A predicament called 'bank borrowing'
Wednesday, 29 October 2008
Shamsul Huq Zahid
The government can seek funds in the form of grants as well as credits from bilateral donors and concessionary loans from multilateral lending agencies, and borrow. But it can hardly steal money to finance its annual budgetary deficit.
With the volume of external grants and loans shrinking in recent years and the domestic revenue collection remaining well below potentials, the government is left with only one option, borrowing heavily from bank and non-bank sources. And successive governments have availed themselves of that easy option to bridge the resource-gap.
But the freedom to borrow, at least, from domestic banking sources by the government, it seems, is going to be curtailed soon. Because, the multilateral donors want it to be so, according to a report published in this daily last Monday.
Much to the desire of the International Monetary Fund (IMF), the finance ministry has drafted an ordinance, styled, the Government Properties and Budget Management Ordinance-2008, and sought the seal of approval from the council of advisers. The proposed ordinance, among others, seeks to limit the government's annual bank borrowing to an amount not exceeding 3.0 per cent of the country's gross domestic product (GDP).
The finance ministry, reportedly, has gone for putting a cap on the bank borrowing as the donors, particularly the multilateral ones, have expressed their dissatisfaction over the government's propensity to borrow more and more from the banks.
However, the government is yet to hit the borrowing limit mentioned in the proposed ordinance. In the fiscal 2007-08, the government's bank borrowing-- Tk. 104 billion-- was less than 2.0 per cent of the GDP. If the government does not cross the budget projection, the borrowing would be equivalent to 2.2 per cent of the GDP during the current financial year.
The donors' concern over the government's ever-increasing borrowing from the banking system is very much logical. For, on the one hand, such borrowing entails a high cost on the government exchequer and, on the other hand, it crowds out the private sector, which is considered the main engine of economic growth.
The ill-effect of higher borrowing by the government from domestic bank and non-bank sources is evident from the swelling interest payments. In the fiscal 2007-08, the interest payments overshot the budget projection. The government paid Tk. 106.21 billion as against the projection of Tk. 94.64 billion. The interest payment this fiscal has been project at Tk. 112.74 billion. The amount is nearly 50 per cent of the total development expenditure made by the government last fiscal.
However, one has to take into cognizance the trouble the government faces in mopping up resources to meet the recurrent as well capital expenditures. The so-called globalization has substantially narrowed down its major source of revenue earning-customs duty. The eligible taxpayers are yet to develop the habit of paying taxes to the government. In a country of 140 million people, only 0.6 million are reportedly paying taxes regularly. Such a low level of tax compliance is attributed to inefficiency of tax administration and lack of awareness among the eligible taxpayers.
However, one source of tax revenue-the value added tax (VAT), introduced in 1991 by the then BNP government at the advice of the multilateral donors, has emerged as the saviour over time. The revenue earned from VAT is now 100 per cent more than what is earned as import duty.
The government finds it difficult to get both ends met because of less-than-expected domestic as well as external resource mobilization and the rising revenue expenditures. There are subsidies and substantial amount of expenditures on social safety net programmes.
And the annual development programmes (ADPs) bear the main brunt whenever the government decides to keep the fiscal deficit within a 'respectable' level. The revised ADPs adopted at the fag end of every fiscal year would bear testimony to that fact.
The policymakers at the finance ministry are well aware of the possible bad effects of higher bank borrowing. Yet the exigencies, particularly the economic ones, often force them to take recourse to higher-than-targeted bank borrowing.
To meet the resource gap, the government can well look for non-bank sources, mainly the savings instruments. However, the rates of interests offered to the buyers of the same are not at all attractive. Thus, net borrowing from the savings instruments was less than one-third of the amount projected in the budget for the fiscal 2007-08. A relatively vibrant stock market for more than a year is partly responsible for the lower-than-projected sale of the government's savings instruments.
The donors, bilateral and multilateral, can help the government out by making available sizeable funds as both development and budgetary supports. Nobody expects such supports to come by without strings. But the conditions attached to aid must not hurt the sentiment of the majority.
Finally, the government does need to take into cognizance all relevant issues, including the prospect of aid flow in the short, medium and long terms, before the promulgation of an ordinance concerning budget management. The bank borrowing in higher volume is bad, no doubt. Is it not better to put a restraint through policies rather than doing it through the adoption of a law?
