Make the national budget relevant
The number of risks our economy is currently facing due to all the global instabilities is perhaps unprecedented since the early days of Bangladesh’s independence. Faced with this reality, the government is expected to present the new budget early next month.
Over the past two years, the government has had to prepare less ambitious budgets due to the pandemic. But now it has no choice but to increase its support for the people, who are suffering both from the aftermath of the pandemic and from the various supply shocks due to the Russian invasion of Ukraine.
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At the same time, debt servicing – especially after watching what is happening in Sri Lanka – and budget deficits are becoming growing concerns for Bangladesh. During the last fiscal year, Bangladesh’s debt service to revenue ratio fell from 56.2% in 2019 to 81.2%. According to the International Monetary Fund (IMF), “although the risk of debt distress remains low, the risk of an increase in the debt service-to-revenue ratio has increased.”
And this is where the concern is particularly acute, because for years Bangladesh has struggled to improve its tax-to-GDP ratio. In the past nine years, our highest tax-to-GDP ratio was at an embarrassing 9% in fiscal year 2017-18. Over the past fiscal year, that figure has fallen to 7.6%, the lowest in South Asia and one of the lowest in the world.
“The money is really coming out of taxpayers’ pockets. But it’s not going into state coffers,” says Zahid Hussain, former chief economist at the World Bank’s Dhaka office. “The money goes into the pockets of various intermediaries in the system.” This major leak affects the entire budgetary management of the country. Then there is the issue of tax evasion, which is believed to be quite common among the political and business elite.
Without increasing tax revenues, the government has no other alternative to finance its expenditures, without increasing the risks of servicing the debt. Already, the Finance Division has warned the government to avoid open-ended loans and discourage the import of luxury goods to cope with macroeconomic pressures arising from external shocks. In addition, he observed that the financial health of commercial banks has weakened due to the increase in non-performing loans (NPLs), driving up the costs of letters of credit (LC) – putting increased pressure on our reserves. change – and that the government needs to take initiatives to complete the megaprojects on time, which would relieve some of this pressure. But these recommendations have been passed on to the government for years. Instead of paying attention, the government went after anyone who made these suggestions.
Loan repayments are already the fourth largest item in overall budget expenditure. However, this would not be a problem if the loans were used wisely for financially viable projects that benefited the economy and the people. This must be the government’s priority in the future, unlike in the past.
Also, on the expenditure side, allocations for the education and health sectors need to be increased. Moreover, their ability to absorb budget allocations also needs to be improved. In the budget for the financial year 2021-22, the education sector received only 2.08% of GDP. In its Education 2030 Framework for Action, UNESCO recommends allocating 4 to 6% of GDP to education. However, at the current rate of resource allocation, the education budget as a percentage of GDP could reach only 2.15% in 2025 and 2.26% in 2031.
Even in the post-Covid period, Bangladesh spends about 2.5% of its GDP on health, which is the lowest in South Asia. Numerous studies have shown that due to the high amount of out-of-pocket expenditure on health services, the majority of people are only one health crisis away from falling below the poverty line. In fact, many people have fallen below the poverty line due to some form of health emergency.
Naturally, the allocation for subsidies is revised upwards by 24.1% to Tk 66,825 crore in the upcoming budget. The alleged purpose of this is to keep prices low, in a context of volatility in the international market. But will this goal really be achieved?
If we take the electricity sector for example, the government has been paying for years for much more generation than we need, while improving transmission capacity very little. As a result, millions of taka of public funds have been wasted to subsidize overcapacity in power generation. Will the new subsidy increase also be flushed down the drain?
To pay for the increased grant allocation, the government is set to cut the Annual Development Program (ADP) funds by 7.89%. According to Dr. Selim Raihan, Executive Director of the South Asian Network on Economic Modeling (Sanem), “Whenever there is a budget cut, it is the ADP that is the main victim”. But development activities should take priority over the non-development aspects of the budget.
While this is true, how useful would it be? After all, since the 2008-09 fiscal year, the government has not been able to fully execute the budget once. In its recommendations for the next budget, the Center for Policy Dialogue (CPD) said: “Over the past decade, setting budget targets in Bangladesh has mostly come across as a numbers game.
But the budget must be more than that. As the World Bank explains, “accurate revenue and expenditure forecasts are essential to preparing a credible budget. In Bangladesh, overly optimistic expenditure allocations are presented with ambitious revenue targets”. Which, in short, translates to: the government plays politics with the budget.
It is unclear how long the government can afford to do this, but it is clear that the people can no longer. They also cannot afford poor government execution and wasted budget allocations. The sooner the government realizes this, the sooner it can work to make the budget relevant again, and for the right reasons.
Eresh Omar Jamal is deputy editor of the Daily Star. His Twitter handle is: @EreshOmarJamal