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Budget: An Instrument to Signal Changes and Guide Human Behaviour

by M Shamsul Haque
***If we do not want to follow the prescriptions of IMF then we have to develop an alternative development financing system based on a whole set of changed strategies in project selection and financing. The "microfinance architecture" is emerging as a strong contender as an alternative for bottom-up organisational growth targeting poverty reduction as primary goals.***
In a post-budget article in The Daily Star Professor Rehman Sobhan traced the ancestry of the current budgeting practice to the early years of Pakistani rule. He explained the ritualistic deficit financing from external assistance In the name of ADPs. In FYI997, 31 per cent of the ADP accounted for current expenditure, 41 percent for construction and 19 per cent for import of equipment and machinery j Citing these figures, he gave an account of the possible recipient of the ADP expenditure by contractors and public functionaries, leaving very little for accelerating development or poverty alleviation.
The structural relationship between budget deficits of a poor country such as Bangladesh and external assistance, therefore, is dubious and Professor Sobhan has been a strong critic of the "aid and dependency" phenomenon. As mentioned Ln the paper, reduction of external assistance from the early 1990s should have reduced budget deficits since not much structural change took place in the economy. Instead budget deficits are on the rise during the regime of this government and those have been financed from domestic borrowing including banks.
This year the debate over deficit financing has been more focused on bank borrowing not only for the possible impacts on inflation and crowding out of the private sector but also for the
quality ,of expenditure which Profcsidt' SoTnHH‘Gand others have highlighted. Hence, the manner in which he described budget-time shadow-boxing between the current and past finance ministers falls short of the true role of budget as a tool to attain certain objectives by guiding human behaviour.
This is the essence of budgeting in a corporate environment. For example. Nissan Motor Co. of Japan has been losing billions of dollars over the past six years. They hired a CEO. Ghosn, a French citizen, to turn it around. He announced a target of 20 per cent cost reduction including retrenching 17,000 employees and closing down five plants. Recent reports indicate that Nissan will make a profit next year. This year more questions have been raised from almost all quarters except the party in power because the budget is giving wrong signals to spend more and earn less. That is recipe of disaster in the offing.
This year we are more con-
cerned because the government resorted to domestic borrowing to finance bulging public expenditure as a sequel to previous years perhaps to avoid the accountability pressure from the donors that is also linked with certain reforms: Good governance, privatisation and reforming the financial sector to name a few. It was mentioned in the same paper that aid worth about seven billion dollars worth was in the pipeline. The government could not plan to draw down larger part of that fund because they wanted fund to expand its horizon of ADP in which donors might not have been interested.
We are also concerned that revenue collection targets will fall further short of the target this year although targets are moderate this year compared with the past year. In corporate budgeting realistic targets are set and people concerned are guided through reward and punishment to attain those. This year revenue collection officials will be more relaxed about collection and being an election year not much attention
will he focused, on that because there is provision for bank borrowing for the finance ministry.
The tendency to spend more will increase this year, as more of the projects will be undertaken in the earlier part of the year so that money flows out to whom they are intended for. As pointed above construction expenditure covers the bulk of ADP and as "construction is development", as the finance minister pointed out in the recently held workshop on the education sector allocation, we will see hectic activity of poorer quality in the sector. Many of us got good quality education from tin-shed schools and colleges. Can we ask the government to drastically cut construction from the education sector and reduce budget deficit to that extent or divert the money for teacher development?
Currently money supply is rising at the rate of 19 per cent when inflation rate is claimed to be about four per cent If real growth in GDP is planned for 5.5 per cent, then by simple accounting the excess money supply is
bound to push price level upwards significantly. Cutting down the fat from the ADP to contain inflationary pressure, as suggested by Professor Sobhan. will be made difficult by the politicians this year. I read a long time back that "money is like water. Once you create, it will flow first within the country and then flow outside the country". It is more likely that we will see pressure building on our foreign exchange reserve. That will force devaluation and push up the prices for imports. This in turn will widen fiscal deficits unless imports are curtailed including those needed for ADP.
Inflation is a form of tax and It is paid disproportionately by the poor people and it allocates more wealth to the better off in the country. That is why inflation must be avoided if we want some reduction in poverty level that is remaining steady despite so-called efforts in poverty alleviation. Inflation, similar to corruption. is surely an enemy of the poor. It is more so for the state. That Is why we are concerned at
the possibility of higher rate of Inflation through deficit financing by increasing money supply as indicated above. If we cannot create conducive socio-economic environment for the private sector to invest and create Jobs for the unemployed, idle excess money is better than higher public expenditure during the election year. Excess supply of bank credit will lower cost of money that will help' refinance 'edrli^r government debts and budgeted expenditure on account of interest payments.
If we do not want to follow the prescriptions of IMF then we have to develop an alternative development financing system based on a whole set of changed strategies in project selection and financing. There is little indication in the budget for that kind of a shift in paradigm. The "micro-finance architecture" is emerging as a strong contender as an alternative for bottom-up organisational growth targeting poverty reduction as primary goals. We have to start thinking to use our strengths as a nation. Following the Pakistani model after 30 years of independence from Pakistan can lead us to the same fate, that is. to stay mired in poverty and uncertainty for the future. Budget can be more prescriptive to favourable changes to avoid that catastrophe.
The writer is Professor at the IBA. Dhaka University.