Marrying ambition with reality

The task facing the implementation of the FY24 budget is not to get the size spent. Imperative going forward is to contain operating expenses, including subsidies; increase spending efficiency in the public investment programme; and widen social assistance while reaching better the poor and the vulnerable. The budget is too large relative to the implementation capacity and the state of the economy. Subsidies and Annual Development Programme expenditures fall short on the results intended such as export diversification or domestic job creation. Social interventions fall short on proportionality to fit the economic stress faced by the nonelites.

The fiscal corridor for meandering in the Tk7.6 lakh crore FY24 government expenditure target is narrow. It is bounded by a large legacy footprint and sticky policy choices. The government's operating expenses are projected to increase to Tk4.75 lakh crore, close to the Tk5 lakh crore revenue target. There is little, if any in reality, operating surplus to cushion a large bucket of all the other recurrent and capital expenditures. Employee-related expenses, interests, and subsidies constitute 57% of the budgeted operating expenditure. 

The room for manoeuvres seeking austerity is in subsidies and the Annual Development Programme (ADP). A revisit from a results perspective could help nail rationalisation opportunities as would expenditure on line items classified as "social protection". Implementation bottlenecks even drag public investments backed by adequate funding. Expenditures on social assistance are subject to accounting games, targeting errors and delivery malfunctions. Education attracts significant construction centred allocation while allocation to health is caged in the mutually reinforcing web of the inability to spend low budgetary allocation.

Are subsidies delivering the intended results?

The budget proposes nearly Tk1 lakh crore in subsidy and incentives in FY24, embedding a 7.1% increase relative to the upwardly revised FY23 budget target from Tk82,745 crore to Tk93,000 lakh crore. Similar revisions are likely in FY24. There is reportedly an outstanding subsidy of around Tk60,000 crore in the power and agriculture sectors carried over to FY24. These are indicative of cracks in the management of subsidies. 

Energy subsidies do not connect with energy provision well enough. Unpaid bills have disrupted energy supply. Despite raising gas, fuel, and electricity prices, the allocation for power and energy subsidies is significantly higher than FY23. The power sector accounts for the bulk of the increase from the current financial year, yet allegedly short of the amount needed to settle the previous year's arrears. The Rampal Power Plant and the Payra Power Plant are shut due to a shortage of coal arising out of non-payment for coal cargo. The Bangladesh Petroleum Corporation has reportedly alerted the Energy Division about drying oil supply due to non-payment of fuel oil import arrears.

Export and remittance subsidies do not score any better. Export diversification remains a pie in the sky despite a plethora of subsidies to non-garment products. The share of exports in GDP has declined from 16.7% in FY11 to 13.4% in FY23. Even though subsidies have made little difference, they survive because of unfettered elite support. The remittance subsidy has benefited the remittance recipients for sure but failed miserably in attracting remittances to the formal channels. Having been in place for several years now, the remittance subsidy has gained deep roots in popular psyche notwithstanding nearly 26% increases in taka-dollar rate received by the remitters since the remittance subsidy came in place. The promise of subsidy diverting remittances to formal channels has eluded so far.

The FY24 budget does not go beyond baby steps in subsidy rationalisation. Some marginal changes are proposed such as stricter regulations regarding the value-addition based eligibility criteria for cash incentives provided to garment exporters who rely on materials supplied by their buyers. Policies relating to all other export subsidies, remittances, agriculture mechanisation, fertiliser and so on remain without question.

Mega aspirations amidst mega financing constraints

The government is aiming big. The Tk2.63 lakh crore ADP is 15.6% higher relative to the revised FY23 ADP, well ahead of the projected 6% rate of inflation. Deferring low-priority projects has faltered. There are well over a thousand investment projects with nearly another thousand awaiting approval during the year. The rate of new project entries far outweigh the successful exits leading to build up of legacies with vested interests.

Infrastructure is the highlight of ADP allocations, as usual. Transport, power, and energy dominate. The rest such as housing, education, health also has large infrastructure content. The highest 10 allocation recipient ministries and divisions are ones intensive in infrastructure provision. Mega projects remain the preferred strategy. The top ten infrastructure projects together account for Tk600.5 billion, equivalent to 22.8% of the total ADP, spent on power plants, expressways, rail tracks, airports, and mass rapid transit. 

