Budget promises change but not enough
Saturday, 12 June 2010
As the first full-year budget of Government that was swept into power on a promise of change, this annual programme of spending and revenue mobilization had raised hopes of a turning point. At the end, it delivered on several aspects, like in power and energy, but left a few question marks regarding the strategy for achieving the high levels of investment that will be needed to achieve the ambitious national targets set for 2015 under the Sixth Five Year Plan - still under preparation -- and in the Vision 2021 document, bits and pieces of which have been made public in several high level forums.
Given the turnaround that is being witnessed in the global economic outlook which has also bolstered Bangladesh's trade performance and domestic production in the final quarter of the outgoing fiscal year, a pertinent question that might be raised is whether the Budget 2011 does enough to seize the opportunity at hand. Not to be ignored, perhaps the focus of the programme has been laid on getting the domestic house in order before looking outward, such as in raising our competitiveness in global markets, to seize market access and create more jobs in export-oriented production.
This paper notes that the budget estimates of revenue, expenditure, deficit and its financing, have all to be made within a framework of certain assumptions about the size of the economy and its expected rate of growth. Hence, a target has to be set and projections have to be made though the basis for these projections could be tenuous at best, specially at the start of the year. A lot could change over the course of the year, and being optimistic rather than pessimistic always seems to be the better option. Thus after a lacklustre economic performance during the past fiscal year - largely a result of the aftermath of the global economic recession - the Finance Minister's upbeat projection of GDP growth for the next year at 6.7% is deemed plausible, subject to the proviso that the 1700MW of power generation planned for 2010 and 2011 do actually come on stream. However, what gets the Finance Minister (FM) into a bit of a quandary is his stipulation of FY2010 GDP growth of 6.0% when Bangladesh Bureau of Statistics already produced an estimate of only 5.54%. True, BBS estimate could not have taken full account of the improved economic picture in the last quarter of FY2010. That does give the FM scope to contest BBS estimates.
By targeting 6.7% GDP growth for the coming year, the FM has also given short shrift to the idea of growth fragility believing rather on the economy's potential for growth of higher than 6.0%, in the hope of attaining 8.0% growth by 2013-14. He acknowledged that higher growth would need raising the rate of investment to as high as 32% in the outer years of the Sixth Plan. That puts a daunting challenge before the public and private sector planners and investors of this country. Can this be delivered when investment rates have been stuck at 24-25% of GDP for the past decade? The budget takes a few steps to rev up the investment effort, but is it enough? A coherent programme for improving the investment climate, in making room for domestic investment, in diverting foreign direct investment from China, Vietnam, and India, into Bangladesh, appears all but missing. While acknowledging the lack of progress in Private Public Partnership (PPP) achievements, he outlined the new initiative called the Bangladesh Infrastructure Finance Fund, which got a Tk. 16 billion infusion of public funds and some tax incentives for investors to invest in BIFF bonds.
To be fair, the budget does place the topmost priority on resolving the crisis in the power and energy sector. A Road Map for Development of Power and Energy Sector has been revealed which not only talks about augmenting generation, but addresses more fundamental issues of diversification of fuel use, improving transmission and distribution, tackling load/demand management, promoting use of renewable energy, and the like. The programme is bolstered with a whopping allocation of Tk. 61 billion, a 61% increase over last year's allocation. That said, the FM has left a few unanswered questions regarding how he proposes to deal with the projected ballooning subsidies to the power sector stemming from the high cost of rental power projects that are expected to be commissioned on an emergency basis and the proposed use of diesel and furnace oil in future generation. The estimates by Power Development Board (PDB) indicate that adding the 9500MW of generation upto 2015 will create a subsidy burden on the budget of Tk. 150 billion over the next five years. The saving grace to all of this is the FM's assertion that if the power sector plan takes effect, the gap between demand and supply will be history by close of 2012. All would otherwise like to share that optimism and hope that comes about.
Turning to the macroeconomics of the budget, it is found that an adherence to the hitherto prudent management of resources and expenditure that has characterized the economy's overall macroeconomic management for nearly two decades, a stance that served it well during the global financial crisis and also earned it decent sovereign ratings from Standard & Poor and Moody's. Increasing the size of the budget over the previous year by 20%, at Tk. 1321.7 billion, is not imprudent when revenue growth is stipulated at 18.5%. NBR's revenue performance for the outgoing year gives reason for good cheer. To achieve 16.5% revenue growth was no mean feat given what was considered a highly ambitious revenue target for FY2010 in the aftermath of the global recession, which stymied exports, imports and domestic economic activity. In this light, the revenue growth target of 18.5% for the coming year appears quite plausible and consistent with the near-term outlook for the domestic and global economy.
With revenue projected at 11.9% of GDP, and expenditure at 16.9%, that leaves a fiscal deficit of 5.0% of GDP. Such a deficit has proved sustainable in the past though the final outcome tends to be a shade lower than budgeted. Its financing also has nothing new in the sense that the 2-2-1 mix has been maintained: 2.0% foreign, 2.0% domestic bank, and 1.0% domestic non-bank financing. While this arrangement will not upset the economic cart, 2.0% bank financing might add fuel to inflationary money supply growth to cause inflation headaches later and may even undermine the government's target of moderating inflation down to 6.0 per cent.
A pleasantly surprising element was the high performance in Annual Development Programme (ADP) implementation that has been indicated in the Budget at a Glance. A lot of skepticism was expressed by all and sundry about the lack of dynamism in the bureaucratic machinery in so far as project implementation was concerned - blame it on Public Procurement Rules (PPR) or whatever. If the budget figure of Tk. 285 billion is really accomplished at the end of the year, that would be a whopping 46% increase over the actual utilization in FY2009. The Planning and Finance Ministry deserve credit for this feat subject to the caveat that all observers will make, and that is with regard to the quality of public spending. The national interest would be best served by focusing on outcomes or results from the copious amounts of public spending that is done every year. Hardly anyone will disagree with this observation.
