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Reading between the lines

Because there are no reasons to assume that production cost per unit has increased, it can be concluded that profit per unit did not decline, though the total amount of profit obviously fell because of decline in volume. So, the rationale for enhancing the rate of subsidy is at best tenuous.

Mirza Azizul Islam
THE finance minister announced a package of measures on April 19 to mitigate the impact of the on-going global recession on our economy. Elements of the fiscal package for FY 2008-2009 comprise increase of cash incentive for export of three items and higher allocation for subsidies to agriculture and electricity, recapitalisation of state-owned financial institutions, agricultural loans and social protection (food) .The additional financial implications for the revised budget of the current fiscal year have been estimated asTk.3,424 crores.
Let me analyse the rationale and the likely impact of these measures.
• Export subsidy: The package increases export subsidy by 2.5% for three items --jute goods, leather and leather goods, and frozen shrimp. Additional financial requirement for this appears to be overestimated. Considering that the bulk of cash incentives goes to garments (excluded from the present package) and that the value of exports of these items is likely to be less than in the previous year, the increase in rate is unlikely to entail additional cash requirement ofTk. 450 crore. I have been given to understand that some of this amount will be used to meet past arrear claims.
Presumably, the rationale for the choice of the three items is that all of them suffered a decline in volume and value of exports. Data for July-December 2008 reveal that in all these cases the fall in volume was more than the fall in value relative to the same period of the last year. This has several implications.
First, the unit price did not fall compared to the previous year; for frozen food, there was probably a substantial increase because the decline in volume amounted to almost 17% against 4% decline in value. If the fall in export value is due to a slump in international demand, one would expect a fall in both volume and unit price. Since this did not happen ope needs to examine whether the fall in export volume is due to domestic production problems.
Second, because there are no reasons to assume that production cost per unit has increased, it can be concluded that profit per unit did not decline, though the total amount of profit obviously fell because of decline in volume. So, the rationale for enhancing the rate of subsidy is at best tenuous.
Third, if the fall is really due to a slump in international demand, it is unlikely that the enhanced subsidy will lead to an increase in the volume of exports. If the subsidy is passed on entirely to foreign consumers in the form of lower dollar price without an accompanying increase in volume, the country ends up by subsidising foreign consumers. For the country to gain positively any additional subsidy-induced price decline must be accompanied by more than proportionate increase in export volume. In the other extreme case, in which exporters do not reduce the dollar price at all, the benefit will accrue entirely to exporters in the form of addition to the quantum of their profit, but there would be no increase in export earnings of the country. * ,
• Subsidy to agriculture Increased allied -i tion to the agricultural sector is welcome with or without recession. The sector received high priority in the original FY 08-09 budget as well. However, it has not been clarified as to how the subsidy would be administered. The government needs to decide whether the subsidy will be given in the form of price support for final product or input subsidy, or both. In any event it would be important to ensure that the targeted beneficiaries receive the subsidy. This measure is likely to boost both domestic production and consumption.
• Subsidy for electricity The allocation will be given to Power Development Board to cover the price differential between its purchase price from private producers and sale price. This amount will neither provide any stimulus for enhanced domestic production of electricity, nor will users receive any benefit in the form of reduced price. This part of the package is thus not a stimulus in any sense, nor is it in anyway related to the global recession.
• Agricultural loan (recapitalisation): Similar comments as above apply to the allocation for this purpose. In the wake of the natural calamities in 2007, the caretaker government put a lot of emphasis on disbursement of agricultural credit In consequence, there was a 62% increase in disbursement in FY 07-08. This growth in loan was not matched by required capital increase of the concerned financial institutions. The enhanced allocation for recapitalisation will thus contribute towards meeting accumulated capital shortfall, but it is unlikely to stimulate the flow of agricultural credit by’itself.
» Social Protection (food): In Bangladesh, where nearly 40% of the population lives below the poverty line, there is always a lstrong1 case fqr greater allocation /or
3 isodial protection; The enhanced allocation will thus contribute to poverty allevi -ation, but its efficiency as a growth stimulant is open to doubt
The following conclusions emerge from the above analysis. Only the export subsidy element in the package is apparently directly related to the global recession. But if the objective is to increase export earnings, the instrument is likely to prove to be a blunt one. The increased allocation for the four other items is justified on various grounds, but unrelated to the global recession.
The government has got some fiscal space created by the reduced need for subsidy on petroleum, fertiliser and low rate of ADP implementation. The government could use the space either to reduce budget deficit, estimated to be 5% for the current fiscal year, or to increase allocation to some priority sectors even without a global recession. the Government justifiably chose the latter option.
However, the nature of enhanced allocations suggests that only the subsidy to agriculture may be a growth stimulant The others may be justified on legitimate grounds, but unrelated to global recession or growth stimulus. Therefore, to brand 2008-09 fiscal package as a stimulus package to mitigate the impact of global recession is an inaccurate characterisation ofthe package.
Mirza Azizul Islam, Ph 0 is former Adviser to the Caretaker Government, Ministries of Finance and Planning..