On budget deficit and subsequent possibilities
Tuesday, 12 June 2007
Qazi Azad
PUNDITS on economics theorize an idea with a qualifying statement to characterize the situation under which the idea will hold good. "Other parameters remaining constant" is the language of the usual qualifying statement. This is how they acknowledge that economics, unlike exact sciences, cannot assure that two plus two would always make four.
Yet professional economists lately tend to generalize theories while applying them. They do so more often while planning efforts for economic uplift for obtaining desirable qualitative changes in socio-economic conditions. The World Bank in the third quarter of the last century, particularly in the 1960s, opposed such generalization. Instead, it forcefully argued for and adopted the "case specific" approach. The policy saw a social or an economic problem not in isolation from other problems of the society concerned. It sought to resolve any such problem with due regard for local conditions. The approach worked well. It delivered good results. Today's prosperity in many of the former poor countries has been created on the infrastructural base built at that time.
But the speedy pace of globalization in the post-cold war period, which eased the political compulsion for precluding adverse social reactions, seems to have reoriented the old approach to socio-economic development. Economic theories have been virtually remodeled by de-emphasizing the need to characterize a situation as peculiar to local conditions and then to seek to obtain a qualitative change in a particular sphere through planned programmes either by adjusting with those conditions or by attacking those conditions simultaneously in an evolutionary process.
The new generalized approach, promoted by the World Bank, the International Monetary Fund and some bilateral donors in conjunction with those two institutions, which has been also broadly accepted by the aid-recipient helpless governments, may create some distortions in the usual process of economic development.
When we view budget deficit in any year in terms of percentage points of the gross domestic product (GDP) and then try to rationalize domestic borrowing to plug it citing the examples of other countries, we normally ignore that the saving rate is an important factor for consideration. A big budget deficit cannot be met through internal borrowings without creating some unwanted distortions in the economy if the saving rate does not support it. It is also true for taxation.
The saving rate is not only a function of economic growth but is also factored upon the demographic growth. A high population density, as in this country, can hold it in check if the level of poverty is depressingly high. However, the provision for massive borrowing by the government may be a disguised effort to reduce domestic demand and money circulation for driving down inflation, which would buy time for the government to relax with reduced worries on this issue. The intervening time -- between the reflow of the borrowed money to the market through government spending and the possible reduction of prices of essentials in the world market and within the country in the event of better harvest in the next season, would provide some relief to the government.
Higher taxation without regard for the saving rate may actually depress entrepreneurship by slowing down capital formation--an important factor for receiving bank loans for big projects on pledging collaterals. The saving rate may generally fall at least temporarily in this country due to the present high inflation and the consequential rise in the cost of living.
Considering all these points, the caretaker government may think whether the proposed budget of Tk 871.37 billion for the ensuing fiscal 2007-08, with a deficit equal to 5.6 per cent of the GDP, of which 2.0 per cent will be financed with funds from external sources, would be approved in its existing size or slashed down by curtailing spending on some relatively less important budget heads.
The estimated total revenue receipt in the coming fiscal is Tk 573.01 billion including earning from the NBR, and the non-NBR and the non-tax sources. The projected revenue receipt is 10.8 per cent of the GDP. The estimated budget deficit, on assumption of the liability of Tk 75.23 billion of the Bangladesh Petroleum Corporation, on account of its accumulated losses, stands at Tk 298.36 billion. Although in terms of percentage point of the GDP, it looks as if it is a small amount--only 5.6 per cent of the GDP, as quoted by the finance adviser in his budget speech, the deficit in figure is huge. It is Tk 298.36 billion, of which Tk 191.80 billion will be raised, as envisioned, through domestic borrowing as loans from banks and by floating bonds.
While contending in his budget speech that the estimated huge budget deficit will not create any immediate additional fiscal liabilities and will not retard the credit flow to the private sector, the finance adviser agreed that meeting it through borrowings will require future governments to pay a big amount to banks and other sources in repayment of these loans together with interest.
