Do We Need Social Security Programs?

Social spending without contribution Is not always a durable solution. Lottery and social security bond Creates initial social transfer pond.

A fresh debate resurfaced over the allocation on social welfare and security programs.The current govt increased the spending on social security programs over the years. In the previous post, I delineated how these programs rendered ineffective.Argument put forward in favor of raising social spending is that in many developed economies social security spending occupies a decent share of GDP and in Bangladesh it is still below 3%.

In many of these developed economies, public opinion,petition lead the public representatives to scrutinize opaque issues,to summon concerned people at the Parliament to offer explanation. And the free press is allowed to broadcast and print details of the hearing. In Bangladesh that never happens. There are privileged people who roam scot free and hardly have any accountability. And a section of press,capable of manufacturing « narrative », keeps disseminating disinformation to maintain status-quo.

In many of these developed economies, unemployment rate is pretty low and they have a concept of social contributions apart from income tax.In a country of 160 million where we have only 7.5 million registered taxpayers,this idea of social contribution is alien. Many here enter job market pretty late. And prospect of job at private sector is pretty uncertain as ruling elites dominate the business. In the wake of regime change or corruption, many found themselves in the club of unemployed. In addition, a large part of our workforce involved in informal sector where scope for saving or making social contributions is very minimal. In developed economies, people contribute to government fund very long time to receive benefits during their post retirement age.In Bangladesh that kind of prospect is very bleak as very few could manage to do so. Here govt finances the social security programs through indirect tax,borrowing from banks and abroad.People’s participation in social contributions is absent. And most of this tax money falls into wrong hands. To sustain a government-run social security program,government has to collect contributions from many people just to give benefit to one retired person. But the concept of ratio of active age to retired age population and intergenerational transfer ¹are not working in Bangladesh as we do not have well functioning institutionalized job market. One solution is to call for voluntary support to social security fund.

Govt may float social security bond,starting from TK 100. Those who are interested may buy these bonds using NID card. And NBR will track the number of bonds held by each NID. Based on the amount of one's contribution, one individual may receive a certain sum during his post retirement life. Government may also add fund to it. For instance, if social security bond fetches TK 100 crore. Government may contribute another TK 100 crore and distribute the money among the target population. Government may also launch a lottery to finance the program,more plausible than the social security bond. 5% of lottery buyers have chance to win some prizes while 95% will have the feel good factor. The point is if you really want social security then you have to contribute to it. Government in no way is going to pay fully the whole social security spending.

I personally think except the elderly allowance all social spending should be wound down. A government that depends on borrowing and indirect tax does not have the luxury to spend public money on universal pension and social security. Rampant corruption even makes that idea very untenable in the context of our country.As govt is mulling to offer ration card to 10 million vulnerable families, it is better to downsize/abolish other social programs. At the end of the day,money well spent or lost belongs to people. While incurring a rising budget deficit,it is not wise to open new spending avenues where risk of leakages looms large.

Notes And References:

1. “Macroconomics”,Rudiger Dornbusch,Stanley Fischer,Richard Startz,7th edition,McGraw-Hill.

La Semaine Dernière A Mes Yeux

(10 juin --- 17 juin)

Selon un reportage,le train entre Dhaka et Sylhet,connu comme «Parabat Express» a été mis à feu.Cinque heures après le service de train a repris.

Selon un reportage, une ONG Article Nineteen se dit que 118 journalistes sont tombés victimes de harcèlement dans le 5 mois de cette année. En juin,4 journalistes ont été tués à traverse du pays.

Selon un reportage, un Russe est mort mystérieusement dans Green City à Pabna.Il travaillait dans la centrale nucléaire de Rooppur à Pabna.

Selon un reportage,le bilan depuis incendie et explosion dans entrepôt privé de conteneur s'est alourdi.Deux blessés ont succumbé à leurs blessures. Malgré le stockage de produit chimique,six mois avant une équipe de gouvernement a surveillé l'entrepôt et n'a trouvé aucune violation.

Selon un reportage,à cause de Mousson et pluies torrentielles, inondation se détériore à Kurigram,Sunamganj et Netrokona. A Kurigram,300 hectares de champs de riz,de jute,de légumes et de sésame sont sous l'eau.De plus, inondation rend 50.000 villageois immobilisé à Kurigram.Des écoles arrêtent activités scolaires.

