How have the Sectors been impacted by this year’s Budget? – Part I

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    The Economist, a London-based weekly, recently published a list of 66 emerging stable economies, ranking them according to four measures of financial strengths, namely public debt as a percentage of GDP, total foreign debt, costs of borrowing and foreign exchange reserves. Bangladesh fared well in the ranking, securing 9th position from the top, signifying its economic resilience amid the onslaught of the pandemic induced recession. 

    Amid the coronavirus pandemic, Bangladesh is in a precarious position to ensure the economic growth achieved in the last decade is sustained throughout the FY 2020-21 and beyond. Given that the country is soon to graduate from an LDC status, the stakes are much higher. Among other economic challenges, the pandemic has posed an additional threat to the growth potential of the country and the budget needs to reflect the government’s initiatives that are poised to tackle these challenges. The fiscal budget for the FY 2020-21 was unveiled by the finance minister to mixed reactions from stakeholders with its ambiguity in terms of revenue generation. The budget, which was announced on the 11th of June, is the largest yet in Bangladesh’s history with a set target of BDT 568,000 crore for the fiscal year 2020-2021. Admittedly, the size of the budget is only relevant if its major components are targeted towards alleviating the healthcare and economic challenges faced due to the pandemic. Healthcare and agriculture should be the main priority segments to receive the most support. Research conducted by BRAC showed that the COVID-19 pandemic caused a loss of more than BDT 565.36 billion for the farmers in the past one and a half months alone.

    The current proposed budget is 13.24 percent (BDT 66,423 crore) higher than the revised budget of the current financial year and is 8.56% higher than the main budget for FY2019-20. The pressure is on the government to reduce the budget deficit of last year and ensure higher revenue collection this year, especially given the impending financial needs due to the pandemic. Currently, the budget has set a revenue target of BDT 378,003 crore along with an additional BDT 4,013 crore sourced in foreign grant. The National Bureau of Revenue (NBR) has been set a target of BDT 330,000 crore and revenue from non-NBR sources have been set at BDT 15,000 crore. Subsequently, revenue target excluding taxes has been set at BDT 33,000 crore. It is estimated that, without foreign grants, the budget deficit will widen to a record BDT 190,000 crore or 6% of the gross domestic product (GDP). Experts are skeptical of the government’s ability to ensure adequate revenue generation on par with the targets, especially given the shortcoming of previous year’s tax collection. 

    Hence, the finance ministry is under pressure to ensure higher revenue generation with the aim to minimize budget deficit this year. Currently, the budget deficit has been set at 5.8 percent of GDP i.e. BDT 185,984 crore. In comparison, the budget deficit for the FY2019-20 was 5 percent. To mitigate this gap, the government plans to borrow BDT 80,017 crore from international sources. Additionally, the government plans to borrow BDT 109,980 crore from domestic sources, BDT 84,980 of which will come from banks, BDT 20,000 crore from savings and BDT 5,000 crore other sectors. The plan for this borrowing is yet to be laid out in details and its unclear how private banks are to sustain this borrowing demand with falling deposit and worsening NPL performance. 

    The size of the Gross Domestic Product (GDP) for the next financial year has been set at Tk 3,171,800 crore, which is BDT 364, 100 crore higher than the revised GDP of the current year, BDT 2,805,700 crore. The growth rate has been fixed at an ambitious 8.2 percent and the GDP growth rate of the current fiscal year has been revised downward at 5.2%. The IMF has predicted the global economy to shrink by 3% as an impact of the pandemic. Admittedly, Asia is predicted to perform better than the West. However, the country’s heavy reliance on RMG export brings into question the viability of such a high GDP growth given falling orders from western buyers and halt in local businesses. The government also aims to keep inflation limited to 5.4% in the coming year. According to the Bangladesh Bureau of Statistics (BBS), the monthly inflation rate, [calculated on the basis of a consumer price index (CPD)] dropped to 5.35% in May 2020 from 5.96% in the prior month. The pandemic has thrown inflation prediction off balance with innumerable value chain disruptions and most domestic product value chain are just barely recovering from the fall in demand. 

    Addressing concerns about the economic cost of the pandemic, the government has so far allocated BDT 1,03,117 crore as part of the economic recovery package. The finance ministry plans to create loan facilities through commercial banks at subsidized interest rates for the pandemic affected industries and businesses. How the government plans to incentivize the banks to lend to SMEs and other businesses at a reduced rate is yet to be determined. The government also plans to increase its social safety net programs to protect the extreme poor and low paid workers of five informal sectors. Lastly, the government plans to increase money supply into the economy, all the while maintaining a stable inflation. The finance ministry has made this claim of increasing money supply without articulating its plan and how it plans to hold inflation in bounds. 

    As part of the economic stimulus, the government has created a fund amounting BDT 5,000 crore for the export oriented industries so that they can continue to pay salaries and allowances to their workers and employees. A working capital loan facility of BDT 30,000 crore at a subsidized interest rate for large industries has also been introduced. For the Cottage, Micro, Small and Medium Enterprises (CMSMEs), the government has also setup a working capital loan facility of BDT 20,000 crore at a subsidized rate. To improve the country’s export competitiveness by financing the pre-shipment expenses of exporters, a new Pre-Shipment Credit Refinance Scheme of BDT 5,000 crore has been initiated through Bangladesh Bank as well. 

    Author: Rageeb Kibria, Principal Business Consultant, LightCastle Partners.

    As part of LightCastle’s budget analysis, we look into the direct and indirect impacts of this year’s budget on different sectors. While some of the sectors have received significant policy assistance, others have been cast aside in the government’s attempt to salvage additional revenues for financing the budget. The economic contribution and perceived importance of the sector were key considerations while deciding whether the sector will be eligible for policy support.

    References

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.