For the last nine years Bangladesh has been growing steadily with an unbroken run of 6 percent or higher growth rates, reaching as high as 8.2 percent in 2019. With the unparalleled health, social and economic threats raised by the coronavirus pandemic, is the budget for fiscal year (FY2021) fit for purpose to restore economic and social stability in the country?
Apart from steady annual gross domestic product (GDP) growth rates, Bangladesh has enjoyed relative macroeconomic stability in ready-made garments (RMG) exports and foreign remittances (together covered over 75 percent of import bills), a good foreign exchange reserve (US$ 33.2 billion, May 2020), and a low debt service ratio (6.3 percent, 2018). Ever since Bangladesh’s first case of Covid-19 infection and death in March 2020, its economic success has come to a grinding halt. Even though no one really knows when the pandemic will be over, the government has severely underestimated the economic damage and social upheaval caused by Covid-19, and as a consequence, both the government and the general population are struggling to come to terms with the shock. Given that Bangladesh has been dealing with Covid-19 for the last six months, only time will tell if the budget for FY2020-21 can address the socio-economic challenges created by the pandemic. However, from the current vantage point, it appears that the budget is both too large and small at the same time, presenting enormous problems to policymakers and not boding well for the Bangladesh economy and the ordinary citizen, especially those hardest hit and most vulnerable. This article will analyse this difficult dilemma.
Why the budget FY2020-21 is too small
On June 11, the government of Bangladesh unveiled its record Tk 5.68 trillion (US$ 66.9 billion) national budget for FY2020-21 to start from July. According to Abul Barkat, President of the Bangladesh Economist Association (BEA), the budget is “unrealistic” and “not people orientated”. Approximately 36 million people had lost their sources of income in the first two months of the pandemic. During the same period, just under 60 million people moved into lower class structures, of which, over 25 million people fell into extreme poverty. In comparison, the situation of the very rich made up of around 17 million people remained unchanged, according to the BEA president. With the huge challenge to support the millions affected by Covid-19, throwing additional money at the problem is unlikely to resolve it anytime soon. If the ‘devil is in the details’, then the government needs to clarify which safeguards it has put into place to ensure allocated money reaches the people it was intended for, and not misappropriated. In this time of crisis if the government continues to carry on with ‘business as usual’, then the proposed budget can be viewed as nothing more than old wine repackaged into a new bottle. Experts have argued that the budget falls significantly short of being responsive to the context of the coronavirus pandemic, and there is a huge disconnect between the budget and the reality on the ground.
Understandably, the government has increased its allocation for social safety net programmes (SSNPs), which previously had stood at 2.58 percent of GDP in FY2020. This has increased to 3 percent of GDP in FY2021, with the lion’s share of SSNPs allocation devoted to pensions and allowances of government employees, as indicated on line item 9 on the SSNPs list. Because Bangladesh is not in a position to implement universal healthcare, education, or pension schemes to a level of those in many developed countries, SSNPs should be open primarily to those most in need rather than being open to everyone as is currently the case. Of the total workforce, 85 percent operate in the informal labour sector leading a hand-to-mouth existence. In the current crisis, a significant number of these workers have now fallen below the poverty line, and as trends suggest, many more will follow in the coming days and months. A vast majority of people now rely on relatives and charities for financial and material help. An effective way for the government to address the issue would be to have programmes of ‘employment guarantee schemes’ or ‘unemployment benefit’ for people who are losing their jobs. There is a humanitarian argument to save lives and livelihoods through fiscal instruments such as tax financed social assistance for those that need it the most, even if it does not generate economic activity or revenue.
