Combating the challenges ahead

The Finance Minister AHM Mustafa Kamal has placed the 5th budget of present tenure of Awami League government, the party in power, in the National Parliament on June 1, 2023. The government placed the budget at a time when the country has been reeling and experiencing high inflationary pressure, nagging dollar crisis, dwindling of our foreign currency reserves, stress in the balance of payments, negative trend in inflow of foreign remittance and export earnings etc.

The price hike of essentials is one the burning issues and the lower and middle income people have been assaulted by the soaring price commodities. Last year in August, the country observed the highest overall inflation of 9.52 per cent. In the current year in April inflation has jumped again at 9.23 per cent. The government’s projected targets for the next fiscal year budget is ambitious as government targeted GDP growth at 7.5 per cent and containing the inflation at 6 per cent are not only lofty but also unrealistic. The government has proposed a hefty budget with an outlay of TK 761,785 crore which 12 per cent rise of the outgoing fiscal year budget.

Achieving the targeted growth and containing projected inflation will be biggest challenges and highly impossible in the present scenario as the country has been observing negative trend in macroeconomic indicators. The imports of raw materials and capital machineries through letter of credit have fallen due to paucity of dollars and stress in the balance of payments. Owing to lack of imports of raw materials and capital machineries, our export has also been plummeted.

Resultantly, our export earnings have been shrinking and government has been losing imports and export revenues. Moreover, electricity outage and constrained in payment of due added fuel into this problem as businessmen cannot utilize full capacity of their production. Inflation has exacerbated further as big and small businessmen cannot import goods due to persist dollars crisis. The Small businessmen are much affected and they are winding up their business. Whereas the big businessmen are somewhat surviving in the prevailing scenario as they both make imports and export.

Due to government and Central bank initiatives to restrain imports, the import of goods through LC has been dropped significantly. Last year in 2022, each month imports through LC were around USD 8 billon which has now come down to USD 5 billion in the current year due to various restrictions imposed by central bank and dollar shortage. Controlling imports is short-term solutions and if such restriction continues for long time, it will intensify the inflation of food and non-food items and already we have felt the impact of controlling imports. Consequently, the Government is losing both import and export revenues. The economic growth of the country will also be affected due to restrictions of import in the long run.

In the proposed budget, as per standard, the government has kept 5 per cent of GDP amount as deficit which is TK 257,885 crore. The remaining amount of the budget which is TK500,000 crore would be collected through the NBR and Non NBR sources. The deficits amount will be collected from domestic and foreign sources. It has set a target of TK155,395 crore which would be collected from the internal sources whereas Tk106,390 to be collected from the foreign sources in the form of loans and grants.

To meet up the deficit amount from domestic sources, the government has projected to borrow TK 132,395 crore from the banking sector. Since banking sector has been facing liquidity crunch, the government would not be able to collect targeted deficit amount from the banking sector. If government goes for the banking sector to meet up budgetary deficit, it will make crowding out effect that means private sector will not have enough money as loans which make impediment in job creation.

Then only option for the government has as a last resort that is to go to central bank to cover up its deficit amount. In that case, the central bank will supply deficit amount by printing broad money. Printing money is not a good option as it will create broad money which will escalate inflationary pressure excessively. Printing money will circulate money in the market which go to the people hands and ultimately chasing lots money to few products, consequently, rising inflation. Outgoing fiscal year, the Central Bank has already printed Tk70,000 crore to support the government deficit and end of current fiscal year govt. borrowing from the central bank will rise sharply.

To curb the galloping inflation, it is not wise to print money taking consideration of the present scenario, rather, the government should go for controlling the circulation of excess money through interest rate hike. The government has long been put a cap on the interest rate ceiling reasoning that it would help more investment into the country. For long interest rates of borrowing and lending have been fixed as 6 and 9 per cent respectively. However, the economist and IMF has been pressing the government to uncap the existing deposit and lending rates. With the uncapped of deposit and lending rate, the excess money supply from the market can be controlled through channeling in the banking sector. In this way inflation can be reined.

The government fails to achieve projected GDP growth for the current fiscal year and revised the target twice and fixed at 6.5 per cent. Finally GDP growth has been achieved by 6.03 per cent. However, it would be quite impossible for government to achieve targeted GDP growth of 7.5 per cent for next fiscal year 2023-24 as the country has been shattered by myriad macroeconomic instability.

Taming the inflation, retaining the growth trajectory and creating more jobs for people would be challenging jobs for the government in the upcoming fiscal year. In order to reduce the inflationary pressure from common people, the indirect tax burden must be removed, capped deposit and lending rate regime must be withdrawn, social safety net program must be enhanced and subsidized product access to marginalized people must be ensured. Creating high powered money by printing notes through central bank must be stopped.

The private sector should be given access loanable funds to create jobs. The Government must take necessary reform programmes, solve dollars crisis, resolve power shortage, protect depletion of dollars reserves, stop less important project and enhance remittance and export earnings to take the back on track. However, no roadmaps and indications have been chalked out by the government in the proposed budget. Without addressing and reformation of macroeconomic indicators, attaining projected growth and containing inflation are highly impossible.

The writer is a banker