The Financial Express

Covid-19, Bangladesh budget 20-21 and public debt

| Updated: July 01, 2020 21:59:48

Covid-19, Bangladesh budget 20-21 and public debt

The Bangladesh government announced its annual budget on June 11   amid  the Covid-19 pandemic crisis  with still soaring virus infections and  the infection curve showing no sign of flattening. It is estimated that the infection could reach 123,000 by the end of this month (June). By Thursday, June 18, the number of Covid-19 cases already exceeded 100,000 in the country (FE, June 19).

Furthermore, the covid-19 pandemic has exposed the fault lines of the country's fragile healthcare system. Soaring numbers of infections will lead to pushing millions into poverty as the country is again reimposing zone-wise lockdowns. The reimposed lockdowns will further weaken the economy. Now with an inadequate social safety net, people in most instances are relying on relatives, individuals and charities for financial and material help. 

Given the severity of the crisis and to get a much better informed understanding of the situation, the announcement of budget could have been delayed  until the end of the year as is the case with some other countries. But the Bangladesh government appears to have felt confident enough in getting the full grasp  of the  pandemic crisis  and its economic and financial consequences enabling it to present the budget.

Obviously, once in a life time health crisis calls for the mobilisation of additional resources to provide immediate assistance to the affected population whose lives and livelihood have been disrupted, in many instances even destroyed while trying to keep the economy afloat to the extent it is possible.

The health crisis is causing income losses for the working population and further accelerating poverty among the poor. Weaknesses in household consumption, business investment and productivity  are now clearly visible and these key factors are now holding back economic growth. Also, falling productivity is the direct outcome of lack of investment, and in many instances, capital shallowing. In such an economic environment  setting macroeconomic parameters can be very challenging.

The crisis has once again revealed the vulnerabilities and inequities inherent in the current development model pursued by Bangladesh. Of particular concern is 50 million workers in the informal sector whose livelihood remains under serious threat. Also, livelihood of workers in the formal sector  has now hit harder as lockdowns continue. Only unconditional cash transfer corresponding to the minimum wage can ameliorate their financial hardship.

The Covid-19 is causing the economy to slowdown which will mean a dent to government revenue on one hand and  increased spending demands on the other. This changed economic scene will lead to what may be described as 'parameter changes'. As the government really cannot yet get a firm handle on the size of decline in economic activity and how quickly it might recover, all the estimates are likely to be guesstimates.

The impact of Covid-19 has caused the budget bigger in size this financial year, and is likely to be even much bigger in next financial year as unemployment rises and output further declines. A  'V' shaped recovery is  most unlikely. Therefore, the fiscal response will be continue to grow, and there is no alternative other than mounting the needed fiscal response to the looming economic crisis caused by the pandemic. According to the World Bank (WB) estimate GDP could plunge to 2-3 per cent in 2019-20 and fiscal deficit soar to 7.7 per cent of GDP.

The finance minister rolled  out the budget with an outlay of Tk 568,000 crore for the financial year 2020-21. Excluding foreign grants, the  budget deficit stands at TK 190,000 crore accounting for 6 per cent of GDP. The budget document provided a revised GDP growth estimate for the financial year 2019-20  at 5.2 per cent, a downward shift from the original estimate of 8.2 per cent.  However, it projected  8.2 per cent growth rate for the next financial year (2020-21).

The country is currently reeling under severe negative economic and social impact arising from the Covid-19 pandemic. The budget allocated TK 29,692 crore for the healthcare sector. This represents an increase  by 23 per cent  from the revised allocation of TK 23,692 crore for the fiscal year 2019-20. The budget earmarked TK 10,000 crore exclusively  to  provide emergency  response to  deal with the pandemic.

The finance minister also announced the economic recovery packages which   stood at TK103,117 crore equivalent to 3.7 per cent of GDP. The minister also provided a number of strategic policy initiatives  to deal with the negative economic fallouts caused by the pandemic. They include discouraging luxury expenditures (not very clear what constitutes luxury or not) and prioritising  public expenditure to create jobs. Also, interest rate subsidy  for businesses, expansion of the social security  net and increased money supply are also parts of  those strategic policy initiatives.

The enhanced budget allocation for the healthcare sector and the stimulus packages announced  are commendable and steps in the right direction. But given the scale of the crisis, these allocations can only be viewed as stopgap measures rather than long term measures, in particular to shore up the public healthcare system and to create a more expansive and inclusive social security network. The lessons of this pandemic must be learned quickly and the present crisis also  presents an opportunity to rethink ways to better deliver healthcare and welfare spending.

