THE 48th national budget of the 2019–20 financial year is placed when macroeconomic instability looms large with creeping imbalances while the situation of common people is also in distress. Though common people are paying major share of the taxes, they are getting little benefit from it. The government is claiming that GDP is growing at a faster pace but at a rate which is not compatible with other socio-economic indicators. The rate of poverty reduction has decreased. Inequality and unemployment are rising alarmingly while real wage is declining.
There is revenue imbalance with rising expenditure and falling income, which is leading to increased deficit. Value added tax is increasing every year while share of income tax shows little change, which means tax structure is severely regressive. There is significant gap between targeted revenues and collected revenues. The economy is prone to severe debt crisis since loans are getting unsustainably higher.
The rate at which import payment increases does not match with rate of export earnings, which is creating current account deficit. The amount of loans is increasing but these are not being repaid now. When repayment will start, it will negatively affect the overall balance of payment. This may also slide the economy into a debt trap.
Based on the backdrop, the following sections examine whether the declared budget as a major part of fiscal policy instrument has addressed the key questions and problems regarding education, health, employment, poverty and welfare of the general people.
National income accounting discrepancies
THERE is a doubt about the rate of growth in national income. National income or GDP is the summation of investment, consumption, government expenditure and net export-import in the economy in given year. GDP increases when these variables increase. So, it is necessary to examine whether the changes of these variables are reflected in the national income change.
Investment comes from savings. In comparison with financial year 2016-17 both domestic savings rate and national savings rate have declined in financial year 2017-18. Domestic savings rate decreased to 22.83 per cent in 2017-18 from 25.33 per cent in 2016-17. In financial year 2016-17, national savings was 29.64 per cent of total GDP which also declined to 27.42 per cent. According to primary estimation of financial year 2018-19, both domestic and national savings show increasing trend. The statistics ushers that income has been reduced for most of the people or consumption expenditure has reached such a higher level that they cannot save. As a result, investment will not increase; rather it may remain stagnant or decrease.
Likewise, the ratio of private investment to GDP remained stagnant for the last few years. This is due to the lack of business confidence owing to political uncertainty as well as inadequate availability of infrastructure. In the financial year 2017-18, share of private investment to GDP has in fact declined from previous year.
Again, the total savings are not converting to investment due to the growing gap between savings and investment over the years. This situation occurs because of siphoning of capital or lack of security of capital leading to either reduced savings or less investment or both. For example, Global Financial Integrity (GFI) estimates that 5.9 billion US dollar is siphoned from Bangladesh during the period of 2006 to 2015.
National income and consumption expenditure are intertwined to each other. In order to boost national income at the rate that government claims, consumption expenditure should be expanded. The consumption in both public and private sector has increased in financial year 2017-18 in comparison to financial year 2016-17. In contrast, the temporary estimation for financial year 2018-19 shows negative trend both in public and private consumption.
People’s income or purchasing capacity is supposed to ameliorate because of increased consumption expenditure. As pointed by recent ILO report, however, the real wage has in fact declined in last few years. Growth of real wage has decreased by 3 per cent in 2017 in comparison to 2015 and 2016. During the period of 2008 to 2017, average real wage growth was the minimum in Bangladesh compared to other south Asian countries (3.4 per cent). Making the situation even worse, unemployment rate has increased as well. Currently there are 1 lakh 29 thousand job vacancies for the job seekers in the industrial sectors against 20-22 lakh job seeking people. Thus, large number of people is losing their income which has implications for reduced standard of living.
The HIES data show that the rate of calorie intake has decreased by 5 per cent, making it 2210 kilo calorie in 2016 from 2318 kilo calorie in 2010 (HIES, 2016). Similarly, poverty situation is not improving as the rate of poverty decline has slowed down.
The preceding analysis suggests that the official figure of GDP growth rate is grossly overestimated which is hardly supported by available evidence. Governments in many developing countries tend to engineer growth statistics to inflate the performance of the economy. For example, a recent study by the former chief economist of India finds that the country’s actual GDP growth rate is 2.5 per cent lower than the official estimation (Subramanian, 2019). If similar study is done in Bangladesh, GDP growth rate will also be lower by 2.5 per cent to the level of 5-6 per cent, which is the auto-pilot growth rate for Bangladesh, given the consumption level maintained by remittance from migration to cities and abroad. Moreover, considering stagnant remittance income and declining consumption, the current official rate of GDP growth is nothing but highly inflated, masking the real scenario of the economy.
