Mukti

On the 2008-09 Budget

Posted in economics by jrahman on June 12, 2008

The military-backed government of Bangladesh announced the country’s Budget for the 2008-09 financial year earlier this week.  The task of a Bangladeshi finance minister is never easy, regardless of the political persuasion of the government.  And striking the right balance at a time of rising inflation and global economic slowdown would have been difficult for any finance minister in the world.  

Considering all this, the Budget is perhaps not as bad as the habitual knee-jerk reactions by opposition parties suggest.  In fact, it probably is on balance not too dissimilar to what any other government could have achieved in the current circumstances.  That said, I do have some reservations.

Let’s begin with some of the higlights of the Budget.  The Budget is summarised hereHere is the Budget speech in English.  The following points stand out.

  • A doubling of subsidies and spending on welfare measures to shield the poor from spiralling food and oil prices.  In the 2006-07 financial year, the subsidy bill is estimated to end up being US$2.3bn, more than twice the budgeted figure.  US $1.9bn are allocated for subsidies for food, oil and fertiliser in 2008-09.
  • The allocation for food budget is raised by 120 per cent in 2008-09 and 2.4m tonnes of rice and wheat are to be distributed at subsidised prices.
  • Despite soaring world prices, state-set fuel prices are not adjusted, even though the oil import bill is expected to hit US$3.1bn this year, and the state-owned Bangladesh Petroleum Corporation is struggling to finance oil imports. 
  • Development spending is set to fall to 25 per cent of total spending, sharply lower than the 35 per cent to 50 per cent the government set aside in recent years.
  • The Budget forecasts a revenue of US$9.9bn in 2008-09, leaving a budget deficit of US$4.3bn – equivalent to 5 per cent of GDP, compared with 4.4 per cent in 2006-07.  The deficit will financed through higher borrowing.
  • The Budget is based on a GDP growth forecast of 6.5 per cent in 2008-09 (compared with 6.2 per cent in 2006-07).  Consumer price inflation is forecast to ease to 9 per cent from 10 per cent.

Are the macroeconomic forecasts too optimistic?  A comparison with international forecasts suggest that pundits expect the economic growth to recover and inflation to ease in 2008-09 (Table below).

Source: Asia-Pacific Consensus Forecasts, April 2008; ADB ADO March 2008, http://www.adb.org/Documents/Books/ADO/2008 /statapps.pdf); the Economist Group.
(a) Financial year (for example, 2008 refers to the year ending
30 June 2008).
(f) Forecasts.

The table is from this Forum piece.  While the central projections in the Budget are similar to those by the IMF, ADB or private sector economists, there are considerable risks to the baseline forecast.  I would have preferred to see more discussion about these risks and what they might mean for the estimates and projections.  In that piece, I noted:

And in an environment of 40 taka per kg of rice, calls for subsidies that assist the poor here and now will be very difficult to ignore for the government. If significant external assistance is not forthcoming, the government will have to either cut expenditure elsewhere and/or raise taxes, or finance the widening deficit somehow. The former option presents obvious political difficulties. The latter presents significant macro-economic risks. In an already tight global credit market, government borrowing to finance widening budget deficit will crowd out private investment. Alternatively, if the Bangladesh Bank were to finance the deficit by printing money, we would be taking the first steps to hyper-inflation.

It appears that the government has chosen a combination of cutting the development budget and borrowing.  On balance, both appear to be right choices.  Prof Rehman Sobhan covers the issues rather well here.

Development budgets are inevitably political in nature.  And by political I don’t mean pork beef-barrelling.  Development budget involves making trade off and priorities – should we spend 100 taka more on primary schools or vaccination programmes, should we build a metro system in Dhaka or spend the money on a dam on the Padma, these are, or ought to be, the stuff of politics.  An unelected regime such as this should not make those decisions. 

There is certainly a very real possibility that the government borrowing to finance the larger deficit is going to crowd out private investment.  But perhaps a bigger drag on business investment has been business confidence.  If confidence recovers with political developments, or alternatively if confidence dips with political uncertainty, then how much will the crowding out matter? 

Perhaps the fuel subsidies are a much bigger problem.  The regime withstood considerable pressure from the IMF-WB-ADB to reduce fuel subsidies.  With the oil price rising to US$140 a barrel in the world market, it’s only a matter of time before the government has to cut fuel supsidy and embrace price hikes.  In India and othe countries in the region, elected governments are braving protests because subsidies are clearly not affordable.  I think an elected government will find it easier to make this difficult decision. 

And indeed, the decision need not be slash all subsidy to everyone.  The Indonesian experience may suggest some lessons (thanks to a discussion at the BD Investment googlegroup): industrial users should pay market prices, as they compete in the world market; the poor should be provided targeted support with cash vouchers toward food and fuel purchase; and efforts are made on keeping public transportation costs under control.  Apparently, Indonesia started providing 20 million households with such subsidies after a 100 per cent price rise in 2005. 

Indonesia’s track record in terms of administrative efficiency is not that much brighter than ours, so there is no reason why we should not at least consider it.  If we could rationalise the BPC, management of the fiscal policy would be much easier, and we would have more money for poverty alleviation.

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  1. […] Original post by Mukti […]

  2. The recession and Bangladesh « Mukti said, on October 30, 2008 at 3:49 pm

    […] The ADB notes that the Bangladesh Bank had an accommodative stance in 2007-08.  Its quarterly publication on Bangladesh also has good discussion of the Budget.  We discussed monetary policy here and the Budget here. […]


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