Amid the daunting challenges posed by Covid-19, the government announced 19 stimulus packages and allocated Tk 1.31 trillion to put the economy back on track. The combined support accounts for 3.7 percent of GDP and will be managed and distributed through the banking sector. Given the current crisis the banking sector is going through, it is not in a position to perform such a massive responsibility. The biggest issues affecting the sector are mismanagement, non-performing loans (NPLs), institutional weakness, liquidity shortage, low net profitability, and political patronage. The Finance Ministry should have set out comprehensive operational guidelines to the crisis-ridden sector on how to manage and distribute the stimulus packages. Several private and state-owned banks have had their reputation battered due to ‘bad’ loans and severe mismanagement that has led to the loss of confidence of depositors. Therefore, not all banks are equally capable of providing loans to support the Covid-19 affected businesses such as small and medium enterprises (SMEs), which are finding it difficult to access the stimulus package through the banks.
There is a possibility of the banking sector running into further trouble, especially if Covid-19 loans end up being bad loans. Historically, the bank-client relationship has been the criteria for how borrowers were selected by the banks, and if this still remains the case, it would not be a positive move for the sector. A significant number of NPLs in the banking sector are by defaulters who have been given support and leeway by policymakers. Habitual defaulters always tend to be rich and politically connected, and this puts the banks in a dilemma as they find it difficult to refuse them as well as recover the loans from them. Because of the previous track record on loan defaults, there is justified apprehension that the new opportunities announced for corona-affected businesses will be severely misused. The government is attempting to implement a huge stimulus package via the banking system, which could potentially be a recipe for disaster, particularly if the portfolio of NPLs and irregularities increase. During such a critical time, instead of having full oversight in disbursing and managing loans, the central bank has left full responsibility to commercial banks. This situation could leave SMEs out in the cold especially if they do not have access to concessional loans to cover immediate loss and bankruptcy.
In his budget speech, Finance Minister, AHM Mustafa Kamal mentioned that currently 13 ministries are implementing a host of programs related to health and family welfare, and that in seven areas ‘reforms’ would be implemented; however, it did not include the health sector. For FY21, the health budget has increased by 14 percent to Tk 292.47 billion as compared to Tk 257.33 billion in FY20, and an emergency fund of Tk 100 billion was also made available. At the beginning of the pandemic a Dhaka hospital was supplied with 11,000 counterfeit N95 masks. Professor Syed Mozaffar Ahmed, Proctor of the hospital filed a case against the supplier Sharmin Jahan, assistant registrar at Dhaka University and a member of Awami League’s Central Sub-Committee on Women and Children. Many doctors took to social media to express their frustration over sub-standard personal protective equipment, which prompted Prime Minister Sheikh Hasina to raise the issue and put it on the agenda. According to the Bangladesh Doctors Foundation, up until the end of July, at least 80 physicians that tested Covid-19 positive have died, while another 12 died displaying Covid-19 symptoms.
Although the increase in the health budget is necessary, it remains inadequate to tackle the fallout from the existing health crisis. First, the Health Ministry lacks the capacity to implement the budget and without improved management of the health sector, effective utilisation of the allocation will remain in question. Second, there are legitimate questions concerning corruption and mismanagement in the health sector, particularly the private health sector where there is serious lack of transparency and accountability. In the budget it was claimed that many private hospitals were transformed into specialised hospitals to treat Covid-19 patients, and therefore, were billing the government for services. However, as media reports indicated there was a significant gap between the announcement and the reality on the ground. It is highly doubtful whether hospitals such as Regent, JKG Health Care and Shahabuddin ever provided any meaningful Covid-19 services to patients, besides forging coronavirus test reports and certificates. It is reasonable to suggest that this could just be the tip of the iceberg, which is usually the case when corruption and misappropriation raise its ugly heads in Bangladesh.
