FY 2013-14 budget: A critical appraisal
Published : Wednesday, 26 June 2013
Nitai C Nag
On June 06 last Finance Minister AMA Muhith presented in the parliament the next fiscal year's budget wherein, alongside the revenue income and expenditure he also highlighted the government's success stories over the last four years and a half. Progress can be noticed in many areas ranging from agriculture to digitalisation. Of them, achievements on the food and agriculture fronts are probably the most remarkable.
Food and agriculture: During the last four years, rice production went up by 50 lakh or 5.0 million tonnes. So Bangladesh now does not have to import rice. While the government now can pay more attention to food security, it can also meet the requirement of foreign exchange for development projects. The number of hungry citizens declined from 58 per cent in 1990 to 31.50 per cent in 2010. Between 2010 and now the poverty rate reportedly fell further to 29 per cent.
Policies intended for favouring the farming community include revitalising the Bangladesh Agricultural Development Corporation (BADC), enhancement of the food storage capacity, procurement etc. The BADC has been reactivated and strengthened. It now plays a significant role, among others, in supplying quality seeds to the farmers. The public food storage capacity has been enhanced to about 1.6 million tonnes from 1.0 to 1.2 million tonnes. According to the food minister's recent statement, the storage capacity will be enhanced to 1.9 million tonnes by the end of June, 2014. As stated in the finance minister's speech, the storage capacity can be expected to rise to 2.0 million tonnes by June 2014. The implication of the food storage capacity which has nearly doubled is simply enormous. This will have a positive impact on the food price stability, food security and the country's probable emergence as a proud food exporter. Already the government procured 1.5 million tonnes of rice and 150 thousand tonnes of wheat from the domestic market in the fiscal year (FY) 2012-13.
Communications sector: A noticeable advancement has taken place in the communications sector. The four-lane projects-Dhaka-Chittagong highway and Dhaka-Mymensingh highway-are rapidly progressing. The Jatrabari-Gulistan flyover and the 3-km Kuril flyover are nearing completion. The railway budget got a big boost during the last few years. Expenditure increment in the railway sector has been very appropriate. We are of the view that whoever will be running the government in future, they should continue and further solidify this pro-people communication strategy.
Some visible progress has been made in river dredging too.
Power and energy sector: Considerable progress has been achieved in the power and energy sector. The per capita electricity generation has increased from 220 kwh to 292 kwh. New electricity connections have been provided to three million subscribers. One recent research reportedly found that as much as 2.25 per cent of the recent gross domestic product (GDP) growth is attributable to the incremental power supply made possible thanks to the government's recent efforts. Solar system installation is going on in remote areas in full swing. The finance minister announced that during the last few years, 680 million cft of natural gas had been added to the national grid.
Credit rating: The investment-GDP ratio would move up to 26.85 per cent in the FY 2013; this is the highest ever ratio for the country. Foreign Direct Investment (FDI) might have increased to US $ 1.7 billion in 2012 from US$ 1.136 billion in 2011. Recently, credit rating agencies ranked Bangladesh in terms of its capacity to service debts, at par with the Philippines, Indonesia and Vietnam. Between 2009 and now the revenue-GDP ratio rose from 10.78 per cent to 12.84 per cent and the tax-GDP ratio from 8.98 per cent to 10.8 per cent. The average annual growth in revenue had been 24.94 per cent during the last four years and the total revenue earnings doubled during the same period. The number of taxpayers rose to 1.164 million (11.64 lakh) from 645 thousand.
Foreign trade: When it comes to foreign trade, in addition to the success in the readymade garment (RMG) sector, Bangladesh now exports ocean-going ships and medicines. As many as 187 brands of medicine are now exported to 87 countries that include the USA and the UK.
ICT sector: A significant advancement has also taken place in the information and communication technology (ICT) sector. The number of mobile phone users has increased to nearly 100 million while 34 million men and women use internet. The teledensity has risen to 65 per cent. E-service centres have been launched in all the districts. The e-payment and mobile banking services are also threre.
MDG achievements: Bangladesh has also been able to achieve a number of Millennium Development Goals well ahead of schedule - a feat that has earned her the world community's admiration.
No room for complacency: The above account suggests that the economy of Bangladesh now stands on a higher plateau. The task now is to try to consolidate the progress and put in best efforts to take the economy and the nation to higher and higher plateaus. There exists no room for complacency, because as many as 47 million people still are unfed or underfed.
