Achieving targeted GDP growth

Since Finance Minister AMA Muhith tabled the Finance Bill (Budget) 2014-15, the media has been flooded with streams of comments and views. Economists, planners and financial experts have converged to dissect the budget, highlighting its merits and demerits, strengths and weaknesses. In their primary reaction, that came almost instantly, they questioned the viability of the projected growth target, terming it too ambitious. In fact, lull in the country's investment situation over the last few years has worked as a deterrent to economic growth, making the prospect of higher rate of GDP growth further difficult. The Finance Bill was passed and parliament was prorogued, but the debate over the budget has continued.   
As a matter of fact, the prospects for achieving the ambitious gross domestic product (GDP) growth target as proposed in budget 2014-15 fiscal year (FY) appear to be increasingly bleak amid fears of political unrest coupled with capacity deficiency in handling a large annual development programme (ADP) outlay, higher revenue target and uncertain investment mobilisation.
Economists observe that the country's economy is currently in a very sensitive stage necessitating appropriate policy measures to accelerate economic growth. Challenges for the government in the coming days are many: improving law and order, developing infrastructure, smooth gas and power supply to attract local and foreign direct investment, creating a credit-friendly situation for industrial entrepreneurs, ensuring good governance in the financial sector, ensuring collection of targeted revenue, checking corruption in public spending and containing inflation.
The budgetary outlay for the current fiscal year that began from July 01 has been set at Tk 2.5 trillion (2.5 lakh crore), including a Tk 863 billion (86,300 crore) ADP fund. The budget also carries a deficit of Tk 675 billion (67,500 crore).
POLITICAL FACTOR: With a looming political uncertainty in the days to come, the need for peaceful solution to conflicts is imperative to ensure a smooth journey towards attaining the middle-income status for the country by 2030. Although public investment has increased, it cannot be an alternative to private investment, which is crucial to accelerating economic growth. The damages inflicted by political unrest last year to the national economy also dented the confidence level of the intending investors causing a slower growth in investment in the private sector. An investor never wants to put his/her investment at risks, when there is political uncertainty around; and a consensus in the political arena becomes a matter of utmost necessity.
The country's economy is feared to be in jeopardy again due to political turmoil after the coming Eid as Khaleda Zia, the chairperson of the Bangladesh Nationalist Party (BNP) has already threatened to stage anti-government demonstrations to press home the party's demand for a dialogue over holding a free, fair and acceptable election.
STRUCTURAL FLAWS: Meanwhile, some structural flaws have been identified in the public finance plans. The income and expenditure structure, which mainly depends on the speculative target of revenue collection, remains a critical area. If the government fails to achieve the target, high borrowing from the banking system will fuel inflation. Besides, the budget for FY 2014-15 envisages higher foreign aid mobilisation, which may not be possible unless the government improves its project implementation capacity.
Although the current state of the economy indicates a relatively stable export-import situation, remittance and investment inflow reflects a sluggish growth and has fallen far short of requirement. Given the current state of the economy, more emphasis should be given to strengthening of the key policy issues to facilitate investment and accelerate growth. In the budget for FY 2014-15, the government targets a 7.3 per cent growth in GDP.
Higher GDP growth target needs optimum utilisation of resources with appropriate policy measures for boosting credit, investment, employment, and production performance.
As it is, the GDP growth rate will remain stagnant at 5-6 per cent unless anything disastrous happens to the economy.
ADB PROJECTION: Meanwhile, the Asian Development Bank (ADB) in its Asian Development Outlook (ADO) 2014 projected a lower GDP growth unless higher investment was recorded in the infrastructure sector.
For the FY 2013-14, ending on June 30 last, ADB had forecast a downturn in GDP growth from 5.6 per cent compared to 6.0 per cent in the previous fiscal year (2012-13).
The ADB said the garment industry has been facing challenges in adopting tough compliance and safety standards. According to ADB, growth should improve in the FY 2014-15 to 6.2 per cent, but a major boost will follow only with a ramped-up investment in infrastructure in place.
