Naeem Mohaiemen and Jyoti Rahman

Published in the Daily Star on 27 December 2009.

Analysts celebrate remittance growth curves in seminars, but we need to unpack these shiny numbers. The Ministry of Expatriates’ Welfare and Overseas Employment publishes the total number of migrant workers by year, but has no timely statistics on returns which, by evidence of our airports, is large. So we have no calculation of how many are coming back due to deportation or job loss.

AIR Arabia is a low-cost carrier eating into Emirates and Etihad’s dominance of the high-volume Bangladesh-Middle East route. On a recent Arabia flight, we noticed something odd: instead of struggling to carry heavy bags filled with gifts, many passengers were empty-handed and wearing sandals.

When immigration forms were handed out, the blue-collar workers asked the literate passengers to help fill out forms (a familiar experience on Middle East flights). At that moment, we noticed that these men had no passports, only a form from the Bangladeshi Embassy that was a “replacement for lost passport.” Nestled within that form, the “last place of domicile” was listed as “Abu Dhabi jail.”

It emerged, through halting conversations, that there were over a hundred deportees on the flight, all had been arrested after they were fired from their jobs, which made immigration papers invalid. This is where the low-cost carrier comes in as the cheapest option for deportation, at the migrants’ own expense. What was the positive, active role of the Bangladeshi embassy during their ordeal in jail, and during deportation? We’ll leave the workers’ reply it to the reader’s imagination.

Before parsing this anecdote, let’s first telescope out to macro-statistics. At the beginning of the recession in September 2008, remittances were considered to be a major channel where Bangladesh would be affected. But a year on, remittance flows into Bangladesh have shown remarkable, counter-intuitive resilience.

But there are key differences according to source countries. Middle East accounts for three-fifths of our remittances, with Saudi Arabia alone accounting for nearly a third. Remittances from this region fell by 4% in October 2008, but then continued to grow to be about 15% higher in the year ending September 2009.

Contrast this with the US and UK (collectively another fifth of remittances). In September 2009, remittances from the US were about 9% lower than a year ago, while those from the UK were down 1%. During the nadir of the recession in these countries, remittances fell by 13% and 27%, respectively. So how did migrant workers in the Middle East keep remittances flowing, when those in the US and UK dropped?

Can the Air Arabia deportees illuminate one piece of this puzzle? According to their stories, since 2008, as mega construction projects in the Middle East have gone belly-up (something that will accelerate after Dubai World’s recent debt default), many construction workers — “slaves building monuments,” according to Ghaith Abdul-Ahad in The Guardian — have been fired immediately.

As soon as a worker is fired, he is “out of status”/undocumented. But most choose not to return home, since a family, and even a portion of a village, is depending on their income. Instead, they find another worksite that will hire undocumented workers, of course for a fraction of the legal pay. The calculation is simple: stay in the country and continue to work, knowing that you will eventually get caught.

When they do get apprehended (one deportee said he was arrested when he stepped outside for a cigarette break), they are sent to prison and eventually deported, with no chance of recovering their possessions and savings. Faced with layoffs, or at least diminished work opportunities, and eventual loss of any money earned, these workers told us that they send back all income as fast as possible through formal channels and hoondi.

In Yasmine Kabir’s trenchant My Migrant Soul, the narrative uses the diary of a Bangladeshi worker who died while in custody in Malaysia. More recently, there are reports that when migrant workers die in workplace accidents, they are sometimes buried immediately and nothing is reported to the families. Malaysia has repeatedly had crises with stranded Bangladeshi workers, who arrive and find their construction jobs have disappeared. Yet, paradoxically, there was a jump in remittance from Malaysia ($20m in 2007, $324m in nine months of 2009), during this same period.

Even prior to the recession, a key difference between workers going to the Middle East/Asia and the West has been that the latter had one layer of middle class professionals, or at least middle-class aspirations. More importantly, migrants to America/Europe have a path to citizenship in their new homes, something completely absent in the Middle East/Asia. Thus, migrants to the West are more likely to spend and invest in their adopted countries. The working class migrant in the Middle East/Asia is always a “guest worker,” and has no choice but to send earnings home.

Analysts celebrate remittance growth curves in seminars, but we need to unpack these shiny numbers. The Ministry of Expatriates’ Welfare and Overseas Employment publishes the total number of migrant workers by year, but has no timely statistics on returns which, by evidence of our airports, is large. So we have no calculation of how many are coming back due to deportation or job loss.

Is a hostile and unstable work environment with no migrant rights and little job security resulting in large remittance flows, since Bangladesh is the only safe destination for blue-collar workers’ earnings? This is not the only explanation for increased remittance flow, but it is certainly one possible factor, along with others that need to be explored. Finally, we need to demand, once again, that the government take real steps to represent and protect the rights of all working class migrants.

Jyoti Rahman
Published by the Daily Star on 13 September 2009.

BETWEEN 1972 and 1990, real (that is, inflation adjusted) per capita income in Bangladesh grew by an annual average of 1.1%. Since 1990, per capita income has grown by 3.4% a year. As a result, the proportion of people living below the poverty line — defined as daily calorie intake of 2122K — fell from 47.5% in 1992 to 40.4% in 2005. Over the same time, the proportion of undernourished people fell from 36% to 27%. In 1990, 26% of Bangladeshis had access to improved sanitation facilities, and only 4% of households had a television set; the proportions rose to 36% and 48% respectively by 2006.

It is clear that something happened in Bangladesh in the early 1990s, and we are better off for it. It is not an exaggeration to say that Saifur Rahman was at the centre of what happened. When one abstracts from the day-to-day politics of sound bites, 24-hour news cycles, and arguments about specific policies, it becomes clear that Saifur Rahman got some big things right that made the statistics cited above possible.

The most important thing he got right was about the supremacy of the market mechanism in allocating resources. It is difficult to imagine today, but three decades ago few people trusted the market mechanism. This was well over a decade before the Singh-Rao reforms in India. The Washington Consensus of liberalisation, deregulation, and privatisation was still years away from being articulated. China was still recovering from the Cultural Revolution. Western powers at that time happily supported generals, regardless of their economic policies, as long as they locked up dangerous communists.

In the 1970s, the natural option for a cunning populist general would have been to embrace some form of “socialism.” And whatever the theoretical merits of socialism, no country in the past six decades has made sustained improvement in living standards relying on socialism as practiced in Bangladesh in the early 1970s. It is our good fortune that Ziaur Rahman listened to a pragmatist accountant’s empirically based arguments.

While economic reform started in the early 1980s, it wasn’t until another decade that the economy accelerated. This was because in the 1980s, under another general and different finance ministers, reforms were piecemeal and haphazard, monetary and fiscal policies were pursued without any coherent framework, and loans were issued on political calculations, not sound finance, leading to debt defaults.

Economic growth picked up only in the early 1990s, when Saifur Rahman again got two important things right. He emphasised macroeconomic stability — steady growth, low inflation, sustainable external deficits. More importantly, he understood the importance of opening the economy to the external world. He undertook a comprehensive liberalisation of the economy in the early 1990s.

As a result, exports and imports both rose sharply relative to GDP. Exporters have been competing in the global market, while importers have been exposing the domestic economy to competition from abroad. Increased openness should have improved efficiency at the microeconomic level, which should have translated into faster economic growth at the macroeconomic level.

And that is exactly what happened in Bangladesh. In the 1970s and the 1980s, multi-factor productivity — the efficiency with which capital and labour were employed in the economy — stagnated or even diminished over time. This changed in the 1990s, with a turnaround in the MFP growth underscoring the statistics cited in the first paragraph.

Saifur Rahman also understood that in order to invest in human capital, government revenue needed to rise. His solution was to rationalise the tax code, lowering the rate, and broadening the base. The Value Added Tax, introduced in 1991, was a major milestone on this front. However, the task of simplifying the tax code and increasing the tax take remains unfinished and, 18 years later, Bangladesh continues to have the lowest revenue-to-GDP ratio in the region.

