The Financial Express

Budget FY22 & support for agriculture, CSMEs

| Updated: May 20, 2021 21:36:14

-Representational image -Representational image

Unlike the first wave of the Covid pandemic, the second wave has brought a number of new challenges for the agriculture sector. These include damage to paddy production due to blast disease and heat wave in a number of districts, the lowest amount of public food stock in last 13 years, volatility in domestic rice supply and its adverse impact on retail market price, volatility in the supply of vegetables and other crops due to lockdown and delayed import of onion and their consequent adverse impact on market price etc. At present, public food stock is only 4.62 lac MT. This amount is very low to meet the extended social safety net based food distribution programme which is targeted to be implemented in the fiscal year 2020-21 (FY21). The lockdown is having an adverse impact on the poultry and dairy sectors as well due to a lack of marketing facilities. The volatility in the agriculture product market has caused inflationary pressure in recent months. Overall, Bangladesh's food security in Bangladesh is yet to reach the pre-pandemic level (IFPRI & Cornell University, 2021).

The disbursement of stimulus package for the agriculture sector (Tk. 239.20 billion) was not up to the mark. Disbursement of agriculture refinancing scheme (Tk. 50.0 billion) was to the tune of only 45 per cent, the corresponding figures for refinancing scheme for low-income farmers and small traders (Tk 30.0 billion) was only 22 per cent. Procurement of boro paddy/rice in FY20 (additional 0.2 million m tonnes) was rather poor, and the amount of agriculture subsidies (Tk 95.0 billion) that was disbursed was only 76 per cent. The remaining amount of fund needs to be disbursed in the coming months.  

In view of these, the government may consider the followings: 

a. Considering the loss of crop (approximately 1 lakh ton) due to heat shock, the government has allocated Tk 420 million for the affected farmers. The ministry of agriculture should identify the 'actual' farmers who lost the crops and take steps to disburse the fund properly. However, the amount of support is very low (Tk.4.2 per kg of paddy) considering the market price of paddy Tk.32-34 per kg). The support will thus not be adequate to make up for the loss of crops. In order to meet the loss suffered by the farmers (about Tk.330 crore), the MoA should discuss with the Finance Ministry to further raise the allocation.

b. Given the volatility in farm income over the last one year, the repayment period of agriculture loans (both working capital and term loan), distributed under the stimulus package, should be extended to three years. [According to the circular of the Bangladesh Bank, the tenure for the loans under the stimulus package was set at 18 months, including a grace period of six months. Till, December 2020, a total of 143747 farmers have received credit under the package.] In this context, the reduction of the maximum ceiling on farm loan to 8 per cent is a welcome initiative undertaken by the Bangladesh Bank. Earlier the central bank had fixed the rate of interest on farm loan at 9 per cent per annum.

c. Given the poor performance of procurement of boro in FY21 (0.9 million tonnes as against the target of 1.9 million tonnes), necessary funds need to be allocated to incentivise procurement price and stimulate procurement (through hats & bazars) in order to encourage farmers to sell to the government.

d. With a view to reducing the production cost of crop, non-crop, fisheries and livestock sub-sectors, import of the different raw materials should be waived from advance income tax (AIT). These include different agro-processing sectors such as production of poultry feed, fish feed, dairy, and dairy products.

e. Government should make the necessary allocation for timely implementation of two irrigation projects based on solar power (project completion years: 2022 and 2023). Ministry of Agriculture should seek funds for taking more projects to popularise solar power-based irrigation facilities across the country.

f. Given the significantly large number of unemployed people, MoA should design and seek funds for implementing a special project for creating employment opportunities. This can be done by providing training, low-interest credit and marketing support facilities for different types of agriculture products, agro-processing and other support services.

g. Government should continue allocating funds for extending farm mechanisation during the pandemic period. This will hopefully contribute to a reduction of production cost and also take care of the limited availability of farmworkers. It is to be noted that MoA is currently implementing a farm mechanisation project for disaster-prone areas with the support of the Asian Development Bank, which will end in 2024.

PROPOSALS FOR SMALL AND MEDIUM ENTERPRISES: Small and medium enterprises (SMEs) have been most affected during the first wave of Covid-19 and also afterwards; their challenges continue as Bangladesh suffers from the ongoing second wave of the pandemic. Indeed, the second wave is making their situation even more vulnerable by accentuating the current difficulties. Considering the vulnerabilities suffered by the SMEs, the government had allocated Tk.220.0 billion crore under the first stimulus package; however, the rate of disbursement was slow compared to other stimulus packages. As of April 11, 2021, about 68 per cent of the dedicated fund has been disbursed. Gender-wise disaggregation shows that 94 per cent of the beneficiaries of loans under this package were male, and only 6.0 per cent were female. However, the allocation for female entrepreneurs was above the minimum targeted amount (5.7 per cent of total allocation of funds against the target level of 5 per cent). Apart from this, the government has rolled out a fresh stimulus package of Tk.27.0 billion to boost cottage industries and SMEs. In March 2021, Bangladesh Bank released a policy in support of the start-ups under the special funding facility of Tk 5.0 billion. Besides, the banks could set up their own start-up funds with 1 per cent of their operating profit. Out of this fund, 10 per cent of this fund should be allocated among women entrepreneurs. A Tk 100.0 billion stimulus fund for micro-enterprises is currently at processing stage; the Central Bank would provide the funds to microfinance institutions which would disburse the fund through on-lending at an interest rate of 8 per cent p.a. The MFIs could disburse the credit to micro-enterprises which are not covered under any support programmes. Besides, the SME foundation will provide Tk 1.0 billion loan to selected SMEs.