The projected growth rate at 8.2 per cent for the financial year 2020-21 looks over optimistic. In view of the declining RMG exports (13 per cent contribution to GDP)  and remittance inflows (9 per cent contribution to GDP), lower household consumption (the highest contributor to GDP) and declining private investment along with broader economic disruption caused by the pandemic, how the minister could expect a similar growth outcome like the one in 2018-19 (a normal year) remains puzzling.

Bangladesh is possibly going through the most economically challenging time since its independence. Also, there is no semblance between the projected growth rate of 8.2 per cent and that projected by a multilateral institution like the World Bank (WB) which projected a growth rate to be in the range between 1.2 per cent and 2.9 per cent for 2020-21.

In the latest report published by the Asian Development Bank (ADB) on June 18, 2020, it  predicted that  emerging Asian economies (i.e., developing countries in Asia) would grow by 0.1 per cent this year (2020), slowest since 1961. Next day ( June 19, 2020), the ADB  published another study which warned that Covid-19 threatened top 10 per cent off global output. The study further indicated that the disaster was likely to be even more devastating than previously expected.

Also, the International Monetary Fund (IMF) projected a negative growth outcome for the global economy, shrinking by 3 per cent this year (2020).  OECD chief economist Laurence Boone expressed the view that economic activity across OECD countries collapsed  and by 20 to 30 per cent  in some member countries. GDP in OECD countries are expected to decline by 7.1 per cent this year. Therefore, it remains a surprise how Bangladesh can achieve the projected growth of 8.2 per cent in the next financial year.

The estimated revenue collection for the coming fiscal year  is TK 378,000 crore but the total outlay stands at Tk 568,000 crore leaving a budget deficit of TK 190,000 crore. This fiscal deficit will now add to the already accumulated public debt (government debt) which is now equivalent 34 per cent of GDP (of which 38 per cent are external debt).The Debt-GDP ratio is likely to rise to 38.3 per cent by 2022-23.This figure is relatively low in comparison with the US at 84 per cent, the Eurozone 69 per cent and Japan at 154 per cent. If output falls sharply and the deficit grows, the debt-GDP ratio for Bangladesh will climb up.

In Bangladesh budget deficit is financed through borrowing from internal and external sources, foreign grants and bonds.  Bangladesh does not have  deep and liquid bond markets, making it rather not effective. The finance minister did point out that the government would increase money supply while mitigating any inflationary pressure on the economy. Now what this 'increase in money supply' means is not totally clear; it can be assumed printing money using the government's right to do so. But that runs the risk of depreciation of the currency. For a trade dependent country like Bangladesh, this can boost inflation considerably. Also, fiscal deficits can widen the current account deficit and push up interest rates.

George Soros has suggested an easy way out for the European Union (EU) to get out of  the current crisis by selling 'perpetual bonds' on which the principal does not have to be repaid (although this can be repurchased or redeemed at the issuer's discretion). We may call this the Soros Paradigm of Fiscal Deficit Financing. 

In the case of Bangladesh, application the Soros Paradigm will simply involve Bangladesh Bank to buy government debt equivalent to the budget deficit required to respond to the pandemic crisis and then write that off.

Policy makers in Bangladesh are faced with very difficult policy options to protect people from the pandemic with a very fragile healthcare system. At the same  time the government is striving to mitigate economic fallouts from social distancing, lockdowns and external economic shocks.  That will require mobilising resources both internally and externally and must determine where the government can best spend the money within the framework of a broader national recovery and stabilisation plan or more precisely framing an exit strategy.

However, the long-term economic effect of Covid-19 depends on the  extent of time that will be required to end the economic freeze. If the  IMF and the WB forecasts are correct, the process of recovery will take time, but the worst fears for developing countries like Bangladesh have not yet been realised. For Bangladesh now, the challenge will be once the virus is brought under control, to accelerate inclusive growth in the recovery phase.

For Bangladesh, it is a critical time for the economy. Economic recovery is likely to be a long drawn process to get back to where the economy was before the crisis. That calls for fiscal policy  to play a significant role in managing the economic cycle than it has been the case in the past. Under the current circumstances, the scope for using monetary policy (i.e., interest rate) to stimulate the economy has become very limited for a variety of reasons.

This raises the issue of rising public debt. There are divergent views on public debt levels and their sustainability from economic and financial management perspectives (some have been already dealt with  in this article). However, we have to look at the composition of debt instead of just focusing on the aggregate levels of debt. What matters is not how much is borrowed, but how and where it is spent. If there is  something to show for deficit spending, then there is a case for public borrowing. At this critical point in time, that will require keeping the fiscal stimulus going until recovery is assured. Once mission is accomplished, it can be rolled back.

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