Bring on fiscal policy
If there ever was a challenging time for fiscal policy, that is it! The budgeting season for the federal government has started amidst a potential global health and monetary crisis whose depth and duration are as uncertain today as when it started.
The uncertainties aren't likely to dissipate soon. Bangladesh is highly vulnerable to the public health insurance and economic risks. There is bound fiscal space with deficits and public borrowings already increasing for days gone by year . 5.
Revenue mobilisation and expenditure prioritisation will be hugely challenging. The capacity to borrow from domestic sources without leading to injury to industry and financial markets will face more extreme tests.
Business as usual in both revised cover fiscal 2019-20 and the brand new cover fiscal 2020-21 won't do. Thinking from the box is now at a premium.
The health and economical challenges are defining themselves. The principal goal of fiscal policy needs to be to expand the capability of medical system to check, quarantine and treat more patients.
Despite the fact that the virus hasn't yet spread in Bangladesh to an extent observed in East Asia, Iran, Europe, and America, not forgetting several others, the chance to public health is immense and growing per hour.
Fighting the virus is which means overarching priority. The question now is not whether to raise the public spending on health; the question is how quickly and effectively this can be done.
Sadly, the authorities usually do not yet seem to be to have fully woken out of their slumber. Yet many have gone into self-lockdown and social distancing.
The consequent disruptions to production and trade have both short- and long-term costs. However the short term deserves the best priority and urgently needs a robust fiscal response.
If there ever is a time to be short-sighted, it really is now.
The results of the non-fiscal measures, set up and hopefully yet to come, to flatten the spread of the virus takes a fiscal response to flatten the monetary costs curve, not just over time as regarding COVID19 spread, but also across different damaged groups.
This will inevitably kink the fiscal deficit curve for a year or two minimal. Such a kink is unavoidable.
The economic impact of the behavioural and policy response to fight the virus may very well be deep and wide enough to be beyond handling through fiscal readjustments within the prevailing resource envelope.
Some readjustments -- fiscal austerity in areas where expenditures are less critical (festival bonuses, travels, untargeted subsidies, vanity projects) -- are necessary for sure, but they may well not touch more than the surface of the problem.
We need bold and imaginative initiatives to help make the costs of the livelihood disruptions bearable at the idea of incidence.
The right mixture starts with public health policy in the driver seat to limit human contagion. Fiscal and financial policies have to contain the monetary contagion.
For now, the types of response required are: to aid individuals, in the informal and formal sectors, who lose income; help influenced businesses to prevent this situation from having long term damaging effects; and ensure the delivery of public services.
Providing support to households reliant on livelihood from informal sector is definitely the biggest challenge. It should take broader and continuous usage of safety net programmes.
This should be the brand new key focus of the revised fiscal 2019-20 budget and the fiscal 2020-21 budget.
Way too many Bangladeshi households live on the financial edge in the informal sector. They need support whether they meet eligibility requirements for back-up programmes.
Of the full total 60.8 million used in 2016-17, 85 % were in the informal sector.
Most of them are on the brink of losing their daily income even with out a lockdown.
If they each are given Tk 3,000 monthly (slightly above the upper poverty line) for 90 days, you will be charged about Tk 46,500 crore, which is the same as 1.8 % of GDP.
This might require doubling the prevailing social protection budget (excluding public pension payments).
The task will be identifying and reaching them since, by definition, they aren't registered. However, many have mobile connectivity.
A joint effort relating to the non-governmental organisations employed in the informal sector, mobile financial companies and the government will be needed to deliver social assist with them.
More generally, the federal government should fix holes in the back-up and create exceptions for the initial circumstances of the existing crisis.
The government will have to ensure that the machine can cope with a rise in the amount of beneficiaries.
Potential options for providing income support to households reliant on the formal sector include: providing unconditional cash aid, reducing tax withholdings to improve collect pay and reducing and even eliminating temporarily all advance taxes on individual incomes and financial wealth.
Tax concession will never be of much use for the lowest-income individuals with little financial wealth.
There are about 6 million used in the formal sector. A shutdown of the institutions they work for will put their livelihoods at risk.
If they are provided the same cash assistance as employees in the informal sector, it should take another Tk 5,400 crore, which is equivalent to 0.2 per cent of GDP.
Identifying and transferring cash to them through the mobile financial service platform shouldn't be that big of a challenge.
Many small and mid-size organizations could face extreme pressure to cut employment.
Relief to households wouldn't normally necessarily help organizations because many households will limit their spending beyond necessities before public health risk is over.
One way to make an effort to shift their incentives -- and offer the financial methods to retain payroll -- is to partially finance payroll of organizations based on the amount of employees retained.
One specific option is to allow payroll support for a limited period (say 90 days) for, say, 50-100 employees working at least half time, up to monthly wage of, say, Tk 20,000.