THE target of tax revenue in financial year 2019-20 is 3 lakh 40 thousand 100 crore taka, while the actual tax revenue of financial year 2017-18 was 1 lakh 94 thousand 327 crore taka. To meet the target of financial year 2019-20, the tax collection needs to be increased by 75 per cent, which is quite impossible since previous experience shows targets are not met. The target of tax revenue in financial year 2018-19 was set 3 lakh 5 thousand 928 crore taka. Of these, even after revising the target, NBR collected 1 lakh 53 thousand 419.89 crore by March this year which was 54.73 per cent of the target. Further, the target of non-NBR tax was set 9, 727 crore taka. Since the target of budget announced in June will not be achieved, the revised target is set with significant difference between the announced and revised budget.
Moreover, the ratio of income tax with the expansion of GDP does not match. Of the total population in Bangladesh only 2.1 million pays income taxes. If GDP is increasing, then why collection of tax is so less? The tax-GDP ratio is also low compared to other developing countries.
Notably, tax structure is heavily dependent on Value Added Taxes (VAT). The burden of this indirect tax is on the ordinary people. On the contrary, tax exemption and tax evasion for the upper classes have become the norm. The ordinary taxpayers are working as the main sources of debt repayment and development. Though it is argued repeatedly, income tax is not made as the main source of tax revenue. In financial year 2018-19, the amount of VAT has been estimated to be 1, 10, 555 crore taka, which means VAT has increased by 380 per cent in 9 years. VAT is like the duck to the government that lays golden eggs. In this process tax structure has become severely regressive.
Shifting from its initial plan to set a uniform rate, the government has finally unveiled four rates of VAT to please businesspeople and will take them on board to implement the new VAT law from the next fiscal year. Again, the general public has to compensate for large loan defaulters.
While government expenditure is increasing, the income is not increasing leading to chronic budget deficit. In proposed budget of financial year 2019-20, the overall deficit excluding grants is 1,45,380 crore taka. To finance the deficit, government resorts to borrowings. Due to gradual increase of loans, a huge amount of expenditure goes to repay the loans with interest. In 2019-20 fiscal year, 18.3 per cent of the revenue expenditure is allocated in this sector which was 18 per cent in previous fiscal year. Consequently, the government’s investment in education and healthcare sector to generate human capital or skilled labour force is not increasing.
In the last 10 months of this fiscal year annual development expenditure was 55 per cent. Question also arises regarding the allocated expenditure of annual development program. Concerns remain about the quality provision of expenditure in the development sector. Different mega projects are being undertaken with excessive cost and repeated cost over-runs. For example, expenditure in Padma Bridge project has constantly increased with projected cost currently surpassing 30 thousand crore taka. In Bangladesh, cost of making per kilometre road is far higher than that of in India and China. In India, US$11-13 lakhs are spent to make four lane highway roads. In China the amount is US$13-16 lakhs. For example, cost of making Dhaka-Sylhet four lane highway is worth US$70 Lakhs in Bangladesh. The scenario is quite clear. Corruption has been in a strong motion and there is also lack of regulatory measure taken by the government. Picture of looting in the Rooppur atomic project has been unveiled recently.
The implementation of the budget was 76.1 per cent in the fiscal year 2017-18, while the figure was 79.1 per cent in financial year 2017, 80.8 per cent in financial year 2016, 81.6 per cent in financial year 2015, 84.6 per cent in financial year 2014 and 90.8 per cent in financial year 2013. Likewise, revenue collection, the main tool for budget implementation, has witnessed a major setback in the outgoing fiscal year 2018-2019. Revenue collection grew by 7.27 per cent in the first nine months of the financial year 2018-19, against the overall target of about 44 per cent, with a shortfall of 50,367 crore taka.
Budget deficit can be accepted if it creates multiplying impact on the economy. One of the major reasons for the increase in debt is the increase of the number of government jobs than required. The mass promotion of government officials and creation of additional posts include extra salaries, allowances and other facilities. In financial year 2018-19, 20.5 per cent of the revenue expenditure has been allocated for salaries and allowances. Again, in financial year 2019-20 the allocation of revenue and development expenditure in public administration is 18.5 per cent. There are 1,554 officers against 850 posts of Deputy Secretary. In addition to 450 posts of Joint Secretaries, 787 people are working; while against the 100 posts of Additional Secretaries 435 are working. Besides, contractual appointment is also present rampantly. In 2017, among 142 officers recruited on contractual basis 12 Secretaries were re-appointed after their retirement.
Balance of payment imbalance
THE surplus or deficit of current account balance in Bangladesh is determined mainly by import cost, export earnings and remittance inflows. According to latest available information from Bangladesh Bank, there is no change in capital account. The issue of foreign investment and loans — that is financial account — is the third component of overall balance of payment. Financial account balance gets influenced when the amount of loans increases, and the interest payment starts. Since current account and financial account have more influence on macro economy of Bangladesh, these two accounts need to be discussed critically.