Keeping in tradition with the last five years the government has continued its wholesale offer to individuals to whiten their untaxed and undisclosed ‘black’ money. The amnesty contained in the budget for FY2020-21 differs from previous years as it has been widened to cover all sources of black money including, money laundering, human trafficking, drug dealing and a host of other criminal activities. What the government considers a lucrative proposition is intended for non-tax paying holders of black money. First, if black money holders wanted to pay taxes on their income, then why would they evade paying tax in the first place? Second, why would they enter the tax net to be registered? From 1 July 2020 until 30 June 2021, individuals can invest their untaxed and undisclosed money (cash, bank deposits, shares, bonds, savings certificates) in the stock market, real estate, economic zones and hi-tech parks. The government will not question the source of the black money as long as individuals pay the 10 percent government tax on their investments. This provision was codified in the Finance Act 2020. The Finance Minister has stated, “No authority, including the income tax authority, can raise any question on such declarations”. He went onto say, “Extraordinary times demand extraordinary measures”.
The Finance Minister in his budget speech stated that, “Bangladesh is now a role model for the developing countries in terms of increasing the literacy rate and eradicating gender gaps in education”.
Despite the official narrative, advocates of education who want a robust commitment from the government to education sector are not ecstatic with the 0.01 percent budget increase. The nominal increase means that Bangladesh maintains its record for having one of the lowest allocations for education as share of GDP and of the national budget, especially in South Asia. Civil society education forums such as Campaign for Popular Education have warned that the progress made in education over the previous two decades are in danger of vanishing due to the immediate and longer-term impact of the pandemic. Similar sentiments were echoed by the Finance Minister in his budget speech where he admitted that due to the pandemic, “the loss to the overall education sector has been enormous”. Teachers and educationists have vented their frustration at a lack of an education and rescue recovery plan for the sector. Investments in ICT infrastructure, connectivity, ICT-based learning, and educational technology support and teacher training cannot be achieved by such a nominal increase. The capital needed to develop human resources to meet the challenges of the impending Fourth Industrial Revolution requires a far greater allocation.
This suggests that the budget allocated is far too small for the multitude of challenges now facing Bangladesh in the context of the Covid-19 pandemic. Moreover, the way the budget has been allocated presents additional problems including corruption, financial irregularities and lack of oversight in the private healthcare as well as the banking sector.
Why the budget FY2020-21 is too large
At the same time as being wholly inadequate to cushion the economic and social fallouts from the Covid-19 pandemic, the proposed budget is also far too large however. We will now explain why.
For FY2020-21, the Finance Minister has set a targeted total tax revenue of Tk 3.78 trillion to bankroll the Tk 5.68 trillion budget. Although the total for tax revenue is near identical to that of FY2019-20, according to the minister, the two tools needed to boost tax revenue earnings for the coming year would be the “expansion of tax net” and “easy and simple tax-filing system”. A significant percentage of tax revenues amounting to Tk 3.30 trillion is expected to be earned through the National Board of Revenue (NBR), which aims to enlarge the taxpayer’s network. However, there is acknowledgement that setting such an ambitious revenue collection target would be a challenge. Bangladeshi economists and financial analysts are critical of the revenue target suggesting it is ambitious and unachievable. First, there is no clear indication as to when the impact of the Covid-19 pandemic will end. Second, the NBR lacks a user-friendly tax payment system or automated services and is unable to effectively deal with tax evasion.
Actual revenue mobilisation for FY2019-20 was significantly lower by Tk 300 billion as per the government’s own revised estimate. Within this backdrop the proposed budget is considering around a 9 percent growth in revenue collection. Given the disruption in economic activities both globally and in Bangladesh, it will be a very challenging task, if not impossible to meet the revenue target set in the revised budget. The revenue target proposed for FY20 of Tk 3,256 billion to be collected by the NBR is extremely high, and was lowered to Tk 3,005 billion. It is very likely that the revenue target will not be met for the current fiscal year. For FY21 revenue collection is proposed at Tk 3,780 billion, of which Tk 3,300 billion will be through the NBR, while non-NBR tax revenue is estimated at Tk 150 billion. Non-tax revenue is estimated at Tk 330 billion. It is very likely that the budget deficit for FY21 will increase, especially if the set revenue targets are not met and spending is increased. If enough revenue is not raised it could potentially impact the proposed increased spending on health, social assistance programs as well as other projects that are supposed to help people and businesses survive the current socio-economic climate.
