Policy recommendations for budget FY22

The economic downturn and uncertainty induced by the Coivd-19 pandemic continued in the fiscal year 2020-21 (FY21), although at a lower intensity than was initially perceived. During the first half of the ongoing fiscal year, much of the discussions and debates in the national policy discourse had centred around economic recovery and its shape, in view of the worst effects of the pandemic receding. However, as the second wave of the pandemic started to unfold, the overarching focus once again shifted to the protection of lives and livelihood.

CONTRASTING DEVELOPMENTS: The trends of macroeconomic correlates in FY21 unveil a number of contrasting developments. First, although growth in revenue mobilisation started to pick up, pace of public expenditure in FY21 failed to do so. This slow pace of public expenditure can be attributable to a number of attendant factors, viz. design, execution and quality. The public expenditure framework for FY21 was designed in a very formulaic manner, and a number of constraints were introduced in cases of public expenditure, including for Annual Development Programme (ADP) allocations after the budget was announced. [In July 2020, the finance division advised the agencies to prepare lists of ADP projects according to three priority categories: high, medium and low. The division also said that only 70 per cent of the budgetary allocation from government fund against ADP projects can be spent. Later in December 2020, the finance division of the finance ministry allowed the agencies to spend 75 per cent of the ADP allocation.] It is to be noted that the projects with foreign funding were allowed to fully utilise the allocated funds. At the same time, purchasing vehicles was suspended till June 30, 2021.

The limited administrative capacity to implement the budget has also restrained the pace of public expenditure. Failures to fully operationalise the targeted cash transfer programme (Tk 2,500 each to five million poor households) and special honorarium to healthcare providers are glaring examples to this end. Quality of public expenditure has also come under scrutiny, particularly in view of irregularities in health sector-related public procurements. Second, in terms of growth in industrial production and manufacturing, small industries were lagging behind their large and medium counterparts. Third, food inflation was on the rise, while the opposite was true for non-food items. Fourth, although positive developments were observed in cases of export earnings, remittance inflow and foreign exchange reserves, disquieting trends were evident as regards overseas migration, import of capital goods and Foreign Direct Investment (FDI) inflow.

The aforementioned macro-level indicators, however, often fail to capture the underlying micro-level trends within the economy. Regrettably, barring one Bangladesh Bureau of Statistics (BBS) telephonic survey, no other government effort was visible to capture such dynamics. This lacuna in the data ecosystem was somewhat bridged by independent actors, researchers and academia. Although the figures they produced had variations, some general trends could be drawn from these micro-level surveys. It is observed that while people lost their jobs due to Covid-19, the majority were able to be reemployed.  Many had to shift from services sectors to agricultural jobs. Consequently, their income and working hours did not restore to the pre-pandemic level. As such, downward adjustments can be observed in the consumption and saving pattern of people, particularly those belonging to low- and middle-income groups who were compelled to adjust to the loss in income. There is an indication of a significant rise in both the poverty rate and inequality, according to a study of PPRC-BIGD. And finally, structural transformation, both in terms of employment generation and rural-urban migration, was contradictory to what was expected, defying the concept of progress towards modernisation of the economy.

In order to ameliorate the situation induced by the pandemic, economists and analysts have unequivocally identified four sectors of the economy that require additional and particular attention. These are health, social protection, agriculture and small and medium industries. Furthermore, they have asserted that, instead of focusing on economic growth, more emphasis should be given to saving human lives and livelihoods. While assessing the government's policy responses in view of the pandemic, the independent actors were of the opinion that the overall use of fiscal instruments in terms of policy response was inadequate. It was repeatedly highlighted that the design of the stimulus packages did not take cognisance of the needs of the people most distressed, such as the small entrepreneurs.

Finally, it was stressed that policy responses by the government were mostly deployed through the traditional channels. However, some innovative efforts were observed, particularly in the distribution of relief packages. The prevailing weaknesses in traditional channels and failure to comprehend local contexts oftentimes resulted in ineffective delivery of policy supports. This was evinced in the cases of providing stimulus packages through commercial banks and while disseminating information through digital platforms which could not reach the backward people residing in peripheries. Marginalised people lacked access to these instruments, which had put a brake on the attainment of the desired outcome of these policy responses.

Taking cue from the above discussion, the following policy recommendations are put forward, which should inform the upcoming budget and medium-term macroeconomic framework.

