The Financial Express

Managing the macroeconomic challenges in Covid-induced situation

Evaly and Fianancial Express Mobile Evaly and Fianancial Express Desktop
People have their temperature checked while entering a market in Dhaka, Bangladesh on May last    —Xinhua People have their temperature checked while entering a market in Dhaka, Bangladesh on May last —Xinhua

Economic performance of Bangladesh in FY20 ought to be assessed from the vantage point of an extraordinary year when an once in a lifetime global crisis of our time had unfolded in the form of the Covid-19 pandemic. To note, even before the outbreak the Bangladesh economy was facing significant challenges in a number of areas including domestic resource mobilisation, governance in the banking sector and export earnings. Macroeconomic challenges were further exacerbated by the pandemic and were accentuated by multiple natural disasters that struck Bangladesh in 2020 (e.g. cyclone and floods). The impact of Covid-19 was particularly evident during the last quarter (April-June) of FY2020 when the economic activities were severely disrupted in the backdrop of the 'general holidays' (i.e. lockdown) declared by the government. 

Indeed, FY2020 ended with a fall in economic growth, a large shortfall in revenue mobilisation, disruption in the pace of the implementation of public investment projects, escalation of budget deficit and bank borrowing, slowdown of private sector credit growth and sharp fall in trade. As can be seen from Table-1, all major economic correlates experienced major departures from their respective annual targets as far as FY20 economic performance was concerned.

REVENUE MOBILISATION: In the run up to the national budget for FY2021, CPD had flagged concern that lack of fiscal space could constrain the government's response to the Covid-19 pandemic. Regrettably, the fiscal framework underpinning the budget apparently did not consider the pandemic. As the Ministry of Finance data reveal, FY20 ended with a subdued revenue mobilisation growth of 4.4 per cent. This meant that the target for FY21 was 43.7 per cent higher than the actual collection in FY20 (Table -2).

During the July-October period of FY21, total revenue mobilisation rose by 8.0 per cent compared to the corresponding period of FY2020. However, this was underwritten by the phenomenal growth of 38.8 per cent from collection on revenue from interest, fees and tolls and others (IFT and others). It is to be noted that the growth thanks to IFT and others may not sustain over the coming months due to its nature of being a one-time payment.  NBR tax collection increased by 3.4 per cent during the July-October period of FY21 over the comparable period of FY20, thus requiring a growth of 76 per cent (!) during the remainder of the fiscal year. The growth in revenue mobilisation during the aforementioned period was primarily driven by a better collection of VAT (17.3 per cent). However, income tax collection exhibited a negative (-) 10.1 per cent growth during the July-October period of FY21. This can perhaps be attributed to the various tax exemptions provided in view of the pandemic. Indeed, the total revenue collection would have to grow by a whooping 59.7 per cent during the remainder of FY21 if the target was to be achieved.

PUBLIC INVESTMENT RESTRAINED: According to IMED data, only 76.8 per cent of the original annual development programme (ADP) allocation could be spent in FY20. In the first two quarters of FY21, the implementation rate of the ADP allocation has been less than that of the same period of FY20. In total, only 24.3 per cent of the total ADP allocation was spent during July-December of FY21. The implementation rate of the 'Taka component' was 24.0 per cent, while that of 'Project Aid' was 24.9 per cent.

Total expenditure for the top ten ministries during the July-December period has fallen compared to FY20. Ironically, amongst the top ten ministries/divisions in terms of allocation, the implementation has been the lowest in the Health Services Division. In an ideal situation, taking into account the current pandemic, the spending by the Division should have led the way. Only 14.6 per cent of the initially allocated amount to be spent by the Health Services Division has been spent. Even in pre-Covid situations, the ADP implementation rate of this sector was higher than this, at 16.5 per cent for FY20's first two quarters. The failure of implementing the allocation earmarked for the Health Services Division is a reminder that Bangladesh has not been able to address many of the problems afflicting the country's healthcare system. Implementation status of eight mega-projects during the first half of FY21 indicates that only 17.4 per cent of allocations has been spent, which is far below from the average implementation rate for the total ADP.

EXPANSIONARY FISCAL POLICY NOT IN PLACE: According to MoF data, total expenditure accounted for 14.9 per cent of the GDP in FY20, which is less than FY19 share of 15.4 per cent of the GDP. In FY20, operating expenditure had a growth rate of 5.6 per cent while development expenditure increased by 6.4 per cent. Overall, there has been a growth of 6.1 per cent in total expenditure in FY20.

