High deficit budget to hit investment, growth
Economists and business leaders said that the proposed budget for fiscal 2012-13 being highly deficit would force the government to resort to excessive bank borrowings, resulting in lower credit flow to the private sector and investment stagnation.
‘With such a huge deficit, the government will have to go for excessive borrowings from banking channels which will create liquidity crisis and squeeze credit flow to the private sector,’ former Bangladesh Bank governor Salehuddin Ahmed told New Age in an instant reaction to the budget.
If the government fails to receive expected foreign loans, the bank borrowing pressure may increase further, he said, adding that without improving project implementation, expected foreign loan might not come through.
As a result, overall investment in the country would decline, creating problems in achieving GDP growth rate which in turn would affect employment generation.
Former finance adviser to the interim government AB Mirza Azizul Islam said, ‘I think the government will have to face a big challenge in implementing the budget, especially in terms of financing.’
Mirza Aziz also expressed doubt over achieving the targeted 7.2 per cent GDP (gross domestic product) growth in the coming fiscal. ‘I assume that achieving 7.2 per cent growth will not be possible.’
The economist said there is a possibility of worsening political situation in the coming days and the government might have to borrow more from the banking sector. ‘These two things will have a negative impact on investment prospects.’
The Federation of Bangladesh Chambers of Commerce and Industry president AK Azad said the expansion of private sector would be hampered in the coming fiscal year as the government had taken a target of borrowing Tk 23,000 crore from the banks for deficit financing.
He said the overall deficit financing of the proposed budget would be Tk 52,068 crore, of which the government would borrow Tk 23,000 crore from the banking source to make up the deficit.
Due to higher borrowing target from banking source, the banks would fall into a severe liquidity crisis and the interest rate on loan disbursement and deposit collection might be increased, he told reporters in an instant reaction to the proposed budget at the FBCCI conference room in the capital.
Under the circumstances, the credit flow in the private sector will reduce and as a result the country’s industrialisation process would be severely affected.
He said the government had initially taken a borrowing target of Tk 18,957 crore from the banking source for FY2011-12, but the target was eventually surpassed within first half of the outgoing fiscal year.
Azad said the budgetary measure to increase the source tax on export goods to 1.2 per cent from 0.6 per cent would affect exports.
He said ‘The country’s export sector is now facing a crisis due to the economic recession in Europe and and the proposed source tax will be the last straw. We request the government not to increase the tax.’
Salehuddin said that implementation of the proposed budget for fiscal year 2011-
2012n would be difficult as there is no clear-cut indication on how the government will address the issues like inflation, investment, employment, and power and energy crisis.
‘The proposed budget is traditional and a routine one like previous budgets… It contains nothing except some mathematical figures,’ he told New Age giving his reaction on the budget.
The budget will also increase tax-burden on regular taxpayers as minimum tax rates have been increased without increasing the ceiling of tax-free income for individuals, he pointed out.
The former governor of the central bank also criticised the provision of allowing the facility of whitening black money, saying that it was not acceptable both on moral and economic point of view.
Whitening black or undisclosed money would encourage earning money in illegal ways and discourage regular taxpayers from paying tax, he observed.
Finance minister Abul Maal Abdul Muhith set some mathematical targets without
giving any clear indication of possible solutions to problems relating to macro-economy.
In the budget, there is no clear picture on energy crisis which will also lead to lower-than-expected investment, Salehuddin commented.
Achieving 7.2 per cent GDP growth and reducing inflation to 7.5 per cent may not be achievable, he said.
In May, overall point-to-point inflation remained very high compared to the target set by the government for the current fiscal year.
Achieving the target of 22 per cent growth in revenue earnings may also prove difficult in the context of some internal and external factors such as possibility of declining import, he said.
He said that the main challenge of the proposed budget would be to increase investment, pursue austerity measures in government expenditure, improving government’s fiscal management and proper coordination between fiscal and monetary policy.
The Exporters’ Association of Bangladesh president Abdus Salam Murshedi told that the export sector would face problems in the coming days with the government going for increasing the source tax.
He said the country’s industrial sector is now facing an energy crisis which resulted in production shortage.
The Dhaka Chamber of Commerce and Industry president Asif Ibrahim asked for not to increase the source tax on export products.