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Economy faces 'twin deficit'

Economists predict forex reserve erosion, inflation rise

Jasim Uddin Haroon | April 21, 2018 00:00:00

A sharp rise in current account deficit is aggravating the country's 'twin deficit' phenomenon that surfaced after many years.

An economy is said to have a twin deficit, if it has a current account deficit along with a fiscal deficit.

Many international think-tanks earlier predicted the situation for Bangladesh's economy this year.

The country has both fiscal or budget deficit and current account deficit amounting to over US$ 6.3 billion, more than 300 per cent higher in a year. The government has a deficit target of 5.0 per cent of the gross domestic product (GDP) to meet the budget funding.

Traditional macro-economists predict that persistent double deficit in a country leads to currency devaluation or depreciation that can be severe and sudden.

The nominal exchange rate, after keeping an upward trend over the past one year, is now standing at Tk 83 in inter-bank BDT-US dollar exchange (average) rate. This exchange rate was Tk 79.85 on April 18, 2017, according to the central bank statistics.

On the other hand, the average price of the US dollar in the city's kerb market is around Tk 85.

Economists view that Bangladesh's fiscal deficit may not be a matter of big trouble, as the government agencies cannot spend their allocated budgets.

But they view that current account balance may be a matter of concern for the country, as its deficit is widening every month. They said such big deficit in the current account balance may even hit the foreign exchange reserve significantly.

"Yes, there is a chance for erosion of the foreign exchange reserve once the twin deficit intensifies," said Dr Zahid Hussain, a lead economist for South Asia Finance and Poverty Group of World Bank.

He also said the fiscal deficit will also widen this year following low level of resource mobilisation by the tax authority.

The National Board of Revenue (NBR) chairman recently told the media that the resource mobilisation may fall up to Tk 300 billion this financial year.

Dr Hussain also said this may even raise inflationary pressure on the economy.

On the other hand, another leading economist -- Dr Ahsan H Mansur -- said the money market crisis along with the twin deficit has created a new dimension in the economy.

"It's a new phenomenon that the money market deficit exists along with the twin deficit."

Dr Mansur said it has happened due to two reasons - high yield of the national saving certificates and aggressive lending by some banks crossing advance-deposit ratio.

He said the situation is already impacting the money market, as rates of interest have shot up. "It is also impacting the country's investment and employment scenario. The cost of doing business here will ultimately be hit hard," he noted.

On the other hand, Dr Mirza Azizul Islam, an economist and former caretaker government adviser, told the FE: "Literally there is a twin deficit in Bangladesh now, which the US economy usually suffers and manages. If twin deficit intensifies in the country, national economy will suffer."

Dr Islam said the fiscal reality is that the government agencies cannot spend their allocations for lack of capacity. He said if the twin deficit mounts amid the government's spending splurge and large tax reduction, it will be a matter of worry.

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