Three types of weaknesses are usually embedded in the national budget of Bangladesh: (a) Weakness in revenue collection and generation; (b) Low efficiency and high costs in productive sectors; (c) Poor expenditure management leading to poor quality outcomes.
Traditionally, the country's budget outlay is increased every year by 17-18 per cent maintaining a sectoral balance giving priority to education, agriculture, infrastructure and social sector expenditures. It has been a crucial task to formulate a clear reform strategy for the Proposed National Budget 2019-20 that articulates how various targets are to be met while addressing the above three types of weaknesses. The proposed budget, however, has not taken a strong position on improving the performance of a number of problematic sectors through concrete reform measures. Somehow it has maintained the status quo.
Revenue collection and spending-two important aspects of the budget-have significant implications for the people. Budget impacts our lives directly and indirectly. Therefore, a well-thought-out budget can help achieve medium and long-term political and socio-economic goals of the government.
The revised budget 2018-19 and proposed budget for 2019-20 have been announced under the economic context when gross domestic product (GDP) growth touched 8.13 per cent surpassing the target of 7.6 per cent to be achieved by FY2019 as per the seventh five-year plan (7FYP) of the government. Per capita income has increased to USD 1,905 from USD 928 in FY2011. While domestic inflation rate is at a tolerable level of 5.5 per cent, the external sector is facing challenges due to lower export and remittance income, which has resulted in negative current account balance. Despite the high GDP growth, it has so far failed to create employment in the economy and reduce inequality in society. Therefore, the growth numbers and almost doubled per capita income in ten years have not been meaningful for larger sections of the population.
The size of the proposed budget, at Tk 5.23 trillion (5,23,190 crore), is the highest so far in the country. But it is still 18.1 per cent of GDP and not large enough for an emerging economy. In FY2018-19, originally the size of the budget was 18.3 per cent of GDP which reduced to 17.4 per cent in the revised budget. The revised budget got passed in parliament without any study by the competent parliamentary committee on the actual attainments. The reality is that the fiscal framework is becoming weaker as both revenue collection and development expenditure targets remain unfulfilled.
Deficit financing mechanism is common to all our budgets. An attempt to maintain a balance between foreign and domestic sources of deficit financing is always there. But it ends up with domestic sources; bank borrowing becomes the major source of financing. However, in recent years, instead of taking soft loans from foreign sources, hard-term foreign fund, costly borrowing from banks and saving certificate have become the dominant source. In FY2019-20, sale of national savings certificates is planned to be reduced by as much as 40 per cent compared to that of the last year. But while the banking sector is facing a liquidity crunch, more borrowing from banks will have a crowding out effect on the private sector.
Burdened with huge non-performing loans (NPLs) and faced with liquidity crisis, the banking sector needs a total overhaul to overcome the existing challenges. The amount of NPLs in the banking sector exceeded Tk 1.0 trillion for the first time in March 2019. The share of NPLs also rose to 11.87 per cent of the total outstanding loans in the first quarter of FY2019 from 10.30 per cent in the previous quarter.
Without total stop on the wilful default culture, curbing of political influence and corruption, and improving efficiency, the banking sector will not get a new life. Sadly, the proposed budget does not have much to offer in solving such a serious problem. It talks of exit route for loan defaulters through insolvency and bankruptcy laws, but does not provide any details. The proposal to form a Bank Commission should have identified the real problems facing banks and other financial institutions and suggested solutions.
In line with the higher budget outlay, revenue targets have also been set high. In FY2019-2020, revenue target has been set at 13.1 per cent of GDP compared to 12.5 per cent in the revised budget of FY2019. High targets set during the last couple of years were beyond the capacity of the National Board of Revenue (NBR). Without institutional strengthening of the NBR and full automation, higher revenue collection is not possible. The budget speech does not shed any light on how revenue-GDP ratio will be increased from the current low level. Higher revenue collection target may create pressure on existing taxpayers if appropriate fiscal measures are not in place for capturing more revenue in the exchequer.
With the annual inflation rate at 5.5 per cent, absence of proposal to hike individual income tax threshold (it has remained the same for the past four years) will create problem for new taxpayers. On the other hand, corporate tax rates have not been reduced, much to the chagrin of the business community. Such high corporate tax rates, coupled with tax on dividends, may continue to make Bangladesh an unattractive business destination. The proposed tax on retained earnings in excess of 50 per cent of paid-up capital has been criticised by the business community as based on wrong principle. Many consider that 15 per cent tax on stock dividends may discourage listed companies in capital creation and reinvestment. However, raising tax-free limit of dividend income for investors to Tk 50,000 from Tk 25,000 may encourage reviving the capital market. Initiatives to support the agricultural sector, including reduction in customs duty on harvesting machinery by creating new H.S. code, will have a positive impact.
Raising the level of private investment, including foreign direct investment (FDI) should be an option to meet the challenges of mobilising more revenue. Though the national economy is progressing, inadequate infrastructure, power and energy shortage, and bureaucratic bottlenecks are still the major impediments to sustaining the progress. Shortfall in tax revenue and weak ADP (annual development programme) implementation are currently the major worries for the economy.
Dr Muhammad Abdul Mazid is former Secretary to the government and former Chairman, NBR.