A budget for business

The budget is business friendly, particularly businesses catering to the domestic market, both in expenditures and financing. The economy is on a recovery path with lingering uncertainties on the local trajectory of the virus.

The budget speech is better focused on pandemic management than last year, but short on prioritising spending on health, providing substantive fiscal support to distressed families and enterprises, restoring the functionality of education, helping the rural economy cope with the added pressure, and facilitating the rise of the digital economy ushered in by the pandemic. 

The lessons learnt about the fault lines in expenditure planning and management in responding to the pandemic on the health and economic fronts, an advantage not present last year, are not perceptible even in the incremental part where the legacy of the past does not bind.

Fragile economic recovery

Following a massive hit in the last quarter of FY20, recovery started from July last year but remained incomplete more in terms of income than employment when the second wave struck in March 2021. The second wave has so far (knock in the woods) been less disruptive than the first, but confidence can never return until the population is fully protected from the spikes of the virus.

Most surveys on the poverty impact of the pandemic suggest a sharp increase after the first wave in March 2020. A large part of this increase was not reversed despite gains in rolling the wheels of the economy and macroeconomic stability.

Exports are crawling back towards pre-pandemic levels, formal remittances have spiked, and private consumption is gaining. Inflation is moderate in the 5% to 6% range. Supply disruptions, occasional panic buying, and policy vacillations caused food price volatility.

With a rise in import payments, largely due to rising international commodity price increases, the external current account reverted to deficit in April. Surplus in the financial account buffered any pressure on foreign exchange reserves, which is currently over $44 billion. Monetary growth and bank liquidity rose while the average bank lending rates are down around 7.5%.

Yet private investment is struggling. Private sector credit growth has in fact stagnated with a downward trend in the single digit range since December 2019, notwithstanding regulatory forbearance that assured automatic renewal of outstanding credit. Import of capital has been weak. The disruptions to mobility and assembly caused by rising waves of the virus within and in neighbouring countries have undermined business confidence in an environment where the cost of doing business is high anyway.

The government rolled out an ambitious budget for FY21, targeting a 13.3% increase in nominal expenditure over the revised FY20 budget. The pace of spending in the first eight months of FY21 has been slow, constituting only 33% of the original budget. ADP expenditure declined by 12.2% over the first eight months of FY21. The implementation of mega projects within the ADP accelerated towards the end of 2020. Current expenditure declined marginally in the first half of FY21.

Both the level and composition of expenditures in the outgoing fiscal have been non-responsive to the imperatives of the pandemic. Fiscal deficit has remained below levels that could seriously be described as expansionary.

The budgetary constants

Notwithstanding some scaling down, the FY22 macro-fiscal targets provide fodder for gaping budget conversations centered around the probable. The less said about the GDP growth target, the better. We do not even know from the Bangladesh Bureau of Statistics what the actual GDP growth in FY20 was, not to speak of the estimated growth in the current year.

What is certain is that the state of public health and economic management will be the most important ingredient for growth going forward as the high-income economies seem poised for a roaring recovery, thus unlocking pent up demand for Bangladesh's export and labour.

The revenue, expenditure and external financing targets look modest relative to the current year revised budget. The cynic might say they look as modest as the plausibility of reaching the Moon relative to Mars. Particularly so, given the bloated revised budget base.

The one exception to implausible targets perhaps is the 6.2% of GDP budget deficit. This is achievable even though a slightly lesser target in the outgoing fiscal year is unlikely to be achieved. It is achievable if budget implementation can unstrap the cobweb of rigidities.

Favorable interest-growth differentials have kept the public debt situation less worrisome. External debt constitutes 13.4% of GDP (over a third of the total debt stock), consisting of long-term loans from multilateral and bilateral lenders at concessional or semi-concessional rates.

The average maturity of new external debt commitments is close to 34 years, with an average interest rate of one percent. The low risk of debt distress, assessed jointly by the World Bank (WB) and the IMF, is robust to factoring in the economic shocks precipitated by the pandemic.

The debt-GDP ratio has risen by about 5.8 percentage points of GDP during FY16-20. There are limits to how high debt can go. These limits are tighter for countries with shallow financial markets domestically and limited access to global financial markets.

