A rapid assessment of national budget 2012-13 by Unnayan Onneshan
THE current budget is faced with the challenge of arresting the intensified macroeconomic pressures that have drifted the economy into deceleration of national output. The fiscal measures, suggested in the proposed budget, coupled with contractionary monetary policy and orthodox exchange rate management are part of a three-year programme agreed between the government and the International Monetary Fund. The programme articulated in the Memorandum of Economic and Financial Policies is a typical IMF programme of austerity measures, which in recent times have come under serious attacks from mainstream economists for inducement of slowing down economic growth.
The recent macroeconomic pressures of own making, ensued by wrong choices of policies, stemming from chaotic management of the economy and pursuance of policy conditionalities in order to be eligible for the loan from the extended credit facility of the IMF have had a knock-on effect, particularly on investment, leading to a deceleration of growth of national output. According to an Unnayan Onneshan estimate, the real GDP growth may reach as low as 5.47 per cent in 2011-2012 and the IMF also projected a GDP growth rate of 5.5 per cent. If such policies and instruments of tightening remain in place and no recourse is made to escape the trap, the GDP growth may further dip in 2012-2013.
In comparison with the target of the GDP growth rate of 7.2 per cent mentioned in the proposed budget, Unnayan Onneshan, through considering the impacts of IMF-MEFP on real economic variables, cautions that the real gross domestic product growth in FY2012-13 might be as low as 5.31 per cent. If such turns out to be the case, this reflects a shrink by 1.89 per cent than that of the government target of medium-term budget framework and medium-term macroeconomic framework for the current fiscal year.
The challenge of maintenance of fiscal balance was the making of the government of the day as it allowed a kind of rent seeking in the power sector. The huger for quota rent ballooned the rate of government borrowing to feed in the demand for the quick rental power plants, resulting in high fiscal deficit, future debt servicing liabilities and above all crowding out investible finance for the private sector for expansion of the productive sector. Indirectly, it also left a knock on effect on government’s capacity to finance physical and social infrastructure, needed for maintaining growth of the economy.
In the FY2011-12 budget, overall deficit was targeted at Tk 452.02 billion that was five per cent of the GDP. However, the target increased to Tk 463.28 billion, 5.1 per cent of the GDP in the revised budget. Overall deficit for FY2012-13 is targeted at five per cent of the GDP that is Tk 520.68 billion in terms of volume, which might increase to Tk 533.65 billion by the end of the next fiscal year.
In addition, government borrowing from the banking system was targeted at Tk 189.57 billion in FY2011-12 which was revised to Tk 291.15 billion that is 53 per cent more than that of the target. For FY2012-13, government borrowing from the banking system is targeted at Tk 230 billion. Continuation of the current trend may witness a total of Tk 351.90 borrowed from the banking system by the end of the next fiscal year.
Associated with the above, the contractionary monetary policy to curb inflationary pressure resulted in slump in investment, particularly by the private sector through increasing the cost of fund. Thus, ever-increasing domestic borrowing of the government and low foreign exchange reserve due to mounting petroleum bills resulted in a crowding-out effect and squeezed the scope for domestic investment.
The economy is also experiencing pressure on balance of payment as the growth rate of export started decelerating and import bills increasing, fuelled by the import of petroleum products for power generation. The hunger for high import of petroleum products resulted in depreciation of national currency and the foreign exchange reserve also dwindled. The contractionary monetary policy, however, restrained import of capital machineries and intermediate good.
The rate of point-to-point inflation in May 2012 came down to slightly below double-digit at 9.15 per cent. The high inflation, resulting in lower consumption, led to decrease in aggregate demand, culminating in lowering the rate of expansion of the economy, as the current economic growth in Bangladesh is a consumption-led one.
Implementation of the revised annual development programme till April 2012 is 55 per cent that is 3 per cent less than that of the same time of the previous fiscal year. Chaotic scenario in the process of ADP implementation has limited the scope for employment generation.
Moreover, a chunk of the projects taken under the ADP suffers from political expediency.
The flow of foreign aid disbursement in the current fiscal year is comparatively lower than those of other fiscal years. In addition, the incremental FDI inflow has witnessed a trend of deceleration. Keeping the loan from the IMF aside, the assistance from foreign sources has shrunk that exerted pressure on public investment, holding back the process of growth in the country.
In case of poverty reduction, the basic problem of poverty lies in its concept that poverty is the manifestation of social property relationship. However, slump in investment has squeezed the scope for employment generation opportunity without which the process of alleviating poverty is next to impossible and the overall impact may lead into stagnation in the pace of reduction in poverty. If the reduction in poverty is halted from the desired level and the rate of graduation from poverty goes down or stagnates, the rate of economic growth also falters.
BY CONSIDERING the impacts of the IMF-MEFP on real variables of the economy, the Unnayan Onneshan projection reveals that the real GDP growth in FY 2012-13 might be as low as 5.31 per cent. However, the government has targeted a real GDP growth rate of 7.2 per cent in FY2012-13. If such estimates hold, this is a shrink by 1.89 per cent than that of the government target of medium-term budget framework and medium-term macroeconomic framework in the current fiscal year.
