The depressed external demand calls for a new thinking on economic architecture – whether we spend energy on export diversification or rather think in terms of economic diversification Day labourers await being hired for work when the countrywide shutdown had left most of them without anything to do and thus anything to eat. The photo was taken in the capital in May. File Photo: Saikat Bhadra/TBS The current pandemic has thrown an unprecedented challenge to all countries and the pain in Bangladesh is all too palpable in the ever climbing numbers of the infected and the dead, the cries of the hungry on the streets, the anger of the garment workers who are agitating in front of their closed factories, and countless other worried faces of business owners and people suddenly without a job.
However, as there are crises, there are also new opportunities. The Covid-19 crisis is no exception. How we can grab the moment and wrestle out the advantage is the new challenge of the New Normal that Finance Minister AHM Kamal faces on Thursday as he presents his budget. One thing the current pandemic has laid bare is that our economy and its enviable growth figures are thinly laid upon a fragile superstructure. That structure came crashing down resoundingly as the economy juddered to a painful halt and the number of Covid-19 patients started to go up in alarming progression. Neither the economic framework nor the health system was capable of absorbing that shock. And so every day we find an increasing number of people begging on the street and hear of tales of how people are dying without getting any health care.
The situation represents the twin dangerous curves – of infection and poverty. And both the curves have to be flattened for the economy to get a life. That is truly a tall task for the finance minister. So this extraordinary year calls for an extraordinary budget that surpasses the rhetoric of containing a budget deficit within five percent of GDP or say, the mere mincing of words that social security is expanding and that poverty reduction is high on the cards. We have heard all of these in the past presentations of budget after budget over the years – how the governments have been successful in poverty alleviation – and they all show their hollowness this year as fast income erosion has erased that thin line that divides the poor and the non-poor. People who were once showcased as poverty alleviation success stories have fallen through the crack to become poor again.
This crisis has also made a point afresh – that we should not waste money on projects made costlier by deliberation.This is why it is time for the finance minister to think creatively and set priorities in the light of reality. Why should our roads be the costliest in the world? Why should we waste time and make projects many times costlier than the originally planned budget? And are the projects bearing the promised fruits they were meant to?It is time for social auditing of every project, and rein in over spending. In this time of crisis, every taka is precious.
First, let us have a quick stocktaking of the “New Normal” reality. Exports remain an iffy affair as global demands remain depressed. Nobody knows when that demand will peak again. Domestic investment is depressed too. People are faced with job loss and income erosion leading to demand depression. This gives no incentive for entrepreneurs to invest in the economy. So a depressed economy would lead to less revenue generation. Corporates would pay less Vat and tax on their lower revenue. Imports would slow down leading to low customs duty payments.
Opening the economy in the midst of a raging pandemic does not mean the wheels will start moving any time soon. What if the situation goes off the deep end and then another lockdown is needed? Against this background, the finance minister has to set his compass both about where he should spend and also where to find that money.
So what are the priorities?
Health and social safety is the first stop. Two kinds of challenges have emerged out of the pandemic. The first one is very obvious – how to increase the capacity to fight the Covid-19 through enhancing testing capacity, improving treatment facilities and enforcing effective quarantine.But on the secondary layer remains the reality that our everyday health care is now stretched thin by the onrush of pandemic patients. People are also dying from otherwise preventable, treatable ailments. People are facing deaths that should not have been in a normal time. So that necessitates the need for improving the overall health superstructure.
New disease brings new uncertainties requiring new measures and approaches
Social safety protection due to loss of job and income erosion is the other need that has arisen out of the crisis. It is estimated that poverty has doubled as a result of the pandemic shock and it will need around five percent of the GDP to feed the about seven crore poor, old and new. Taking adequate early measures to ward off any possible food crisis is another area needing immediate attention.
The World Food Organisation’s early warning that despite food surplus there may arise a food security situation is something to be taken seriously. It needs to be ensured that rice production does not face any hiccup due to input crises. Farmers have already lost their capital for the next production season because of the bottom falling out of the market and they need early support in terms of cash, seeds and fertiliser. Both input and output distribution channels have to be up and running smoothly.
Education will be another Achilles’ heel in this time of pandemic. With academic sessions on hold and income erosion, drop-out rate will shoot up and, as experts fear, may reach what it was 10 years ago. It will be a real challenge to teach those who can still enroll. The majority of the students come from poor to low income families and for them to have access to computers and broadband Internet for online classes is but a pipedream. Even if classes can be resumed in the brick and mortar campuses, the challenge to provide health safety to students, teachers, and support staff is the elephant in the room.
