'Conservative budget' plays it safe
MA Taslim | Friday, 20 June 2008
HAD the democratic processes in the country not been interrupted, the finance adviser of the caretaker government would not be required to present even a single budget, but on June 9 he had the privilege of presenting the second national budget in a row. The 2008-09 budget bears the imprint of a conservative mind, all too rattled by the devastation wrought on the economy by the back-to-back natural calamities and the initial policy bungle.
There is now an emphasis on restoring business confidence and safeguarding the minimum rather than venturing out for the maximum. Those who are anxious to ensure the food security of the nation and minimum well-being of our less fortunate compatriots would find a lot in the budget to cheer about. However, those who are more adventuresome would regard the budget as unduly cautious, which has thrown away the opportunity for faster growth and quicker poverty reduction.
The budget strengthens the current social safety net programmes and introduces some new ones including a 100-day employment generation scheme. These will be of benefit to a large number of poor people if implemented properly. The budget also provides for generous agricultural subsidies (diesel and fertiliser) that will ease cost pressures on farmers, and thereby contribute to increased crop production. It also continues with the unsustainable subsidies for petroleum products.
The substantial increase in such payments proposed in the budget necessarily means that allocations to other activities must be curtailed. The pace of economic activities directly linked to the budget will accordingly slow down to some extent. No wonder the Adviser has kept his growth ambition modest at only 6.5 per cent in a region growing at well over 7.0 per cent. Bangladesh risks falling further behind its neighbours with attendant consequences.
The proposed budget for the next fiscal is actually smaller in real terms than the revised budget of the current fiscal by about 3.0 per cent. The budget size had to be limited in order to contain the blowout of the budget deficit that has opened up since the Adviser is not willing to take the risks of raising additional revenue by raising tax rates. The windfall gains that the exchequer had during the current fiscal due to the anti-corruption drive is unlikely to be sustained during the next fiscal.
Total expected revenue next year in real terms will not increase much over the current revenue. No marked increase in foreign grants and loans inflow is forecasted. Hence the only source of additional funds will be net domestic borrowing, which the government proposes to raise by a whopping 92 per cent. Such a large increase in government borrowing is likely to have some untoward impact on the economy.
Two major economic problems that have received inadequate attention in the budget are inflation and power. Inflation is arguably the most hurtful economic problem faced by the ordinary people. The inflation rate has increased steadily since 2000-01 reaching double digit figures during the current fiscal. It seems the budget is uncertain about the factors that cause or contain inflation. It has listed a large number of measures that the government has taken in order to reduce inflation.
However, some of these are most unlikely to have had any significant influence on inflation while others have, contrary to the claim, actually contributed to increasing inflation. What is disconcerting is the mention of Consumer Rights Protection Ordinance as a medium term measure to contain inflation. A large number of people seem to suffer from this misconception. A consumer law is normally not designed for controlling prices; and creating an impression that it can control inflation, will undermine its credibility when put into force.
The budget forecasts a price inflation of 9.0 per cent during 2008-09. The forecast is supposedly based on increased food production both at home and abroad. If the global cereal production does increase as forecasted, the average cereal price should not rise. This is already evident; the price of wheat in the international market has declined sharply, by as much as two-thirds in some cases.
If cereal prices fall, or at least do not increase, the consumer price index should not rise much given that cereal prices receive a large weight in the consumer price index. Why does the budget forecast such a high rate of inflation during the next fiscal? The inevitable conclusion is that some of the other prices used to construct the index are expected to rise at an even faster rate. Will demand pressures become more acute? Is the long-overdue revision of the petroleum prices on the card?
There is no sign of immediate abatement of the incessant increase in petroleum prices in the international market. Much of the world around us is in the grip of rising inflation. Inflationary expectations seem also to have become entrenched in our economy, which does not bode well for the future. It can throw a monkey wrench inside the economic machine upsetting the carefully crafted estimates of the budget. If inflation does take hold, the monetary authorities will have no choice but to tighten the money market during the next fiscal.
