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Test for macroeconomic finesse

INAM AHMED
For Saifur Rahman, he could not have felt more exhilarated than he is now in putting the final touch to the budget. The ground looks perfectly even -- macro-economy set on a stable footing, deficit bridled, balance of payment looking fine and donors ready with their palms open. Nothing to hold him back from shifting the growth engine to the top gear.
Yet, the ground may still be mucky and if one misses the spots, a bad slip can mar the race. Too much aid flow in funds without productive projects may lead to "Dutch Disease" syndrome. A real appreciation of taka is still a possibility. A high-growth desire may lead to import pick-up coupled with inflationary pressure. Exports will need to be raised to support the high-growth goal that top economists explained as the challenge for the
finance minister in the next fiscal.
One needs not lose heart in these facts because here lie challenges and finesse of macroeconomic management. And this will be probably the last chance for Saifur to go for the reforms he has promised to the donors because once his government enters the penultimate year, politics will outpace the economy. And an unfinished agenda will have more backlashes than anything else.
"The prospect of getting funds from the World Bank and the IMF under PRSP and PRGF programmes has taken off much of the pressure from the resource balancing exercise for the coming budget," explains Dr Wahiduddin Mahmud. "This is good news for the finance minister."
The bad news is that he has to unveil the packages of reforms negotiated under these programmes, the economist goes
on. The reforms are likely to be wide ranging, and some of them will be politically resisted.
"For this, the timing may be opportune for the government, given that it has yet to pass the midway mark of its tenure and that the political resentment may be more than offset by the short-run benefits from increased flow of external funds," said Dr Mahmud.
Dr Debapriya Bhattacharya, executive director of the Centre for Policy Dialogue (CPD), concurred with the point.
"Being in the middle of the government's tenure, this may as well be Saifur's last opportunity for a radical move. Because, the last two years are always difficult to implement reforms due to political sensitivity."
And reforms are important because if Saifur sets the table for high-growth game and then finds
that the game plan is not matched by institutional reforms in areas like administration, judiciary, governance, he will have to experience driving a cart without having the horses under shackles, Dr Debapriya said. The result can be anything.
Dr Mahmud observes that the government is hopeful of successfully negotiating the Bank-Fund programme assistance to be available over the next two to three years. In that case, the availability of foreign resources may even exceed the present projections, as the finance minister has indicated.
"While this will ease the government's fiscal situation, there is a downside as well. The Bank-Fund assistance will be available as support for the balance of payments, not tied to project spending. Given
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the floating exchange rate, one needs to be careful that such exchange inflows do not create a "Dutch disease", that is, a real appreciation of exchange rate that will adversely affect our export competitiveness," he warns. "The Bangladesh Bank can take this opportunity to bolster its foreign reserves, but that will put indirect limitations on the way these foreign funds can be used for budgetary support as well. Simply put, you can have your cake and eat it too."
But the "Dutch Disease" may spread to the realm of policymaking too.
"Although the arithmetic of the proposed budget's balance sheet is not known yet, (and) the revenue surplus available for financing the development budget sheet is not known yet, the revenue surplus available for financing the development budget is reportedly projected to remain almost unchanged in nominal terms compared to the current fiscal's revised budget," he says.
It means a lower revenue surplus both in real terms and as a proportion of GDP -- certainly an adverse development so far as self-reliance is concerned.
"The Bank-Fund assistance is not a grant but a loan, even though in confessional terms. There must be enough absorptive capacity to utilise this assistance productively. Apart from increased development spending and a possible foreign reserve build-up, the assistance should also be used to reduce the government's domestic public debt and current borrowing, thus making more room for credit creation for private sector investment."
Dr Mahmud points out that the recently announced development budget projects a 20 per cent growth in development spending for the next fiscal. This is based on an optimistic assessment of aid availability that may well be justified.
"The question is whether project implementation can be sufficiently strengthened to achieve this high target. The other more important concern is whether, in implementing a large development programme, there will be enough restraint on corruption and resource waste that characterise the government's development spending. The prime minister has reportedly expressed concern on both issues. Now we have to wait and see how far this concern is backed by political will."
The government's optimistic expectations regarding increased project aid disbursements will again depend on the quality of project implementation. In the education sector, for example, while the ADP allocations from domestic resources have sharply risen over the past years, the proportion of project aid financing has steadily declined to
less than a third of development spending in this sector.
The ADP, in Debapriya's view, is also a kingpin to prop up investment.
"The fiscal situation is under control because of satisfactory revenue collection and the fiscal deficit is also under control at around 4 per cent of GDP because of cut in ADP," he says. "And as more aid will pour in, deficit financing would become easier. Here, the major challenge would be implementation of the ADP I quality projects."
"If exports fail to pick up then the key strategy would be to prop up domestic demand and here public expenditure is going to have a crowding in effect for private investment," he points out.
But if investment picks up, this will lead to import pressure, posing the real challenge for macroeconomic management.
Inflation -- now at 6 per cent -- is already creeping up and the moderately expansionary policy could fuel that further. Secondly, a wage growth is already in view and that could lead to erosion of competitiveness. At the same time, the possibility of an exchange rate backlash is also real.
"Thereby, going from the current low level equilibrium to a high gear growth activities will have its cascading effects which unless properly managed will have an adverse effect, Debapriya said.
Dr Mahmud agrees to some extent with donors' doubt that increased allocations in this sector will not produce results in terms of improving the quality of education, unless there is more accountability.
"On the other hand, project aid has accounted for about two-thirds of development spending in the health and population sector. But even in this sector, there is now a lack of overall direction and planning, so that the gains of the past years are now at risk. The challenge lies in an overhauling of the existing arrangements for screening and implementation of development projects," he says.