The Financial Express

Budget FY 2019-2020: Continuing the momentum of growth

| Updated: July 11, 2019 15:54:06

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Global gross domestic product (GDP) growth in 2018 was slightly lower than that of the previous year mainly because of the trade issues between China and the USA, slower economic activities in the United Kingdom (UK) and the European Union (EU) and geopolitical tensions worldwide.

However, the economic climate of Asia and the Pacific was conducive to high growth in 2018. According to the International Monetary Fund (IMF), the region continued to be the most dynamic within the global economy. The inflation in this region continued to be low despite the higher growth.

As a part of the Asia and Pacific region, Bangladesh registered an impressive GDP growth rate of 7.86 per cent in FY18, up from 7.28 per cent in the preceding year. Both the agricultural and industrial sectors grew faster last year than 2017. The service sector grew by 6.39 per cent in FY18, which was 0.30 per cent less than in the previous year. Though both gross domestic savings and national savings decreased slightly, the investment to GDP ratio increased to 31.23 per cent in FY18, from 30.51 per cent in the previous fiscal year indicating investor confidence in the economy. The involvement of the private sector in development projects through Public Private Partnership (PPP) initiatives also fuelled investment. The focus has been recast on the railways and inland waterways by the government.

The inflation level continued to remain on the lower side at 5.78 per cent in FY18 despite GDP growth reflecting the effectiveness of both fiscal and monetary policies. Revenue receipts also increased in FY18 to 11.53 per cent of GDP from 10.0 per cent of GDP in the last fiscal year, which is expected to encourage the authorities to take on more development projects.

However, the stock market performed sluggishly in FY18 and the benchmark index, DSEX closed at 5,405.5 points after booking a loss of 4.40 per cent during the year. As on June 28, 2018, the DSE market capitalisation stood at Tk 3.847 trillion against Tk 3.801 trillion on June 29, 2017.

In terms of interactions with external economies, exports have risen by 6.43 per cent on the back of the readymade garments industry. RMG exports grew at 13.0 per cent & accounted for almost 80.0 per cent of all exports. Despite strong exports, a 25.23 per cent growth in imports has led to a trade deficit on the balance of payments in FY18. This gap is largely caused by the import of intermediate goods which was over 50.0 per cent of total imports and a 140.00per cent growth in food grain imports in FY18. In comparison, growth in the import of capital goods was only 33.00 per cent and for consumer goods, this was 0.16 per cent.

A growth in workers' remittances of 17.32 per cent to US$ 14.98 billion brought down the overall current account deficit to some extent. The foreign exchange reserves stood at $ 32.02 billion at the end of 2018 down from $ 33.23 billion in 2017.

OVERVIEW OF FINANCIAL SECTOR: The financial sector of the country faced tightening of liquidity in FY18 by Bangladesh Bank, triggered by a decrease in the minimum Loan to Deposit Ratio (LDR). This was intended to curb the excessive sub-prime lending by banks and financial institutions in 2017 which continued into 2018. However, the monetary policy continued to remain expansionary to accommodate growth demand by keeping inflation in check. The monetary policy strategy was drawn to keep the inflation level below 6.0 per cent and banks and financial institutions acted in line with this strategy.

The central bank adopted multiple initiatives to support the liquidity position of banks, monitor bank exposure and bank investment in commercial paper. These policies were designed to combat the growing number of non-performing loans (NPLs) in the financial sector. The gross NPL ratio reached 28.24 per cent at the end of FY18 from 26.84 per cent in 2017. Despite the financial slowdown and policies adopted, private sector credit grew by 17 per cent whereas deposits grew by 10 per cent only. In response, the central bank reduced the repo (repurchage agreement) rate to 6.0 per cent from 6.75 per cent, while the reverse repo rate remained unchanged. This made it easier for banks and financial institution to access cheaper fund sources.

The weighted average lending rate of commercial banks increased to 9.95 per cent at the end of FY18 from 9.56 per cent in the previous year. Similarly, the deposit rate increased to 5.50 per cent from 4.84 per cent, leading to interest rate spread decreasing to 4.45 from 4.70 per cent.

However, downward pressure on interest rates resumed in the second half of 2018, with lending rates going down to 9.47 per cent and borrowing rates down to 5.25 per cent in October 2018. This led to an intensification of the price-driven competitive strategy amongst industry players.

NPL CRISIS: Against the rising trend of NPLs, especially by the huge corporate houses, the government decided that defaulting borrowers could regularise their accounts on payment of only 2.0 per cent down payment. The government believes that this step would curb the growth of defaulted loans. The government also feels that the declaration of allowing fresh loan with single digit interest rate would help reduce the cost of the product with immediate effect resulting in a decline in NPLs thus further improving the economic and financial scenario of the country.