In recent time, the deficit in current account balance is noticeable. For the past two years, the slow pace of export earnings and remittance income and the high growth of import expenditure have been creating a lot of pressure on the current account balance. In July-April of the fiscal year 2018-19, the gap between export earnings and import expenditures has increased to $ 13,675 million in the trade deficit. The recession in remittance income in few past years has also raised concerns. Despite a slight increase in July-April of this fiscal year (13,303 million dollars) comparing to the same period of last fiscal year, the ups and downs of remittance inflows are going on. As a consequence, there is a deficit of $ 5,065 million in current account.
Financial account, although it currently shows no deficit, requires a serious discussion. One of the main elements of financial account — the foreign direct investment (FDI) is trivial. Though it increased slightly during the July-March period of this fiscal year, for some years it remained stuck close to 2.5 billion US dollar. On top of that, the investment in the capital market and other sectors has declined. The investment of Bangladeshi expatriates in capital market has decreased by 22.94 per cent. Meanwhile, the amount of medium and long-term foreign loans increased by 16.30 per cent in the July-April of financial year 2018-19 compared to the same period of previous fiscal year. The amount of other short-term loans has increased. In most cases, loans are being taken for large infrastructural projects. It is seen that life-span of projects extends frequently. As a result, the cost of these projects is also increasing on one hand and flow of foreign loans is on the rise to bear these increased costs on the other. Questions have also been raised about the quality of these projects.
According to Bangladesh Bank report, the amount of medium and long-term foreign debt during July-March of financial year 2018-19 is 4314 million US dollar. It was 3220 million dollars in previous fiscal year. So, it has increased by 33.98 per cent in just one year. In the meantime, other long-term foreign debt amounted to 1005 million US dollar, which was only 161 million at the same period of the previous fiscal year. The rate of repayment of loan during the period is less than the previous year. Due to surplus in financial account overall balance of payment is indicating little shortage though current account balance shows huge shortfall.
Payments of loans are not made right now. That is why shortage in financial account is unnoticeable. The problem will arise when the repayment begins. The entire economy will be under pressure and stability will be lost due to repaying the accumulated burden of debt. By taking too much credit, the economy is constantly engaged in a debt crisis. Eight years ago, in order to address the crisis of overall balance of payment, Bangladesh was forced to go under the extended loan facility of IMF with strict conditions.
The amount of foreign currency reserve is also in decline from financial year 2017. In July-April period of financial year 2017-18, the reserve amounted to 31,753 million US dollar and stood at 32,123 million dollars at the same time in financial year 2018-19. Due to the dollar crisis in the market, central bank is supplying dollars to the open market from the reserve. Businesses are not getting dollars due to the use of dollars in large projects. The failure of LC opening has led the overall foreign transaction in unstable situation. Again, interest rate of foreign debt is on the rise. In order to repay the debt, more pressure on the dollar bills will emerge. As emphasised above, the deficit will increase further when the repayment of interests of various loans for projects begins.
Education and health
PRESENT state of education and health has been in affinity with previous trend of deprivation and low allocation of budget. Besides, quality is not maintained with the current allocation of budget. In the financial year 2018-19, allocation in education sector is only 13.6 per cent of total budget and allocation in health sector is only 4.3 per cent of total budget. Instead of focusing on improving quality of higher education in the country, current budget proposes to hire teachers from foreign countries which will result in increased outflow of capital. Since key problems of quality and institutional deficits in educational institutes have not been addressed, merely importing teachers will do nothing but serve the government’s fancy narrative.
Out of Pocket Expenditure (OOP) is so high in Bangladesh in comparison with other countries. In 2017, from the health report published by the government, OOP as share of total expenditure is 67 per cent in Bangladesh which is larger than the neighbouring countries like India (62 per cent), Pakistan (56 per cent), Nepal (47 per cent), Bhutan (25 per cent) and Maldives (18 per cent). Public health sector is deteriorating in terms of providing quality health service. The allocated money for education and health sectors are mainly spent for infrastructural development.
Agriculture and industry deceleration
RECENT declining trend of growth in productivity in agriculture can be attributed to a number of reasons. First, the post-green revolution period has not experienced any breakthrough as regards technological advancement in the country on the one hand, and the poor and marginal farmers who comprise the majority of total farm population cannot afford the high cost of using high input technologies in agriculture on the other. Second, despite higher cropping intensity, the declining trend in the availability of arable land causes the growth in agricultural sector to fall. Third, though the budget allocation in agriculture is increasing, the large portion of this allocation goes for meeting non-development expenditure every year leaving a meagre amount for development spending, thus constraining development in the sector.