Selon un reportage,le candidat du parti au pouvoir a remporté l'élection municipale à Cumilla.Le candidat perdu a jeté le résultat et a accusé le gouvernement d'avoir fait truquage électoral.

Selon un reportage, un groupe rebelle du CHT a offert au gouvernement un nouvel accord de paix pour mettre en fin violence là-bas.

Ma Semaine Gastronomique

Date	Petit-déjeuner	Déjeuner	Dîner	Snacks,Sucrerie et Fritures
11	Pain ,Omelette,Cornichon à la Mangue,Thé avec citron sans sucre	Riz,Épinards malabar avec graines de Jacquier, Courge amère avec Haricot rouge,Poivron	Pain,Courge amère avec Haricot rouge,Mangue	Mangue, Litchi,Thé sans sucre
12	Pain,Omelette,Jacquier,Thé sans sucre	Riz,Courge amère avec Haricot rouge et crevette,Calebasse gourde, Soupe de lentille	Pain(fait par moi),Calebasse gourde,Mangue	Jacquier,Riz gonflé,Arachides,Thé sans sucre
13	Pain,Calebasse gourde,Litchi,Jacquier,Thé sans sucre	Riz,Papaye et Haricot vert,Œuf mollet,Épinards malabar, Soupe de lentilles,Poivre, Citron,Litchi	Pain,Soupe de lentilles dans Papaye et Haricot vert,Épinards malabar	Thé au lait,Dattes
14	Pain tchapati,Papaye et Haricot vert,Œuf mollet,Thé sans sucre	Riz,Épinards buffle, Labeo Bata poisson avec Gourde épineuse,Graines du Jacquier avec Crevettes séchés, Soupe de lentilles	Nouilles	Arachides, Thé sans sucre,Dattes,Nouilles,Graines du Jacquier
15	Pain tchapati,Papaye et Citrouille, Thé sans sucre	Riz,Amarante rouge,Calebasse gourde, Purée de Ruban poisson séché avec oignon, Purée de Poivron,Rita poisson, Soupe de lentilles	Riz battu dans lait chaud et datte	Pois de chiches,Thé sans sucre,Jacquier
16	Riz gonflé,Jacquier,Thé sans sucre	Riz,Feuille de Moringa et Lentilles,Épinards d'eau,Omelette	Riz gonflé, Feuille de Moringa et Lentilles	Niébé,Dattes,Thé sans sucre
15	Pain tchapati,Gourde serpent et Gourde pointue,Œuf poché, Thé sans sucre	Riz,Œuf dur et pommes de terre,Courge amère, Soupe de Lentilles	Paratha,Pommes de terre	Arachides,Thé sans sucre,Riz battu dans lait chaud avec datte

Another Flawed Incentive Program?

Huge subsidy and social security Sometimes proved their futility. For the sake of a balanced budget Cut spending for social pocket.

Government has formally presented the budget for FY 2022-23. Around TK 83000 crore of subsidy & incentive has been proposed. A large part of this subsidy will be attributed to energy,fuel and fertilizer. To ensure food security and contain the inflationary pressure, TK 16000 crore subsidy on fertilizer is justified¹. TK 33092 crore is allotted in the name of social security. But when government is running a huge budget deficit, this huge subsidy and social security spending is unacceptable. Many multilateral institutions revising their growth forecast including slower growth in developed economies.Interest rate/policy rate increase in US and EU hints to that direction.This means demand for oil, gas will be much lower in these countries. There will be reflection of it in LNG and oil prices.I can’t figure it out why the subsidy on BPC is going on when cheaper sources of oil are available. Supply side uncertainty about food grain, cooking oil and fertilizer is largely responsible for driving up the price levels. High oil price is partly to blame. In that light subsidy in food and food production is ok. But this BPC subsidy money should be shared by consumers and shelved for better use.

