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The Financial Express

Budget FY22: Deficit financing and public spending

| Updated: May 08, 2021 21:49:27


Budget FY22: Deficit financing and public spending

At a time when the government should opt for increasing public expenditure to accelerate economic recovery, it appears to have taken measures that are not commensurate with the needs of the time. As of December FY21, the overall budget deficit excluding grants stood at Tk. 84.08 billion, which was significantly lower than the deficit that prevailed in the corresponding period of FY20 (Table-1). Although the revenue mobilisation scenario had marginally improved during the July-December period of FY21 compared to the same period for FY20, total public expenditure had actually declined. Both Annual Development Programme (ADP) expenditure and non-ADP expenditure have seen downward trends for the period of July-December in the current fiscal year. The budget deficit was financed mainly by domestic borrowing, although foreign borrowing also exhibited a considerable increase during July-December of FY21. Within domestic borrowing, both bank and non-bank sources experienced downward trends. Compared to the corresponding period of FY20, sales of NSD certificates have shown a growth of 256.9 per cent during the first half of FY21.

As the second wave of the pandemic has forced the government to opt for a nationwide lockdown, there is a need for increased public expenditure to support the affected marginalised people in the country. Indeed, this is high time when public expenditure should dictate the fiscal framework. The budget deficit may be financed with higher borrowing. With the lower outstanding public debt, Bangladesh can certainly afford a higher budget deficit if the budgetary allocations are made where they are needed the most.  In view of the above discussion, the following proposals may be considered for the upcoming FY2022 budget:

a) Although Bangladesh has already received significant commitment as regards external funding support from different multilateral and bilateral sources, disbursement of the funds has been lagging behind. The World Bank (WB), International Monetary Fund (IMF), the Asian Infrastructure Investment Bank (AIIB) and Asian Development Bank (ADB) are four external sources that have promised a sizeable amount of US$6.03 billion in loans. However, disbursement stood at only US$1.79 billion as of March 2021, which amounts to only 29.78 per cent of the commitment (The Business Standard, 2021). It is important for the government to pay special attention to ensure speedier disbursement of this pledged fund. To this end, the government should ensure a fast pace in preparing project proposals, receiving the Executive Committee of the National Economic Council's (ECNEC) approval and conducting final negotiations. In the upcoming budget, the government needs to look deeper into the process of fund disbursement from external sources.

b) In particular, supports received for emergency assistance for health sector projects need to be implemented on an emergency basis in the backdrop of the second wave of the pandemic. Thus, the government in the budget for FY22 needs to give equal importance to receiving funding opportunities and ensuring proper use of the funds.

c) For financing the budget deficit in FY21, the government had set the target of collecting Tk. 1.099 trillion from domestic sources, of which Tk. 200.00 billion is expected to come from the sale of NSD certificates. As of now, the collection from this particular source has already exceeded its budgetary target. In view of the experience, the government may need to increase the budgetary target set for sales of NSD certificates for financing the deficit in the budget for FY22. However, existing regulations related to the sale of NSD certificates (e.g., purchasing limit, the requirement of e-TIN and NID while purchasing, interest rate etc.) should be kept unchanged and properly enforced.

d) Bank borrowing should provide the residual amount required for budget deficit financing. As the banking system currently has a substantial amount of excess liquidity, commercial banks should be able to serve the required borrowing; stepping in by the central bank is unlikely to be required. Hence, the risk of inflationary pressure will also be low.

PUBLIC EXPENDITURE DURING THE PANDEMIC: During the period of the Covid-19 pandemic, public expenditure under the national budget for 2021-22 should highlight four areas. These include: (a) ensuring better health facilities for Covid patients; (b) enhancing social safety net programmes for poor, new poor and marginalised people; (c) raising allocation for employment-enhancing infrastructure development projects; and (d) supporting agriculture, Small and Medium Enterprises (SMEs) and export-oriented industries for their recovery and thereby keeping the existing jobs. Since the pandemic is likely to be a prolonged one, it is expected that policymakers will take into account the importance of three 'R's while preparing the budget for the next year: (a) readjustment; (b) recovery; and (c) reforms.

