Blindsided by Covid-19

There is hardly any precedence of preparing a national budget under such extraordinary hard times and with so much uncertainties and dilemmas. There is yet no clear direction on the public health front about how to cope with the ongoing covid-19 pandemic, which makes any plan for the rescue and recovery of the economy merely speculative. One cannot but sympathise with the finance minister for seeming to grope in the dark in preparing a budget which he optimistically titled as economic recovery and a road map for the future. The reality is that one cannot at this point even predict the extent and length of the economic downturn, while the immediate need is to find a balance between policies for savings lives and livelihoods as the pandemic scenario unfolds. The budgetary allocations will play an important role in all this, but not without a national comprehensive strategy of surviving this crisis, which still seems missing.

In allocating funds, as expected, the budget has rightly focused on strengthening public health facilities particularly to deal with the pandemic, providing safety nets including food security for the poor, and providing various kinds of incentives and subsidies to agriculture and enterprises of various kinds who have incurred losses due to the lockdown. The question is whether these allocations will be enough to achieve the intended goals, even if the usual misuses and leakages of funds can be minimised. More than ever, the effectiveness of the budget will depend more on the management of implementation than on financial allocations, in respect of the relief, rescue and recovery measures.

The budget has proposed increases in the coverage of the social security programmes and the allocations have been increased to some extent; but these expanded programmes may still fall short of the need, particularly in terms of identifying and supporting those who have lost their livelihoods because of the economic disruptions and have now joined the ranks of the poor. Some studies have shown that providing for the minimum subsistence of the needy people including these new poor may require minimum public spending of up to 4 percent of GDP, depending on the length and severity of the various social distancing measures and the extent and speed of economy recovery.

Incidentally, the challenge of managing the expanded social security programmes have exposed the problem of lack of representative credible local governance. This compels the government to rely on the centralized bureaucracy with very little local knowledge to manage things at such times of crisis. It is no wonder that the Indian state of Kerala, known for its strong local governance, has proved a model for coping with Covid-19, by implementing effective lockdowns, infection tracing and delivery of social security assistance.

The proposed budget has allocated increased funds for the health sector, perhaps equivalent to about 1 percent of GDP, which would imply more than a doubling of the proportion realised in recent years; this proportion will still be low by the standards of low-middle income countries. The ongoing pandemic has painfully unravelled the extremely poor management of our public health system which cannot be remedied overnight by fund allocations alone. Yet, enough funds must be made available for tackling the endemic, by creating facilities for patients who need hospital treatment, and for largely increasing the numbers of testing for detecting bot existing infections and immunity acquired through past infection. Epidemiologists agree that for devising any meaningful strategy of containing the pandemic, such tests on a very large scale will need to be conducted, and this will need funds even if some low-cost testing procedures become available.

Of course, the budget has had to be prepared under severe resource constraints. The target of revenue collection at about 12 percent of projected GDP is unlikely to be achieved, given the economic downturn and an uncertain recovery. Although there are already some commitments of loans from the international financing institutions, the projection of foreign loans worth about 9 billion US dollars financing of about 40 percent of the budget deficit, is very unlikely to be realised. As it is, the projected budgetary deficit amounting to 6 percent of GDP is nearly double the average ratio of the recent years. The deficit may thus become even larger unless the government resort to more borrowing from the banking system, which is already projected to cover about 45 percent of the deficit, the rest being covered by a reduced projection of earnings from the sale of savings instruments. 

A saving grace is that the debt burden of the government from domestic and foreign sources is not too high to pose any problem of fiscal sustainability, so that there is enough justification to go for a higher budgetary deficit, particularly given the needs for public spending in the current crisis situation. Moreover, the public demand for bank borrowing may not pose much problem of meeting the credit demand from the private sector, which will likely to remain stymied depending on the extent of economic recovery, and also because the private sector enterprises will be able to access subsidised bank credit through the refinancing facilities from Bangladesh Bank as part of the government's economic stimulus packages. 

Given the resource crunch, extreme austerity will be needed in public spending, which may require not only weeding out nonessential revenue expenditures, but also cuts in spending on more than a thousand on-going development projects. One may argue that such cuts will create delays in the completion of these projects; but if we could have tolerated for years a culture of overruns in time and cost in project implementation, we can very well do so at such extraordinary times.  We need to prioritise the foreign funded projects, a few strategic mega-projects where delays will be costly, and projects that will help employment generation. But the allocations for spending for the priority areas, such as public health, social safety nets and food security, and incentives for economic recovery, specially for small enterprises, must be protected, ad if possible, enhanced.