Prospects for growth in Bangladesh are more uncertain now than ever before. The scope for fiscal adjustment in the face of lower growth is more limited in rigid fiscal systems. There is therefore no room for squandering the space that currently exists.

The interest burden is high relative to revenues (17.5% of revenues in the FY22 budget) compared with most other countries except Sri Lanka, Brazil, India, and Lebanon. High interest burden owes to rise in borrowing through NSCs paying double digit rates.

A shift towards domestic bank borrowing, as envisaged in the FY22 budget, is warranted because of much lower risk-free rates and extremely low likelihood of crowding out private credit when the banking system is flushed with excess liquidity. It should make the bankers happy even though the rates are much lower than a year ago.

The $11.5 billion net disbursement of foreign financing projected for FY22 will be a challenge. There is money in the pipeline, but the billion-dollar question is whether the budget implementers can raise their game in aided investment projects, procure enough vaccines and act on reforms needed to elicit budget support from the donors. The budget support target is $2 billion, 1.3 times the current fiscal year's revised target. The government also expects to receive $1.5 billion as vaccine support.

These are issues that come up each year with the budget makers banking on future rosier than the past while economists and other analysts clamour for more realism in the projections. Despite large shortfalls relative to budget targets year after year, the budget makers have managed to overlook the fool's errand flagged by Mark Twain's worry: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Slowdown in economic activities with the arrival of the second wave has made any significant uptake in revenues most unlikely until imports and domestic sales recover. Direct tax revenues cannot grow without growth in firm revenues and profitability.

The projected revenue growth for FY22 is 10.5% relative to the revised budget, but it still implies nearly 30% growth assuming actual revenues in FY21 are only 15% short of the revised budget. Can this be achieved?

The changes in taxation are business-friendly and revenue decreasing

There is hardly any worth-a-mention increases in tax incidence at the income and expenditure levels. The only notable exception is an increase in the income tax rate on fish farmers with an annual income of over Tk30 lakh from 10% to 15%.

Individuals having net personal wealth over Tk50 crore will pay a 35% surcharge on assets, compared with 30% on net assets above 20 crores currently. The investment rebate is reduced to Tk 1 crore from Tk 1.5 crore. Minimum surcharge on wealth is abolished and tax slabs on net assets reduced from 7 to 5 with a maximum rate of 35%. 

The business friendliness of tax changes has come in several forms. Corporate income taxes are lower. The most significant is the 25-percentage point reduction in corporate tax rate for non-financial non-listed companies and listed companies, except tobacco producers and telecoms. Income taxes on single person companies registered under the Companies Act is reduced from 32.5% to 25%. 

Tax holidays are extended and expanded to new entrepreneurs in agricultural-processing, fruit processing, milk and dairy production, baby food and farm machinery manufacturing. Turnover based minimum taxes are reduced from 0.5% to 0.25%. Advance income taxes have been reduced from 4% to 3% for import of raw materials for industries. 

Income taxes on public traded providers of MFS increased from 32.5% to 37.5% and 40% for non-traded. This is a move in the wrong direction when the avowed policy is to bring the average corporate tax rate down over time and at a time when MFS has emerged as a critical medium of financial transactions due to the pandemic. 

However, inclusion of MFS as a means of payment along with bank transfer where making payment through bank transfer is a mandatory provision may help expand their business volume. 

The 15% rate of tax on operating income of private universities, private medical, dental, and engineering colleges as well as private colleges engaged solely in imparting education on ICT will be included in the Finance Act to, perhaps, remove the legal complexity in its application. This will still be controversial because these are registered as nonprofit institutions. 

Selected domestic market-oriented industries have more to celebrate. Expansion in VAT exemptions favour domestic industry and services such as ACs, refrigerators, motor car and motor vehicles, home appliances, polypropylene staple fiber, computer accessories, and raw materials for mobile phones, sanitary napkins, and diapers. 

Tax exemption extended to the companies engaged in production of three and four wheelers, home and kitchen appliances as well as light engineering products for ten years. There is a significant increase in tariffs on imported feature phones and a decrease in tariffs on imported parts of LED. Reduction in advanced taxes on imports from 4% to 3% will only marginally offset the discriminatory treatment of imports relative to domestic production. 