These caps would make sure the government isn't sending handouts to already profitable large organizations or giving large payments per employee to small organizations made up of highly paid professionals.
The goal is always to provide relief to relatively small businesses trying to keep employees on the payroll while staying afloat. Cutting hours, employment or wages would decrease the payments.
Efforts to keep businesses afloat is most likely the most important from economic sustainability point of view.
Reduction in exports and consumer demand will force liquidity constrained companies out of business despite being viable post-crisis.
This might impair the longer-term productive capacity of the economy. One option is for the government to suddenly stop the operating payments organizations need to make.
Bangladesh Bank has recently put a moratorium on loan repayments for 6 months until June 2020 and relaxed foreign exchange regulations for trade transactions until September 2020.
In addition, tax payment deadlines could possibly be extended. None of the actions would stop a recession and even cause a recovery, nonetheless they could generate space for some firms through the acute phase of the crisis.
The government should consider providing wider support to the economy predicated on economic data.
It can be impossible to avoid some economic contraction given the social distancing.
To place circuit breakers on recession, the government should adopt policies with computerized triggers that kick in over time if the economy stays weak, including additional payments to households and businesses.
Specifically, if the employment-to-population ratio falls half of a percentage point within the next six months, then more direct payments could venture out to individuals, with another round of payments a year from now if the employment rate remains below what used to be normal.
These policies would provide ongoing support for the economy in the event of a deeper recession. Stronger labour market monitoring will be had a need to make it work.
Fiscal stimulus package needs ideally to be timed to activate when draconian social distancing measures are eased, and international connectivity get started to be restored. This will take at least 6 more months, optimistically speaking.
The package range from an assortment of individual and corporate income tax adjustments. Breaks in individual taxes may bring relief for some without much mileage due to the very low base.
The reach of value-added tax, supplementary duty and customs duty are much wider.
An over the board non permanent downward adjustment in these rates could boost consumption spending by lowering prices and/or boost investment spending by increasing profits.
Cuts in corporate tax rates, advance taxes of all sorts in particular, will boost both business profits and liquidity. That is an possibility to reform corporate taxation to make it simpler and more investment friendly.
Tax cuts will certainly reduce an already low tax-GDP ratio. However, rather than paying businesses through various subsidies, it can be better, both from accessibility and liquidity points of view, to accumulate less from business to begin with.
Tax administration reforms to lessen the wedge between what the taxpayers pay and what the federal government collects is actually a win-win for the general public and the government.
Public expenditure stimulus ought to be through boosting infrastructure such as for example road rehabilitation and maintenance, river dredging, electricity transmission and distribution lines, water supply and sanitation systems and digitisation, among others.
This is also an opportunity to reform the Annual Development Programme by downsizing, if not dropping, the political elephants that neither stimulate demand nor build productive capacity.
Fiscal provisions will need to make certain that public services can continue steadily to operate. For example, some additional funding might be needed so that temporary staff could be engaged during periods when employees cannot work.
Obvious settings where this could help ensure service delivery includes the utilization of outsourced nurses and paramedics in hospitals. Partnership with health care providers outside the public sector is a key.
The scale and impact of the virus remains hugely uncertain. So policymaking is difficult.
Policies ought to be robust to different eventualities and flexible when confronted with change. Longer-term policy adjustment may also be needed.
This could result from lessons learned from the knowledge of this year.
These issues can be left to future budgets, when using the scale and duration of the coronavirus outbreak could be more predictable.
For the present time, the finance minister ought to be concentrating on ensuring the continued delivery of public services and measures to minimise the economical damage.
Interventions to safeguard the vulnerable and steer the economy out of an extended recession are needed set up Bangladesh Bureau of Statistics recognises it.
The required additional financing should be mobilised through tapping external financing windows, domestic borrowing and monetisation of deficits.
We are constrained in what can be achieved on the policy response side, much like the capacity of the health system.
The still relatively low, though rising, public debt to GDP ratio allows space for more domestic and foreign debt.
If now is wii time to borrow more to rescue the economy, when? When the present is at risk, you borrow from future since there is no future without the present.
Implementation of the fiscal policy response will be challenged by information asymmetries and elite capture.
However, since that is a covariate shock -- one that is all encompassing whose effects are observable -- the chance of not knowing and reaching the damaged is relatively low.
There it's still adverse selections with some not hurt and/or in a position to cope profiting from the support.
Targeting efficiency will make a difference, but we cannot allow best be the enemy of the good under such dire circumstances.
With a more robust commitment to transparency and accountability mechanisms, we hope the corruption virus won't terminally infect your time and effort to reach out to those genuinely hurt and financially incapable of bearing the costs of the flattening of the COVID19 spread curve globally and nationally.
The author can be an economist.