Prioritising high impact work in the progress of transport and energy infrastructure is a no brainer. So is getting them to cross the last mile. Financing constraints arising from dollar shortage and high inflation will limit adding more than completing if the budget constraint is not softened by toxic borrowing from the Bangladesh Bank. The FY24 budget has offered little to change the view that ADP continues to have too many projects for too long costing too much. 

There are opportunities to cut fat so that the promising legacies move forward without compressing government spending on higher order priorities. Even beyond mega projects, there is plenty of room for cutting the lower category projects fully contingent on financing from domestic sources. The size of the ADP coincidentally equals the size of the projected budget deficit (Tk2.6 lakh crore). The coincidence is insightful on the size of the financing needed beyond revenue mobilisation at a time when financing costs are higher and access tighter.

In the eyes of the beholder

Carefully chosen ADP expenditure cuts will need to generate significant savings to accommodate expanded expenditure needs for social assistance. High inflation, lower real wages, and decreased employment have created additional demand for social assistance. The reported size of the social protection budget covers expenditures remotely connected with the essence of social protection leaving judgement malleable to the eye of the beholder. 

The size of expenditures intended to reach the poor and the vulnerable identified on the basis of correlates such as land, gender, age, location and so on are at best half the reported size of Tk1.25 lakh crore in the FY24 budget (equivalent to 2.5% of the projected FY24 nominal GDP). The list of interventions covered by this amount ranges between cash transfers to the old poor and distressed mothers to food security, employment generation, subsidies to marginal farmers, micro-credit, education stipends to public pensions, subsidies to NSC interests, spending on capacity development projects and Various Funds and Programmes dominated by allocation to the Finance Division for dealing with health, economic and natural shocks. Spending on cash transfer, food security, employment generation and primary stipends constitute 1.3% of GDP. This falls to 0.7% when public pension is excluded. 

Increases in allocation for social security programmes such as unconditional cash transfers, which directly benefit the poor, look pretty in percentages (10 to 25%) and paltry in absolute purchasing power (Tk50 to Tk100 increase per month per beneficiary after seven years). The coverage of the social safety net for the elderly and widows is projected to increase by one lakh each. The proposal to for a bigger increase in the number of beneficiaries under all the schemes (old age allowance, widow allowance, disabled student stipend, and disability allowance) requiring an additional expenditure of Tk3,445 crore was rejected on grounds that the number of poor has decreased as reported by BBS's 2022 HIES data. As if the poor disappeared, not to speak of the vast size of the vulnerable population.

There is progress but still too much reliance on food-based response to crisis. About one crore families are provided food items at subsidised prices through the Trading Corporation of Bangladesh (TCB) to help cope against inflation. There is an allocation of Tk7,000 crore in the FY24 budget. The modes of delivering emergency social assistance have lagged changes in their ecosystem. Targeted cash support disbursed through MFS in delivering assistance in response to the pandemic reached the "listed poor" without any pilferage or non-monetary cost such as queuing. Education stipends are disbursed online through mobile financial services without any noise of hassle. Yet food-based interventions are always the instrument of first resort despite widespread allegations of pilferage, patronization, and mismanagement.

Out of the deep freeze reforms

Spending must focus on what is essential under the prevailing state of the economy. Spending on infrastructure is needed to get the economy back on track. So are spending on relief for households and repair for small businesses. Relief must focus on parts of the polity hurting deeply. 

Resources needed for boosting infrastructure spending have to be found from novel sources such as the state-owned enterprises, including the options of liquidation and divestiture. The government is nursing eternally sick industries, including several in the private sector. What is holding the pursuit of SOE divestiture and liquidation in the deep freezer? Reforming without prompting subterfuge reaction requires much more shared and tested thought going into policy determination and a lot less of my way or the highway. Making fundamental processes better would drive the economy faster and surer than mindless pursuit of fiscal expansion.

Zahid Hussain is a former lead economist of the World Bank Dhaka office.