Making hay while the sun, it appears, is the finance ministry’s mantra as it goes about preparing the budget for fiscal 2021-22, its second in the backdrop of the extraordinary challenges thrown by the pandemic.
The government is sitting on a record amount of foreign aid and at the same time, the development partners are chipping in liberally to help Bangladesh weather the pandemic gale. Closer to home, banks are sitting on excess liquidity and nowhere to lend to given the precarious state of the economy.
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It is these two wellsprings of funds that the ministry will draw upon for the most part to bankroll the budget for the next fiscal year amid shrunken domestic revenue mobilisation.
The government is hoping to use a record Tk 115,000 crore (about $13 billion) in foreign funding in fiscal 2021-22, up 35.4 percent year-on-year, according to finance ministry officials.
At present, about $50.4 billion of foreign aid is present in the pipeline, while the World Bank, the Asian Development Bank and other development partners have expressed their intent to provide budget support to the Bangladesh economy to better manage the pandemic whirlwind.
Banks are expected to provide Tk 76,252 crore towards the financing of the budget, down 4.4 percent from this fiscal year.
The government would extract Tk 37,000 crore from non-bank sources, up 4.8 percent from fiscal 2020-21.
Subsequently, the budget deficit, which is the shortfall in the government’s income compared with its spending, is projected to hit 6.1 percent of GDP — the highest in recent memory.
For developing countries, a budget deficit is not unusual as the government needs to spend big on building infrastructure to shore up future economic activities. The government meets the gap between income and expenditure through domestic and foreign borrowing obtained as loans or grants.
But keeping the deficit within 5 percent is recommended by the International Monetary Fund, and is in fact considered international best practice.
Historically, in Bangladesh, when the budget is drafted, a 5 percent deficit was projected but the actual deficit would invariably be about 4 percent every year as the ministries and divisions failed to use their allocated funds.
However, since fiscal 2018-19, the budget deficit has been trespassing the 5 percent-mark. This fiscal year, it is tipped to cross the 6 percent-mark.
But, that is no cause for alarm — yet.
“A 6 percent budget deficit is technically a nonissue even in normal times, not to speak of a health exigency and economically distressful time such as the pandemic,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
As long as the 6 percent deficit goes towards the areas where extra funding is needed for the pandemic, it would not be a problem.
The areas that have risen in the priority list because of the pandemic include health, social protection, education, CMSMEs, agriculture and rural development.
A rise in budget deficit due to an increase in expenditure in these areas could pay high economic and social dividends, Hussain added.
The finance ministry is not too worried, either.
“There is no long-term risk for the government’s higher expenditure for the pandemic and lower revenue collection this fiscal year. In fact, the debt-GDP is still in the comfortable zone,” said a finance ministry official requesting anonymity as he is not authorised to speak with media.
In the first nine months of fiscal 2020-21, revenue collection increased 6.4 per cent from a year earlier. But because of the ongoing countrywide shutdown, the momentum has taken a hit, it added.
Most countries are following an expansionary fiscal stance and the Bangladesh government is no different, said Zaid Bakht, a former research director of the Bangladesh Institute of Development Studies.
“On one hand, everyone is saying that you must spend to prop up the economy and do the health sector interventions — even if there is a deficit. And on the other hand, our tax-GDP ratio is very low and there has been a big shortfall in revenue target in recent times. Where would the funds come from?”
The raft of stimulus packages has increased the money supply in the economy and gave rise to inflationary risk.
“So for the government, foreign borrowing is a low-cost funding source. It is a logical conclusion that foreign loans are being used for deficit financing,” said Bakht, currently the chairman of Agrani Bank.
Hussain, however, is doubtful of the government’s ability to spend the foreign financing projected for the next fiscal year.
“It is highly ambitious. There is money in the pipeline, but the billion-dollar question to get nearly $12 billion disbursed in one year is whether the administration can raise their game in implementing aided projects and carry out the reforms needed to get budget support from the donors,” he added.
In fiscal 2019-20, the government managed to use about $7.3 billion, which is the highest yet.
