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Short term solutions for deeper malaise

Staff Correspondent
The proposed budget seeks shortterm solutions to the economic malaise arising from adverse developments on many fronts, said economistWahiduddin Mahmud.
It represents the expected response of an Interim government to a situation of widespread food insecurity and an environment of political and economic uncertainty, he said.
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"Moreover, many issues of budgetary policy remain un-addressed, or are only tentatively addressed, in the context of uncertainty regarding international fuel and food prices and domestic inflation and food supply situation," he said.
Commenting on the proposed budget for the fiscal year 2009, he said, "In spite of the large size of the proposed budget, the emphasis has been on making provision for continued increase in subsidies on food, fuel and fertilisers and for planned expansion of social safety-net programmes. As a result, the size of the Annual Development Plan (ADP) has got squeezed. Moreover, the government plans to borrow heavily from the banking system to meet the increasing budgetary deficit."
While such a budgetary stance seems to have been forced by compelling circumstances, the finance adviser must be well aware that none of these are sustainable solutions to the problems the economy is facing, Mahmud said.
He said die prevailing rates of subsidies are already putting unbearable pressure on the budgetary balance. "If the current rate of growth in the government's domestic borrowing continues unabated, it will jeopardise macro-economic stability." he warned.
Curtailing the government's development expenditure and public investment will negatively impact the economic growth and social development indicators, and will ultimately go against achieving the goals of expanded social safety-net programmes that the budget is proposing, he said. "Evidently, this is a budget that is looking for shortterm solutions.”
The size of the ADP has had to be kept relatively small to accommodate the large increase in current expenditure, which in turn is mainly due to meet the rising costs of subsidies. The proposed size of the ADP is only 25 percent of total budgetary expenditure; during the period from early 1990s until recently, this proportion has been above 40 percent on average,
according to the revised budget estimates for each year. This will be a noticeable reduction in the ADP size also as a proportion of GDP, Mahmud continued.
It is true that in the past there has been huge wastage in the government’s development spending and that the reduced size of the proposed ADP is a response to meet the exigencies of an unusually bad spell of economic tidings, he said.
"Part of it is economic populism, but the rest of it needs to be based on an objective assessment of the effectiveness and relative social benefits arising from the subsidies and development spending in different sectors. Our budget management largely lacks the capability for such an analytical approach to determining the actual trade-offsinvolved," hesaid.
Given the uncertain environment surrounding the implementation of the proposed budget, there will be need for rethinking many aspects of the fiscal policy on the bpsis of evolving circumstances. "This will not be like the routine year-end preparation of the revised budget. In particular, there will be need for monitoring the trends on several fronts: the global food and fuel prices and their impact on budgetary subsidies; the domestic food market situation and the costs of building adequate food stocks; and the progress and effectiveness of the expanded social safety-net programmes. The fiscal response to these trends may require restructuring of the budget," he said.
This has also been the case for the budget of the outgoing fiscal, Mahmud continued. "The original allocations for subsidies have gone up manifolds in the face of pressing circumstances. The large-scale downsizing of the ADP has been dictated mainly by weak implementation; but this has also helped to meet the unexpected increase in subsidies.”
"The decision to make subsidies transparent in budget will promote fiscal accountability and disci-
pline," hesaid.
Again, he said, the overall credit and monetary expansion has been kept under control in spite of the increased borrowing of the government from the banking sector and this has been possible because of weak demand for credit in the private sector.
Mahmud said in the recent months, there have been signs of some dynamism in the private sector activities, thus putting pressure on the liquidity of the banking system. "The proposed budget projects large increases in the government’s bank borrowing that may crowd out private borrowing needed for a rejuvenation of the private sector. This will again need some rethinking. Overall, while the arithmetic of the incomeexpenditure balance of the budget has been somehow worked out for the time being, there is not much assurance that things will remain the same. Many important aspects of fiscal management thus remain somewhat unresolved." he said.
He said there are other reasons for added focus on the implementation strategy’ for the proposed budget. For one thing, the implementation will see a regime change, assuming all goes well on the political front. "For another, the effectiveness of several new measures for ensuring social safety nets or for supporting agricultural production will need to be monitored," he said.
Mahmud said the proposed expansion of the social safety-net programmes is a step in the right direction but the implementation will remain a big challenge. The proposed programme for guaranteed employment for a minimum of 100 days in the rural areas is shaped in the line of a similar scheme introduced in India in 2005 and the implementation of that scheme has been facing many hurdles across different states in India.
"Compared to most states in India, our safety-net programmes are well established and richer in variety. It is worth considering whether our existing programmes
like food for work and test relief can be expanded into a universal employment guarantee scheme so as to avoid overlapping and achieve better coordination.' he pointed out.
The former adviser said the modus operandi for implementing the programmes for supporting agriculture and other priority sectors needs to be similarly w-orked out. "The allocations for agricultural research in the current budget have remained unutilised. In respect of subsidy on urea fertiliser. easy and timely availability for farmers rather than low administered prices has proved to be more crucial." hesaid.
He also said it is not clear whether the diesel subsidies given to farmers after the Boro growing season was over were meant to be an incentive measure for boosting production or merely a means of income transfer. "There is an urgent need for forming a taskforce drawing upon expertise from both within and outside the government to devise effective policies towards supporting agricultural production." hesuggested.
Mahmud said the provision of special allocations for the backward regions is a w elcome step. The problem is that the overall allocations of development spending currently do not follow any definite criteria of regional distribution, so that it will be difficult to determine whether the special allocations really represent additional ones, he observed.
The readjustment of the slabs of import tariffs is generally in the right direction since it is likely to give a boost to industrial incentives .although at the cost of some revenue loss, he said. Even then, a fairly optimistic target for revenue collection has been set for the coining fiscal year encouraged by the fact that the revenue effort for the current fiscal has yielded good results.
"Indeed, this year's experience suggests that economic and political uncertainties are no hindrance to boosting tax collection effort, heconcluded.