Between political imperative and economic reality

It is crunch time in the Bangladesh economy. The tennis maestro Virginia Wade once suggested that "it's only when it comes to crunch time that people's true character comes out". One may adapt this perspective to the current economic situation and say that "it's only when it comes to crunch time that an economy's true strengths and weaknesses come out". Indeed, Bangladesh's economy in this crunch time is exposing its structural attributes as well as demonstrating its policy challenges.

These reckonings are coming at a time when the government is announcing its budget leading to the national elections, which are scheduled to take place in the middle of the upcoming fiscal year (FY24).

Economic reality

Successive budgets of the country have had a weak fiscal framework. Its Achilles Heel had been the inordinately low tax-GDP ratio. While the operating expenditure of the government has experienced a steady increase – both in Taka term and as a share of GDP, the programmed development expenditure perennially faltered. As a result, the budget deficit has remained manageable.

However, this area of comfort is depleting discernibly, as in FY23 the budget deficit rose by 1% of GDP crossing the 5% mark. This suggests that the government has not been able to mobilise enough domestic resources (notwithstanding robust GDP growth) to underwrite its development ambitions. The fiscal shortfall may become the hallmark of FY24.

In order to finance its fiscal deficit, the government is increasingly falling back on domestic borrowing (although foreign borrowing has grown as well). The banking sector is now bearing the brunt of such borrowing, possibly crowding out private entrepreneurs. Accordingly, the FY24 budget will inherit a fiscal framework which would be vulnerable more than usual.

Curiously, Bangladesh's economy withstood its fiscal pressures in the recent past largely due to the relative ease characterising its external balances. This comfort zone, too, has almost withered away in recent months. Deterioration of the balances of payment, current account and financial account cannot be solely attributed to the war in Ukraine and the consequent supply shocks and commodity price rise in the global markets. 

Structural features of the economy, such as a lack of diversity in the export basket, low per capita earning of the remittance workers, inability to tap foreign direct investment and low utilisation of concessional external assistance, underpin the current unfavourable trends concerning the external balance. 

All these have led to the depreciation of the value of the national currency, fast depletion of the foreign exchange reserve, and scarcity of foreign currency for underwriting critical imports. The burgeoning debt repayments are adding a new dimension to the worrying situation in the balances of our external transactions. The dim prospect of the export sector and the erratic flow of remittances do not provide any solace to the problem. 

Thus, the country's economy is caught between precarious external balances and a deteriorating fiscal space. The gravity of the situation is becoming evident as the central bank struggles to contain the high inflationary pressure along with foreign exchange rationing and expenditure restraint. 

But, the trade-offs between efforts to improve the external and fiscal balances are also becoming apparent. For example, import control contributed towards lower tax collection. The inability of the country to pay for its outstanding and upcoming fuel import bills (i.e. coal, liquid fuel and LNG) exposes the gravity of the obtaining situation. 

The area of respite for the government is food production. This includes cereal, vegetables, fish and livestock. The cost-push inflation has affected the market prices, but there is no reason to worry about food security at the aggregate level. Expansion and deepening of the social safety net as well as other social security programmes may ease the pressure on consumption of the disadvantaged people.  

Our shortcomings in macro-economic management and accumulated unattended reforms are catching up with us. No wonder it is usually said that you do not get punished for your failing; you get punished by your failings. 

Nevertheless, one wonders where the macroeconomic stabilisation efforts will anchor itself in FY24, given the circumstances concerning revenue, finance, investment and employment. It is also to be seen what impact the economy will experience once the much-anticipated alignment of the exchange rates and liberalisation of the interest rates take place in FY24. 

One possible adjustment approach could have been stabilising the economy at a sub-optimal (lower) equilibrium. Such a restrained approach was offered when the government fixed its economic growth and related targets for the elapsing fiscal year (FY23). Is that approach politically feasible in an election year?

The political imperative

Intellectual of American Left, Michael Parenti, profoundly said, "We should always remember that the core relationship between economics and politics is neither neutral nor conditional." It is for our political leaders to remember that.

Usually, governments want to go to national elections riding high on a spending wave. The opportunity for such fiscal profligacy in Bangladesh is very limited in FY24. It will also be difficult for the government to borrow its way through without affecting investment and employment in the private sector. This may as well fuel the inflationary pressure further. 

On the other hand, the scope for increasing the fiscal space by broadening the tax base and imposing new taxes is restricted by a potential pushback by the voters. A broad section of the population is already experiencing diminished livelihood conditions. The social tension will further aggravate if the government employees are given a pay rise which will have a spillover inflationary effect on the market prices. The need for rationalisation of the subsidy package streamlining of public utility prices (particularly of fuel and electricity) and price enhancement of intermediate inputs for production would complicate the picture further. 

Indeed, a large part of the compulsions concerning fiscal management relates to the commitments made by the government for securing the IMF credit. As the date for the second disbursement by the IMF draws near, the need to undertake revenue raising and reprioritising measures will set. The framers of the budget may maintain a shadow (core) plan to meet the obligations to providers of balance of payment as well as budget support. 

Paradoxically, the current government, after its one-and-half decade rule (in three phases) is facing the national elections with the most disadvantageous state of the economy of its tenure. Indeed, if one recalls the relevant national statistics before the "national elections" of 2014 and 2018 this becomes more apparent. In those times, economic growth was much more buoyant, the inflation rate was much more subdued, the exchange rate was stable, and fiscal and external accounts were steady. Further, both public and private investments were demonstrating slow but positive growth.

Sober assessment

A crunch time is described as a moment late in a game when a team must perform at their best to win. This demands a sober assessment of the situation and the prospect. But overriding political imperatives, if not the prevailing political culture, may not allow one to take a candid note of the economic realities.

Thus, the budget speech for FY24 will not only take stock of the visible successes of the government achieved over the last 15 years, but will also declare high developmental ambitions for the medium term. But the reported budgetary numbers for the immediate future will reflect political aspirations and not necessarily relate to economic realities.

Debapriya Bhattacharya is a Distinguished Fellow at the Centre for Policy Dialogue (CPD)