7.2pc growth might be achievable, WB’s budget assessment

FE Report June 21, 2012

The World Bank (WB) Wednesday said the government’s growth target for the fiscal year (FY), 2012-13, at 7.2 per cent is achievable if the energy supply-related problems can be overcome and road infrastructure, be improved.

“This is a daunting task but attaining growth of 7.0 per cent or above might be possible. For this, Bangladesh needs two things — fuel [gas and power] and road improvement,” Dr Zahid Hussain, senior economist of the WB’s Dhaka office told the reporters at a media briefing on fiscal 2013 budget assessment.

আগামী অর্থবছর ৭ দশমিক ২ শতাংশ প্রবৃদ্ধির লক্ষ্য অর্জন কঠিন হবে ॥ বিশ্বব্যাংক

সহজে বুঝা বাজেট

WB lead economist Sanjay Kathuria and senior economist Dr Zahid Hussain jointly presented the Bank’s assessment of the proposed budget for fiscal 2013.

Sanjay Kathuria said attaining the target will be challenging for both domestic and external problems.

He said the country’s 6.3 per cent GDP (gross domestic product) growth rate in the outgoing fiscal year is impressive, in the view of the prevailing crisis in Europe and other economies.

He said slowed-down private investment provides a disconcerting signal about sustainability of growth, reinforcing the need for reforms in areas of energy, land, infrastructure and costs of doing business.

WB senior economist Mr Zahid said the Bank has reviewed its earlier assessment of the projected growth scenario for the south Asian nations including Bangladesh.

He said the global economic situation will rebound from the second half of the current calendar year, following the G-20 and G-7 meetings on possible way-out of the headwinds.

“Our last week’s growth projection for Bangladesh is 6.4 per cent,” Mr Hossain noted.

The Bangladesh economy has been growing by more than 6.0 per cent since 2004. But the steady economic growth, propelled by garment exports to the Europe and the USA, has raised concerns among policy makers about the outlook for growth in the context of the economic problems in those countries.

WB lead economist Sanjay Kathuria observed the projected level of aid disbursement at US$2.3 billion next fiscal is very ambitious in the light of what could be achieved in the outgoing fiscal.

He said: “It can happen …. High level discussions are going on between the government’s economic relations division (ERD) and the development partners to try to unlock some of development partners’ resources which are huge … .”

He said: “If there is any attempt, it will require very strong efforts for budget management….”

Mr Kathuria said there is need for faster movements by the development partners and also on the part of the government in particular. He said WB has a portfolio of $5.8 billion and 80 per cent of it, is outside the Padma Bridge project.

The lead economist said there is need for making concerted efforts to utilise $16 billion dollars worth of aid that is lying in the pipeline.

Senior economist Dr Hussain said the aid disbursement in the outgoing fiscal is lower than the budgetary estimate. “But it is higher than that of the last fiscal year (2010-11),” he added.

He said there is some strong evidence of crowding-out effects of government’s borrowings from the banking system in the outgoing fiscal, on private investment.

“The net disbursement of industrial term loans amounted to Tk 27.12 billion during July-April period of fiscal 2012 against Tk 52.73 billion during the corresponding period of the previous fiscal,” he added.

He said net disbursement of non-farm rural credit stood at Tk 73 million during July-April period of the outgoing fiscal against Tk 2.33 billion during the corresponding period of the previous one.

“So we get a clear picture about the crowding-out effects on private investment,” Mr Hussain added.

Referring to the proposed budget document, the WB said the subsidy would remain high in the next fiscal as it has been projected at 3.1 per cent of gross domestic product (GDP) against 2.4 per cent of GDP in the previous fiscal.

Mr Hussain said Bangladesh faced higher inflationary pressures mainly because of expansionary monetary policy that had earlier taken place.

He said the pursuit of tight monetary policy by the central bank has yielded some good results on both food and non-food inflation.

He said: “The central bank’s implementation of tight monetary policy has helped to reduce the growth of broad money [M2] and reserve money.”

He said Bangladesh Bank did not intervene in the exchange rates and relied on market forces to determine the external value of the local currency.

“It helped to lower the non-food inflation rate from its peak at 14 per cent peak in March, 2012 to 12.7 per cent in May, 2012,” Mr Hussain added.

He said the free-floating exchange rate without intervention has also improved the remittance earnings.

Mr Hussain said current account surplus has increased and the overall balance-of-payments (BoP) deficit has reduced following the exchange rate flexibility. “But we’re not sure whether it will be sustained or not,” he noted.

“And if this is sustained, high subsidy for petroleum imports will mainly account for this,” Mr Hussain added.

About subsidies, Mr Hussain observed that the amount of subsidies in the proposed budget for fiscal 2013 ‘remain large’, being “equivalent to 1.5 times the total education budget and 3.5 times the health budget” “Is this right social priority?” he asked.

Mr Kathuria said the aggregate size of the budget for fiscal 2013 has expanded because expenditure/GDP ratio is projected to rise 18.4 per cent in the forthcoming fiscal.

He said the budget is modest as the expenditure growth rate has been projected at 18.9 per cent in the next fiscal compared with that of 25.7 per cent in the outgoing one.

Mr Kathuria observed that automatic price adjustment mechanism would help make subsidies in the budget more predictable.

He asked: “Can net foreign financing worth $2.3 billion in the coming year from $1.4 billion in the outgoing one, be achieved.” He said measures are needed to reduce deficit financing of the budget through domestic sources and to increase aid absorption.

Mr Kathuria said easing of doing business is an important area of reform for the government. “Issuing licences should be made automated,” he added.

He said the opportunity for attracting foreign direct investment (FDI) exists for Bangladesh but reforms need to be carried out.

Mr Kathuria said para-tariffs have become the dominant instrument of protection and the faster increase in tariffs on consumer goods is not driven by revenue-earning motive.

Replying to a volley of questions, Mr Hussain said there is need for expansion of items, on the basis of which the rate of inflation is now calculated.

“It is true that our basket was prepared in 1995-96. We should re-make it,” he added.

But, he said, a large basket does not necessarily give a high inflation rate.

Replying to a question on the facility for whitening of undisclosed money, Mr Hussain said: “In my experience, I can say that the possibility of investing undisclosed money in productive sectors is very little.”

He said the facility has been in operation since 1975 while stating that no significant rise in investment of that money has been noted during this period.

Mr. Hussain said providing subsidy does not help reduce income inequality. “We’ve studied it and found that untargeted subsidy does not improve the income inequality issue,” he added.

He said subsidy is not helping to reduce the economic disparity in the society and is not also benefiting the low income group while it is cushioning the well-off.

He said in their analysis, they found bottom-20 per cent of the society only get 12 per cent benefit of the subsidy in power sector. “You will be surprised to know that the middle and higher income groups derive the maximum benefits – about 52 per cent of power sector subsidies.

Mr Hussain said there is need for ensuring transparent operations of the state-owned power entities like Power Development Board and Bangladesh Petroleum Corporation.

“They are receiving enormous subsidies, so their financial statements should be transparent,” he observed.