Historically, the economy has been growing at an average rate of six per cent in the recent decade. It has the potential to increase to its real GDP growth rate to as high as 6.72 per cent in the current fiscal year and 6.87 per cent in FY2012-13 as per business as usual scenario. The country has witnessed ups in real GDP growth rate of 6.27, 6.63 and 6.66 per cent in FY2003-04, FY2005-06 and FY2010-11 respectively in the current decade. The growth rate of real GDP nose-dived after FY2005-06. In FY2008-09 it reached 5.74 per cent which is the lowest in nine consecutive fiscal years and then again gained the momentum.
Real GDP Growth
Source: Authors’ calculation based on Bangladesh Bank, 2012
IMF–MEFP triggering contraction
THE government is heading towards contraction by minimising public expenditure, reducing subsidy and increasing in-equalising tax such as value-added tax in accordance with the IMF-MEFP. It is evident that reduction in public expenditure leads to lesser generation of employment, and hence holds back the growth process. The production cost would hike, if subsidy is minimised drastically without taking alternative measures, when the government is banking its growth, amongst others, on agriculture. Increase in tax, particularly VAT, would only elevate the burden of the marginalised section. All these together would reduce the aggregate supply, which may slow down the overall pace of growth of the economy.
Keeping in mind the diktat of the IMF, the central bank has been following contractionary monetary policy from the beginning of the current fiscal year through its last two monetary policy statements. The IMF-MEFP has asserted much pressure to follow restrained monetary policy. Increased rate of interest and monetary squeeze has already decelerated the pace of investment and would continue to do so. The tightened domestic investment would reduce not only employment generation but also aggregate demand. As a result, the historical trend of growth of the economy would slow down.
The IMF-MEFP requires exchange rate to be flexible using demand-supply mechanism. The depreciation of the taka against the dollar would not only increase the import payment bills but also exert pressure on balance of payment, which would eventually shrink the foreign exchange reserve. Ultimately, aggregate demand may go down and thus the pace of growth may be hindered.
TO ACHIEVE the targeted GDP growth rate, it is necessary to maintain the rate of inflation at a tolerable limit. In Bangladesh, it is mainly driven by external supply-side factors and internal demand for food and energy. The pressure has been furthered because of the rise in imports and depreciation of the taka.
The rate of general inflation (point-to-point) in May was 9.15 per cent which was 9.93 per cent in April. However, general inflation (twelve month average) in April was 10.86 per cent against 8.54 per cent in the same period of the previous fiscal year and this was 10.92 per cent in the previous month of this current fiscal year.
Total inflation scenario in Bangladesh
Source: Authors’ calculation based on Bangladesh Bureau of Statistics, Bangladesh Bank 2012
An inconsistency is observed between the businesses as usual scenario of inflation and the projection made by the MTMF, the MTBF and the IMF-MEFP.
According to the IMF-MEFP, MTBF and MTMF forecast, inflation might increase to 8.6, 7 and 7.5 per cent at the end of FY2012-13.
The annual average rate of food inflation has increased over the past three years. Point-to-point food inflation is declining from October 2011 and twelve month average from December 2012 mainly due to bumper harvest of food grain. On the contrary, non- food twelve month average inflation items maintained an upward trend from the very beginning (July 2011) of FY2011-12 due to electricity and fuel price hikes.
Food and non-food inflation (point-to-point) in May was 7.16 and 12.72 per cent respectively while it was 8.12 and 13.77 per cent respectively in April. However, food and non-food inflation (twelve month average) in April was 11.93 and 10 per cent respectively against 11 and 4.14 per cent respectively in the same period of the previous fiscal year.
Food inflation is higher in urban areas whereas non-food inflation is higher in rural areas. Point-to-point urban and rural inflation decreased to 11.12 and 8.83 per cent in May 2012 against 11.77 and 9.21 per cent respectively in the previous month of the current fiscal year. In rural areas, food inflation is decreasing at a slower rate but non-food inflation is experiencing an upward trend than that of the urban areas. The double-digit inflation is affecting mostly the poor people living in rural areas and the fixed-income people in urban areas.
The statistics of Bangladesh in recent years depict a different picture than that of the findings of The Philips Curve.
In Bangladesh rate of unemployment has been increasing along with increasing inflation rate from FY2005-06. Thus, the economy is heading towards a three-way trap as high inflation is creating income erosion and increasing unemployment rate is preventing access of general people to income source which in turn might slow down the pace of poverty eradication.
The rate of inflation, especially food inflation, and poverty are positively correlated. Increase in food inflation drags down additional marginalised people below the poverty line.
The cumulative impact of high inflation (particularly the weighted inflationary impact of the price of rice) has resulted in significant income erosion of the marginalised people. From this assessment, it is clear that high inflation increases instability among local people and bank increases its interest rate which reduces investment. As a result, more people become unemployed and go below the poverty line.
EXCESSIVE borrowing from banking sectors for deficit financing in the current fiscal year indicates a sharp crowding-out effect which may dampen private investments. Even the IMF-MEFP assessment on net borrowing from the banking system is overambitious and it may trim down the opportunity of other investments as well as the production capacity of the country. Moreover, the target to attract foreign financing in the MTMF projections is also myopic. Revenue, one of the sectors of financing, has increased over the years, of which collection of total revenue including tax revenue increased at a higher rate than that of non-tax revenue.