On the other hand, government of Bangladesh's track record on social security spending is marred with corruption.Back in August last year,I penned this piece titled “Flawed Incentive Programs”² to highlight the ineffectiveness of social security spending due to unwarranted corruption. Sharing it again:

In recent weeks, series of reports laid bare flaws and inefficiencies attached to social security programs and incentive packages designed to assuage Corona-battered business community. Built-in corruption in management and disbursement of funds of the programs, as exposed by the news reports, once again undermines people’s trust on government at a moment when it badly needed their support to mobilize resources on measures to restore COVID-hit economy. A news report divulged that Ministry of Social Welfare detected some 87,000 fake beneficiaries who swallowed benefits under social security programs3. The matter surfaced when the ministry is implementing digitization of accounts of beneficiaries. So far 7.6 million accounts have been digitized and 2 millions await to join the list. Another program designed to augment income-earning opportunities for the poor has come under criticism after a government report found irregularities. The 12-year-long "Amar Bari ,Amar Khamar( My Home,My Farm)" benefited 5.7 million people,but 1 million beneficiaries were identified as affluent, not eligible for such program4. Department of implement ation,monitoring and evaluation of Ministry of Planning in its report found that 1 million ,17% of the total beneficiaries, fake beneficiaries took interest-free credit reserved for the poor under the “Amar Bari,Amar Khamar” Project(2009-2021) ,costing TK 78.85 billion of taxpayer’s money. Some swindled the credit for 12 years. Not only social security programs, irregularities can be traced even in Corona incentive packages for businessmen. Government allotted credit of Tk 300 billion for big businesses and credit of Tk 150 billion for SMEs at subsidized rate of interest. According to a news report, many businessmen misused the credit by repaying old debts,investing in share market and purchasing flat 5. It derailed the objectives,propelling economic activities, the credit package initially conceived of. Instead of bringing the pace in manufacturing, retail and SME activities, misuse of the fund makes it unlikely to avail more soft credit in the future. So cash-strapped SMEs will face further problems to manage working capitals for their businesses. Earlier 22000 fake freedom fighters had been detected in freedom fighter allowance program. Facing a barrage of criticism, government hardened the procedures for identifying the true freedom fighters and discarded the fake ones from the list. Even corruption mars "home for the homeless" project,which is being implemented by Prime Minister’s Office. Use of substandard materials, project site on flood-prone land and bribery called into question the objective of the whole project.Even PM' s office has started probe in 36 upazilas6. My own survey on rickshawpullers for my site reveals that only a minority of the true target population receives the social security programs. I interviewed 43 rickshawpullers and only three subscribed to any of these programs. And all of them were relatives of local representatives who are responsible for running the operations of social security programs at grass root level. 7 The revelations expose inefficient management of public funds and waste of taxpayer’s money. This will further hold back widening of social security programs and implementation of post-COVID efforts. One thing is apparent that most of the scams in social security programs got exposed while digitizing the database. If mobile operators and mobile financial service providers can able to sell SIM and open accounts with biometric verification why can the government not go for this step to identify the beneficiary population?Bangladesh runs an array of social security programs from allowance for senior citizens to allowance for freedom fighters. These programs cost Tk 641.76 billion in 2018-19(Source: Bangladesh Economic Review 2019) and in 2021 rose to Tk 955.74 billion3. Even tiny scam could wipe out thousands of crores of taxpayer’s money. Seldom heard or reported in the press about the fact that other government agencies had given prior information about murky affairs or shoddy dealings in various programs run by ministries. This fund may fall in wrong hands and may be used to stir trouble at home or abroad or weaken democracy and democratic institutions. So there is no reason to take wasting of taxpayer’s money slightly. Ensuring accountability of all government organizations is the key to plug the holes in leakages of management of public fund and resources. If this continues without any checks, people’s trust on government and government institutions will erode and their support on undemocratic forces may rise. Just throwing the money in gutters in the name of ineffective social security and corona incentives only swollen the pockets of a certain quarter who excel the art of misappropriating public funds and those who have evil intentions to cause trouble at home and abroad. Amending the laws to hold all the quarters accountable to constitutional bodies is the first step to stem corrupt practices.

Things have not improved much in one year. A news report says a Medical Assistant Training School ,cost TK 210 million, in Gazipur has turned into a safe place for addicts. Another report says boat ambulance donated by govt in haor region turned useless in one year. More recently Bangladesh Army approached govt to write off the commercial loans it took from public banks to set up Sena Edible Oil Company. The oil company did little help when oil prices soared recently.It appears that mismanagement and misuse of public money have become contagious. This tendency only wastes our valuable resources. “Public investment” at the end of the day is just a big failure and a waste of time and money. In a country where caring of public resources, accountability are absent, there is no point to run subsidy and social security programs that hardly meet the intended goals. Removing/downsizing some of the social security programs and cutting subsidy will be a much more desirable move in the wake of growing budget deficit and current account deficit.

