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Problem lies over possibility of achieving growth rate

First of a two-part article titled National budget 2018-19: A case study of fiscal policy


Hasnat Abdul Hye | June 14, 2018 00:00:00


Annual budget of any government is the major policy instrument used for multiple objectives of macro-economic nature. Bangladesh is no exception to this. Among the major objectives that are sought to be achieved through budgetary income and expenditures are the promotions of economic growth measured by gross domestic product (GDP), maintaining necessary non-development activities through expenditures for routine governance and backstopping the growth-enhancing programmes, delivery of services like health, education, employment generation, poverty reduction and gender development with targeted programmes apart from contribution of sectors with cross-cutting remit of their normal activities, alleviation of suffering of the disadvantaged group through safety net programmes, keeping in check rise in prices resulting from budgetary expenditures under development and non-development heads, providing incentives to and creating an enabling environment for private sector investment and maintaining stability of financial institutions like banks, insurance, non-financial bodies like merchant banks and promoting capital market through tax incentives. It is obvious from this list that no other policy instrument used by government has such wide-ranging goals and overarching objectives to be realised through decisions within a common framework and repeated every year. Though planning has comprehensive coverage of the economy, setting aggregate and sectoral target and indicating allocation of resources, it is the fiscal policy in the form of budget that actually mobilises the resources for all the sectors of the economy and allocates these for developmental and non-developmental purposes. In a command economy budget is the handmaiden of planning, playing a complementary role. But for a mixed economy with a small public sector, fiscal policy through budget merely uses the planning targets as guidelines and not as directives to allocate resources among various sectors. The state of the economy in the year preceding the preparation of budget and the economic outlook for the ensuing fiscal year to be covered by the proposed budget largely determine the size of the budget, its resource mobilisation strategy and programmes for development and non-development activities. In this sense an annual budget is a continuation of an ongoing exercise for operationalising fiscal policy. It is not completely independent of the past and cannot take the future, the next fiscal year's prospects, for granted. While the former acts as some kind of restraint on the limits of fiscal power, the uncertainties of future that cannot be foreseen calls for revision of budgetary estimates for income and expenditures. In any discussion of budget as the concrete articulation of fiscal policy the underlying objectives, the constraints imposed by past performances and the need for possible changes half-way through the implementation of the budget have to be kept in mind.

The two men parameters of the annual budget, estimated income and proposed expenditures have to be related to the objectives mentioned above. The justification and rationale for estimated income from different sources and their allocation between development and non-development programmes can be found only if these are directly related to the stated objectives of fiscal policy. Even then, ends may not in all cases justify the means (taxation, expenditures) if there are conflicts between means and ends (e.g. high tax on corporate bodies and expected increase in investment). Therefore, analysis of annual budget has to proceed at two levels simultaneously. Firstly, with reference to stated objectives and secondly, the manner of mobilising resources and their allocation for development and non-development purposes. Keeping in mind the objectives of fiscal policy in the form of annual budget may not guarantee or ensure appropriate strategy for resource mobilisation through tax, non-tax revenue, fees, domestic and foreign borrowing and grants from external sources. There may be a disconnect between objectives, fiscal policy and the strategy of resource allocation. What is more serious, there may be a mismatch between requirements of resources for certain sectors irrespective of their contribution to public welfare. When both these considerations are taken into account in analysing budget, the question of implementation of the budget, both for estimated resource mobilisation and projected expenditures, becomes relevant. Without a critical appraisal of the first two criteria for a successful (realistic) budget the issue of implementation capacity right at the beginning appears more like a red-herring. Yet, it has become de rigueur on the part of budget analysts to zero in on the third aspect of budget viz. implementation capacity as if this is the opening gambit of the exercise for dissection of the document containing fiscal policy for a year. Implementation is no doubt a problem but it cannot be given precedence over the first two criteria i.e. budget's relation to policy objectives and allocation of resources made for realisation of the stated objectives. Again, to emphasise, a budget that does not address the policy objectives directly and makes wrong decisions regarding resource allocation is nothing short of smoke and mirror, hiding the actual intentions or not paying adequate attention to the steps that have to be taken because of conflict of interests, lack of political will or sheer expediency.