ENSURING BETTER HEALTH FACILITIES FOR COVID PATIENTS: During the current fiscal year (FY21), the government has raised the allocation for the health sector. Unfortunately, the ministry of health and family planning (MoHFP), particularly the Health Services Division (HSD) were unable to spend the allocated budget. Till March 2021, the HSD spent only 21 per cent of its allocated budget, which was much lower than even the average national ADP expenditure (41.92 per cent). [The HSD has spent only Tk 25.15 billion out of Tk 119.79 billion allocated under the RADP for FY21.] It is one of the poorest performers in terms of implementation of ADP during this period (7th from the bottom out of 57 ministries/divisions). Indeed, over the last ten years (FY2011-2020), its annual spending never crossed the level of 83 per cent of total budget allocation. Failure to spend the allocated budget has been a major obstacle to ensuring better treatment facilities for Covid patients across the country. Against this backdrop, the national budget for FY22 should take two-pronged approaches - (a) faster implementation of the ADP projects by maintaining quality and standard and (b) Enhancing the ability to spend more to implement important projects. Despite the announcement last year, most of the frontline health professionals and workers have yet to receive the incentives- only 7.7 per cent of the total 23,285 public sector frontline health professionals and workers have received the incentives so far. [It was announced last year that doctors, nurses and other healthcare staff working in  public hospitals in Dhaka will receive Tk 2,000, Tk 1,200 and Tk 800, respectively, as daily allowances for the period during which they will stay in quarantine. At the same time, doctors, nurses and other healthcare staff working outside of Dhaka will receive Tk 1,800, Tk 1,000 and Tk 650, respectively]. Such weak enforcement of the commitment is disappointing given the importance of the job being carried out by health professionals and workers tirelessly during these pandemic times.

In view of these, the government may consider the following:

a. The budget allocation for the health services division (HSD) should be increased with the expectation that the division will be able to spend the amount by addressing its internal weaknesses and challenges as regards the slow pace of utilisation of funds. The additional allocation needs to be utilised for expanding treatment facilities of Covid patients across the country (i.e., setting up isolation units with necessary treatment facilities, oxygen supply, increasing the number of ICU beds and required facilities). Given the allegation of corruption in public procurement (TIB, 2020), the overall tendering process in the health sector needs to be made more transparent, competitive and efficient. The MoHFP should set a specific timeline for each project for completion of procurement related activities.

b.The government should have the necessary funds ready to procure vaccines from different sources at the earliest. Discussion with different sources of vaccines (GAVI, Russia, China, India, England and USA) need to be carried out. Given the shortages of vaccine doses in the country, timely procurement of vaccines from these possible sources is urgently required. [Available vaccine doses will be finished by the first week of May 2021 while the programme of vaccination for the first timers has been stopped as of April 26, 2021 in view of shortage of vaccine doses.]

c.Considering the limited success against the new strain of virus, necessary preparation for domestic supply should be made for the next two/three years. The ongoing discussion as regards local production of vaccines, in collaboration with foreign companies (e.g., producers in Russia), and creating storage facilities of vaccines under the six-country South Asia cooperation led by China, for use locally and within the regional countries, need to be finalised. Besides, public procurement from other sources (e.g., GAVI) needs to be given equal importance.

d. The fund (Tk.1.4 billion) earmarked for providing incentives to health workers and professionals engaged in treating Covid patients should be released immediately for the overwhelming majority of health professionals and workers (92.3 per cent of total eligible health professionals and workers) who are yet to receive the incentives.

e. Given the long-term nature of Covid related health hazards, the government should allocate necessary funds for FY22 for health professionals and workers serving in public health facilities who are engaged in Covid-19 treatment. The government may consider similar incentives for health professionals and workers who are providing treatment facilities in private clinics and hospitals through direct payment to respective personal accounts.

