Budget Implementation and Private Investment

Bangladesh’s finance minister has presented a budget with a total expenditure outlay of Tk9 lakh 38 thousand crore and estimated revenue collection of Tk6 lakh 95 thousand crore, requiring a deficit of Tk2 lakh 43 thousand crore. The overall budget deficit is estimated at 26%, which makes 6.5% of GDP. In terms of volume, the budget seems enormous with a large-scale deficit. A large budget with a sizeable deficit is not new in our country, because historically every government has presented a large budget with a big deficit. This trend is found not only in our country but also in many developed and developing countries, which prepare large budgets with deficits. However, the budget in our country bears some special features. Budgetary allocation increases at a certain rate every year, and a large budget with a sizeable deficit is undertaken even though the previous budget has not been fully implemented. 

A budget itself is a sort of forecast, so it is hardly implemented in full. However, variance between budgetary allocation and implementation is the most crucial part of any budget, as implementation with the lowest variance produces the most desired economic benefit, while wide variance does not produce good economic benefit in the country. A smaller budget with the highest implementation rate is much better than a large budget with poor implementation. For example, a budget containing a total outlay of Tk10 lakh crore with sixty per cent implementation will contribute Tk6 lakh crore to the economy. On the other hand, if a budget of a total outlay of Tk8 crore is ninety per cent implemented, it will contribute Tk7 lakh 20 thousand to the economy. So, because of a higher implementation rate, a smaller budget can produce better economic benefit in the economy. Now a question arises whether this strategic advantage has been taken into consideration while preparing the budget in our country, the answer to which is not known to us.

In the proposed budget, the deficit is estimated to be Tk2 lakh 43 thousand crore. But there is a difference between the stated deficit and the effective deficit. Our experience shows that the effective deficit is always higher than the stated deficit. Revenue collection has been estimated at Tk6 lakh 95 thousand crore, but historical data reveals that the revenue target has hardly been achieved, and there is always a significant shortfall. As learnt from the newspaper report, the revenue shortfall has already accumulated over Tk1 lakh crore in the current fiscal year. So, there is no hope of increasing revenue collection in the coming fiscal year in the present situation. Economic uncertainty has been continuing in the domestic and international arenas. Businesses and investments have been passing through challenges without a sign of improvement. There is no employment generation; rather, people are continuously becoming unemployed. Common people are the worst sufferers, with their daily livelihood hindered due to price hikes and income loss. Even import-export volume has not been rising. With all these slow indicators, there is no scope of achieving the revenue target, so a revenue shortfall of Tk150 billion to Tk200 billion is not an unlikely situation. If this assumption holds true, an effective budget deficit may stand at Tk3 lakh 50 thousand crore as opposed to the stated deficit of Tk2 lakh 43 thousand crore.

How this massive deficit will be financed is the most concerning issue. The budget has estimated to mobilise Tk116 crore from foreign sources and Tk112 crore from bank borrowing. Like all previous budgets, nothing has been mentioned about financing a revenue shortfall. The success of implementation depends on how securing finance for a budget deficit works. If financing cannot be arranged, there will be one problem, while a different type of challenge will emerge if financing can be arranged at any cost. In the former situation, the budget cannot be fully implemented, and meeting regular government expenses as well as operational costs will only be part of the implementation. Consequently, budgetary goals, viz., rising investment, employment generation, rising GDP, and controlling inflation, cannot be achieved. In the latter situation, if the government tries to secure financing for the deficit at any cost, the scope of private investment may be the worst hit.

Budgets estimate mobilising 116 crore from a foreign source, which in the present volatile situation would be difficult, and there is a likely possibility of a big chunk of shortfall. The anticipated shortfall in revenue collection is another area. So, the bank is the only and last resort for the government to mobilise finance for the deficit. If the effective deficit reaches Tk3 lakh crore, out of which Tk2 lakh 50 thousand crore is required to be arranged from a bank loan, there will be tremendous pressure on the country's banking sector. Firstly, the dilapidated condition in the banking sector does not afford providing enormous loans to the government. Secondly, if banks somehow manage this amount of loan for the government, the private sector investment will be badly impacted. The banks will not have available loanable funds to extend to the private sector.

In our country’s private sector, investment significantly depends on bank loans, as other sources of funds are either not properly developed or limited. If private investment is hindered, the economy will not get momentum; employment will not be generated; business turnover will remain low, adversely impacting the government revenue collection; and finally, the country’s GDP will not rise at the expected level. Although the substitute for a bank loan for the government deficit budget is very limited, the suitable substitute should be explored; otherwise, budget implementation and private investment cannot be well balanced. There is a close correlation between budget implementation and private sector investment, so an appropriate balance should be maintained between these two situations to maximise budgetary goals. 

_____________________________________

The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. He can be reached at [email protected]