Although the nature has been quite miser in pouring monsoon rain this year, the same cannot be said of the budget season. Though shortened for obvious reason including the Eid festival, Bangladesh has been witnessing quality budget discussions in many spheres. Academic institutions, think-tanks, NGOs, politicians, civic activists and, of course, the hyper-active ‘talk-show participants’ have been providing their wise views relentlessly. This time, thanks to the participation of BNP MPs, the parliament is also experiencing heated debate on budget in its floor. The speaker took an added initiative of allowing a Budget Helpdesk to operate within the Parliament to help the MPs get relevant data on allocations and expenditures for making informed debate on budget.
It may be noted here that Unnayan Shamannay along with Budget Management Unit (BAMU) has been providing this information service to the MPs for quite some years.I must thank Honourable Speaker and her team for appreciating the value of this Helpdesk in facilitating continuation of this service. This Helpdesk has, indeed, been strengthening the capacity of our Members of Parliament in making the budgetary debate well-informed and focused. Surely, this is helping the lawmakers to contribute deeply in strengthening the base for economic democracy which has been flourishing despite some limitations in our political democracy.
The participation of non-members of the parliament in various academic and civil society forums has been further improving the quality of our budget discussions. I am sure our new generation of MPs will be even more focused on the floor of the Parliament while discussing budget if they keep their eyes and ears open to these discussions taking place outside the parliament including social and other forms of media. Given this perspective, let’s now focus on the pros and cons of this year’s budget.
This year’s presentation of budget was jointly made by the new Finance Minister and Prime Minister. Honourable Prime Minister demonstrated her usual compassionate support to her cabinet colleague who was struggling to make the budget presentation due to his illness. She came forward to finish the job like a captain of a cricket team. Also in her post-budget press conference the Premier reconfirmed her firm determination to change fortune of the citizens through effective measures and worthwhile fiscal and monetary policies.
No doubt the proposed budged is inclusive and feasible if the government successfully can implement the budget proposals in full earnest. Indeed. The vision for a fast moving Bangladesh has been well set in the budget. The challenge remains how well we can ensure the quality implementation of that vision. She is, no doubt, setting the tone. The outcome will depend on how other members of her team play their tunes in making the orchestra soothing to the ears of the people at large. Besides many fiscal proposals, the budget has also proposed some corrective measures for the financial sector of the country.
The Prime Minister evidently made clear the urgency of bringing more people under the tax system. Indeed, our tax net remains so small despite the country has been growing more than six per cent for the last decade or so. In fact, our GDP has been growing more than eight per cent for the last two fiscal years, the highest in the Asia Pacific region according to ADB. Besides, she has been equally mindful about the on-going debate on the banking sector. Her government’s budget document clearly acknowledges the problems prevailing in the financial sector and hence proposes a number of corrective measures including some prudent reforms.
Given the growing level of gross non-performing loans (not necessarily net NPL which is around 2 per cent as against 5 per cent in neighbouring India) the budget document proposes reforming the Bank Company Act, Insolvency and Bankruptcy Acts to bring order in the banking sector. Surely, if these reforms can be implemented in right earnest, the wilful defaulters will face the music in due course. The support from the judiciary is also badly needed for early disposal of the cases for which a huge amount of loans has been stuck in the system. The proactive judiciary can certainly help improve the state of the affairs in the field of non-performing asset management in the banking sector.The system must first recognise the existing problem and make necessary disclosure for addressing it. The large borrowers should not be allowed to take the banking sector for a ride and stand on the way of the nation’s upbeat journey of faster growth. They too must take the larger pains if they have messed up with large loans, particularly in terms of trade finance which has gone sour by 28 per cent. However, the media and the civic activists should also remain careful about the danger of creating a panic in the financial sector by overdoing their activism. I am sure they are all aware of the fact that this is a highly sensitive sector which thrives on people’s confidence. None should dent that knowingly or unknowingly.
The business environment depends a lot on a stable financial sector. We have managed this sector so well during the difficult days of global financial crisis. Both the interest and inflation rates were falling and exchange rate remained stable against the backdrop of rising inflow of remittances, foreign private loans and exports. The foreign exchange reserve went up by five times to 32 billion US dollars in just seven years (2009-2016) providing better signal to the foreign direct investors and international credit rating agencies.
I must express my gratefulness to the government for not interfering in the operational autonomy of the central bank which could pursue its monetary policy quite independently. It could for that matter create new credit for productive investment following financial inclusion strategy which has been applauded by the UN agencies and international financial agencies. There was no talk of liquidity crunch or foreign exchange instability during those years. I will, therefore, urge upon the Ministry of Finance to further empower the central bank to address the malaise which has cropped up in the financial sector rather than going for a Banking Commission which will only delay the process of addressing the problem.
Similarly, the central bank should be left alone in addressing the issue of lowering the rate of interest which has a lot of ammunitions in its armour. Let the central bank act judiciously given its mandate. Knowing fully that market may not have soul, the central bank should still try to activate the market mechanism based on supply and demand situations of the available loanable funds. If needed, it can lower its bank rate to provide a few more lines of refinances to selected sectors that are productive and inclusive.
