget for the last 10 years instead of correcting the faults of the institutions, which not only increases the burden on taxpayers but also causes a net loss to the economy.
Further, large scale liquidity shortage has led interest rate to rise, thus discouraging investment in private sector by raising the cost of capital. Despite all these challenges, Budget for FY 2018-19 outlined no institutional reform measures to revamp the banking sector.
It is evident that there has been a vicious cycle in the capital market that ends up with investors’ reluctance to investment. Lack of investors’ confidence and lesser profit of the companies have created the fall in the exchange. Most of the banks, listed with the stock exchanges, registered profit fall in January-March, 2018 compared with the same period in the previous year. Fall in profit, in turn, is raising debt liability of the companies enrolled in share market. Eight companies top-listed in share market have a total of Tk 21,226 crore debt with a total paid-up capital amounting to Tk 2,966 crore.
Amid chaotic situation in the country’s financial sector and political uncertainty ahead of the national elections, foreign investors are increasingly exiting from the capital market. Net foreign investment at the Dhaka Stock Exchange hit negative Tk 282 crore in May, 2018 which was the highest in recent years. In the month, foreign investors sold shares worth Tk 624 crore against their purchase of shares worth Tk 341.83 crore.
Private sector investment has been remaining stagnant at around 22 per cent for a decade. It stood at 22.07 per cent of GDP in FY 2014-15 and 21.78 per cent in FY 2015-16. It is found that net Foreign Direct Investment has slumped recently. In 2017, FDI has declined by 7.76 per cent compared to that in the previous year. In 2014, FDI stood very low at USD 1551.28 million in the milieu of political unrest. FDI rose subsequently to USD 2235.39 million and USD 2332.72 million in 2015 and 2016 respectively. But it again declined and stood USD 2151.56 million in 2017. While slump in FDI in the year 2014 was clearly due largely to the then political chaos, in 2017, decline in FDI in a stable political environment can well be attributed to the environment, not friendly to business.
Med-term challenges
IN THE medium term, the country is facing a set of challenges that were not well reflected in the budget for FY 2018-19. Rate of poverty reduction has been slowed down and the incidence of poverty has concentrated in certain geographic pockets. Decrease in the rate of formal employment creation, alarming increase in youth unemployment rate and declining people’s real income clogged dynamism in the economy despite continuing GDP growth. Lack of diversification in real sector particularly in agriculture and industry has contributed to sluggish output and employment in the economy.
The macroeconomic policy framework has not succeeded to boost the agriculture and the industry sectors to their potential. The decelerating growth in agriculture has been on the decline of late. The rate of growth in agriculture has been falling since the FY 2010-11. The rate of growth in industrial sector has been falling as well. Whereas in FY 2010-11, the rate of growth in manufacturing sector was 10.01 per cent, the rate came down to 9.96 per cent in FY 2011-12 and 9.64 per cent in FY 2012-13 and again fell to 8.16 per cent in FY 2013-14. It rose to 9.67 per cent in FY 2014-15 and further increased in 2015-16 reaching 11.09 per cent. But in FY 2016-17 it again fell down to 10.5 per cent. As a result, the share of industrial sector in GDP is increasing at a decelerated rate.
Bangladesh is missing the opportunity to benefit from its demographic dividend by turning its huge number of youth into human capital, due to the faulty education system. As of the ‘Global Human Capital Report 2017’ published by World Economic Forum, Bangladesh ranked 111th out of 130 countries reflecting much poorer performance in education sector. Unemployment rate among the relatively more educated labour force, particularly higher secondary and tertiary education, has appeared disappointing. The recent Labor Force Survey by the BBS revealed that the educated unemployed account for 39 per cent of the total unemployed in FY 2016-17. In a recent study, World Bank observed that 70 per cent of the graduates are remaining unemployed for two years after leaving their colleges while the rate is 40 per cent for those who have completed technical education.
Not only employment opportunity, but also real income has declined in recent yeas. Data from Household Income and Expenditure Survey 2016 shows that individual income decreased by 2 per cent between 2010 and 2016 while per capita calorie intake decreased from 2318 kilo in 2010 to 2210 kilo in 2016.