Financing the mounting deficit is mainly dependent on borrowing, both domestic and foreign. In FY2011-12, overall public debt was estimated at Tk 402.66 billion which is 31.59 per cent higher than that of the revised budget of FY2010-11. The share of domestic borrowing and foreign borrowing has been estimated at Tk 272.08 billion and Tk 130.58 billion respectively in the current fiscal year, which are 67.57 and 32.43 per cent of the total debt. Moreover, in FY2011-12, net foreign and domestic debt has been projected at Tk 130.58 billion and Tk 272.08 billion respectively which are 125.79 and 9.63 per cent higher than those of FY2010-11.
Total borrowing, foreign borrowing (net) and total domestic borrowing
Source: Finance Division, 2012
In the current fiscal year, the IMF-MEFP estimation of total financing as percentage of the GDP is 3 percentage points less than that of the estimation of the MTMF. In the business-as-usual scenario, total financing as a percentage of the GDP might be 1.19 and 89 percentage points less than that of the projections of the MTMF and the IMF-MEFP respectively. If the current trend continues, the gap between the projections of the IMF-MEFP and the MTMF and the business-as-usual scenario might be 6 percentage points and 1.42 per cent respectively in FY2012-13 and 9 percentage points and 1.65 per cent respectively in FY2013-14.
There are two sources of deficit financing: internal and external debt. The government has become more dependent on the banking sector rather than the non-banking one for domestic debt financing. Over the past few years, the overall budget deficit has registered an increasing trend that exerts a serious pressure on the total financial leverage of the country.
During the last two fiscal years, government domestic borrowing has increased. Total domestic borrowing of the government has increased to 320.09 per cent during July to January FY2011-12 than of the same time of the previous fiscal year. Between FY2009-10 and FY2011-12, the average annual domestic financing is expected to be Tk 180.65 billion which is 167.15 per cent more than that of the average annual domestic financing from FY2002-03 to FY2004-05.
The projections of the IMF-MEFP on domestic borrowing may not be realised in the upcoming fiscal years. There is a gap between the projections of the IMF-MEFP and the MTMF and the business-as-usual scenario. In FY2011-12, the projection of the IMF-MEFP may be 1.1 and 1.04 per cent higher than the projections of the MTMF and the business-as-usual scenario respectively. If the current trend continues, the gap between the MTMF projection and the business-as-usual scenario might be 46 percentage points in FY2013-14 and 56 percentage points in FY2014-15.
The IMF-MEFP assessment on net borrowing from the banking system is more ambitious and it may trim down the opportunity of other investment as well as the production capacity of the country. In the current fiscal year, the MTMF projection of borrowing from banking system (as percentage of the GDP) is 1.8 per cent whereas it might be 2.34 per cent under the business as usual scenario and 3.2 per cent in the IMF-MEFP projection. If the current situation exists, the IMF-MEFP projection will be 1.71 per cent and 1.02 per cent higher than the projection of the MTMF and business-as-usual scenario.
IN FY2012-13, total revenue has been estimated at Tk 1457.14 billion in which tax revenue and non-tax revenue are Tk 1168.24 billion and Tk. 228.46 billion respectively which is 22 per cent higher than the current fiscal year. In prevailing economic situation it is difficult for the government to collect the targeted revenue.
In FY 2010-11, the collection of total revenue, tax revenue and non-tax revenue, was Tk 984.57 billion, Tk 823.21 billion and Tk 161.36 billion respectively (up 22.43, 26.86 and 3.92 per cent respectively on the previous fiscal year). In the meantime, the contribution of the NBR and non-NBR were Tk 790.91 billion and Tk 32.2936 billion respectively which was higher by 27.48 and 13.37 per cent than that of FY2009-10.
Export and import
The trade deficit is increasing at a staggering rate because of the increase in import payments and slower rate of the export earnings. The continuous depreciation of national currency against dollars has induced increase in the import payments.
In FY2010-11, the export earnings and import payments increased by 41.49 and 41.79 percent respectively than those of the previous fiscal year due to readymade garments. For other sectors, such as raw jute, jute goods and leather, the increase was by 35.73, 24.05 and 32.20 per cent respectively in FY2010-11 than that of the previous fiscal year.
During July-April 2012, export earnings were $19,777.04 million which was 8.41 per cent higher than that of the same period of the previous fiscal year. Export earnings are following an irregular trend over the months of this fiscal year. However, export earnings have decreased 7.13 per cent in April 2012 than that of April 2011. 51 per cent of export earnings came from the EU zone and 22 per cent from the US. However, the EU debt crisis and global recession, especially in the US, have led to decreased price of commodities and discouraged export earnings. Another reason of decreasing trend of export earnings is the increase in the rate of interest. Continuous increase in the price of electricity, gas and fuel has also led to increase in cost of production and as a result, there has been a pressure on to holding the competitiveness of the exportable.
There is a discrepancy among the projection of MTMF, MTBF, IMF-MEFP and the business-as-usual scenario on the percentage change of export earnings from FY2011-12 to FY2015-16. In FY2011-12, the projection on export earnings growth by the MTMF and MTBF is the same at 14.5 per cent, whereas the business-as-usual scenario and IMF-MEF might stand at 4.99 and 14.2 per cent respectively.