The plan for meeting a huge budget deficit through borrowing from domestic and external sources, which indicates a clear prospect of a marked rise in future state liabilities, presupposes that enhanced prosperity commensurate with the increase in state liabilities would be achieved for repayment of the loans. But if it cannot be ensured, the state will be stuck up with huge accumulated liabilities at one stage, like most of the state-owned enterprises now which previously received fabulous amounts as loans from the state-run banks assuming that they would achieve greater prosperity in the future.
The management style of the interim government is reassuringly good. It may succeed in delivering output as being anticipated. But can it guarantee that the future elected governments will be equally good in management? It is generally expected that Bangladesh, after the widespread corrective measures under the current emergency, will not be the same again, at least not as it was prior to the promulgation of the state of emergency. But democracy may not be able to maintain, with its noise and chaos, the current management standard. Even perceptions may vary in the future to pave the way for some changes in the management approach. If the prosperity being assumed now is not delivered by circumstances then, it is not unlikely that the state will have difficulties in repaying the accumulating huge loans.
Since the major engine of growth under the current free economy is the private sector, the interim government may attach high priority in the new budget alone to development of such infrastructures, which no subsequent government would dare to relegate to secondary importance on the question of its survival in office. The matter of huge deficit in the proposed budget may, therefore, be thought over once again, seriously, while finalizing the budget.
The proposals for reducing the tariff on imported industrial raw materials for maintaining a logical difference with that on imported intermediate products and finished products, and for withdrawal of proposed duty on imported textile machinery, computers and their accessories, as made by some groups of industrialists, may be sympathetically considered. The wastage in processing of industrial raw materials in course of manufacturing is always high while virtually no wastage takes place in processing intermediate products into finished ones.
Local basic industries will be subject to profuse financial haemorrhage of unbearable proportion if these have to pay disproportionately high tariff on imported primary industrial raw materials. It would inevitably decelerate the expansion of basic industries. We should not risk learning a lesson by having our fingers burnt or from a major shock from the dreaded deceleration.
The private sector is the major engine of growth under the current free economy. We should give proper weightage to the logical views of the sector on matters of manufacturing and trade. The government, however, should carefully decide what would actually best serve our national interest taking into consideration the conflicts of interests that sometimes prompt opposing views of some local industrialists on matters of a few policies.
PUNDITS on economics theorize an idea with a qualifying statement to characterize the situation under which the idea will hold good. "Other parameters remaining constant" is the language of the usual qualifying statement. This is how they acknowledge that economics, unlike exact sciences, cannot assure that two plus two would always make four.
Yet professional economists lately tend to generalize theories while applying them. They do so more often while planning efforts for economic uplift for obtaining desirable qualitative changes in socio-economic conditions. The World Bank in the third quarter of the last century, particularly in the 1960s, opposed such generalization. Instead, it forcefully argued for and adopted the "case specific" approach. The policy saw a social or an economic problem not in isolation from other problems of the society concerned. It sought to resolve any such problem with due regard for local conditions. The approach worked well. It delivered good results. Today's prosperity in many of the former poor countries has been created on the infrastructural base built at that time.
But the speedy pace of globalization in the post-cold war period, which eased the political compulsion for precluding adverse social reactions, seems to have reoriented the old approach to socio-economic development. Economic theories have been virtually remodeled by de-emphasizing the need to characterize a situation as peculiar to local conditions and then to seek to obtain a qualitative change in a particular sphere through planned programmes either by adjusting with those conditions or by attacking those conditions simultaneously in an evolutionary process.
The new generalized approach, promoted by the World Bank, the International Monetary Fund and some bilateral donors in conjunction with those two institutions, which has been also broadly accepted by the aid-recipient helpless governments, may create some distortions in the usual process of economic development.
When we view budget deficit in any year in terms of percentage points of the gross domestic product (GDP) and then try to rationalize domestic borrowing to plug it citing the examples of other countries, we normally ignore that the saving rate is an important factor for consideration. A big budget deficit cannot be met through internal borrowings without creating some unwanted distortions in the economy if the saving rate does not support it. It is also true for taxation.
