Managing budgetary deficits prudently
Friday, 5 December 2008
Syed Fattahul Alim
To meet its budgetary deficit, the government borrows from both internal and external sources. The internal borrowing is made usually from banks and other non-bank institutions. But the banks are also the sources of credit on which the business of the country is crucially dependent. Of late the government's borrowing from the banks has increased considerably in comparison to the previous years. Of the many negative aspects of the internal borrowing by the government, payment of interest on the loan is one. A study carried out by the General Economics Division (GED) under the Planning ministry has revealed that in the current fiscal, the government has made the highest ever allocation of fund amounting Tk 125.65 billion, which is 12.6 per cent of the total budgeted amount for servicing the government's debt on account of interest payment. Of the total debt servicing on interest, however, the lion's share amounting Tk 112.74 goes to serving internal debt.
Needless to say, this amount to be spent on interest payment is a drain on the budgetary resources available in the hands of the government. The government would not have to go for such internal borrowing had there been adequate resources available from its revenue earning.
In addition to its revenue earning, the government earlier would receive substantial amount of fund in the form of foreign aid which helped to meet the budgetary deficit considerably. But the amount of foreign aid has been on the wane during the last few years. The fall in the foreign assistance for financing the budgetary deficit has not wholly been due to any apathy on the part of the international donor community to assist Bangladesh, though. In fact, it has been partly deliberate, for the successive governments have been endeavouring to strengthen the internal capacity of the economy through mobilising its own resources. The decision to reduce dependency on foreign aid was certainly a very bold and patriotic decision. The decision was necessary for more than one reason. Enhancing the internal strength of the economy to make its own national budget was certainly the overriding reason. But there was yet another compulsion to wean from too-much aid dependency. One may recall here how a visiting foreign dignitary had once branded Bangladesh as an international basket case. Such spot on the nation's lot was stuck not long after the nation had won its independence. One should, notwithstanding their other failures and follies, thank the past elected governments for their efforts at enhancing the capacity of the economy in order to reduce dependency on foreign assistance. But such attempts at increasing internal capacity of the economy cannot also be expected to be achieved overnight and without any cost. For an economy with weak industrial base and at the same time burdened with a disproportionately huge population, it is really a very hard, though not impossible, task to accomplish. So, one has to accept such teething problems on the economy's journey towards self-sufficiency.
Returning to the issue of meeting budgetary deficit through internal borrowing one has to admit that such consequences are a corollary to a nation's efforts at attaining self-sufficiency. However, the risk could be managed well, if it was supported by a robust level of revenue earning. But the revenue earning, too, is very low compared to the size of the Gross Domestic product (GDP). As a result, the extent of the deficit has come to 4.99 per cent of the total Gross Domestic Product (GDP) in the ongoing fiscal. Compared to this, in the last budget the deficit was less by 0.22 per cent.
The fallout of financing the deficit by way of borrowing from the local banks as well as non-banking financial institutions is well-known. As mentioned in the foregoing, it is not purely the interest to be paid on the amount borrowed that is the main problem with the fiscal management. In fact, the government borrowing, when it becomes high has its cascade effect on the overall economy, too. Looked at from one angle, it is like drinking one's own blood to sustain oneself. The consequence of it in economic terms is inflation. And inflation means the money is losing its purchasing power. But Bangladesh Taka has been losing its purchasing power persistently since long due to a host of factors. Of these, the inordinate rise in the price of essential commodities has been the worst contributing factor. Moreover, the economy's overdependence on import of consumer as well as capital goods has also caused to constantly push the value of local currency down in comparison to foreign ones. As a result, taka had to be devalued progressively in the past. But this trend was never matched by increasing the income level of the people. Against this backdrop, the government's enhanced borrowing from the banks will contribute significantly to the inflationary trend, thereby further eroding the purchasing power of the people.
This is in fact a Hobson's choice for the people, for they have no better choice before them at the moment. And it is exactly for this reason, a more prudent fiscal management would be the best option before the government to get over the uncertain times lying ahead. Uncertain because, the situation in the global economy has also been going from bad to worse-from recession towards depression-in the advanced economies.