Weaknesses of the budgetary exercise relate to areas belonging to both income and expenditure plans. We intend to touch upon a few of them here, specifically the public servants' compensation, agriculture subsidy, pricing of public utilities, public and private investment etc.
Public servants' compensation: One should remember that public servants are the very people who will bear the primary responsibility of materialising the government's development plans. Unless this community is well-off, the government cannot expect things to progress up to the expectation. Thus when the finance minister says: "We significantly enhanced the pay and allowances of the government employees with effect from 2009 … we may constitute a permanent Pay Commission that may recommend salary adjustment commensurate with inflation … Constituting another pay commission will be due in the next year …" it seems that he is not quite mindful about how the public servants in general and the lower grade ones in particular are doing financially. While it may be conjectured that the "significantly enhanced" part of the public servants' salaries was eaten up by inflation long ago. It is unfortunate that the public servants' compensation packages are among the lowest in South Asia. We thus are of the opinion that the public servants in general may be given some financial redress under the proposed budget.
Health and education sectors: Again, for the sake of healthy and qualified manpower the expenditure in the health and education sectors needs to be significantly enhanced. The education policy that this government has put in place recommends that the share of public expenditure in this area should rise to six per cent of GDP. There appears to be no indication in the budget justifying the fact that in near future the government's own recommendation will be fulfilled.
Agriculture subsidy: In agriculture, the mainstay of the economy, the government has shown negligence to some extent. The government claims that subsidy in agriculture has not decreased from the last year's level, as some arrears were added to the originally-earmarked amount of subsidy and during the next year no such thing is going to happen. It may well be argued that even if the proposed amount of subsidy is equivalent to last year's net allocation excluding arrears, it is certainly less than last year's in the real sense. This is not a fair deal for agriculture. The progress so far achieved in poverty reduction and food security is because of the agriculture sector's progress. So, we suggest to the government to revise upward the allocation in the form of agriculture subsidy.
Private investment: As mentioned, the finance minister is proud of the investment scenario. Thanks to the enhanced public investment the investment-GDP ratio has risen to nearly 27 per cent, the highest in the country's history. This has been so despite a decline in private investment in the percentage point of the GDP.
It is, however, worrisome to note that private investment is not picking up and in this situation the finance minister declares: "we will keep on pursuing our tight monetary policy." Unless enough private investment takes place, the aggregate investment cannot be sufficiently raised through public investment alone, the latter being a complementary factor of the former, not substitute.
Achilles' heel: The most worrisome area of the budget in our view is the power sector. Unfortunately, despite the advancement so far made in the power sector the area seems to have remained as the government's Achilles' heel. This is because the government's so-called medium-term and long-term policies concerning the sector have not yielded the desired result. The short-term measures to repair the worn-out plants and installation of quick rental plants have proven to be "long term." And that is the most worrisome part of the story. The finance minister has announced that the government would continue to adjust power tariff to keep parity with international prices. It is disconcerting that the finance minister is making this untenable and seemingly "alien" argument to the annoyance of the public. Since electricity is a non-traded item, also produced mostly from the non-traded inputs (natural gas), it should not be priced at par with the so-called international price. Remembering the simple marginality principles of economics it can be imagined that every dose of the utility tariff hike proves unprofitable to many business concerns. The recently-observed high non-food inflation, it may be argued, is being caused/ fuelled by the rising power tariffs. One could also attribute the declining trend of private investment to at least partly to such rising costs of basic inputs. Also the tight monetary policy in such a situation is most likely to aggravate the problem.
Our suggestion thus for the government is to rely less on the oil-hungry quick rental plants in order to deflate the need for raising power tariffs and, at the same time, to concentrate mostly on building coal-based mega projects and do, unlike now, the utmost to turn the long-term measures into short-term ones as far as possible.
A contradiction: Finally, let us focus on a contradiction in the budget speech. While the finance minister expects that the economic growth in the fiscal year 2014 will be 7.2 per cent, he also reminds us that the growth rate in an election year falls by 0.3 - 2.6 per cent.
Now, what is the implication of reduction of the expected growth rate for the entire budgetary scenario? The answer is 'bad.' Suppose, the economy actually travels along a lower growth trajectory, then the immediate affected area will be the revenue target. And the readers may easily work out the implication of the latter for the rest of the economy.