However, bankers protested against the decision as they reasoned that such rescheduling will put the entire banking financial sector under severe liquidity crisis. They pointed out that such low percentage of down payment by the borrowers as well as payment through small instalments will increase the repayment period. This would not help the crisis being faced by the financial sector at the moment.

On the other hand, the liquidity crisis has created a situation where many financial institutions (FIs) have failed to repay the depositor banks and the individual depositors who have parked their life's savings with those FIs. As a result, it is putting the fate of FIs at stake as the financially solvent banks are no longer planning to place their funds as deposits with these FIs.

Revenue collection around the end of the 2018-19 FY seems to be losing its growth momentum. Against a target of Tk 2.03 trillion for the first nine months of the year, the  National Board of Revenue (NBR) has been able to collect only Tk 1.53 trillion. This means there has been a shortfall of Tk 500 billion. As the lowest collection in the last 18 years, this has become a matter of grave concern for the Finance Minister. The revenue collection target for the NBR for FY 2018-19 was 40 per cent more than the previous fiscal year. But according to the financial experts of the country, this target was highly irrational. Revenue collection from Customs & Excise has been the lowest though positive trend of tax collection gave some ray of hope.

BIGGEST BUDGET: The budget for fiscal year 2018-2019 was of Tk 4.64 trillion. But this was revised to Tk 4.42 trillion later.

The proposed budget for fiscal year 2019-2020 was presented on June 13, 2019. This year's budget is the biggest in Bangladesh's history at Tk 5.23 trillion.

In the proposed budget for 2019-2020, government. earnings will be 69.09 per cent from the Local Taxes & Customs by the NBR. Another important sector for revenue earnings will be Internal Tax collection, which will be around 29.82 per cent (proposed).  These earnings, when compared with budget of 2018-2019, shows that the proposed earnings would increase by 12.58 per cent. This is not desirable for many groups.

On the other hand, allocation in proposed expenditure of FY 2019-2020 has 20.45 per cent for government's administrative expenditure, a total of 53.53 per cent for government's development sector and 26.02 per cent as government's burden.

Total expenditure reflects that administrative expenditure of government is almost close to 50 per cent of development expenditure. But the most important sector, health, did not get this importance.

If government can control the burden, then it will have more funds for development activities.

Almost 34 per cent of budget deficit would be met by taking loans from commercial banks. This is especially concerning for business communities and bankers as government loan of Tk 473.64 billion will create a tremendous pressure on the liquidity situation in the banking sector.

The Bangladesh Economist Association was right to point out that the continuously increasing GDP does not reflect the technological progress. This is why inequality is rising in society because of improper distribution of wealth.

All the matters mentioned in the proposed budget should be reviewed by the government while taking in mind the ongoing crisis being faced by the various sectors important to the economy, especially the banking and non-banking financial institution (NBFI) sectors.

SUSTAINING THE MOMENTUM OF FAST ECONOMIC GROWTH:  The Asian Development Outlook (ADO) 2019 has reported that after 1974 Bangladesh achieved the fastest growth of around 7.9 per cent in fiscal year 2018.

This is the fastest economic growth rate among 45 countries in the Asia-Pacific region. The ADO also predicted that this growth rate will be 8 per cent in FY2019 and FY2020. 

The government has targeted 8.2 per cent growth for the upcoming fiscal year starting from July 01, 2019. If 8.0 per cent growth is achieved, the same will also be a new record and Bangladesh will continue to maintain fastest growth in the Asia-Pacific region. South Asia will see buck trend of slowing growth in Asia 6.8 percent in 2019 and 6.9 percent in 2020, (Asian Development Outlook 2019).

The ADB stated that the key attributors for this growth are strong leadership, good governance, stable government and continued political calm, sound macroeconomic policy and right development priorities. The drivers of the growth have been identified as higher public sector investment, stronger consumption demand, revival in exports, improved power supply and higher growth in private sector credit. 

The ADB pointed out that Bangladesh has favourable trade prospects despite a weaker global growth while exports and remittances are likely to increase further. It also mentioned that strong public investment will increase considerably due to continued policy support. Banking sector reforms will attract higher private investments which will support this ongoing growth.

Bangladesh has emerged as an important factor in the world economy due to its geographical position as neighbour of both China and India which are poised to become superpowers. There is also tension in Sino-Indian relations. So all other competitive superpowers of the world have now focused on developments in Bangladesh with renewed interest.

The possibility of Bangladesh emerging as a developed country is very bright. It will continue to develop and Budget FY2019-20 reinforces that hope.

SM Shamsul Arefin is Managing Director & CEO of Uttara Finance

and Investments Limited arefin@uttrafinance.com

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