One unintended positive aspect of a calamity is that it brings clarity to our purpose, direction, and priorities. All of a sudden, the numerous choices seem to disappear to focus on the real job at hand. The distinction between what needs to be done and what can wait becomes ever so unequivocal.
At times, adversity brings out the best in us by uniting us against one common enemy and deploying all our resources to beat it. Covid-19 has emerged as the common enemy not just for Bangladesh but for the rest of the world as well. Our budget is imminent and the top priority will definitely be putting the economy back on track from the devastating impact of Covid-19.
As per the forecast of multilateral agencies such as the World Bank and ADB, the robust economic growth that the Bangladesh economy was experiencing over a sustained period in the recent past is set to come crashing down in FY 19-20, and this trajectory is likely to continue in FY 20-21 as well.
GDP growth is estimated to be as low as 2% to 3%. This comes as no surprise as the key indicators of the economy, including remittance, export, domestic production, and demand showed signs of considerable decline. The worrying part would be the threat of a persistent de-growth.
Slowdown in the real economy has translated into many businesses finding it difficult to generate enough cash flows to survive. Consequently, there have been instances of non-payment, partial payment, and pay cut for employees. Even more drastic measures of lay-off and termination have been adopted by some firms. Against this backdrop, it is highly likely that economic activities will shrink further and unemployment could rise to an alarming level, leading to a threat to social stability.
Government revenue collection will definitely be hit hard. With declining sales levels, indirect taxes such as VAT collection are set to fall short of target. International trade has already fallen and collection of duty, taxes on import stage, and source tax on export will see downward pressure.
It’s hard to see how many sectors can remain profitable amid this crisis and therefore corporate income taxes are expected to tumble. Personal taxes will undergo a similar trend with pay cuts and the rise in unemployment. The fact that we have one of the lowest Tax-GDP ratios (8.5% approximately, even Nepal has roughly 20%) in the world mainly due to our long-time failure to widen the tax net makes us more vulnerable.
On the one hand, we have all sources of revenue for the government in for a downward pressure and as a consequence we are staring in the face of a massive shortfall. At the same time, the requirement for government funding to revive the economy will increase manifold.
Many sectors that historically contributed heavily to the national exchequer will now require government support for their survival. A case in point can be the cement sector. It generally contributes immensely in the form of VAT, duty, income taxes, AIT etc. Now the pre-existing overcapacity in the industry has been exacerbated by sharp fall in sales due to Covid-19. Cement Manufacture association sought government support, including refund of their Advance Income Tax (almost Tk700 crore).
Most businesses will struggle to post a profit this year. Recovery of some of the sectors, including but not limited to, steel, real estate, aviation, tourism, hospitality, automobiles, and consumer durables might take longer due to the nature of business. Hence, they too will require government support.
It is abundantly clear that simultaneous decline in government revenue and increase in government expenditure to support economic recovery will widen the budget deficit. However, the government cannot err on the side of conservatism in a period like this. Priority has to be putting the economy back on track, increasing economic activities, and ensuring jobs at least at the current level.
If it means a larger budget deficit (FY19 Tk1.1 trillion approximately) and increase in deficit as a percentage of GDP (FY 19, 5.1%), then so be it. At this moment, this will be the lesser of the two evils as prolonged economic downturn threatens to expose the structural flaws of the economy, causing long-term damage.
We can take heart from a report in The Economist that ranks Bangladesh as the ninth strongest economy to withstand the fallout from Covid-19. One of the arguments for that is the relatively low level of our domestic and foreign debt as a percentage of GDP (33% approximately). Therefore, in a time when we need to increase government spending to revive the ailing economy, we will be in a much better position compared to many competing economies where debt level is already high.
As far as specific sectoral allocations are concerned, some of the sectors that deserve more attention understandably include health, social security and safety net, agriculture, small businesses, export-oriented businesses, and businesses with larger contribution to employment generation.
To accommodate funding to stir up the economy at a time of sluggish revenue collection, we might consider reallocation of funds from some less priority ADP projects. One such sector could be power and energy (allocation in the last budget was Tk28,051cr approximately, representing over 11.3% of the budget) where we have now excess capacity with lower demand from the industrial and commercial sectors. Quality of ADP implementation has been under scrutiny for a long time. At a time when every penny counts, we need to be more mindful and selective in this regard.
With every challenge, there comes an opportunity. There has been visible movement among companies across the globe to diversify their production facilities away from China. Th US-China trade war is an issue and even Japanese government announced a $2.2bn package to help Japanese firms move out of China.
In this connection, Vietnam and India have emerged as potential destinations with their governments reacting promptly to attract the investment. BIDA is also taking initiatives like trying to lure Japanese investors through virtual meetings. This budget should have specific allocations for attracting these FDI. We should aggressively work to address reduction of the red-tape in approval processes and easing the cost of doing business in Bangladesh. Not every day do you get such a mass exodus of firms looking to relocate. Bangladesh must do everything in its capacity to ensure that this opportunity is not missed.
Our economy is at a crossroad. We have not faced challenges on so many fronts at a time, not at least in the recent past. Right policies and quality implementation can pave the way for a faster recovery while inadequate steps and reactive implementation can lead to a prolonged crisis.
What gives us hope is that our economy has shown resilience in the past in the face of adversity. If we get our act together with the right kind of priorities and timely interventions, there is no reason why we cannot come out triumphant once again.
Md Sadekur Rahman is a banker and can be reached at [email protected].