a. It is important to ensure speedy disbursement of the subsidised credit among eligible SMEs. Banks specialised on SME financing should be allocated more funds to disburse credit not only to their existing clients but also to new borrowers. Banks should explore innovative approaches to disburse credit for SMEs - these could be done through the selection of new borrowers with recommendations of business associations, local business samities/trade bodies and MFIs. Banks could also consider disbursing a part of their credit to SMEs through MFIs as well.

b. A database of all categories of enterprises, including MSMEs needs to be prepared on an urgent basis. This database should include information on the registration of businesses, location of the business, number of employees, types of products produced, yearly turnover and payment of official fees and taxes (including VAT) etc. Initially, this database could be prepared based on the datasets available with the various public and private organisations. Such a database would help identify enterprises that have not received any support as yet and also sectors that have traditionally received less attention in the package etc. Based on the database, fiscal and monetary policy support could be directly extended to the enterprises; this will also help better monitor the results.

c. Given the level of vulnerability of SMEs, the loan repayment period for SME loans, under the stimulus package, needs to be extended to three years. This is similar to what is allowed to the export-oriented sectors.

d. Since the pandemic has disproportionately affected women entrepreneurs, a separate stimulus package needs to be introduced in support of women entrepreneurs. In fact, due to the pandemic nearly half of women SMEs to shut down for failing to pay rents. Though the government allocated funds for women entrepreneurs under stimulus packages meant for CMSMEs, 58 per cent of them have not heard about it and 93 per cent women enterprises have not applied for any loan under the government support scheme (CPD, 2021). Amid this crisis situation improvement in the access to loans and training of the women entrepreneurs are a crying need. In this backdrop, the package should provide fiscal and monetary policy support, including waiver from paying registration fees, VAT, electricity bills for a limited period of time. Enterprises located across the country should also be eligible for subsidised credit.

PROPOSALS FOR EXPORT-ORIENTED INDUSTRIES: Export-oriented industries had started to get back to pre-Covid situation following the first blow of the covid pandemic. Thanks to the first stimulus package, including an incentive package of Tk 105.0 billion for export-oriented industries, the industries were able to pay workers' wages for four months. This helped the recovery of a large number of enterprises.  It is to be noted that the pace of recovery is different for different categories of enterprises (e.g., RMG enterprises). According to the resilience index, estimated for 600 RMG enterprises, while the overall score was 43.4 (out of 100), the values for small, medium and large-scale enterprises were 37.8, 49.2 and 54.2 respectively. Amid the second country-wide lockdown, the GoB has decided to keep the industries functioning. In this time of crisis, countercyclical fiscal measures are considered to be effective. However, as the industries have started to recover, such measures are likely to be no longer required. Export-oriented industries need to target new business opportunities which are emerging in view of Covid-pandemic.

a. Given the significant size of the global market for non-cotton based apparel products, the Ministry of Commerce should propose that the Ministry of Finance introduce a fresh 10 per cent cash incentive for enterprises. Enterprises which will produce 100 per cent non-cotton based apparels will be eligible for this support. These fiscal incentives may be put in place for the next seven years. The required fiscal expenditure could be accommodated by withdrawing the 1 per cent cash incentive for export of apparels to all markets which is currently in operation. It is important to note that the proposed cash incentive facility will be over and above the tax holiday facility currently in place for non-cotton based apparels exporting enterprises.

b. Export-oriented industries need to be incentivised in order to promote the use of renewable energy-based power in factories. SREDA, through the Ministry of Power, Energy and Mineral Resources (MoPEMR), will need to request the Ministry of Finance to provide a 5 per cent tax break for factories that generate at least 20 per cent of its total energy requirement by renewable energy (e.g., solar energy).

c. The government should undertake a new project with a view to setting up a new leather industrial park exclusively for export-oriented enterprises. All needed facilities as per international standard should be there. Technical support of the Leather Working Group should be sought in this connection.

d. Government should implement a Carbon tax (7 per cent of gross energy expenses) for industries in a phased manner. This will contribute to reducing carbon emission. Companies should be encouraged to set their own roadmap for reducing their carbon footprint by 2030 in light of the SDGs.

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 'CPD's Recommendations for the National Budget FY2021-22.' Research support was received from Mr Muntaseer Kamal, Mr Md. Al-Hasan, and Mr Syed Yusuf Saadat,  Senior Research Associates of CPD; Mr Abu Saleh Md. Shamim Alam Shibly and Ms Nawshin Nawar, Research Associates of CPD; Ms Helen Mashiyat Preoty, Programme Associate of CPD; and, Mr Md Salay Mostafa, Research Intern of CPD.

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