The inability to implement the budgeted ADP (Annual Development Programme) is partly due to resource constraint but also a reflection of implementation constraints in line ministries. Similarly, the growing foreign aid pipeline is partly due to harmonisation issues relating to government expenditure policies and donor fund release policies, but also due to implementation constraints in the government.
IMPLEMENTATION CONSTRAINTS: The best reflection of this challenge is from the experience of the roads and railways sectors. Even though in FY2010/11 and FY2011/12, roads and railway sectors both received ADP resources as envisaged under the Sixth Plan, they spent significantly below their allocations. This improved in FY2013 and FY2014, but the expenditures still fell short of the allocations. Â
The Road sector is critical for ensuring the growth targets of Bangladesh. For example, a project like "4 Laning of the Dhaka-Chittagong Highway" should be considered as one of the transformational investments for taking Bangladesh to a higher growth trajectory. Yet the slow pace of implementation of such a transformational project is pulling back the GDP (gross domestic product) growth. As reported in the IMED (Implementation Monitoring and Evaluation Division) evaluation, this high priority project, which started in January 2006, was originally supposed to be completed by December 2013. However, as per IMED report, until June 2012 only 18.4% physical progress was achieved. This is due to over-programming of the roads sector. The roads division has 156 projects under implementation. The task of managing and monitoring such a large number of projects at the same time is stretching the implementation capacity beyond the road division's limit.
The above example illustrates a major challenge facing the government for improving the planning, budgeting and implementing the ADP. The government needs to ensure that high-priority projects get completed on time and should require ministries to demonstrate satisfactory progress with physical implementation of ongoing projects before allowing new projects.
UTILISATION OF AID PIPELINE: As was shown in Figure 4, some $17 billion of ODA (official development assistance) is available for use by Bangladesh. This stock of committed but undisbursed ODA involves highly concessional terms (long repayment schedule and low interest cost, estimated at about 1.0% on average). A major budgetary management challenge for the Seventh Plan is to accelerate the use of these resources. A focused review of the main constraints can be used to inform the main policy needs for unlocking a more rapid use of these resources to serve the investment needs of Bangladesh. From past experience, government procurement and implementation capacities are important constraints to faster use of the aid pipeline that require quick resolution. The Annual Development Programmes (ADP) would also need to be made consistent with the availability of the ODA pipeline. Where the constraint involves development partners' policies, the government should engage in an open and constructive dialogue to resolve them. Finally, donor-funded older projects that no longer serve the development needs of Bangladesh could be restructured and the saved resources recycled to serve the current investment priorities.
EXPENDITURE MANAGEMENT CHALLENGES FOR THE SEVENTH PLAN: The experience of the Sixth Plan provides evidence on the need for some important areas for policy and expenditure management reforms during the Seventh Plan. A quantitative framework is provided in Table 4 to illustrate these reforms.
a) Size of government spending:  As noted, the level of government spending increased substantially during the Sixth Plan in both real terms and as a percent of GDP. Despite this progress, total spending fell short of the Plan targets in the last two years. Given the large development requirements of the country, the size of government spending needs to increase substantially by six percentage points of GDP between FY2014/15 estimated actual and the target for FY2019/20. This is ambitious, but necessary, to achieve the development goals of the 7th Plan. Needless to say, the increase in spending should be financed within a consistent macroeconomic framework. Much of the additional spending will need to go to high priority spending on infrastructure, agriculture and rural development, human development and social protection.
b) Spending priorities-- Increase spending on infrastructure: The infrastructure constraint to growth is well known. Therefore, infrastructure spending should grow by at least 2.0% of GDP, of which some 1.4% should come through the budget and an additional 0.6% should come from private contribution to the PPP initiative.
c) Spending priorities-Increase spending on agriculture and rural development: The high priority given to this sector is appropriate. This needs to be pushed further to support the ongoing rural transformation in Bangladesh that has been highly supportive of poverty and extreme poverty reduction. This spending should be increased by 0.7% of GDP.
d) Spending priorities- Increase spending on human development: This is probably the highest priority spending item to achieve the Seventh Plan's goals relating to empowering people and reducing income inequality. Given the very low level of human development spending currently, this spending should increase by at least 2.6% of GDP, from 2.4% in FY2014/15 to 5.0% in FY2019/20. Without faster progress with human development, especially education, long-term income equality will not fall. Improvements in human development are also essential to secure and sustain GDP growth acceleration to 7.0% and beyond. International experience shows that the production base of a middle income economy entails higher capital intensity and skill intensity relative to a low-income economy.
e) Spending priorities-Increase spending on social protection: The government has adopted a new National Security Strategy.  This is an excellent win-win initiative and the FM (Finance Minister) should be commended for his leadership role on this. The sound implementation of this is the highest priority during the Seventh Plan. Yet, it is recognised that even after best possible prioritisation of beneficiary selection, the size of the poor and vulnerable group is large and the average benefits are low. So, an important spending priority for the Seventh Plan would be to implement the government's unmet Sixth Plan commitment to increase the social protection spending to 3.0% of GDP by the end of the Seventh Plan.