As regards the overriding objectives of promoting growth, the budget of 2018-2019 has been bold and confident. It has set a target of 7.40 per cent growth in GDP for the next fiscal year. During 2015-2016 fiscal the GDP growth target was 7.05 per cent. But according to the final estimate by the Bangladesh Bureau of Statistics (BBS) actual growth rate was 7.11 per cent. Robust domestic demand, along with recovery in external demand, contributed to this growth. The finance minister mentioned in his budget speech this year that in the fiscal 2016-2017 the growth rate surpassed the target by 0.04 per cent posting the growth rate at 7.28 per cent. This has been followed by a rise in GDP growth rate to 7.65 per cent in 2017-2018. So the trend rate of growth of GDP has been consistently above 7.0 per cent for the past few years with year-on-year incremental growth. On the basis of this performance the growth rate in the budget for 2018-2019 has been set at 7.80 per cent. If the estimates of GDP growth rates of preceding years by BBS are accurate then the fixing of the target for GDP growth by 0.15 per cent taking it to 7.80 per cent during the next fiscal appears to be realistic. The International Monetary Fund (IMF), has meanwhile, in its latest update on Bangladesh economy has forecast a GDP growth of 7.0 per cent during the next fiscal. The divergence between the IMF forecast and the target fixed in the budget is not big enough to generate controversy and the finance minister can be congratulated for being a little ambitious. The problem, however, lies not in the growth rate itself but over the possibility of achieving it given the macro-economic environment at present. To attain a growth rate of 7.80 per cent in GDP the overall investment has been expected to be at least 33.54 per cent of GDP. Out of this, private sector will have to account for 25.25 per cent GDP-investment ratio. Because of the liquidity crisis in commercial banks and double-digits lending rate charged by them private investors are not likely to be enthusiastic about increasing investment. Borrowing by government from the banks to meet the budget deficit will put them at a further disadvantage. The possibility of rising inflation resulting from widening balance of payments may exacerbate their problem. The foreign direct investment (FDI) could compensate for this slack in domestic investment but the budget speech has mentioned that FDI dropped by 7.8 per cent during 2017-18 ending up with $2.15 million. More worrying is the increasing volume of outbound capital invested offshore by Bangladeshi investors. According to World Investment Report-2018 outbound investment by Bangladeshis rose by 3 (three) times in 2016-2017 amounting to $170 million compared to $41 million a year ago. As regards public sector investment through ADP, though Taka 1730 million has been earmarked for next fiscal as against Taka 1533.31 million in 2017-18, the bulk of this amount will be spent on ongoing projects and there is no indication regarding their completion within the next fiscal or about their contribution to GDP. In fact, the relation between ADP investment and GDP growth has never been worked out sector-wise, the two decisions being taken in isolation of each other. The capital-output ratio in any sector is not known to have been established in the ADP and as such it is a sort of make believe exercise undertaken by the ministry of planning and finance.

hasnat.hye5@gmail.com


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COMPANY YCP HIGH LOW CLOSE %CHG
JANATAINS 13.0 14.3 14.3 14.3 10%
PRAGATILIF 107.0 117.7 112.0 117.7 10%
SAIHAMTEX 35.3 38.8 35.3 38.8 9.915%
DELTALIFE 100.9 110.9 101.4 110.9 9.9108%
NHFIL 64.9 71.3 65.9 71.3 9.8613%
NURANI 16.5 18.1 16.7 18.1 9.697%
SAFKOSPINN 19.7 21.6 20.6 21.6 9.6447%
PRIMELIFE 49.6 54.5 51.7 54.3 9.4758%
LRGLOBMF1 7.0 7.6 7.6 7.6 8.5714%
SAIHAMCOT 15.2 16.6 15.3 16.4 7.8947%
COMPANY YCP HIGH LOW CLOSE %CHG
SAIHAMTEX 38.8 38.8 35.3 35.3 9.915%
DELTALIFE 110.9 110.9 101.4 101.4 9.3688%
NHFIL 71.1 71.3 65.9 65.9 7.8907%
SAIHAMCOT 16.5 16.6 15.3 15.3 7.8431%
NURANI 18.1 18.1 16.7 16.8 7.7381%
ICBAMCL2ND 6.9 6.9 6.5 6.5 6.1538%
MBL1STMF 7.6 7.6 7.2 7.2 5.5556%
ANLIMAYARN 32.3 32.6 30.7 30.7 5.2117%
FORTUNE 38.4 38.4 36.5 36.5 5.2055%
PRAGATILIF 117.7 117.7 112.0 112.0 5.0893%
COMPANY YCP HIGH LOW CLOSE %CHG
MLDYEING 22.6 22.5 20.6 20.8 -7.9646%
METROSPIN 9.3 9.5 8.6 8.6 -7.5269%
SALVOCHEM 25.3 25.9 23.4 23.6 -6.7194%
MEGHNAPET 14.0 14.2 12.8 13.1 -6.4286%
SAVAREFR 87.5 90.0 81.3 82.3 -5.9429%
SHYAMPSUG 22.3 22.0 21.0 21.1 -5.3812%
AMBEEPHA 627.0 630.0 590.1 596.0 -4.9442%
ACTIVEFINE 46.1 46.4 43.5 43.9 -4.7722%
ALLTEX 8.7 8.9 8.2 8.3 -4.5977%
FAMILYTEX 6.6 7.2 6.2 6.3 -4.5455%
COMPANY YCP HIGH LOW CLOSE %CHG
FAMILYTEX 6.4 7.2 6.2 7.2 -11.1111%
MAKSONSPIN 9.1 10.2 8.9 10.2 -10.7843%
BXSYNTH 6.9 7.7 6.9 7.7 -10.3896%
UNITEDAIR 3.6 4.0 3.5 4.0 -10%
SALVOCHEM 23.4 25.9 23.4 25.9 -9.6525%
GLOBALINS 17.1 19.1 16.8 18.9 -9.5238%
METROSPIN 8.6 9.5 8.6 9.5 -9.4737%
INTECH 68.0 74.5 63.7 74.5 -8.7248%
CNATEX 5.0 5.5 4.9 5.4 -7.4074%
MLDYEING 20.9 22.5 20.6 22.5 -7.1111%