TAKE COGNISANCE OF THE POSSIBLE IMPACTS OF THE SECOND WAVE OF THE COVID-19 PANDEMIC: As availability of real-time data from public sources remains a concern in Bangladesh, the existing trends and evidence as presented by both public and independent sources need to be utilised to design the path towards recovery. As the second wave is already here, it is important for the policymakers to formulate a national budget that fully recognises the economic damage inflicted by the pandemic as well as its long- and medium-term implications.

FORMULATE A MEDIUM-TERM RECOVERY PLAN: One of the major criticisms of the FY21 budget was that instead of designing a Covid-specific budget, the government largely opted for a business-as-usual one. The budget for FY21 was apparently designed under the assumption that managing the fallout from Covid-19 will be easy, and the economy will bounce back within a short period in FY21. Given the current dynamics of the pandemic, it can be said that recovery from the entire fallout will take much longer than expected by the finance ministry a year ago. Over the next few years, all recoveries are susceptible to changes in the nature of Covid-19 and the availability and effectiveness of vaccines. Taking these into cognisance, the government needs to formulate a medium-term recovery plan to consolidate its position, contain the virus and progress towards sustainable recovery.

FOCUS ON EQUITY AND REDISTRIBUTION, NOT ECONOMIC GROWTH: The national budget for FY22 should focus more on equity, redistributive justice, protecting jobs and saving lives, and less on economic growth. Attaining a high GDP growth should not be what the budget for FY22 should set its target on. Rather, the budget should be one of redistribution, particularly addressing the underlying factors driving rising inequality. Although the BBS has not yet released the final GDP growth data for FY2020 and provisional estimates for FY21, it is likely to be lower than the target despite positive growth in the per capita income. For a change, the budget should set targets as regards employment and growth in income at the household level rather than GDP growth or per capita income.

PURSUE AN EXPANSIONARY FISCAL POLICY IN FY2022: CPD has urged in favour of an expansionary fiscal policy since the onset of the pandemic in Bangladesh. An expansionary fiscal policy for macro-level recovery should be informed by the needs of public expenditure rather than worries about the budget deficit. Public expenditure-GDP ratio should increase in FY22 not only at the programmed level but also at the execution level. In order to pursue the proposed expansionary fiscal policy, the following six issues should be considered:

First, revenue collection should be raised in FY22 by not introducing new taxes but by curbing tax evasion, black money and illicit financial flows. More equitable fiscal measures are expected in the national budget for FY2022. Strategic support measures should be extended to domestic market-oriented industries with a view to diversifying the economy.

Second, the sectoral prioritisation for public expenditure is critical in the budget for FY22. As discussed earlier, four sectors, viz. health, social protection, agriculture, and small and medium businesses, should receive priority in budgetary allocation. In addition to these, sectors related to education and employment-generating public work programmes should also receive due attention.

Third, expediting the implementation of on-going projects under the ADP which are closer to completion should receive the highest priority. The high priority projects should be monitored closely on a regular basis.

Fourth, the time has come to make a significant investment in strengthening administrative preparedness and raising institutional capacity and line Ministry capacities to implement the budget in due time, within stipulated cost and with good governance.

Fifth, value for money and good governance need to be ensured in order to fully realise the synergistic effects of the policy measures. Overpriced projects and rampant corruption in public procurement should not define expansionary fiscal policy. Nepotism in implementing social safety net programmes should also be addressed to avoid mistargeting and inclusion error.

Sixth, the medium-term debt scenario should enable Bangladesh to provide the much-needed policy space to pursue an expansionary fiscal policy. The high level of excess liquidity in the banking system will be able to provide residual financing for a higher budget deficit. However, it is recommended that available foreign financing should be prioritised to underwrite the required public expenditure from the perspective of cost-effective utilisation of available resources.

PUT SUPPORTIVE MACROECONOMIC AND SECTORAL POLICY MEASURES IN PLACE: In the budget for FY22, a number of supportive macroeconomic and sectoral policy measures should receive attention. Redesigning the stimulus packages, taking cognisance of their weaknesses and past implementation experiences should be one of the priorities. Continuation of the tax-exemption facilities in view of the pandemic, such as on PPE and medicines, should also continue in FY22.  The government should continue the two per cent incentive on remittances as it has contributed significantly to the increase in remittance flows, replenished foreign exchange reserves and reinforced exchange rate stability, which is essential to maintain in such unpredictable global market conditions.

