Covid-19 crisis and fiscal space for Bangladesh economy
Raju Ahmed, Md Salim Al Mamun and Md Ezazul Islam
The Covid-19 impact on Bangladesh economy since March 2020 reflected a sharp decline in growth rate of real gross domestic product (GDP) to 5.24 per cent in FY20, compared to a record high of 8.15 per cent growth in FY19. Likewise, the pandemic has slowed down economic growth of other South Asian countries in varying degrees. In order to avert possible economic disruptions, these countries, including Bangladesh, have been taking extensive fiscal measures depending on their own capacities. This article attempts to assess the fiscal space of Bangladesh economy compared with that of peer countries and tries to understand whether Bangladesh economy has enough fiscal space to sustain in an adverse situation if uncertain future, like Covid-19, prolongs.
GROWTH OUTLOOK OF SOUTH ASIA: Despite economic slowdown, growth rate of Bangladesh in 2020 was projected to be the highest among all South Asian countries as estimated by the International Monetary Fund (IMF), World Bank (WB) and Asian Development Bank (ADB). Table-1 shows that only Bangladesh, Bhutan and Nepal will manage positive growth rates in 2020, where Bangladesh's performance would be much better than others. Growth rates of other regional countries including Afghanistan, India, Pakistan, Maldives and Sri Lanka were projected to decline in 2020. However, the economies of Bangladesh, India, and Maldives would rebound in 2021 as speculated by the IMF, WB and ADB (Table-1). Similar to other parts of the world, countries in South Asia have announced comprehensive stimulus packages to be implemented by unconventional monetary and expansionary fiscal measures in order to protect or minimise the impact of the pandemic in their economies. Discussion of this article is limited to understand the absorbability of this unusual fiscal burden needed for Bangladesh's economic recovery from the effects of Covid-19 pandemic, while comparing with some peer countries of South Asian countries, as they have commonality in strategies for rapid growth and poverty reduction.
STIMULUS PACKAGES ANNOUNCED BY SOUTH ASIAN COUNTRIES: To recover the economy from the disruptions caused by the coronavirus, most South Asian countries' governments and central banks have provided emergency lifeline through monetary and fiscal intervention. Though the interventions varied from country to country, the emergency supports were given to household and firms through cash transfer, wage support, food voucher, credit guarantee scheme, interest payment subsidy, different tax concession etc., among others. Bangladesh government announced a comprehensive stimulus package of Tk 1.20 trillion (roughly 4.30 per cent of GDP covering both fiscal and monetary measures) to help different segments of people including formal and informal sector workers, migrant and vulnerable workers, small vendors and farmers. The government increased credit flow in priority sectors including small and medium enterprises (SME) and micro, small and medium enterprises (MSME). It is evident from chart-1 that India and Bhutan provided largest amount of stimulus packages (roughly 14.0 and 10.0 per cent of GDP) while Sri Lanka had minor share in terms of GDP. The concern is that most of the countries may need to scale up their stimulus packages in coming days, if the effects of Covid-19 worsen further.
AVAILABLE FISCAL SPACE FOR IMPLEMENTING STIMULUS PACKAGES: The most widely used definition provided by Heller (2005) describes fiscal space as "the room in a government's budget that allows it to provide resources for a desired purpose without jeopardising the stability of the economy". Therefore, fiscal position in an economy would be sustainable if raising government's spending or experiencing lower tax collection would not create any disturbance on debt sustainability. If a country has enough fiscal space to be used for any adverse situation, it will, in turn, help to recover the economic activities in future and, subsequently, increase government revenue collections through taxes. The fiscal space of Bangladesh is more spacious than other South Asian countries except Afghanistan and Nepal according to the public debt to GDP ratio. Pakistan, Sri Lanka, India, Bhutan, and Maldives have high levels of public debt to GDP ratios, margining their room for fiscal manoeuvre as well as limiting the space to recover from any crisis, like Covid-19. This paper, therefore, discusses five considerations to examine the fiscal space in the countries of South Asia in the wake of Covid-19 pandemic. These are: (i) central government revenue; (ii) central government expenditure; (iii) central government fiscal balance; (iv) public debt situation; and (v) public debt sustainability.
GOVERNMENT REVENUE: The revenue to GDP ratio is one of the prominent measures to explain country's fiscal capacity or space to combat against economic crisis. Enhancing the mobilisation of tax revenue would increase country's fiscal space. IMF mentions that the average tax to GDP ratio is lower in low-income developing countries than that of emerging and middle income countries. In case of South Asian countries, the revenue to GDP ratio remained stable at around 20 per cent over 2015-2019. During that period, revenue-GDP ratio of Bangladesh is lower as compared with other south Asian countries, maintaining at around 10 per cent. On the other hand, Afghanistan, Bhutan, Maldives and Nepal maintained more than 20 per cent level of tax to GDP ratio. India experienced low level, similar trend of Bangladesh, while Pakistan and Sri Lanka maintained the ratio between 10 and 15 per cent. The Covid-19 pandemic is likely to squeeze government revenues due mainly to a contraction in economic activity and depressed business confidence in 2020 and beyond. Most South Asian countries provided tax rebates on emergency medicine, medical equipment to combat Covid-19 in addition to relaxing the tax structure, which will affect revenue-GDP ratio in the respective countries. This lower revenue to GDP ratio thus creates a burden to execute country's recovery and development plan. However, in crisis time, the quick implementation of stimulus packages is critical in order to revive economic activities.