In FY2012-13, projection of the MTMF, IMF-MEFP, MTBF and the actual scenario of percentage change of exports is 14.5, 16.6, 14.5 and 4.75 percent respectively. This also shows that the gap might increase in the upcoming fiscal years. The projection of the MTMF about the growth rate of export earnings is too ambitious.
Table 1: Future scenario of Exports
Business as usual scenario MTMF MTBF IMF
2010-11 41.49 41.7 41.7 41.7
2011-12* 4.99 14.5 14.5 14.2
2012-13* 4.75 14.5 14.5 16.6
2013-14* 4.54 14.5 14.5 15.7
2014-15* 4.34 15 15 14.49
2015-16* 4.16 15 15 12.97
2016-17* 3.99 15 15
Source: Authors’ calculations based on Ministry of Finance, International Monetary Fund, Bangladesh Bank, 2012
During July-March 2012, import payments were $26,944.50 million which were 11.22 per cent higher than that of the corresponding period of the previous fiscal year because of the higher growth rate of fuel imports for the higher demand of quick rental power generation. In this period, except food grains and other than food items, crude petroleum, petroleum products have increased by more than 50 per cent. However, the capital machinery increased by a small margin than that of the same month of the previous fiscal year. During July-February, the fresh L/C opening of capital machinery decreased by 26.87 per cent which might adversely affect the industrial sector.
However, import payment has reduced by 10.66 per cent in March 2012 than that of March 2011 after taking a restrained monetary policy and devaluation of the taka against the dollar.
Imports of food grains increased 120.08 per cent in FY2010-11 than that of the previous fiscal year because of increase in food inflation. However, the most satisfactory thing is that food grains import reduced by 44 per cent in July-March 2012 than that of July-March2011 because of the various measures taken by Bangladesh Bank which discouraged the imports of luxurious goods.
The projection of the MTMF on percentage change of import exceeds than the projection of any other sources. In FY2011-12, the projection of MTMF, MTBF, IMF-MEFP and the business-as-usual scenario on growth rates of import is 15, 14, 18.1 and 4.86 per cent respectively. In FY2012-13, projection of the MTMF of percentage change of import was only 15 per cent whereas the actual scenario was 4.64 per cent. This also shows that the gap might increase in the upcoming fiscal years.
Table 2: Future scenario of Exports
Business as usual scenario MTMF MTBF IMF
2010-11 41.79 41.8 41.8 41.8
2011-12* 4.86 15 14 18.1
2012-13* 4.64 15 15 13.6
2013-14* 4.43 15 15 12.4
2014-15* 4.24 15.5 15.5 11.29
2015-16* 4.07 15.5 15.5 10.1
2016-17* 3.91 15.5 15.5
Source: Authors’ calculations based on Ministry of Finance, International Monetary Fund and Bangladesh Bank, 2012
Remittance is one of the most important sources of foreign earnings. Bangladesh emerged as the seventh largest remittance earner in FY2010-11 with the amount being $11,650.32 million.
During the first ten months of this current fiscal year, the remittance flow stood at $10,615.75 million which was 10.43 per cent higher than that of the previous fiscal year. In April 2012, remittance was $1,083.89 million which is 2.27 per cent lower than that of March 2012. Labour migration was 0.57 million up to April. If the current condition continues, remittance might reduce further to $1,097.55 million by the end of the current fiscal year.
In FY2010-11, the growth rate of remittance was only 6.03 per cent. A total number of 0.44 million people migrated from the country which was only 2.33 per cent higher than that of the previous fiscal year. The percentage of labour migration dropped down in FY2010-11 because of the global economic recession, political instability in Middle Eastern countries and squeeze in the demand in labour markets.
Remittance and number of migrated people
Source: Authors’ calculations based on Bangladesh Bank, 2012
The projection of the MTBF, IMF-MEFP and the business-as-usual scenario on remittance is lower than that of the projection of the MTMF. In FY2011-12, the projection of the MTMF, IMF-MEFP, MTBF and the business-as-usual scenario on remittance was $12,900 million, $12,815 million, $10,020 million and $12,265.18 million respectively. However, in the business-as-usual scenario, remittance might stand at $12,880.05 million in FY 2012-13 which might be lower than that of the projection of MTMF, MTBF and IMF-MEFP respectively.
Future scenario of Remittance
Source: Authors’ calculations based on Ministry of Finance, International Monetary Fund, Bangladesh Bank, 2012
The growth rate of foreign aid has slowed down in recent fiscal years. An irregular trend of the flow of aid has emerged over the last ten years. At the same time, a large gap between the flow of total foreign aid and net foreign aid is occurred due to the increasing trend of payments (principal) over the years.
During July-March FY 2011-12, total foreign aid increased by 4.55 per cent and decreased by 20.89 per cent than that of the same period of FY2010-11 and FY2009-10 respectively. During the same period, total payment (principal) and total net foreign aid increased by 11.91 and 0.03 per cent than that of the same period of FY2010-11. However, these were 26.41 per cent higher and 37.04 per cent lower than that of the same months of FY2009-10.