FINANCING OF THE PROPOSED SPENDING STRATEGY: Any proposed government expenditure strategy must be financeable. The suggested financing plan is shown in Table 4 above. The bulk of the additional resources must come from government revenues in order to ensure the consistency of the spending strategy with macroeconomic stability. As during the Sixth Plan, the proposed expenditure strategy cannot be implemented if the required revenue mobililisation does not happen. In that event, there will also be corresponding shortfalls in the Seventh Plan's targets for GDP growth and human development as happened during the Sixth Plan.
In addition to tax revenue mobilisation, which is the key, the government should also consider reforming the oil pricing and market deregulation which will help delink the budget from BPC (Bangladesh Petroleum Corporation) deficits, and reform state-owned enterprises and state-owned banks to earn a profit instead of requiring budget subsidies. These policies will free up scarce budget resources for use in education and health sectors where the spending gap is huge.
IMPROVING EXPENDITURE MANAGEMENT: There is a range of expenditure management issues. A few of the important ones were highlighted earlier. One important reform is to improve expenditure allocation mechanism by focusing initially on the full implementation of projects that are considered transformational in nature. Their timely implementation must be given the highest priority in both management and budget allocation. Secondly, implementation capacity constraint at the ministry/agency level must be considered as a critical variable for budget allocation. Third, the practice of allocating resources to the 1200 plus projects in the development pipeline should be revisited. Projects that are no longer a priority or have been in the pipeline for long period with little progress might be closed down. Fourth, a system of six monthly review of the foreign aid portfolio chaired by the Finance Minister and involving high-level decision makers of the main development partners might be undertaken for a few years until all outstanding portfolio issues are sorted out and foreign project aid utilisation improves. Finally, to avoid disruptive procurement problems for large infrastructure projects and recognising the prevailing governance problems that will not likely go away in the near future, the government might think of resorting to turn-key procurement arrangements for large projects involving multilateral donor funding. Â
IMPLICATIONS FOR THE FY2015/16 BUDGET: The spending reforms are not one-time quick fixes and involve major sustained progress over the medium term. Yet, the coming FY2015-16 Budget is the first year of the Seventh Plan implementation and needs to provide the signal about the government's thinking and strategy for expenditure reforms during the Seventh Plan.
A first recommendation is that the FY2015-16 Budget should provide the broad policy framework underlying the medium-term expenditure strategy for the next five years. This will reflect the government's own thinking but might also pick up some of the suggested policy reforms regarding oil pricing, public enterprise management, management of public banks, emphasis on transformational projects, use of implementation capacity as an instrument of expenditure allocation and the use of turnkey procurement for large multilateral donor-funded projects.
Second, the size of the Budget will likely go up by about 1.0-1.3 % of GDP owing to the implementation of the wage increase award. There should be at least another 1.0% of GDP increase in spending on priority sectors. In nominal terms, the FY2015-16 Budget should grow to about Taka 3000 billion, as compared with Taka 2300 billion spent in FY2014/15. To avoid an adverse effect on domestic inflation, these proposed increases in total budget and high priority sectors should be financed by a strong tax mobilisation effort, through better utilisation of foreign aid pipeline, and by reducing low-priority spending (transfers to public enterprises and public banks, block allocations for unplanned spending, etc.).
Third, the Budget should give a clear indication of government's spending priorities by increasing the shares of resources allocated to priority sectors. Energy and transport have already been the focus of past few budgets and their expenditure allocations as a share of GDP have been growing. Also, the allocations for agriculture and rural development have not fallen as a share of GDP. These priorities should be maintained in the forthcoming Budget. But allocations for education, health and social protection have been falling as a share of GDP and as such these should be increased as a percent of GDP. The additional 1.0% of GDP increase in spending outside the wage increase should mostly be provided to these three priority areas.
Fourth, the Budget should seek to increase the use of foreign aid pipeline. For example, the annual disbursements are around $2.0 billion as against a growing pipeline of $17 billion. Using an average project life of five years, it should be possible to increase annual disbursements to at least $3.0 billion. The additional $ 1.0 billion of aid use will help increase development spending on priority sectors by 0.5% of GDP in FY2015/16.
CONCLUDING REMARKS: The government's prudent fiscal management is commendable and has contributed to macroeconomic stability. Another positive aspect of the budgetary management is the relatively low cost of government employment and public debt. These have helped preserve the limited fiscal space in a very tight resource situation. The government's spending priorities are well founded, although there is scope to do better by delinking oil transactions from the budget and requiring state-owned public enterprises and state-owned commercial banks to earn a profit instead of subsidies. The very low level of spending on priority sectors is more a reflection of inadequacy of resources rather than absence of political commitment. For FY2015-16 Budget the four main recommendations are (a) to raise public revenues; (b) increase spending on health, education and social sectors as a share of GDP; (c) increase the use of foreign aid pipeline and (d) provide a clear statement of expenditure reforms for the Seventh Plan along the lines suggested in this paper. Â
Dr Sadiq Ahmed is Vice Chairman of the Policy Research Institute (PRI).
sadiqahmed1952@gmail.com