Next budget would be an immense balancing act

Next fiscal is likely to be one of the most challenging years from a fiscal management perspective, among others. 

With the virus still around, the economy will take time to recover. 

When recovery is going to start is extremely uncertain. 

There will be pressure on public expenditure to fight COVID-19, strengthen the health system, support livelihoods at risk and keep businesses afloat. 

At the same time, expenditure on critical infrastructure projects must continue.

Revenue mobilisation will be a daunting task, given the various tax concessions and administrative forbearance that will have to be allowed to individuals and institutions in these very difficult times.

Budget deficit target will most likely exceed the usual 5 per cent of GDP.  What the finance ministry will propose is any body's guess. Assuming it will be somewhere between 6 to 7 per cent of GDP, the issue will be finding harmless ways of financing it. 

Given a relatively low public debt to GDP ratio, debt sustainability is not currently any major concern, particularly given the fact that the cost of existing foreign debt is very low. 

There is, therefore, space for increasing public borrowing from concessional external sources. 

The big donors have opened new windows for providing budgetary financing to meet COVID-19 caused emergencies, in addition to their regular financing windows.

These opportunities will need to be fully utilised keeping in mind there never is a free lunch even under emergencies. 

If you want quick disbursing funds from external sources, you have to make a convincing case based on comprehensive interventions designed to meet the emergency needs within a credible short and medium-term macroeconomic framework.  

The government will need to demonstrate their commitment to reform policies and regulations that make it difficult for consumers and investors to conduct their ordinary business of life.  

The government will also need to ramp up utilisation of the existing aid pipeline by speeding up the implementation of the foreign-aided projects in the annual development programme (ADP).

It is mindboggling why the government decided not to avail the debt service suspension facility offered by the Organisation for Economic Co-operation and Development countries. 

How do you convince donors that you have large funding needs to meet emergencies when you are choosing not to use options that will help defer external debt service payments amounting to about $300 million or so?

External financing has historically been less than 2 per cent of GDP. 

There are limits to how much this can be raised; maybe another 1 per cent of GDP the most. 

Domestic financing of the deficit will rise. There is limited potential for borrowing from non-bank sources. 

When incomes are down, savings are down too and therefore the demand for National Saving Certificates (NSCs) will be depressed. 

In fact, NSC holders may decide to cash out their savings invested in the instruments to pay for their living expenses.  It is, therefore, reasonable to assume reliance on bank borrowing will have to increase.

This could be a problem for the private non-financial sector particularly if production and investment begin to recover. 

An early recovery is unlikely, but the banks are already assigned with a large financial package to finance the working capital needs of the affected small and large business enterprises. 

Bangladesh Bank will be refinancing a significant portion of it. However, the banks will have to bear all the risk. 

In this situation, the banks may be more than happy to park their money in treasury bills and bonds that offer 7 to 9 per cent interest without any default risk. 

There is thus the risk of crowding out their own funding for the financial support packages where default risks are very high and the rate of return is marginally higher than government bills and bonds because of the 9 per cent ceiling on the interest rate.

The last option is the monetisation of the deficit by borrowing from the BB.  This may not create additional inflation risk if aggregate demand remains as depressed as it is now. 

However, deficit monetisation is not an option that can be used too much too long. 

The government will, therefore, have to remain very flexible in adjusting expenditures during the year depending on the financing situation, particularly ADP expenditure and avoidable non-development expenditures.

Reducing leakage in revenue collection will also be most helpful.

The author is an economist