Contrary to the needs triggered by the pandemic and as advocated by CPD, the government was not able to pursue an expansionary fiscal policy. Public expenditure fell by a large amount during the first four months of FY21 compared to the pre-Covid situation. A substantial fall is noticed in development expenditure, with a 35.1 per cent decline in ADP expenditure compared to the corresponding period of FY20 (Table-3). Operating expenditure was also lower. In fine, public expenditure has been largely subdued.

With a view to saving about Tk. 336.61 billion from the ADP in FY21, the Finance Division has allowed ministries and agencies to spend only 75 per cent of the fund allocated by the government for ADP in FY21. The remaining 25 per cent cannot be spent for operation under any circumstances. The rest 25 per cent of allocation has been put under hold since the Finance Division suspects that the revenue target will be difficult to achieve under the pandemic. Funding for low-priority projects was also suspended to make Tk. 520.0 billion (about one-fourth of the ADP budget) available for spending measures related to tackling the impact of the pandemic. High-priority projects have been allocated 40 per cent of the overall ADP allocation . The Prime Minister had earlier stated back in April 2020 that unutilised funds from the ADP allocation would be redirected towards tackling the Covid-19 pandemic. Curiously, the created fiscal space (by reducing the scope of ADP expenditure) was not diverted to expenditure for other priority purposes. This has perhaps made Bangladesh an exception in the global map as the country had apparently gone for austerity during the time of a crisis.

BUDGET SURPLUS AT A TIME OF CRISIS: FY20 ended with a budget deficit of 5.5 per cent of GDP, which was well within the revised target of 6 per cent. As of October FY2021, there was in fact a surplus in the fiscal balance (Table-4). Although revenue mobilisation was somewhat subdued, a higher fall in public expenditure, particularly ADP expenditure, has primarily contributed to this situation.

As expected, the government borrowing scenario under the pandemic was quite extraordinary. While the inflow of foreign grants was zero, that on account of net foreign borrowing saw a significant increase. Net sale of NSD certificates was extraordinarily high and this was used, along with bank borrowing, to repay the borrowing from other non-bank sources. Despite capping the purchase of three types of national savings certificates at Tk. 50 lakh in total under a single name and at Tk. 1 crore under joint names, NSD certificate sales surpassed its annual target by the end of the first half of the fiscal year.

STABLE INFLATIONARY TRENDS DESPITE VOLATILITY IN PRICES OF ESSENTIALS: FY21 started with an inflation rate (moving average) of 5.64 per cent, which reached its highest level at 5.77 per cent in October 2020 but managed to come down to the initial level of 5.64 per cent by January 2021. Food inflation has been exhibiting a generally increasing trend while non-food inflation has been coming down. The fiscal year started with a comparatively high non-food inflation rate of 5.79 per cent, which by January stood at 5.43 per cent. Curiously, an increase can be observed in the inflation rate for medical care and health expenses, which started with 7.47 per cent in July 2020 and stood at 8.72 per cent in January 2021. However, the highlight of the inflationary trend since the outbreak of the pandemic was the instability seen in the prices of several essential items, including rice, onion, potato, sugar, edible oil, vegetables etc. The official food inflation data do not reflect the anxiety of low-income people of the country who are struggling to keep their purchasing power intact in the backdrop of rise of prices of the essentials.

TURN-AROUND IN INDUSTRIAL PRODUCTION DESPITE VOLATILE EXPORT: FY20 ended with a slump in the export scene as export earnings declined by 16.9 per cent and missed the growth target of 12.2 per cent by a large margin. In FY21, the volatility in export earnings had continued. During the July-January period of FY21, total export earnings decreased by (-) 1.1 per cent. This implies that total export earnings will need to grow by 70.4 per cent during the remainder of FY21 if the annual growth target of 21.8 per cent was to be reached, an impossibility given the current situation, both nationally and globally, and the global trade forecasts. On a positive note, industrial production for large and medium industries increased by 7.7 per cent during the July-October FY21 period while the corresponding figure for FY20 was 5.4 per cent according to the BBS data. It is to be noted that, the data portray extraordinarily high growth figures for several industries. For example, the production of leather and associated products increased by 58 per cent although the associated exports of leather and leather goods had declined by 10.6 per cent during the same time frame. Increase in electricity production was 4.6 per cent. However, intermediate goods import declined by 8.8 per cent during the first six months of FY21. Nevertheless, it is apparent that domestic market-oriented industries primarily contributed to the enhanced industrial production growth.