Notes And References:

1. “Agri-subsidy Aims To Not Let Runaway Food Prices Tumble Further”,Shawkat Ali,Business Standard,June 09,2022.For more read at https://www.tbsnews.net/economy/budget/agri-subsidy-aims-not-let-runaway-food-prices-tumble-further-436734
2. “Flawed Incentive Programs”,Rezaul Hoque,https://hoquestake.blogspot.com,August 08,2021. For more read at https://hoquestake.blogspot.com/2021/08/flawed-incentive-programs.html?m=1
3. ”87000 Bhatabhogir Khonj Nei(No Trace of 87000 Beneficiaries)”, Najnin Akhter,Daily Prothom Alo, July 26,2021.
4. “Gorib Sajlen 10 Lakh Sochchhol(1 Million Affluent People Played Poor)”,Arifur Rahman,Daily Prothom Alo,August 02,2021.
5. “Pronodonar Taka Noy Chhoy(Misuse of Incentive Money)”, Daily Prothom Alo,July 26,2021.
6. “ Ashrayan-2 Project Scam: 36 Upazilas Under Scanner”,Ali Asif Shawon, Dhaka Tribune,July 06,2021. For more read at https://www.dhakatribune.com/bangladesh/2021/07/06/arshrayan-2-project-scam-36-upazilas-under-scanner
7. “Live Stock”,Rezaul Hoque,https://hoquestake.blogspot.com/2020/01/live-stock.html?m=1,January 11,2020

La Semaine Dernière A Mes Yeux

(03 juin--- 10 juin)

Selon un reportage, explosion dans un entrepôt privé de conteneur a tué 49 personnes et blessé centaines. Incendie était issu de section de conteneur où produit chimique a été gardé.

Selon un reportage, autorité thaïlandaise a découvert un groupe de Rohingya abandonné par trafiquants dans une petite île.

Selon un reportage,des ouvriers d'atelier de confection ont asphyxié les rues de Mirpur en demandant hausse de leur salaire.

Harcèlement et attaque contre des journalistes continuent sans arrêt.Selon un reportage, un journaliste a été appréhendé à Rangamati après des fidèles du parti au pouvoir ont porté plainte contre lui en utilisant la loi draconienne Digital Security Act. La cour d'appel lui a accordé la mise en liberté provisoire sous caution.Selon un autre reportage, cadavre d'un salarié d'une chaîne privée a été trouvé à côté d'un lac de Dhaka,deuxième mort mystérieuse d'un journaliste dans 6 mois.

Selon un reportage, le gouvernement du Bangladesh a annulé le permis de l'ONG Odhikar,une voix critique contre gouvernement. Amnesty International s' est opposé la décision et a exprimé inquiétude.