Also unfinished — indeed, one might say, not even started — is the task of reducing the bureaucratic burden on private agents, business and consumer alike, that pervades every aspect of life in Bangladesh. It takes eight months to register a property, and nearly four years to enforce a contract in Bangladesh.

Over the past few years, we have heard endlessly about corruption. While the lock-them-up approach to anti-corruption has proved to be a costly failure, it is surprising that no serious effort has been made by any government to cut the red tape.

Did Saifur Rahman not get this? Or did he simply run out of time?

He definitely did not get the importance of rising inflation under his watch. In the middle of this decade, the US dollar depreciated heavily against other floating currencies, including the Indian rupee. Pegged against the dollar, the taka also depreciated against the rupee, setting off a rise in food prices. As the chief macroeconomic manager, Saifur Rahman did not see the link — arguably his biggest failure.

On balance, Saifur Rahman made a difference for the better. His political counterparts — late S.A.M.S. Kibria, Dr. M.K. Alamgir, and the current finance minister — have a broad philosophical consensus on the direction of our development trajectory. In a country beset with polarised politics, this is a great positive.

Jyoti Rahman

Published in the Forum on 6 July 2009.

This piece gives a macroeconomic analysis of the Budget.

On June 11, Mr. A.M.A. Muhith submitted the third Awami League government’s first budget. In the weeks since, the budget has been much parsed and analysed. As such, there may not be much in this piece that is particularly novel.1 A review, nonetheless, is attempted, focussing on three issues.

First discussed are the economic growth projections. Contrary to some commentary that the budget forecasts are “not ambitious enough,” 5.5 percent is, on balance, a prudent growth forecast for 2009-10.

Then the fiscal outlook is discussed. While much is said about the implementation of the government’s development expenditure targets, implementation of its medium term revenue enhancement measures deserves greater attention.

The final section analyses a few medium term growth issues that are alluded to in the budget. How these issues are resolved will perhaps prove lot more important than any specific measures announced on June 11.

A steady boat
Buffeted by a number of shocks — political uncertainty, natural disasters, global commodity price spike, and now the global recession — Bangladesh’s economy has proved surprisingly resilient in recent years, and the budget forecasts only a modest easing in growth in 2009-10 (Chart 1).

On a sectoral basis, agriculture is forecast to contribute about 1 percentage point to forecast growth. Agriculture makes up slightly over a fifth of GDP. To contribute 1 percentage point to 5.5 percent growth, agriculture will need to grow by about 4.8 percent in 2009-10.

Let’s put this in context. Agriculture is a volatile sector, with annual growth in the past couple of decades ranging from 0.3 percent to 7.4 percent. In the past four years, the sector has grown at an annual rate of 4.3 percent, while it grew at 4.9 percent a year under the second Awami League government.

This suggests that a 4.8 percent growth rate for agriculture may not be unreasonable. Of course, there are risks — natural disaster being the most obvious one. The forecast explicitly assumes improved agricultural productivity, diversification of crop production, and improved disaster management capacity.

The industry sector is expected to contribute about 1.75 percentage points to 2009-10 GDP growth. This translates into a forecast of about 5.9 percent growth for the sector, the same rate achieved in 2008-09, but slower than 7.8 percent achieved annually in the past half decade. Indeed, if realised, this will be the most prolonged slowdown in industry growth since the early 1990s.

It’s obvious that the slowdown in the industry sector has its roots in the global recession.2

About three-fifths of the industry sector is manufacturing, which grew by 5.9 percent in 2007-08 — a sharp slowdown from the 8.6 percent a year achieved in the previous half decade. Undoubtedly, through an export slump, it is manufacturing that has borne the brunt of the global recession. But, compared with sharp falls in industrial production witnessed around the world — the biggest contractions since the 1930s in many countries — our manufacturing sector seems to have held up reasonably well.

If the rest of the industry sector (30 percent construction, the rest nearly evenly split between mining and utilities) grows at the average rates recorded in the past two decades, manufacturing will need to grow by about 5 percent for the whole sector to achieve budget forecast. Given the severity of the global recession, risks to the manufacturing sector seem to be firmly weighed to the downside.

On the other hand, there may well be upside to construction, which has grown at 5.7 percent a year since 2006-07, compared with an annual growth of 8.4 percent in the previous decade. The recent construction slowdown has been attributed to political uncertainty and associated low confidence, as well as high costs of building materials. To the extent that both these factors have dissipated, a construction boom may well be on the cards. Construction could get further fillip from various infrastructure investments being unrolled.

Finally, the services sector is forecast to contribute about 2.75 percentage points to economic growth. This translates to an implied sectoral growth forecast of 5.5 percent in 2009-10 — a percentage point slowdown from the average over the past half decade, but on par with what was achieved in the previous half decade.

Retail and wholesale trade, as well as transport and communication services, have driven the services boom during the past half decade. These services, indeed the entire services sector, have benefited from high remittance inflows over this period. Defying expectations, remittance inflows have held up thus far into the recession. While the budget forecasts assume renewed remittance inflows, should remittances dip, the service sectors will be hurt (a remittance slowdown could hurt construction too).

Social services — health, education, community services — have also contributed to the services boom. With a favourable business environment and various government programs supporting them, these services should see robust growth, partly off-setting potential negative impacts of the global recession.

From the GDP (expenditure) perspective, the economic slowdown is driven by an investment downturn. Investment-to-GDP ratio is forecast to dip in 2009-10, implying investment growth will be at half the rate recorded in 2008-09. The forecasted investment slowdown has been questioned by some commentators. However, such a slowdown would hardly be unusual in the current global economic climate.

Possibly more at risk are the export forecasts. Exports are estimated to have grown by 12 percent in 2008-09, down from nearly 16 percent the previous year. Exports are projected to grow by 12.5 percent in 2009-10, and then by 18 percent a year in the following two years. As discussed in the final section below, there is reason to be sceptical about this medium-term outlook for exports.
In summary then, the forecast slowdown in growth in 2009-10 is, on balance, prudent.

There are, of course, risks around this forecast.3 In addition to the global recession, the most significant economy-wide risk to the forecast is perhaps energy shortage. The budget explicitly assumes “increased private sector investment in response to measures to eliminate power and gas shortage…”

This assumption, plus in election pledges for the energy sector, provides benchmarks against which the government’s performance should be assessed.

Enter taxman
A budget deficit of 5 percent of GDP is forecast for 2009-10. To put this in context, the budget deficit is estimated to have been 4.1 percent of GDP in 2008-09, while in the previous year, the army-backed regime presided over a deficit of 5.1 percent of GDP. At 4.7 percent of GDP in 2011-12, the deficit is expected to continue to exceed the government’s target of 4 percent of GDP over the forecasting horizon.

Shafiq Islam/Driknews

Higher development expenditure appears to be the major reason why budget deficit is rising. In 2008-09, development expenditure is estimated to have been 3.7 percent of GDP. This is projected to rise by a percentage point by 2011-12. Non-development expenditure, on the other hand, is expected to dip by 0.4 of a percentage point relative to GDP over the same period.

Much has been said about the failure to implement ambitious budget targets. Particularly, development programs seem to repeatedly miss the target. Two points need to be made here.

First, a major impediment to full implementation of development programs is the lack of local government authority over, and responsibility for, development work.4 The government seems to betray a degree of bipolarity when it comes to local empowerment. On the one hand, lofty promises reiterate its commitment to strong local government. On the other hand, its actions — power grabbing by the MPs in local affairs — belie that commitment. Failure to resolve this internal contradiction will not only affect development expenditure, but in time could also engulf the government in a political crisis.

