Facing the economic challenge with 'Charter of Change'

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Zaidi Sattar and Ahsan Mansur
The long awaited budget of the new government came with a few surprises. The general direction had become public knowledge in light of several leaks in the press on tax and expenditure strategies. With an outlay of Taka 1.14 trillion, the Finance Minister acknowledged it was ambitious, but his Government was determined to take on the challenge that confronts the economy in the wake of the global economic crisis. He called attention to their election promise of instituting a charter of change.
To be sure, the budget does make an effort to respond to the pressing national economic issues while responding to demands from various pressure groups/constituencies. The task is not easy and sometimes the objectives could be perceived as conflicting.
This preliminary analysis looks at the appropriateness of the various targets set in the budget and the associated down-side risks and tradeoffs. Arguably, some of the measures are populist in nature - like the proposal for whitening black money or declaring undisclosed money -- despite their short-term appeal and support from pressure groups. It could cause more harm than good to the economy and the government's revenue efforts in the medium to long-term.
One can sight some novelty in this budget, at least on two counts. One, it brings a semblance of gender sensitivity by earmarked expenditures specifically for women's advancement through special allocations in the Ministries of Education, Social Welfare, Health and Family Welfare, Food and Disaster Management. A second novelty lies in the proposal for District Budgets which though will be offered in the next budget, but preparations will take off this fiscal year.
The ambition for growth acceleration has been chastened by the impending slowdown of exports and imports over the next few months, as the global crisis hits home with somewhat greater severity. Budget numbers are therefore predicated on the assumption of a modest gross domestic product (GDP) growth of 5.5 per cent in fiscal 2010, with average inflation tamed at 6.5 per cent for the year.
Nevertheless, the economy reaches an enviable milestone with a size of $100 billion at the end of the next fiscal year - small cause for celebration for an economy that was barely $7.0 billion at independence in 1972. GDP growth of 5.5 per cent next year would be no mean achievement, given the sign of dark clouds in the export horizon, though remittance is expected to be still robust at about $10 billion.
None should be faulted for questioning the realism of the expenditure and revenue programme, not to mention the financing of the deficit and its implications for private sector development. It is hard to believe that the target of Taka 305 billion development expenditure can be achieved when the previous Annual Development Programme (ADP) had to be downsized significantly to Taka 230 billion - a number that appears unlikely to be realized. Taka 200 billion is what might be achieved by end June. In that case, a target of 50% increase in ADP spending could raise genuine questions about the realism of budgetary targets.
Likewise, some cynicism about the targeted National Board of Revenue (NBR) revenue growth of 15 per cent, from Taka 530 billion to Taka 610 billion, might not be misplaced in light of the expected slowdown of imports, exports and domestic activity over the coming six months or so. Only if the developed market economies turn around by next September - as is being cautiously predicted by some - can we expect these revenue numbers to actually take shape.
From a macroeconomic perspective, the overall fiscal deficit of 5.0 per cent is certainly appropriate, given the need for a countercyclical fiscal policy stance. The expansionary fiscal stance is needed to boost domestic demand in the face of a markedly slower foreign demand for Bangladeshi exports. While supporting the expansionary stance we would like to point out that in the past the government could not implement such expansionary stance due to its own capacity constraints. Last budget also was expansionary with the targeted deficit of 5.0 per cent of GDP. In the event, because of shortfalls in implementing the ADP, the deficit turned out to be 3.7 per cent. The challenge for the Finance Minister this time would be to somehow energize the lethargic implementation machinery while ensuring quality of public spending. To be fair, he has recognized this shortcoming and taken on the challenge by vowing to introduce strict monitoring of implementation with innovations like Critical Path Method (CPM).
Financing of the large budget deficit will, however, be a challenge. Setting aside the populist rhetoric, financing of such a large budget deficit will require a record level of foreign financing if we want to avoid an excessive crowding out of the private sector borrowing from the banking system. As stipulated in the budget, net foreign financing at Tk 132 billion (equivalent to US$2.0 billion) will require gross disbursements of more than US$2.5 billion. Such a high level of disbursement has never materialized in the past and there is no particular reason for this to happen this year as well, even if government efforts to mobilize budget supports worth US$700 million from the Asian Development Bank (ADB) and World Bank succeed.
Any shortfall in external financing will increase financing from the banking system further, which at the target level of Tk. 205 billion is already excessive and would be an all time high, leading to pressures on the banking system to curb lending thus crowding out private investment - contrary to the overall mission of what the Finance Minister would like to call a market friendly budget. (The authors are, respectively, Chairman and Executive Director, Policy Research Institute of Bangladesh)