The writer is a professor at Dhaka School of Economics. ncnagcu@yahoo.com
Nitai C Nag
On June 06 last Finance Minister AMA Muhith presented in the parliament the next fiscal year's budget wherein, alongside the revenue income and expenditure he also highlighted the government's success stories over the last four years and a half. Progress can be noticed in many areas ranging from agriculture to digitalisation. Of them, achievements on the food and agriculture fronts are probably the most remarkable.
Food and agriculture: During the last four years, rice production went up by 50 lakh or 5.0 million tonnes. So Bangladesh now does not have to import rice. While the government now can pay more attention to food security, it can also meet the requirement of foreign exchange for development projects. The number of hungry citizens declined from 58 per cent in 1990 to 31.50 per cent in 2010. Between 2010 and now the poverty rate reportedly fell further to 29 per cent.
Policies intended for favouring the farming community include revitalising the Bangladesh Agricultural Development Corporation (BADC), enhancement of the food storage capacity, procurement etc. The BADC has been reactivated and strengthened. It now plays a significant role, among others, in supplying quality seeds to the farmers. The public food storage capacity has been enhanced to about 1.6 million tonnes from 1.0 to 1.2 million tonnes. According to the food minister's recent statement, the storage capacity will be enhanced to 1.9 million tonnes by the end of June, 2014. As stated in the finance minister's speech, the storage capacity can be expected to rise to 2.0 million tonnes by June 2014. The implication of the food storage capacity which has nearly doubled is simply enormous. This will have a positive impact on the food price stability, food security and the country's probable emergence as a proud food exporter. Already the government procured 1.5 million tonnes of rice and 150 thousand tonnes of wheat from the domestic market in the fiscal year (FY) 2012-13.
Communications sector: A noticeable advancement has taken place in the communications sector. The four-lane projects-Dhaka-Chittagong highway and Dhaka-Mymensingh highway-are rapidly progressing. The Jatrabari-Gulistan flyover and the 3-km Kuril flyover are nearing completion. The railway budget got a big boost during the last few years. Expenditure increment in the railway sector has been very appropriate. We are of the view that whoever will be running the government in future, they should continue and further solidify this pro-people communication strategy.
Some visible progress has been made in river dredging too.
Power and energy sector: Considerable progress has been achieved in the power and energy sector. The per capita electricity generation has increased from 220 kwh to 292 kwh. New electricity connections have been provided to three million subscribers. One recent research reportedly found that as much as 2.25 per cent of the recent gross domestic product (GDP) growth is attributable to the incremental power supply made possible thanks to the government's recent efforts. Solar system installation is going on in remote areas in full swing. The finance minister announced that during the last few years, 680 million cft of natural gas had been added to the national grid.
Credit rating: The investment-GDP ratio would move up to 26.85 per cent in the FY 2013; this is the highest ever ratio for the country. Foreign Direct Investment (FDI) might have increased to US $ 1.7 billion in 2012 from US$ 1.136 billion in 2011. Recently, credit rating agencies ranked Bangladesh in terms of its capacity to service debts, at par with the Philippines, Indonesia and Vietnam. Between 2009 and now the revenue-GDP ratio rose from 10.78 per cent to 12.84 per cent and the tax-GDP ratio from 8.98 per cent to 10.8 per cent. The average annual growth in revenue had been 24.94 per cent during the last four years and the total revenue earnings doubled during the same period. The number of taxpayers rose to 1.164 million (11.64 lakh) from 645 thousand.
Foreign trade: When it comes to foreign trade, in addition to the success in the readymade garment (RMG) sector, Bangladesh now exports ocean-going ships and medicines. As many as 187 brands of medicine are now exported to 87 countries that include the USA and the UK.
ICT sector: A significant advancement has also taken place in the information and communication technology (ICT) sector. The number of mobile phone users has increased to nearly 100 million while 34 million men and women use internet. The teledensity has risen to 65 per cent. E-service centres have been launched in all the districts. The e-payment and mobile banking services are also threre.
MDG achievements: Bangladesh has also been able to achieve a number of Millennium Development Goals well ahead of schedule - a feat that has earned her the world community's admiration.
No room for complacency: The above account suggests that the economy of Bangladesh now stands on a higher plateau. The task now is to try to consolidate the progress and put in best efforts to take the economy and the nation to higher and higher plateaus. There exists no room for complacency, because as many as 47 million people still are unfed or underfed.