Schools have to run in shifts to ensure social distancing. That would require more classrooms and teachers. Classes have to run on weekends too, requiring extra allowances for teachers. Sanitation has to be maintained in schools. They would all require money for which budgetary allocations have to be made.
Time for economic diversification rather than running after export diversification
This Covid-19, if the predictions of the experts and WHO are anything to go by, will be here for quite some time. Maybe up to two years or even a decade. And if events roll out like that, it is unlikely that the export markets would show much appetite for the tees and jeans and dress shirts in the years ahead. The situation accentuated by the unprecedented oil price slump will also depress demand for migrant workers in the middle-east. The depressed external demand calls for a new thinking on economic architecture – whether we spend energy on export diversification or rather think in terms of economic diversification.
RMG boss Rubana Huq’s warning that massive job shedding would occur this month in the apparel sector is also a wake-up call for the policymakers to vigorously focus on employment generation in domestic demand driven industries. This needs revamping the SMEs and micro-SMEs which would absorb the workers made excess in the apparel industry. The furniture factories, the tailoring shops, the workshops, the small-scale poultries have to be regenerated to give jobs to the unemployed.
Then the questions come: if the currently announced Tk20,000 crore stimulus for the SMEs is good enough for them, and if the small businesses will be our saving grace from this blackhole? If that were so, then why would SMEs have to pay the same amount of interest rates on loans as the big industries? And most importantly, most M-SMEs are not a part of the formal banking system and therefore the stimulus package would fail to do any good for them. There must be a system to help them, probably by engaging the myriad microfinance organisations.
So diversifying the economy would basically mean looking at import substitution industries, the kind of paradigm change that the Latin American countries have embraced. Tax and tariff policies will come into play here. How would the finance minister reduce the cost of doing business? Where would he give a rebate on tax and where would he hike duty?
This also requires a review of the big projects that would contribute to economic diversification and then railroading them to their finish line as soon as possible. For example, completion of the Padma bridge and Dhaka metro rail will lead to economic diversification. The economic zones should be readied as soon as possible. Such actions will require a master planning and then rolling out the plan with energised manpower.
Think fresh on the ADP
The ADP will need to be reviewed too for the same reason. Projects that will support skill development or the Internet infrastructure strengthening should be put on the express lane.
Think finances clearly
So these supporting pillars for the economy in the New Normal situation have to be built and expenditure priorities also have to be reset accordingly. And it is here the finance minister has the chance to show his dexterity to make creative choices. But before that, a clear assessment of the economic loss has to be made. Which of the sectors are the most damaged and to what extent? Where is that? Without that how do you set aside a recovery fund?
The finance minister has to think about how to make the public spending a catalyst for private sector job creation. Much of the jobs that need priority attention can be better executed by the private sector or the non-government actors. The public-private mix of actions would result in better health service delivery or education campaigns. Instead of trying to serve health service totally on its own, the government can easily task the private hospitals and NGOs to run its jobs. It can pay the private hospitals for the delivery of service to the general public free of cost.
The task is to kill the mouse, whether the cat is black or white makes no difference. But probably the greatest pitfall in case of expenditure is the unscientific approach to problem solving without depending on realistic data and proper projections based on scientific modeling. What is the projection for coronavirus infection? How many will probably be infected in the next one year? How many will need hospitalisation? How many ventilators would be needed?
Without an assessment, how can one tick money off for the pandemic? Do we know how much subsidy we need in agriculture to reach that desired goal? How much credit will the farmers need this time? Where exactly will the subsidy go? How do we target the poor for social protection? How many will get the dole-out and for how long?
So it is wiser to work with the foreign financing pipeline that is never properly utilised. We at best use 15 percent of the pipeline that needs to be increased to 18-20 percent of the existing commitments. That needs studying of the foreign financing projection, setting targets and resolving the bottlenecks. What new things he is going to do to make dollars flow in a gush is something to be watched. And yes, the banks, the easily reachable sugar bowls for money. How much money could be tapped from the bank vaults in the current low liquidity and deposit situation?
