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     Volume 8 Issue 72 | June 5, 2009 |

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Cover Story

A High-stakes Budget

Arun Devnath
Photos: Zahedul I Khan

With the new budget all set to be announced, the Hasina administration faces a series of challenges. Economic analysts say the next budget – a first for the new government -- will be aligned with efforts to tackle the fallout of global recession on the local economy.

Signs of a slowdown are palpable in economic activity. Exports are on the downward curve. Domestic demand is relatively low. Investment is in freefall. Gloom thickens on the horizon. In its latest economic review, the Metropolitan Chamber of Commerce and Industry (MCCI) says: “Most of the major economic indicators showed signs of weakness during the (January-March) quarter.”

A slowdown in private consumption is reflected in the slowing growth of governments VAT collections, which grew by just 10.1 percent in the third quarter, compared to the 30.5 percent growth in the same period a year earlier. The slowdown in private consumption is also indicated by the reduced imports of consumer goods, which declined by 26.3 per cent in the third quarter. Private investment also fell markedly as indicated by lower investment in machinery and reduced imports of capital goods in the third quarter compared to the same period of the previous fiscal year, according to MCCI.

The upcoming budget is a high-stakes budget. Economists have suggested that the government will have to take quick steps to prop up domestic demand. Analysts point to slowing imports of industrial raw materials that contracted by 1.4 percent in the third quarter, down from the year-ago-period. A declining trend in investment was in line with weak business sentiment caused by the decline in both domestic and external demand. This is part of the reason Mamun Rashid, a banker and economic analyst, suggests that the government put a brake on falling investment.

“Primarily, the budget should prioritise employment generation, investment augmentation and infrastructure development," Rashid says.

He also stresses the need to strengthen local government and improve the "bench strength” of civil bureaucracy, which is a "must for driving reforms and budget implementation." Rashid says the government should allocate more money and design appropriate programmes for the Public Service Commission, Bangladesh Public Administration Training Centre (BPATC), municipalities and local government institutions. “We should also be able to chart a definitive role for 'development partners' and 'foreign investors' in the entire process," says Rashid.

In the run-up to Budget Day, public-private partnership (PPP) has created a buzz in the corporate elite. It is a scheme for a government service or private business venture which is funded and operated through a partnership of government and one or more private companies. The schemes are referred to as PPP. In some types of PPP, the government uses tax revenue to provide capital for investment, with operations run jointly with the private sector or under contract. In other types, the scheme could be the other way round. The renewed underscore on PPP in infrastructure development, as indicated by different ministers in their statements, will make the 2009-10 budget special.

"However, PPP may remain a challenge if we can't put in the befitting legal support and institutions to identify appropriate projects, participation agreement, a timely funding plan with executionable private sector participation,” Rashid says.

The leading economic analyst cautions optimists that the country's private sector is still too fragile to attract large capital and physically constrained to implement large projects. “It may warrant large global corporations to join in," he says.

Pre-budget discussions indicate that the government may come up with a brief guideline for PPP programmes under which the private sector would be allowed to make as high as 70 per cent of the entire investment in power and energy infrastructure projects. PPP programmes are crucial for the energy sector as the country is reeling from a huge power crunch.

The PPP scheme is expected to be different for social, healthcare and education projects. In these projects, the government will share the major part of the investment. “It is very encouraging that the finance minister has signalled that PPP will form a major new element in the budget since, if done successfully, this has the potential to firstly leverage government funds by 3-4 times with private sector capital from both domestic and foreign infrastructure investors,” says Ifty Islam, managing partner at Asian Tiger Capital Partners (AT Capital).

Public-private partnerships are crucial for the energy sector.

“It can also help overcome capacity constraints within the governments by utilising private sector experitise and knowledge in projects. Making PPP a core or central initiative is what makes the 2009-10 budget stand out,” Islam says.

This is one of the ways the government can lay the foundation for Bangladesh becoming an 8 per cent plus growth economy in the longer-term, Islam hopes.

The budget to be announced on June 11 will be the first budget by the new government. The Awami League that leads the ruling coalition was voted to power on the strength of an election manifesto that lays out a vision for a prosperous 'Digital Bangladesh' by 2021.

“For obvious reasons this budget needs to reflect policy and financial measures that can initiate the realisation of the aspirations voiced in the manifesto,” says Habibullah N Karim, president of Bangladesh Association of Software and Information Services (BASIS).

Those aspirations are broadly in the areas of education, a drive against corruption and social equity. Karim suggests the government should fast-track poverty alleviation and economic emancipation through export growth. Export earnings in the January-February period showed some signs of uptake. After experiencing a negative growth of 1.6 percent in the previous quarter, exports grew by 6.0 percent in the third quarter.

“This comparison does not hide the fact that the third quarter export growth in FY09 depicts a markedly decelerating trend as compared to the export growth in the corresponding quarter of the previous fiscal year,” MCCI President Abdul Hafiz Choudhury says.

