Four alternatives figure high as domestic financing falters

Four remedies come into consideration as regards a fiscal rejig as domestic financing in Bangladesh faces daunting challenges amid interest surge on bank loans and borrowing through treasuries, too, officials said.
A meeting of the Cash and Debt Management Committee (CDMC), chaired by finance secretary Dr Md Khairuzzaman Mozumder, Thursday discussed that government borrowing from savings certificates declined and so the dependence on the market increased for domestic financing.
The meeting also took into notice that banking sector is the major source for market-based financing and in the recent past the government dependence on the central bank for domestic financing increased.
However, due to suspension of 'devolvement'-a euphemism for printing money--by the central bank, the financing pressure on commercial banks has increased with a consequential hike in interest rates.

The meeting participants were told that until May 31, auctions had been held for selling securities worth Tk 4.684 trillion, but until Thursday last in June, securities worth Tk 3.543 trillion could be issued.
They were of the view that achieving the domestic-financing target would be challenging if the present situation continued, sources said.
Data placed at the meeting showed that government's interest spending against domestic loans during the July-March period increased 10 per cent. The exchequer paid Tk 275.74 billion as bank-loan interest,
up by Tk 66.19 billion or 32 per cent compared to the spending in the corresponding period of last fiscal year.
The spending to pay interest in foreign-debt servicing during the period increased by Tk 71.67 billion or a record 162 per cent year on year.
The net interest payments in nine months of the current fiscal year increased by Tk 129.86 billion compared to the same period in the last fiscal.
The meeting noted that, like in the outer world, the trend of high interest would continue in the near and medium terms in Bangladesh. "If the high rate of inflation continues and policy interest rate remains high, there is little chance that government spending for interest payment will go down."
Sources said the meeting also discussed that the weighted average yield on various security instruments increased significantly over the year, posing severe challenges for government's domestic borrowing.
The yield for 91-day treasury bills had increased to 11.52 per cent until this May from 6.68 per cent a year back while the yield for 182-day treasury bills shot up to 11.64 per cent from 7.65 per cent, and 11.80 per cent from 7.65 per cent in the case of 364-day bills.
The yield rate for 2-year treasury bonds increased to 12.05 per cent from 8.03 per cent a year back and up to 12.75 per cent from 8.80 per cent in the case of 20-year ones of the government borrowing instruments.
A senior finance official, preferring anonymity, told the FE Friday the meeting weighed a slew of ways out from the financial quandary. Discussed among remedies for the domestic-financing dearth are raising revenues, proper steps to expand marker for government securities, rationalisation of the size of fiscal budget, and best use of foreign loans and fresh borrowing.
"It is almost certain that the government would not be able to lessen the size of fiscal budget compared to previous budget as there is no such practice in the past," he said.
Moreover, the official said, augmenting revenue receipt overnight to resolve the domestic-financing hurdles would not be so easy.
"We have discussed the four alternatives," another top official said, adding that preference may be given to the issuance of more and more long-term bonds to resolve the crisis clouding domestic financing.
Contacted Friday for his view of the macroeconomic dilemmas, Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, told the FE that a combination of all the aforesaid four alternative measures could help resolve the domestic-financing crisis.
He thinks higher revenue mobilisation would not be possible unless the economy becomes vibrant. Moreover, the revenue board will have to stop "corruption within its administration as they eat up a significant amount of revenue".
"The relatively easier way to lessen pressure on domestic financing is lessening expenditure," he said, but that has "political side-effects."
Mr Hussain suggests cutbacks on subsidy spending in line with the advice of the International Monetary Fund (IMF), like the one--incentives on remittance, as the earnings of remitters increased due to repeated depreciation of the local currency.
"Also, there is scope to lessen expenditure in annual development programme without hurting the economy," the economist opines and mentions that "politically motivated" projects should be cut out from the ADP.
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