Weaknesses of the budgetary exercise relate to areas belonging to both income and expenditure plans. We intend to touch upon a few of them here, specifically the public servants' compensation, agriculture subsidy, pricing of public utilities, public and private investment etc.
Public servants' compensation: One should remember that public servants are the very people who will bear the primary responsibility of materialising the government's development plans. Unless this community is well-off, the government cannot expect things to progress up to the expectation. Thus when the finance minister says: "We significantly enhanced the pay and allowances of the government employees with effect from 2009 … we may constitute a permanent Pay Commission that may recommend salary adjustment commensurate with inflation … Constituting another pay commission will be due in the next year …" it seems that he is not quite mindful about how the public servants in general and the lower grade ones in particular are doing financially. While it may be conjectured that the "significantly enhanced" part of the public servants' salaries was eaten up by inflation long ago. It is unfortunate that the public servants' compensation packages are among the lowest in South Asia. We thus are of the opinion that the public servants in general may be given some financial redress under the proposed budget.
Health and education sectors: Again, for the sake of healthy and qualified manpower the expenditure in the health and education sectors needs to be significantly enhanced. The education policy that this government has put in place recommends that the share of public expenditure in this area should rise to six per cent of GDP. There appears to be no indication in the budget justifying the fact that in near future the government's own recommendation will be fulfilled.
Agriculture subsidy: In agriculture, the mainstay of the economy, the government has shown negligence to some extent. The government claims that subsidy in agriculture has not decreased from the last year's level, as some arrears were added to the originally-earmarked amount of subsidy and during the next year no such thing is going to happen. It may well be argued that even if the proposed amount of subsidy is equivalent to last year's net allocation excluding arrears, it is certainly less than last year's in the real sense. This is not a fair deal for agriculture. The progress so far achieved in poverty reduction and food security is because of the agriculture sector's progress. So, we suggest to the government to revise upward the allocation in the form of agriculture subsidy.
Private investment: As mentioned, the finance minister is proud of the investment scenario. Thanks to the enhanced public investment the investment-GDP ratio has risen to nearly 27 per cent, the highest in the country's history. This has been so despite a decline in private investment in the percentage point of the GDP.
It is, however, worrisome to note that private investment is not picking up and in this situation the finance minister declares: "we will keep on pursuing our tight monetary policy." Unless enough private investment takes place, the aggregate investment cannot be sufficiently raised through public investment alone, the latter being a complementary factor of the former, not substitute.
Achilles' heel: The most worrisome area of the budget in our view is the power sector. Unfortunately, despite the advancement so far made in the power sector the area seems to have remained as the government's Achilles' heel. This is because the government's so-called medium-term and long-term policies concerning the sector have not yielded the desired result. The short-term measures to repair the worn-out plants and installation of quick rental plants have proven to be "long term." And that is the most worrisome part of the story. The finance minister has announced that the government would continue to adjust power tariff to keep parity with international prices. It is disconcerting that the finance minister is making this untenable and seemingly "alien" argument to the annoyance of the public. Since electricity is a non-traded item, also produced mostly from the non-traded inputs (natural gas), it should not be priced at par with the so-called international price. Remembering the simple marginality principles of economics it can be imagined that every dose of the utility tariff hike proves unprofitable to many business concerns. The recently-observed high non-food inflation, it may be argued, is being caused/ fuelled by the rising power tariffs. One could also attribute the declining trend of private investment to at least partly to such rising costs of basic inputs. Also the tight monetary policy in such a situation is most likely to aggravate the problem.
Our suggestion thus for the government is to rely less on the oil-hungry quick rental plants in order to deflate the need for raising power tariffs and, at the same time, to concentrate mostly on building coal-based mega projects and do, unlike now, the utmost to turn the long-term measures into short-term ones as far as possible.
A contradiction: Finally, let us focus on a contradiction in the budget speech. While the finance minister expects that the economic growth in the fiscal year 2014 will be 7.2 per cent, he also reminds us that the growth rate in an election year falls by 0.3 - 2.6 per cent.
Now, what is the implication of reduction of the expected growth rate for the entire budgetary scenario? The answer is 'bad.' Suppose, the economy actually travels along a lower growth trajectory, then the immediate affected area will be the revenue target. And the readers may easily work out the implication of the latter for the rest of the economy.
The writer is a professor at Dhaka School of Economics. ncnagcu@yahoo.com
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