Since the early 2000s, Bangladesh has been continuously going through budget deficits that have been financed by an increase in bank borrowing. At the same time, the economy has been growing steadily at an annual rate of 6 percent while the budget deficit on average has been around 5 percent of GDP. For example, the government borrowed Tk 474 billion in FY2018-19 and Tk 824 billion in FY2019-20, and as the trend suggests, this is expected to rise. The revised budget deficit for FY20 is estimated at 5.5 percent of GDP, whereas the overall budget deficit for FY21 is Tk 1,900 billion, or 6 percent of GDP. The huge budget deficit is expected to create a significant demand for capital both in domestic and external markets. To fund the deficit the government plans to borrow Tk 706.04 billion externally from the World Bank, International Monetary Fund and the Asian Development Bank. They also hope to obtain foreign grants worth Tk 40.13 billion. In addition, the government will borrow Tk 849.83 billion from domestic banks and Tk 250 billion from non-bank sources such as savings certificates, which can create significant stress on the domestic financial sector and at the same time crowd out the private sector.
The government has set the GDP growth rate at 8.2 percent for FY21. This indicates that they believe economic activities will quickly take up pre-Covid-19 levels and the subdued economy will undergo a robust recovery. However, given that both infection and death rates continue to rise, uncertainty remains as to when full economic activities will resume, and if this is even possible under the current circumstances. If recovery starts to take shape towards the end of 2020, then it is highly questionable that the GDP target would be achieved. The two principal drivers of economic growth in Bangladesh are RMG exports and foreign remittances, both of which are under severe stress in the current global recession. First, the European Union and North America, which are the two most important markets for Bangladeshi exports have been forecasted with negative growth as well as feared to have prolonged recession. As a result, RMG exports earnings have declined by 18.12 percent in FY2019-20 as compared to the previous year. With a further decline in RMG exports by 3 percent in FY2020-21, Vietnam has outperformed Bangladesh to take the mantle of second largest global RMG exporter. Second, with an unprecedented plunge in oil prices, countries in the Middle East that are large oil exporters have experienced a contraction of their economies. Many documented migrant workers from Bangladesh have lost their jobs in those countries and the main concern is remittances will decrease in the coming months. There is also the possibility that Middle East countries will send far larger numbers of workers back to Bangladesh.
In the budget strategic priority has been given to job creation. With a sluggish economy it will be a major challenge to create jobs during the Covid-19 induced unemployment crisis. However, when jobs are created the underlying issue will be how to maintain these jobs during economic uncertainty as it will pose a significant risk not only to the existing employment situation, but also to the employment generation for new job seekers. Together with informal and formal sector workers, thousands of migrant workers from Middle East countries have now joined the pool of jobless people. The brutal reality is that many people are unlikely to return to their jobs once all of this is over, not because the road to recovery will be a long one, but the need for these jobs will disappear. First, Covid-19 has brought the virtual and technology-based world to the forefront. Companies and institutions have made remote working the ‘new normal’, whereby an employee does not physically need to be present at the workplace anymore. To carry out work duties, employees only need a company laptop, access to a virtual private network and a Wi-Fi connection. Second, the drive to modernise agriculture and increase output will have a direct impact on job losses. To mitigate against this, part of the overhaul of agricultural modernisation should be to expand the agricultural sub-sectors and agro-based industries.
