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The Financial Express

Macroeconomic policy stance for FY21 budget

Fahmida Khatun, Mustafizur Rahman,  Khondaker Golam Moazzem and Towfiqul Islam Khan | Published: May 10, 2020 22:24:53 | Updated: May 10, 2020 22:33:44


Macroeconomic policy stance for FY21 budget

The national budget for fiscal year 2020-21 (FY21) is going to be formulated at a time when the Bangladesh economy, as other economies around the world, is suffering from the fallouts of the novel coronavirus (COVID-19) pandemic. Since March 8, 2020, when the first COVID-19 case was identified in the country, number of both cases and deaths due to the pandemic has been on the rise. At the same time, the economy has been worst hit ever in the history of Bangladesh.

While it is well-known that nation-wide 'public holiday' (lockdown) has immense cost, both economic and humanitarian, the government's decision to go for it was the right one in view of containing the spread of the pandemic. Given the state of health infrastructure and health-related human and other capacities, and prevailing state of behavioural practices, precautionary steps must be given priority. According to indications from global trends and as opined by large section of health experts, Bangladesh is yet to cross the peak phase of the spread of the COVID-19 pandemic. In view of this, opening up of economic activities, other than agriculture and food chain related activities (production, wholesale and retail) could result in further spread of the virus at a critical phase of the pandemic. Expert opinions must be given due importance in this regard. Government's decision to revive the economy must be informed by health safety priorities, and the measures to mitigate people's sufferings should be designed by taking into cognisance this primary objective. Accordingly, as experts are suggesting, opening of economic activities should be synchronised with the trajectory of the pandemic, and mitigation to ameliorate the sufferings of the people designed. Indeed, international experiences of even developing countries do not support opening of economic activities beyond the essential sectors during the peaking phase when there is high risk of contamination. The recent guidelines by the World Health Organisation (WHO) in this context also takes a cautionary perspective.

Government's fiscal compulsions - lack of adequate resources to underwrite the attendant economic costs of lockdown - should not be the overriding consideration in the context of opening up of the economy. Resources will need to be found by creating fiscal space. Secondly, before opening up, it is critical to examine both implementation and capacity of the concerned entities, be in factories, offices or shopping malls, and the capacities of relevant government agencies to enforce compliance. It has been seen that even when RMG entrepreneurs had set their own safety measures, they were not able to comply with and enforce those. The same is apprehended in case of shopping malls. In view of this, any decision as regards, opening of the economy must be taken, as was noted, ought to be in a planned manner, taking into due cognisance of lower risk in terms of activities and in consideration of spatial dimension (e.g. zoning as has been the case in some countries), by undertaking a thorough audit of compliance and backed by adequate enforcement measures. If the government is able to extend adequate relief/cash support to the people in need, it will be able to withstand the pressure to open up the economy prematurely.

To tackle the impact of COVID-19, the government has undertaken a number of steps to ensure health safety and address adverse impacts on the economy. Health measures include emergency allocation of resources for the the Ministry of Health and Family Welfare and as incentives and insurance coverage for healthcare workers. Besides, the government has announced general holidays since March 26, 2020 to check the spread of the pandemic, by maintaining social distancing. The resultant lockdown meant that most offices and businesses are closed and most economic activities have grounded to a halt. Production and supply chains are disrupted, income opportunities are lost, and poverty situation has worsened, with new poor population joining the ranks of the old ones. All these adverse implications will have both immediate-short term and medium terms impacts on the economy which will need to be tackled through immediate policy response and by keeping the needs of the recovery phase in consideration.

To mitigate the losses incurred by individuals, enterprises and entrepreneurs, the government had to go for large amount of unforeseen expenditures. These include stimulus packages for export-oriented and domestic market-oriented enterprises and the agriculture sector, mostly in the form of subsidised credit and expansion of safety net programmes for the vulnerable groups. The government has also undertaken expansionary monetary policy measures to create liquidity for commercial banks to disburse these supports to the affected sectors. However, there is a demand for more support, particularly for the poor and low-income groups to ensure food security.

Understandably, the Ministry of Finance (MoF) will have to work hard in order to generate the additional resources required for higher government spending to energise and reinvigorate COVID-induced depressed economic activities in FY21. At the same time, these expenditures will have to be made in a manner that creates employment opportunities and generates resources without increasing inflationary pressure in the economy.

In the run up to the preparation of the budget for FY21, the MoF will have to take a realistic assessment of key macroeconomic performance parameters in FY20. This will allow the MoF to establish reliable benchmarks with a view to designing feasible objectives and pragmatic approach, macro and sectoral proposals for the needed resource generation, and to ensure efficacy in implementation in view of the upcoming FY21 budget.

In the context of the emerging scenario due to COVID-19, the Centre for Policy Dialogue (CPD) has prepared a set of concrete recommendations for the upcoming national budget for FY21. These suggestions are preceded by a brief overview of the economy and the macroeconomic stance to be followed in view of COVID-19.

