Economists discuss Covid-19 crisis-2
The Business Standard talked to senior economists on the government’s policy response to the impacts of Covid-19, on setting priorities in the next budget and the route to economic recovery. Moderated by Dr Zahid Hussain, the discussion was joined by Executive Director of the Policy Research Institute of Bangladesh Ahsan H Mansur, Distinguished Fellow at the Centre for Policy Dialogue Dr Debapriya Bhattacharya and Director General of Bangladesh Institute of Development Studies (BIDS) Dr KAS Murshid. They expressed their views on the effectiveness of the policies taken thus far to overcome the current situation and what else is required. Inam Ahmed, The Business Standard Editor, opened up the discussion. This is the second part of a two-part discussion
Zahid Hussain: I want to go to demand management now. The next budget is ahead of us. We heard that it would be proposed after two months but now it seems that the budget will be presented on June 11.
I will start with Ahsan Mansur bhai. We know that a typical budget will not do in this situation. There is no point of disagreement here. If we talk about five priorities in this year's budget, what do you think those priorities should be?
"There is a crisis of financing. This year we see a fall in revenue collection. We can assume that the situation will not improve that much in the next year."
There is a crisis of financing. This year we see a fall in revenue collection. We can assume that the situation will not improve that much in the next year. So, what can we do about financing? And will the size of the budget be dependent on the amount of financing or will it be based on necessities and then we will try to finance that anyhow?
Ahsan Mansur: I think the government is going to place a more or less typical budget. Number one, there is an ambitious goal that there will be a growth of 8.5 percent, revenue collection will be 33 to 35 percent. But that will not be achieved anyway. It did not happen even in the last five or seven years. It will not happen this time as well. If a typical budget of the same type is proposed this year, it will not be useful.
I think the budget should be divided into two parts--the first six months and the next six months and the focus should be on the first six months. The first priority should be to strengthen the public health sector because coronavirus is not going to leave us in the first six months of the next fiscal year. So we must support it [health sector] by considering it as the principal line of defense. Otherwise the economy will not be revived.
"I think the budget should be divided into two parts--the first six months and the next six months and the focus should be on the first six months. The first priority should be to strengthen the public health sector because coronavirus is not going to leave us in the first six months of the next fiscal year. So we must support it [health sector] by considering it as the principal line of defense. Otherwise the economy will not be revived. The second priority should be the livelihood issue. Around one and half to two crore people have been unemployed. All of them have their family members as well. So we have to feed around five crore people. The government has to keep a big chunk of allocation for that. Our suggestion was that cash transfer would be more effective in this context."
The second priority should be the livelihood issue. Around one and half to two crore people have been unemployed. All of them have their family members as well. So we have to feed around five crore people. The government has to keep a big chunk of allocation for that. Our suggestion was that cash transfer would be more effective in this context.
We have the infrastructure, we have the national IDs, we can do it. And it can be done, firstly, on the basis of self selection. People who need this help will come up with their national IDs and information of their previous jobs. The government will verify their information and give them cash help. We do not need to hand out a big amount of money. The government is currently providing Tk2,500, it could be raised to Tk3,000. So, those people would not have to come out in search of food.
The third priority should be revitalising the economy. The package that has been provided is not too bad as the first step. It could be raised later if necessary. The deficit issue should not be taken as the primary concern because we have to save lives, we have to save the economy. If we can do that we would be able to control the deficit. The government has to rethink some points here. The circulars that have been issued are not implementable. These should be more realistic. Some revisions have been made and more is needed.
Finally, I want to mention the SME sector, specially the microeconomic sector. Tk20,000 crore is not enough for this sector. It will not be possible to provide money in this sector at 9 percent interest rate. The government has to do two things here; they have to be flexible on interest rate and think of something like three or four percent margins. I am not talking about following India where 100 percent guarantee has been given to the SME sector. We don't want a hundred percent guarantee. I think we need some risk sharing at the least and 50/50 is a reasonable risk sharing arrangement. So Bangladesh Bank has to take 50 percent risk in this crisis moment.
Zahid Hussain: Thank you Ahsan bhai. I totally agree with your point of view about cash transfer. I heard yesterday that 50 lakh families will get cash transfers. But here the problem is, I heard that the list of people who qualify for the help have been prepared even before determining who would qualify for the help.