Second, it was not always the case that development expenditure missed targets. Indeed, under the stewardship of S.A.M.S. Kibria, development programmes were implemented in a better manner than has been the case since.

Moving from implementation to financing, how does the government propose to pay for the additional development expenditure?

Revenues have been marked down in the budget because of slower GDP, imports, and remittance growth. Nonetheless, at around 11.5 percent, revenue-to-GDP ratio is projected to be higher throughout the forecast years than in the recent past — in 2006-07 revenues were only 10.2 percent of GDP.

Again, there are implementation concerns — it’s easier to promise that revenue collection will rise than to implement it. Nonetheless, it is possible to increase revenue collection. Tax revenue relative to GDP has already risen by 1 percentage point since 2006-07. Potentially bigger risks to revenue growth are from slower GDP, import, and remittances growth.

Even if revenue were to grow as forecast, it will still not be enough to arrest the rise in budget deficit. Two-fifths of the deficit is expected to be financed from foreign borrowing in 2009-10, rising to over half by 2011-12. The concern over the foreign borrowing is not so much about the cost of debt-servicing, which appears to be modest by international standards. Rather, it is the strings and conditionalities that may come with the debt that should worry us.

To be sure, conditionalities suggested by donors and international agencies can anchor credibility of commitments to difficult but needed reforms. However, for this to happen, such conditionalities have to be carefully negotiated. And therein lies the test of leadership for the finance minister and his officials.

Should foreign borrowing prove too dear — whether in financial terms or in terms of political economic costs — the deficit will have to be financed from domestic sources. As it is, the budget forecasts that nearly half of the deficit will be financed by bank borrowing in 2009-10. Bangladesh Bank will have to be extremely careful in the coming period about not monetising the deficit, fuelling inflation in the process.

The appointment of someone closely linked to the political side of the ruling party’s election campaign to the governorship of the central bank does not bode well for the autonomy of that institution. Governor Atiur Rahman will have an opportunity to prove the sceptics wrong if he can resist printing money to pay for the debt (as an aside, a more immediate risk of inflation may well be commodity prices, which could start rising rapidly as the Chinese economy recovers).

Continued budget deficit is, of course, not sustainable over the long term, and there is no alternative to raising revenue. The government seems well aware of this. The budget acknowledges that revenue-to-GDP ratio is much lower in Bangladesh than in neighbouring countries. Over the medium term, the government plans to raise revenue by a combination of: expanding tax coverage; rationalising the tax system; decentralising the collection operations; and institutional reforms separating tax policy from tax administration.

These ideas may not have political glamour but, if properly followed through, they could significantly boost public finances and our ability to invest for growth and development. As such, the government’s performance on this front should be closely monitored. Of course, “political compromises” such as the “black money deal” raise concerns about the credibility of the government’s commitment on tax reform.

Growing pains
To recap then, the economic growth forecasts underpinning the budget are rather prudent. While there are serious concerns about implementation of various expenditure and revenue measures, these challenges are not insurmountable. And finally, the government should be held to account for its promise to reform the tax system over the medium term so that ambitious development programs can become sustainable. It is the medium term growth prospects that this section focuses on.

Recall from above that an export boom is forecast for 2010-11 and 2011-12.

Is this sensible?
This forecast appears to be rather rosy if one considers that Bangladesh’s major export markets — the United States, the United Kingdom, the euro area — are likely to remain mired in a sluggish recovery over these years. True, our ready-made garments and knitwear, servicing the budget end of the market, have proved resilient going into the recession. However, there is no reason to think that the so-called Wal-Mart effect will underpin an exports boom.

However, there is an interesting assumption that may explain the forecast export revival. The economic growth, and by extension fiscal, forecasts rest on a number of medium term assumptions. One of them is: “sustained high growth rates in exports through exploitation of new market opportunities and export market diversification.”

It’s not clear what exactly “new market opportunities” and “export market diversification” refer to.

However, the giant economies of China and India — among the first to recover from the global slump — appear to be natural candidates. Rightly or not, there is a perception that the government enjoys a special relationship with India, while the Chinese alliance has been a constant in our foreign policy since the 1970s. It is about time that the government cashes in those friendship chips so that Bangladeshi goods can enter these massive markets.

ADNAN/DRIKNEWS

In addition to exports diversification, there is a lot of emphasis on small- and medium-sized enterprises being an engine of economic activities. While this is a welcome focus, many impediments — from infrastructure bottleneck at the broadest level to access to finance, market, business skills, and supply network at the micro level — need to be addressed for the SMEs to be serious driver of sustainable growth.

And, finally, the budget assumes “greater efficiency and technological progress across the economy, partly driven by increased investment in information and communication technology.”

Political gimmickry such as the term “Digital Bangladesh” notwithstanding, a lot could be done to streamline service provision and reduce transaction costs, thereby enhancing economy-wide productivity growth that could sustain a growth pick up into the next decade. However, measures such as digitising the land records that could underpin this growth spur will require significant political courage.

In the long term, how the government steps up to these challenges will prove lot more important than any specific measures contained in this budget. As they put the budget behind them and start working on the five-year plan, Mr. Muhith, the planning minister, and their officials, should keep that in mind.

1. For a broad initial coverage, see: S Ahamed, Budget for recession and recovery, the Daily Star, 15 June 2009. Available at: http://www. thedailystar.net/newDesign/news-details.php?nid=92579.
2. For a discussion on how the crisis has been affecting Bangladesh, see J Rahman, Surviving the great recession, Forum, June 2009. Available at: http:// www.thedailystar.net/ forum/2009/june/surviving.htm.
3. For a discussion on some of the risks, see J Rahman, Risks to the economic outlook, The Daily Star, 14 June 2009. Available at: http://www.thedailystar.net/newDesign/news-details.php?nid=92408.
4. For a discussion on the governance challenges, see A Saleh, The devil is in implementation, The Daily Star, 12 June 2009. Available at: http://www.thedailystar.net/newDesign/news-details.php?nid=92177.

Syeed Ahamed

Published in the Forum on 6 July 2009.

This piece gives an overall view of this year’s budget.

ADNAN/DRIKNEWS

The budget for the fiscal year 2009-10 (FY2010) has attracted a mixed response and has been termed as bold as well as exaggerated, conservative as well as ambitious, and challenging as well as full of rhetoric by different quarters. While pro-poor allocations and taxation has been appreciated, controversial proposals such as the black money recycling scheme invited widespread criticism. While the budget has taken some traditional stances such as block allocations and high government borrowing, it has also introduced some new approaches such as the public private partnership and economic decentralisation.

This article will analyse some good, bad and unknown issues of this year’s budget by exploring different budget proposals and post-budget discussions.

The good growth recovery
Bangladesh’s GDP growth slowed down by 0.31 of a percentage point during FY2009 (from 6.19 percent achieved during FY2008) owing to multiple disruptions, political uncertainties and consequential low public investment, as well as the global recession. While the global recession seems to be bottoming out, its delayed impact may continue to hurt Bangladesh’s growth prospects during the coming quarters. Keeping in mind the slowing down of demand in our exporting markets, performance of neighbouring economies, and projections of ADB-IMF, any growth figure over 5.5 percent in FY2010 would suggest a resistance to further slip and a 6 percent growth would mean a good resurgence. Hence, while the growth target for FY2010 — set at 5.5 to 6 percent — may appear unadventurous, attaining this target will be quite an adventure itself.

To achieve this growth target, the government’s forecast of investment efficiency, measured by incremental capital-output ratio (ICOR), may seem odd. It is predicted that the ICOR will increase in 2010, meaning more investment will be required to achieve a similar level of production. There are possibly two explanations behind this projected drop in investment efficiency — the recession-recovery dynamics, and the lagged response of rural investment.

