The annual budget ritual is gradually approaching the finale. Interest groups have done their work in the numerous discussion meetings and dialogues with the Finance Minister (FM). The nation had the privilege of viewing the high and mighty disseminating their wisdom – courtesy of the electronic media and the groups that bankrolled them. They made good use of the opportunity to impress upon the FM the catastrophic consequences on the national economy if their supremely justified demands were not met. As usual the FM gave them a patient hearing; he will confirm the distribution of the goodies (in the form of tax and subsidy advantages) on the last day of the budget session to those who are deserving in his prescient eyes.
The only group that was conspicuously absent from these events is the general public or the consumers. Very little was said on their behalf. There was no shortage of experts and business leaders to warn against the grave dangers of imposing taxes, such as AIT on exports or cell phone bills, on the relevant industries and on the economy, but not many to enlighten the audience on the consequences of imposing such taxes, or for that matter not imposing them, on the ordinary public. It is as though whatever was regarded good by the invitees of these events was also good for the general public.
Many commentators have regarded the proposed budget 2012-13 as unduly big and ambitious. At Tk1917.4 billion the budget does appear gargantuan. However, appearances can be deceptive. The size of a budget is not defined in terms of absolute value, but rather in terms of the share of the GDP it consumes. When expressed as a proportion of GDP, the proposed budget is actually slightly smaller than the current budget (18.1 against 18.2 percent, Budget Speech 2012-13). Given that a good part of the budget may not be implemented the actual proportion could be lower. Since a large part of the current deficit has been shifted to the next budget, the real spending will be even smaller.
The Awami League-led government is believed to be an activist government with left-of-centre leanings. Such a government is expected to raise the share of the government in the national economy. This has been true in the case of the first three budgets. The share of the national budget in GDP has risen from 16.2 percent in 2008-09 to 18.2 percent in 2011-12.
The exigencies of the political business cycle suggest that an elected government (of whatever leanings) would increase budget spending and reduce tax efforts during election times. The fact that the lofty election promises of Awami League remain largely unfulfilled also calls for larger spending in order to energise the supporters and pacify the voters just before the election. All these considerations imply that the new budget should be substantially larger than the current budget. But it is not. What prevented the FM from crafting a larger budget?
A persuasive hypothesis is that the foundation of the proposed budget was laid when the FM signed the Memorandum on Economic and Financial Policies (MEFP) last March to access about $1 billion IMF funds in the wake of a worsening balance of payments situation. As the head of the IMF mission had said: “In view of the government’s upcoming budget, our discussions focused on fiscal performance in FY12 and budget priorities in FY13 … we urged the FY13 budget aim for moderate deficit reduction in order to contain domestic bank borrowing, consistent with program targets. It would also help reinforce monetary restraint, as necessary to tame inflationary pressures and stem reserve losses, …”. Accordingly the IMF imposed some tough conditionalities (understanding in the IMF lingo) on the government taking advantage of latter’s limited negotiating strength (see Table below). These conditionalities essentially bound the hands of the FM.
One of these conditionalities requires the government to limit bank borrowing to Tk 99 billion during the first six months of 2012-13. The whole year’s ceiling would perhaps be in the range Tk200-250 billion. The new budget has proposed Tk230 billion as the government’s borrowing requirements for the fiscal year, which presumably is within the limit. Since the magnitude of net domestic credit next year is likely to be close to Tk6000 billion, government borrowing will be restricted to less than four percent of the net credit, which will according to the IMF ‘leave ample space for private sector credit growth’. Although the government is hoping high, the likelihood of a large increase in foreign borrowing is slim. These, together with the possible quantum of tax and non-tax revenue, essentially set the limit on the size of the budget within which the FM had to juggle the sectoral numbers. He has tried to stretch the budget without violating the conditionalities by pushing the predicted growth rate of government revenue to the highest achievable (21.6 percent growth).
The bank borrowing ceiling for the current year was set by MEFP at Tk252 billion. It was earlier estimated that the government would have to borrow more than Tk350 billion from the banking system. It had borrowed over Tk196 billion by November 2011. However, the government did not increase net credit from the banks further till May 2012. Part of the deficit has been shifted to the next fiscal year which avoided breaching the ceiling.
The MEFP also sets a ceiling on the reserve money held by Bangladesh Bank. This essentially defines an upper limit of the growth rates of the monetary aggregates. The half-yearly growth of reserve money (July-Dec 2012) is restricted to less than 5 percent suggesting that the rate of monetary expansion will have to be modest in 2012-13. Since the ceiling on reserve money is adequate to restrict monetary growth it is not clear why the IMF imposed separate ceilings on the two components of reserve money, viz. net domestic assets and net international reserves held by Bangladesh Bank. Perhaps it wanted to ensure that if the balance of payments deteriorated sufficiently stiffer remedial measures could be imposed to protect international reserves regardless of the reserve money position. Taken together these numbers imply that the future monetary policies will have to be restrained. Such restrain will help contain inflation, which is a major concern of the IMF as well as the government.
The symbiotic relationship between monetary and fiscal policy is amply demonstrated by the current situation wherein the monetary restraints agreed with the IMF effectively limit the flexibility of fiscal policy by restricting both the size and the choice of instruments of resource mobilisation for deficit financing. Any additional government spending has to be financed from tax revenues. If the government violates the monetary conditionalities, the current monetary policy stance will be in jeopardy.
There are minimum targets for tax revenues of both the current and the next fiscal year. Incidentally the provisional amount of tax revenue collection shown in the revised budget 2011-12 is the same as what has been agreed with the IMF. The NBR will no doubt receive a pat on the back for its achievement. MEFP also requires streamlining tax administration and the enactment of a new VAT law to enhance tax collection.
IMF funds are provided to support the balance of payments when it is perceived to be in fundamental disequilibrium. Accessing the IMF funds requires a commitment to address the disequilibrium. This usually requires efforts to raise export (and other) earnings and reduce import payments, or more generally to reduce aggregate demand. The main market mechanism that serves both these purposes is depreciation of the currency. BB has already allowed the taka to depreciate very considerably. It has also taken some administrative actions to reduce imports. If remittances do not maintain the robust growth or the expected volume of foreign assistance does not materialise, further depreciation of the taka or stiffer import restrictions will be necessary.
The root cause of much of the current woes of the economy is the shortsighted policy decision to overcome electricity shortages with injudicious hurry through (quick) rental power plants. Not only that the strategy did not solve the longstanding problem, it blew big holes in the budget and the balance of payments. The FM was forced to seek succour from the IMF which was given, but with conditionalities. These conditionalities restricted the policy space. Much of the effort of the government will be devoted to damage control; it will fill up the holes it has dug.
M. A. Taslim is a Professor of Economics of the Department of Economics, University of Dhaka. He is currently holding the charge of the Chairman of the Department. He was formerly the Chairman of Bangladesh Tariff Commission.