Article by Dr Debapriya Bhattacharya, Distinguished Fellow at Centre for Policy Dialogue (CPD).

Remember how a father expounded to his inquisitive son studying economics the difference between recession and depression? The wise father said when my neighbour loses his job then it is a recession; when I lose my job then it is a depression.

The exciting exchanges on whether Bangladesh economy, in post-Covid-19 phase, will enter into a period of "recession" or "depression" are predicated on definitions, assumptions and estimates. More stimulating is our conjectures about the economy's recovery track – whether it will be a V-curve or W-curve – these often remind me of the post-2008/09 Global Economic and Financial (GEF) crisis related discourse.

Yet, leaving out the finer details, it is being increasingly recognised that Bangladesh – with rest of the world – in the coming years will step into a period of economic slump. This would mean that not only our growth rate will be diminished, but citizens will experience loss of income and savings, coupled with increased unemployment and poverty. International financial institutions (IFIs) have already downgraded the GDP growth projection to 3 percent for the outgoing fiscal year (2019-20) (as against the planned 8.2 percent), and for 2020-21 to 2.9 percent.

On a rare show of consensus, the applied economists of Bangladesh have broadly expressed agreement regarding the overall (macroeconomic) policy stance to be pursued to confront the attendant crisis. They have all fallen back on the time-tested doctrine of expansionary counter-cyclical policies, espoused by the great John Maynard Keynes in the aftermath of the Great Depression of 1930s. The essence of these policies is quite simple. Economic output is strongly influenced by total spending in the economy; accordingly, availability of liquidity in the market and spending capacity of the government improve the demand-side factors of economic growth. These strategic objectives are addressed through monetary policy actions by the central bank and fiscal policy actions by the government.

The Stance

Thankfully, the government moved pretty swiftly on this path. In her speech on the eve of Bangla New Year (13 April 2020), the Prime Minister gave articulation to this policy stance by mentioning its four elements: increase of public expenditures; incentives to economic activities; broadened social protection; and augmented money supply. However, sequencing of the policy instruments in practice had been quite interesting.

We observed that Bangladesh Bank provided the initial bulwark of this policy approach through monetary policy tools, with a range of measures to enhance liquidity in the market. These included – lowered Repo Rate, reduction of Cash Reserve Ratio (CRR), loan repayment deferrals, buy-back of treasury bonds, higher allocation to the Export Development Fund (EDF). The economic recovery policy package announced later was also anchored on lowering interest rates. We observed very few fiscal measures at this stage, other than additional allocation to the Health Ministry to fight Covid-19 and withdrawal of all types of duties and taxes on pandemic-related imports. As experience will later reveal that, given the entrenched structural vulnerabilities and governance challenges, the banking sector of the country was in an inadequate position to deliver the government's instructions on directed credits.

Deployment of monetary policy tools ahead of fiscal measures was possibly conditioned by the desire to provide market signal and relative ease of their implementation. However, no less was it dictated by the deteriorating fiscal framework of the government. It is characterised by, inter alia, low tax yield, marginal contribution of revenue surplus to finance the Annual Development Programme (ADP), and heavy dependence on domestic borrowing – although the fiscal deficit remained manageable. The bottom line had been that the government in the completing fiscal year did not have fiscal space to scale up public expenditures, or the administrative capacity to deliver those.

The Task

Now that the government has decided to stick to the routine and announce the national budget for the fiscal year 2020-21 in due time, the hunt for fiscal space to give substance to its declared policy stance will become the defining task. In this connection, I am reminded of a handy phrase from the film The Hunt for Red October – "don't take a dump, son, without a plan. And senior captains don't start something this dangerous without having thought the matter through." So, what is the plan?

As we know, fiscal space is the room (extra money) in a government's budget that allows it to provide resources for a desired purpose (in this case, mitigating the adverse impact of Covid-19) without jeopardising the stability of the economy. The government, of course, has in its disposal, at least half a dozen fiscal policy instruments in this regard. The question is how fit are those to serve the currently required purpose?

