The saying 'beg, borrow and steal' comes into play when one needs something desperately.
It's hard for the government to steal in a situation where it badly needs funds to meet budgetary deficit. Thus, begging and borrowing are the options that remain open before it in such a situation.
As far as begging is concerned, the donors, both bilateral and multilateral, who dole out funds to a developing country like Bangladesh, are behaving miserly these days. However, they tend to be extremely generous in dishing out advice-critics, however, prefer to consider the same as 'conditions' attached to loans. Some government leaders at times are also found grumbling about the donors' advice. For, a few of the advice are so unpalatable that the government finds it hard to carry through the same domestically.
Borrowing, it seems, is the softest option before the government in mobilising funds to plug the hole in the budget. Notwithstanding its implications on other areas of the economy, the government can anytime procure funds from the country's banking system if it desires so.
The donors, reportedly, have volunteered to spoil the happy relations between the government and the banks. They, according to a report published in this daily early this week, advised the government to put a cap on the level of its borrowing from banks through the adoption of necessary rules. And the ministry of finance has already prepared and approved the rules in this connection. It is rather unclear whether its actions were spontaneous or under compulsion.
The rules, if approved finally by the council of advisers, will make it mandatory to keep the level of the government's borrowing from the banking system at 3.0 per cent of the gross domestic product (GDP) in any financial year.
One might feel tempted to ask: Will it be proper to limit the borrowing capacity of the government through a legal provision? Who would extend assistance to the government in case of any extra-ordinary situation?
For instance, in the just concluded financial year (2007-08), the budget deficit was projected at 4.2 per cent. But despite having foreign loans more than the usual amount, the deficit had reached 4.8 per cent. Two back-to-back floods followed by a severe cyclonic storm, higher food, fuel and fertiliser subsidies had forced the government to spend more than the budgeted amounts.
Natural calamities and price escalations in the international market are realities and whoever comes at the helm of the statecraft would have to face these problems in the future. In such a situation, one cannot rule out the possibility of the budget deficit going beyond what is projected in the original budget of any financial year. What would be the option then before the government to meet such exigencies? Will the donors give guarantee to the effect that they would provide additional funds to the government to meet its emergency needs at anytime in the future?
All these questions are not being raised in support of the government's unbridled borrowing from the banking system. Borrowing by the government always has its cost. In addition to exacerbating the problem of debt servicing, it has a crowding-out effect. When the government borrows heavily, the credit flow to the private sector becomes thin, leading to slowdown in investment and other economic activities. Moreover, higher government borrowing fuels inflation, the most unwelcome development.
It is most likely that the government, made to restrict to its bank borrowing to the level of 3.0 per cent of the GDP, would resort to high-interest bearing non-bank borrowing. Such borrowing may not have any effect on credit flow to the private sector but it would surely affect flow of funds from the depositors to banks and to the capital market. The banks then might feel tempted to raise their rates on term deposits, pushing up their cost of fund. The ongoing pressure on banks to reduce their lending rates would naturally dissipate in such a scenario.
The idea of setting a limit to bank borrowing by the government may appear justified and the private sector would love to see its enforcement. But there are a few hard realities that the government of a resource-scarce country like Bangladesh has to confront with. So, before getting the regulations on bank borrowing on the ground, all stakeholders do need to assess the pros and cons of the same. It would not look nice if the government breaks its own rules and regulations, no matter how serious the situation is.