Ma Semaine Gastronomique

Date	Petit-déjeuner	Déjeuner	Dîner	Snacks,Sucrerie et Fritures
04	Pain , omelette, thé sans sucre	Riz, Poisson ruban séché (dans gourde épineuse, graines de Jacquier, Haricot vert),Épinards malabar,Anchois gangétique,Labra(un plat végétarien préparé avec gourde calebasse,pois de chiches, patate douce),poivron,concombre	Riz gonflé,pois de chiches	Vermicelle,Thé sans sucre
05	Pain, Labra(un plat végétarien préparé avec gourde calebasse,pois de chiches, patate douce),Thé sans sucre	Riz,Poisson Rita,Concombre,Citron,Poivron,Courge amère et Soupe de lentille	Riz gonflé, Poisson Rita,Haricot vert	Biscuit,Riz battu au lait froid et raisins sec,Thé sans sucre
06	Pain,Haricot vert et Thé sans sucre	Riz,Labra(un plat végétarien préparé avec gourde calebasse,pois de chiches, patate douce),Ruhi poisson,Soupe de Lentilles, Citron,Banane	Riz battu à l'eau chaud avec datte et raisins,Patate douce	Thé sans sucre
07	Pain, Labra(un plat végétarien préparé avec gourde calebasse,pois de chiches, banane verte, patate douce),Banane et Thé sans sucre	Riz,Gourde serpent,Ruhi poisson ,Citron,Poivron et Soupe de lentilles	Pain,Gourde serpent dans Soupe de lentilles,Lait avec dattes	Thé sans sucre,Riz gonflé et Banane
08	Pain,Omelette,Banane,Thé sans sucre	Riz,Feuilles de Jute,Feuilles de patate douce,Rita poisson,Citron, Poivron.	Riz gonflé, Pois de chiches, Rita poisson,Oignon, Poivron	Thé sans sucre
09	Pain,Calebasse gourde,Haricot vert et Pommes de terre dans la Soupe de lentilles,Thé sans sucre	Riz,Rita poisson,Purée des graines de Jacquier et Crevettes sec,Labra(un plat végétarien préparé avec Calebasse gourde,Banane vert,Haricot vert,Citrouille, Gourde épineuse, Pommes de terre),Soupe de lentilles, Citron, Poivron	Pain,Labra(un plat végétarien préparé avec Citrouille,Gourde épineuse, Calebasse gourde,Banane vert,Haricot vert, Pommes de terre)	Riz gonflé, Banane,Cornichon à la mangue, Thé sans sucre,Dattes,Arachides
10	Pain,Labra(un plat végétarien préparé avec Citrouille,Gourde épineuse, Calebasse gourde,Banane vert,Haricot vert, Pommes de terre),Œuf dur,Thé sans sucre	Riz,Omelette, Poisson Ruban séché dans Gourde épineuse, Graines de Jacquier, Haricot vert,Épinards d'eau, Soupe de lentilles, Citron, Poivron	---	Riz gonflé dans lait et datte,Riz gonflé avec Cornichon à la Mangue, Arachides, Thé sans sucre

Deficit Financing:Road To More Taxes

A tax cut in present day Says in future we have high tax to pay. For the sake of debt stabilization Paying debt interest is the solution.

Government has recently decided to float the exchange rate of Taka against the US dollar. Bangladeshis living abroad now can get the market offered value of their hard-earned remittances. The fall of Taka is an incentive to them. The move is highly appreciating as it will ease of the pressure to some extent on central bank's foreign currency stock. Idea is that such move discourages unnecessary import holding back the import spending. On the other hand, depreciation makes the Bangladeshi export items more competitive at a time when recession like scenario is more credible than before, signalling individual spending cut of Occidental consumers.

But is it enough to improve the current account deficit? Ahead of election, govt has in no mood to follow austerity measures. In the previous post I tried to underscore how growing budget deficit is posing a danger to our economy. Amid this growing budget deficit ,govt mulls reducing corporate tax by 2%.This means to finance deficit we have to borrow more.

Just take a look at the composition of our tax revenue and expenditure.In 2020 government expenditure stood at Tk 4201 billion while it earned a tax revenue of TK 2659.1 billion,leading to a budget deficit of TK 1542.5 billion.Both govt expenditure and tax revenue increased in the subsequent years. But tax receipts never outweighed the spending. In 2021, budget deficit grew to Tk 1874.5 billion. And in 2022 it is projected to be TK 2146.8 billion,6.2% of GDP.Tax revenue only became 10% of GDP in 2021 and projected to be 11% in 2022¹.

Total Revenue & Total Expenditure(In Billion Taka)

	2020	2021	2022
Total Revenue	2659.1	3515.3	3890.0
Total Expenditure	4201.6	5389.8	6036.8
Budget Deficit	1542.5	1874.5	2146.8

Source:Bangladesh Bank

Failure to generate enough tax revenue means we have to borrow more from both internal and external sources to meet the budget deficit.

In 2020,domestic financing accounts for 3.4% of GDP while foreign financing accounts for 1.4% of GDP.In 2022,domestic financing projected to be 3.3% of GDP while foreign financing projected to be 2.9% of GDP¹. As bank borrowing and borrowing through sale of national savings certificates are rising, govt in future has to either print more money or to cut spending in other sectors or has to raise tax levels to pay the interests. Moreover inflationary pressure has already pushed the depositors and investors on national savings certificate on loser's side.

Like domestic borrowing, our external debt is also rising. In 2015-16,our debt was $41.17 billion. In 2020-21,it became $81.57 billion². Our external debt almost doubled in 5 years. As our budget deficit grows,our external debt grows.Now say we want to keep the external debt at this current level. Economist Olivier Blanchard argues that to make it happen, we have to generate enough tax revenue so that tax minus spending equals(primary surplus) the real interest payments to existing debt ³. For the subsequent years, this measure has to be followed in order to stabilize the debt. Otherwise it will add to the past debt, increasing our debt burden.

