Zaidi Sattar |
June 19, 2022 8:13:03 PM
June 19, 2022 8:23:17 PM
Not every budget is a single policy document. For Bangladesh, the FY2023 budget is the culmination of more than 50 years of courageously tackling formidable development challenges to make the country a successful development story. When discussing the budget, it is important to place it in a historical context because budgets are essential instruments of development.
Bangladesh began its journey in 1972 with a per capita income below US$100, along with Chad, Rwanda, Burundi and Nepal. Its gross domestic product (GDP) was only $7 billion and some 75% of the population of 70 million live in poverty.
Five decades later, at the end of fiscal year 2023 (FY23), we expect Bangladesh’s GDP to exceed half a trillion US dollars with a per capita income more than 28 times higher than it was in 1972. The march towards the graduation of least developed countries (LDCs) in 2026 remains intact despite the onslaught of the Covid pandemic and the impacts of the Russian-Ukrainian war.
For all their shortcomings, annual budgets such as the FY23 budget, have singularly contributed to sustained economic progress for more than 50 years. Building on the solid macroeconomic foundations of the past 30 years, three Five-Year Plans (6th, 7th and 8th) and two Prospective Plans (2021 and 2041) have defined the roadmap for rapid inclusive growth based in particular on notable achievements in the last decade.
Bangladesh has long shredded its ‘basket case’ image to be noted by leading development economists as a country with ‘development momentum’. In 2010, the Wall Street Journal took note and wrote, “Bangladesh, no longer a hopeless case.” Just recently, Oxford University professor and former UKAid chief economist Stefen Dercon, after reviewing development progress in several African and Asian countries, described Bangladesh as one of the most great “development success stories”, earning Bangladesh the epithet of the “Bengal Tiger”. Lionceau”. International analysts no longer consider Bangladesh as the epitome of poverty and natural disasters but as a “paradox” of development (?).
Bangladesh is a development case study for researchers and scholars from the world’s leading universities, not only for its success as a leading garment exporter, but also for its progress in social and human development.
Every decade, average GDP growth has increased by at least one percentage point. GDP per capita growth reached 7% in fiscal year 2019. Economic history for the past 100 years shows that more than half of countries experience declining incomes in one decade or another. Not Bangladesh. Leading economists are surprised at how quickly Bangladesh has grown in such a short time. Sound macroeconomic management for a quarter of a century has laid the foundations for stable and sustained growth.
Poverty has also declined at a steady rate. Today, only 20% of the population is considered poor and only 10% extremely poor.
These are the main indicators of economic progress, supplemented by human development indicators: reduction in infant and maternal mortality, increase in longevity, gender balance in education, participation of women in the labor market, etc. Progress in human development has been hailed by none other than Nobel Prize-winning economist Amartya Sen, who has his roots in this part of the world. The New York Times Pullitzer Prize-winning columnist Nicholas Kristof went so far as to suggest that President Joe Biden learn lessons from Bangladesh on how to reduce poverty in the United States of America (USA).
Thus, any budget must be considered in light of these long-term developments. The FY23 budget is structured around this central objective: “Bangladesh’s challenges in the next fiscal year and the strategy to address them”. This budget should also be seen as part of the long-term perspective of Bangladesh’s development. The macroeconomic and fiscal framework presented reflects a continuum of prudent macroeconomic management that is the foundation for stability and growth despite the external challenges of global developments.
In the FY23 budget, a number of difficult issues were addressed. However, four crucial economic challenges required more attention. These are: (a) Inflation …which is mainly imported inflation; (b) Debt and deficits with reference to sustainability issues; (c) Potential balance of payments instability despite strong export growth; and (d) Persistence of high protection and constraints to export diversification
INFLATION: The current inflation problem is of external origin. The poor are suffering and the inflation monster must be tamed. Monetary management alone will not solve this problem. With a depreciation of almost 8% over the past month, this presents a great opportunity to reduce rates without reducing protection or revenue – the two main stumbling blocks. Now is the time to get inflation under control with tariff cuts. The budget proposal missed this opportunity. Is it possible to do something before Parliament approves the budget?
DEFICITS AND DEBT: Despite the well-known low tax-to-GDP ratio, Bangladesh’s prudent macroeconomic management, which continues with the proposed budget, is characterized by sustained fiscal deficits of around 5% of GDP, 60% financed by domestic resources and 40 percent with foreign aid. Deficits generate public debt. But deficits are needed to finance investments in social and physical infrastructure for development. However, these sustainable budget deficits have led to sustainable public debt – both internal and external. Public debt has actually declined from 50% of GDP in 1990 to 40% in 2022. External debt has also fallen from 25% of GDP in 1990 to 14% in 2022, while the debt service ratio (external debt payments such as foreign exchange earnings ratio) is only 5.5 percent.
The IMF and World Bank Debt Sustainability Analysis, released in April 2022, gave Bangladesh a clean bill of health. But the Sri Lanka debacle should keep our policy makers on their toes to avoid an episode of Lanka in the future.
BOP CHALLENGE: The FY23 budget signals the end of pandemic management and focuses on the economic recovery that remains strong with robust exports (over 35% growth) and imports (over 45% growth). growth) which are expected to continue in the coming year. Exports eventually hit the $50 billion mark, but the surge in imports put pressure on the balance of payments, causing the exchange rate to depreciate by almost 8%. This should boost exports and limit imports in the coming year. It’s a good thing that BB finally decided to bite the bullet and let the exchange rate be flexible. This measure will prevent the loss of foreign exchange reserves. The current account deficit (CAD) is still expected to be below 3% of GDP, which is a sustainable figure, especially in light of current account surpluses in most years over the past two decades. The CAD also reflects the excess of investment over national savings – which is good for the rapidly growing economy which is investing heavily in mega infrastructure projects (e.g. Padma Bridge) that will propel soon the growth rate of the economy.
PERSISTENT PROTECTION: Tariff adjustments in the budget reveal persistent protection. Preliminary estimates show a modest increase in the average nominal rate of protection (NPR). Recent adverse global trends presented a golden opportunity to rationalize tariffs. But the opportunity seems to have been missed. The links between the two strategies – export diversification and tariff rationalization – should have been recognized. The persistence of a policy of high protection has got the better of export prospects. Tariff rationalization is an issue that is more than ever waiting to be addressed and resolved. It is not just that we have to prepare for LDC graduation in 2026. Done right, it is the most effective instrument for bringing down domestic prices of consumer goods as well as eliminating Bangladesh’s unique situation of anti-export trade policy bias that is preventing export diversification. Over the past year, two high-level committees from the Department of Commerce and the National Board of Revenue (NBR) have been working diligently on the issue of tariff rationalization. We can’t wait to know the result.
A multitude of industrial products have been identified for “infant industry” protection, as many of them are new and growing industries. Good idea. But using an additional duty (SD) for protection might not be a good idea under the rules-based system of the WTO. Moreover, this protection should have been time-limited and performance-based. Annual performance monitoring should be part of the strategy going forward. Otherwise, we will again be burdened with a crowd of “geriatric infants”. Economic history teaches us that once introduced, protection becomes deeply embedded in the system and difficult to dislodge. Consumers end up bearing the brunt of the protection tax which also discourages exports.
Dr. Zaidi Sattar is the President of the Bangladesh Policy Research Institute (PRI). [email protected]