During a recession, private sector is typically reluctant to invest and government often adopts expansionary fiscal stance to revive GDP growth. As a result, the ‘projected’ ICOR appears low in the context of a modest GDP target. Once the proposed stimulus package and public investment programmes are put into effect, the private sector will recover and the actual investment efficiency will look better in the backdrop of a moderate growth attainment and revised (downward) public investment figures.

The budget allocations, which shifted focus from urban-industrialisation to economic devolution and rural development, may reduce the investment efficiency in the short-run as rural development shows a delayed (but sustained) response to investment. A study on China’s economic growth between 1978 and 2000 (Journal of Asian Economics, 14, 2003) shows that in the long run, investment efficiency can be reaped through rural industrialisation and proliferation of small firms in non-state sector. The current budget seems to have addressed this stance. Hence, an annual fall in projected ICOR can be ignored if economic devolution can be ensured and a reasonable growth is achieved during the current fiscal year.

Economic devolution
The budget, in allocation and in principle, has aimed to promote ‘economic devolution’ by advancing the local bodies to set and administer their own economic goals. Development of the regulatory framework is already under preparation as the Upazila Parishad Act has been passed in the parliament, the Pourashava Act is awaiting parliamentary approval, the Union Parishad Act has secured cabinet approval, and the City Corporation Act has been tabled. The finance minister has promised to introduce a district level budget for FY2011, initially for one district in each division. Ministries and divisions have been asked to create a Budget and Planning Wing or Branch within their organisational structure for faster approval and effective monitoring of projects.

On the expenditure side, subsidy for fertiliser and agricultural inputs has been reduced by 37.7 percent from last year’s revised budget. Since the price of different fertilisers declined by 30 to 70 percent in the world market over the past several months, the proposed subsidy seems reasonable for the new fiscal year. To facilitate multiple crop production and to expand the cultivable land by improving drainage system in the haor areas, Tk 4000 crore has been allocated. In addition, Tk 280 crore and Tk 185 crore have been allocated for development of high yielding variety seeds and for agricultural research and agricultural rehabilitation assistance. The budget has recapitalised the micro credit institutions (Krishi Banks and Karmashanghstan Bank), increased the fund for housing and SME, and has allocated Tk. 3,575 crore to invest in the construction and reconstruction of roads and bridges under LGED.

While the proposed decentralisation of police administration seems pertinent, the setting up of a Public Representative Board to oversee police forces may raise concerns and should be implemented with outmost transparency to stop unwarranted politicisation.

Against the above budgetary measures and aims, there are potential worries about economic devolution. Recently, Bangladesh’s decentralisation dilemma has taken a new turn. We have moved from the traditional conflict between administrative and political representatives. Now the conflict is between central and local political representatives, i.e. MPs and upazila chairpersons. The major constitutional duty of an MP is to work on policy issues in the legislature, not handling the development programmes. However, given the socio-political context of the country, if the government wants to provide some spending power to the MPs, this should be done under transparent framework without undermining the duties of the upazila representatives.

Pro-growth, pro-poor taxation
The budget proposes to widen the tax net instead of increasing tax rates, increase tax on luxury consumptions while reducing tax on essential and production related items, and offers tax reduction to specific industries while withdrawing the largely misused tax-holiday scheme.

The tax rate for deductions of income tax at source against capital gain from the sale of land has been slashed down from 5 percent to 2 percent in urban areas, whereas a further reduction to 1 percent has been proposed for other areas. It has also reduced the income tax burden on senior citizens by lowering the age bar from 70 years to 65 years. While major food items and fertilisers will continue to enjoy the zero-rate tax, additional duty exemption has been offered for the import of phosphoric acid used for fertiliser production. Duty rate on books (including fictions, novel) has been reduced from 12 percent to 5 percent. More importantly, the budget has reduced the duty on basic raw materials from 7 percent to 5 percent, which will stimulate the local industries. The budget also increased the threshold level for VAT from Tk 24 lakh to Tk 40 lakh to encourage small and medium enterprises. The threshold level for imposing excise duty on bank deposits also increased from Tk 10,000 to Tk 20,000 to encourage small savers.

On the other hand, the budget imposed tax on personal cars and increased supplementary duty on the imports of luxury vehicles. In addition, 5 percent regulatory duty has been imposed on luxury items falling under 25 percent slab of duty. It increased the supplementary duty on air-conditioners and imposed 25 percent customs duty on mobile phone sets on an ‘ad valorem’ basis, which will increase the cost of expensive mobile phone sets. On the other hand, a reduction in corporate tax rate for mobile phone operators has been offered with a condition that they will enlist in the stock exchange as a publicly traded company.

Overall, the changes in duty rates and duty structures seem pro-poor and pro-growth.

The bad
Recycling black money
The budget has renewed the debate surrounding the definition and importance of black money in the economy. The proponents of this black money recycling scheme are now making a distinction between illegally and legally earned un-taxed money by terming them black money and undeclared money. The opponents of the scheme however disagree with such differentiation and demand cancellation of the scheme altogether.

The black money recycling proposal overshadowed the post-budget discussions, not only on moral grounds, but predominantly on an economic standpoint. Earlier such schemes were never successful in attracting investment and only created new avenues for tax-dodgers who regularised more black money by paying less tax showing exaggerated investment progra-mmes. Since the penalty is only 10 percent, compared to the 25 percent regular tax, the proposed scheme will encourage the honest tax payers to ‘paint’ their white money black to get additional tax-cuts.

The FBCCI reaffirmed their position on black money and demanded that only legally earned ‘undeclared money’ should be allowed into investment. The ‘no question asked’ clause of the scheme should then be withdrawn to scrutinise the sources of the money and Central Intelligence Cell (of the National Board of Revenue) and Anti-Money Laundering Department (of the Bangladesh Bank) should be part of this inspection process.

Given the failure of previous schemes and the uncertainty of its prolonged duration, the government should rethink the proposed scheme.

However, to address the lack of investment in power and infrastructure and to stop capital flight, the government may consider specific project proposals on a case-by-case basis. In this case, a consortium could commit an amount of previously undisclosed money to invest in a specific project related to power or infrastructure. The government will then scrutinise the sources of the money and if clean, will allow the money to be invested in the project after due penalty.

Disclosed budget
If you are wondering whether the revelation of budget details before the due date was a leak or a means of ‘testing the water before swimming’, the finance minister has the answer for it — its both. While there were some unintentional leaks of budget documents at the finance ministry, the finance minister intentionally revealed much of the proposals before the budget to watch public and media response. He acknowledged that the feedback he gained through such revelation helped him formulate the financial plan.

Though one might condemn the stance as an informal means to minimise post-budget criticism, a well-organised budget consultation can reinforce democratic responsiveness too. After all, the budget of the republic is an open document and some organised revelation during pre-budget consultations can be used to better reflect public demands and expert opinions.

After the announcement of the last financial year’s stimulus package, we have seen the finance minister changing positions in response to demands from different stakeholder groups. We have witnessed how the finance minister has been readjusting on black money recycling scheme amid criticism. If it is responsiveness — not hesitance — then pre-budget revelation of proposals and following reactions are good for the budget. However, to limit future confusion, a formal approach towards pre-budget consultation and revelation should be put in place.

RAJ ANIKET/DRIKNEWS

Unspecified allocations
Block allocation is an obscure area in Bangladesh’s budget. It is essential to have some block allocation in the budget for uncertain expenditures such as natural calamities, for proposed programmes that are still under preparation (e.g. PPP budget, salary increase). But block allocations often cause double jeopardy by allowing corruption when spent and by stagnating development expenditures when kept idle. Unwarranted expenditures are often observed in programmes where block allocations are made without proper budgeting. On the other hand, many development programmes based on block allocations remain just political rhetoric and never see any release of funds. Hence, disproportionate presence of block allocation in the national budget makes us uncomfortable.

