FY20-21 Budget: Bangladesh’s high stake gamble to keep its dream alive

Bangladesh is braving the Covid-19 crisis to keep its dream of transition to middle income country alive by putting its economic growth rate for the fiscal year 2020-21 at 8.2 percent. This is to be pursued simultaneously with boosting farm production, tackling Covid-19, providing social security, and keeping unemployment low.

Bangladesh is not new to taking up challenges. It has grown steadily for several years (averaging a GDP growth rate of about seven percent per annum), enjoyed macroeconomic stability, a good foreign exchange reserve (USD 33 billion in May 2020) and low debt service ratio (7.2 percent in 2018). It also has good social sector achievements, including the reduction of poverty and hunger, compared to most developing countries.

But with Covid-19 still raging at full swing, can Bangladesh accommodate high growth while tackling the coronavirus, which requires social distancing (enforced through lockdowns) to fight it effectively? It is a tough call for the country in an uncertain economic and social environment.

The priority on growth may undermine the fight against Covid-19. The push for an annual growth rate of 8.2 percent for FY20-21 will require moving the country's economic activities full steam ahead, with finance, trade and services, manpower development, all moving forward in tandem. It will require the movement of goods and services and people across the country and beyond, and most importantly, it will require removing lockdowns.

The recent decision to withdraw the lockdowns did have the desired impact of movement of goods and services, and opening of shops and businesses, but it has also led to a significant spike in the Covid-19 infection rate. Currently, about 3,500 to 4,000 people are getting infected daily, and fatalities are mounting. It is anticipated that the infection rate may accelerate further in the days to come. With a high density of population, especially in urban areas, the underdeveloped public health care system, and poor compliance with lockdowns, the country remains a fertile ground for further spread of the coronavirus. The cost in terms of loss of lives and livelihoods can mount very rapidly.

The agricultural sector is also getting caught in the coronavirus trap. At the onset of Covid-19 infection in late March, thousands of people "fled" from urban areas to the relative safety of rural areas. They, and those already engaged in the rural and agricultural sectors, seem to have remained largely unscathed by the virus.

There is no guarantee that they will remain so in the future. People engaged in agricultural activities, carried out in the open with adequate space around, are naturally in the low risk category. But one cannot ignore the eventual spread of the virus to the people working in rural areas. Farm workers getting infected with Covid-19 may lead to labour shortages and eventually affect agricultural output. Food production may decline, and prices can increase, with negative impacts on the poor in both rural and the urban sectors. This eventuality seems remote, but it can be a possibility.

The financial challenge of restarting the garment industry is another hurdle for the new economic growth target. The readymade garment (RMG) sector employ nearly four million workers (mostly women) and it is a major foreign exchange earner of the country (USD 33 billion in 2018). The high growth scenario will require opening up of the RMG sector as soon as possible. The sector has suffered from lockdowns through lost production, lost export earnings and continued payment to furloughed employees. The government will undoubtedly be under pressure to provide support to the sector. One innovative way to do this could be to offer matching loans to well-conceived and jointly agreed private sector initiatives for restarting factories and exporting products abroad.

There is also the issue of a slump in remittance income. Quite a large number of Bangladeshi migrant workers recently returned from abroad, and this trend may continue, with host countries themselves being increasingly affected by Covid-19. It is anybody's guess how the countries hosting Bangladeshi migrant workers will perform in the coming year, and what lies ahead for Bangladesh in terms of the flow of remittance income (which stood at about USD 15 billion in the pre-Covid-19 period). One could however expect that remittance income will go down steeply and recover very slowly when the Covid-19 infection subsides globally.

The financial sector underperforming and misfiring is a very real possibility in the new fiscal year. Bangladesh has regularly underperformed in terms of revenue collection. The new budget sets an ambitious revenue collection figure of Tk 3,300 billion. In the first half of fiscal year 2019-20, revenue from taxes fell short by Tk 318 billion, creating worries of a projected shortfall for the whole year that could be as high as Tk 800 to 900 billion. Government's bank borrowing soared to Tk 508 billion by January 15, 2020. Given this backdrop, it is unlikely that the FY20-21 revenue collection target will be met.

The money whitening opportunity through investment in the construction sector (housing) is an innovative one. It can work, but it is expected to increase the demand for construction workers. If this works, it will push up aggregate demand for the basic necessities of workers engaged in the construction sector. This will help keep agricultural prices up and favourable for the producers, but it can also have inflationary consequences, if supply fails to respond fairly quickly (for reasons mentioned above).

The huge budget deficit (Tk 1,860 billion) is expected to create significant demand for funds in both domestic and external markets, leading to increased pressure on the financial sector. External borrowing (estimated at Tk 800 billion) can probably be met, but domestic borrowing of about Tk 1,100 billion (of which Tk 850 billion will come from domestic banks), can create significant stress on the domestic financial sector, and crowd out the private sector.

It is still not clear how the combination of various stimulus packages, the refinancing schemes, the government's borrowing from Bangladesh Bank (Tk 150 billion) and re-lending at a four percent interest rate, will work out. Injection of funds into the economy can be effective if supply elasticity is positive and high. In the Covid-19 context, this may not be so. It can instead lead to a rise in inflation, which can eventually lead to lower living standards for the poor and for fixed income earners.

Will the gamble pay off? Fortune favours the brave, and Bangladesh has certainly gambled with a growth budget, rather than sticking to a cautious, protective, healthcare centric budget. Healthcare allocation has gone up, but at 6.1 percent of total allocation, it is at joint sixth place. The gravity of the Covid-19 situation would have called for a higher allocation for health, which could create space for pursuing the dual objectives of growth and fighting Covid-19.

Compromise between contending claims for resources can be restricted by the Covid-19 upsurge. However, the gamble could pay off with the helping hand of something that budget planners hold close to their hearts—the "carryovers".  In the FY18-19 budget, the Annual Development Programme remained under-utilised by 39 percent. These figures do not show the actual realised surplus (a part of carryovers may be pre-committed). These leftover funds, or carryovers, can provide some relief to the financial authorities to pursue the dreams of the new budget.

Effective and field tested new medicines to fight Covid-19 can however be an immense game changer. It can tie up all loose ends and create space for pursuing the targets of growth as well as social and health objectives.

Atiqur Rahman is an economist, ex-Adjunct Professor at the John Cabot University, Rome, Italy and ex-Lead Strategist of IFAD, Rome.