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Donors critical of development surcharge

’Govt borrowing from banks threat to private sector'

Star Report
Donors have expressed their concern that if the government continues borrowing from banks, as is refiecterf in the proposed budget for fiscal 1997-‘ 98, it will pose as a threat to the Srivate sector, according to ighly placed official sources.
They also took a critical view of the government's policy on reforms contained in the finance minister's budget speech and felt that the budget promotes protectionism.
A number of fiscal measures including the infrastructure development surcharge, came under the microscope of donors who felt that these are anathema' to trade liberalisation.
The donors met with Finance Minister SAMS Kibria on the proposed budget last Monday in the city.
The donors also reiterated that the government should, by any way. increase the total wage bill under the new pay structure. This balance should be , maintained by linking pay hike
with productivity and by downsizing the manpower.
The budget deficit, an issue which came up in the meeting, as a percentage of GDP. is not that nigh compared to recent experiences. In FY 1995, the deficit was at its highest of 6.8 Kcent of GDP. This year it has n projected at about 5.5 per cent which is now dubbed as modest', analysts told The Daily Star.
One reason for sustainability of the deficit is that a major portion of foreign financing of the deficit is available as soft loans.
But though the size of deficit does not pose a problem this time, it is the mode of financing. mostly bank financing hidden in the public account head, which is a threat to macro balances, experts said.
The government has already borrowed heavily from the banking system this year which is likely to go beyond Tk 1400 crore. Yet it did not face much
pressure because of a weak private sector demand for credit, and the economic growth that was generated mainly came from the agriculture sector.
But for the coming year, the growth must come from nonagriculture sector which means a steep rise in private sector activities. Experts feel that the agriculture sector which already had a high growth rate of six per cent this year, will not be able to churn out a similar miracle unless an extraordinarily good' weather prevails. But when the government's financing source will be predominantly the banking system, this will create credit crunch and thwart the private sector, they felt.
"We can predict from the economic cycle that manufacturing sector will grow next year which will need huge credit, mainly advances as working capital.' said an economist. " It will be very im-
portant for the banks to provide that fund."
The composition of foreign financing which is about 7.5 per cent over this year's revised estimate, is also too optimistic in view of the global trend of declining aid availability, analysts said.
"In fact the foreign component should also be less than this year's revised estimate," said an expert. "A 7.5 per dent increase is possible only through a major devaluation of Taka?
Donors in their meeting with the finance minister have already voiced their dissatisfaction over the government's performance and commitment on reform measures. Since commodity and project aid are largely linked to reforms and the budget did not reflect any firm stance on the issue, it is also unlikely that aid will increase.
So far. reforms have been accelerated in energy and financial sectors. But results in privatisation and trade liberalisation are dissatisfying. In
some instances, the government had even taken steps backward in the trade regime, the donors viewed.
The proposed 2.5 per cent infrastructure development surcharge was put under microscope in the meeting. The donors had dubbed it as a protectionist measure. But the idea of protectionism is also defeated since the surcharge will also hurt the local Industries intended to be protected.
Moreover, there is no matching fund for the proposed surcharge which is intended to strengthen the country’s weak infrastructure. Rather, sources said, the money collected from the surcharge will be spent for paying higher wages to the government workers.
However, the donors are happy with the size of the ADP which is projected at Tk 12800 crore. This year's ADP outlay includes Tk 553 crore food for works programme, which, when excluded from the original size, will bring down the ADP size below that of this year's original size.