Borrowing from the public banks is already at an all time high that has hiked up debt servicing obligation. One cannot ignore the question of debt sustainability while designing the budget. And designing the budget is not only how much we can spend. There is also the question of where we can save. Electricity is one place that will then need to be streamlined as Tk9,000 crore, and that’s a lot of money, is going into capacity payment to all the private power stations just for sitting idle. Why can’t the government use the force majeure to stop that payment, or defer the payments for two or three years and use that savings to prop up our broken health system?
Definitely the amount of export and remittance subsidy will go down with exports and workers abroad facing trouble big time. That will save money for the government to be used for economic recovery. So the government’s financing and expenditure need a revisiting. Why has the subsequent budgets expenditure on maintenance and repair gone down? Does it serve building more roads? Why are special allowances going up? Who gets that money?
And this whole process requires a wide spectrum of reforms – from revenue to administrative. Automation of the revenue system to plug thefts and bribery is a must. Unfortunately some 36 projects later in the last one decade, revenue reforms and automation works are still limping. Some say it is the resistance within that stops reforms for the ulterior motive of generating graft. It is now estimated that if the money taxpayers spend for bribes could be included into official count, the tax-GDP ratio would have improved by 5 percent.
Go beyond the poor
The old and new poor must be addressed through allocations. But one should not forget the middle class and the lower middle-income group as well. They are people of limited income and they have been hit hard. Strangely these groups of people have been overlooked in the budgets all the time, making their upward mobility harder. So it is time to be kind to them. Give them a fiscal breather. Make them spend the saved money to generate that demand that would ultimately boost the SMEs and import substitution industries we have talked about before.
The pandemic has shown how vulnerable our workforce is against any natural disaster or the whims of the entrepreneurs. They see their salaries being wiped out by half and their jobs just spirited away overnight. And they have nothing to fall back upon especially in an economic crisis exacerbated by a health crisis of unprecedented magnitude. So it is high time for the finance minister to introduce universal health insurance coverage. That would relieve the government from its huge burden of bearing the health cost of a ballooning population. That would set the government on the right path to improving health infrastructure. And that would as well boost the private sector healthcare system.
Proper auditing of the health service and education is of urgent need too. Private hospitals just cannot get away with squeezing money from the private citizens’ pockets and providing them with below standard services. And as we need a better health system, it is important to think who are going to be our doctors. Most of them are now coming from private medical colleges, but are the first semester intakes of the right merit and are they getting the quality education needed to become well trained doctors? Because when you are at the hospital as a patient you want someone who knows what the deal is.
And we need proper job insurance too so that when someone loses a job, that person does not immediately go destitute. And also a system to insure the small informal sector businessmen so that when they suddenly face an economic shock, they do not sink like lead. These all call for comprehensive thinking and devising ways out because as we understand, this Covid-19 is not going to go away anytime soon and that many more pandemics are lurking just around the corner.
And reforms too
The tax reforms are abysmally inconsistent and played up to the powers that be with the strongest voice muscle. Vat is a concrete case in point. The automation of Vat realisation is still lost in the labyrinth and the Vat administration is highly handicapped. Syncing income tax, corporate tax, customs duty with Vat remains incomplete. A 2006 study says Vat exemptions lead to revenue loss of 2.54 percent of GDP. A review of these exemptions is now needed if finances have to be repaired. There is a huge theft in turnover tax because of corruption and discretionary power of the Vat officials.
The alternative dispute resolution (ADR) is not working properly. Why do the department representatives also sit on the ADR board who would naturally defend their original decisions? Reforms should also come in expenditure too. Why should we keep on building roads with abnormally high cost? Why should they be the costliest in the world? Why do we build costly tunnels while cheaper alternatives exist? Reforms are also needed in the investment rules and process. Despite all the talks about a business-friendly administration, every businessman will vouch how tardy the system is to get anything done.
With possibilities of businesses moving out of China in the aftermath of the pandemic, and with reports that India is wooing the businesses looking to invest elsewhere other than China, it is high time for Bangladesh to be proactive to lure some capital away from the land of the dragon.
Can he play up the card?
So, amidst such huge challenges, will the finance minister be able to tide over the pandemic damages? That depends on how much political power he wields to face the situation. Will he submit himself to the relentless demands of the apparel moguls and bow to them, or will he seek jobs in the informal sector just as China is doing today by propping up the small businesses? Will he reform expenditures to rein in the greedy “project builders” and see that every taka counts for the GDP or will he again gloat in the glory of mere growth numbers, no matter if they transform into meaningful schemes? These questions are all up in the air. We will find the answers soon.