Acknowledging Defeat?

Tax cut and relaxing duties on oil May worsen the economic turmoil. Ensuing debt and high tax in future New government has less for expenditure.

Last week Bangladesh Bank held press conference to convince clients that there is no liquidity crisis. In fact, there is a liquidity of TK 169 trillions in Bangladeshi banks. The announcement came in the wake of many banks' inability to open LCs as per govts' instruction to curb import(Source: “Bank e Takar Sonkot Holey Debe Kendriyo Bank(In Case Of Liquidity Crisis Central Bank Will Pay)”, Daily Prothom Alo,November 15,2022,p-1).

Meanwhile, import is still higher than export,which witnessed fall in the two consecutive months. Traditional sources of remittances like UAE,Saudi Arabia also witnessed negative growth.Current account balance and overall balance is still negative (till September). Taka is hovering around Tk 102/USD as per official figure. But market rate is a bit higher. Government is however optimistic that by the end of January there will be no dearth of US dollar.

But we have to acknowledge that before and after election years big depreciation/fall of Taka against US dollar was observed in the past.In 1990-91,rate of taka was Tk 35.67/USD . In 1991-92,it was Tk 38.14/USD.In 1996-97, it was Tk 42.70/USD. In 1997-98,it was Tk 45.46/USD. In 2000-2001,it became Tk 53.95/USD. In 2001-02,it was Tk 57.43/USD. In 2005-06, it was Tk 67.07/USD. In 2007-08,it became Tk 68.60/USD.Biggest depreciation came this year. Now in the open market Taka is being sold at Tk 106/USD.

Year	Exch.Rate(TK/$)
1990-91	35.67
1991-92	38.15
1995-96	40.84
1996-97	42.70
2000-01	53.96
2001-02	57.44
2008-09	68.80
2009-10	69.18

Source:Bangladesh Economic Review 2019

To finance the budget deficit and prop up the forex reserve, govt is heavily relying on borrowing. Govt is inclining more and more towards banks for domestic borrowing as sales of national savings certificates hit the nadir this year. This year only Tk 7.32 billions worth of NSD certificates have been sold after govt made tax return mandatory for purchase of NSD certificates worth more than Tk 500,000(Source: “Sanchaypatra Bikri Komechhey,Sudo Komtey Parry(NSD Sale Lowers,Interest Rate May Follow Suits)”,Daily Prothom Alo,November 13,20222,p-11).

Pledged budget support from multinational donor may assuage the problem temporarily but raises the total debt stock. It is highly unlikely there will be 180 degree change in the governance,which led to this situation,during the rest of the tenure.

Meanwhile, govt did little to raise the revenue. Surprisingly,it reduced corporate tax from 22% to 21%. And special duty on diesel and gas was also lifted. Yet Non Performing Loan (NPL) keeps rising. A tax cut in the present means more taxes in the future as argued by Olivier Blanchard.

I put forward some observations that hint some important change in the future:

1. A managed floating exchange rate discouraging exporters to bring exports and encouraging importers.
2. Corporate tax cut, removing duties from oil and gas,relieving bureaucrats from submitting tax returns.
3. Releasing forex reserve money to stabilize dollar market.
4. Holding back data on balance of payment, inflation,NPL that is costly for the govt.

This growing budget deficit and revenue fall also curb future govt's ability to spend more. Guido Tabellini and Alberto Alesina in an article titled “Voting On The Budget Deficit “,published on American Economic Review (1990) argue that how one group of policy makers' belief about future govt and its policy leads to inefficient outcome like high debt. More generally, if the current govt thinks future govt may be run by the opposition then it causes the current govt to borrow more now so that future govt may not spend more in the wake of high debt.In that light govt itself is acknowledging its defeat in the next election scheduled to be held by the end of 2023! It is indeed interesting how the govt responds to the reform works it pledged to the creditors.