A tight monetary policy coupled with the expressed intention of the government of running a huge deficit budget financed largely by bank borrowing will put unremitting upward pressure on the interest rate negating the presumed impact of the current verbal assault on the interest spread. Private investment will be inevitably crowded out reducing the factor productivity growth of the economy.
The other major issue of great concern especially to the business community is power. The shortage of power has already reached a critical level. Frequent and long load shedding has not only caused much inconvenience to the ordinary people, but has adversely affected the business sector, especially those activities that are power-intensive. The budget admits to a power shortage of 25 per cent; the actual shortage could be greater. There has been very little addition to the power generation capacity, but the budget expects to add 696 MW by the end of 2008. Another 450 MW is expected to be added to the national grid by the end of 2010. All told it seems that we may expect about 1200 MW to be added by the end of 2010. This additional capacity is hardly enough to meet even the incremental demand of this period.
Considering the fact that most of this power generation will depend on adequate gas supply, and the latter is anything but certain, it is an open question if these capacity projections will be realised at all. In other words, the industrial sector cannot plan their operations on an adequate and certain supply of power during the next three to five years. Their cost of production will be pushed up as they attempt to circumvent the problem on their own. The productivity of the industries and their competitiveness will suffer.
The budget has been hailed by many business leaders as business-friendly. The Adviser seems to have tried hard to make up for the initial government policies that the business sector perceived to be rather harsh and counterproductive. The budget proposes a reduction in corporate taxes as well as tariffs on machinery, raw materials and intermediate products, allows for wider tax holidays and extends the bonded warehouse facilities for all 100 per cent export industries.
All these business incentives add up to relatively modest revenue earnings during the next year forcing the government to rely more on borrowing. The consequent increase in the interest rate will act against business investment spending. If the government attempts to wriggle out of this predicament by loosening the monetary policy, the genie of inflation will take hold of the economy. It will be interesting to observe how these opposing forces play out during the next fiscal year.
MA Taslim is a professor of economics at Dhaka University, co-chairman of one of the six working committees under Bangladesh Better Business Forum and Chief Executive Officer (CEO) of Bangladesh Foreign Trade Institute. bdnews24.com
There is now an emphasis on restoring business confidence and safeguarding the minimum rather than venturing out for the maximum. Those who are anxious to ensure the food security of the nation and minimum well-being of our less fortunate compatriots would find a lot in the budget to cheer about. However, those who are more adventuresome would regard the budget as unduly cautious, which has thrown away the opportunity for faster growth and quicker poverty reduction.
The budget strengthens the current social safety net programmes and introduces some new ones including a 100-day employment generation scheme. These will be of benefit to a large number of poor people if implemented properly. The budget also provides for generous agricultural subsidies (diesel and fertiliser) that will ease cost pressures on farmers, and thereby contribute to increased crop production. It also continues with the unsustainable subsidies for petroleum products.
The substantial increase in such payments proposed in the budget necessarily means that allocations to other activities must be curtailed. The pace of economic activities directly linked to the budget will accordingly slow down to some extent. No wonder the Adviser has kept his growth ambition modest at only 6.5 per cent in a region growing at well over 7.0 per cent. Bangladesh risks falling further behind its neighbours with attendant consequences.
The proposed budget for the next fiscal is actually smaller in real terms than the revised budget of the current fiscal by about 3.0 per cent. The budget size had to be limited in order to contain the blowout of the budget deficit that has opened up since the Adviser is not willing to take the risks of raising additional revenue by raising tax rates. The windfall gains that the exchequer had during the current fiscal due to the anti-corruption drive is unlikely to be sustained during the next fiscal.
Total expected revenue next year in real terms will not increase much over the current revenue. No marked increase in foreign grants and loans inflow is forecasted. Hence the only source of additional funds will be net domestic borrowing, which the government proposes to raise by a whopping 92 per cent. Such a large increase in government borrowing is likely to have some untoward impact on the economy.
