Budget in an unsteady economy: The Bangladesh context

Unsteady in the economic parlance manifests instabilities in significant macroeconomic variables triggered by the economic shock in the aftermath of events that causes a lasting ripple effect in the global context. The global economy is now in the grip of inflation, growth stagnation, and trade disruption, with uncertainty’s bandwagon effect in Russian aggression on Ukraine. The increasing price of fuel, the uncertainty in the world grain market, and the fluctuating value of the world’s major currencies due to changes in the interest rates make the projection of economic variables vulnerable and often fancy.

The annualized inflation rate reached its zenith in many resilient economies characterized by the mild historical inflation and overall macroeconomic stability; 10 per cent in the United Kingdom, 8.3 per cent in the United States, and 8 per cent in the Eurozone. The Russian aggression in the aftermath of the Covid-19 recovery could derail the smooth growth process in many countries of the world. The annual budget exercises could be futile as a projection of major macro aggregates such as growth rate, inflation expectation, and revenue target may be unsustainable in this chaotic environment.

Exchange rate volatility, higher inflation, and recurrent changes in interest rates are the major causes of economic uncertainty that could make budget formulation and implementation process shaky.

Even in a stable economic environment, the implementation experience of the budget lags substantially in expectation when we review the outcome against the target. The revenue shortfall is a perennial feature in budget implementation in Bangladesh. Even with a revised estimate in the mid-year, the actual collection falls short, and with inbuilt structural flaws, the tax-GDP ratio could not be raised to a level at par with the developing country’s status. In many instances, the implementation status of the Annual Development Programme failed to cross the 60 per cent expenditure level. There are shortfalls in the overall GDP growth, and the creeping inflation exceeds the projection by a few percentage points.

The perspective of the current budget exercise for FY 23 with all its macro and micro targets could be an arduous task for the finance ministry. The ministry has identified several crucial challenges that could frustrate the attainment of many objectives of the budget. The major challenge is containing the import-driven inflation amid the higher price of fuel, food, edible oil, and important inputs such as fertilizer and capital equipment. The major challenge is maintaining a stable foreign exchange reserve conducive to financing essential import of raw materials and necessary food items. Other challenges include boosting private sector investment for employment generation, a cap on the interest rate, and reducing the budget deficit.

The subsidy issue is now a major concern in both developing and developed countries including Bangladesh. A rise in the price of electricity, gas, and food is a major driver of galloping inflation and many developed nations earmarked a comfortable allocation to enhance the purchasing capacity of the fixed income earning group. The incremental price adjustment could be a way to minimize the deficit. Still, the uncertainty about the Russia-Ukraine war with its supply of wheat and fertilizer could be a threat to a major shift in a price adjustment. The subsidy-induced budget expenditure may take the budget deficit beyond 8 per cent of the GDP from the current 6 per cent. It could derail funds from many essential projects. A preliminary estimate indicates that the electricity, gas, and fertilizer subsidy could cost over USD 5 billion [Tk. 50,000 crore] in Bangladesh.

The international embargo on importing fuel from Russia is constraining the budget. Bangladesh is in a dilemma regarding importing oil from Russia, which is cheaper than the oil imported from many Middle Eastern countries.

A pertinent issue in subsidy is the distribution modalities, as different reports question the effectiveness and equity in disbursement. The proposed budget for FY 22-23 should address the rationalization of subsidy in a framework of medium to long-term perspectives delineating the channel through which the handouts reach the targeted sectors.

Consider the case of fertilizer distribution which is a very critical input. Bangladesh previously imported MOP, TSP from Russia. Now the urgency binds Bangladesh to import from Canada at a higher price. Poor farmers are often forced to buy fertilizer at a higher price than the stipulated subsidized price. Weak market monitoring, particularly at retailers and distributors ends works as conduit in this malpractices that the administrative ministry and the various departments should address through strengthening the monitoring of the various sources of the supply chain; from dealers and distributors to farmers to ensure efficient distribution of fertilizer and other inputs.

The example of France’s Emmanuel Macron’s government subsidy of USD 26 billion to help consumers cope with rising prices, largely through caps on energy price increases and the promise to deliver an anti-inflation law enhancing handouts for low-income households may be replicated in many countries of the world. Kristalina Georgieva, Managing Director of International Monetary Fund [IMF], in an about-turn endorsed subsidies “in a much targeted manner, preferably by providing subsidies directly to people.” When it comes to the cost of living crisis, “There are two priorities, one the very poor people and segments of society that are now struggling with high food and energy prices”.

The budget is a comprehensive document delineating both the micro and macro aggregates on a sound and reasonably stable framework. However, for the last three years, economies all over the world are formulating the budget on an unpredictable premise owing to the Covid-19 pandemic. The problem is aggravating more this fiscal year due to Russian aggression on Ukraine, causing serious disruption in the supply chain of many vital commodities such as oil, energy, food and fertilizers. In this volatile environment, the projection on many macro variables such as overall growth rate, inflation or revenue targets or expenditures may not reach the targeted domain.

However, the nature of public expenditure should be based on the dictum of value for money; “a country’s income measured by its expenditure must be hedged with proper qualifications.” The quality of public spending is more appealing in this chaotic environment. The term value for money is used in a different context but ultimately converge to cost-effectiveness embedded in economy, efficiency, effectiveness, and equity.

The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He can be contacted at [email protected],ac.bd