Why is the government increasing subsidies at a time when it needs to preserve fiscal space to respond to the adverse impact of the coronavirus?
The Bangladesh Bank (BB) has extended the 2 percent cash incentive on remittance to Bangladeshis working at the United Nations, other global agencies abroad, and shipping and airline companies owned by Bangladeshi or foreigners (but not the Bangladesh government). Recall that the government introduced a 2 percent subsidy on remittances, as traditionally understood meaning remittances from migrant Bangladeshi workers abroad, with the FY20 budget.
This new BB circular is a further extension of the government subsidy scheme to include the type of Bangladeshi workers mentioned above who will be entitled to get the cash subsidy.
It appears increasingly that the only objective of the 2 percent cash subsidy policy is to encourage the remittance of money earned by Bangladeshis abroad to Bangladesh through "legal" channels.
The question then is why not extend it to include all transfers of foreign exchange from Bangladeshis abroad to Bangladesh through legal channels? Why single out UN, global agencies, shipping and airline companies? Also, why limit it to labor income only? There is no subsidy on receipt from sale of services nor is there any subsidy on receipts of dividend and interest income from abroad.
Why not extend it to firms too as long as it is on interest and dividend income and not merchandize export receipts which already are subsidized.
In fact, if you want to carry this to its logical conclusion, you could take a step further and propose a generalized cash subsidy for transfers of foreign exchange by Bangladeshis from abroad to Bangladesh through legal channels irrespective of whether it is labor income, capital income, capital receipts from sale of properties abroad and even repatriation of foreign from retentions quotas allowed the exporters.
After all, the objective is to maximize transfer of foreign exchange from Bangladeshis to Bangladesh through legal channels. So, why not bring them all under a uniform subsidy umbrella. This will greatly simplify the subsidy disbursement process by the banks, the BB and the Finance Ministry officials who otherwise will need to verify the source of the cash transfer to make sure they comply with the eligibility criteria.
One can even be more creative. In the early 1970s James Tobin, an influential American macroeconomist and a Nobel laureate in economics, proposed what is known as the "Tobin tax". Prompted by volatile floating exchange rates, Tobin proposed to reduce this volatility with a small tax levied on every amount exchanged from one currency into another. He wanted to discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies. Tobin wanted to "throw sand in the wheels" of global finance with a simple tax that would be small enough to make short-term purely financial movements uneconomical without being a burden on trade.
What we could introduce is a subsidy on every amount transferred from abroad to Bangladesh through legal channels except, say, FDI and external borrowing. This would be a grease in the wheels of transferring money from abroad through legal channels with a burden on the national budget that lacks any prima facie welfare rationale.
What exactly the social benefit is from using public money to encourage remittance through legal channels in a country which has over $32 billion in gross foreign exchange reserves? Clearly, it is not a positive externality since the recipients here fully capture the benefits from the transfer and there is no other direct benefit to anyone else from the money they have received. Had the subsidy been limited to remittances sent to families living under the national poverty line, one could find an equity argument. That is not necessarily the case either. In fact, all survey evidence show that remittance constitute a tiny fraction of the income of the population below the poverty line.
Last but not the least, why is the government increasing subsidies at a time when it needs to preserve fiscal space to respond to the adverse impact of the coronavirus? Already, fiscal deficit has ballooned and government borrowing from domestic sources is well on track to exceeding the budget target.