Economic Reforms: Morning Shows The Day

Bonds as a mean to clear subsidy debt Maybe not a resource and may cost the govt great.

Everyone anticipated that government might show some commitment to economic reforms at the start of new year. Having bagged the second tranche of IMF credit pack, this anticipation was gaining some grounds. However, some news reports hint it demonstrated weak commitment to reforms the economy badly needed.

Bangladesh Bank in its website announced that it extended relaxation of internal credit risk rating score of bank clients. The credit risk rating score distinguishes between a good client and a troublesome one. Client who fails to get a threshold score is identified as ineligible to avail loan. During the pandemic, this credit risk rating score was relaxed and the chance was extended several times. This extension allows defaulters and bad clients to seek further loan till December 31,2024. Over the years we witnessed how incidents of loan scam increased and non performing loan cast a shadow over the stability of the economy. This decision has the potential to further worsen the prevailing situation.

Another news divulged that government planned to issue bond to pay due Taka 260 billion to the banks and other organizations ,which lent the money as subsidy to fertilizer and electricity. Of this amount ,electricity accounts for Taka 140 billion and gas accounts for Taka 120 billion(Source : “Government Set To Issue Bonds To Pay Off Bank Debts Against Power Subsidies Today”,Abul Kashem,The Business Standard, January 04,2024, for more read at https://www.tbsnews.net/economy/government-set-issue-bonds-pay-bank-debts-against-power-subsidies-today-769082) . Government already issued bonds for paying the gas subsidy spending it took from the banks. It plans to float further bonds to pay off the electricity subsidy loan after formation of the new government. Banks are happy in this arrangement as they may receive regular interest payments from the government till the bond matures. But every year govt has to pay further money to the banks as interest payments. At a rate between 7% and 8%, govt has to pay between Taka 18.20 billion and Taka 20.80 billion as interest payments. At first glance, this bond arrangement appears to be a resource creation. But the banks did not ask for the bonds or show any interest for them. Rather,the government pushed the bonds to the banks. The demand was artificially created. Now every year govt has to print further Taka 20 billion to pay the interest of the bonds. The crucial thing is that whether the banks will be able to give this money to the private sector. IMF review report disclosed that private sector credit growth did not reach the pre-pandemic level. And government remains the largest recipient of bank credit. The new government is likely to raise the prices of utilities and policy rate further. Though challenging, a vibrant private sector could overcome them. But the question is who dominates the private sector. Just a month ago we witnessed how some groups swindled money from Export Assistance Fund created by Bangladesh Bank. Moreover, one-sided election set the ground for further capital flight and US Visa and trade restrictions. Against this backdrop, it is naïve to assume that banks will make good use of this interest money. Rather,they will find it convenient to lend the money again to the government which never defaults to repay. Govt has a huge debt service liability. Despite commitment to cut spending, it has to rely on the banks to finance deficits. The action of issuing bonds is still tantamount to printing money as the demand is not market generated. The point is government has to print less money every year instead of a huge amount of money just once. Silver lining is that two/three/five years later things will improve so much that it will compensate the payments on bonds and interests. But the cost is it has to inject more money into the economy over the bond's entire life( Taka 260 billion + interest).

I think instead of bond government should go for the Petrobangla due. Internal audit report said Petrobangla earned huge money by maintaining accounts with several banks while keeping the NBR in the dark. Petrobangla owes Taka 220 billion to NBR as tax payments. This Taka alone covers the revenue shortfall in the first two quarters of this fiscal year. I think NBR should install some mechanism within Petrobangla and Bangladesh Petroleum Corporation (BPC) to get the tax money in real time. VAT and other duties from daily transaction will end up in NBR coffer daily. It is more pragmatic right now than going after petty businesses who are struggling now.

This latest decision of bond issue unravels the funding crisis of the government. Despite the claim of resource creation, the decision has the risk of increasing public debt, curtailing credit to private sector and worsening the inflation.