Bangladesh News

It could be both a glorious and a dreadful time for a finance minister to present his budget this year.

Glorious because this is going to be his first budget of a new government that came to power with a sweeping victory after two years of a non-elected regime. So it is his time to show to the nation how his party and government want to envision the future. And secondly because in the midst of a brutal global recession, the country’s economic indicators still hold up fine to the dismay of many naysayers.

But dreadful also because of the same two reasons looked at from a different angle and also for the assembly of a few more reasons such as governance status, infrastructure and institutional capacity. A high-speed game, as Finance Minister AMA Muhith plans soon after an election, may risk an upturned cart.

As the finance minister is set to present his first budget of the new government today, the ground under his feet remains quite unstable because of still an unpredictable external environment. There are signs in the air that recession will ease in the days to come — good figures are coming from China, India, South Korea and even Japan. But the US, the powerhouse of the world, remains mixed with unemployment data dampening the spirit. The real worry is, the recession impact is supposed to come late in Bangladesh, and even if the global economy turns around next year, Bangladesh might then feel the lag effect. Put simply, Bangladesh is getting into the trajectory of global woes late and is likely to come out late. It needs a massive preparation to face any such event and the budget should have that cushion.

Once fallout from recession deepens, revenue collections would become one direct victim. If the economy shrivels, import would too — already it has declined by 10 percent during July-April of this fiscal year — leading to erosion of earnings from the inflow of goods. And if that happens, the budget, as ambitiously as it has been laid out, would become uncertain in its implementation. A bad budget management could be any finance minister’s nightmare.

Another daunting task would be to keep the export wheel moving. Although the overall export figure remains robust at 12.7 percent during July-April, major sectors other than readymade garments declined. In the face of a lag effect, further demolition of the export indicators may be expected. The remedy should be sought in competitiveness, which also may include looking at exchange rate, market tapping and right stimulus.

The next victim could be foreign aid. For a country that consumes $1.5 billion (on average in the current decade) in foreign assistance a year and could absorb even more, provided it had the capacity to spend, shrinking aid could create caveats in some vital development areas. Already an uncertainty in availability of aid has been created because of the government’s two decisions — to change the public procurement rules (PPR) and shift away from the poverty reduction strategy (PRS) to five-year planning.

If the PPR is changed to ease competition in tender participation and to let inexperienced firms take part in bidding, this would lead to legal problems with all ongoing donor projects. Donors simply cannot lend money for terms they did not sign agreements for. Disbursements from ongoing projects may grind to a halt. Secondly — and this specifically applies to the World Bank, the largest multilateral donor — as the government plans to move into five-year planning sooner than anticipated, it would not have a multi-year planning to show to the Bank for budgetary support right now. And the World Bank cannot support any programme that is not anchored in a multi-year poverty reduction strategy and its country assistance strategy ends this month.

More than anything, if budget is for growth and development, the fulcrum of that goal will be governance and reform issues. On both counts, the five months of the government did not reflect enough change that was expected of the new government after five years of corruption-driven tyrannical rule and two years of thoughtless regimentation. The ethos that the AL’s election manifesto was based on is not fully reflected in the actions — one simple example is the AL ’s second promise of fighting corruption and it is anyone’s guess how much of it would be fulfilled. The local government system has all but turned like Chinese Democracy. As it seems now the government’s outreach to the various stakeholders in the society is still weak and development management risks of not being all-inclusive.

But the tug of the political economy might even be more difficult to balance. Great expectations have been created in the election manifesto of the Awami League and the party in power will now have to deliver on its promises. The party gets a satisfying relief in the fact that its priority one promise to bring down prices has been materialised as the global commodity market plummeted from the brutal highs. The government set in motion some perception that it is serious to tackle price inflation. But the situation is changing fast with the oil price again creeping up — it has already reached the $80 level — and fuelling speculation of a commodity price rise as well. Non-food inflation has increased from 4.8 percent in December to 6.6 percent in April. Voters would not like to plunge back into a high-price regime. Here, the government has to set its strategy clearly for the future threat. Do not take low inflation for granted.

As a logical continuation of this threat, the government will have to seriously address its other promise — to reduce poverty by way of boosting agriculture. This was a good year for agriculture with an 8 percent higher food grain production, thanks to a good weather and a full-throttle effort of the government to reach inputs to farmers at an adjusted rate. But the real challenge lies in augmenting output through research and development.

A worry already voiced around is that seed development is too slow and current seeds are losing productivity. A new variety needs at least seven years to develop. Unless the challenge is taken seriously and new technologies like GMO are introduced, agriculture may falter with decreasing availability of farmland and stagnant yields. And despite its shrinking foothold on the national GDP — it accounts for about 20 percent of the economy — shrinking agriculture would mean loss in employment, an increase in inequality and, of course, facing a food insecurity.

But the question of modernising the economy is equally important. This requires a new lifeline to manufacturing and services sectors. Both now look glum — manufacturing growth has declined by 0.86 percentage points and services by 0.24 percentage points. Other than the global recession, a lot to do with such declines can be attributable to a lack of confidence among the investors as legacy of the two years of the caretaker government’s, or rather the military’s purge on corrupt businessmen and politicians that at one stage went overboard, instilling a sense of widespread insecurity.

The BDR incident followed by some off-track remarks by some ministers on various economic issues has not helped restore confidence. And in this confusion, investors are confused about who the real policy actors are and who holds what prerogatives. The external environment lurking in the background always dampened spirits of entrepreneurs. But investment is needed badly and in incremental amount as capital productivity, as the Centre for Policy Dialogue points out in its analysis of the economy, has declined for a third consecutive year this time. Unless more money is invested this year’s equivalent growth will not come, let alone higher figures.

But energy, another priority promise of the AL, will remain a lingering problem in achieving this higher investment. The country is already reeling under a persisting gas and power crisis, which is affecting productivity and acting as a disincentive for investors. Even the efforts to set up new power plants this year would not be enough to ensure comfort for investors to set up new establishments. This year’s load-shedding, which is now 2000MW, will increase in the coming years unless the government ensures adequate new power projects. The country’s gas crisis is also set to increase in 2011. While the new power projects totalling 5000MW capacity in the next five years demand several billion dollars of investment, the government would also have to ensure alternative to gas, which is traditionally the key source of power. Ensuring this alternative would mean the country would either tap its own coal resources by heavily investing in mining, or build nuclear power or it would have to import coal or oil. Either case demands billions of dollars of investment and proper project implementation.

If the goal of any economic policy is achieving high growth — although high figures necessarily do not mean reduction in inequality — the finance minister will have a lot to worry about. Bangladesh has been on the over 6 percent growth path for quite some time. But the trajectory has levelled out and is in fact declining. GDP growth is expected to come down to 5.88 percent this fiscal year. This means the economy needs some magic actions to break through the 6 percent limit. Sadly, public investment is on the decline and private investment stagnated.

From this angle, a big ADP planned for this year may look logical, matching with a planned moderately expansionary policy. But logical as it may be, implementation of Tk 30,500 crore in development programme planned for next fiscal year looks absurdly unlikely as this year’s spending capacity may hardly reach Tk 19,000 crore.

Capacity does not develop overnight and any radical reforms are not in the horizon. And if that is the case, a lot of the political vision may remain on paper or may be risked in squandering. A bigger ADP may bring in the risk of high bank borrowing despite the government’s plan for financing through savings instruments, which are non-inflationary in nature but highly demand driven and may not be successful.

In that scenario, two things will happen — crowding out of the private sector and inflationary pressure. Both prospects are disastrous for growth and development, especially when the global market is projected to heat up, again.