Ahsan Mansur: I just want to make one point on this list. I will give an example of my own village. A list has been prepared for our village. Then the education officer consulted a person from the village to verify the list. The man found only four people of the village named in the list of 420. The officer could not believe that. He went to the village and talked with other people about the list; all of them said that they didn't know most of the people named there. This is the nature of the list that has been made to provide cash transfer.
That's why I want to emphasise on self selection and verification by the government which will be a better way. If the list has to be made then these should be displayed in the mosques and other public places of the villages so that people can place their complaints about those.
Zahid Hussain: Debapriya, I will ask you the same questions that I asked Ahsan bhai. I will also add two specific questions with that. First one is the question of Bernie Sanders. He asked if a vaccine is available will we be able to provide universal vaccination? That is everyone will get the vaccine. Will it be based on the ability to pay? Will it be voluntary or involuntary?
The second question is regarding social protection and Ahsan Mansur bhai said that he prefers the budget divided in two parts, first six months and second six months. There is a proposal of minimum guaranteed income for social protection strategy which is being discussed for a long time. Could you please tell us your opinions on this?
Debapriya Bhattacharya: I am not disagreeing much with Mansur bhai. I am also seeing a very typical budget, and I don't think that it will be very helpful. The main reason is, we are not used to taking action based on science, information, and data. We want to run our national life based on some preconceived ideas. For example, there's a saying that we are a heroic nation, coronavirus will not do any harm to us. Sometimes we make our decisions based on these assumptions. We said coronavirus will not be an obstacle in achieving an eight percent growth. This typical budget has emerged from this kind of thought process that does not want to see reality.
There are three fundamental problems with this. First, we have not done any institutional assessment to measure the economic loss of coronavirus based on which the budget could be formulated. Now the budget will be based on blind assumptions. Because we do not have proper assessment about the sectors most hurt by unemployment, who have lost the most capital amid the crisis? We do not have any benchmark. That is why we see unrealistic assumptions on revenue collection and other costs.
"If in the next financial year Bangladesh needs to protect any group that is, I personally think, the lower-middle class people. We have to give them expendable income. And it should be provided with our tax system where we have a minimum income slab of TK2.5 lakh, it must be raised to Tk3.5 lakh. On the other hand, the tax rate should be lowered from 10 percent to five percent. The marginal tax which is 20 percent and ultimately turns to 30 percent, must be lowered to 15 percent, that means, you have to give money to the lower-middle class. They must be given support in the education and health sectors. They should be given support on house rent. That 50 percent of people that remains if you exclude the lower 40 percent and top 10 percent, if the government cannot provide money to them then the number of people living in poverty will rise in Bangladesh. And the new poor will just not create an economic crisis, it will also create a social and political crisis."
Second, generally the budget is proposed on a mid-term macroeconomic framework. The mid-term framework that was provided last year has lost its validity. Are we going to use any second mid-term framework as a part of which the budget will be presented?
Third, we have entered the crisis of coronavirus from the preparation of the eighth five-year plan. So what will happen to the eighth five-year plan? How will it affect the budget? Is there any closing assessment of the seventh five-year plan? We don't know anything about these.
Finally, we are a part of a global development strategy that is the SDG. What is the current status of this? Have we not got any assessment? So the material and informational base that we need to prepare a budget is not present.
Now I will come to your two other questions. I think the copyright issue that is associated with vaccines, the matter of intellectual property rights – should be considered a public property. And there is a global movement on this demand so that the global trade system cannot be an obstacle for this. We must take part in that movement. It must be a part of the fundamental rights. I cannot accept it that only the rich will be able to afford the vaccine. It is also not compatible with the fundamental propositions of our state.
You have also asked about minimum guaranteed income. It is very important. We are realising the problem that has been created because of the absence of a universal protection system. It is specially for the lower and lower-middle income people. There is pension service from the government but that is not universal.
I want to say another thing about the budget that you and Mansur bhai talked about: the monetary policy. Till March this year, 75 percent of the budget deficit has come from loans taken from internal sources. How will it be sustainable in the next few years from a devastated, banking sector? The Bangladesh Bank had to issue more than hundred circulars. They are well aware of their power. If you have to prepare a budget you have to put emphasis on the economic steps. That means we have to emphasise the fiscal policy.
