The global Covid-19 pandemic has terrorised the world, unleashing huge number of infections and sad loss of lives. On March 23 the Government of Bangladesh imposed a lockdown that was extended to May 30, 2020. On the economic front many economic activities, especially in the urban areas, came to a grinding halt. Exports declined and many overseas workers have returned. Growth of Gross Domestic Product (GDP), tax revenues and export earnings all registered sharp reductions in FY20. The government has taken a series of measures to reduce the spread of the infection and announced several stimulus packages to help the needy and stem the downward spiral of economic activities.
GOVERNMENT POLICY RESPONSE: To mitigate the adverse impact of ‘global pandemic’ from Covid-19, the government has adopted a Work Plan with four major strategic programs to be implemented in immediate, short-term and medium-term span. The four major strategies the government has adopted are:
(a) Increased public expenditure with a target to create job. Funding of foreign tour and luxury expenditures from the government budget will be discouraged;
(b) Introducing fiscal stimulus package to retain workers in the manufacturing sector, to maintain competitiveness of the enterprises especially in the export-oriented manufacturing sector and to revitalise the economic activities and business environment. The major policy interventions in this regard are to provide several credit facilities at low interest rate from the banking system for the businesses;
(c) Expansion of social safety net programs to meet the basic needs of people living below poverty line, day labourers and for those who are engaged in the informal sector. The major interventions include (i) Free food distribution; (ii) sale of rice under Open Market Sale (OMS) program with a highly subsidised price (Tk 10 per kg); (c) cash transfer to the targeted vulnerable population; (d) expansion of allowance programs (Old Age Allowance and Allowance for Widow/husband Deserted Women) to all eligible person (100 per cent) of the 100 most-poverty stricken Upazilas; and (e) expedite construction of house for the homeless people.
(d) Increase money supply to maintain liquidity of the economy so that the financial shock from the pandemic can be absorbed and day to day businesses can be operated smoothly. Bangladesh Bank has already lowered CRR (cash reserve ratio) and Repo rate to increase money supply and it will continue if needed. However, special attention will be given so that inflation does not increase as a result of increased money supply.
The Covid-19 stimulus package is broad-based. The value of the package is estimated at US$ 13.3 billion (4.0 per cent of FY20 GDP) and its fiscal cost is estimated at 2.0 per cent of GDP. Much of the stimulus package was aimed at recovery of economic activities to support GDP growth, exports and employment. Direct social transfers to the poor and the vulnerable was very modest (Table 1).
EVALUATION OF THE INCOME TRANSFER PROGRAM: The stimulus package is undoubtedly comprehensive and seeks to provide a combination of measures to provide food and income support to the poor, improve health care, protect employment and revive economic activities. Preliminary estimates suggest that in the short-term in the absence of adequate income transfers national poverty rate in Q2 of 2020 might spike to 29.0 per cent , up from 20.0 per cent in Q1 of 2020Q1 (pre-Covid-19 level), while extreme poverty might grow from 10.0 per cent to 21.0 per cent. The projected poverty scenario assumes income loss of 80.0 per cent for urban informal workers and 10.0 per cent for rural workers. Research on what might constitute adequate income transfers suggest the need for some Tk 960 billion (3.80 per cent of GDP) equivalent. As compared to this, the first-round income transfer in the government’s stimulus package amounts to a mere Tk60 billion (0.20 per cent of GDP). Additionally, newspaper reports suggest that the problem of targeting remains a major constraint to the effectiveness of the transfer programs. So, the overall conclusion is that the income transfer programs adopted so far, even if well implemented, are far lower than the massive amount of resources needed to prevent a surge in the incidence of short- term poverty.
Of course, income transfers are only one instrument and the stimulus package will likely have a good poverty reduction effect if income and employment opportunities grow for the poor. The stimulus packages relating to these opportunities include support to agriculture and micro and small enterprises (MSEs). Available evidence suggests that the rural economy has recovered fairly robustly, although the onset of serious flooding has caused problems for the poor. The revival of MSEs is less promising both because of the Covid-19 demand constraints as well as the huge MSE policy constraints that remain unaddressed.
8FYP & THE WAY FORWARD: Even before Covid-19 happened, Bangladesh was going through a major revenue constraint owing to the weakness in revenue mobilisation effort. A manifestation of the revenue constraint is illustrated in Figure-1. Tax revenue as a share of GDP is one of the lowest in the world. It is not only very low, it has been falling since FY2017, indicating the huge revenue mobilisation challenge Bangladesh faces. The main consequence of this revenue constraint is the inability to allocate adequate resources to the core development programs including social security.
Another notable aspect of this revenue constraint is the expanding gap between budgeted and actual tax collections. This gap has become especially large in the past several years (Figure-2). For example, the revenue gap between budget and actual has grown progressively from 14.0 per cent in FY17 to whopping 39.0 per cent in FY19, which were pre-Covid periods. The gap has grown further in FY20 to 42.0 per cent owing to the additional losses from Covid-19 in the last four months of FY20. As a consequence, many budgeted expenditure items have faced ex-post budget cuts owing to revenue constraints. Most current expenditure items like civil service salaries and pensions, supplies and materials, defense, and interest payments are fixed obligations that cannot be cut. So, the main adjustment burden has been shared by the annual development program and the spending items in the nature of transfers (subsidies, grants to local government institutions and social security spending). The cuts have often been as large as 30 per cent of the budget allocation.
The government is concerned about this falling tax to GDP ratio and the constraint it imposes on its development spending. To address the revenue constraint, the government prepared a medium-term fiscal framework (MTFF) for the Government’s Perspective Plan 2041. Related to the PP2041 MTFF, an MTFF has also been prepared for the 8th Five Year Plan (8FYP). The 8FYP MTFF builds in the adverse effects of the ongoing Covid-19 pandemic but it also incorporates the government’s resolve to implement major tax reforms as envisaged in the PP2041 MTFF. The projected total revenue, expenditure and fiscal deficit paths for the 8FYP are shown in Figure-3. The fiscal deficits are consistent with sustainable external and domestic financing in terms of debt sustainability and monetary programing. Since these projected trends are predicated on the full implementation of revenue and expenditure reforms of the PP2041, actual outcome will be a function of these reforms and also the timing of exit of the Covid-19 pandemic. Shortfalls on either count will lower revenue and expenditure performance.
The 8FYP is the first five-year program for the implementation of the PP41, which has set a target for eliminating extreme poverty by FY31. Among other policies, the ability to secure this target will depend upon the implementation of a well-thought out strategy for social protection. The 8FYP advocates stronger efforts to implement the NSSS, with emphasis on converting the large number of programs into the Life Cycle Framework provided in the NSSS, enhanced efforts to develop and put online a list of beneficiaries based on the income eligibility of 1.25 times the 2016-17 poverty line (NSSS definition of poor and near poor), converting all programs to cash basis, make all transfers online using G2P approach, sharply increasing the actual spending on social protection and doing real time results based M&E to monitor implementation.
The implications of the fiscal policy framework illustrated in Figure-3 for resource availability for the social protection programs during the 8FYP is illustrated in Table-3. The planned target is to increase spending on non-civil service social protection from 1.2 per cent of GDP in FY19 to 2.0 per cent of GDP by FY25. This planned allocation is consistent with public spending priorities and available resource. This is a minimum level of social protection spending that will have to be ensured to support the poverty reduction targets of PP41.
Dr Sadiq Ahmed is the Vice Chairman of the Policy Research Institute of Bangladesh.