The pre-eminent source for augmenting fiscal space is enhanced domestic resource mobilisation, which does not show any encouraging sign at this moment. The tax-GDP ratio in Bangladesh, one of the lowest among comparable countries, never took off beyond 10 percent GDP. Even that share had been going down in the recent years, indicating a yawning gap between targets and achievements, no less because of setting unrealistic targets. Indeed, the reported revenue target for FY2021 is to be only 1.35 percent more than that of the preceding year. The revenue growth will be constrained not only because of the pre-existing weaknesses, also for moderated by the need to provide various tax rebates (the targeted income tax amount is going to be lower than that of FY2020) to spur private investments and increase disposable incomes in the hands of the taxpayers. The possibility of embarking on any radical measure such as tapping into illicit financial outflows do not seem to be on the cards.

Second, opportunity in enhancing fiscal space lies in expansion of the public expenditures with reorientation of the priorities. The reported amount of public expenditures is only 5 percent more (including the announced stimulus package) than the earlier year's target. The marginal increment planned is not in case of the ADP outlay, but for other heads, including revenue expenditures. What comes as a surprise is that ADP financing projection (about 34.4 percent) does not indicate any explicit ambition of higher use of foreign aid in the pipeline. Within the ADP, commitments to the mega projects remain paramount.

Arguably, there is very little flexibility in reprioritising revenue budget, about 80 percent of it remains earmarked for three heads (pay and allowances, subsidies and interest payments). Accordingly, Covid-oriented programmes, e.g. cash support of Tk4,000 crore for those who lost jobs during the lockdown, would be accommodated at the margins of the public expenditure kitty. May be some additional allocations will be made to health sector, safety net programmes and agricultural mechanisation. Nonetheless, one does not observe a high level of public spending ambition for FY2021, particularly when  Bangladesh records its public expenditure ratio on the lower side (around 15 percent of GDP) among its peers. One wonders what prompted this measured expression of budgetary aspiration. Is it a testimony to the pragmatic approach of the policymakers as they could not locate necessary fiscal space for the purpose?

The reticence of the policymakers to resorting to the third method of increasing fiscal space through greater reliance on domestic borrowing (from an almost dysfunctional banking sector) was dictated by the concern of possible crowding out effect on the private borrowers. Regarding the fourth method of borrowing from abroad, we are yet to secure firm commitments regarding access to additional external financing (grants, concessional finance, including budget support, balance of payment support, etc) as well as debt moratorium. Reportedly, the government is seeking USD 2.2 billion worth of budget support from various IFIs.

In fact, the critical absence of fiscal space became evident, when the government, quite early in the process, resorted to the fifth method, i.e. seigniorage. Bangladesh Bank (4 May 2020) released new cash amounting more than Tk70,000 crore, which is almost one-third of ADP outlay.

The paradox of the situation is that Bangladesh currently enjoys a robust debt sustainability index, indicating its potential of further borrowing. Given its public-debt-to-GDP ratio (around 34 percent), the country could afford a couple of additional percentage of fiscal deficit (may be 7-8 percent of GDP, up from the trend rate of 5 percent), provided it had effective access to domestic and foreign debt markets. In view of its current modest rate (less than 6 percent), it did not risk much to spur the inflation rate. High borrowing from the domestic banking sector would have of course had the possibility of putting pressure on interest rate.

As it says in the song Hotel California, "We are all just prisoners here of our own device." Years of neglect in reforming our local government, tax administration, banking sector and capital market are now imposing binding constraints on our much-needed fiscal ambition. Even our contracted foreign loans (e.g. budget support from the World Bank) remain stuck, because of our inability to deliver the promised reforms.

The Moment

To conclude, I guess this is the "moment" for embarking on a set of policy and institutional measures to release the structural constraints imposed on our fiscal ambition. Admittedly, these are high voltage political economy issues. Will the upcoming national budget be able to turn the threats of post-Covid economy into a political opportunity to address these long outstanding tasks? Let us see.

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