ADP revision: Govt doing opposite of what’s needed

It seems the government is doing an about-turn from the austerity stance taken at the start of the fiscal year.

Take the case of the annual development programme. As part of the belt-tightening measures, the finance division in a notice on July 3 last year pared back the programme.

Projects were classified into A, B and C categories. The A-category projects will go on as normal, while up to 75 percent of the allocation for the B-category projects can be spent. All C-category projects were put on hold.

Now, the government is walking back from that position.

As is practice, the ADP project invariably gets revised down during the course of the year, with the chop coming from the amount allocated from foreign aid.

Given the foreign exchange reserves crunch and the narrow fiscal space, the calibration in the ADP budget was expected to be different: the foreign aid portion would stay intact, while the government's own fund is pared back.

But it is business as usual. The original ADP is expected to be trimmed down by about 6.1 percent to Tk 231,000 crore, The Daily Star has learnt from finance ministry officials involved with the exercise.

The foreign fund portion would be slashed by about 16.4 percent to Tk 76,954 crore.

The fiscal coordination council has decided to go for an expansionary fiscal policy, according to the finance ministry officials.

This would revive economic activities and generate employment.

"So, we have been asked not to cut down the government's own fund portion in revised ADP," said one of the officials, who insisted on anonymity to discuss private conversations.

In the ADP budget for fiscal 2022-23, Tk 149,016 crore has been allocated from the government's own fund.

There is also no reason to assume all ADP expenditures are equally employment generating, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

Expenditure austerity is needed particularly in domestically-financed ADP projects to contain domestic demand growth, Hussain said.

But that does not appear to be the case.

"This is strange because if the idea is to protect employment while alleviating pressure on foreign exchange reserves and inflation, it is the externally funded projects that should get high implementation priority. The proposed ADP revision is in the opposite direction."

In the current macroeconomic context, inflation reduction and alleviation of foreign exchange shortage have to be the top policy priorities, according to Hussain.

Inflation averaged 8.76 percent in the first six months of the fiscal year, up from 5.7 percent a year earlier, according to data from the Bangladesh Bureau of Statistics.

As of January 18, foreign currency reserves stood at about $32.5 billion, down 28.1 percent year-on-year, according to data from the Bangladesh Bank. This is enough to cover about three-and-a-half months' import bills.

"It's all good that the government wants to invigorate economic activities by using more of its own funds towards ADP, but from where would they get the dollars?  In domestic-funded projects, I have to pay for the imports," said Ahsan H Mansur, executive director of the Policy Research Institute.

In foreign-funded projects, the imports are made using the dollars coming in, leaving some surplus dollars in the central bank's coffers.

"They cut foreign funds because they can't utilise it -- that is their ineptness. The original strategy was the right one -- this is the time to accelerate the utilisation of foreign funds and minimise the domestic-funded projects."

The move will heap pressure on the balance of payment, said Mansur, also the chairman of Brac Bank, adding that there will be a drain on dollars.

"The import pressure is already high now and we are not getting the dollars for that. Imagine what will happen if the dollar crunch intensifies. This is a short-term vision."

The move will fuel inflation further, said Mansur, a former economist of the International Monetary Fund.

Under the current circumstances, the government has to borrow much for public expenditure and deficit financing, and that is already having an adverse impact on the economy, said Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue.

The reason being the borrowing is from the BB, which is always inflationary.

Foreign-funded projects and projects will fewer imports must be given priority, he said, adding that a bigger cut in the ADP budget would be beneficial for the economy.