There never is a free lunch. Protection to few large domestic market-oriented industries will hurt consumers of their products, weaken the incentives for export diversification, hinder the development of the digital economy, and limit the provision of online education. 

Duties imposed on mobile phones last year caused smartphone prices to spike. Local mobile phone producers profited and now other appliance giants who have just entered manufacturing computer devices and accessories will consolidate and fatten excess profit. 

Most of the tax measures, while reducing the burden on the taxpayers, will result in revenue losses. Making e-TIN mandatory for buying saving certificates and postal savings deposits worth a minimum Tk2 lakh each, obtaining registration of cooperative society and approval of any building design from the municipality office may add to the tax base, but not right away. 

Tax revenue collection will depend on progress on fully digitising tax filing and payment, fast-tracking the settlement of the backlog of tax cases, and making audits productive. These have faltered despite many initiatives. 

The budget speech provides the usual lip service to reforms to reduce tax evasion and leakage without making any concrete and time bound commitment. The "National Board of Revenue has already taken some initiatives, like the upgradation of ASYCUDA World, implementation of National Single Window project, introduction of automated customs risk management, automation of bond management, introduction of authorized economic operator system etc." 

Cannot blame you if you find this all too familiar.

Will the budget spend right?

The budget is business friendly on the expenditure side as well. Sectors relying on mega contracts for implementation such as transport, power, and energy account for 16.4% of total expenditure and 37.3% of development expenditure. In this respect, the FY22 budget is almost a replica of the past both in the allocation of total budgetary resources and that of the incremental resources. 

The imperatives of the pandemic warranted a change in the allocation to areas that have risen in priority. These include health, social protection, education, small scale manufacturing, agriculture, and rural development. 

A rise in budget deficit due to rise in expenditure in these areas could pay higher economic and social dividends in a pandemic context. The FY22 Budget is as preoccupied as in any other year preserving line-item expenditures inherited from the pre-pandemic past. 

What was "right" before the pandemic is certainly not so during the pandemic and probably will not be so even after the pandemic. Crises often solve the difficult problem of "preference revelation" in collective decision meeting. 

Information on what the Bangladesh society currently needs is available anecdotally in the media every day and more rigorously through a variety of surveys at frequent intervals. These are hard to miss, but the financial provisions suggest otherwise.

The distribution of budgetary allocations by functions (infrastructure, social and economic) cannot change dramatically in any given year in an incremental budgetary process where the legacy of the past inevitably dominates. What can change is not the total allocations by functions but the incremental part of it. More so in the development budget where the room for the exercise of discretion in response to a dramatic change in ground realities is larger.

Development expenditures are budgeted to increase by over Tk29,000 crore, but the sectoral distribution of this increase is only insignificantly different from the sectoral distribution of the total development budget allocation.

The changed realities not sufficiently reflected in policies

Here are a few key changes in the ground reality the budget seems not to have adequately picked up:

Health hazards: The pandemic unraveled glaring infrastructural and moral decay in healthcare. Deterred by the expensive healthcare system, many people choose not to seek professional care. Government hospitals have struggled with the number of patients, are burdened with shortages of ventilators, ICUs, aging facilities, rooms, shortage of doctors and nurses, and underfunding. Yet health ranks 6th in terms of the incremental allocation in the ADP. Its share in total spending is 0.9% of the projected GDP, almost the same as in the revised FY21 budget. 

Vaccination is priority number one both from health and economic points of view. The management of vaccination centers have been excellent thus far. The government has also done a good job lining up funds for vaccines. The question for the next fiscal year is whether we will be able to use the money to vaccinate 70-80% of the population. 

Bangladesh's vaccinations campaign needs to be geared up massively to get to herd immunity within a year. Beyond vaccination. testing, diagnosing behavior causes of community transmission, treating the infected, and non-covid care deserve accelerated policy and budgetary care.

The good news is that all duty waiver on import of covid testing kits, special types of masks and raw materials required for hand sanitisers, masks and PPE production are extended and duty-free facilities are provided for the import of raw materials required for the preparation of the virus detection RT-PCR kit.  

