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Volume 6 | Issue 07 | July 2012 |


Original Forum

Implementing Budget FY2012-13:
Testing Times Ahead
-- Mustafizur Rahman
Discriminatory Taxation to Boost Finance Capital?
-- Asjadul Kibria
Road Safety in Bangladesh: Key issues and Countermeasures
-- Hasib Mohammed Ahsan

Road safety: Held Hostage by Trade Unions

-- Tawfique Ali
Immersed in Corruption
-- M Abul Kalam Azad

Photo Feature

Pedestrians at Fault

Interview with Sultana Kamal
-- Rifat Munim

The Conundrum of Police Reform

-- M Liton

Police Accountability and the 'Rule of Politics'

-- Zahidul Islam Biswas

The Debate over the Rohingya Issue
-- Dwaipayan Barua
Where is Bangladesh heading for?
-- G M Quader
Population Challenges for Bangladesh
-- A K M Nurun Nabi

Sufia Kamal : Her Journey Towards Freedom
-- Mofidul Hoque

Outspoken Campaigner: A Postscript
-- Shah Husain Imam
Political party finance
-- Muzaffer Ahmad
The climb of their lives
-- Mohammad Isam


Forum Home

Implementing Budget FY2012-13:
Testing Times Ahead

Against the backdrop of global economy, PROFESSOR MUSTAFIZUR RAHMAN dwells on the challenges in implementing the FY2012-13 budget.


The backdrop
Bangladesh's budget for the fiscal year 2012-13 should merit distinction for a number of reasons. These include both domestic and external factors. The year 2012 will be remembered as a time when appropriate fiscal-budgetary management emerged as the most important and the most challenging task confronting finance ministers and governments, across countries, all over the world. In both the developing and the developed world, policymakers had to grapple with hard choices that involved difficult trade-offs which in turn had crucial implications for growth, inflation, investment and income distribution in their respective economies. Many of the challenges facing domestic policymakers originated in the way the global economy was evolving, with rising commodity prices that affected inflation in the domestic economies and the import bills and falling global demand that affected export earnings, balance of payments position and exchange rates. On the other hand, the emergent global situation had important ramifications for the way domestic policies were to be calibrated necessitating greater dependence on domestic demand, higher tax effort and greater domestic resource mobilisation, stimulating investment, curbing inflation and stabilising exchange rates. The challenge of rebalancing the economy at a time when the toxic mixture of inflation in the financial economy and stagnation in the real economy has emerged as a major concern in many countries. The challenge of stabilising the economy and at the same time maintaining respectable growth rate were to test the nerve of Finance Ministers across countries and continents.

In view of the above, coming up with an appropriate budgetary framework and fiscal proposals for FY2012-13, one that was fiscally sustainable and operationally implementable, was never going to be an easy task for the Bangladeshi finance minister. In the event, the budget for FY2012-13 has made an honest attempt to address the attendant tasks as best as it could. However, reconciliation of the often conflicting choices involved in sustaining the growth momentum, restraining inflation, harnessing domestic resources, encouraging investment and at the same time taking care of the cause of distributive justice, will, in all likelihood, make the implementation of FY2012-13 budget proposals a rather challenging enterprise.

As one would recall, as distinct from many other low income countries, the Bangladesh economy was able to weather the global recession of 2007-08 with commendable resilience, maintaining growth and sustaining investment. However, in spite of the robust performance in mobilising domestic resources and the good performance of agriculture that ensured food security, FY2011-12 witnessed a number of strains and tensions which defined the context and backdrop in which the budget FY2012-13 had to be framed. As is known, growth and investment targets for FY2011-12 had to be revised downward. Inflation exceeded the target of 7.5 per cent by a significant margin with core inflation dictating the momentum. The subsidy estimates had to be revised upward and the rise in foreign exchange reserves that provided stability to our exchange rate was halted with consequent significant depreciation of the Bangladeshi taka. Inflation was fuelled in FY2011-12 underwritten by an expansionary monetary policy that originated from rising subsidy requirement and growing public expenditure particularly in view of lower use of foreign resources for implementing the development plan. The monetary policy for July-December, 2012 tried to address the emergent situation through lower growth rate targets for broad money and credit, both public and private. It was now the turn of the fiscal policy to match the monetary policy. The investment-inflation -- growth-distribution nexus had to be re-established in a manner that was both conceptually credible and implementationally feasible. Herein remained the major challenge in framing the budget for FY2012-13.

