Budgeting during uncertainty

It was the last of the budgets; it was the first of budgets—last for the incumbent regime, and first for the new Speaker.

And at a time such as this, the Finance Minister AMA Muhith knew exactly how to welcome Shirin Sharmin Chowdhury, the first female Speaker of the parliament—

“It may well turn out to be an uphill task for you to run the affairs of this parliament congenially and neutrally in the face of violence, intolerance and corruption that have engulfed our political arena.”

It sounded more like a self-reminder by the Finance Minister who was placing the National Budget for Fiscal Year 2013-14 (FY2014). Concerns over sheer political and economic uncertainty were apparent throughout the budget speech. Defending the economic growth of passing fiscal year which fell short of target, the Minister argued, ‘If we could prevent the recent violent political programmes, GDP growth for the current fiscal would be higher’. He also noted that the private investors are a bit hesitant because of the upcoming election related political tensions which might further lower down private investment.

Yet for the Finance Minister, ‘attaining a higher growth rate by increasing investment’ remained the main goal of his last budget. But how realistic is it at a time such as this?

The finance minister admitted that to achieve the 7.2 per cent GDP growth target for FY2014, the government will have to go against the wind of a typical pre-election phase that otherwise witnesses a slowing down of the economy. Bangladesh’s GDP growth dropped by two and a half per cent in FY1991, almost one per cent in FY2002 and half a per cent in FY2009. According to the provisional GDP estimate by the Bangladesh Bureau of Statistics (BBS), the economy is already slowing down and as a result, the GDP growth rate fell from 6.7 per cent in FY2011 to 6.03 per cent in FY2013.

The Finance Minister however argued, since the provisional GDP estimate for FY2013 is based on 8 months’ actual production statistics which ‘exclude’ data on Boro harvest, we might see an upward revision of this estimate in the future. It’s rather peculiar that the Finance Minister would assume that the BBS estimated GDP ‘excluding’ the Boro production, whereas provisional estimate of GDP is supposed to include Boro estimate anyway.

He also argued that, since public investment as percentage of GDP is increasing from 6.5 per cent in FY2012 to 7.9 per cent in FY2013, ‘this will certainly make positive contribution to overall growth rate’ and the GDP for FY2013 will go higher. There are two fundamental flaws in these assumptions. First, the provisional estimate already took into account the increase in public investment; otherwise the estimate would have been lower. Second, the provisional estimate of public investment is already higher than regular scenarios. Usually the government can implement around 89 to 90 per cent of its announced Annual Development Programme (ADP). But provisional figure estimated that the government will implement almost 95 per cent of current ADP, which doesn’t match with the implementation status reported by the IMED.

Even if the estimate for the passing fiscal year gets revised upward, attaining a 7.2 per cent GDP growth in FY2014 will still be difficult. The Minister plans to substitute the lack of private investment by increasing public investment. In a pre-election period, any Finance Minister remains under political pressure to increase government spending. Slowing down of public investment will further tempt the government to go for higher expenditure. The Padma Bridge fiasco has only increased the expenditure pressure on the government by BDT 6,852 crore (for FY2014 only).

Thus, a new ADP for FY2014 has been announced at BDT 65,870 crore, which is 20 per cent and 26 per cent higher than the original and revised ADP of FY2013 respectively. To finance this incremental growth in public investment, the government will now have to increase its revenue earnings by 22 per cent in FY2014.

As per the budgetary documents, the government is aiming for the incremental revenue earnings mainly from two sources—local value added tax (VAT) and income tax on companies, which will have to register growth rates of 47.6 per cent and 37.3 per cent respectively. However, when the Finance Minister is predicting a slowing down of private investment, how realistic is this to target such high revenue earnings from income and value added tax from the local business sector?

Moreover, the government is also predicting high borrowing from the banking sources to finance the deficit. On net account, the government is aiming to finance 54 per cent of its deficit from the local banking sources, which will create a crowding out effect on the private sector, and will further discourage private investment.

Over the decades, high and expensive government borrowing from the local sources has already created a vicious debt cycle for the government, where the government needs to take new debt to repay its old debts.

In FY2014, net long-term debt of the government is predicted to be 55 per cent of total bank borrowing. However, a closer look at the figures reveals that the government’s gross short-term borrowing will be more than 5 times higher than the long-term borrowing. The government’s long-term debt through 2 to 20 years Bangladesh Treasury Bond (BGTB) would be BDT 20,100 crore; while gross short-term debt e.g. 91 to 364 days’ treasury bills would be BDT 107,600 crore. Apparently, much of it will be used to repay previous debts.

Since the current regime will resign half way through the coming fiscal year, excessive amount of short-term loan during the later days of its regime may put the next government under pressure.

Evidently, without a rejuvenated private sector, the government will not be able to manage the economy on its own. There is a high chance that both the targets by the Finance Minister, for GDP growth and investment, will fall short of target in FY2014; and maintaining a fiscal balance will become difficult.

Reducing the customs duty of windshield glass for vehicles to address and compensate the increase in vandalism at the time of political unrest will not be enough to keep economic stability. Even if the government tries to fuel the economy with high public investment, higher private investment will be required to supplement government’s earnings. And the Finance Minister very well understands that maintaining political stability will be the determinant of economic stability. That is why he sounded so desperate during in his appeal during the budget speech to ‘bring an end to the political impasse through dialogue’.

But will this economic realisation be met by political commitment?