There are two parts of the fiscal policy. Earning part and expenditure. In the developing world the efficacy of fiscal policy is better than monetary policy in this kind of situation. In fiscal policy, there is more benefit in expenditure than in earning. So we have to pay attention to the revenue expenditure structure, and development expenditure structure that we have. If we take the health sector as a fundamental sector, then what can we do there? Fifty percent of the new ADB is material infrastructure in the current projects, specially in the mega projects. If you look at the revenue expenditure, I was looking at the expenditure structure of March, I see that the areas where expenditure has gone down significantly are repair and maintenance. It is a small but important sector. We are expending more on special allowances, not in salaries or allowances. Other thing is allowance to institutions. So the government must look at these.
We have subsidies of about Tk33,000 crore. We have to make this sector more transparent. In earlier eras we provided a lot of subsidies to oil and fertiliser. I personally think that the profit that Petrobangla made has to be invested in the health sector. This is the biggest source to invest in the health sector.
If in the next financial year Bangladesh needs to protect any group that is, I personally think, the lower-middle class people. We have to give them expendable income. And it should be provided with our tax system where we have a minimum income slab of TK2.5 lakh, it must be raised to Tk3.5 lakh. On the other hand, the tax rate should be lowered from 10 percent to five percent. The marginal tax which is 20 percent and ultimately turns to 30 percent, must be lowered to 15 percent, that means, you have to give money to the lower-middle class. They must be given support in the education and health sectors. They should be given support on house rent. That 50 percent of people that remains if you exclude the lower 40 percent and top 10 percent, if the government cannot provide money to them then the number of people living in poverty will rise in Bangladesh. And the new poor will just not create an economic crisis, it will also create a social and political crisis.
Zahid Hussain: Thank you Debapriya. Murshid bhai you will also discuss the same questions. I just want to add another question in line with Debapriya's discussion. He talked about the profit of the petroleum corporation. But its profit will depend on how smartly the corporation is managing its contracts. Their efficiency in this area will determine if BPC will get the profit in its account. Another question is this, Debapriya was talking about providing subsidy and we provide capacity charges to the rental power plants in electricity sector; at the moment, the demand for electricity has fallen a lot, as far as I know, we pay around Tk9,000 crore for this capacity charge annually. I would like to know your comments on this.
Inam Ahmed: At the same time we are continuing power import.
Zahid Hussain: Yes. So, my last question to Murshid bhai is- did the government ask for any advice from BIDS on the budget? What advice have you given? And the reports that we see in the newspapers about the ADB- how much of that reflects your advice?
KSA Murshid: I agree with both Ahsan and Debapriya. I do not have much to add after their discussion. You asked about BPC. I do not know how BPC really works. Because it always seems that they are not in a good position. Among many of our shortcomings we had a positive thing that we could assure energy security. So if we do not do that it will be the missed opportunity of the century. Because the oil price will never be like this.
I don't know what to say about the power plants. This was a political decision and there is no economics here. And the temporary benefit that it provided has been achieved. Their usefulness is now over. It is time now to think how to develop an escape plan from this monster. When something exists for a long time it creates its own dynamics so it becomes a big challenge to extricate ourselves from it.
I don't know what to say about the power plants. This was a political decision and there is no economics here. And the temporary benefit that it provided has been achieved. Their usefulness is now over. It is time now to think how to develop an escape plan from this monster. When something exists for a long time it creates its own dynamics so it becomes a big challenge to extricate ourselves from it.."
Under the circumstances we have to utilise every option that is before us. So to release resources for the things that are high priority is much more crucial.
Debapriya said about assessment. But what is the assessment of the impact of the Covid-19 on the economy? But there really is nothing. We are assuming a lot of things.
Suppose we have an assessment. Now the relation that we have with our macro and real economy where we have only two sectors, garments and agriculture, so this is not a complex mechanism. With the spread of coronavirus our economy has shrunk a lot.