The weak spending capacity of the health ministry is not a convincing rationale when the country is faced with a massive public health distress. The budget provides tax holidays to the private sector for setting up 200-bed specialised and 250-bed general hospitals outside Dhaka, Chattogram, Gazipur and Narayangonj districts. This policy is based on a disjointed view of hindrances to private investments in health care facilities in the underserved peripheries. 

The public would have felt more assured if the budget speech were more specific on health service deliverables in terms of the number of people expected to be fully vaccinated, the infrastructural and medical supplies inadequacies met, and health staff shortages alleviated. 

The budget provides little evidence of such preparation other than the same rhetoric as last year. On vaccination all we have is the following commitment: "Plans have been devised to vaccinate 80% of the people in phases. In the first phase, people with risks will be vaccinated, and 25 lakh vaccines will be given each month. The vaccination program is being implemented at the field level through coordination between the EPI and the Centers for Disease Control (CDC)".

Livelihood vulnerability: The pandemic heightened and unraveled the vulnerability of the poor. The interventions for fighting poverty and food insecurity have been vastly inadequate and unnecessarily heterogeneous. In a nationwide monitoring survey, carried out in February 2021, a fifth of the respondents reported having no sources of help to turn to if faced with a future emergency expenditure and another 7% would have to mortgage or sell assets. 

Only 14.3% and 32.5% could rely on their own savings and borrowing from friends or relatives, respectively. No more than one-fourth of the ultra-poor got government income support and over three-fourth of the new poor remained out of the relief initiative. 

The amount of direct cash and food support provided to these groups was vastly inadequate and the distribution mechanism fraught with usual pilferage and targeting problems. 

These notwithstanding, the most significant initiative in the FY22 budget is the increase in the allocation for poor elderlies from Tk2,940 crores in the current fiscal year to Tk3,420 crores covering 9.7 million people in 262 ultra-poor Upazilas with an unchanged payment of Tk500 per month! 

Excluding the non-core programs, transfers to households and individuals aimed at addressing poverty and vulnerability in the current year budget is equivalent to 0.9% of GDP across 40 programs. This is unlikely to have changed despite the expansion of beneficiaries in allowances for the elderlies, increased allowances for widows, women deserted by husbands, pregnant women, lactating mothers, and insolvent disabled. 

The budget speech promises some course corrections taking account of the lapses in design and implementation of support for the old and new poor households. The corrections may increase the efficiency of delivering support, which will be no mean achievement. But the slim size of the support will still leave many behind. 

Interventions such as the Employment Generation Program for the Poorest (EGPP), implemented by the Ministry of Disaster Management and Relief, can be handy at a time like this. 

Since its launch in 2008, the EGPP has emerged as one of the flagship safety net programs of the government. It employs rural extreme poor during the lean season over two cycles for 80 days doing physical work for rural communities. Wages are transferred to the beneficiary's bank account. 

Several evaluations, including by BIDS, found EGPP contributed to increasing the purchasing power and overall household consumption of the beneficiaries significantly while reducing outstanding loans. It could reach the vulnerable sections in the community and improve their socio-economic conditions. 

There have been complaints of bribery in beneficiary selection and wage payment, high implementation costs and poor quality of public assets built through work projects. That is no excuse for making the best the enemy of the good.

Learning poverty: The in-person schooling in Bangladesh has remained shut since March 2020 affecting about 38 million students and a million teachers. The government responded through TV-based learning programs (Amar Ghare Amar School), Bangladesh Betar and community radio. 

A WB study in May 2020 found around 55% of Grade 9 stipend recipients did not have access to TVs. There is a perceptible decline in the time students spend studying at home after school closures. Another WB study in June 2020 found around half of adolescents were spending less time on education than before the lockdown, with 94% reporting increased time on household chores or childcare.

According to the South Asia Network on Economic Modelling (SANEM) household survey done over the phone between November-December 2020, only 21% students participated in any forms of online (TV, Internet) education since the pandemic. 

The participation was lower in poor households (15%) compared with non-poor (26%). The dominant reason (50%) for not participating was the unavailability of online class activities. Lack of access to the Internet and smart devices were also prominent (23%). 

