In election-centred fiscal measures, there are basic similarities that the countries’ governments tend to reach the people with increasing its expenditure which, in turn, usually leads to a rise in the fiscal deficit.
As like as Bangladesh, which is lagging far behind in enhancing domestic resource mobilisation, many countries are not able to collect taxes as much as they actually require, keeping pace with expansionary fiscal policies.
While the national election is knocking on the door, Bangladesh is supposed to face such situation, fuelling further pressure on macroeconomic stability as the country’s most indicators continue to show downward trend or slow growth.
The government of Bangladesh has first taken sky-touching fiscal policies, and then it announced Tk 7,61,785 crore budget for the fiscal year 24, which was 17 per cent of gross domestic product (GDP). It was the highest-ever budget in the history of the country with a deficit of Tk 261,785 crore, 5.2 per cent of GDP.
Meanwhile, it has set a revenue collection target of Tk 430,000 crore for the National Board of Revenue in FY24. The target is around 30 per cent higher than revenue collected by the revenue board in FY23. NBR never sees such growth in the history, indicating that the fiscal deficit will widen too this year.
In its latest South Asia Development Update, the World Bank (WB) echoes the situation and reveals the comparative analysis of South Asian countries during the election year.
The global lender says that election-year increases in fiscal deficit, primary balances, or government wage bills were statistically significant only in three regions, and South Asia was one of the only two regions where all three fiscal outcomes increased significantly.
In South Asia, specifically, election years were associated with 0.6 percentage point of GDP higher primary deficit, 0.8 percentage point of GDP higher primary spending, and 0.2 percentage point of GDP higher government wage bills than non-election years.
In 2023 and 2024, parliamentary or presidential elections will be held in seven out of eight South Asian countries, including Bangladesh.
With fiscal positions already fragile in several South Asian economies and government debt stocks high, spending increases, or revenue decreases around these elections would add to fiscal pressures.
In South Asia, primary fiscal deficits tended to widen in or just before national elections, on average by 0.5 percentage point of GDP, and only half of this deterioration was reversed in the two years after the election.
For several South Asian countries, the World Bank (WB) finds evidence of narrowly targeted fiscal actions around subnational elections.
The global lender shows more generally, primary fiscal deficits, primary government expenditures, and government wage bills rose significantly around elections, on average by 0.7, 0.5, and 0.1 percentage point of GDP, respectively.
South Asia is among the emerging market and developing economy (EMDE) regions with particularly pronounced election effects, it adds.
On average among EMDEs, primary spending increases averaging 0.5 percentage point of GDP were virtually fully reversed within a year following the election.
In consequent, deficits as well as wage bills around elections could erode fiscal sustainability and lock in spending rigidities over the longer term.
Commenting on the matter, Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Post, “Though the election year increases government’s expenditure, still the government’s borrowing in FY24 is lesser than the previous fiscal year, indicating that the government is not following the normal trend this year.”
“It does not mean that fiscal pressure declined due to the decision. Rather, the government should have to take necessary measures to reform the banking sector and revenue administration after the election so that forex crunch can be reduced and revenue mobilisation can be increased.”
“There is no scope to wait for global economic strain curtails, and then our external account imbalance will be balanced. Instead, we should take into account post-election period soon,” Hussain added.
“Besides, if political unrest and instability continue, it is undoubtedly impossible for revenue mobilisation as much as expected to reduce fiscal pressure.”
The business and export activities are being hindered owing to political unrest that continued in the country.
Political instability and demonstrations took place at a time when the country is facing severe economic headwinds, including depletion of foreign exchange reserves, and soaring inflation while exporters are also facing work orders’ crisis, putting pressure on forex further.
Businessmen voiced concern over political unrest in the country, disruption in the supply chain, and delivering ongoing work orders. They also called for ensuring political stability and harmony among the ruling and opposition parties for the sake of the country’s economic and export growth.
Comparative study in India, Pakistan and Bangladesh
The World Bank shows that in India, significant spending increases around state elections. Infrastructure-related social programs, interest spending on subnational debt, capital spending, farm debt waivers were seen in different election years.
Besides, state banks appear to have increased agricultural lending around state elections. Similarly, contested constituencies benefited from greater improvements in power supply while commodity revenue collections declined and capital spending rose around previous state elections.
In Pakistan, government spending was significantly higher in election years and significantly lower after elections and fiscal deficits were significantly larger in election years, it states.
In contrast, for Bangladesh, no study has shown clear evidence of political budget cycles.
A study examining the question fails to find any systematic impact of political factors on disaster relief during 2010 –14. However, monetary policy appears to have been significantly more accommodative in election years during 1980–2008, it said.