The targets and their feasibility
As is the case, the budget for FY2012-13 has set a GDP growth target of 7.2 per cent, about almost a percentage point higher than what was likely to be attained in FY2011-12. To start with, this target, although in consonance with the target set out in the Sixth Five Year Plan (SFYP) will be achieved from a lower base line (not on the baseline of 7.0 per cent for FY2011-12 as envisaged in the SFYP). As the review of the budget proposal carried out by the CPD (available at www.cpd.org.bd) has argued, attaining a 7.2 per cent growth, the most ambitious target in recent times, would require significant contribution from all the three major components of the economy-agriculture, industry and services. Much will depend on investment growth, at a time when private sector credit growth rates are planned to be significantly sealed down to rein-in inflation. Much will depend on the government's ability to use higher amount of foreign aid. This the budget has programmed at the high level of USD 3.2 billion. The fact of the matter is that, in the backdrop of lower than planned use of the comparatively low level of targeted foreign aid in FY2011-12, the ability and capacity of the development administration will have to be radically enhanced in order to attain this ambitious target. The domestic component of the 55 thousand crore taka public investment targets in the form of Annual Development Programme (ADP) in FY2012-13 will be financed mainly through bank and non-bank borrowing by the government. The borrowing target from banking sources, at 23 thousand crore taka, and sourcing of the 10 thousand crore taka through non-banking sources, will both be challenging -- the first because this will need to be done without crowing-out the credit available for the private sector, and the second in view of the restrained growth in savings at a time of high inflation and rising cost of living.

The investment target itself -- about one-third higher than the likely implementation level in FY2011-12 -- will envisage the largest in quantum terms and highest in growth terms in one single year in recent times. It is also true that in recent times there has been significant increase in the size of the ADP, from about 19 thousand crore taka in FY2008-09 to about 40 thousand crore taka in FY2011-12. Of course, no one doubts that in view of the revealed and latent demand for infrastructure in the economy, a robust growth in investment is indeed the need of the time. But what are the additional measures that will be put in place to attain this? This remains a legitimate question. It is good that gradually, over the past years, the government has brought all the ministries under the medium term budgetary framework and the budget for FY2012-13 does talk of introduction of budget management wings or branches in all ministries and divisions. However, such initiatives, to generate the expected results, will take time. Adequate human resources will need to be developed for these to work effectively to ensure qualitative leapfrogging in terms of design, implementation, output and outcome of developmental plans. As the CPD budget analysis has shown that a large number of projects, many in the selected priority sectors, do not have appropriate allocations for their completion within the stipulated time. As the analysis carried out by the CPD indicates, only 35 new projects have been included in the list of 1,037 projects in the ADP accounting for about 1.3 per cent of ADP allocation. On the other hand, 192 are carryover projects from earlier period (11.4 percent ADP allocation) and 454 projects are to be concluded this year (35 per cent of ADP allocation). Many of the projects in the latter two groups relate to priority sectors. The thrust this year will thus need to be on these projects if the investment targets in FY2012-13 are to be reached not only in the public sector, but also in the private sector since a large of the investment here depended on public sector investment in infrastructure particularly in power, energy, transport and communication.

Raising public investment's share in ADP from 5.9 per cent in FY2011-12 to 6.9 per cent in FY2012-13 and that of the private sector from 19.1 per cent in FY2011-12 to 22.7 per cent in FY2012-13 will need exceptional improvement in terms of both public sector performance and private sector inducement. One key factor here will be attaining the targets for the power and energy sectors.

Achieving the targets for power and energy sectors in FY2012-13 will be crucially dependent on the government's ability to sustain the burden of subsidy in the economy. It is not clear how the 10 thousand crore taka spent on subsidy in FY2011-12, that was supposed to be shifted to and accommodated within FY2012-13 budget, has been accounted for. The movement of fertiliser prices in the global market indicate that either the government will have to go for significant raise in fertiliser prices to limit subsidy expenditure to the budgetary target of 6 thousand crore, or the actual subsidy requirement will end up to be significantly higher that the budgeted amount. With regard to the fuel subsidy, the vicious cycle of higher import of fuel for quick rental, subsidised sale of fuel, subsidised sale of fuel-generated power and the increasing subsidy burden in the economy, the phasing out of furnace-diesel driven power generation will need to be ensured on an urgent basis. From a policy of adjusting energy prices to deal with the rising subsidy burden in the economy the government will need to go for initiatives to reduce the cost of energy production to adjust the subsidies. However, the economics of imported coal-based power generation in absence of a medium to long run plan for production and use of domestic coal, remains suspect. Finalisation of coal policy and necessary steps to exploit and use national coal reserves should be seen as a priority task since it is evident that it was the energy sector that has perhaps single-handedly undermined the macroeconomic management in FY2011-12. If the global fuel price registers some decline in the coming months, we will enjoy some respite, but this should not deter us from addressing the structural and long term issues.

