The fiscal framework will not hold

The major problem of this proposed budget is its fiscal framework. There are both accounting and programming problems. My general notion is that the government will need to reconsider the fiscal targets within the next three to six months. Realities on the ground – national and global – will make these numbers obsolete. 

The accounting problem is created by use of inflated (yet to be measured) year closing benchmark numbers for 2019-20. This has resulted into unrealistic implicit growth figures for revenue collection and partly for public expenditures. The NBR has to increase its collection by one and a half times in the next year. Indeed, we may very record a higher fiscal deficit figure.

The total revenue-GDP ratio target is set at 12.4 percent of the GDP for the elapsing year. But it possibly not go beyond 11 percent of GDP. The tax revenue is said to be 11 percent of GDP, which will be 10 percent. So there is a one to two percentage points of GDP mismatch across the fiscal span. If the propensity to fulfill your revenue is lower than your propensity to fulfill your expenditure target than you will end up with a higher budget deficit.

The other problem of the fiscal framework is financing of deficit.

It projects that 3.5 percent of the deficit will come from the domestic sources which is more than 55 percent of the total. And 47 percent of the total fiscal deficit will be funded by bank borrowing. The amount of credit facilities that we have promised in stimulus packages and the amount of borrowing the government has been making – they are not consistent. This is what is called the mismatch between the fiscal and the monetary policy.

If you look at the credit target for the next fiscal year for the private sector, which is 14.8 percent (up from current 9 percent), it becomes even clearer. There is a lack of correspondence between the fiscal and monetary policies in this case.

Funding from the foreign sources has to be driven by the international financial institutions as most countries of origins of the bilateral providers are also under the pandemic. They themselves are busy with developing domestic stimulus and bail out packages. But Bangladesh needs to make a special effort to use the foreign aid in the pipeline currently.

The figures on the state of private sector investment and its financing itself is in a great confusion. We need to read the budget document along with two other documents. One is the closing assessment of the 7th five year plan and the other is the three years macroeconomic framework.

The assessment of the 7FYP shows that we have failed miserably in reach our target on private sector (along with tax collection and public expenditure).There is a table in the medium term macro framework which says that this year's private investment is 12.7 as a share of GDP. And it will double in the next year to 25.3 percent.

This would also bring us to the GDP growth estimate of 5.2 per cent for 2019-20. Interestingly this number this year comes from the Ministry of Finance, not from the Ministry of Planning as per tradition.

So, the whole point I am making is that all these numbers in the fiscal framework have been derived exactly not in a very professional way. This may undermine the effectiveness of the good policy promises that the government has made.

I am very supportive of the four-point medium-term strategic approach - enhancing of public expenditure, expanding the safety net, expansion of the credit flexibility, and liquidity injection. These are all the right approaches. But there is a structural mismatch between the policies and the fiscal framework proposed.

And all that has been said about fighting coronavirus essentially resemble what has been said earlier or the extension of ongoing programmes. Allocation priorities have been changed. At the margin.

The budget lacks recognition of pandemic realities, creativity of fiscal framing and imaginative programming.

So my general point is that we have been given a very ordinary budget in an extraordinary time.