BRIEF OVERVIEW OF THE ECONOMY: Challenges facing the Bangladesh domestic economy prior to the pandemic including those concerning the financial sector and those originating from the global headwinds have now been further aggravated by the adverse impacts emanating from the outbreak of the novel coronavirus (COVID-19) pandemic.  As may be recalled, excepting remittance, all major performance indicators were south-bound, resulting in weakening of the balance of payments position, subdued domestic resource mobilisation and low utilisation of allocated development expenditure. With export earnings decreasing by 18 per cent in March 2020, and remittance flows falling by 32 per cent in April 2020, and the adverse implications of the ongoing lockdown, the signs as regards economic performance for the fourth quarter of FY20 are truly ominous. Indeed, all these will have cumulative impact on performance of the Bangladesh economy in FY20. Although the MoF had earlier set the target of an 8.20 per cent growth of the Gross Domestic Product (GDP) for FY2020, the projections will need to be revised downward significantly. Various international organisations including the World Bank (WB) and the International Monetary Fund (IMF) have projected a highly reduced growth of between 2.0-3.0 per cent for Bangladesh in FY20. Indeed, the growth projections for all countries have been revised downward.

Uncertainties in the global economy in view of COVID-19 and consequent repercussions for the Bangladesh economy are already creating added pressure on the economy both from the demand side and from the supply side. This in turn will have adverse implications for revenue mobilisation during the remainder of FY20 as also beyond. This will originate from lower collection of revenue from customs duties (CD), value added tax (VAT) and supplementary duties (SD) at the import stage due to downturn in trade, particularly based on import payments (on account of both price effect and quantity effect). Closing down of enterprises, job losses and income reduction will lead to lower income tax collection, both corporate and personal. Adversely affected private and multinational companies incurring revenue losses will be likely to pay lower corporate tax.

Taking cognisance of economic trends, prior to when COVID-19 hit the economy, CPD had projected that the total revenue shortfall in FY20 could be over Tk 1.0 trillion (Tk  100 thousand crore). These estimations were based on available data from the MoF. Now, the adverse consequences of COVID-19 will need to be added to this. Consequently, the fiscal deficit as percentage of GDP will be significantly higher than the target figure of 5.0 per cent.

In this context, CPD feels that in view of the current trends in revenue collection and public expenditure, budget deficit may increase to 5.50 per cent of the GDP in FY20. Depending on the extent of COVID-19 and associated costs and policy measures, this may rise further. Higher demand for cash incentives in the wake of COVID-19 may put additional fiscal pressure on the exchequer.

MACROECONOMIC STANCE IN VIEW OF COVID-19: In view of the emergent scenario, CPD feels that budget for FY21 will need to take cognisance of an expansionary macroeconomic stance to underwrite the needed additional public spending and infusion of adequate liquidity into the economy. Pursuing such an approach will likely increase fiscal deficit in the FY21 budget. However, in view of the emerging scenario such a stance is conceivably the right one. The MoF will, however, need to design deficit financing in a prudent way so that loanable funds for the private sector are not crowded out and inflationary pressure is not created in the economy. CPD thinks that greater recourse to higher foreign aid to underwrite the fiscal deficit is the pragmatic way forward in this backdrop. In doing so, the budget will need to keep in its perspective tasks of health risk mitigation and ensuring food security through expanded safety nets, and the recovery phase by helping the entrepreneurs, enterprises, businesses and commerce.  The FY21 budget proposals will need to be informed by concrete and well-targeted measures, instead of open and general ones.

To address the health emergencies, help mitigate the risks and shocks originating from COVID-19, stimulate domestic demand at a time of reduced income and livelihood opportunities and to strengthen supply side response, the government will need to pursue an expansionary fiscal policy and go for expanded public expenditure. The shock absorption capacity of Bangladesh economy will critically hinge on the efficacy of how this is done to stimulate demand, generate supply response and create employment opportunities. Increased budget deficit should be managed through prudent reallocation and prioritisation of public expenditure. The COVID-19 situation emphasises the need for higher allocations for the health sector. Sadly, the share of health budget is at present equivalent to only 0.9 per cent of GDP of Bangladesh. This is even lower than the target of 1.12 per cent of GDP set out in Bangladesh's 7FYP.

Since the expansionary fiscal public expenditure stance will need to be pursued at a time of weakened fiscal-budgetary scenario and shrinking fiscal space, there must be renewed efforts towards both better mobilisation of resources through energetic and strengthened steps to curtail tax avoidance and enforce anti-illicit financial flow laws and regulations, and by raising efficacy of public expenditure. Greater effort will be needed to mobilise foreign aid, taking advantage of G-20 decision to support low income economies, and putting stress on getting aid in the form of budgetary support. Implementation of ongoing fiscal and administrative reforms should also not be lost sight of in this backdrop. These aspects must be reflected in the budgetary proposals for FY21 and their implementation. The fiscal space to be created due to higher budget deficit should be used efficiently and with inclusivity, so that concerns of rising inequality are not further accentuated in view of COVID-19 response in FY21 budget.

Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; and  Towfiqul Islam Khan, Senior Research Fellow, CPD.

avra@cpd.org.bd; www.cpd.org.bd

[The article is based on CPD IRBD 2020. Research support was received from Md. Zafar Sadique, Mostafa Amir Sabbih, Muntaseer Kamal, Md. Al-Hasan, Abu Saleh Md. Shamim, Nawshin Nawar and Tamim Ahmed]

 

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