Bangladesh: Development Issue 4

Bangladesh: Public Expenditure Management

Md. Matiur Rahman and Dr. Haripada Bhattacharjee*

BANGLADESH raised between 1972 and 2003 its dollar per capita income fourfold, reduced poverty by more than a third, increased life expectancy by more than 40%, and enhanced gross primary enrollment by over 80 per cent during the same period (World Bank, 2005). This remarkable progress is a testimony to the resilience and determination of a dynamic young nation and gives hope that with continued determined effort Bangladeshis can look forward to further gains in respect to development.

Notwithstanding past progress, Bangladesh is still amongst the poorest countries in the world with only $400 per capita income. It will take over 40 years of growth at this pace to reach the current per capita income level of Malaysia even though the recent per capita growth of Bangladesh rose from 3.7 per cent to 6.0 per cent. The World Bank estimated that Bangladesh could aspire to become a middle-income nation over the next 15-20 years if per capita growth rate rose by around 5.5 per cent. To achieve this, Bangladesh needs, among others, a sound public expenditure management.

Generally, economic management in Bangladesh has been sound over the last decade. Bangladesh achieved decent rates of growth, a steady reduction in poverty incidence, relatively low inflation, and a fairly stable domestic debt, interest, and exchange rates. Allocation of public expenditures of Bangladesh in broad categories -- such as interest payments, education, health, agriculture, transport, public order and safety, and others -- is much better than in India, Pakistan and Sri Lanka.

Each of these countries spends over 6.0 per cent of the GDP on interest payments. Defence spending in Bangladesh is also much low at 1.3 per cent of the GDP. India, Pakistan and Sri Lanka spend 2.4, 4.5 and 4.9 per cent respectively of their GDPs on defence (World Bank, 2005). The role of Bangladesh's defence forces in international peace keeping is a source of significant foreign exchange earning.

One notable feature in public expenditure of the government has been the shift of spending from agriculture and industries to the social sectors. Total expenditures on education, health, the social safety net and disaster management are currently about one third of total budgetary expenditures (see table 1). Outcomes in the social sectors have been good and much better than in the physical infrastructure areas.

Bangladesh's budgetary expenditures have not been characterised by high share of interest payment. Bangladesh has avoided excessive reliance on domestic and foreign borrowing, unlike its neighbours. Debt servicing has increased significantly, reflecting the increasing cost of domestic borrowing through nationalised commercial banks and foreign suppliers' credit. The GOB spends the equivalent of less than one per cent of the GDP on the safety net programmes.

However, the ratio of expenditures on safety net programmes as percentage of the GDP and public expenditures has been declining. While expenditure on social sectors has remained fairly constant since the mid-1990s -- in the range of 3.5 to 4.0 per cent annually, safety net expenditures now make up less than 20 per cent of all social sector expenditures, down from 30 per cent in the late 1990s -- indicating a crowding out of social assistance.

Safety net programmes roughly cover below 10 per cent of poor individuals and are administered by a large of number of agencies. Benefit incidence analysis of the safety net programmes reveals that these programmes are essentially the pro-poor. For example, Food for Work Programme created about 75,000,000 hours of works in rural areas, vulnerable group development programme assisted about 480,000 households by providing food to the poor, national nutrition programme helped significant reductions in poverty, improved in school enrolment, particularly of girls and in raising the marriage age (World Bank 2006).

Another study by the World Bank (2005) shows that the overall system of public expenditures on education and health are strongly pro-poor. For example, primary education (40 per cent of all current educational spending) is strongly pro-poor. The share of the poor people in all public health expenditures has been increasing and currently it is estimated to 45 per cent. The essential service package (ESP) allocations to "Child Health" are the most equitable and strongly pro-poor.

There are some weaknesses in Bangladesh's public expenditures programme. Low effectiveness of capital spending, inadequate attention to operations and maintenance, inappropriate employment and pay policies, and the existence of fairly large subsidiaries, etc., are the most important factors that affect sound economic management.

The weak expenditure management combined with other institutional weaknesses, has compromised the quality of public services. The most glaring examples of poor public service delivery are the deteriorating law and order situation; the high perception of corruption and citizen's dissatisfaction with services; and an inefficient bureaucracy that still maintains highly tight controls over critical business processes.

Moreover, the Annual Development Programme (ADP) includes many projects that are questionable. Questionable projects regularly find their way into the ADP mainly because of the weaknesses in the system of project management. For example, the ADP expenditures under Roads and Highways Department include about 800 sub-projects with annual ADP allocations of about 2.0 to 3.0 per cent of their project costs, implying that it would take 30 to 50 years to complete these projects (World Bank 2005).

Another area of weak public expenditure management is the large hidden subsidies and growing contingent liabilities, which are not reflected in the budget. Direct subsidy currently amount to less than 0.5 per cent of the GDP and is given on school textbooks, fertiliser distribution and several non-traditional export items. Indirect subsidy is estimated at 2.6 per cent of the GDP and is given on gas and electricity prices. Large contingent liabilities have accumulated on account of state-owned enterprises.

Despite all these weaknesses, public expenditure management in Bangladesh is broadly consistent with the government's economic and social development policy objectives. The successes in the social sector can be attributed to three factors: (i) the priority given by successive governments, (ii) strong support of various stakeholders in pursuing human development objectives, and (iii) an improved policy framework that enabled considerable innovation.

Recently government has taken efforts to prepare a medium-term expenditure framework. Experiences of other countries suggest that this can be a powerful tool to improve the effectiveness of public spendings provided projected activities well implemented.

>> Source: The Daily Financial Express, Bangladesh, July 20, 2006

* Md. Matiur Rahman is Director of Customs Intelligence and Investigation and Dr. Haripada Bhattacharjee is Professor of Department of Marketing, Dhaka University