The increasing inflationary pressure, burgeoning current expenditures, widening budget deficit and fund dearth facing the private sector — these are some of the macro-economic factors to create severe pressure on the country's economy in the coming months.

• The macro-economic trends suggest that the real economic sectors will be under severe strains in the coming months." said Dr Debapriya Bhattacharya. a senior Research Fellow of BIDS at a discussion organised by the Centre for Policy Dialogue (CPD) on the impact of flood.

'The government, with a yiew to ease the situaUon. has come up with a package comprising fiscal measures, ex-nchange rate realignment, tariff adjustments and bank financing support. The package while being geared up to promoting a moderately expansionary approach has to be constantly reviewed for sustainability of the macro-economic fundamentals." said Dr Bhattacharya at the dialogue's inaugural session on 'Macro-Economic Impact of the Flood'.

The statistics suggest that infiation rate was 7.55 per cent in November, up from 7.27 per cent in August. The budget deficit is expected to cross five per cent of GDP and will as a re-

sult increase the government's borrowings.

Later, 'speaking at the dialogue on “Trie 1998 deluge: developing coping capacities" held at the CIRDAP auditorium yesterday. Finance Minister SAMS Kibria said the fear of high in-flatoin rate will die down In the future with the fall in prices of essentials.

"We have already disbursed Tk 1300 crores as agricultural credit to boost the rural economy. " said Kibra. "We have been able to absorb any kind of pressure on the balance of payment as we received timely funds from the IMF and the World Bank."

"Bangladesh's image has brightened as we have been suc-cesful in facing it with courage." said Kibria.

Earlier. Dr Debapriya said that the performance of the national economy in the financial year 1998-99 would be greatly influenced by the damage caused by the recent floods.

"The Initial government estimate puts the flood loss figure at US $3.4 billion which amounts to about 10 per cent of the GDP." he said.

Inflation

Debapriya said that, inflation rate in November. 1998, was around 7.55 per cent with food index experiencing a

marginal fall and non-food component registering rises in the terminal month.

"The inflationary trend, which surfaced during 1996-97 and steadity crawled upwards throughout 1997-98. may continue to do the same during the current fiscal year." he said. "Given the macro-economic trends, the consumer price index may well reach the eight per cent mark by the end of the year."

Current Expenditures

Regarding current expenditures. Bhattacharya said the recent flood is also expected to have a substantial impact on the government's expenditure portfolio. The most important factor in this regard will be enhanced foodgratn imports by the government to meet domestic production shortfall.

"Because of the fiood-related expenditures, absolute volume of recurrent expenditures is ex-Eted to overshoot the initally-

igeted amount of TK 157.5 billion and the expendlture-GDP ratio in FY99 may well witness an unavoidable increase in its FY98 benchmark of 7.4 per cent." said the economist.

Budget Deficit

The budget deficit is also going to increase in FY99 as a result of the flood's budgetary im-

pact. particularly because of revenue shortfall, post-flood relief activities, enhanced food distribution operations and rehabilitation needs. Dr Bhattacharya said.

'The overall budget deficit for FY99 was initially estimated at Tk 93.4 billion or 4.3 per cent of GDP. Current trends suggest that the deficit may very well go beyond 5 per cent of GDP. resulting in an increase in deficit balance to the tune of more than Tk 100 billion." he said.

Despite the government's attempts to tap resources, there will still be a financing gap of Tk eight billion. Part of this gap will be met through a net increase in foreign financing of more than Tk 10. billion on a budget benchmark of Tk 55.2 billion.

Government Borrowings

"There will be a need to find supplementary resources from domestic sources to meet the incremental revenue shortfall. This suggests that government borrowings, either from the banking sector or from nonbanking sources, will increase, he pointed out.

The government changed its fiscal stance in 1997-98 as it opted to mop up private savings from the market through is-

suance of highly-priced saving instruments. Continuation of such practice will dampen private investment prospects.

Reverting back to the banking system for borrowing by the government is also not an easy option because of enhanced net demands on the banks’ loanable funds in the post-flood situation. said Dr Bhattacharya.

The borrowing by the government from the Bangladesh Bank (BB) at the end of November '98 amounted to Tk 41.31 billion, which is 9.3 per cent more than the last year's corresponding figure.

However, between the end June '98 and November '98. government borrowing from the BB has shown a hefty decrease of Tk 11.63 billion, a decline of about 22 per cent.

Borrowing by the government from the banking system stood at Tk 96.44 billion as of end November. 1998, indicating an annual increase of about 21 per cent. In contrast to the government's borrowing trend from the Bangladesh Bank, borrowing from the banking system during the past five months of FY99 increased by four per cent.

Credit Expansion

There is an apprehension that the high level of domestic borrowing by the government

in FY99 from the banking system may limit the access of private sector to investible resources. Dr Bhattacharya said.

While, the government remains committed to channelling more than Tk 30 billion as agricultural credit, it is term lending which may have to suffer a cutback.

The unfortunate inability to discontinue financing of the loss-making SOEs through the nationalised commercial banks is going to heighten this dilemma." he observed.

Domestic credit expansion seems to have slowed down since July. 1998, as the rate of increase has fallen to 2.21 per cent. However, the rate of increase in credit flow to the private sector had been higher (2.44 per cent) in comparison to public sector (1.6 per cent) between July 30 to November 5 this year.

Import and Export

The Import level is going to rise due to increased food and rehabilitation related imports. Thus import growth may be in the range of 12 and 13 per cent as against the sluggish rate of 5.5 per cent in the proceeding year.

The volume of export recorded a shortfall of 14.4 per cent during the July-October period.