As the announcement of the national budget is approaching, a number of suggestions and demands are already on the table. Unlike the previous years, the setting for the upcoming budget is totally different. The spread of coronavirus across the world as well as Bangladesh has drastically changed the whole perspective.
Following many other countries, the government of Bangladesh has also imposed lockdown in the form of public holidays to contain the spread of the pandemic. The lockdown, however, is not a strict one and there are many gaps. Nevertheless, it has largely shut down the overall economic activities with a serious toll on the larger sections of people who mostly depend on informal and semi-formal economic activities. There is now a demand for opening up business activities to recover livelihoods of millions of people as the inadequate and mismanaged social safety net programmes are yet to support many of them.
Again, fragile health infrastructure makes it very hard to fight against the deadly virus providing insufficient medical treatment to the patients. Inadequate testing facilities coupled with a lack of motivated medical caregivers have turned the situation vulnerable. Even the regular treatment of other diseases has also become difficult as many hospitals are refusing to offer treatment to patients. Home staying and physical distancing are, so far, the most effective tools to check the transmission of coronavirus.
Thus the upcoming budget for the next fiscal year (FY21) and the revised budget for the current fiscal year (FY20) need to address three areas on priority basis. These are: economic activities, social safety nets, and health infrastructure. Higher allocations and well-designed policy programmes for these areas are key challenges to design the new budget and also revise the current one.
Budgetary allocations and spendings need revenue generation. As tax and non-tax revenue along with tiny foreign aid are not enough to finance the total spending outlay, the government has to go for domestic and external borrowing. The policymakers, however, think that this budget deficit needs to be kept within a limit to avoid any adverse fallout on the fiscal front. It is reflected in the medium term macroeconomic policy statement for FY19 to FY21. Unveiled by the finance ministry in 2018, it said: "In the medium term, government intends to pursue a moderate consolidation path to keep budget deficit within 5.0 per cent of GDP." (P.35)
Consolidation means fiscal consolidation which is basically 'a process where government's fiscal health is getting improved and is indicated by reduced fiscal deficit.' The deficit is the 'excess of total budget expenditure over total budget receipts excluding borrowings.' Thus fiscal deficit basically means the required amount of borrowings to meet the rest of the budgetary spending not covered by fiscal receipts.
The country's budget accounting doesn't show fiscal deficit separately. Instead, there is 'budget deficit including grant' which is similar to fiscal deficit because to finance the deficit, it requires borrowings only. As foreign grant is non-refundable, it is considered a part of total revenue receipts. There is also 'budget deficit excluding grant' and it is the overall budget deficit where financing is sourced by both domestic and external borrowing as well as foreign grants. The whole thing is an accounting exercise and has little to do with gross change in deficit financing requirement which almost entirely depends on borrowing as foreign grants contribute less than 2.0 per cent of the total deficit financing.
GOING BY THE NUMBERS: Statistics available with the finance ministry showed that annual average deficit financing stood at 3.80 per cent of Gross Domestic Product (GDP) during FY13 to FY19. It is well below the limit of 5.00 per cent of GDP due to lower than programmed spending of budget.
Media reports suggest that budget deficit may increase to over 6.0 per cent of GDP in the revised budget for FY20. The current budget, approved in June last in the national parliament, has set overall deficit at Tk 1.45 trillion which is 5.0 per cent of projected nominal GDP worth Tk 28.85 trillion in FY20. In the revised budget, value of deficit may increase to Tk 1.75 trillion which will be 6.0 per cent of the GDP.
The rise in budget deficit has already been reflected in the increase in government's bank borrowing target by more than 54.0 per cent in the current fiscal year. Against the original target of Tk 473.64 billion, the revised target is set at Tk 729.51 billion. The government borrowed a total of Tk 580.0 billion from the banking system in the first 10 months of the current fiscal year.
Slowdown in revenue collection due to the impact of COVID-19 is compelling the government to borrow more to meet up recurrent and development expenditures in the ongoing fiscal. During the first nine months of the current fiscal, the National Board of Revenue (NBR) collected a total revenue worth Tk 1.65 trillion against the targeted Tk 2.21 trillion. Thus the shortfall stood at Tk 560 billion and even may cross Tk 700 billon at the end of the year.
As robust collection of tax revenue coupled with better alignment of expenditure is the main component of fiscal consolidation, the last quarter of the current fiscal is in no way on the right track. The first-half of the next fiscal year may also experience the same even if coronavirus comes under control and economy fully opens up. Keeping this reality in mind, the government has set a modest rate of growth in revenue collection for FY21. It has set a target of Tk 3.30 trillion revenue collection which is only 1.35 per cent higher than that of the original target of Tk 3.25 trillion and almost 10.0 per cent higher than the revised target set at Tk 3.0 trillion for the current fiscal year.
On the spending side, the government has also decided to keep the development outlay for the next fiscal almost similar to the current fiscal year. Original outlay of Annual Development Programme (ADP) is Tk 2.02 trillion in FY20 and next year's ADP is set at Tk 2.05 trillion, registering only 1.0 per cent growth.
Total outlay of budget is yet to be finalised. It is, however, hinted by the finance ministry that the size may be around Tk 5.62 trillion, registering around 7.50 per cent growth over Tk 5.23 trillion, the original outlay of the budget for the current fiscal year.
DEFICIT FINANCING: Thus, budget deficit in the next fiscal year may hover between Tk 1.75 trillion and Tk 2.0 trillion depending on the budget size. Whatever the deficit, it is the financing that matters most. For the past few years, around 80 per cent of the deficit is financed by domestic borrowings. Among the domestic sources, non-bank borrowing dominated during FY14 to FY18 while the government has switched to more reliance on bank borrowing since FY19. A major reason is to reduce the burden of higher interest payments on non-tradable fixed income securities, savings certificates, to be precise. Medium term macroeconomic framework is set to reduce the sales of savings certificates on net basis to 0.70 per cent of GDP in FY21 from 2.0 per cent of GDP in FY18. If the government wants to achieve the target, it has to increase borrowing from the banking system in the next fiscal.
Over-reliance on bank borrowing may produce crowding-out affect on private credit, especially when the government announced that Tk 900 billion incentive packages for business, industry, agriculture and trade have to be financed by bank credit. Though the central bank has already made provision of Tk 750 billion for refinancing the banks to disburse the loans, it may be under more pressure to finance the budget deficit.
In extreme case, the government may opt for borrow directly from the central bank by minting money. The government will issue treasury bills and Bangladesh Bank will supply currency notes against the bills through devolvement when commercial banks will not purchase the bills and bonds. This is the borrowing by printing money which will definitely increase inflationary pressure and erode real earnings of low and middle-income people who are already struggling for their lives and livelihoods.
Part of the borrowing will, however, be used to pay interest on previous loans and so only primary deficit -- fiscal deficit deducting interest payment -- will be is available for financing the budgetary expenditure.,
The government has, however, another option which is borrowing from external sources. The finance minister has already stepped up to negotiate with multilateral donor agencies to get soft loans. Adequate borrowing from the external resources will ease some pressure on domestic borrowing. The medium term policy statement already mentioned that 'borrowing from external sources is a preferred strategy.' The current external debt-GDP ratio is around 15.0 per cent and the medium term policy framework has set the limit at around 21.0 per cent for FY21. Thus, some fiscal space is there for additional foreign borrowing in this critical period. Though pressure on exchange rate may mount in near term, it may be managed without much difficulty.