So the macro policy only has a very limited impact. It is correct that we have to emphasise the fiscal policy that will only be relevant for the formal economy. But coming back to the question of priority, I think the priority of creating a safety net is obviously high. We have been discussing this targeting for more than fifty years. And there have been hundreds of studies on targeting. BIDS has done hundreds of studies on targeting. What we always see here is that it works up to a certain point. I have no problems with that. But the example that Mansur cited, that in a list of 420 people only four are from a village, if that is happening in this magnitude, then this is something to be seriously concerned about. And that begs the question that we had at least some sort of capability at the local level, for both the government and the NGOs, and this is something that we could do. Has it broken down?
In terms of other priorities I think agriculture and food security should be crucial because agriculture has saved us throughout the years, that this is one area that the Covid-19 did not affect that much, I mean. The crops are growing despite the epidemic. If we can keep the rural economy at a certain level then it will solve a huge part of our problem. Even now the rural economy in terms of population is 75 to 80 percent. So we need special arrangement for agriculture and food security. We need a disaster fund because this is not the end of the story.
For the priority of the health sector some people must sit together and find out which aspects of the health infrastructure should get attention.
In terms of providing support to the MSMEs, I think this is crucial. And I worry about these people because they are not members of any association. I was talking to some MSME people and they said, "look I do not have any banking relation, I have some large liabilities, my rent has been due for three months and I have to shut down my factory."
And if we look at the boutiques, IT, technologies etc. we see some of them are doing well and I think that is the new emerging economy. Maybe we have to be much more technology oriented. So there are many kinds of demands on our limited resources. However, we need to prioritise.
The question with safety net is the length of time to provide a safety net. Three thousand taka will last one month. Then what? Are you going to open up after three months? Or one month? Now the whole situation is uncertain. So we need to think about a solution that will actually sustain a restructured economy that takes into account our new priorities and new ways of addressing the crisis.
Zahid Hussain: I want to ask a question quickly in this moment of our discussion. What is your projection about the recovery? Is it going to be V, W, U or L?
Ahasan Mansur: I think what the IMF is saying is that a sharp V--it is not possible. The government's optimistic claim of having an 8.5 percent growth is also not realistic. We will be very lucky if there is any spread out V. That should be our strategy to at least get a spread out V. I don't believe that it is possible to restructure the economy now, we have to restart the economy and then do the restructure in the process. Right now, the strategy should be making the wheel turn again. And that must start with the SME, MSME and then RMG, some of which are already started, and then the rest of the economy.
Debapriya Bhattacharya: I have been observing From the beginning that no work is being done on the basis of information and data. And the required institutional, conceptual and other needed coordination to use information and data to take decisions are also absent. So my observation is that restarting the economy without any reformation will prolonged the crisis. If you want to transfer cash or create a database, whatever you do, a reformation must be done along with this. There must be a place for social accountability and a place of participation of the people. If this does not happen this situation will be much prolonged. That is what I fear.
Inam Ahmed: Then are you thinking of a U?
Debapriya Bhattacharya: I am here on the side to invent a Bengali alphabet. I think it will be like a very complex Bengali alphabet Ña (ঞ) which seems like the hunchback of Notre Dame. My point is you should take this crisis as an opportunity where we will do all the necessary reformations. It needs a conceptual transformation. That psychology of change must come from political understanding. Technical economists like us cannot do much about this, we need social and political deliberations for this. The success of this discussion will depend on how much we could provide our thoughts on that social and political level.
Zahid Hussain: Murshid bhai, I asked you a question about BIDS. We don't know whether you ducked that question deliberately or not.
KAS Murshid: I'll answer that at the end. Before that I want to ask why are we reopening the economy? There must be a demand. At the moment that demand is absent. So ultimately, we have to leave it to the market. Because RMG or export related sectors will depend on global market condition and global market condition being what they are I don't know what the future holds.
The domestic market is more under our control. Maybe we will see some normalisation here. And it will be automatic. So we have to support that which needs to be opened. What Debapriya was saying here is that we have to try new opportunities otherwise it will all be counterproductive. Some positive things could be taken from here. Like technology. Everything is going online, everything is being smart, it has a big business side and also employment side and relatively this is a safe economy since whoever will be involved here will get something from the coronavirus crisis. Another thing is that a new international market has emerged related to PPE, hand gloves, and masks.