Price volatility of essential commodities must be controlled. As part of sectoral policy measures, promotion of agricultural diversity should receive continued and expanded support. As there are rising concerns as regards the food-stock situation, adequate food-stock must be maintained through imports considering the amount procured through domestic procurement. 

ENHANCE INSTITUTIONAL CAPACITY AND COLLABORATIVE EFFORTS: In the final analysis, the budget and all policies are indicative and provide directions. Much depends on implementation, its quality, timeliness and good governance in the implementation ecosystem. For attaining the inclusive development agenda, the benefits of the taken policies should reach the doorsteps of the marginalised. For the policies to provide the expected outcomes, the institutional capacity of the institutions must be enhanced. In the previous budget, selected non-state actors were given the responsibility of distributing the stimulus packages. In redesigning the stimulus packages and their disbursement, other non-state actors should be made a party to the process. Involvement of non-state actors can bring in important dimensions and perspectives in case of designing the stimulus packages, their delivery and monitoring processes. This is particularly important from the vantage point of addressing the demands of the marginalised groups.

DO NOT UNDERMINE MEDIUM-TERM REFORM AGENDA: Without addressing the reform agenda, the underlying weaknesses in the fiscal framework and implementation of the budget will not be feasible. CPD has been drawing attention to this in successive IRBD reports. A viable completion timeline should be chalked out in the FY22 budget for reforms that are under consideration - Customs Act, Direct Tax Act and others. At the same time, efforts towards raising the ease of doing business and improving the investment climate should be put into high gear. The pandemic should be no excuse in this connection; rather, these steps are essential for building back better.

CONCLUDING REMARKS: The state of the Bangladesh economy, at a time when it is posed for the announcement of the FY22 Budget, transmits some worrying signals. While the government did come up with a number of initiatives to mitigate the sufferings of the people and overcome the adverse effects on the economy in view of the pandemic, the much-expected turnaround is still not there. One conclusion that can be drawn from the analysis presented above is that addressing embedded institutional weaknesses and resilient recovery have become entwined. Inherent weaknesses in the banking sector are undermining the government's efforts to trigger economic recovery through bank-dependent stimulus packages.

Attempts to trigger private sector investment through subsidies, incentives and working capital support are not being able to compensate for the inherent challenges that continue to undermine the competitiveness of the private enterprises. Reaching the marginal groups and those who are left behind are proving to be difficult in the absence of effective local-level institutions and access to real-time data. Generating domestic resources to underwrite the needed resources have been weakened in the absence of the much needed fiscal reforms.

The net outcome of the above has been that private sector investment has been below the targets set out in the plans and budget and as manifested in the negative growth of capital goods and term loan uptake and that of FDI. Revenue generation figures remain way below the targets, and redistributive functions of fiscal policies cannot be excluded because of the enforcement capacities and failure to implement long-awaited fiscal reforms. FY21 targets for export growth remain way below targets. Even during the pandemic, the much needed expansionary fiscal-budgetary policies could not be implemented because of continuing and endemic weaknesses of implementing agencies and line Ministries. No tangible change could be brought in terms of the capacity to both earn and to spend.

In view of the above, a number of recommendations have been put forward in this article that cover both short-term urgent measures and medium-term macroeconomic management, institutional capacity building and reform measures. As was emphasised above, both these tasks have emerged as independent and mutually enforcing. These have covered three areas. From the approach to the design of budget for FY22, stress has been given to pursuance of expansionary fiscal policy, and, focusing on redistribution rather than economic growth. From the public expenditure side, priority has been urged for social safety net expenditure, health and education and CSME-oriented investment-augmenting measures. Adequately, affordability and price stability has been prioritised in the discussion as regards food items. Towards this, fiscal measures, timely import, and food stock management has been stressed. In terms of reform measures setting up of Banking Commission, Agriculture Price, Competition Commission, and fiscal reforms have been emphasised to create the foundations of a good-governed and well-functioning economy that will help to recover from the pandemic and build back better.

Dr Fahmida Khatun is Executive Director, CPD; Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD.   [email protected]; [email protected]

The article is based on 'State of the Bangladesh Economy in FY2021: Third Reading.' Research support was received from Muntaseer Kamal, Md. Al-Hasan, and Syed Yusuf Saadat,  Senior Research Associates of CPD; Abu Saleh Md. Shamim Alam Shibly, Tamim Ahmed and Nawshin Nawar, Research Associates of CPD; Nadia Nawrin and Foqoruddin Al Kabir, Programme Associate of CPD; and Ratia Rehnuma, Research Intern of CPD.