The saving rate is not only a function of economic growth but is also factored upon the demographic growth. A high population density, as in this country, can hold it in check if the level of poverty is depressingly high. However, the provision for massive borrowing by the government may be a disguised effort to reduce domestic demand and money circulation for driving down inflation, which would buy time for the government to relax with reduced worries on this issue. The intervening time -- between the reflow of the borrowed money to the market through government spending and the possible reduction of prices of essentials in the world market and within the country in the event of better harvest in the next season, would provide some relief to the government.
Higher taxation without regard for the saving rate may actually depress entrepreneurship by slowing down capital formation--an important factor for receiving bank loans for big projects on pledging collaterals. The saving rate may generally fall at least temporarily in this country due to the present high inflation and the consequential rise in the cost of living.
Considering all these points, the caretaker government may think whether the proposed budget of Tk 871.37 billion for the ensuing fiscal 2007-08, with a deficit equal to 5.6 per cent of the GDP, of which 2.0 per cent will be financed with funds from external sources, would be approved in its existing size or slashed down by curtailing spending on some relatively less important budget heads.
The estimated total revenue receipt in the coming fiscal is Tk 573.01 billion including earning from the NBR, and the non-NBR and the non-tax sources. The projected revenue receipt is 10.8 per cent of the GDP. The estimated budget deficit, on assumption of the liability of Tk 75.23 billion of the Bangladesh Petroleum Corporation, on account of its accumulated losses, stands at Tk 298.36 billion. Although in terms of percentage point of the GDP, it looks as if it is a small amount--only 5.6 per cent of the GDP, as quoted by the finance adviser in his budget speech, the deficit in figure is huge. It is Tk 298.36 billion, of which Tk 191.80 billion will be raised, as envisioned, through domestic borrowing as loans from banks and by floating bonds.
While contending in his budget speech that the estimated huge budget deficit will not create any immediate additional fiscal liabilities and will not retard the credit flow to the private sector, the finance adviser agreed that meeting it through borrowings will require future governments to pay a big amount to banks and other sources in repayment of these loans together with interest.
The plan for meeting a huge budget deficit through borrowing from domestic and external sources, which indicates a clear prospect of a marked rise in future state liabilities, presupposes that enhanced prosperity commensurate with the increase in state liabilities would be achieved for repayment of the loans. But if it cannot be ensured, the state will be stuck up with huge accumulated liabilities at one stage, like most of the state-owned enterprises now which previously received fabulous amounts as loans from the state-run banks assuming that they would achieve greater prosperity in the future.
The management style of the interim government is reassuringly good. It may succeed in delivering output as being anticipated. But can it guarantee that the future elected governments will be equally good in management? It is generally expected that Bangladesh, after the widespread corrective measures under the current emergency, will not be the same again, at least not as it was prior to the promulgation of the state of emergency. But democracy may not be able to maintain, with its noise and chaos, the current management standard. Even perceptions may vary in the future to pave the way for some changes in the management approach. If the prosperity being assumed now is not delivered by circumstances then, it is not unlikely that the state will have difficulties in repaying the accumulating huge loans.
Since the major engine of growth under the current free economy is the private sector, the interim government may attach high priority in the new budget alone to development of such infrastructures, which no subsequent government would dare to relegate to secondary importance on the question of its survival in office. The matter of huge deficit in the proposed budget may, therefore, be thought over once again, seriously, while finalizing the budget.
The proposals for reducing the tariff on imported industrial raw materials for maintaining a logical difference with that on imported intermediate products and finished products, and for withdrawal of proposed duty on imported textile machinery, computers and their accessories, as made by some groups of industrialists, may be sympathetically considered. The wastage in processing of industrial raw materials in course of manufacturing is always high while virtually no wastage takes place in processing intermediate products into finished ones.
Local basic industries will be subject to profuse financial haemorrhage of unbearable proportion if these have to pay disproportionately high tariff on imported primary industrial raw materials. It would inevitably decelerate the expansion of basic industries. We should not risk learning a lesson by having our fingers burnt or from a major shock from the dreaded deceleration.
The private sector is the major engine of growth under the current free economy. We should give proper weightage to the logical views of the sector on matters of manufacturing and trade. The government, however, should carefully decide what would actually best serve our national interest taking into consideration the conflicts of interests that sometimes prompt opposing views of some local industrialists on matters of a few policies.