Fiscal policy barely prioritises macroeconomic stability

The fiscal policy for the ongoing fiscal year has shied away from prioritising macroeconomic stability although several key indicators have come under serious stress owing to internal and external factors, said a noted economist.  

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, says the budget deficit widened in the first eight months of 2022-23, with domestic financing, largely monetised, on course to overshooting the budget target.

"External stabilisation is in dire need of course correction."

He said the fiscal measure that matters directly for external balance is public expenditure on imports not financed externally. The promised effort to cut import-intensive domestically financed projects is awaiting visibility in the fiscal outturn data.

"The fiscal policy in FY23 so far has shied away from prioritising macroeconomic stability."

According to the economist, the FY23 budget faced several challenges in adapting to macroeconomic stress amidst post-pandemic recovery, global supply chain disruptions and a deeply uncertain external outlook.

The budget makers sought to expand the fiscal deficit hoping global headwinds will fade, thus allowing the FY23 fiscal measures to catalyse investment, growth, employment, disinflation, and building up foreign exchange reserves. 

"The outturns on all the above so far have not been the desired direction, only partly due to tight external financing conditions, a strong dollar, and elevated international commodity prices," Hussain said.

Despite significant corrections in the corporate tax regime for three years in a row and an expanding fiscal regime incentivising import substitution through higher tariffs and subsidising exports, the private investment rate, export growth and employment have declined.

GDP growth is projected by the Bangladesh Bureau of Statistics to fall to around 6 per cent and inflation is running above 9 per cent.

Productivity growth slowed. Foreign exchange reserve depletion is still looking for a bottom, tax revenue growth slumped and borrowing from the Bangladesh Bank ballooned.

Hussain thinks lower growth with higher inflation is symptomatic of the predominance of supply shocks caused by foreign exchange rationing, gas shortage and a proliferation of economic management by command and control.

"Public policy response to the external shocks lacked fitness for purpose."

He said revenue mobilisation has been most disappointing. Betting on higher buoyancy parameters, through better tax compliance, has not paid off. The revenue gains from base expansion and several indirect tax rate increases have failed to outweigh the revenue losses from the direct and indirect tax decreases.

According to Hussain, disinflation and stabilisation of foreign exchange reserves are macroeconomic imperatives. This warrants fiscal consolidation meaning a declining path of primary fiscal deficit and shunning the monetisation of the government's domestic borrowing.

"Tax policy and administration reforms can add some more. These must build on the work already done on the related legislations and the various projects in place for automation of tax services."

"We must walk the talk on expenditure allocations."

He says the expenditure shares of the top ten economic sectors have to square with the priorities deserved by the agriculture and social sectors and thinks expenditure rationalisation is needed to expand funding for these sectors. 

The economist called for direct generosity where it is needed the most as inflation has damaged the real income, food security, and essential expenditures of households in heterogenous ways.

He thinks several structural reforms need immediate execution.

These include bringing market-driven flexibility back into the interest rate and the exchange rate regime, finishing the work in progress on several financial sector legislations, putting in place a transparent regime of energy pricing, injecting functionality into the shops set up to provide services in one stop, and several key reforms in trade and human development policies.