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Growth: Can this budget help it leap?

Faaria Tasin
FT1 HE recent announcement of the fiscal budget has triggered a wave of JL opinions countrywide. Is the curiosity surrounding the budget necessary? Absolutely. We know that for a developing country like Bangladesh, fiscal policies may tend to take precedence over monetary since financial sectors are still developing.
Firstly, let us briefly take a look at some of the figures presented this year. The budget targets an acceleration of real GDP growth to 7.3% (from 6.12%) and a fall in inflation to 6% (from 7.5%). Some have critiqued the enormous size of the Tk. 2.5 trillion budget; However, a 15.9% increase in spending may not be considered undue as nominal GDP growth rate is targeted to be more than 13.4%; the deficit level of 5% of GDP (excluding grants) - though increasing - is still in line with past budgets and debt sustainability.
The real question now remains whether Bangladesh can finally free itself and leap to the 7% growth threshold. Many may question the relevancy of this. A 6% growth implies that the economy is expanding nonetheless. However, for Bangladesh it is more essential to increase the growth rates especially to tackle the problems of unemployment and poverty. Each year, 1.8 million people enter the job market, and without adequate expansion, the economy would be unable to absorb all the new people coming into the labour force. Moreover, a rise in growth rate provides an opportunity for many people to climb up the poverty line.
So what are the factors that are barring us from attaining the desired growth year after year? Let us rewind back to 1970s. GDP of Bangladesh was at par with countries such as Korea, Indonesia, Malaysia and Thailand. The annual average growth rate (CAGR) for Bangladesh between 1990 and 2000 has been only 4.6% in contrast to Korea (7.3%), Malaysia (7.9%); whilst Indonesia ascended during the 2000s with an average growth of 15%. High growth rates are not magical, rather attainable given the right policies.
Investment remains a crucial factor for attaining high growth rates. In fiscal 2014, proportion of investment to GDP in Bangladesh was at 28.7%. In order to attain 7.3% growth rate, the required proportion of investment-GDP should be 34.3%. It would be a formidable task to increase investment by 5.6 percentage points over one year, especially since private investment rates have been almost stagnant over the last five years. For investment to grow, factors such as political stability, energy, infrastructure and good governance need to be present to boost investors' sentiment.
As far as public investment is concerned, further improvement in the management in ADP implementation is required. According to a recent Asian Development Bank portfolio review, half of the project time elapses by the time only 20% of the funds are released. This mainly occurs due to poor project readiness. In addition to procedural constrains, inefficiency subsists in the planning cell of executive agencies and line ministries. Delays in procurement and recruitment of
consultants remain common in infrastructure projects. Resettlement and land acquisition can delay project implementation by 2 to 2.5 years.
Foreign direct investment is an area where Bangladesh has potential for growth; In Fiscal 13, FDI inflow was $1.73 billion, compared to Vietnam ($7.4 billion) and India ($32.2 billion). FDI can bring in new technology and management know-how into the country.
Attaining a galloping growth rate of 8% in the later years also requires investment in human capital. Let us take a look at the case of education and health. Between fiscal 10 and fiscal 14, public allocation for education was increased by 1.7 times. Stripping away the effects of inflation, we can see that it was raised by 1.3 times only. Public spending on education as a proportion of GDP has been hovering around 2% whereas countries like Vietnam, Malaysia and India are spending 6.3%, 5.9% and 3.3% respectively. Proportion of public spending on health has been on the wane: from 6.2% in fiscal 10, to 4.4% in fiscal 15. As the returns on education and health may encompass a time lag, investment in human capital should be increased immediately in order to reap the benefits in the near future.
Growth rates can be expected to improve considerably in fiscal 2015 with the help of political stability, robust exports, remittances and global recovery. Grossing the 7% growth rate threshold remains the biggest challenge! The writer is Head of Research, The Daily Star and can be reached at faaria.ts@gmail.com