A significant number of people are still living below the poverty line, despite considerable thrust on poverty alleviation in all planning documents since the independence of Bangladesh. Though, the proportion of poor in the population declined between 2000 and 2016, the rate of reduction in poverty has been showing a downtrend. The incidence of poverty decreased from 49.8 per cent in 2000 to 40 per cent in 2005. In this period, poverty declined by 1.96 point on an average. The rate of poverty was 31.5 per cent in 2010 marking an annual fall of 1.70 point on an average. In 2016, incidence of poverty fell to 24.3 per cent showing an average reduction of 1.2 point per year.
Though economy of Bangladesh has been achieving commendable growth in the recent decades, it has failed to distribute the benefit of growth fairly among the citizens. Inequality; especially income inequality, has been rising over the years. Gini co-efficient of income has increased from 0.451 to 0.483 at national level between 2000 and 2015 showing an average yearly growth of 0.47 per cent. The Gini co-efficient of income has increased to 0.483 in 2015 from .458 in 2010 representing an increase of 5.5 per cent during the period.
The poorest 5 per cent had 0.78 per cent of the national income in their possession in 2010 which dropped to 0.23 per cent in 2015. By contrast, the richest 5 per cent, who had 24.61 per cent of the national income in 2010, enjoys a share of 27.89 per cent in 2015.
The government spending in social security measures, though increased in recent years, is still appeared to be inadequate since a large number people in the country is living under poverty line. In FY 2018-19, the proposed allocation for social security and welfare sector is Tk 27,156 crore which is 5.8 per cent of the budget outlay. For Social Security and Welfare sector, the proposed allocation in FY 2017-18 was Tk 20701 which was 6 per cent of the total budget. In FY 2016-17, the proposed allocation for the social security and welfare sector was estimated at Tk. 19880 crore, representing only 5.8 per cent of the total outlay.
Such low allocation was attributed to the diversion of expenditure from social sector to meet the rising payment on account of principal and interest for the high public borrowing to finance the budget deficit in the recent years. Moreover, in Bangladesh, social safety net programmes have been developed and evolved on adhoc basis. The major shortcoming of these SSNPs is that they are short-term in nature and only designed to address post-disasters situations.
Attracting more private investment, restoring investors’ confidence and ensuring political certainty may lead to employment creation, poverty reduction and decreasing income and wealth inequality in the country. These are the prudent ways to realise Bangladesh’s potential and continue marching forward on the pathway to future prosperity.
In order to get rid of the outlined bottlenecks, the country has been waiting for a medium-term strategy that generates increment in the productive capacity and provides avenues for the poor to obtain an increased share. The adoption of such a growth strategy necessitates a prudent economic management. It warrants harmonisation of fiscal and monetary policy in order to stimulate the expansion of productive capacity and the fall in the rise of inflationary pressure.
A vigilant look into the falling investment demand is pressing since any further decline in the private investment is assumed to significantly slow down the pace of growth in the economy. The private domestic expenditure may be dampened, if a decline in expenditure happens. The growth of export as well as increased private investment should, therefore, be emphasised in order to escape further downturn in the economy. Macroeconomic stimuli are required to be initiated in order to ensure pro-poor growth through generating employment opportunities in the economy. Besides, an increased allocation of resources and implementation of development programmes in health and education sectors must be ensured, while the social safety net programmes institutionalised into of a sustained system of social security.
The proposed actions in various macroeconomic plans and strategies are inadequate to bring fiscal discipline in the management of deficit, debt and subsidy one the one hand and to increase income in the absence of radical reforms in the tax system, on the other. The regressive tax structure is ridden with low base, avoidance and evasion. There is huge missing of distributive justice, characterised by widening income, spatial and male-female inequalities, driven by jobless growth.
There is need for a pro-active state. As experienced in the recent past, policies that focus mainly on stabilisation, but pay little attention to proper allocation and distribution is more likely to even fail in stabilisation of the economy. Second, numerous un-coordinated seemingly less than effective programmes relating to social safety nets need to shift its emphasis on social protection through innovation in social policies. Third, given the vulnerabilities existing in the external sector, breaking into the high-value global supply chain has become important to the country.
- This is an abridged version, customised for New Age, of the Bangladesh Economic Update’s June 2018 issue, published by Unnayan Onneshan, an independent multidisciplinary think-tank in Bangladesh.
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