Given the turnaround that is being witnessed in the global economic outlook which has also bolstered Bangladesh's trade performance and domestic production in the final quarter of the outgoing fiscal year, a pertinent question that might be raised is whether the Budget 2011 does enough to seize the opportunity at hand. Not to be ignored, perhaps the focus of the programme has been laid on getting the domestic house in order before looking outward, such as in raising our competitiveness in global markets, to seize market access and create more jobs in export-oriented production.
This paper notes that the budget estimates of revenue, expenditure, deficit and its financing, have all to be made within a framework of certain assumptions about the size of the economy and its expected rate of growth. Hence, a target has to be set and projections have to be made though the basis for these projections could be tenuous at best, specially at the start of the year. A lot could change over the course of the year, and being optimistic rather than pessimistic always seems to be the better option. Thus after a lacklustre economic performance during the past fiscal year - largely a result of the aftermath of the global economic recession - the Finance Minister's upbeat projection of GDP growth for the next year at 6.7% is deemed plausible, subject to the proviso that the 1700MW of power generation planned for 2010 and 2011 do actually come on stream. However, what gets the Finance Minister (FM) into a bit of a quandary is his stipulation of FY2010 GDP growth of 6.0% when Bangladesh Bureau of Statistics already produced an estimate of only 5.54%. True, BBS estimate could not have taken full account of the improved economic picture in the last quarter of FY2010. That does give the FM scope to contest BBS estimates.
By targeting 6.7% GDP growth for the coming year, the FM has also given short shrift to the idea of growth fragility believing rather on the economy's potential for growth of higher than 6.0%, in the hope of attaining 8.0% growth by 2013-14. He acknowledged that higher growth would need raising the rate of investment to as high as 32% in the outer years of the Sixth Plan. That puts a daunting challenge before the public and private sector planners and investors of this country. Can this be delivered when investment rates have been stuck at 24-25% of GDP for the past decade? The budget takes a few steps to rev up the investment effort, but is it enough? A coherent programme for improving the investment climate, in making room for domestic investment, in diverting foreign direct investment from China, Vietnam, and India, into Bangladesh, appears all but missing. While acknowledging the lack of progress in Private Public Partnership (PPP) achievements, he outlined the new initiative called the Bangladesh Infrastructure Finance Fund, which got a Tk. 16 billion infusion of public funds and some tax incentives for investors to invest in BIFF bonds.
To be fair, the budget does place the topmost priority on resolving the crisis in the power and energy sector. A Road Map for Development of Power and Energy Sector has been revealed which not only talks about augmenting generation, but addresses more fundamental issues of diversification of fuel use, improving transmission and distribution, tackling load/demand management, promoting use of renewable energy, and the like. The programme is bolstered with a whopping allocation of Tk. 61 billion, a 61% increase over last year's allocation. That said, the FM has left a few unanswered questions regarding how he proposes to deal with the projected ballooning subsidies to the power sector stemming from the high cost of rental power projects that are expected to be commissioned on an emergency basis and the proposed use of diesel and furnace oil in future generation. The estimates by Power Development Board (PDB) indicate that adding the 9500MW of generation upto 2015 will create a subsidy burden on the budget of Tk. 150 billion over the next five years. The saving grace to all of this is the FM's assertion that if the power sector plan takes effect, the gap between demand and supply will be history by close of 2012. All would otherwise like to share that optimism and hope that comes about.
Turning to the macroeconomics of the budget, it is found that an adherence to the hitherto prudent management of resources and expenditure that has characterized the economy's overall macroeconomic management for nearly two decades, a stance that served it well during the global financial crisis and also earned it decent sovereign ratings from Standard & Poor and Moody's. Increasing the size of the budget over the previous year by 20%, at Tk. 1321.7 billion, is not imprudent when revenue growth is stipulated at 18.5%. NBR's revenue performance for the outgoing year gives reason for good cheer. To achieve 16.5% revenue growth was no mean feat given what was considered a highly ambitious revenue target for FY2010 in the aftermath of the global recession, which stymied exports, imports and domestic economic activity. In this light, the revenue growth target of 18.5% for the coming year appears quite plausible and consistent with the near-term outlook for the domestic and global economy.
With revenue projected at 11.9% of GDP, and expenditure at 16.9%, that leaves a fiscal deficit of 5.0% of GDP. Such a deficit has proved sustainable in the past though the final outcome tends to be a shade lower than budgeted. Its financing also has nothing new in the sense that the 2-2-1 mix has been maintained: 2.0% foreign, 2.0% domestic bank, and 1.0% domestic non-bank financing. While this arrangement will not upset the economic cart, 2.0% bank financing might add fuel to inflationary money supply growth to cause inflation headaches later and may even undermine the government's target of moderating inflation down to 6.0 per cent.
A pleasantly surprising element was the high performance in Annual Development Programme (ADP) implementation that has been indicated in the Budget at a Glance. A lot of skepticism was expressed by all and sundry about the lack of dynamism in the bureaucratic machinery in so far as project implementation was concerned - blame it on Public Procurement Rules (PPR) or whatever. If the budget figure of Tk. 285 billion is really accomplished at the end of the year, that would be a whopping 46% increase over the actual utilization in FY2009. The Planning and Finance Ministry deserve credit for this feat subject to the caveat that all observers will make, and that is with regard to the quality of public spending. The national interest would be best served by focusing on outcomes or results from the copious amounts of public spending that is done every year. Hardly anyone will disagree with this observation.