Budget leaves fiscal space in quandary

Fiscal space is practically lying on thin ice in Bangladesh, and the lack of attention being paid to it is quite alarming. A budget financing and debt management plan in a pandemic era is necessary to avoid a possible credit crunch and ballooning of debt-GDP ratio. Hence, it is not enough for government expenditure and revenue to only be harmonious, rather it is a prerequisite to be infallible in the face of unforeseen dents in design.

The fiscal space of a government, amongst others, is measured by the leeway available to policymakers to adjust financing plans such that it does not thwart public finance in the long run or ensue trailing in financial markets.

The primary goal is to augment employment and earnings for people in the wake of massive contraction, set forth in by the COVID-19 pandemic. For the first time in thirty years, the trend of poverty is set to reverse its course – what had been a gradual decline in poverty since 1992 is about to take off in an upward direction.  

The COVID-19 pandemic will aggravate widespread inequality. Economic growth in Bangladesh has been stalled to only 5.2 percent, an absolute low for the first time since 1980 and unemployment is set to reach an all-time high at 7.75 percent since 1984, a more than three-point increase from 4.3 in 2018.

Restoring the economy to pre-Covid scenario will thus require a concerted effort and mix of both monetary and fiscal policy measures. This effort may in turn require drastic adjustments to previous policy measures to cater to the new challenges of today. As a result, the size of the fiscal space available to the government becomes an imperative on which the efficacy of policy reforms may be mediated. With providence and prudence, governments need to lead to respond the unmatched catastrophe.

The fiscal space for policy adjustments in Bangladesh looks rather bleak. Scope for financing has already been crunched due to a probable steep decline in collection of value added tax, the main source of revenue, owing to income losses and lower consumption spending.

In the budget, which constitutes 17.9 percent of GDP, and revenue collection target, a considerable 11.9 percent of GDP, along with a negligible contribution from foreign grants, the official figure for the annual deficit stands at 5.8 percent of GDP.

The National Board of Revenue (NBR) cast doubts on the targeted revenue collection of Tk3, 30,000 crores amidst the ongoing crisis, 10.4 percent of GDP, which is confounding, given its collection rate of 8.5 percent for the last five fiscal years.

It instead projects tax revenue retrieved to be worth Tk2,50,000 crores, which will increase deficit to 8.5 percent of GDP. The probability of a swelled deficit and thinner fiscal space is ominously further supported by an underwhelming 74 percent of targeted tax collection by NBR in the first nine months of the last fiscal year. This leave the government the only option of resorting to further borrowing from the bank than earmarked in the budget.

The banking sector is acting as the main source of finance for the stimulus packages provided by the government for loss-inflicted strategic industries. The dependence on the banking sector for more than the borrowing target of Tk84,000 crores in deficit financing in the budget for FY2020-21 is likely to aggravate the woes. Although the liquidity position of banks have been improved by easing of regulatory requirements from the central bank and creation of new money, standing at 6.5 per cent of GDP, an increase in the excise duty on deposits higher than taka one million is likely to curb saving propensities, proving harmful in the face of withdrawal pressures on banks.

Contrarily, the budget projects a surge in private investment from 12.7 per cent in the current fiscal year to 25.3 per cent, implying that an investment of Tk465, 781 crores will be required for such an unrealistic leap in a post-Covid fiscal year.

An estimation of the Unnayan Onneshan shows that revenue collection will face a decline of 6 percent in the FY2020-21 due to the economic shutdown. The waning revenue will thus compel the government to resort to heavy borrowing from banks.

Yet, vacuuming funds from the banking sector for deficit financing may leave the private sector credit growth in peril due to crowding out and subsequent liquidity crisis for the private sector. Private sector credit growth has in fact dwindled to 8.86 per cent in March, the lowest since December, 2008.

Government borrowing from banks is at an all-time high, since in the last fiscal year the government borrowed an astounding 138 percent more than the previous year. At the same time, concerns may be expressed on whether foreign loans acquired will amount to 2.4 percent of GDP as official figures suggest. The inability to secure foreign loans at this level will further entrench the hopes of adequate revenue collection and debt management in disdain.

One of the striking strategies for the financial and capital market proposed in the budget has been the offered opportunity of sanctioning undisclosed money into the capital market. There are anxieties regarding the effectiveness of this particular initiative as the government lock-in on capital market investment is likely to deter investment into safer options such as bank deposits, savings certificates and real estates.

Under such circumstances, the official projection of a 25.3 percent private investment in FY2020-21 may prove to be rather ambitious and impractical. The estimation therefore suggests a considerable curtailing of fiscal space for the government, with the potential of dampening the efficacies of its policy measures.

The global pandemic has revealed a myriad nuances in every tier of formulating well-informed policies, effective management and executing realistic targets. The budget had the capacity to serve as an opportune moment to meet the expectations of the people through breaking the shackles of conventional budgetary measures, converging rather on well-rounded economic development targets.

Ironically enough, the budget still remains in the spectrum of tunneled vision in management of its objectives. The context of a thinning fiscal space is impending in the realm of public finance and debt management, threatening the firmness of financial markets and business investment, deceptively masked by a bloated liquidity position in the banking sector.

The economy may still fall prey to a prolonged downturn if the infirmities in planning for financing government expenditure bear unintended negative spillovers in terms of overestimating revenue collection targets, failing to streamline non-developmental public spending, and the overreliance on bank borrowing.

Dr Rashed Al Mahmud Titumir, a professor of economics at the development studies at Dhaka University, is the chairperson of Unnayan Onneshan, an independent multidisciplinary think-tank. rt@du.ac.bd