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Middle-income status and the proposed Budget for FY 2016-17

| Updated: October 23, 2017 04:28:34

Middle-income status and the proposed Budget for FY 2016-17

With a target of 7.2 per cent growth in Gross Domestic Product (GDP), a total budget outlay of Tk. 3.40 trillion has been proposed for the fiscal year (FY) 2016-17. To implement the budget, which is 15.42 per cent higher than the last year's and 28.74 per cent higher than the revised budget of the previous year, the target of revenue collection has been set at Tk. 2.42 trillion with a budget deficit of Tk. 978.53 billion. In the proposed accounts of revenue collection, Tk. 2031.52 billion will be collected as the National Board of Revenue (NBR) tax, Tk. 72.50 billion as non-NBR tax, and Tk. 323.50 billion as non-tax revenue.
One of the striking features of the proposed 2016-17 budget is increased allocation for non-development expenditure vis-à-vis development expenditure. Non-development expenditure has increased from Tk. 1845.59 billion in the 2015-16 budget to Tk. 2157.44 billion in FY 2016-17 representing a 17 per cent rise whereas development expenditure has increased from Tk. 1025.59 billion in the 2015-16 budget to Tk. 1170.27 billion in FY 2016-17 representing a 14 per cent rise.
To finance the proposed budget deficit of Tk. 978.53 billion, the target of domestic borrowing has been set at Tk. 615.48 billion while the targets of foreign borrowing and grants have been set at Tk. 307.89 billion and Tk. 55.16 billion respectively. However, such a high target of domestic borrowing to finance the fiscal deficit is likely to limit the availability of investible funds in the private sector causing the already sluggish private investment to further slow down. Private investment remained stagnant in recent fiscal years and stood at 21.75 per cent of GDP in FY 2012-13, 22.03 per cent in FY 2013-14, 22.07 per cent in FY 2014-15 and 21.78 per cent in FY 2015-16.
Consequently, the total investment also became torpid as it stood at 28.39 per cent of GDP in FY 2012-13 and slightly increased to 28.58 per cent, 28.89 per cent and 29.38 per cent in FY 2013-14, FY 2014-15 and FY 2015-16 respectively since public investment assumed a somewhat an increasing trend of late - from 5.76 per cent in FY 2011-12 to 7.6 per cent in FY 2015-16. It is, however, needless to say that with the current trend in private investment, the target of the economy growing as a middle- income one by 2021 is likely to remain unattainable.
Sluggish investment can largely be attributed to the increasing trend in illicit capital outflow that has contributed to stagnation of national savings in recent years. Data from the Global Financial Integrity (GFI) indicates that illicit financial flow from Bangladesh amounted to US$ 5,587.67 million per year on average during the period from 2004 to 2013. Total illicit capital outflow from the country stood at US$ 5,921.33 million in 2011, US$ 7,225.14 million in 2012 and US$ 9,665.80 million in 2013. Consequently, capital formation in the economy did not gain momentum for higher national savings and investment. For instance, national savings as percentage of GDP stood at 30.53 per cent in FY 2012-13, 29.23 per cent in FY 2013-14, 29.02 per cent in 2014-15, and 30.08 per cent in FY 2015-16.
In addition, increasing borrowing to finance the deficit has caused the government to allocate a large portion of non-development expenditure for interest payment resulting in enormous escalation of non-development expenditure as conspicuous in the 2016-17 budget. Statistics suggest that allocation for interest payment as percentage of total non-development budget stood as high as at 17.9 per cent in FY 2013-14, 18.4 per cent in FY 2014-15, 17.9 per cent in FY 2015-16, and 17.5 per cent in FY 2016-17. Rising allocation for interest payment causes the government to reduce allocation for other important sectors. For instance, a declining trend has been observed in the allocation for subsidies in recent years. Allocation for subsidies and incentives stood at 10 per cent of the total non-development budget in FY 2013-14, which declined in the following years and became 9.9 per cent, 8.0 per cent and 7.8 per cent in FY 2014-15, FY 2015-16 and FY 2016-17 respectively. Furthermore, given the fact that the financial sector is characterised by institutional fragility, proposed investments of Tk. 131.21 billion for capital market and Tk. 20.00 billion for recapitalisation in state-owned banks, which cause non-development expenditure to shoot up, may prove to be ineffective resulting in inefficient use of taxpayers' money.
It is, however, commendable that allocation for social sector - expenditure on education, health and social security - has increased in the proposed budget for  FY 2016-17 compared to that of the previous fiscal year. For education and technology, the proposed allocation has been set at 15.6 per cent of the total budget outlay in FY2016-17 compared to 13.1 per cent in FY2015-16; for health sector, the allocation has stood at 5.1 per cent in FY2016-17 compared to 4.3 per cent in FY2015-16; and for social security and welfare, the allocation has become 5.8 per cent of the total budget in FY 2016-17 compared to 5.7 per cent in FY 2015-16. Despite increased allocation in the 2016-17 budget, Bangladesh lags behind other developing countries in allocating adequate resources for social sector, particularly for education. To capitalise on the opportunity of once-in-a-lifetime demographic dividend that the country is currently experiencing, there is no alternative to strengthening of the human capital base by investing substantially in education and technology.
Given the targets set in the proposed budget, the government expenditure on education as percentage of GDP will stand at 2.85 per cent in FY 2016-17, which is still much lower than the standard expenditure of 6.0 per cent of GDP recommended by the United Nations Educational, Scientific and Cultural Organisation (UNESCO). Moreover, much attention is needed in order to improve the quality of education throughout the country.
In terms of the declining rate of growth in agriculture, cut in the budgetary allocation for the sector in recent years is likely to pose a challenge to the country's attempt to ensure food security. While the allocation for agriculture as percentage of the total budget was 9.4 per cent on an average during the last five fiscal years, the proposed allocation for the sector has been set at 6.7 per cent of the total budget for FY 2016-17. Agricultural growth stood at 4.37 per cent in FY 2013-14 and fell to 3.33 per cent and 2.6 per cent in FY 2014-15 and FY 2015-16 respectively.
Data from the Bangladesh Bureau of Statistics (BBS) show that the number of unemployed population increased at an annual rate of 5.29 per cent during the period of 2000-2010. Unemployed population increased from 1.70 million in 2000 to 2.60 million in 2010 while 10.6 million people were day labourers who did not have job security. Taking this trend into account, the World Bank suggests the country needs to increase employment opportunities by two per cent in order to enter the middle income group by 2021. However, creation of employment opportunities is largely contingent upon accelerated investment, particularly in private sector. The current state of sluggish private investment is unlikely to create significant multiplier effect in the economy and thus fails to enhance employment opportunities. It is, therefore, imperative to boost investment by facilitating private entrepreneurship and maintaining a stable investment climate. In addition, capacity of the institutions involved in budget implementation has to be strengthened in order to rise to the challenge of structural rigidity that the economy is currently undergoing.
Dr Abu Eusuf is Professor and Chairman, Department of Development Studies & Director, Centre on Budget and Policy, University of Dhaka.
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