In FY2010-11, the flow of net foreign aid decreased by 28.94 per cent than that of the previous fiscal year and net foreign aid as percent of GDP was only 0.99 per cent, which was 1.48 per cent in the previous fiscal year. Despite the increasing rate of food aid, the payment (principal) increased by 5.83 per cent than that of the previous fiscal year and project aid decreased by 19.36 per cent so that the government had to finance a significantly larger proportion of the deficit through domestic borrowing, specifically through domestic banks. In the business-as-usual scenario, the inflow of net foreign aid might stand at $1,053.9 million and $1,066.69 million in FY2011-12 and FY2014-15 respectively. If the current trend continues, the net flow of foreign aid as per cent of the GDP might decrease in the upcoming fiscal years such as it might stand at 0.89 per cent in FY2011-12 and 0.80 per cent in FY2014-15.
There is a huge difference between the business-as-usual scenario and IMF-MEFP of net foreign as per cent of the GDP. Unfortunately, there is no estimation of foreign aid in the MTMF and MTBF. The business-as-usual scenario suggests that net foreign aid as per cent of the GDP might stand at 0.89 and the IMF-MEFP suggests that it might reach 1.6 per cent. The IMF-MEFP projected that net foreign aid might increase up to FY2012-13. Instead of this projection, the business-as-usual scenario suggests that it might be lower than that of the IMF-MEFP.
Foreign exchange reserve
In spite of the global financial crisis, economic slowdown and higher rate of inflation, reserve increased over the years but at a decreasing rate. In FY2010-11, foreign exchange reserve increased by only 1.51 per cent than that of the previous fiscal year. Foreign exchange reserve might shrink in the upcoming fiscal years due to the recent slower rate of remittance inflow and upward trend of petroleum imports.
During January-April 2012, reserve continued to be lower than that of the previous fiscal year. On May 22, 2012, foreign exchange reserve dropped by 7.39 per cent to $9,594.99 million against $10,354.86 million on May 22, 2011. It was $10,193.0 million in April 2012 which was 6.41 per cent higher than that of the same period of the previous fiscal year. Reserve increased in April 2012 because of the first instalment ($141 million) of $987 million disbursed by the IMF. However, the continuation of the trend from July 2011 to April 2012 suggests that the reserve might reach $10,155.4 million in June 2012, which is 6.93 per cent less than that of June 2011.
The projection of MTMF and MTBF on foreign exchange reserve is higher than the projection of IMF-MEFP and the business as usual scenario. There is a huge difference between the projection of reserve by MTMF and IMF-MEFP. In FY2011-12, in the business-as-usual scenario, the reserve might be lower than the projection of MTMF, MTBF but higher than the projection of the IMF-MEFP. Increase in debt and deficit, inflation, devaluation of currency and increase in import payments have reduced the foreign exchange reserves.
Current account balance
Instead of the continuous trade deficit, the current account balance recorded a positive trend from FY2001-02 to FY2003-04, then again from FY2005-06 to FY2010-11 but the incremental growth rate of current account balance has been erratic over the years. In FY2010-11, current account surplus was $995 million which was 73.37 per cent lower than that of the previous fiscal year because of the negative trade balance with a deficit of $7,328 million where imports surpassed the export earnings. According to the IMF-MEFP, one of the major causes of the pressure on the current account balance is the substantial rise in fuel prices on the international market.
The current account balance stood at $455 million in March 2012 which was $177.52 million in the previous month. During July-February 2012, current account surplus was $681 million which is 31.83 per cent lower than that of the same period of the previous fiscal year. The slower rate of current account surplus occurred mainly due to the increase in deficits of trade, service and primary income. In the meantime, a larger deficit in trade, service and primary income was increased by more than 17 per cent than that of July-February 2011. Along with the increasing trend of remittance inflow at 12.88 per cent, increase in secondary income helped attain the current account surplus.
In the business-as-usual scenario, current account surplus might attain in the upcoming fiscal years, but the incremental growth might decrease. The current account surplus might increase to $1,055.2 million and $1,235.9 million in FY2011-12 and FY2014-15 respectively.
According to the projection of the MTBF and the IMF-MEFP, current account balance as per cent of GDP might increase in the upcoming fiscal years but in the projection of the MTMF and the business-as-usual-scenario, it might increase at a positive rate. In FY2011-12, the IMF-MEFP, and MTBF projected that current account balance as per cent of GDP might reach a negative value of -0.7 and -0.2 respectively.
Table 3: Future scenario of Current Account Balance
UO Projection MTMF IMF MTBF
2009-10 3.74 3.7 3.7 3.7
2010-11 0.94 0.9 0.9 0.9
2011-12* 1 0.4 -0.7 -0.2
2012-13* 1.06 0.2 -0.9 0.2
2013-14* 1.12 0 -0.8 0
2014-15* 1.18 0 -0.5 0
2015-16* 1.24 0.1 -0.3 0.1
Source: Authors’ calculations based on Ministry of Finance, International Monetary Fund, Bangladesh Bank, 2012
Annual development programme
POSITIVE relationship between implementation of the annual development programme and economic development is seen in the development process. The expenditure on the ADP has continuously increased over the last twenty years but implementation of the ADP has been much lower than the target. In FY2012-13, the government has proposed an allocation of Tk 550,000 million for the ADP. In the business-as-usual scenario, at the end of FY2012-13 the revised ADP and total implementation might stand at Tk 513,139.82 million and Tk 376,892.6 million respectively. This suggests that total implementation as percentage of the PADP and RADP might be 68.53 per cent and 73.45 per cent respectively. The percentage of the RADP in the PADP might be 93.29 per cent.