A large amount of this year’s development and revenue budget has been kept as block allocation. Block allocation for unexpected non-development expenditure increased from Tk 800 crore in FY2009 (of which only Tk 183 crore was spent) to TK 900 crore, while a whopping TK 3,388 crore of block allocation has been kept for the new pay scale. An allocation of Tk. 5,000 crore has been kept in the budget to continue the previously announced stimulus package. The LGRD ministry also proposed to keep Tk 5,000 crore as block allocation. An amount of Tk 2,200 crore is set as block allocation to aid the much-discussed public-private partnership (PPP) endeavour. In addition, most of the social safety net and rural development programmes have been announced based on block allocations.

The cancellation of a previous plan to offer block allocations to MPs for development is a welcome decision. The government should now take immediate steps to set up modi operandi, monitoring mechanism and project specific budget for the remaining programmes, which have been proposed under block allocations.

The uncertain
Deficit financing
As the finance minister admitted, financing and implementation of the budget will be its biggest challenge. The low fiscal capacity and high fiscal need to implement the budget will create a ‘fiscal stress’ in the economy. The deficit for new budget stands at Tk 34,358 crore or 5 percent of the GDP (almost a percent of GDP higher than the previous year’s revised deficit).

If the global recession and slowing down of private investment hamper the achievement of revenue target (set at Tk 79,461 crore), the deficit scenario will turn dreadful. Since import duties constitute nearly 42 percent of the total tax revenue, a decline of duties on imports as a consequence of the fall in global commodity prices may particularly jeopardise the revenue collection effort. Provisional statistics suggest a sharp fall in trade related revenue earnings during FY2009 — the collection of import duties fell short of target by 11.9 percent.

The expansionary fiscal stance may also cause problems for the monetary sector if the government resorts to bank borrowing to finance its deficit. This may imperil the private sector investment either by increasing the demand for loan and thus increasing the interest rate, or by squeezing the share of private sector borrowing from the banking system. Securing foreign financing will be critical to keep the local funds available for the private sector. However, the global economic recession may turn that option all the more uncertain. Even successful financing of such a large deficit may cause long-term fiscal stress by increasing the interest payments.

Public Private Partnerships
The much-conversed public private partnership (PPP) in the national budget has created some opportunity and uncertainty at the same time. As discussed in a previous write-up (Daily Star, May 18), the scheme encourages off-budget financing by private sectors to meet the growing public debt and support the developmental need of the country. However, this opportunity is eclipsed by the lack of a legal and regulatory mechanism.

The budget proposed to administer the PPP projects under the Private Sector Infrastructure Guidelines, which was prepared by the Prime Minister’s Office in 2004. A closer look at that document suggests that the Guideline is not comprehensive enough to govern the complex mechanism of PPP projects. For instance, the Guideline suggests forfeiting the tender security in case private partners fail to execute a contract, but it does not explain how the risks and consequences of such failure will be shared between government and private partners. That’s why global experience of such scheme shows that most successful PPP projects are managed under a legal regulatory mechanism, not under executive guideline.

PPP is a synergy, not privatisation or deregulation. To ensure transparency and accountability of PPP contracts, and distribute the risks, resources and rewards among the public and private partners, setting up of an appropriate legal framework is required.*

* For detailed analysis of PPP budget and post budget analysis, see http:// chorjapod. wordpress.com/budget/

Mridul Chowdhury

Published in the Daily Star on 30 June 2009.

THERE is no doubt that Digital Bangladesh is not only a catch-phrase for the government, but is also a reflection of the common man’s desire for a better and modern Bangladesh. The once popular phrase Shonar Bangla is now being replaced by “Digital Bangladesh.”

The national budget reflects the government’s commitment towards Digital Bangladesh, but possibly falls short with respect to giving a clear direction about the approach it will take to realise the goal. Its commitment is indicated by the fact that the total allocation for ICT-related components has substantially increased from last year.

However, there are also indications that the level of commitment may not be matched by the degree of preparation needed for creating Digital Bangladesh, since it is very much of a cross-cutting issue that permeates across almost all sectors.

One of the most talked-about components of Digital Bangladesh is the issue of e-governance, which gets vague and scattered mention in the budget. There is a statement that “we want to transform to e-governance by 2014″ without an explanation of what it means. There are many e-governance projects underway — so the process has already started. In that context, the meaning of this statement is unclear.

Furthermore, except for NBR automation and land record management automation, there is no specific mention of any other digitisation/automation or e-governance project. This does not necessarily indicate a lack of commitment, but possibly reflects a lack of adequate planning prior to budget presentation.

While the government is focused on finding public-private partnership (PPP) solutions for infrastructure development, this attention has not diffused through to issues of e-governance. The section on PPP does not mention e-governance at all, although there is significant scope for private sector partnership, and not just outsourcing opportunities, in this sector. Sustainability of e-governance projects often depends on whether the technological partner has invested in the success of the project. The budget does not reflect that there is adequate appreciation of this aspect within the government.

An example from a neighbouring country can give a better sense of what I am talking about. The Bangalore One initiative by the government of the Indian state of Karnataka covers 26 citizen services pertaining to 11 government departments. There are 17 centres through which these services are provided to citizens. This entire service delivery mechanism has been made possible with little investment from the government since there are 6 private sector players involved, including software companies and banks.

The budget also does not reflect an understanding of the biggest problems of the software industry, which is the main engine for creating a Digital Bangladesh. The two biggest bottlenecks that the software industry is currently facing are — financing options and availability of skilled human resources with technological and management capabilities.

The government has attempted to address the first bottleneck by doubling the Equity and Entrepreneurship Fund (EEF) of the Bangladesh Bank from Tk.100 crores to Tk.200 crores, although the finance minister makes no mention of the fact that there is implementation challenge in the disbursement mechanism itself, since identifying innovative software companies requires a different set of criteria and skill level on the part of the fund manager.

This EEF had remained unused in previous years — so the solution is not necessarily to increase the amount of the fund but to develop capacity to disburse the funds and perhaps also link it to possible PPP initiatives in e-governance.

With respect to the second bottleneck, the finance minister makes no clear commitment except to “target a benchmark of 4,000 computer engineers and scientists graduating each year from the last year of our tenure.” There is no clear allocation of funds associated with this commitment. The software industry has long been proposing the development of training institutes to make the computer engineers and scientists “industry-ready” since the curriculum and approach taken by most universities do not prepare their graduates for employment in the industry.

The Bangladesh Computer Council has, for many years, been subsidising internship of students employed in the software sector, but a more systematic approach to preparing human resource needs more targeted focus from the government.

With respect to access to information and communication technologies, the government makes high-level commitment by promising to extend the reach of fiber optic cables within the country and linking to a second submarine cable. In a time of growing access to Internet through mobile phone networks and upcoming Wimax technologies, one fails to see why the government is still focused on building out fiber optic cables when the real issue that remains untouched is how common people will get access to computers and Internet in an affordable way. Building and extension of telecenters (or “rural cyber-cafes”) is not mentioned, neither is the issue of using government post-offices as telecenters.

With regards to applications of ICT in education and health, the budget demonstrated very little understanding of the issues involved. Even after years of advocacy by NGOs and UNDP, this year’s budget again reflects that the government still seems to fail to appreciate the issue of use of ICT tools for general education — that sending computers to school should not only be aimed at making students computer-literate. The issue of ICT tools for health services in disadvantaged areas is also not touched upon at all.

With respect to taxation, some essential drivers of Digital Bangladesh, such as mobile phones, computer monitors and printers, are taxed more than deemed appropriate by relevant quarters.

The budget makes one wonder whether the government is a bit unprepared when it comes to Digital Bangladesh. An emergency fund of Tk.100 crore has been allocated with no clear indication of what it will be spent for. Furthermore, the administrative mechanism for realising Digital Bangladesh is still a bit unclear since the points of decision-making and implementation monitoring seem to be scattered across several government entities.

