Government between Scylla and Charybdis

Like Odysseus in Homer's epic facing clear and present danger on both sides en route home, the Bangladesh economy is buffeted by two menacing forces. One is the burgeoning public debt and the other is inflation that has crept up to two digits. Apart from their growing magnitude these two macro-economic variables are not new or sudden in their appearance, both having cruised along for over a decade. But both have caused alarm as they now threaten to spin out of control. If unabated, the macro-economic turmoil caused by them may push the economy into a tailspin. The result will not be recession as it has been experienced in Europe and America but stagflation, which though slightly better than recession with negative growth, will derail the economy from the course undertaken to attain middle-income growth in the near future. Slower growth rate or stagnation will mean lower per capita income and greater incidence of poverty exacerbated by skewed distribution of income. Failure in prudent economic management over the past is cumulatively responsible for the economic crisis that looms large at present. Economic management is traditionally carried out by fiscal and monetary policy. The first is exclusively in the domain of the government while the latter is ideally the bailiwick of the central bank. In reality, monetary policy has become a joint responsibility of the ministry of finance and central bank and very often dictated by the ministry. As long as the central bank remains beholden and subordinate to the ministry of finance, its independence and by extension, independent monetary policy will be a chimera. The problem with the Bangladesh economy is that it is afflicted with profligate fiscal policy and a monetary policy that is often forced to be amenable to underpin this profligacy. The worst example of fiscal mismanagement and extravagance is the chronic budget deficit and consequent public borrowing. The mismatch between revenue and expenditure has led successive governments to go on a borrowing binge, mostly from domestic sources and externally on a diminishing scale. The insidious nature of public borrowing is manifest not only in its growing magnitude, year on year, but is also indicated by the failure to remain within the timeline of borrowing in a particular year. In the current fiscal year, the budget provided a total of Tk 190 billion for borrowing by the government from commercial banks (including state-owned) and the central bank. According to figures released by the Bangladesh Bank recently, during the first four months of the present fiscal year 78 per cent of the targeted amount has already been borrowed. To give some idea about the accelerated rate of borrowing, it has been disclosed that public borrowing from banks till October 27 stood at Tk 116 billion and jumped to Tk 149.05 billion on October 31, an increase of Tk 33.05 billion only in four days. Compared to last fiscal year (2010-2011), government borrowing from the banking system during the current fiscal year (2011-2012) increased by a whopping 1221 per cent. This is not only unprecedented but also mind-boggling. No explanation has been given by Bangladesh Bank for this precipitous rise in public borrowing but since revenue earning during the first four months have not been way below the targeted amount, only unrestrained public expenditure can be attributed for this. It would be interesting to know the break-up of public expenditure during the first four months, but given the lack of transparency some informed guesses can be made. According to the World Bank, during the current fiscal year the government would require Tk 300 billion for payment of subsidy to Bangladesh Power Development Board, Bangladesh Petroleum Corporation and the Bangladesh Chemical Corporation (for fertiliser). Last year, actual subsidy given to these bodies was Tk 123 billion, indicating an exponential growth in subsidy payment projected for this year. From these figures it can be concluded that the sudden rise in government expenditure this year, necessitating enhanced borrowing, is due to the requirement to pay subsidy on petroleum products. Given the trend of rising price of these items in the international market, the rate of public borrowing can be expected to accelerate unless there is a drastic fall in the international market. Faced with this stark reality, the government had to take a decision between accelerated borrowing or cutting subsidy. It has opted for the latter. As of now, subsidy on petrol, diesel, octane and kerosene has been reduced and their prices increased. Subsidy on fertiliser and food grains have not come under this reduction. Some media-savvy economists have decried the decision to reduce subsidy on the petroleum products mentioned above arguing that it would fuel inflation, forcing it higher. It does not require much wisdom and knowledge about macro-economics to know that subsidy reduction on petroleum products would create some inflationary pressure, particularly on essential consumer goods. Against this impact on prices of daily necessities, the consequences of continued borrowing by the government and at an accelerated rate, has to be analysed for comparison in order to find out which one is more insidious. It is passé to say that public borrowing reduces money for private sector borrowing through the oft-quoted crowding-out effect. Since the cudgel of the critics is on the impact on prices, the result of borrowing at the present geometric rate on inflation should be taken into consideration. Government borrowing this year has been mostly from commercial banks (including state-owned ones) and the Bangladesh Bank. This borrowing has increased money supply, exceeding the target set in the half-yearly monetary policy announced by the Bangladesh Bank. According to available figures, Broad money has increased steadily over the past years, fuelling inflation. During 2007-2008 the rate of increase of money supply was 17 per cent. It rose to 19 per cent in fiscal 2008-2009. During the last fiscal year increase in money supply jumped to 22 per cent. Given the almost doubling of targeted borrowing this year, money supply will reach a record high by the end of the current fiscal year. If the targeted borrowing is exceeded, as it is likely to be, the increase in the volume of money supply may hover around 30 per cent. The large increase in money supply is bound to push inflation higher than at present (12 per cent). Bangladesh Bank, in spite of its intention, will fail to stick to the monetary target fixed in the monetary policy. In fact, monetary policy will be held hostage to the profligate fiscal policy, as in the past. Given the inability of Bangladesh Bank to rein in money supply and contain inflation, the initiative had to come from the ministry of finance. Though belated the ministry has realised the gravity of the situation and decided to cut subsidy on petroleum products. No doubt there will be negative impact of this on the price of consumer goods, increasing inflation in the short term. But the rise will be much higher if the policy of public borrowing at accelerated rate is continued. Therefore, before giving opinion through knee-jerk reaction regarding inflationary impact of the subsidy reduction, the countervailing effect of less borrowing by the government made possible by subsidy reduction should also be taken into consideration. The decision to cut subsidy should be seen as the return of the prodigal fiscal policy, availing of prudence and pragmatism. It is not a populist move and the government deserves some kudos for being bold and determined to bring financial management under some discipline. Faced with fiscal and monetary meltdown, the buzzword in Europe now is austerity. There the axe has come down hard on the generous welfare programme and subsidised education, raising public outcry. In Bangladesh, the situation is different. There is no crippling sovereign debt and no ballooning welfare programme. Whatever social programme is currently on the ground it is miniscule in size and therefore is exiguous in the overall public expenditure. Apart from subsidy, expenditure on administration claims the major share of the annual public revenue budget. Despite frequent promises of downsizing the government, the public sector has incrementally become bloated. There is scope for slicing some fat from this Leviathan. The government has started its austerity programme with subsidy because it is a simple and straightforward exercise, though unpopular. Effecting economy within the government at various levels may be difficult but not impossible, given the political will. For this to happen the bureaucracy has to bite the bullet. So far it has not given any indication that it has the stomach for this. But the time has come when the citadel of conservatism and status quo has to open its door to reforms. The privileged public sector can dither but cannot ignore this crying need. The days when the public had to bear the brunt of austerity alone are over. The writer is a former teacher of Economics, Dhaka University and a retired Secretary. E-mail : hasnat.hye5@gmail.com