Budget for 2020-2021

Overcoming temptations

by Faizus Saquib Chowdhury | Published: 00:00, Jun 04,2020


A aerial picture shows workers unloading goods on a cargo boat in Dhaka on June 2.  — Agence France-Presse/Munir Uz Zaman

OVER the past decade, policymakers have demonstrated certain unabashed tendencies particularly in dealing with macro-economic matters. One can notice a clear pattern of announcing large budgets, setting ambitious revenue targets, leaning towards large-scale projects, unrealistic GDP growth rate forecasts and a carefree approach towards deficit financing. It will not be surprising if policymakers show temptation to keep continuing this pattern. The budget for the 2020–21 financial year will be a test case for them to prove whether they can overcome such temptations and respond to evolving realities in the context of the COVID-19 outbreak.

It is relevant to take a look at the budget for the current financial year. The estimated budget expenditure was Tk 5,231 billion which was an 18.22 per cent increase on the expenditure for the 2019 financial year. For the 2020 financial year, the government set its revenue target at Tk 3,778 billion, which was a 19.33 per cent increase over the previous year. The size of the annual development programme was set at Tk 2,027 billion in the 2020 financial year which marked a 21 per cent increase over the preceding year. Last but not least, the government planned a budget deficit of Tk 1,453 billion which was 15.45 per cent higher than that of the preceding financial year.

The statistics paint an image that the current administration is prone to set ambitious targets in critical areas. There is worrisome love for big numbers. Given that the budget for the 2021 financial year is formulated in the context of the COVID-19 outbreak, a failure to reign in the temptation of being ambitious and aiming at unreasonably big numbers is destined to be perilous for the national economy in the future. Temptations as such must be overcome.

The first temptation for the government will be to present a budget which will be larger than the budget for the 2020 financial year. The current and previous finance ministers have frequently taken pride in presenting large-size budgets. The government appears to equate large budgets with a large feather in the cap. It is already in the air that the Finance Division is working on budget of Tk 5,500 billion for the 2021 financial year, scheduled to be proposed on June 11. Where will the money come from?

The current scenario of revenue collection is dismal. The COVID-19 outbreak has cast a deep shadow on the economy. The revenue generation capacity has received a big jolt. It will be a fatal remedy to heavily rely on additional revenue sources for the realisation of a large budget.

The second temptation will be to set an overambitious revenue target in line with previous practice. The revenue target was set at Tk 3,000 billion for the current financial year. Such a high target was set in stark denial of the huge shortfall in collection of revenue in the preceding year. A bias towards setting high revenue targets regardless of revenue potential has remained questionable. An overly ambitious target necessarily leads to shortfall in revenue collection and causes undue discredit to the National Board of Revenue.

The collection of revenue in July–March stood at Tk 1,650 billion only as against the budget target of Tk 2,210 billion for the period. A shortfall of Tk 561.4 billion had been registered even before the general holiday caused by the COVID-19 outbreak was ordered in the last week of March. Simply announcing a high target does not change the reality faced by boots on the ground. Pragmatism is warranted. The revenue target for the 2021 financial year should be based on actual collection in the current financial year. Unfortunately, revenue collection for the current financial year may hardly cross the Tk 2,000 billion mark because of the general holiday. So, setting a revenue target for the 2021 financial year no higher than 110 per cent of Tk 2,000 billion will be consistent with emerging economic conditions. This seems be sensible and feasible.

The third and most dangerous temptation will be to plan a budget deficit regardless of the revenue potential of the economy. In recent years, policymakers have resorted to larger budget deficits every year. They considered a budget deficit of 5 per cent of the GDP to be modest. In reality, this is not a sustainable practice for a resource-constrained country such as Bangladesh. By pegging the budget deficit as a percentage of the current GDP, policymakers are failing to factor in the level of cumulative debt and becoming oblivious of the increase in debt service liability beyond the sustainable level.