In the budget speech, there is mention of the government working with IT associations for “creating a workplan.” This can be seen as a positive sign to engage the private sector, but it can also indicate lack of adequate preparation within the government. We are anxiously waiting to see which is true.

Syeed Ahamed

Published in the Daily Star on 15 June 2009.

INCIDENTALLY when the manifestos for National Election 2008 were being prepared, the world economy was already in recession and the election promises were linked with the recovery. This must have facilitated the budget to address the recession and election promises in chorus and with success.

The budget admits the challenges ahead forecasting a 5.5% GDP growth, but it also aims to change that conservative scenario by promoting investment, decentralisation and infrastructural development. The finance minister has received a mixed (though largely positive) response for various proposals. This article however underscores few uncertainties surrounding the budget proposals.

The policy paradox
Bangladesh’s economy has been an orphan without a long-term perspective plan, more like a vessel without a compass. The poverty reduction strategy paper (PRSP) failed to fill the gap of a medium or long-term plan, without which the development promises of annual budgets can easily get off course.

The finance minister has proposed that the PRSP will be pulled out by 2011, and be replaced by a five-year midterm plan for 2010-2015 and a long-term perspective plan for 2010-2021.

The minister also announced that the five-year plan will influence the annual budget objectives, while the current PRSP will affect the budget for the intervening period. While this will surely end the disappointing “policy-paradox,” this transition period, however, may affect this year’s budget proposals. Since both the new PRSP and the FYP is under preparation, how will this budget, which has already been announced, follow those yet to come as perspective plans?

Recycling black money
The finance minister made a moral compromise by offering a three-year amnesty to “recycle” (I have reservation calling it ‘whitening’) black money into the mainstream economy without any question. The decision came as a desperate attempt to stop capital flight and promote domestic investment.

In a time of global recession, such decisions could merit some justification if it was at all an effective approach. But earlier instances were hardy successful in stopping capital flight. While this is a huge disappointment for the real tax payers, the major problem of this year’s proposal is its duration. In the past, there was an uncertainty about the duration of the scheme. But now that the scheme is surely for the next three years, regular tax payers will be encouraged to evade 25% regular income tax during the next few years, and resort to the minimum 10% penalty under this scheme.

The operations of Central Intelligence Cell (of the National Board of Revenue) and Anti-Money Laundering Department (of the Bangladesh Bank) should be strengthened to press on the tax evaders, to recycle their money instantly and discourage future tax evasion.

Are we all Keynesians now?
At a time of recession, Keynes suggested an economic policy to increase the aggregate demand (e.g. through consumption, investment, and government purchases). No wonder big economies around the world are announcing big budgets and taking unprecedented investment programs. Bangladesh’s national budget for FY2009-10 seems to have targeted the Keynesian need for investment.

Admittedly, Bangladesh is a passive victim of the global recession and cannot blindly follow the steps of developed economies. However, the Keynes model can create an opportunity for Bangladesh to finally decentralise the economy.

In the proposed annual development program of Tk.305 billion, 22.1% has been allocated to the local government, 14% for the power-energy and 15.7% for communication (including roads, highways and waterways).

In addition, an Infrastructure Investment Fund of Tk.21 billion and an employment generation program for the hardcore poor have been announced. These programs can be used in building infrastructures at the local level, which in turn may assist decentralising the economy.

The double-trouble
The proposed budget has a twin-risk both in its earnings (i.e. deficit financing) and in its expenditure (for development program) plans.

William Vickrey, a Canadian professor of economics and Nobel Laureate, argued: “Budget deficits do not in themselves produce inflation, nor does a balanced budget assure a stable price level.” The budget aims to finance two-third of its Tk.340 billion deficits through foreign financing. Securing that money might become uncertain amid the global economic downturn. And poor management of deficit financing may endanger the whole purpose of a Keynesian budget by increasing inflation and reducing private investment.

Some expenditure programs, based on block allocations, also create uncertainties. The government should remain cautious about these allocations for social safety net programs, which often remains unused or gets wasted in corruption. In the words of Benjamin Franklin: “Beware of these little expenses; a small leak can sink a great ship.”

Jyoti Rahman

Published in the Daily Star on 14 June 2009.

THE much anticipated and widely leaked budget has finally been declared. This piece will focus on the key macroeconomic forecasts that underpin the budget. The budget rests on a forecast GDP growth of 5.5% and an inflation of 6.5% in 2009-10. These forecasts feature possible impacts of the global recession, including impacts on remittance and exports. The fiscal deficit is forecast to remain within 5% of GDP next year, of which 2 percentage points are expected to be financed from external sources.

Are these forecasts sensible?

Let’s start with GDP growth. The 5.5% forecast growth for 2009-10 is broadly consistent with international agencies — for example, the Asian Development Bank forecasts a growth of 5.2% next year.

But how confident can we be that this forecast will be realised?

Yogi Berra, an American baseball player, is said to have cleverly remarked: “Prediction is very hard, especially about the future.” Macroeconomists would nod in agreement, particularly now. The speed and ferocity with which the recession ravaged through the global economy caught everyone by surprise, and forecasts were marked down heavily and frequently. The IMF marked down its forecast for 2009 world growth five times since the collapse of Lehman Brothers last September. It is self-evident that there is a considerable amount of uncertainty around any forecast, and the budget forecasts are no exception.

And yet, there is very little discussion on any risks to the outlook in the finance minister’s budget speech or official documents.

Given the global recession, risks would appear to be heavily weighted towards the downside. To be sure, the forecast growth is a slowdown from this year’s 5.9% (and 6.25% average in recent years). However, compared with our neighbours, the forecast slowdown is very modest. And a range of plausible developments — export slowdown leading to manufacturing stagnation, sharp slowdown in services coming from remittance drop — could slow growth to 4% or less.

What would such a sharp slowdown mean?

Of course, it would mean less employment and income through to faltering poverty alleviation. And for the government, it would mean less revenue and higher deficit. How that deficit is financed could have implications for the inflation forecast.

The budget forecast of 6.5% inflation for next year is identical to that of the ADB. With bumper harvest, falling world prices, and the taka’s appreciation against the Indian rupee, food prices have been on the ease, helping disinflation. However, if budget deficit ends up being higher than expected (and/or if the 2% of GDP external finances are unavailable), then Bangladesh Bank might come under pressure to finance the deficit. And this could put added pressure on the inflation.

However, not all risks are negative. Nature could well be kind to us, resulting in yet stronger harvest. Plus, remittances — which have proved surprisingly resilient — could accelerate. The price of crude oil has ticked up in recent months and this could revive the Gulf labour market, and fuel remittance growth.

But a remittance boom could also be a mixed blessing. Take away other opportunities and remittance growth could fuel a real estate bubble, instead of productive investment. And at the same time, higher oil prices could mean higher inflation.

Former US President Harry Truman bemoaned the lack of one-handed economists. Bangladesh’s budgets seem to be drafted by one-handed economists, because they seldom discuss risks in details.

This budget could have been different. There are many ways the forecasts underpinning the budget could be missed. A discussion of some scenariosa bumper harvest and buoyant remittance on the upside, export slump and lack of foreign financing on the downside — would have only enhanced the finance minister’s credibility.

The government will likely reap political benefits if the future turns out to be brighter than what is predicted in the budget speech, just as it stands to face political headwinds if things turn out to be worse.

However, a proper discussion on the risks would have spared us the political theatrics. And more importantly, it would have given all stakeholders a much better understanding of the economic conditions and outlooks that will shape the budget’s outcome.

Asif Saleh

Published in the Daily Star on 12 June 2009.

THE 2009-10 budget has been announced amid much fanfare. Thanks to the media and initiatives from various business groups, wide scale pre-budget aspirations of people received much air time. The reality, though, is that even the best of budgets and policy initiatives can fail due to issues beyond the control of the finance minister. The devil will not be in the details, but in implementation. So it’s important to get the potential road-blocks identified.