ADP implementation status over the months
Source: Authors’ calculation based on Implementation Monitoring and Evaluation Division (IMED), Ministry of Finance, 2012 *ADP Implementation data available up to April, 2011-12.
It is observed that a large percentage of the ADP allocation was spent in a short time in the last few months of each fiscal year. In FY2011-12, the implementation of the RADP is the lowest among the last three fiscal years. Though implementation capacity is not improved, a large amount of the targeted ADP is very ambitious and myopic. Total expenditure of the RADP was Tk 227,100 million in FY2011-12 (July to April). Total domestic allocation was Tk 260,000 million in the PADP in which implementation was Tk 155,730 million. On the other hand, total expenditure of foreign allocation is only 48 per cent. In the first ten months of FY2011-12, total implementation of the ADP as percentage of the RADP was only 55 which were 3 and 4 per cent less than that of the same time in FY 2010-11 and FY2009-10 respectively.
In FY 2012-13, the revised ADP might be Tk 513,139.82 million which might be 4.95 per cent of the GDP in the business-as-usual scenario. Though the IMF-MEFP projection of the RADP as percentage of the GDP is only 4.9 per cent, the projection of the MTMF is 5.6 per cent in FY2012-13. In FY2010-11, the revised ADP as per cent of the GDP was percent which was 46 percentage points higher than that of the previous fiscal year. The actual RADP as percent of the GDP is far away from the projection of MTMF and IMF-MEFP. In FY 2009-10, the actual RADP as percent of GDP, projection of IMF-MEFP, MTBF and MTMF were at 4.1, 4.1, 3.7 and 3.7 per cent respectively. The projection of it by MTMF, MTBF and IMF-MEFP might reach at 5.3, 5.1 and 4.5 whereas under the business-as-usual scenario, it attained at 4.56 per cent in FY2011-12. The business-as-usual trend shows that actual trend might reach at 4.49 per cent in FY2014-15 whereas MTMF and MTBF projection suggests 6.6 and 6.1 per cent respectively in the same fiscal year.
Allocation status of large ten ministries
ANALYSIS of last three years’ allocation status of the top ten ministries shows that the allocation for the education, primary and mass education, and health ministries is decreasing. In the next fiscal year, a large share of the development budget will go to the Power Division which is Tk 78,900 million and 13.1 per cent of the total development budget. However, in FY2012-13 the shares of development budget in the allocation for the education, primary and mass education, and health ministries are 4.2, 7.3 and 6.4 per cent which are 8 percentage points, 7 percentage points and 1.6 per cent less than those of the previous fiscal year respectively. In FY2012-13, the share of the agriculture ministry in development budget is 2.1 per cent which is 1.1 per cent higher than that of the previous fiscal year.
The important steps taken in the proposed budget for FY2012-13 are to distribute ‘agricultural inputs support cards’ among 14.0 million farmers, increase seed supplies capacity through the BADC, distribute organic, green, and bio-fertilisers among farmers, reduce the interest rate on agriculture credit and increase its size, emphasise extension of paddy cultivation in flood-, saline- and drought-prone areas, create an agricultural research fund, and organise ‘farmers marketing group’ and ‘farmers club’. However, in some cases, those initiatives may have not been realised due to the lack of sufficient fund for implementation, timely disbursement, as well as proper guidelines.
The sectoral share of gross domestic product (GDP as percentage) of the board agriculture is declining day by day with increasing allocation of the ADP. However, this allocation was not sufficient to reduce the declining growth rate of this sector because of its, amount, implementation rate and its time of disbursement. In FY2011-12, ADP implementation rate was 60 per cent to the proposed budget (March 2012) and it was 65 percent in revised budget (up to April 2012).
In spite of the government again setting aside a sum of ADP Tk 89,175.20 million in the proposed budget which is more than 20 per cent (20.40 percent) compared to FY 2011-12 (proposed budget). From the analysis of the last 10 years data, it is found that ADP implementation may not be more than Tk 55,288.60 million. In addition, budgetary allotment on agriculture ADP is 16.20 per cent to the total proposed ADP. Moreover, the government has also proposed more than 86 per cent of its total allocation for the non-development sector. Therefore, maximum allocation is going to the non-development sector which is one of the major constraints for development.
The government has increased the target of credit disbursement to this sector at Tk 141,300 million, a modest rise from the outgoing fiscal year’s target of Tk 138,000 million. Therefore, target of credit disbursement in this sector has increased by about 2.40 per cent (2.39 per cent). The gap between the target and actual disbursement is also following an increasing trend. On average, the disbursement rate as percentage during the last 10 fiscal years was not more than 93 per cent. Accordingly, it is found that the actual disbursement of credit may not be more than Tk 131,613 million. Moreover, the finance minister has proposed Tk 60,000 million as agricultural subsidy during the current fiscal year against Tk 45,000 million in FY2011-12. Therefore, the proposed subsidy in this sector will increase by more than 33.33 per cent.
Increasing crop production and yield along with cropping intensity might be assumed as one of good indicators for food security, but future sustainability remains questionable. However, there are no guidelines and budgetary allocation for sustainability of the agriculture sector in proposed budget whereas creating an enabling environment for sustainable growth of agriculture for reducing poverty and ensuring food security through increased crop production and employment opportunity are main pillars of the draft national agriculture policy 2010.
