Economy tuned to social charity
Lofty revenue target, untamed inflation, hugely expanded social safety net get major attention in proposed budget
Courtesy Daily Star 10/6/08 Inam Ahmed
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More than a budget document that addresses three key areas for any economy inflation, growth and employment the finance adviser yesterday unveiled a plan that smacks of social charity.
It is a short-term full-hearted programme to cast the social safety net wide, which was necessary for the present day crisis. In non-development expenditure, the adviser plans Tk 16,932 crore for social safety net, Tk 13,648 crore for subsidies and Tk 10,253 crore for salaries of teachers and doctors. But in doing so he misses many other exigencies and leaves unexplained areas like how to feed the furnace of such a high spending budget. Even why and how this social safety net amount will be spent is not clear although he has mentioned many new programmes. The largest outlay, as it seems, is Tk 2,000 crore for a new programme called 100 Days' Employment Generation.
In the end, the crucial issue that would determine the success of this 'social charter' is the capability of the revenue departments to generate money. What has been lacking in the budget is any clear direction that the efficiency of the public administration would be enhanced for both making the social goals achievable and the revenue target achieved. It is indeed a big question in terms of implementing the piffling development expenditure.
The finance adviser has proposed a 38 percent increase in non-development expenditure and 21 percent increase in revenue expenditure. Such increases were necessary in view of the huge subsidy he wants to slop around, sometimes as necessary steps and sometimes from the notion of populism.
Finance Adviser Mirza Azizul Islam had been however earnest in his efforts to boost the farm sector and the agri-industry by slopping huge subsidies and duty facilities. He rightly understood the importance of agriculture in stabilizing the economy. He also tried to correct the wrongs of the last budget that hurt the industry so badly by reshaping the duty structure. His proposed steps would make capital machinery, raw materials and intermediate goods cheaper, thereby giving a fillip to industrialization.
However, the tax holiday proposal, one that the entrepreneurs had been so intensely seeking, may not live up to their expectations as a new slab has been proposed 100 percent tax holiday for the first two years, 50 percent for the next two years and 25 percent for the last one year. This would take the edge off the current tax holiday mode.
But the main challenge would remain whether industry will react to the evolving political situation and whether industry will get enough credit to keep its wheels turning. When the government envisions a 86 percent increase in its borrowing from banks and mind it, this contrasts with a 22 percent decrease in borrowing from savings instruments one gets naturally worried about the probable monetary policy. It is actually difficult to imagine a monetary framework with such a large borrowing plan.
The finance adviser had kept borrowing from non-bank sources low, which are high interest bearing instruments, probably with the aim of reining in the budget's loan repayment obligation, which is already projected to bloat to 17.3 percent of the revenue budget. But the bank loans with all likelihood will lead to crowding out effects on the private sector. However, the adviser projects that investment in the private sector will increase to 22.6 percent and acknowledges the need for private sector credit expansion by 19-22 percent in medium term. How this can be achieved, because of such a high strung budget, is a matter of contemplation.
And this would also lead to inflationary pressure. The proposed budget in fact dwells very little on how to curb the ugly head of inflation. The adviser has predicted capping of inflation at 9 percent next year, but this target is still too high and the fiscal postures do not generate much hope regarding whether this could be maintained. This is more so as he himself confessed that this year the budget deficit has increased from 4.2 percent to 4.8 percent.
The adviser has cursorily mentioned keeping prices of essential items like rice, wheat, edible oil, lentils, onion and garlic at a normal level. But how much that promise will cut is still to be seen in view of the present day runaway price escalation of the items mentioned.
The finance adviser has however correctly targeted export by increasing export subsidies to Tk 1,050 crore from this year's Tk 700 crore. But with the export drive on the top gear, whether that amount is sufficient is an open question.
And in the labyrinths of social network and charities, it is also easy to get lost where the growth is coming from next year. The finance adviser has set a target of 6.5 percent growth for the next fiscal year and said growths would be in the range of 7-8 percent in the medium term (2009-11). It means for an economy of about $60 billion we are again stuck in the 6 percent bracket and that is not enough to generate enough employment. The economy, even if it does not move much, should produce this 6 percent plus growth anyhow and with new initiatives it should reach 7-8 percent next year. Remember,
The other disturbing thing in the proposed budget is its lack of direction in energy enhancement. It has not shown any promises in power generation, and so one would expect to remain in the 'dark age' for an unforeseeable future. Without power, industry will suffer, and the SMEs, have not received any special attention.
Mixed with all these, the employment question will loom large next year. If the farm sector revamps, more importantly if the agri-industry revamps, employment will be generated on a wide scale. But it is not clear what will happen to the industrial employment scenario.
The finance adviser in proposing his budget has however dwelt at length on the present day realities the international and internal shocks, the slackening growth scenario, and the hardship of the commoners. But his smaller ADP outlay by 3.39 percent from this year's original amount does not explain how he would meaningfully channel funds to the rural areas and create sustainable employment. In a developing country like
He has rightly increased diesel subsidy for farmers to Tk 540 crore from the existing Tk 250 crore, but questions still remain as to the efficiency of the subsidy distribution and the real increase in subsidies, given the impending diesel price enhancement. His promise for Tk 272 crore for agriculture extension and research is also heartening.
However endeared the social face of the finance adviser's budget is, economists would certainly look at it with keen interest and skepticism. They will want to see if the macroeconomic stability gets jeopardized because of high borrowing.
Mirza Aziz through his proposed budget has set the tone for a time to wait and see how his short term measures lead to long term benefits.
[Disclaimer: ALOCHONA Management is not liable for information contained in this message. The author takes full responsibility.]
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