f.To promote Covid-19 treatment facilities in the private sector, subsidised credit may be extended for setting up necessary infrastructural facilities such as oxygen supply, increasing the number of ICU beds and setting up ICU units in different private hospitals/clinics across the country.

g. Necessary allocation should be made in HSD's revenue budget to recruit nurses, healthcare staff, doctors and volunteers for different public hospitals both within and outside major cities in order to treat Covid related patients. [The recruitment of the doctors, nurses and health practitioners will be required to fill up the posts vacant in public hospitals and clinics as well as those in newly established hospitals being establsihed under the ADP 2021.]

ENHANCED SOCIAL SAFETY NET PROGRAMMES FOR POOR, NEW POOR AND MARGINALISED PEOPLE: Social safety net programmes targeting the poor, new poor, marginalised people and people with limited income which were implemented during the first lockdown in March-May, 2020 and the following periods, have played an important role in mitigating people's sufferings. Under the stimulus package announced during 2020, the government has allocated Tk.106.83 billion for the social safety net related activities which was 8.6 per cent of the total stimulus package. Despite the urgency on the part of the poor and marginal people to receive support, most of the funds were not disbursed immediately. Till November 2020, disbursement/implementation of the SSNPs was less than satisfactory in terms of the funds distributed: (a) distribution of free food (43 per cent); (b) distribution of rice (100 per cent); (c) distribution of cash among the targeted population (70 per cent); (d) increased coverage of allowance programmes (3 per cent); (e) construction of houses for homeless people (n/a); and (f) support for unemployed and poor workers of export-oriented sectors (n/a). The government later announced a second stimulus package of Tk 12.0 billion allowance for old age, widow, divorcee, and vulnerable people. In the backdrop of limited employment and income opportunities, slow implementation of SSNPs has meant that the poor and the marginal people are not getting the required support in due time.

A number of reasons have been attributed in various reports to the slow progress in SSNP activities during the pandemic period. These include: (a) inadequate list of beneficiaries which forced the government to slow down the distribution of cash support; (b) important target groups were missing such as informal workers, vulnerable people of coastal areas and returnee migrants; (c) 'inclusion-exclusion' bias in the absence of proper database of the poor, new poor and marginal people; (d) over-reliance on government-based system in the beneficiary selection process without giving enough importance to the information/ database available to local level organisations such as CSOs/NGOs/CBOs; and (e) selection process was to varying extent politically-biased; recommendations of politically powerful local, for inclusion in the list of beneficiaries, were not adequately scrutinised.

During the second lockdown, the sufferings of the poor and marginal people have further accentuated.  Considering the livelihood challenges of poor and marginal people due to the lockdown, the government has planned to extend cash and kind support to different categories of people and households. These include - (a) 'food support' to 1.25 crore families; (b) Tk.2500 to each of 35 lakh families for one-time cash support; (c) GR cash support (Tk.150 crore); (d) special support to 12 lakh families by the ministry of women and children affairs; (e) support of 30 kg rice to 50 lakh families; (f) Tk.100 million or 10 crore to 64 district commissioners who are left out from other support facilities; (g) Tk.20-50 lakh to each city corporations to support slum dwellers; (g) union-wise cash support of Tk.25 lakh; and (h) OMS operations throughout the country. However, most of these cash and kind supports will be extended to those who have been enlisted in official databases, including the database prepared by the DCs last year immediately after the pandemic. Overall, the government should put emphasis on expanding public works programmes under different ministries in order to create employment opportunities for the poor and marginalised people across the country.

