Govt not going overboard with subsidy expenditure next fiscal year

That the subsidy expenditure would go up next fiscal year as the government scrambles to keep the pandemic-induced recession from undoing decades of progress in alleviating poverty and elevating its citizens into the middle-class — was a given.

But it turns out the government is exercising restraint, increasing its spending by 17.91 per cent from current fiscal year to Tk 54,695 crore.

The amount would be about 10 per cent of the budget, which is in line with previous years’ allocation.

The next fiscal year’s subsidy budget would be mostly going towards taxpayer-funded spending for agriculture, food support for the poor and loans for large industries and SMEs.

The move to provide low-cost loans to pandemic-hit micro, small, medium and large entrepreneurs, farmers and exporters would increase the subsidy spending on interests to Tk 5,000 crore in the upcoming fiscal year. There has been no such allocation in the ongoing fiscal year.

The government would bear Tk 3,000 crore in interest rate subsidy on the loans going to pandemic-hit businesses and farmers.

Besides, the central bank has deferred interests on loans for May and June. About Tk 16,000 crore in interest was to be paid in the two months.

Now, the government would come up with Tk 2,000 crore in interest support and the borrowers would repay the rest Tk 14,000 crore over 12 months in instalments.

The government has unveiled a stimulus package to provide Tk 30,000 crore in working capital to industries and service sector institutions impacted by the pandemic.

This will take the form of concessional loans at an interest rate 9 per cent wherein, the borrower will meet 4.5 per cent of the interest while the government will absorb the rest as subsidy.

As a targeted measure to support enterprises, jobs and incomes, another stimulus package has earmarked Tk 20,000 crore as working capital for SMEs at an interest rate of 9 per cent.

Only 4 per cent of the agreed interest will be borne by the borrower, while the rest will be borne by the government as a subsidy.

The government has increased the subsidy allocation for the agriculture sector, from Tk 9,500 crore in fiscal 2019-20 to Tk 10,700 crore in fiscal 2020-21 as it looks to accelerate farm production to keep prices stable in the local market.

Usually, agriculture subsidy spending hovers around Tk 6,000 crore every year and this may go up to Tk 7,000 crore this fiscal year.

Apart from paddy, the government plans to increase the production of other crops. There is also a plan to give a boost to farm mechanisation.

Despite the collapse in economic activities at home and abroad owing to the coronavirus pandemic, the government has kept the subsidy allocation for export, remittance, power and liquified natural gas (LNG) imports unchanged next fiscal year.

This is because the government hopes the impact of the pandemic peter out sometime next fiscal year and the economy would be back in the saddle.

The finance division has estimated that the economy would grow by 5.5 per cent this fiscal year despite the devastating impact of the coronavirus pandemic and 8.3 per cent next fiscal year.

The World Bank has projected that the country’s GDP growth would be between 2 and 3 per cent this fiscal year, in a stunning decline from the 8.15 per cent logged in last fiscal year and between 1.2 per cent and 2.9 per cent next fiscal year.

Exports subsidy stands at Tk 6,825 crore, remittance subsidy Tk 3,060 crore, power sector subsidy Tk 9,500 crore and LNG import subsidy Tk 9,000 crore.

The subsidy spending for providing low-cost loans as well as food has been increased to Tk 6,500 crore from Tk 4,882 crore as the country’s expenditure to feed the poor has increased sharply because of the coronavirus-induced shutdown, which has put a brake on the economic activities leaving people with now work.

Under the Food-Friendly Programme, 50 lakh families can buy 30kg rice a month for Tk 10 a kg. The open market sale programme helps about 13 lakh people in urban and semi-urban areas.

Due to the income shock emanating from the pandemic, 77.2 per cent of the vulnerable non-poor fell below the poverty line, according to a joint study of the Power and Participation Research Centre and the Brac Institute for Governance and Development.

This would imply that beyond the 20.5 per cent of the population officially recognised as poor there is a group of ‘new poor’ representing an additional 22.9 per cent of the population that needed to be brought within the discussion on poverty.

“The Tk 54,695 crore subsidy is not a small amount. So, we have to think about this expenditure. We can’t allocate these resources inefficiently,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, a think-tank.

He, however, backed the increase in the subsidies for agriculture, food and low-cost loans, calling them timely.

The Tk 5,000 crore interest rate subsidy extended to businesses and industries aiming at economic recovery is desirable although the amount is small, he said.

“But the subsidy going to the power sector is not coming down. Most of the spending in this category is being used for capacity payment, meaning the government is paying although the power plants are not supplying the electricity. We have to give attention to this area.”

There is no question about the increase in food subsidy as the government would have to expand the open market sales to feed the people, said Mansur, a former economist of the International Monetary Fund.

The subsidy geared towards farm mechanisation would be good for the country. “This should be done ensuring competitive process instead of sourcing equipment and machinery from one or two companies.”

The price of fertiliser has gone down internationally and the use of fertiliser is not increasing in Bangladesh as farmland is not expanding. So, this subsidy should go down, the economist said.

According to Mansur, remittance and export subsidies are unnecessary and these could be extended by depreciating the exchange rate.

“This would have been good for all exporters, while the government would have got rid of administrative processes and costs.”