The central bankers and the bankers know their businesses pretty well. The government should rather help them operate freely within their mandates without any undue interference both from the vested quarters and the bureaucracy. There is no need to reinvent wheels when there is an impeccable record of our financial sector doing so well during global financial crisis. That does not mean that there were no problems in the sector. Surely, irregularities cropped up. Then the central bank acted and brought back order in the sector. Indeed, there are many fraudsters in the guise of loan defaulters. These need to be treated as such by the law and order agencies. If pursued, this strategy will certainly restore confidence in the banking sector which is so badly needed for supporting our ambitious inclusive growth strategy.
The Stock Market can play a significant role in fostering economic growth as well. Unfortunately, our capital market could not rise up to the occasion and provide long term credit to our capital-hungry entrepreneurs. The regulatory environment is still unsatisfactory. The governance system and accountability of the capital market regulator have to be significantly improved to enhance confidence in this market. Both individual and institutional investors deserve to be supported by the regulators. Time has come to instil more confidence in the minds of both groups of investors.
In the proposed budget Finance Minister discourages companies to provide bonus share with a hope that it will attract micro investors for the market. But several sources said that this new proposal will hinder capital development of enlisted companies. The proposed tax on stocks and retained earnings of the listed companies may backfire. This proposal needs serious scrutiny and reconsideration before finalising the budget. We are getting the impression that this will be revised. If this happens the institutional listed companies will get moral boost.
The government can also think about creating a ‘Market Stabilisation Fund’ to face the shock of stock market disaster. Moreover, incentivizing the green bond issuance by local government bodies and the government is long overdue. The bond market environment deserves to be improved for long term funding arrangement for the investors. The universal pension fund could yet be another source of long tenured funding in addition to providing social protection to workers in the private and informal sectors.
The proposed budget also reflects several issues that Awami League mentioned in its election manifesto. For example, education sector will get 15.2 per cent in proposed budget. Because of the commitment to ensure education for all, the government has tried to increase allocation for this sector. As per the international best practice, allocation for the education sector should be 4 per cent of total GDP. In proposed budget it is around 3 per cent (that too including the technology budget). When 63 per cent of the people think education budget should get the first priority, we could do more in this budget as well. Skill development support is yet another area of attention which is badly needed. Creation of BDT 100 crore start-up fund will definitely attract attention of young entrepreneurs and help them create new employment for others. Though small, this deserves to be monitored well so that we can have a replicable model at the end of the day.
Health sector gets 4.9 per cent and it is nearly one per cent of GDP. Allocation for the health sector should be increased in order to ensure healthcare facilities for all citizens. Expense for healthcare is increasing day by day and people generally pay two-thirds of it from their pocket. More allocation means more people will get health-related services.
The proposed budget desires to promote crop insurance on a test basis. After the test trial, we have to adopt marketed solution. Given the chaos in paddy price seen recently, the government should think about institutionalising an Agricultural Price Commission as in India to address this issue. Moreover, the farmers deserve more support in making their transition to commercial agriculture.
The government allocated 14 per cent for social safety net programme. While this is a welcome move, efforts need to be made to reduce inclusion error in the system by introducing biometric digital identification of the beneficiaries. Community assessment of the deserving beneficiaries could further improve the selection process.
No doubt, the proposed budget is inclusive and investment friendly. Besides, we see a balance between earnings and expenses of the government. Yet, we have to further strengthen our drive to increase investment and to create more employment. For that matter, we still have to work harder in increasing the revenue which is one of the lowest in the region.
For the successful implementation of budget we have to focus on the following points:
The government should carefully implement new VAT law so that it does not create pressure on the masses.
The government should review tax-free income threshold and align it with inflation adjustment.
Increased tax on saving documents may affect the pension holders and the low income holders. This deserves to be revisited.
Investing ‘irregular’ money in industrial sector can create employment and can stop capital flight. But the government should tackle this issue carefully so that no one faces unnecessary harassment by multiple agencies. However, the government must be prepared for criticism from different quarters on ethical ground. Some MPs have already raised their voices against this proposal. The international anti-money laundering agencies may also raise their eyebrows.
Tax on imported smart phones can protect manufacturers who produce/assemble phones locally. Yet, the lower cost smart phones used by low-income groups may be spared of this additional tax burden. But tax on SIM card and talk time should be waived without any hesitation.
In Bangladesh, ride sharing service is comparatively a new concept. VAT on this kind of service will increase cost. It may hamper the growth of this tech-oriented business in the country. The same is the truth for other e-commerce businesses.
On the whole, this year’s budget appears to be pragmatic and if some of the anomalies pointed out so far are addressed prudently, this will further support our journey of faster and yet inclusive development.
The author is an eminent economist and former Governor of Bangladesh Bank. He can be reached at: [email protected]