GOVERNMENT EXPENDITURE: Comparative study on government expenditure depicts that Bangladesh and India were the lowest spending countries over 2015-2019 compared to other south Asian countries. Similarly, the ratios of spending of Afghanistan, Bhutan, Maldives and Nepal were quite high, reaching more than 25 per cent of GDP in 2019, while the ratios were at around 20 per cent of GDP for Pakistan and Sri Lanka during the same period. ADB estimated that the fiscal expenditure of Bangladesh will slightly increase from 15.4 per cent of GDP in 2019 to 15.5 per cent in 2020 due to the expenditure related to Covid-19. Similarly, most of the South Asian countries have raised their expenditure in 2020 to support their economy, fighting against the pandemic.
GOVERNMENT FISCAL BALANCE: Higher fiscal deficit creates debt burden and constrains country's fiscal space to combat the pandemic situation. The fiscal deficit of all South Asian countries except Bhutan increased in 2019 (Chart-2). The data also show that the Maldives and Sri Lanka have high fiscal deficit, while fiscal deficits of India, Bangladesh and Pakistan have increased gradually in recent years. In 2020, the pandemic and the associated lockdown led to increase in deficit in most of the South Asian countries (Chart-2). World Bank estimated that the fiscal deficits for Bangladesh, India and Pakistan are 8.2, 7.6 and 8.1 per cent in 2020 in terms of GDP. Meanwhile, the World Bank has projected that average overall fiscal deficit for South Asian countries is to soar to 9.13 per cent of GDP in 2020-2021. Bangladesh and other South Asian countries have been trying to make up their fiscal deficits through different modes of borrowing from domestic and international sources, which will, in turn, create pressure on public debt to GDP ratio in the respective countries.
PUBLIC DEBT SITUATION: The public debt to GDP ratio indicates a country's ability to borrow from the market and the capacity to act counter cyclically in a crisis period. Any country with high debt to GDP ratio can take less countercyclical fiscal measures in pre-crisis or during crisis time. Data of public debt to GDP ratio during pre-Covid-19 indicate that Bangladesh has managed conservatively its public finance to address the economic fallout of the Covid-19 crisis. Bangladesh has experienced low debt-GDP ratio of around 34 per cent of GDP since last few years on an average as compared with other South Asian countries except Afghanistan and Nepal, reflecting Bangladesh's managing capacity of public finance in addressing the economic fallout from the Covid-19. According to the analysis conducted by the IMF, Bangladesh was classified as 'strong' in terms of debt carrying capacity. Some other South Asian countries have experienced much more public debt, even some countries have close to full of their GDP equivalent to public debt. Countries like India, Pakistan, Sri Lanka, Bhutan and Maldives have high debt to GDP ratios which are close to or higher than their GDP.
PUBLIC DEBT SUSTAINABILITY: Public debt sustainability is another important factor of fiscal space for a country. As part of policy response to counter Covid-19 crisis, a number of South Asian countries implemented significant fiscal stimulus in the early stage of the crisis. But such efforts may soon confront public debt sustainability problem where public debt was already high. Some of the South Asian countries entered into this Covid-19 pandemic with high public debt levels and high risk of debt distress (Table-2). These high public debt and debt distress may limit the room for further fiscal support for economic recovery. Among South Asian countries, Bangladesh and Nepal are at low risk in terms of vulnerable debt sustainability. The joint World Bank-IMF Debt Sustainability Framework confirmed that Bangladesh can afford significant amount of borrowing from internal and external sources. The data on debt sustainability depict that Afghanistan and Maldives are at high risk of debt distress among South Asian countries (Table-2).
CONCLUSION: Bangladesh maintained at around 10 per cent of tax to GDP ratio which is lower than all other south Asian countries, except India. The fiscal deficit as percentage of GDP for Bangladesh is below 5.0 per cent in the last decade. Bangladesh managed public debt to GDP ratio in a conservative way so that the country now can afford more borrowing to address the economic fallout from Covid-19 pandemic. Bangladesh has experienced low debt to GDP ratio of around 34 per cent of GDP since last few years. Debt statistics also shows that Bangladesh is at low risk in terms of vulnerable debt sustainability. Therefore, Bangladesh can increase its expenditure, if needed, at significant level through domestic borrowing and foreign loans to support affected sectors of the economy.
Raju Ahmed is Deputy Director, Dr Md Salim Al Mamun is Deputy General Manager and Dr Md. Ezazul Islam is General Manager of Bangladesh Bank. [email protected]; [email protected]; [email protected] Views expressed in the article are the authors' own and do not reflect those of Bangladesh Bank.