External Debt(In Billion US Dollar)

	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
External Debt	41.17	45.81	56.01	62.63	68.59	81.57

Source:Bangladesh Bank

But what is the govt doing?It is considering a tax cut. It means our debt will rise and the govt has to tax more to get rid of those debts. Olivier Blanchard stresses that a tax cut in the present means higher taxes in the future. In that light, our output growth will be lower when we need to grow more to repay our debts and create more jobs³.

More than two-third of our total debt is public debt. Govt took it to finance many infrastructure and development projects. So large part of the debt went to finance politically motivated projects. Some of which were marred by corruption, faced cost overrun and have little or no economic returns.

At a moment when government requires to raise tax,cut spending,govt is mulling populist policies. And the future generation will pay for prices of its populist policies. Stabilizing debt calls for austerity. Free floating of Taka is only a half done job. Raising taxes along with spending cut will complete the task.

Notes And References:

1. Bangladesh Bank Annual Report 2021
2. Bangladesh Bank
3. “Macroeconomics”,Olivier Blanchard,2nd edition, Prentice Hall International, Inc

La Semaine Dernière A Mes Yeux

(27 mai--- 03 juin)

Selon un reportage, le Bangladesh et l'Inde ont inauguré un nouveau service de train entre Dhaka et Jalpaigudi,une ville se situe au pied de montagne de Darjeeling.

Selon un reportage, deux policiers bangladais ont déserté et disparu au Pays-Bas. Ils y sont allés pour participer dans une formation.

Selon un reportage, la Banque centrale a arrêté fixé le taux de change de Taka contre dollar américain.

Ma Semaine Gastronomique

Date	Petit-déjeuner	Déjeuner	Dîner	Snacks,Sucrerie et Fritures
28	Eau de citron ,pain , omelette, thé sans sucre	Riz, gombo, Pama croaker poisson, Courge amère,Soupe de lentille	Riz battu au lait chaud avec datte	Muraly,Thé sans sucre,Biscuit,Riz gonflé avec Chanachur
29	Eau de citron et Psyllium Husk,pain,omelette,gourde serpent avec thé sans sucre	Riz,feuille de calebasse gourde,Anchois gangétique curry,gombo,Courge amère et Soupe de lentille	Riz gonflé, feuille de calebasse gourde,Anchois gangétique curry et Soupe de lentille	Biscuit,Graines de Jacquier,Arachide,Thé sans sucre,Jamrul/Champoo
30	Eau de citron et Psyllium Husk,Pain,Omelette,Luffa et Thé sans sucre	Riz,Épinards de buffle,Ruhi poisson	Riz gonflé,Chanqchur, Épinards de buffle	Riz gonflé, Chanachur,Patate douce,Thé sans sucre,Muraly
31	Pain,Omelette,Lait et Thé sans sucre	Riz,Haricot vert/yardlong,Ruban séché poisson avec Gourde épineuse et graines de Jacquier,Ruhi poisson et Soupe de lentilles	Patate douce	Muraly,Thé sans sucre,Riz gonflé et Chanachur
01	Pain,Haricot vert/yardlong, Thé sans sucre	Riz,Ruhi poisson,Épinards d’eau, Gourde serpent, Soupe de lentilles.	Patate douce	Muraly,Thé sans sucre,Riz battu au ait l
02	Pain,Gourde serpent,Thé sans sucre	Riz,Purée de pommes de terre,Anchois gangétique,Poisson ruban séché dans gourde épineuse, graines de Jacquier, Haricot vert	Nouilles, Riz battu au lait froid	Thé sans sucre,Biscuit
03	Pain,Haricot vert,Thé sans sucre	Khichri(un plat de riz et lentilles populaire dans jour pluevial),haricot vert, omelette, concombre et citron.	Pois de chiches,Chanachur,Riz gonflé	Thé sans sucre,Riz gonflé, pois de chiches

Growing Budget Deficit: A Looming Danger

Govt borrows more to finance deficit,
Raising debt and curtailing consumption legit.