The government proposed an allocation of Tk 95,440 million (development and non-development combined) for FY2012-13. This allocation is Tk 15,870 million higher than the revised budget of FY2011-12 and as a percentage it is 0.10 per cent lower than the proposed allocation of FY2011-12. Additionally, in FY2012-13, a Tk 78,960 million allocation is proposed for the Power Division which is Tk 7,040 million higher than the revised allocation of the previous fiscal year.
The proposed public investment in the power sector has marked negative revision during most of the period between 2006/07 and 2012/13 as the data of previous years shows that, on an average, 90.6 percent of the proposed ADP remains as revised ADP. Only two years (2010-11 & 2011-12) showed the increasing revised allocation than the proposed allocation. Through the weighted mean calculation, it can be predicted that from the proposed Tk 78,900 million ADP allocation in FY2012-13 approximately Tk 71,498 million may remain as revised ADP of which Tk 53,977 million might be implemented.
Rental, quick rental and peaking plants were undertaken on a fast-track basis to address the nagging power crisis. To refuel these power plants, the additional cost for the current fiscal year, as projected by the World Bank, is between Tk 52,000 million and Tk 56,000 million, which is about 0.6 per cent or 0.7 per cent of the GDP (Energy Bangla, 2012). For doing that, the government has provided a huge amount of money as subsidy. According to official estimates, the government in the current fiscal year is set to spend Tk. 200000 million in subsidies for the power sector. The recent rise in electricity prices is the part of government’s move to slash its subsidies for the electricity generation. However, frequent changes in prices of electricity are only creating inflationary pressures.
The budgetary allocation in the FY 2012-13 for the health sector is Tk. 93,330 million (including development and non-development budget). This allocation is Tk 11,830 million higher than the revised allocation, and 0.18 per cent lower than the revised budget of FY2011-12. However, there is an increase in the proposed budgetary allocation in the health sector but a downward revision has been marked always over the years. More specifically, it is observed that on an average 98 percent of proposed budgetary allocation remains as revised allocation. Furthermore, it is observed that the development budget is increasing at a slower rate than that of the non-development budget. During the last five years, there was a significant gap between development and non-development budget allocation in health sector. Additionally, it is observed that, most of the time there is a positive revision of non-development budget while there is negative revision of development budget from FY2006-07.
The proposed Tk 93,330 million for 148 million people means a per capita allocation of Tk 631 per year or Tk 1.72 per day. Additionally, the proposed public investment in health, population and family welfare sector has marked cuts during most of the periods between 2001-02 and 2012-13. Through the weighted mean calculation, it can be predicted that from the proposed Tk 38,250 million as ADP allocation in FY2012-13, Tk 31,794 million might be implemented.
The finance minister has proposed an allocation of Tk 214,080 million for FY2012-13, development and non-development combined, for the Ministry of Education and Ministry of Primary and Mass Education. This allocation is 11.17 per cent of the total budget and 8.09 per cent and 16.6 per cent higher than that of the proposed and revised budget of FY2011-12 respectively.
The gap between actual budget allocation in education and the target of the government articulated in the medium-term budgetary framework 2012-13 to 2015-16 is widening and might do so sharply in the upcoming years.
In FY2012-13, the budget allocation is Tk 214,080 million for the primary and mass education, and education ministries than those of the MTBF projection that was of Tk 218,965.8 million indicating a gap of Tk 4,885.8 million. If the current trend prevails, the gap might increase further in FY2015-16 and in the business-as-usual scenario, the education budget might stand at Tk 259,924.3 million against the MTBF projection of Tk 304,887 million. The gap between actual allocation and MTBF projection in FY2015-16 might increase to Tk 44962.74 million.
The education sector has got Tk 16,020 million more than the allocation made last year. In 2011-12 Tk 198,370 million was allocated. In FY2012-13, total budget allocation is Tk 1,917,380 million and total allocation on education is Tk 214,080 million. Thus, education budget as a percentage of national budgets is 11.17 per cent. Education budget as a percentage of national budget was 12.11 per cent in FY2011-12.
Growth of education budget and percentage of national budget
Source: Authors’ calculation based on Implementation Monitoring and Evaluation and Finance Division, Government of Bangladesh (GoB) (December, 2011)
In FY2012-13 the development budget for education is Tk 69,360 million while non-development allocation is Tk 144,720 million. The education budget, both development and non-development has increased over the years but the expenditure statistics is much unsatisfactory.
The education sector has been provided with an allocation of Tk 69,360 million in the ADP in FY2012-13. In FY2011-12 the ADP allocation in education was Tk 45,432.6 million and revised ADP was Tk 44,361.6 million but total expenditure in education from July to April 2012 is Tk 27183.59 million that is only 59.83 per cent of total allocation. However, implementation of ADP was only 59.83 percent during last ten month exhibiting poor ADP implementation status in education sector in FY2011-12.The average ADP implementation status in education sector from FY 2002-03 to 2004-05 was 72.72 per cent that might be 93.68 per cent from FY2009 to 2011-12.
In FY2011-12, the total proposed budget allocation for gender related expenditure was Tk 431,940 million of which Tk 12,370 million has been allocated for the women and children affairs ministry. In FY2012-13, budget allocation for the ministry is Tk.13060 million which is not that higher than the previous year. Gender allocation in major ministries reflects actually growing consciousness about gender sensitivity.