SIGNIFICANT SURPLUS IN BALANCE OF PAYMENTS: The overall balance of payments registered a buoyant surplus of about USD 6.2 billion during the first six months of FY2021 providing a big boost to foreign exchange reserves. This also helped maintain a stable exchange rate of Bangladeshi Taka (BDT) against the US Dollar (USD). The trade deficit narrowed further riding on reduced import payments. Import payments for the first six months of FY21 fell by 6.8 per cent, faster than that of the export earnings, despite a whopping 50.4 per cent growth in payments against foodgrain imports. Thanks to extraordinary remittance inflow, current account balance posted a surplus of US$ 4.3 billion as of December, 2020. This has created a large flow of net foreign assets for the commercial banks.

EXPANSIONARY MONETARY POLICY PROVIDED SOME BOOST FOR PRIVATE SECTOR CREDIT: The government response to the Covid-19 pandemic was primarily driven by monetary (or 'hybrid') policy instruments, i.e., cheaper credits under the stimulus packages along with monetary easing. However, private sector credit growth as of December 2020 fell to 8.4 per cent as against monetary policy target of 11.5 per cent. This is pointer towards the depressed investment scenario in view of the pandemic. Indeed, capital goods import has also decreased by 16.7 per cent while the import of capital machinery experienced a decline of 29.2 per cent. Net FDI inflow also registered a negative growth of (-) 22 per cent during the July-December period of FY21. Hence, it may be inferred that, while the economy, to some extent, may have turned around in terms of using its existing capacities; private investment may need more time to recover. In the meantime, the monetary system is flooded with excess liquidity and low interest rates for both deposit and lending in the backdrop of depressed demand for new investment. 

SIX EMERGENT TRENDS IN THE ECONOMY IN FY21: The review of major macroeconomic correlates over the first half of FY21 is indicative of the followings.

First, many critically important macroeconomic indicators evince signs of a turnaround. Production of manufacturing industries and electricity has posted a rise and VAT collection has registered positive growth rate. Second, one also needs to be remindful that the pace and turnaround have not been even for all indicators or sectors. For example, the RMG export, knitwear posted a positive growth (3.8 per cent), while woven wear had experienced a sharp decline ((-) 10.9 per cent). Third, recovery in production was better, showing signs of consolidation as regards use of the existing capacities in the economy. On the contrary, both private and public investment-related indicators had remained subdued. Indeed, the economy may need more time to recover fully. Fourth, the global recovery is likely to be slow, uneven and uncertain. On a comparative scale, recovery in the domestic demand has shown much stronger resilience. Fifth, macroeconomic stability has been maintained as reflected in surplus budget, declining aggregate inflation, overall surplus balance of payment, and stable exchange rate of BDT against USD. Sixth, the objectives of the macroeconomic policy interventions to address the adverse impacts of the Covid-19 pandemic were not fully achieved. The constrained fiscal space was already a major concern in the pre-pandemic months, which perhaps constrained the government to pursue a larger fiscal stimulus programme as has been done in many other countries.

As is known, most of the stimulus packages primarily hinged on subsidised credit. Regrettably, even the available fiscal space was not utilised fully. The weak budgetary programming had resulted in a surplus budget for the first four months of FY21. Monetary policy was the primary policy block for the government. Several policy steps were taken which may have contributed to the turnaround. However, the benefits of such policies were not well distributed. Export-oriented industries were far better positioned to take the early benefits compared to the domestic market-oriented industries. Similarly, large and medium industries were able to reap the benefit to larger extent compared to the small industries and agriculture sector.

THE NEED FOR A RE-CRAFTED POLICY APPROACH: The national budget for FY21 needs to be revised at the earliest. The economy needs to come out of a possible second round of flawed programming when the budget is revised. Money should be directly injected where it is needed the most. It will take more time for the global economy to recover; hence the immediate focus should be on the domestic economy where stimulating domestic demand ought to be prioritised. The economy requires continued policy support over the medium term to be able to recover fully.

In the run up to the next national budget for FY22, the policy package must lay out the plan to phase out the tax exemptions and subsidised credit schemes.  The recovery of the economy needs to be carefully monitored by generating credible and timely data. Indeed, tracking traditional macroeconomic correlates is inadequate to understand the recovery status of the economy as new indicators of economic performance are emerging in the backdrop of the pandemic. This also underscores the demand for a renewed effort to generate the needed data.


Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Towfiqul Islam Khan is Senior Research Fellow, CPD.

[Research support was received from: Muntaseer Kamal, Syed Yusuf Saadat, Md. Al-Hasan and Kamruzzaman (Senior Research Associates, CPD); Mr Abu Saleh Md. Shamim Alam Shibly, Mr Tamim Ahmed, Ms Nawshin Nawar and Mr Adib Yaser Ahmed (Research Associates, CPD); and Helen Mashiyat Preoty and S. M. Muhit Chowdhury (Research Interns, CPD)]

Share if you like