Habibullah N Karim of BASIS says: “In all these priority areas, the role of information technology is essential in lowering costs, improving effectiveness and ensuring measurability of progress made.”

IT and business process outsourcing services including software development can be a major source of export revenue as well as an accelerator of the economy.

“I would certainly like to see the budget giving a lot of emphasis on the above-mentioned priority areas as enumerated in the manifesto while giving a clear guidance in the use of IT as the most important empowerment tool in achieving the goals set forth in the manifesto, Karim says.

“For putting the wheels of Digital Bangladesh in motion, I expect the budget to allocate funds for e-government applications, information networks within the government machinery and ICT developments in general.”

The blueprint for 'Digital Bangladesh' can be found in the ICT Policy 2009 approved by the present cabinet. Broad-based automation, designed to ensure a "smooth transition to a Digital Bangladesh", has pulled in a lot of attention.

The total revenue collections are expected to touch Tk 80,000 crore. The government has already approved a Tk 30,500 crore annual development programme (ADP) for the coming year, which many said was a stunt and too ambitious to implement completely. Revenue and development budgets combined, the size of the national budget will hover around Tk 115,000 crore.

Ifty Islam of AT Capital says a major initiative for the government should be to increase the revenue base for Bangladesh which is one of the lowest in Asia. “This requires greater pressure from NBR to ensure that both individuals and corporates pay their taxes. There should be greater sanctions for non-payment or misrepresentation of individual or corporate balance sheets to reduce the tax burden,” Islam says.

A failure by the wealthier in society to pay direct taxes on income creates high levels of indirect tax on goods and imports, which ultimately falls disproportionately on the poorer segments of society versus those with a greater ability to pay, Islam explains. In its budget proposal, the Centre for Policy Dialogue, a private think-tank, says: "The defining features of the upcoming budget will be the ability of the development administration to deliver on the ADP. In its absence, the economy will be deprived of the much-needed fiscal and monetary stimulus.”

To tackle the potential deceleration in growth in the days to come, CPD suggests, the government should be ready to go for higher deficit (which may be around 5 percent of gross domestic product). Bangladesh may also take advantage of a decline in inflation rates which is expected to sustain in future, according to the research organisation.

“In this connection, the government should consider foreign financing as an important source because of the non-inflationary nature of this particular source,” CPD says.

If the government borrows more from domestic sources the availability of private credit may be crowded out, which may derail its effort to increase economic activity in times of economic slowdown. To face the adverse effects of the global economic crisis, the government has already announced an adjustment package with fiscal, monetary and trade policies and institutional measures to assist the affected sectors and encourage.

The government had earlier announced Tk 450 crore for export-oriented industries in cash compensation on top of Tk 1,050 crore allocated for fiscal 2008-09. Under this package, most of the industries hurt by the impact of recession will get additional cash incentives: jute products (10 percent), leather and leather goods (17.5 percent), shrimp and frozen fishes (12.5 percent). The benefits will continue in fiscal 2009-10 as well.

According to Ifty Islam, while there should be a global crisis mitigation fund to provide some support to affected export sectors, the critical priority in the budget should be to support the "growth" enablers” that tackle the constraints to growth in areas such as infrastructure and education.

The NBR must make sure that individuals and corporations pay their taxes. With higher import duties, luxury cars may become pricier.

Economists believe that the government will not only have to extend support to exports but also adopt policies to increase the domestic demand base for the economy in the face of global recession.

Under these circumstances, monetary policy can play an important role in softening the impact of the global economic crisis on economic growth and employment particularly by ensuring liberal access to low-cost credit by small and medium industries, agriculture and rural non-farm sectors, MCCI says.

The government needs to protect the small enterprises by relaxing the tax and VAT policies aimed towards them, so that they can yield profits by keeping their cost of production low.

“Lack of finance is one of the major constraints -- as commercial banks are inherently sceptical of lending to the SMEs due to the high risks and monitoring costs associated with lending to them,” says Ifty Islam.

The government, he adds, should compensate by using grants, perhaps in coordination with donor agencies, as a major instrument for providing financial support for a limited period of time to selected SMEs which have good potential and wide linkages.”

The government should put a brake on falling investments. Many migrant workers have come home after losing their overseas jobs. The budget should reflect the need for greater employment generation.

Budget Day is just six days away. A lot of expectations -- a lot of demands from different circles -- are filling the newspaper pages. As always budget discussions take centre stage in talk-shows on television channels. The government's different agencies and departments, especially the Finance Division and National Board of Revenue, are racing against the clock to prepare for the crucial day. The Parliament started its budget session on Thursday. Finance Minister AMA Muhith was to write his budget speech abroad to give it the “undivided attention” it deserves. All eyes are set on the government in general and on Muhith in particular. A lot of buzz in the air.

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