In the foregoing, a strong case was made of the economy's need to reduce dependency on foreign aid. Granted the argument is unassailable, there are times when one has to look for even the least desirable options for the greater interest of the economy. Bangladesh economy has been passing through such a critical time at the moment. Enhanced external aid would be of great help for us at this time. Unfortunately, the situation obtaining in the international economy holds out little promise that the donors might extend a strong hand to help us out of the looming 'long-term loan trap' that the economy runs the risk of being bogged down into.
There is another trend in the budgetary expenses recently marked by lower rate of Annual Development Programme (ADP) expenditure as only 13 per cent of it has been utilised in the first four months of current fiscal. What is further discomforting is that this low rate of ADP expenditure contrasts sharply with revenue expenses which is on the higher side due mainly to servicing of the internal debt arising from enhanced borrowing from the banks and other non-bank institutions internally as well as externally.
This is certainly a worrying feature of the overall performance of the economy. Lower rate of ADP utilisation also means less emphasis on infrastructure development and other economic activities that create the condition for more investment in the economy. On the contrary, if it resonates negatively with bloated revenue expenses on account of debt servicing, then its overall impact on the economy cannot be overemphasised.
To sum up, the economy is facing negative pulls from three sides. One, higher dependency on internal borrowing to meet budgetary deficit. Two, the uphill task of mobilising revenue to the expected level vis-à-vis the size of the GDP due to the various constraints in the administration, corruption, the culture of tax evasion as well general apathy of the common people towards paying taxes. Three, falling trend in foreign aid. Four, the economic recession in the world economy.
The government will therefore have to show enough prudence in its fiscal management while negotiating these negative forces putting up their hurdles all the way. Though an elected government will be taking office soon after the national polls at the end of the month, the tasks of managing the economy as mentioned above should not still be a matter of just passing the buck to the next government. The incumbent government has to careful in that the next government can start forthwith without having to start it all from scratch thereby depriving the economy the benefits of continuity. Moreover, the government to succeed, too, should have the wisdom to keep the good things of the precursor as much as possible without going into the unnecessary changes that can be done without.
To meet its budgetary deficit, the government borrows from both internal and external sources. The internal borrowing is made usually from banks and other non-bank institutions. But the banks are also the sources of credit on which the business of the country is crucially dependent. Of late the government's borrowing from the banks has increased considerably in comparison to the previous years. Of the many negative aspects of the internal borrowing by the government, payment of interest on the loan is one. A study carried out by the General Economics Division (GED) under the Planning ministry has revealed that in the current fiscal, the government has made the highest ever allocation of fund amounting Tk 125.65 billion, which is 12.6 per cent of the total budgeted amount for servicing the government's debt on account of interest payment. Of the total debt servicing on interest, however, the lion's share amounting Tk 112.74 goes to serving internal debt.
Needless to say, this amount to be spent on interest payment is a drain on the budgetary resources available in the hands of the government. The government would not have to go for such internal borrowing had there been adequate resources available from its revenue earning.
In addition to its revenue earning, the government earlier would receive substantial amount of fund in the form of foreign aid which helped to meet the budgetary deficit considerably. But the amount of foreign aid has been on the wane during the last few years. The fall in the foreign assistance for financing the budgetary deficit has not wholly been due to any apathy on the part of the international donor community to assist Bangladesh, though. In fact, it has been partly deliberate, for the successive governments have been endeavouring to strengthen the internal capacity of the economy through mobilising its own resources. The decision to reduce dependency on foreign aid was certainly a very bold and patriotic decision. The decision was necessary for more than one reason. Enhancing the internal strength of the economy to make its own national budget was certainly the overriding reason. But there was yet another compulsion to wean from too-much aid dependency. One may recall here how a visiting foreign dignitary had once branded Bangladesh as an international basket case. Such spot on the nation's lot was stuck not long after the nation had won its independence. One should, notwithstanding their other failures and follies, thank the past elected governments for their efforts at enhancing the capacity of the economy in order to reduce dependency on foreign assistance. But such attempts at increasing internal capacity of the economy cannot also be expected to be achieved overnight and without any cost. For an economy with weak industrial base and at the same time burdened with a disproportionately huge population, it is really a very hard, though not impossible, task to accomplish. So, one has to accept such teething problems on the economy's journey towards self-sufficiency.