In addition, the Implementation Monitoring and Evaluation Division (IMED) 2012 stated Tk. 1215.6 million was allocated for the ministry whereas Tk 929.235 million is the expenditure amount till March 2012 and the total ADP implementation rate is 76 per cent. In case of the revised ADP, till July to April 2012 Tk 1,431.044 million is the total expenditure whereas RADP allocation is Tk 1,845.9 million. This amount is 78 per cent of the total allocation. Therefore, about 22 per cent is still unused.
During 2010-11, the proposed budget was Tk 2,090 million where revised budget in development was Tk 2,050 million. Proposed budget is found higher than the revised budget. On the other hand, in 2011-12 revised budgets in development sector is higher than proposed budget, whereas non-developmental expenditure in revised budget is little bit lower then proposed budget
FOR FY2012-13, the government has proposed Tk 109,810 million for social security and welfare. If the trend is examined, it can be seen that the proposed allocation for social security and welfare has a negative revision in most of the period during FY2006-07 to 2012-13. By calculating weighted mean, it can be predicted that the proposed Tk 109,810 million in FY 2012-13 may remain approximately Tk 108,321 million as revised allocation.
Allocation for the Social Security and Welfare
Source: Authors’ calculation based on the data from Ministry of Finance
A large number of programmes have been initiated over the last few years in order to uplift the livelihood of poor people. The government has initiated different safety net programmes for improving social security and to protect the poor. In order to do so, there are cash transfer programmes, social empowerment programmes, food security programmes and microcredit programmes as well. The existing cash and food transfer programmes in safety nets may reduce starvation rate of limited number of people in some specific times but for improving social security situation (in its comprehensive sense) more specific measures addressing long term vulnerability must be taken. Moreover, the problem of limited scale and population coverage of SSNPs may initiate problems of leakage and misallocation which may go undetected because of inadequate programme monitoring. In this context, the main components of social safety net programmes require readjustments in terms of real-time budget allocation and implementation; and it is imperative to bring in long-term components to achieve the goals of these programmes. This proposed budget remains more or less likely to be a continuation of previous one.
NO MAJOR environmental programme has been mentioned in the proposed budget. Tk 4,000 million has been proposed for the Bangladesh Climate Change Trust Fund, which is much lower than the government’s commitment. Moreover, no new project has been undertaken under this fund for the current fiscal year. The shrinkage of allocation may interrupt the exiting project activities and prospects of working with changing climate in future. Of late, some new agendas were included in the proposed budget such as medical waste management and national bio-safety framework. These strategies are crucial but need further clarification as no framework has been depicted.
The environment and forest ministry received an ADP of Tk 3,250 million and the water resources ministry Tk 21,760 million. Looking at the ADP and revised ADP trend of these ministries, an increasing trend was found to prevail in project implementation in the foregoing years. In business-as-usual scenario, the revised ADP of the ministries might be Tk 3,888.06 million and Tk 24,869.02 million accordingly.
Year wise Annual Development Program (ADP) and Revised Annual Development Program (RADP) in Ministry of Environment and Forests
Source: Authors’ calculation based on Implementation Monitoring and Evaluation Division and Finance Division
* Upto March 2012; **Authors’ calculation based on previous fiscal years
Poverty and inequality
THE number of people living below the poverty line in 2005 increased to 56 million from 49.7 million in 1988-89 with an annual average rate of 0.39 per cent at the national level. Continuation of the rate might witness the number of people living below the poverty line rise to 59.1 million by 2013 and 62.2 million by 2021 at the national level. This number has decreased in rural areas whereas it has increased in urban areas.
Current situation and future projection of population living below the poverty line
Source: Authors’ calculation based on Household Income & Expenditure Survey (1991-92, 1995-96, 2000, 2005, 2010), Bangladesh Bureau of Statistics, 2012
With the broader perspective of alleviating poverty and achieving the targets of millennium development goals, the government allocates around 50-55 per cent of its national budget as poverty budget each fiscal year. In FY2012-13, Tk 974,400 million has been allocated as poverty budget that is Tk 158,640 million more than that of the revised poverty budget of Tk 815,760 million of FY 2011-12. Poverty budget of the current fiscal year (FY2012-13) is 50.82 per cent of the national budget and 9.36 per cent of the GDP. This proposed allocation as a percentage of total budget is lower than that of the previous years. This lower allocation has occurred at a time when the population (especially poor) are suffering from the higher food prices and food inflation
Budgetary allocation in poverty allocation
Source: Authors’ calculation based on Ministry of Finance
Notes: p indicates proposed
The Rapid Assessment of National Budget FY 2012-2013 is an output of the Economic Policy Unit of the Unnayan Onneshan, a multidisciplinary research centre based in Dhaka, Bangladesh. A team under the guidance of Rashed Al Mahmud Titumir prepared the report. The team comprises Palash Kanti Das, A.Z.M. Saleh, K. M. Mustafizur Rahman, Jayanta Kumar Basak, Nahida Sultana, Nibedita Roy, Jannatul Mozdalifa, Sawon Istiak Anik, Saikat Chandra Halder, Md. Aslam Hossain and Shahid Md. Adnan.