The real economy behind the lofty numbers

A day after the outgoing year’s budget was placed in parliament, then finance minister AMA Muhith had said the lofty targets were achievable, although everyone with any intelligence doubted his words because he had proposed no reforms, and high targets without reforms is unattainable.

A year later, the obvious has come true. The targets remain wishful thinking – in revenue collection, in recurrent expenditure, in investment and in development programmes.

The only exception appears to be GDP growth, shooting above the projection, although the thumping number is now being openly questioned by economists who find no correlation of growth to proxy indicators.

These bring us to the basic question of what we want to know from the budget that finance ministers place in parliament with so much ado. Essentially we would like to see a realistic projection of the trajectory the country hopes to follow, the reforms necessary to attain that graph and how the government is going to improve public life through job creation, building infrastructure, providing efficient services and so on.

The issues remain matters of open debate.

Job creation requires more efficient credit in private hands. The reality is private credit has slowed down.

The financial intermediaries, mainly the banks, are in dire straits. Their share of soured loans has piled up, pushing up their cost of doing business.  

This means the much-hyped promise to deliver cheap credit remains a pipe-dream – it is best to forget what the bankers promised about lowering lending and deposit rates to 9 and 6 percent after they wrestled out monetary perks from the government.

Credit to the public sector has increased, but this is certainly not what is necessary to fuel growth and employment. It’s a consequence of unusually poor revenue collection, another signal that growth may not be what it is estimated to be.

Spending necessarily does not mean good growth. When one spends much above the appropriate estimate for the same work, the money is a sheer waste that generates an illusory growth that is skewed in favor those needing no favors. Somebody somewhere is surely minting money that should have gone to the poor, for health and education, for more projects that generates social and economic impacts.

Unfortunately, the degree of waste is astounding as evident in the cost overrun in projects – from Padma Bridge to metro rail to elevated expressway. Well, let’s not talk about Rooppur yet!

In short, growth per unit is coming at excessive cost.

It is then natural that mega spending has not generated mega employment. As the data shows, employment has almost stagnated.

And this also means that more and more money is flowing into richer pockets instead of it getting spread around. Naturally Bangladesh has become a nation with the fastest growing rich complemented by growing inequality.

Reforms in a swath of areas remains pending. The company law reforms necessary to reduce cost of doing business is still bound to discussions and promises. Just imagine, the company law we have was formulated in 1913 with some insignificant small changes in 1994.

The world of capitalism has marched a long way from there with the invention of the internet and artificial intelligence shaping the types of businesses, and ways of doing it too.

Bangladesh still does not allow a single ownership company to be registered. Many of the start-ups are nothing but one-man shows. A simple change in the annual general meeting date requires a court permission. Share transfers and merger and acquisitions are a nightmare.

Corporate tax, one of the highest in the world, is a blinding spot for reforms and yet in the last few years, hardly anything has been done in this area. Ah well, the banks got a cut on their taxes.

And the banks. How spectacular their decline is! The quality of their assets have declined with more and more loans, they are now faced with cash crisis and the government has been extending more generosity to their nemesis, the loan defaulters.  

The incumbent Finance Minister AHM Mustafa Kamal who will present his first budget after the end of the Muhith era has come up with some magic window-dressing of the problem – he has changed the definition of loan classification, giving more time for a loan to become classified. This will definitely improve the figure for soured loans but in reality the minefield will only be wrapped under camouflage.

And the minefields are many. Revenue for one. Expenditure just another.

As an oxymoron to high growth, revenue has fallen far short of target.Growth should have generated more business or the other way round, and more business should have raked in more revenue. If revenue has not come, something must have gone awry and that needs to be identified and taken care of.

And so, the budget that Kamal is going to present today is expected to have a factual and logical analysis of the problem and a well-thought out answer.

The tax as a portion of the economy, what economists call the tax-GDP ratio in Bangladesh, has not shown any improvement and is the lowest in South Asia, except in Afghanistan.

The VAT law is expected to be implemented from this year, which will remove much of the discretion in taxation that leads to leakage.

As a conjoint of revenue woes, overrunning expenditure has also emerged as a dangerous pitfall. Cost escalation of the megaprojects remains a sticky issue. Very little light is being shed on how much of the escalation is justified, how much is avoidable by being efficient, and how much is outright corruption. The recent exposé on some household purchases as part of the Rooppur nuclear project seems to be the tip of the iceberg and a sign of the breakdown of internal controls in public expenditure management. 

And above all, we need to have a binding timeline for completing projects that make sense for the economy.

Because of a mismatch of revenue and expenditure, the economy is getting sucked into more and more indebtedness. The high yielding national savings certificates, lucrative to the public, have become the main recourse to deficit financing for a good length of time, but not without immense negative impact.

Debts are swelling fast and so is debt servicing obligation. Instead of tapping the present day resources for current obligations, we are simply taxing the future generation.

And who is benefitting from the high yielding certificates? Certainly not the middle class or the poor as often touted. Rather, the rich are the main beneficiary of this skewed system that is driving away funds from the banks and stock market (although the malaise with the capital market is even deeper because of unbridled manipulation).

The economy now seems to be constructed around a culture of subsidy from electricity to gas to bank’s capital formation. The necessity to import LNG – and every day from now we have to pay over $5 million on account of LNG being pumped into the grid – has added to the worry. Gas price increase is now inevitable with knock-on effect on manufacturing.

So time has come to assess the subsidy efficiency and impact--who is getting it and how much of it is going to the rich and how much trickles down to the target population.

The external sector also faces multiple challenges. Exports have increased but on the back of a few concentrated sectors, chiefly apparels, and few markets – the EU and the USA. The US-China trade war and Brexit pose a real challenge here as global economic outlook looks highly uncertain.

Imports have decelerated to some extent this year, but are still on the higher side.

The resulting impacts – still a large trade deficit.