Returning to the issue of meeting budgetary deficit through internal borrowing one has to admit that such consequences are a corollary to a nation's efforts at attaining self-sufficiency. However, the risk could be managed well, if it was supported by a robust level of revenue earning. But the revenue earning, too, is very low compared to the size of the Gross Domestic product (GDP). As a result, the extent of the deficit has come to 4.99 per cent of the total Gross Domestic Product (GDP) in the ongoing fiscal. Compared to this, in the last budget the deficit was less by 0.22 per cent.
The fallout of financing the deficit by way of borrowing from the local banks as well as non-banking financial institutions is well-known. As mentioned in the foregoing, it is not purely the interest to be paid on the amount borrowed that is the main problem with the fiscal management. In fact, the government borrowing, when it becomes high has its cascade effect on the overall economy, too. Looked at from one angle, it is like drinking one's own blood to sustain oneself. The consequence of it in economic terms is inflation. And inflation means the money is losing its purchasing power. But Bangladesh Taka has been losing its purchasing power persistently since long due to a host of factors. Of these, the inordinate rise in the price of essential commodities has been the worst contributing factor. Moreover, the economy's overdependence on import of consumer as well as capital goods has also caused to constantly push the value of local currency down in comparison to foreign ones. As a result, taka had to be devalued progressively in the past. But this trend was never matched by increasing the income level of the people. Against this backdrop, the government's enhanced borrowing from the banks will contribute significantly to the inflationary trend, thereby further eroding the purchasing power of the people.
This is in fact a Hobson's choice for the people, for they have no better choice before them at the moment. And it is exactly for this reason, a more prudent fiscal management would be the best option before the government to get over the uncertain times lying ahead. Uncertain because, the situation in the global economy has also been going from bad to worse-from recession towards depression-in the advanced economies.
In the foregoing, a strong case was made of the economy's need to reduce dependency on foreign aid. Granted the argument is unassailable, there are times when one has to look for even the least desirable options for the greater interest of the economy. Bangladesh economy has been passing through such a critical time at the moment. Enhanced external aid would be of great help for us at this time. Unfortunately, the situation obtaining in the international economy holds out little promise that the donors might extend a strong hand to help us out of the looming 'long-term loan trap' that the economy runs the risk of being bogged down into.
There is another trend in the budgetary expenses recently marked by lower rate of Annual Development Programme (ADP) expenditure as only 13 per cent of it has been utilised in the first four months of current fiscal. What is further discomforting is that this low rate of ADP expenditure contrasts sharply with revenue expenses which is on the higher side due mainly to servicing of the internal debt arising from enhanced borrowing from the banks and other non-bank institutions internally as well as externally.
This is certainly a worrying feature of the overall performance of the economy. Lower rate of ADP utilisation also means less emphasis on infrastructure development and other economic activities that create the condition for more investment in the economy. On the contrary, if it resonates negatively with bloated revenue expenses on account of debt servicing, then its overall impact on the economy cannot be overemphasised.
To sum up, the economy is facing negative pulls from three sides. One, higher dependency on internal borrowing to meet budgetary deficit. Two, the uphill task of mobilising revenue to the expected level vis-à-vis the size of the GDP due to the various constraints in the administration, corruption, the culture of tax evasion as well general apathy of the common people towards paying taxes. Three, falling trend in foreign aid. Four, the economic recession in the world economy.
The government will therefore have to show enough prudence in its fiscal management while negotiating these negative forces putting up their hurdles all the way. Though an elected government will be taking office soon after the national polls at the end of the month, the tasks of managing the economy as mentioned above should not still be a matter of just passing the buck to the next government. The incumbent government has to careful in that the next government can start forthwith without having to start it all from scratch thereby depriving the economy the benefits of continuity. Moreover, the government to succeed, too, should have the wisdom to keep the good things of the precursor as much as possible without going into the unnecessary changes that can be done without.