While the government anticipates an increased cash flow to boost the pandemic-hit economy, its desperate attempt to attract black money holders has not been successful. In the last 41 years from 1972 to 2013, a total of Tk 13.9 billion was whitened, from which the NRB received around one-ninth in taxes. There is no accurate government data on how much black money there is in Bangladesh, but according to a 2010 Finance Ministry report, black money accounts for around 37 percent of GDP. A report by Global Financial Integrity estimates Tk 5.3 trillion black money have been illicitly taken out of Bangladesh between 2005 and 2015, averaging around Tk 500 billion per annum. Economists and civil society organisations question the legal and ethical grounds of the governments drive, particularly as it discriminates against honest taxpayers. Transparency International Bangladesh (TIB) have insisted that the government create employment via investment in order to improve revenue generation. TIB Executive Director, Dr Iftekharuzzaman has stated, “The forthcoming budget is not only giving the opportunity to whiten black money on a large scale but also it’s going to remove the provision of Anti-Corruption Commission to question the source…it cannot be desired”. By having such a privilege for holders of black money, the government is projecting an image whereby it is institutionalising corruption instead of actively combatting to remove it from society.
The budget is thus not only too small for the challenges Bangladesh is facing, but at the same time also too large. The projected 8.2 percent growth the Bangladesh government has drawn upon to justify its nominally large budget for FY2020-21, remains a fanciful overestimation at best, particularly as the figure is based on a flawed methodology. Since the economy had already slowed down even before the onset of the pandemic, the figure remains provisional. Given the challenges the global economy is facing as a whole and Bangladesh’s dependence on RMG exports and remittances, both strongly affected by the current crisis and is unlikely to return to previous levels any time soon (it is much more likely that they will contract further), tax incomes and hard currency earnings of Bangladesh are unlikely to pay for such a large budget. This means that Bangladesh will become further dependent on foreign loans, grants, lines of credit and on quantitative easing in order to make up for the growing shortfalls between its borrowing and income. It presents various challenges for Bangladesh, especially in relation to its currency, which would take too long to go into some detail in this article, but broadly speaking, Bangladesh’s dependence on foreign creditors would increase as well as the likelihood for a currency crisis, or at least inflationary pressures in the coming years.
Conclusion
The coronavirus pandemic has caused an unprecedented health and soci0-economic crisis in Bangladesh that requires an extraordinary response by the government, which so far has not been reflected in the budget for FY21. Allocations for SSNPs have failed to meet expectations and requirements, considering the importance of social assistance programs for saving lives. A lack of strong political will, coherence, and guidance has meant that the stimulus packages do not include a mid-term ‘recovery plan’ needed to keep people in jobs as well as support those who have lost their jobs so they do not fall deeper into poverty. With a banking sector in crisis with high levels of inadequacy and corruption, the central bank needs to closely supervise every stage of implementing the liquidity support package, otherwise the misuse and abuse of funds will increase and the support to private business, which is crucial for the continuation of economic activity, will decrease. Successive governments, including the current one has overlooked and underfunded the health sector, in particular the public health system, the accumulated result which can be seen in how the country is dealing with the current health crisis.
Economic fallout from Covid-19 will severely restrict the growth of Bangladesh as imports fall due to a reduction of economic activity, which will significantly reduce the government’s capacity to raise revenue, particularly from import duties. This will result in Bangladesh having to borrow from external and domestic sources, therefore, creating inflationary pressure because of lower supply and lower imports. With the global economic downturn, foreign currency earnings from exports and the inward flow of remittances are likely to reduce significantly, making it difficult for Bangladesh to achieve its ambitious level of economic growth for FY21, particularly if revenue mobilisation targets are not met and the government escalates spending. Furthermore, the economy is faced with medium to long-term challenges, including increased unemployment as well as inequality, both of which will not be resolved just through a higher growth rate. Government policies have also facilitated at times, largescale money laundering in Bangladesh. Usually, perpetrators of the crime are tied to the ‘power structure’ and often it is ‘them’ who determine the terms for how they can ‘legitimately’ get away with it. The true impact of the Covid-19 crisis will not be known immediately and the challenges cannot be resolved overnight. There is less room for failure for Bangladesh as it lacks the necessary economic tools and public health resources. Therefore, it is important that the response in the budget of FY21 protects as widely as possible, primarily those that are at the greatest risk.