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Fiscal Management in Bangladesh

Bangladesh has maintained aggregate fiscal discipline. This has been achieved despite recurring external economic shocks, natural disasters, and widespread poverty and social needs. Given a highly constrained revenue capacity, Bangladesh has allocated spending well to meet strategic priorities. Modest improvements in revenue performance and declining overall public expenditures have stabilized the central government’s fiscal deficit at less than 4 percent of GDP in recent years. Strong growth and improving fiscal balances have reversed the increase in government debt, which had fallen to 45.3 percent of GDP by the end of FY09. External debt indicators are well within sustainable thresholds. Spending in the social sectors has been sustained, financing for rural development and especially rural infrastructure has increased, and support for targeted poverty reduction programs, including social safety nets for the poor, has continued.

Table 1: External Debt Indicators

State-owned enterprises continue to drain fiscal resources. Bangladesh’s public sector extends beyond the central government, comprising a large state-owned enterprise (SoE) sector and a dominant public financial sector. SoEs operating in traditional utilities, infrastructure, and the manufacturing sector account for more than 20 percent of public sector employment. In addition to being a drain on public resources through a range of subsidies and contingent liabilities, they also exert considerable influence on the economy through the supply of vital inputs and services and their pricing policies. As such, the sustainability of Bangladesh’s fiscal stance depends not only on the fiscal position of the central government, but also on the performance of the broader public sector. While the recent fiscal stance of the central government is sustainable at the primary deficit levels of 1.5 percent of GDP, the fiscal stance of the consolidated public sector remains a lingering concern.

Large problems exist in revenue mobilization and public investments. Mobilization of public revenues remains one of the lowest in the world. Wrapped in old policies and outdated administrative practices, the tax system has not been able to bring new income-generating activities within the tax net. Revenue generation relies heavily on trade taxes. Weaknesses in tax administration continue to result in revenue leakages, evasion and inefficient revenue mobilization. In this environment, fiscal adjustment has been driven by a decline in investment spending, which reached 4.6 percent of GDP in FY09 after peaking at 7.4 percent in FY00. Significant structural rigidities and implementation problems continue to hamper the implementation of the development budget which has been constantly underspent (by around 20-25 percent). Public consumption expenditures on the other hand have risen from 4.5 percent of GDP in FY01 to 5.2 percent in FY09.

Planning and implementation problems continue to affect the quality of the investment portfolio. Time and cost overruns, deferral of project benefits long into the future and declining returns on investment have historically been associated with the management of the development budget in Bangladesh. A review of the investment projects/programs in the ADP23 for FY03-07 reveals that on average, only about one-third of their cost was covered by the development budget. Consequently, the ADP each year has carried over a significant backlog of incomplete projects/programs. New projects/programs entering the portfolio grew by 2.7 percent per year, while the development budget grew by 3.5 percent. The continuing suboptimal allocation suggests that the trend of implementation delays will persist and lower the overall effectiveness of the ADP.

Efficiency of expenditures at the operational level can be improved. A review of expenditure policies and programs in five key sectors – education, health, transport, energy and agriculture – highlights a number of deficiencies and structural issues that need to be addressed. Failure to do so risks the sustainability of the social and development outcomes that have been achieved so far. While sectoral policy frameworks are in place and appear to be appropriately formulated, intra-sectoral expenditure allocations and use do not always reflect the sector’s policy. 

Operational efficiency is very closely linked to the functioning of the public administration, whose reform has stalled. The two most striking weaknesses are low salaries of civil servants and the limited resources available to line agencies for their day-to-day operations. Bangladesh’s performance in this respect is much weaker than other developing countries. There are many forces that work against the forces of reform. Civil service reform is a risky undertaking with a time horizon that goes beyond the tenure of a single government. Moreover, much of the change has to be implemented by units and people who most likely will be affected by the change.

Expenditure distribution remains skewed towards the non-poor people and areas. In education, the poor represent 40 percent of the total population of school-age children but benefit from only 32 percent of the total recurrent education expenditure. Even the primary stipend program, a conditional cash transfer program designed for the poorest 40 percent of students, is only marginally pro-poor. In the health sector, the share of recurrent spending on the 16 poorest districts is less than the share going to the 16 richest districts. Since energy consumption is progressive, with higher income groups consuming more, general public subsidies going to the sector are, in many ways, largely inequitable and benefit the more affluent disproportionately.

Government spending across Bangladesh’s 64 districts is fairly equalized, but the allocation of development spending to poor districts is lower. Coefficients of variation are below 1 for both per capita development and recurrent expenditures at the district level, which is low in comparison to other developing countries. Of some concern is that per capita allocations under the development budget are inversely related to poverty levels in districts (if the three Chittagong districts are excluded). The largely discretionary ADP allocation system, at least at an aggregate level, does not seem to accommodate propoor spending considerations.

Bangladesh’s Public Financial Management structure has served well the purposes of maintaining aggregate fiscal discipline and allocating resources to broad strategic priorities. The management of public finances in Bangladesh is concentrated in the hands of the Ministry of Finance (MoF) and the Planning Commission (PC). These institutions play a leading role in planning, allocating, managing and monitoring of public finances. The delegation of powers with decision-making authority over fiscal aggregates is given to a few key members of the Budget Monitoring and Resource Committee, insulating decision makers from diverse interests and views at the preparation stage. The cabinet has authority to accept or reject fiscal aggregates, which are presented to parliament early June for approval by end-June. The dominant role of the MoF and PC also helps in the strategic allocation of resources. Complemented by the development of a national strategy and to some extent, the introduction of a budget strategy (through the Medium-Term Budget Framework (MTBF)), these agencies help maintain strategic priorities. These effective institutional arrangements at the preparation stage suffer from weaknesses at the implementation stage. The main weaknesses are in ex-post accountability and lack of budget comprehensiveness. Weak accountability is primarily related to the role of the Comptroller and Auditor-General. While a lot of progress has been made in improving and modernizing the external audit function, there is still work to be done to make it independent of the executive and a key instrument of accountability.