Budget analysis: The taste of the pudding is in the eating

The title of this article rhetorically points to the implementation aspect of the budget. The success of a budget depends on its proper implementation, which is also contingent upon realistically set targets. The national budget 2020-21 was placed on June 11, 2020 at an unprecedented time when the country has been struggling with Covid-19 pandemic. The size of the budget is 5,68,000 crore taka, which is 1 percent larger than the previous year's one with a surprising target of achieving 8.2 percent  GDP growth in FY21. It also sets a very ambitious target of revenue earning at about 9 percent higher growth from the previous year's revised target though it is unlikely to achieve the revised one too. The finance minister outlined four-prong strategies in his budget speech as part of budget implementations and recovery of the economy: (i) discouraging luxury expenditures and enhancing public spending to create jobs;  (ii) providing incentives to industries and businesses through low cost loans; (iii) protecting the old and new poor due to sudden loss of their income; and (iv) adopting expansionary monetary policy to support the stimulus with a controlled inflation. There is no denying of the importance of these factors in achieving V or U-shaped rapid recovery from covid-19 crisis.

The recovery of the economy depends on the semblance of normality, which critically hinges on several factors, including judiciously and efficiently prevention of Covid-19 crisis through testing, tracing and isolation, as well as increasing capacity of hospital beds, ICU beds, oxygen supply, medicine supply etc. This year's budget thus gets a bigger allocation for the improvement of public health support system to combat the pandemic. A 23 percent increase is seen in the health sector budget (about 0.6 percent of GDP, which is still lower than the South Asian average) compared to last year with additional block allocation of 10,000 crore taka to incur incidental costs, perhaps to incur the costs of vaccines if they are available in this year. This higher allocation is a welcome move, however, considering the haphazard situation of the public health sector in managing pandemic in terms of prevention and treatment, the allocation does not seem to be adequate. Moreover, without a contingency plan of expenditures, there is a high likelihood of leakage and wastage of public money. Therefore, a successful recovery path depends on how quickly we can contain the pandemic with fiscal and planning resources. 

Another important aspect is to widen the coverage of social safety net to protect the poor and vulnerable from income losses due to the pandemic. However, the allocated resources for the social safety net sector has seen a modest increase of 0.4% of GDP. Compared to the need, the amount and coverage do not seem adequate to bring them in a comfort zone in order to combat the pandemic. A wider social safety net program was needed to support the poor and vulnerable. Apart from the allocation, the cash transfer to 50 lakh families at Tk. 2500 each during lockdown unfolds a reality of unpreparedness in terms of targeting and delivery mechanisms of such supports. It is thus not only the money, but also logistics is an important part of successful implementation of what the Finance Minister has echoed in his budget outlines.   

The government has earlier allocated a credit-based Tk. 30,000 crore for large scale industries (mainly RMG sector is the beneficiary) and Tk. 20,000 crore for the MSMEs with 5-5.5 percent interest subsidies. The ailing banking sector has been given liquidity support by Bangladesh Bank by relaxing CRR and ADR in order to implement the stimulus packages. Further, Bangladesh Bank created refinancing schemes of about 10,000 crore taka, which all are praiseworthy initiatives from the perspectives of accommodative monetary policy stance. However, the credit-based stimulus mechanism unfortunately will leave a large section of MSMEs (over 60 percent) outside the purview of banking due to their opaqueness. Without giving credit guarantee, it is unlikely for the banks to implement the credit stimulus to micro and small firms, which again could create moral hazard problem. Is this not important to bring this large section of unbanked MSMEs to protect their businesses and employment? Nevertheless, MSME sector employs more than 80 percent employment outside agriculture, which is considered as engine of growth. Again, not only money, the weakness lies in preparedness and proper planning. It needs some innovations and proper planning to reach out these distressed firms through making a good list of the MSMEs using BBS data and then involving MFIs to identify and finance these firms. 

At the same time, banks need to be cushioned against all odds to maintain the lifeline of the economy in the recovery phase. The banks are entrusted to implement government's declared stimulus packages for large and MSMEs, agricultural sector and so on. Apart from successful implementation of stimulus, banks might have to finance further in the recovery phase too. So, banks need to be prepared for the sunny days. A caution is that excessive public borrowing from bank (projected to borrow about 85000 crore taka) might crowd out private investment. Some reforms measures would thus be needed to come out of the prevailing restrictive credit regime (credit growth was about 8 percent up to March 2020), which is driven mainly by government-imposed interest rate structure (9-6 structure) and covid-19 crisis. The volume of non-performing loan and restricted interest regime are two important factors that need to be addressed by liberalizing the interest structure with ensuring good corporate governance. 

The deficit financing estimated at 6 percent of GDP will likely to be widened in the context of unfulfillment of the revenue target. However, some judicious budget financing should be in the offing given that the debt sustainability is in a solid foothold for about next 20 years, as predicted by joint IMF-WB analysis. Efficient and judicious public expenditure and finance management is thus the key to take the advantage of fiscal sustainability. With some austerity in public expenditures, mobilization of resources from foreign sources could be a viable option.

In the face of Covid-19 pandemic, the government has been compelled to make a downward revision of the GDP target at 5.2 percent this year, and made an 8.2 percent growth projection for the upcoming fiscal year as opposed to all negative estimates emanating from multilateral lenders. Bangladesh has been achieving a fairly good growth for the decade or so with over 8 percent growth last year and nobody was ready to see a sharp fall from this growth empire by the attack of covid-19. With low growth at around 5 percent or below this year, it is possible to achieve a much higher growth in the next year considering a low base of FY19-20 given that covid-19 crisis is contained. So, the achievement of targeted 8.2 percent or so GDP growth depends on mainly on how quickly and efficiently we can contain the pandemic and return to normalcy. I see this target as a mental compassion given the impressive growth performance of the country over the decade. However, not only allocation of financial resources is enough, lot more works need to be done in a coordinated and planned way to eat the tasty pudding.

The author is Senior Research Fellow at Bangladesh Institute of Development Studies (BIDS). He can be reached at monzur@bids.org.bd