Zahidfe@yahoo.com
The government can seek funds in the form of grants as well as credits from bilateral donors and concessionary loans from multilateral lending agencies, and borrow. But it can hardly steal money to finance its annual budgetary deficit.
With the volume of external grants and loans shrinking in recent years and the domestic revenue collection remaining well below potentials, the government is left with only one option, borrowing heavily from bank and non-bank sources. And successive governments have availed themselves of that easy option to bridge the resource-gap.
But the freedom to borrow, at least, from domestic banking sources by the government, it seems, is going to be curtailed soon. Because, the multilateral donors want it to be so, according to a report published in this daily last Monday.
Much to the desire of the International Monetary Fund (IMF), the finance ministry has drafted an ordinance, styled, the Government Properties and Budget Management Ordinance-2008, and sought the seal of approval from the council of advisers. The proposed ordinance, among others, seeks to limit the government's annual bank borrowing to an amount not exceeding 3.0 per cent of the country's gross domestic product (GDP).
The finance ministry, reportedly, has gone for putting a cap on the bank borrowing as the donors, particularly the multilateral ones, have expressed their dissatisfaction over the government's propensity to borrow more and more from the banks.
However, the government is yet to hit the borrowing limit mentioned in the proposed ordinance. In the fiscal 2007-08, the government's bank borrowing-- Tk. 104 billion-- was less than 2.0 per cent of the GDP. If the government does not cross the budget projection, the borrowing would be equivalent to 2.2 per cent of the GDP during the current financial year.
The donors' concern over the government's ever-increasing borrowing from the banking system is very much logical. For, on the one hand, such borrowing entails a high cost on the government exchequer and, on the other hand, it crowds out the private sector, which is considered the main engine of economic growth.
The ill-effect of higher borrowing by the government from domestic bank and non-bank sources is evident from the swelling interest payments. In the fiscal 2007-08, the interest payments overshot the budget projection. The government paid Tk. 106.21 billion as against the projection of Tk. 94.64 billion. The interest payment this fiscal has been project at Tk. 112.74 billion. The amount is nearly 50 per cent of the total development expenditure made by the government last fiscal.
However, one has to take into cognizance the trouble the government faces in mopping up resources to meet the recurrent as well capital expenditures. The so-called globalization has substantially narrowed down its major source of revenue earning-customs duty. The eligible taxpayers are yet to develop the habit of paying taxes to the government. In a country of 140 million people, only 0.6 million are reportedly paying taxes regularly. Such a low level of tax compliance is attributed to inefficiency of tax administration and lack of awareness among the eligible taxpayers.
However, one source of tax revenue-the value added tax (VAT), introduced in 1991 by the then BNP government at the advice of the multilateral donors, has emerged as the saviour over time. The revenue earned from VAT is now 100 per cent more than what is earned as import duty.
The government finds it difficult to get both ends met because of less-than-expected domestic as well as external resource mobilization and the rising revenue expenditures. There are subsidies and substantial amount of expenditures on social safety net programmes.
And the annual development programmes (ADPs) bear the main brunt whenever the government decides to keep the fiscal deficit within a 'respectable' level. The revised ADPs adopted at the fag end of every fiscal year would bear testimony to that fact.
The policymakers at the finance ministry are well aware of the possible bad effects of higher bank borrowing. Yet the exigencies, particularly the economic ones, often force them to take recourse to higher-than-targeted bank borrowing.
To meet the resource gap, the government can well look for non-bank sources, mainly the savings instruments. However, the rates of interests offered to the buyers of the same are not at all attractive. Thus, net borrowing from the savings instruments was less than one-third of the amount projected in the budget for the fiscal 2007-08. A relatively vibrant stock market for more than a year is partly responsible for the lower-than-projected sale of the government's savings instruments.
The donors, bilateral and multilateral, can help the government out by making available sizeable funds as both development and budgetary supports. Nobody expects such supports to come by without strings. But the conditions attached to aid must not hurt the sentiment of the majority.
Finally, the government does need to take into cognizance all relevant issues, including the prospect of aid flow in the short, medium and long terms, before the promulgation of an ordinance concerning budget management. The bank borrowing in higher volume is bad, no doubt. Is it not better to put a restraint through policies rather than doing it through the adoption of a law?
Zahidfe@yahoo.com