Order, order, order
The government has to do considerable amount of work in bringing back people’s faith in our judicial system. At least this was part of this government’s election promises. The ripple effect of this lack of confidence is reflected in the economy through buoyancy and morale of businesses, investors, and the citizenry at large.

Citizens who feel “there is no justice” and feel unsecured in the country will naturally be hesitant in saving or turning the savings into investment. Our domestic saving has been stagnant at around 20% of GDP during the last five years while total investment slowed down marginally.

When both local and foreign businesses express that there is no legal infrastructure to support the investment they make in this country, promoting the proposed public-private partnership will be even harder.

Notwithstanding the government’s general positive approval ratings, it is getting failing grades in maintaining law and order. Given the dismal 2001 election performance which was squarely blamed on degrading law and order situation, the AL should not need a reminder that even the best budget in the world will not mean much unless the trend is reversed on law and order.

Demystifying amlatontro
To implement the proposals of the announced budget, the role of an efficient bureaucracy is undeniable. So the relationship and understanding between the political leadership (who makes the budget) and the public servants (who implement it) has to improve. And a guaranteed way to jeopardise the relationship is to appoint and promote on the basis of party loyalty rather than qualification.

It’s not enough to just criticize the present status quo as inefficient and corrupt, as the finance minister did a few weeks ago in a pre-budget meeting. Rather one should also recognise that the kind of “people-oriented” public service that Mr. Muhith wants to see has hardly been rewarded by various past governments. Should this government also decide to award high level government posts (both in bureaucracy and in semi-government institutions) as political patronage and cast a blind eye towards efficiency and competence, disenchantment is bound to spread.

Decentralisation
In the election manifesto, the AL promised to make each union the hub of development and administration and each upazila the centre of industrial growth. However, the recent changes giving MPs the power to vet each decision made by locally elected leaders are directly contrary to the spirit of the manifesto pledges. At the least, they are bound to create conflicts, and such conflicts may well doom any development effort.

Understandably, the MPs want some financial muscle to show their clout. But it should not be done through curtailing the local leader’s power but through creating a transparent legal framework where an MP can have jurisdiction over allocation over some funds in his/her constituency. The social safety net programs announced in the budget for rural and agricultural development and for the creation of new jobs at the local level will not be successful without strong local leadership.

Decentralised industrial growth
Similar to development, the focus towards industrial growth needs be decentralised as well. It needs to focus on creating special economic zones outside Dhaka. There is also a false sense of satisfaction into thinking that by removing the barriers of access to finance, local small and medium industries will thrive. Without the infrastructure, access to markets, focused market oriented approach and some level of hand holding, the small and medium sector industries in various sectors will not be able to realise its full potential.

Regulatory reform
Significant policy reform is needed in our regulatory framework to implement most of the proposals made in yesterday’s budget. While the business lobby group managed to get some of their recommendations through the Better Business Forum, voices of the small and local entrepreneurs remains mostly unheard. The development projects of the budget will do little to reduce poverty and inequality in the society if the regulatory reform of land, judiciary and administration remains unresolved,

While having a development budget supported by the political will is important, it is equally important to identify the institutional bottlenecks and impediments that will make it difficult to implement these budget proposals. We hope this year’s budget will be complemented with subsequent initiatives to remove these obstacles.

Syeed Ahamed

Published in the Daily Star on 11 June 2009.

THE finance minister is set to put forward the national budget for fiscal year 2009-10 today. This is the first budget of this government after the restoration of democracy and also the first budget of this finance minister under a democratically elected government.

Over the last few months numerous proposals/demands have been made to the finance minister from different stakeholder groups. At the same time, scores of speculations have been printed about the probable size and composition of the budget. Today, as the finance minister rehearses his budget speech, let’s go over some of the key issues that will be fundamental to assess the new budget once it is announced.

Legal framework of PPP
The government is announcing an off-budget financing feature for development programs in its budgetary mechanism which may account about 15 percent of total national budget. The budget speech and the budget documents should outline how the government plans to formulate the legal framework of PPP projects; how the risks, resources and rewards of the projects will be shared among the public and private partners; how the procedural delays and bureaucratic bottlenecks will be reduced; and how the preference of social responsibility over profit will be ensured in these projects. As I discussed in a previous piece on PPP (DS, May 18), the success of the PPP initiative will depend largely on how transparently and efficiently the government sets the legal mechanism.

Record high deficit
Economies, large and small, around the world are counting high budget deficits mainly due to their increasing revenue expenditures to tackle the looming economic recession. Bangladesh is most likely to follow the trend and a record high budget deficit of over 5 percent of GDP has already been anticipated. Implementation of social safety net programs; block allocation for the PPP initiatives; implementation of new salary scale; and supplementary allocation to previously announced stimulus package will add up to this record high budget deficit.

The government is likely to go or foreign sources to finance the three-fifth of its total budget deficit. However, the finance minister may also increase the duties on luxury imports, target new income tax payers, broaden the tax base for VAT, and bring an end to sectoral tax holidays to reduce the revenue earnings-expenditure gap.

Politics of rice price
Too often Bangladesh’s politics circles around the price of rice. During the run up to the last national election, rice price was a highly contested issue and even after the election, the two political parties exchanged barbs on an alleged promise to bring the rice price to Tk 10. Alas, they forgot how a farmer will survive after selling the crop at that price when the production cost was almost double! The fall in rice price in international markets and subsequent bumper crop in Bangladesh has brought down the price of rice at the end.

A series of suggestions have been made over the past couple of months including imposing duty on rice import, purchasing the grains directly from the farmers and increasing government’s storage capacity to develop buffer stock to protect the farmers. As the country awaits another good harvest of Boro, it would be interesting to see how the budget aims to safeguard the farmers from further decline in price.

Election manifestos and budget proposals
It is expected that the first budget of the newly elected government will address its election promises. While the finance minister goes over the budget speech, let’s revisit AL’s election manifestos to see if it resonates with the budget proposal. AL’s election manifestos promised that highest budgetary allocation will be given to education, science and information technology sectors; power production will be increased to 5,000 megawatt by 2011; special emphasis will be placed on expansion of facilities for research in agriculture; subsidy for agricultural inputs will be enhanced; employment guarantee scheme will gradually be made effective to provide 100 days employment to one youth per family; and a project will be undertaken for young men and women with HSC degrees for appointment in the “national service” for two years. These are some key promises taken from AL election manifestos and let’s keep the manifestos handy while we listen to the finance minister’s speech.

Traditionally, major reforms are initiated during the initial years of an incumbent government, since the political government become reluctant to take drastic approaches towards the end of its tenure, especially before the next election. The first budget of this government is being announced at a desperate time when our exports and employments are threatened by the global economic recession and worsening power shortage. Desperate time calls for desperate measures and what better time than now for finance minister to take bold steps to revive the financial sector! The first cut should be the deepest.

Jyoti Rahman

Published in the Forum on 1 June 2009.

This piece explores how the budget can be tailored to weather the global financial crisis.

Quddus Alam/Driknews

By the time this piece is read, the first budget of the Grand Alliance government will have been finalised. At the time of writing, it is not clear what the budget entails in terms of policy details. However, macro-economic conditions and outlook facing our policy-makers are relatively well understood.

The budget will be brought down as the world economy passes through the most turbulent times since the era of silent movies. Pundits are calling the current slump the Great Recession — perhaps not as dire as the Great Depression, but far worse than any recession since.

The IMF’s forecasts for the world economy are discussed first in this article. Then the focus shifts to Bangladesh: how have we managed thus far, and what are the forecasts for 2009-10? While Bangladesh has proved remarkably resilient thus far into the recession, a slowdown is nonetheless expected.