A Covid-19 Response and Recovery Plan for a coordinated national approach in education, prepared in May 2020, says everything that needs to be said: "...different levels of government need to move in a synchronised and complementary way…in implementation and scaling up the strategies that work…. It is essential that those involved in local service delivery (district and upazila officials, head teachers, teachers, parents, and students) are able to provide feedback on what works and where there are obstacles to the continuation of education. The geography based and population group vulnerabilities also are a strong argument for decentralised planning, management, and response mechanisms for education programs within an overall policy and strategy framework." 

Yet the actions identified to be taken over a 24-month period took more than a year to start! 

Education deserved special attention in the budget. There is a need for massive public intervention to ensure an alternative mode of delivering education with universal access and safety. 

Increasing public spending on education may not be sufficient, but it is necessary. Development allocation for education has increased only 10.3%. Effectiveness of education spending is now more important than ever. The budget speech pays lip service to all of these without explaining what, if anything, will be done to repair the damage in FY22. 

Pressure on the rural economy: Agriculture and the rural economy has been a shock absorber during the pandemic. Families losing jobs and incomes in urban areas turned to their rural roots for livelihood support. Production and trade in agricultural products have been more resilient than overall trade reflecting the essential nature of food and the resulting relative income-insensitivity of demand for it. 

This broad brush conceals the fact that demand for certain agricultural products (e.g. non food agricultural products) dropped dramatically. 

Sales dropped for several higher-value products, such as fresh produce, dairy and meat, and flowers which are generally more dependent on sales to restaurants, schools, festivals, and tourism. 

Restricted inter-district transport movement without any effective alternative to bring the agricultural produce and rural manufactures to markets constrained production, distorted prices, and made living conditions uncertain for the rural lower-income people. 

With disrupted local food supply chains and limited storage capacity, desperate farmers sold their produce, especially perishables. Severe floods in parts of the country in the second half of 2020 affected more than two million rural people.

The FY22 budget provides more of the same for agriculture and rural development. Total allocation to agriculture has increased by a bare 1% relative to the revised budget and by about 7% for rural development (including local government). 

The previous levels of allocation for subsidies on agricultural inputs and farm mechanisation, and refinancing schemes for agricultural credit to farmers and traders are maintained. Disbursement rates have struggled to reach the target, yet the same implementation arrangements persist. 

The functionality of these arrangements was stymied by the lack of coordination in the local administration, the undue influence of local government officials, nepotism, and corruption. 

Development allocation to agriculture has increased by 3.4% and to rural development and institutions by 6%. Agricultural subsidy is unchanged. Advance taxes on import of thresher machines, power ripper, power tiller, operator seeder, combined harvester, rotary tiller, weeder, and winnower are withdrawn. These will help if the input and credit subsidies reach the small and marginal farmers. 

Rate of return to small and marginal farmers are subject to the vagaries of their output prices. Cash needs to support livelihood and working capital and lack of storage capacity depress farm level prices. The budget sets the usual procurement targets at already announced prices. It provides no reason to believe that the small and marginal farmers will benefit from public procurement. 

The Modern Food Storage Facilities project was launched in 2014 to expand storage options for the farmers. So far, it has helped manufacture and distribute 5,00,000 household air- and water-tight food containers ("household silos") to poor farmers and women-headed vulnerable households in disaster-prone coastal areas. Construction of steel silos with a storage capacity for 6,00,000 tons of rice and wheat for 4.5 million households has struggled. 

Rural and peri-urban based micro, cottage, and small enterprises have suffered dwindling cash flows, suppressed demand, and working capital depletion leading to stress on employment. The shedding of work in the non-agricultural part of the economy has forced many to change occupation. 

The liquidity support for small businesses from the commercial banks at a subsidised interest rate could not be accessed by a large fraction of deserving entrepreneurs outside the purview of formal recognition and regulation. 

The reduction in minimum turnover based taxes and income tax rate on single person companies may benefit medium enterprises. Duty on import of some finished products made by these industries has increased and 1% exemption provided on the import of capital machinery to small and medium enterprises irrespective of commercial and industrial establishments. 