It has argued that domestic demand remained depressed in the first half of the year, because of the prolonged political unrest ahead of parliamentary elections in January 2014 which dented consumer and investor confidence.
ADB has predicted that the current account balance would stand at a minus 0.5 per cent at the end of FY 2013-`14, which ended June 30 last, while the inflation would rise to 7.5 per cent.
BANGLADESH BANK'S EVALUATION: The country has been maintaining a surplus in current account since the last fiscal year despite a fall in foreign remittance. Bangladesh Bank (BB) sources reveal that the current account saw a surplus of $2.65 billion in February this year, which came down to $1.38 billion at the end of April.
The central bank said the surplus had been the result of higher export income and a fall in petroleum import.
At the end of April, the country's trade deficit increased to $5.89 billion from $4.94 billion at end of March, according to Bangladesh Bank sources.
Income from merchandise exports stood at $27.37 billion in 11 months during the July-May period against import bills of $30.21 billion in 10 months from July to April of last fiscal year.
The central bank says the growth in export income has been measured at 12.56 per cent against a 10.54 per cent rise in import.
Private sector credit grew by 9.41 per cent during the July-May period over the corresponding period in the previous financial year against 8.89 per cent during the corresponding period in FY 2012-13.
Business leaders have often been citing higher bank interest rates as the main reason behind lower borrowing in the private sector.
They also raised voice against a strict regulatory procedure regarding loan classification and provisioning that imposed embargo on loan renewal and fresh disbursement to defaulters.
CONTAINING INFLATION: Inflation increased slightly by 0.02 per cent to 7.78 per cent in May as the consumer price index (CPI) of some food items rose, as shown in data released by the Bangladesh Bureau of Statistics (BBS). The BBS says food inflation in the rural areas rose to 8.72 per cent in May this year from 8.52 per cent in April last fiscal year. The inflation in non-food items also increased to 4.71 per cent last month from 4.81 per cent in the previous month.
Data show that inflation in urban areas came down by 0.04 percentage points to 7.92 per cent in May this year, while the rural inflation increased by 0.08 percentage points to 7.27 per cent during the same period.
The same, however, fell by 0.07 percentage points to 5.16 per cent in May compared to 5.23 per cent in April. The Finance Minister has set a target of restricting the average inflation to 7.0 per cent throughout the 2014 calendar year, as announced in the budget speech. However, inflation has already soared in the current month of Ramadan.
REVENUE COLLECTION: As things are progressing, the National Board of Revenue (NBR) is unlikely to achieve the revenue collection target (Tk 1250 billion) set for the immediate-past fiscal year. The NBR authorities had been arguing that a cut in tax-at-source on export earnings, sluggish business activities due to political impasse and a reduction in banks' income resulted in lower revenue income. The tax authorities have so far collected Tk 1.036 trillion (1,03,600 crore) in revenue during the July-May period of the 2013-14 fiscal year. The tax authorities, however, are confident that it will be able to achieve the collection target, as significant revenues are collected in June every year.   
ADP IMPLEMENTATION: Meanwhile, the government has been criticised for the low ADP implementation rate, caused mostly by deficiency in fund mobilisation and lack of capacity. The immediate past fiscal year started with a low rate of implementation, but at the end of June (2014), the status jumped to an abnormal 91 per cent.
The government spent Tk 549 billion (54,900 crore), out of total (revised) Tk 659 billion (65,900 crore) of the ADP outlay, according to figures released by the Planning Ministry.
The Finance Minister often says that the government fails to utilise foreign aid as efficiently as it should have done mainly due to lack of capacity.
The government's deficit-financing plans include borrowing Tk 242 billion (24,200 crore) from foreign sources and Tk 432 billion (43,200 crore) from the domestic sources, which includes Tk 312 billion (31,200 crore) from banks, with the rest from sales of savings certificates, bonds and other non-bank sources.
There are a lot of 'ifs' and 'buts', but the critical fact that stands out is the deficiency in implementation capacity, which remains as the X-factor in achieving any meaningful progress vis-à-vis the FY 2014-15 budget.
The writer is a TV personality and writes on economic issues.
[email protected]