Two major economic problems that have received inadequate attention in the budget are inflation and power. Inflation is arguably the most hurtful economic problem faced by the ordinary people. The inflation rate has increased steadily since 2000-01 reaching double digit figures during the current fiscal. It seems the budget is uncertain about the factors that cause or contain inflation. It has listed a large number of measures that the government has taken in order to reduce inflation.
However, some of these are most unlikely to have had any significant influence on inflation while others have, contrary to the claim, actually contributed to increasing inflation. What is disconcerting is the mention of Consumer Rights Protection Ordinance as a medium term measure to contain inflation. A large number of people seem to suffer from this misconception. A consumer law is normally not designed for controlling prices; and creating an impression that it can control inflation, will undermine its credibility when put into force.
The budget forecasts a price inflation of 9.0 per cent during 2008-09. The forecast is supposedly based on increased food production both at home and abroad. If the global cereal production does increase as forecasted, the average cereal price should not rise. This is already evident; the price of wheat in the international market has declined sharply, by as much as two-thirds in some cases.
If cereal prices fall, or at least do not increase, the consumer price index should not rise much given that cereal prices receive a large weight in the consumer price index. Why does the budget forecast such a high rate of inflation during the next fiscal? The inevitable conclusion is that some of the other prices used to construct the index are expected to rise at an even faster rate. Will demand pressures become more acute? Is the long-overdue revision of the petroleum prices on the card?
There is no sign of immediate abatement of the incessant increase in petroleum prices in the international market. Much of the world around us is in the grip of rising inflation. Inflationary expectations seem also to have become entrenched in our economy, which does not bode well for the future. It can throw a monkey wrench inside the economic machine upsetting the carefully crafted estimates of the budget. If inflation does take hold, the monetary authorities will have no choice but to tighten the money market during the next fiscal.
A tight monetary policy coupled with the expressed intention of the government of running a huge deficit budget financed largely by bank borrowing will put unremitting upward pressure on the interest rate negating the presumed impact of the current verbal assault on the interest spread. Private investment will be inevitably crowded out reducing the factor productivity growth of the economy.
The other major issue of great concern especially to the business community is power. The shortage of power has already reached a critical level. Frequent and long load shedding has not only caused much inconvenience to the ordinary people, but has adversely affected the business sector, especially those activities that are power-intensive. The budget admits to a power shortage of 25 per cent; the actual shortage could be greater. There has been very little addition to the power generation capacity, but the budget expects to add 696 MW by the end of 2008. Another 450 MW is expected to be added to the national grid by the end of 2010. All told it seems that we may expect about 1200 MW to be added by the end of 2010. This additional capacity is hardly enough to meet even the incremental demand of this period.
Considering the fact that most of this power generation will depend on adequate gas supply, and the latter is anything but certain, it is an open question if these capacity projections will be realised at all. In other words, the industrial sector cannot plan their operations on an adequate and certain supply of power during the next three to five years. Their cost of production will be pushed up as they attempt to circumvent the problem on their own. The productivity of the industries and their competitiveness will suffer.
The budget has been hailed by many business leaders as business-friendly. The Adviser seems to have tried hard to make up for the initial government policies that the business sector perceived to be rather harsh and counterproductive. The budget proposes a reduction in corporate taxes as well as tariffs on machinery, raw materials and intermediate products, allows for wider tax holidays and extends the bonded warehouse facilities for all 100 per cent export industries.
All these business incentives add up to relatively modest revenue earnings during the next year forcing the government to rely more on borrowing. The consequent increase in the interest rate will act against business investment spending. If the government attempts to wriggle out of this predicament by loosening the monetary policy, the genie of inflation will take hold of the economy. It will be interesting to observe how these opposing forces play out during the next fiscal year.
MA Taslim is a professor of economics at Dhaka University, co-chairman of one of the six working committees under Bangladesh Better Business Forum and Chief Executive Officer (CEO) of Bangladesh Foreign Trade Institute. bdnews24.com