In view of these, the following points should inform the work to be done:

a. A comprehensive listing of all beneficiaries will be required in order to understand who received these benefits and how much, who were left out despite being eligible, which areas were covered more and which were left out etc. A weekly reporting of the distribution of support needs to be published with the information of disbursement in terms of locations, amount, types of beneficiaries etc. The list of the beneficiaries needs to be published and disseminated at the local government offices for public consumption as well as to ensure transparency in the distribution process.

b. It is reckoned that the programmes may not be able to cover all the target areas and all target people. For example, only 150 upazilas will be covered under the VGD programme, which is only 30 per cent of the total number of upazilas in the country. It is apprehended that the support will be availed of by most people only once. Since the people need the support for a longer period of time, the government should gradually increase the allocations under the various SSNPs and distribute those in a phased manner across the country. The poor, new poor and the marginalised people must get the priority in this connection.

c. A significant number of people belonging to the groups of extreme poor, new poor, marginalised people and people with needs remain outside of the official list of beneficiaries of social support programmes. These include urban-based petty traders, hawkers, self-employed, transport workers, floating people, LGBTQ people, ethnic minorities, char people and other marginalised communities and groups. Above four hundred thousand migrants who are by and large non-poor but are in need of support should also be brought under the ambit of assistance programmes. They have got stuck in Bangladesh and will hardly be able to join their jobs abroad. Recent studies have found that a considerable number of new poor (14.75 per cent of the total national population according to PPRC-BIGD study, 2021) are likely to remain outside the social safety net programmes. Unlisted poor, new poor, vulnerable, needy and marginalised people need to be included in the official database that was prepared last year. Adequate cash and in-kind support must be provided to these people. Local level organisations, including NGOs, CBOs and CSOs need to be effectively involved in identifying, selecting and distributing support among these people. Accordingly, necessary funds must be allocated through the various SSNPs in their support.

d. Given the spread of the pandemic with multiple waves and likely adverse impact on economic activities, poor and marginal people may be expected to remain vulnerable for a prolonged period. Hence, a two-year targeted SSN programme needs to be developed for the poor, new poor, marginal and people with special needs. As part of the programme, support needs to be extended several times a year through MFS/banking and other means. A database of these people with necessary information as regards their identification (NID, voter etc.), access to banking and mobile financial services etc., need to be created immediately. The new information about those requiring support may be built on the existing database, and it should be an ongoing process through regular updating.

e. The national budget for FY2021-22 should consider introducing unemployment benefit and unemployment insurance schemes for the various categories of vulnerable people. Development partners, IFIs and international commercial banks may be approached to underwrite such programmes (fully or partially) to make the schemes operational. [Hong Kong government has introduced rehabilitation programme by providing loan at 1.0 per cent rate of interest loan for unemployed workers.] In this connection, EU's contribution to the unemployment insurance scheme, recently launched by the government, is a good example. [As part of EU's contribution, EU has extended a grant of €113 million to pay three months of wages to one million workers laid off by RMG factories. This grant is used to initiate the unemployment insurance scheme for workers working in export-oriented industries. Besides, EU has extended support of €334 million to help fight the pandemic of which €263 million will be used for mitigating the economic and social impacts of the pandemic and €93 million will help to provide cash assistance to workers in the export-oriented industries.] Under this programme, the government may consider introducing 'health and risk allowance (HRA)' for the emergency service providers such as health workers and other frontline workers and professionals. The government may consider introducing innovative SSNPs as introduced in other countries. For example, Zimbabwe has introduced 'harmonised social cash transfer (HSCT)' for ultra-poor people. The scheme will cover health insurance, food support, and education waivers for those eligible under the SSNPs.

Dr Fahmida Khatun is Executive Director, CPD; Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD.  

[email protected]; [email protected]

The article is based on 'CPD's Recommendations for the National Budget FY2021-22.' Research support was received from Mr Muntaseer Kamal, Mr Md. Al-Hasan, and Mr Syed Yusuf Saadat,  Senior Research Associates of CPD; Mr Abu Saleh Md. Shamim Alam Shibly and Ms Nawshin Nawar, Research Associates of CPD; Ms Helen Mashiyat Preoty, Programme Associate of CPD; and, Mr Md Salay Mostafa, Research Intern of CPD.

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