Govt has decided to peg US dollar at TK 88.And it has instructed banks to enforce it without further delay. The decision came at a moment when US dollar was sold at TK 99 in the open market. In addition, it is implementing the decision when current account deficit reached a record level, $14 billion. Not only that govt is also facing a growing budget deficit. At the start of this year, govt found itself amid controversy after it had disbursed $7 billion of Forex reserve to the banks to contain dollar demand. The matter even prompted IMF to issue serious concern about this unreported incident that had not been reflected in the official reserve figure.

Such pegged US dollar rate may call for more govt intervention. When import expenditure outweighs export earnings and govt expenditure continues to rise, demand for dollar will evidently rise. If there were free fall of Taka against US dollar, then depreciation would work as a mean to curb the growing import expenditure and we would be back on trade surplus. Remittances would rise as a consequence of such depreciation.

Such pegged value of Taka against US dollar may help the govt to go with its development expenditures ahead of election year. However, government finds it difficult to finance its expenditures as trade deficit is rising and remittances keep falling. So we have a growing budget deficit. And to finance the deficit, govt is borrowing right and left.

In 2012-13,our budget balance was -3.7% of GDP. In 2016-17,it reached to -4.8% of GDP. For two consecutive years it remained same. In 2021, it worsened further and became -6.2% of GDP¹.

To meet the deficit, government is borrowing both from foreign govt and domestic source. In 2012-13, Foreign financing accounted 1.4% of GDP while domestic financing accounted for 2.7% of GDP.In 2020-21,foreign financing accounted for 2.3% and domestic financing accounted for 3.8% of GDP. In recent years, government hinged heavily on NSD certificates apart from borrowing from domestic banks to finance the deficit. In 2021,govt set a target of raising TK 200 billion from selling NSD certificates². NSD certificates come with a higher interest rate.

This heavy borrowing in the name of public spending did little help to improve the situation. In this part of the world, culture of accountability is notably absent. We frequently encounter reports of a doomed bridge in the middle of a paddy field or without any approach road. Moreover, corruption and misappropriation of public money rendered the public project a loosing concern. So "public investment" at the end of the day turns out to be public embarrassment and liability. Meanwhile, govt's borrowing from banks and people to finance such “public investment “ projects deprived other private investors to go ahead with viable projects as banks lack fund to finance their projects. Among the private investors those who have close political connection managed to get loan whatever left. Meanwhile, laundering activities put pressure on foreign exchange market. Because of their conducts, export incentives and earnings were misused. So such corrupt and misconceived projects failed to bring return to investment as well as to government coffer. But govt has to pay back the loans along with interest. So the deficit gets bigger and govt has to borrow more. There is some kind of vicious circle. Though there is no clear evidence of a link between budget deficit and current account deficit, a closer look at recent data yields that current account deficit gets bigger with increasing budget deficit. In 2012-13, we had a current account surplus of 1.7% of GDP in spite of having a budget deficit. In 2020-21, current account deficit became 1.1% of GDP. In 2016-17,current account deficit was 0.5% of GDP and rose to 3.6% in 2017-18¹.

Budget Balance & Current Account Balance(% of GDP)

	2016-17	2017-18	2018-19	2019-20	2020-21
Budget Balance	-4.8	-4.8	-4.8	-5.5	-6.1
CA Balance	-0.5	-3.6	-1.7	-1.5	-1.1

Source:Bangladesh Economic Review 2021

The rising inflation and deteriorating trade deficit will further widen this deficit. Meanwhile, govt is reluctant to increase its tax revenue. Rather, it announced corporate tax cut amid rising govt expenditures. Such fiscal expansionary policy hints that it will borrow more from the banks and foreign governments to finance deficits. In the previous post,I discussed how such tax cut may render useless and risk reversing the intended outcome. Furthermore, borrowing to finance deficit will raise our external debt,which will curtail output in the long run when we need to create more job opportunities.Not only that people who are investing in NSD certificates may find themselves on the loser’s side as they may pay more because of rising cost of living and/or increase in taxes and duties to service debt.

In the name of public spending or "public investment" amid a corrupt and opaque atmosphere,debt financing of budget deficit yields little benefits.Course correction measure for the government will be to check its spending, abandon fiscal expansion and let Taka find its true value as signaled by the market.

Notes And References:

1. Bangladesh Economic Review 2021.
2. “Budget FY 22: Deficit Financing And Public Spending”,CPD. For more read at https://cpd.org.bd/budget-fy22-deficit-financing-and-public-spending/