The fiscal proposals indicate an effort to raise revenue although it is not clear whether the new tax measures proposed (mainly in the form of imposing and raising supplementary duties) were examined from the perspective of their impact and implications for domestic industries and strategic support designed for particular industries. A number of fiscal proposals including reductions in import duties relating to pharmaceuticals, SMEs, ICT, EPZs etc. will hopefully have the desired positive impact. A number of institutional support initiatives to strengthen human resource capacity and technological capabilities of the NBR will contribute towards more effective tax efforts if implemented according to the envisaged plan.

Domestic resource mobilisation efforts, particularly through mobilisation of investible resources through the capital market, will likely remain weak for some time till the time some of the initiatives being considered start to bear fruit. Failure of the government to follow-up on the investigation report pertaining to the 2010 capital market scam and the delay in taking initiatives towards enactment of financial reporting act and demutualisation of the capital market are not likely to be helpful. Evidently, the SEC is in the process of taking a number of important steps towards good governance in the capital market. One only hopes that these steps will restore confidence in the market and the market will play its role as an important avenue to mobilise equity funds for investment.

The gradual decline in the share of allocation for the health and education sectors in FY2012-13 budget should remain a concern. Whilst allocations in monetary terms have somewhat increased, inflation-accounted figures would actually show stagnating trends in real terms. If considered in conjunction with allocation for social safety net, which has experienced some decline in terms of both its share in total allocation and GDP, there is an apprehension that the budget had to compromise social welfare aspects of allocations because of the increasing burden of public services related expenditures including for debt servicing, subsidy and account of salaries and allowances, share of which has been on the rise in recent years. A significant improvement in the quality of public service delivery system will be needed if the adverse implications of the decreased share of allocations for these important sectors in the GDP are to be mitigated. Raising efficacy of these allocations will need concerted efforts to reduce leakage and wastage. Local government institutions will need to be closely associated with the delivery of these services to ensure this.

Good governance: key to good implementation
It is good to see that in the budget document for FY2012-13 the Finance Minister has devoted a separate section on the policy initiatives and reforms that the government has undertaken over the past three years. There is a need to demonstrate that the government means business when it talks about the fight against corruption, lack of transparency and accountability and mal-governance. Contradictory signals such as adherence to principles of good governance and allowing whitening of black money will only undermine the effort of the government in this regard. Initiatives towards good governance ought to be seen as both good economics and good politics. Indeed, achieving the targets set out in FY2012-13 budget will hinge critically on the government's ability to undertake the second generation reforms targeted towards good governance, raising efficacy of the institutions and qualitative improvement in the public delivery system. Urgent attention will be needed to address some of the key reforms including those involving public expenditure review, civil service, strengthening of local government institutions and alleviating corruption if the desired results are to be attained. Moreover, since the budget for FY2012-13 will be implemented at a time when the global economy will continue to face increasing challenges, particularly because of the emergent debt crisis in the euro-zone, prudent management of domestic economy will be all the more necessary. In the past, the Bangladesh economy has been able to demonstrate exceptional resilience in the face of formidable challenges. An ability to ensure macroeconomic stability which is the key to sustained growth has been a hallmark of this experience. In the 1980s the challenge before Bangladesh was to translate macroeconomic stability into higher growth. Over the subsequent period, Bangladesh had indeed been able to attain growth with stability. However, there is perhaps a consensus that this record has come under some threat in the FY2011-12 period. FY2012-13 must be seen as an opportunity to correct this state of affairs by restoring the soundness of the macroeconomic fundamentals through accelerating the pace of growth by maintaining macroeconomic stability. This will test the mettle of both policymakers and policymaking in Bangladesh in FY2012-13.

Professor Mustafizur Rahman is the Executive Director, Centre for Policy Dialogue (CPD), Dhaka.

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