More importantly, there are good reasons to think that the world economy will have markedly different contours when this recession ends, and our ability to grow strongly in the post-recession world may well require carefully crafted policy support. These are briefly explored in the final section.

World economic outlook
In late 2007, a number of large American and European banks were found to be in difficulty because of exposures to the worsening housing market in the United States. At that time, the cognoscenti view was that such difficulties would, at most, lead to a moderate recession in the US and some other advanced economies.

Then things changed dramatically in September 2008, when a large American bank (Lehman Brothers) failed and the largest American insurance company (AIG) was bailed out by the US government. In a matter of days, credit flows dried up and financial markets worldwide stopped operating as perceived counterparty risks spiked. In a matter of weeks, trillions were lost from global stock markets.

No economy with external links — large or small, rich or poor — was spared. Confidence slumped. Households in the rich world stopped spending. And then the financial crisis hit the docks in the last months of 2008. Industrial production and trade plummeted. The world economy shrank by an annualised rate of 6¼ per cent in the last quarter of 2008, and then by a similar magnitude in the first quarter of 2009.

While the crisis started out from the US housing market, the US economy hasn’t been the worst hit. That unfortunate fate befell the export dependent rich countries — Japan’s GDP has shrunk to its 2003 level, economies of Taiwan, Singapore, and Hong Kong have declined by 10 per cent or more, similar contractions are being experienced by Germany and Spain, while smaller European economies are shrinking by double digit rates. The developing economies have done slightly better, but only just.

By any reckoning, this has been the sharpest synchronised slowdown the world economy has witnessed since World War II. The IMF forecasts the global GDP to shrink by 1.3 per cent in 2009 — the first contraction in the post-war era. Advanced economies are expected to suffer the most — the US is expected to contract by 2.8 per cent, the euro area by 4.2 per cent, Japan by 6.2 per cent.

The developing world will not be immune. China is expected to grow by 6.5 per cent in 2009, India by 4.5 per cent — both half their 2007 rates. Major South-East Asian economies are collectively expected to record no growth at all this year. Developing Asia is expected to grow by only 4.8 per cent, compared with the 10.6 per cent recorded in 2007.

Chart 1 shows economic growth in major advanced as well as key Asian economies.

Chart 1 also shows that relative to our neighbours, Bangladesh is not expected to suffer as much. The IMF expects Bangladesh’s economy to grow by 5 per cent in 2009, a modest slowdown from the 2007 rate of 6.3 per cent.

Bangladesh economic outlook
Indeed, the Bangladesh economy has proved remarkably resilient so far during the Great Recession. At the outset of the recession, exports and remittances were identified as the two main channels through which the global slump could affect Bangladesh. As far as is discernable from data, both are holding up.

Consider exports first. Between September 2008 and February 2009, exports from Bangladesh fell by an annualised rate of less than 4 per cent — while this is an unwelcome reversal from about 20 per cent a year growth witnessed in the recent years, it is still a significantly better performance than 70 per cent or so annualised fall in the East Asian region over the same period. Monthly exports figures are, however, highly volatile and often exhibit strong seasonal patterns. To mitigate against this, the data are often averaged over three months. When the smoother data are used, it appears that Bangladesh’s exports have fallen, but by nowhere near as much as has been the case for our neighbours (Chart 2a).

Fish and prawn, leather goods, and other products have driven the fall in export growth (Chart 2b). Ready-made garments (RMG), which account for nearly two-thirds of the country’s exports, exhibit a much smaller fall than total exports in the months since the recession entered its most virulent phase. Before the recession hit, there was a lot of discussion about the Bangladeshi RMG sector being relatively less affected because the products are mainly sold in the relatively low-priced end in the rich world, a segment of the market has not done as bad as the rest of the economy — the so-called Wal-Mart Effect, after the American retailer that specialises in cheap consumer items. Results thus far may have validated this thesis.

An even more sanguine picture emerges when we consider remittance. Since September 2008, remittances to Bangladesh have grown by 40 per cent — far ahead of Pakistan and the Philippines, two other countries that depend on remittances (Chart 3).

The tenacity of exports and remittances are reflected in the advance estimates of the national accounts, which show that Bangladesh’s GDP is estimated to have grown by 5.9 per cent in 2008?09. While this is slower than 6¼ per cent or so averaged in recent years, this is, indeed, a mild slowdown compared with what is being witnessed around the world.

However, a number of worrying signs are emerging.
In recent months, export orders for knitwear have been falling or are being deferred. Given the lag between orders and shipments, exports may be shrinking by a faster pace in the coming months. Buyers are also negotiating for higher discounts, squeezing profit margins. Meanwhile, there are reports of a sharp slowdown in the outflow of migrant workers, suggesting a future slowdown in remittance flows.

Such dark clouds suggest a further slowdown in GDP growth in 2009-10 — the question is, by how much? The Asian Development Bank forecasts a GDP growth of 5.2 per cent in the next fiscal year, while Consensus Economics — a collection of private sector forecasters — expect growth of 4.2 per cent. Chart 4 shows the slowdown in historical context.

The ADB assumes normal weather conditions, and expects buoyant agriculture growth to continue next year. However, both industry and services sectors are expected to grow at a more subdued pace — the first reflecting weaker exports sector, the second because of weaker income and remittances growth.

It’s easy to show with some quick-and-dirty back-of-the-envelope sectoral calculation that under reasonable assumptions, GDP growth next year could turn out to be weaker than 4 per cent. The calculation is provided below.
-Agriculture grows at the pace set by the government’s poverty reduction strategy, contributing ¾-1 percentage point to GDP growth.

-If manufacturing exhibits zero growth, but the rest of the industry sector grows at the average post-1980s pace, then industry contributes to about ¾-1 percentage point.

-A range of plausible assumptions — the 1990s pace for trade and social services growth, stronger rate of growth for government services, and weak or flat growth for finance and business services — suggest that the service sector could add about 2 per cent or so to GDP growth.

That is, it is not too implausible that Bangladesh could experience the lowest rate of growth since 1990-91, when the country was buffeted by the first Gulf War, the anti-Ershad uprising, and a devastating cyclone.

Of course, manufacturing could grow if there is domestic demand, and the service sector can contribute more than 2 percentage points to GDP growth if there is sufficient domestic demand. If these happened, a respectable 5 per cent plus growth in 2009-10 is also very plausible.

Beyond the recession
The IMF research shows that synchronised recessions that begin with a financial crisis end with a delayed and weaker recovery process, and quite often potential growth path of the recession hit economies are marked down. The Great Recession is not likely to be an exception.

The recession has its source in excessive leveraging by the financial sector of the advanced economies. Even when a sense of normalcy returns, advanced economies’ banks will not issue as many loans as they did in the pre-recession era. The de-leveraging process will lead to subdued credit creation and capital flows, prohibiting a strong recovery in business investment. This will have flow on effects on jobs and household income in the rich world.

Meanwhile, overly indebted households in a number of advanced economies, faced with tighter credit conditions and a tougher job market, will tighten their belt. This consolidation of household balance sheet will mean a subdued demand profile for exports from the developing world.

There is a risk that demands for the developing world’s manufactures may also be hit by rising protectionism in the rich countries. With massive budget deficits and likely double-digit unemployment rates, governments facing re-election in the coming years may well find it easier to hide behind populist protectionism than enact tough fiscal consolidation.

In the post-war era, the most successful development model was to rely on manufacturing exports to the advanced world, use the income generated from the trade to invest in physical and human capital, and improve living standards. Even without protectionism, the de-leveraging process in the rich world will make this formula less feasible for Bangladesh.

That is, even if Bangladesh survives the Great Recession relatively unscathed, economic development and poverty alleviation in the coming years will require innovative policy approaches. It will be interesting to see how the challenges ahead are reflected in the budget.

1. See here for detail: http://jrahman. WordPress.com/2009/04/01/some-scary-numbers/.