Subsidies, debt-servicing to emerge as major challenges
Monday, 23 May 2011
Mushir Ahmed
The ministry of finance (MoF) is giving a final touch to the budget for the next fiscal, keeping the overarching need for maintaining macro-economic stability into consideration. With subsidy bills getting weightier in the wake of global fuel and commodity price-hike and debt servicing, particularly on account of domestic borrowing, rising, all possible efforts will be made to keep the budget deficit within, what is considered, the safe limit -- at 5.0 per cent of the country's gross domestic product (GDP). The budget deficit will not be allowed to overshot this limit, officials said. There are risks to macro-economic stability, if the deficit exceeds the manageable limit. Such risks involve further depreciation of Taka in relation to US dollar -- which has otherwise fallen in value globally vis-à-vis other major currencies -- spiraling of prices and downgrading of country's sovereign rating by the international credit rating agencies. The total public debt is already hovering around 50 per cent of the GDP. "We know the difficulties rising deficit budget can cause if the deficit goes beyond five per cent of the GDP. But honestly speaking, keeping it below that level has become the toughest job in budget-making this year," said a senior official. He said subsidies alone could cost Taka 240 billion and debt servicing including principal payment would hit Taka 210 billion -- together making up more than a quarter of the estimated Tk 1.650 trillion budget for the upcoming fiscal. Last year, debt servicing cost the government around Taka 160 billion, but subsidies, particularly energy bill, remained firmly under check thanks largely to favourbale energy price scenario. But commissioning a raft of rental plants added an extra 40 per cent cost to the energy bill. Rising crude prices also increased further the subsidy bill. "We are making all permutations and combinations," said the official. "What would be the total subsidy if the crude price, despite having witnessed some decline in past few days, goes past US$120 a barrel in the global market? What would be its total size if the domestic prices are adjusted upward -- at least twice in the next fiscal year .. and so on?" "We are still in a guessing game. And things are sometimes changing too fast before we can even take them into consideration. But obviously, we will keep the deficit below five per cent of the GDP," he added. Development commitments in areas without having prior arrangements for lining up of funds, particularly from external sources, and growing bills for grants in the form of subvention, for teachers of private schools and colleges have generated pressures on the budgetary resources. The planning ministry would like to keep the size of Annual Development Programme (ADP) at about Tk 460 billion for the forthcoming fiscal, but if the commitments made in the previous budgets are taken into account, the ADP size could soar past Tk 600 billion. "The obvious choice for us is to stagger the spending further into the future. Prioritising the development projects in the context of the existing infrastructural inadequacies that are constraining the efforts for an accelerated growth performance of the economy, is a daunting task," the sources said. The government's 'subvention' for the country's ever-increasing number of teachers in private educational institutions is likely to cross Tk 80 billion as more schools and colleges are brought under Monthly Payment Orders (MPOs). In addition, the education ministry has sought an extra Taka 60 billion for creating a fund for payment of stipends to tens of thousands of primary and high school students. Of the five per cent budget deficit, the government has planned to finance two per cent from foreign credits and grants, and three per cent through borrowing from local sources. The finance ministry is in favour of more external borrowing, including suppliers credit, in an effort to cut pressure on foreign exchange reserve at a time when import payments have been on a marked rise. It does not want to borrow more from domestic sources because rising public borrowing could crowd out private sector, hampering growth and job creation, the sources said. "The job is getting trickier as the budget day approaches fast," according to a source.
The ministry of finance (MoF) is giving a final touch to the budget for the next fiscal, keeping the overarching need for maintaining macro-economic stability into consideration. With subsidy bills getting weightier in the wake of global fuel and commodity price-hike and debt servicing, particularly on account of domestic borrowing, rising, all possible efforts will be made to keep the budget deficit within, what is considered, the safe limit -- at 5.0 per cent of the country's gross domestic product (GDP). The budget deficit will not be allowed to overshot this limit, officials said. There are risks to macro-economic stability, if the deficit exceeds the manageable limit. Such risks involve further depreciation of Taka in relation to US dollar -- which has otherwise fallen in value globally vis-à-vis other major currencies -- spiraling of prices and downgrading of country's sovereign rating by the international credit rating agencies. The total public debt is already hovering around 50 per cent of the GDP. "We know the difficulties rising deficit budget can cause if the deficit goes beyond five per cent of the GDP. But honestly speaking, keeping it below that level has become the toughest job in budget-making this year," said a senior official. He said subsidies alone could cost Taka 240 billion and debt servicing including principal payment would hit Taka 210 billion -- together making up more than a quarter of the estimated Tk 1.650 trillion budget for the upcoming fiscal. Last year, debt servicing cost the government around Taka 160 billion, but subsidies, particularly energy bill, remained firmly under check thanks largely to favourbale energy price scenario. But commissioning a raft of rental plants added an extra 40 per cent cost to the energy bill. Rising crude prices also increased further the subsidy bill. "We are making all permutations and combinations," said the official. "What would be the total subsidy if the crude price, despite having witnessed some decline in past few days, goes past US$120 a barrel in the global market? What would be its total size if the domestic prices are adjusted upward -- at least twice in the next fiscal year .. and so on?" "We are still in a guessing game. And things are sometimes changing too fast before we can even take them into consideration. But obviously, we will keep the deficit below five per cent of the GDP," he added. Development commitments in areas without having prior arrangements for lining up of funds, particularly from external sources, and growing bills for grants in the form of subvention, for teachers of private schools and colleges have generated pressures on the budgetary resources. The planning ministry would like to keep the size of Annual Development Programme (ADP) at about Tk 460 billion for the forthcoming fiscal, but if the commitments made in the previous budgets are taken into account, the ADP size could soar past Tk 600 billion. "The obvious choice for us is to stagger the spending further into the future. Prioritising the development projects in the context of the existing infrastructural inadequacies that are constraining the efforts for an accelerated growth performance of the economy, is a daunting task," the sources said. The government's 'subvention' for the country's ever-increasing number of teachers in private educational institutions is likely to cross Tk 80 billion as more schools and colleges are brought under Monthly Payment Orders (MPOs). In addition, the education ministry has sought an extra Taka 60 billion for creating a fund for payment of stipends to tens of thousands of primary and high school students. Of the five per cent budget deficit, the government has planned to finance two per cent from foreign credits and grants, and three per cent through borrowing from local sources. The finance ministry is in favour of more external borrowing, including suppliers credit, in an effort to cut pressure on foreign exchange reserve at a time when import payments have been on a marked rise. It does not want to borrow more from domestic sources because rising public borrowing could crowd out private sector, hampering growth and job creation, the sources said. "The job is getting trickier as the budget day approaches fast," according to a source.