There is not much for the cottage and micro enterprises except the continuation of interest subsidies that last year failed to reach them. Sadly, the budget speech only has the following to say: "The government has adopted several incentive packages for micro, cottage and small and medium enterprises including the provision of low-interest working capital facilities worth Tk20,000 crore, most of which have already been implemented. Once these steps of the government in the SME sector are fully implemented, it is expected that the contribution of this sector to the national economy will increase to 32% by 2024." 

Rise of digital services: The pandemic compelled the private sector and the government to turn to digital technologies. Nearly 1,00,000 people joined the e-commerce platforms' delivery, packaging, technology, marketing, advertising, and other sections in the past one year, according to the e-Commerce Association of Bangladesh. 

Progress achieved since the onset of the pandemic is equivalent to the progress that was expected three years later. Big foreign companies (Facebook, Amazon, Google) have expressed interest in Bangladesh.

Usage of digital services expanded beyond e-commerce. 

The number of total transactions through 15 MFS operators jumped by 23.2% (Bangladesh Bank data). Most people used MFS operators to meet their immediate payment needs like buying foods and goods, utility bill payment, remittance receipts and other payments. Transactions of internet banking amounted to Tk103.71 billion in March this year, up 57.4% year-on-year. Virtual call centres have benefited small-scale farmers to sell products at, on average, higher prices to buyers including private companies and purchase essential agriculture input from suppliers. 

Telemedicine has gained new footholds.  Repurposing the 333-information line as a Covid symptom-reporting tool has been popular. The potential for sustainable expansion depends on internet access (4G/5G networks). Two-thirds of Bangladeshis do not have smartphones. Adapting services to work through phone calls or SMS is challenging. There are trust issues regarding the quality of the service.

The pandemic highlighted how critical it is for the government to be able to rely on the digital infrastructure to continue operating and delivering services in the face of disasters. 

The budget recognises the challenges for the development of the digital services sector—lack of inter-operable infrastructure, financial transaction security, and human resources apart from slow and expensive Internet. It has included cloud service, system integration, e-learning platform, e-book publication, mobile application development service and freelancing in the tax exemption list which already has 22 exempted services. 

The e-commerce platform will be included in the definition of a source tax deducting authority. These are welcome. However, the existing 15% supplementary duty, and the 1% surcharge on mobile Internet continues. 

On the expenditure side, the ICT sector does not appear among the top ten in terms of the incremental development budget allocations. The budget speech cites "I will do e-commerce, build my own business" projects to develop the skills of new entrepreneurs in e-commerce and create small and medium entrepreneurs in rural e-commerce. Increased public investment is needed to alleviate the limitation of bandwidth, a binding constraint on the expansion of ICT services. 

Bangladesh not only lags far behind the average developing country in terms of broadband coverage but also well behind other countries in the region. Investing in a massive extension of mobile broadband coverage could give a real boost to inclusive growth. The government must enable competition and reduce the taxation to make it happen.

Epilogue

A professional auditor may not be hard pressed finding some major deviation from compliance to rules and procedures in public financial management in Bangladesh. However, even when compliance leads to large shortfalls in outcomes, the rules and procedures must be flawed. 

This is no revelation to anyone. Yet the feedback loop makes no difference to how the government agencies conduct the extraordinary business of using public money without due regard to outputs and outcomes. 

Pre-budget discussions between the Ministry of Finance and the line agencies focus on the allocations to line items. This correspondingly limits the accountability of agencies to the proper disposition of funds in accordance with the revenue and development budget appropriations. Even if a line agency fails to meet its mandate agreed upon in their Annual Performance Agreements, it is generally not held accountable for failure if it stuck to the allocations granted.

Frugality, waste, and profligacy coexist peacefully in the budget year after year. We are frugal where we need to spend generously (health, education, support for the poor), wasteful where we need to spend smart (cost and time overrun in public investment projects) and indulge in profligacy where parsimony has a premium (travel, foreign training, and perquisites for officials). These are anomalies we have gotten used to just as we are to the sun rising in the east and setting in the west.

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Zahid Hussain is the former lead economist at the World Bank Dhaka office