Clearing debt service liability on time requires cash in hand. Therefore, although unorthodox, a grounded approach would be to adopt revenue-based deficit financing. In operational terms, this would ask for a ceiling on deficit financing as a percentage of the revenue collected by the government. Deficit financing should, as a rule of thumb, not be allowed to exceed 25 per cent of revenue to be collected. If revenue collection for the 2020 financial year is around Tk 2,000 billion, it would be ideal to put a cap of Tk 500 billion on budget deficit. Such a cap will reign in ever-growing cumulative debt service liability and, in turn, contain the budget size.

It goes without saying that increases in the level of the budget deficit may become unavoidable when the economy is in a crisis. In the context of the COVID-19 pandemic, many governments have resorted to expansionary policy based on deficit financing to keep their economies afloat. Larger allocation of funds to crucial sectors such as health care, social safety net programmes and business stimulus packages will perhaps require a high level of deficit financing. However, spending on directly unproductive sectors like defence can be pruned to keep deficit financing within limits.

Under the current regime, ‘development’ has become a buzzword and led the policymakers to adopt ADPs of higher size every year. In the context of a steep downturn of the economy caused by the general holiday, a turnaround is the call of time. It is time to prioritise ‘sustenance’ over ‘development’ as a primary economic goal. Strategically, the coming financial year should be considered a year for the restoration of economic stability rather than growth and development.

In the past decade, the government pursued a policy of large-scale projects to accelerate the growth of the economy. There are 10 such projects of a value of Tk 3,292 billion. Many other large projects have also been lined up, waiting for allocation. All these are highly capital-intensive projects with very low employment implication. The persuasion of large projects diverts funds away from small projects.

When the economy is shrinking, what is needed is a preference to labour-intensive projects. The love for large projects must be eschewed, even if temporarily. The economy needs projects capable of generating employment. An effective strategy would be to implement a host of spatially spread projects so that a dividend also emanates by way of distributive impact on the economy.

Heavy reliance on bank borrowing for deficit financing is another issue in point. It does not need an explanation that excessive borrowing by the government leads to crowding out effect and the availability of funds for the private sector is squeezed. In this connection, it may be recalled that in a post-budget press conference in June 2019, the Federation of Bangladesh Chambers of Commerce and Industry urged the government to explore sources other than bank borrowing to finance budget deficits.

Therefore, policy planners need to turn to other financial tools such as infrastructure funds and bonds to pool funds to cover deficit financing. The economy cannot afford to make the private sector starve from capital shortage because of the government’s undue appetite for funds.

Last but not least, policymakers must thwart the lure of impressing the world with high growth rate figures. In 2019, the finance minister projected a GDP growth by 7.80 in the 2020 financial year. Earlier, the government claimed that the GDP had grown by 7.86 in the 2019 financial year.

No doubt, such figures are something to be proud of. However, the Centre for Policy Dialogue and other research organisations found a serious lack of consistency between GDP growth figures and related performance indicators. The nation benefits nothing from an overestimation of GDP growth. Government policymakers need to recognise the shrinkage of the economy resulting from the COVID-19 general holiday and forecast the rate of GDP growth for the 2021 financial year accordingly.

Moreover, people become confused when different GDP growth rates are forecast by different national and international agencies with huge divergence. Therefore, a robust methodology should be devised and used to reach a reliable estimation. When planned national expenditure figures are used as a base, actual spending figures are always 20 per cent less, at the least.

Budget-making poses a big challenge for every resource-constrained country. Bangladesh is no exception. A steep slump of the economy as a consequence of the COVID-19 general holiday has made it all the more difficult. Policymakers will do the nation a big favour if they align their targets by grounding their ambition and focus on socially important needs and priorities.

The world is suddenly gripped in an unpropitious time. So are we. Any underplaying of the risks associated with high ambition may irrevocably jeopardise the economy and the people.


Faizus Saquib Chowdhury is an economist in training, pursuing a master’s in economics at the University of Warwick.

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