Apart from readymade garments industries, new industrial sectors are not flourishing. In the last six years, number of industrial factories has reduced by 608. In 2012, there were 3,639 big industries which have come down to 3,031 in 2019. Number of medium industrial factories has gone down to 3,014 from 6,103. The fundamental reason of such kind fiasco is the fragility of the institutions, lack of confidence in investment and capital flight hindering the expansion of productive capacity of the job-creating industrial sectors.
In the budget, since the garment sector is most influential industrial sector, 2825 crore taka has been allocated as incentive in sector while no other sectors are getting sufficient incentive to flourish. There is lack of strategic direction for alternative industries and product diversification in the budget.
Financial sector fatalities
REGULATORY imbalances are seen prevalent in everywhere, particularly in banking and capital market. The banking sector can contribute through creation of money, which then contributes to capital accumulation. It also contributes in enhancement of productivity by proving money to help firms in acquiring technological capabilities, which contributes in turn in enhancing productivity. Instead of creating this virtuous cycle, banking sector is promulgating a vicious cycle in Bangladesh. Default loans are increasing. The culprits remain out of punishment. Instead of taking legal steps against the defaulters, the government is seen offering plethora of facilities in favour of defaulters. Banking sector is in liquidity crisis.
Moreover, default loan has been increasing over the years. In 2011, it was 2 thousand 644 crore taka which has become 1 lakh 10 thousand 873 crore taka as of March 2019, up by 88,229 crore taka or whopping 389.64 per cent.
Same holds for capital market. People trade debt or equity-based securities from it. If they do not get equity from capital market, productive capacity will not increase. This explains why the capital market of Bangladesh is so small in spite of the growing size of the GDP. Furthermore, due to frequent scams and controlling of capital market by the clientelistic network, market capitalisation is not increasing in the country.
Poverty and rising inequality
THERE is a disturbing trend of deceleration in rate of reduction of poverty. According to the BBS, the reduction in poverty has slowed down to 1.2 percentage points during the period of 2010–2016 from 1.7 percentages points of the period of 2005–2010.
Income elasticity of poverty, which measures the magnitude of the effect of per capita income growth in reducing the rate of poverty in percentage terms, provides crucial information about the role of economic growth in poverty alleviation. An estimate has been done for South Asian countries provide some revealing insights (Table 2). Bhutan, Sri Lanka, Nepal, and Pakistan have achieved largest reduction in poverty at a rate around 15 per cent annually with India’s rate of decline to be around 9 per cent whereas the rate of decline for Bangladesh is the lowest at about 5 per cent annually. Considering the relative rates of annual change in average income and poverty rates, countries such as Bhutan, Sri Lanka and India experienced higher rate of growth in income along with higher rate of decline in poverty. However, countries such as Bangladesh and Pakistan experienced lower rate of decline in poverty despite higher rate of growth in income.
Turning to inequality, in 2016, Gini coefficient has risen to 0.483 from 0.458 in 2010. In 2016, share of income of the poorest 10 per cent people has decreased to 1.01 per cent which was 2 per cent in 2010.
THIS budget remained in favour of the clientalist network while the interest of the common people has been neglected as usual. It has failed to address the key problems and questions of masses regarding poverty, unemployment, education, health, social security and so on. The regressive mode of tax structure is still prevailing where the lion’s share of tax is borne by general taxpayers. Share of income tax is still very trivial.
Widespread imbalances in revenue, financial and external sectors and disproportionate burden on the income and welfare of the common people are creating challenging sloppy condition for the economy with an impending crisis looming large. Expediency in fiscal mismanagement along with the central bank’s imprudence in adoption of policy measures caused low investment demand in the economy.
In an attempt to restore the economy to the path of achieving sustainability of its growth, the adoption of pro-productive capacity expanding strategy and dismantling the process of primitive accumulation are essential. Centralisation or concentration of power, which signifies the absence of political rights and participation breed law and order conditions in the economy through the winner-takes-all strategy, has been observed in the functioning of Bangladesh economy.
In order to get rid of the outlined bottlenecks, a strategy is needed that generates increment in the productive capacity and provides avenues for the poor to obtain an increased share. The adoption of such a growth strategy necessitates a prudent economic management. It warrants harmonisation of fiscal and monetary policy in order to stimulate the expansion of productive capacity.
This is an abridged version of the Bangladesh Economic Update’s June 2019 issue published by Unnayan Onneshan. The report is prepared by Md Zahidur Rahman, Mostafa Walid Pasha and Md Shah Paran and supervised by Rashed Al Mahmud Titumir.
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