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Economy in tangles

People start to feel the pinch as govt rides on a high fuel import to feed fuel-guzzling power plants

Inam Ahmed
The letter shocked Rahman. A few lines typed in an official language across a white page with the bank's insignia at the top. It says your monthly mortgage payment has been raised by Tk 3,000 in response to the central bank's tighter monetary policy to fight inflation.
Rahman had already cut back on his transport cost by cycling to most places including office. He had held back purchase of a pair of shoes and a decent jacket for the last two months. Now what else he has to cut back on? He sighed. A bad time is coming, he concludes.
The portent that something is going wrong was in the air for the last six months or so. Suddenly both food and non-food items were becoming pricier. Dollar was becoming expensive. Roads were falling apart. And the government was on a bor-
rowing spree.
And now, it seems, the danger has really come true and the government management of the economy seems to be in a shambles, not for one count but for many.
The government's budget deficit is proving too underestimated mainly on account of high fuel import. When the Awami League came to power, it rightly set supply of power as a top priority. But the path it chose proved perilous after two and a half years. It went for quick power fixing, not that it had any choice, by allowing quick rental power plants that run on diesel and furnace oil. But that action opened a fissure in the economy — as when these plants would start rolling, the need for fuel import would go up drastically. When the fuel sales price is lower than the import price, that would leave deep budget deficit.
And that is what has happened now. In the first two months alone, the government has borrowed over Tk 7,000 crore, almost half the annual target of Tk 18,500 crore, to meet its ballooning deficit. And this has happened despite a very high revenue collection growth. It is unlikely that such a high revenue growth will prevail till the end of the year because even last year was a high growth year. In such a case, one can only imagine that borrowing will shoot further.
Such high borrowing and corresponding spending have led to the current inflationary situation of which Rahman is today a victim. Even more worrying is the fact that of the Tk 7,000 crore borrowing by the government, 54 percent of it is from the central bank. This means this amount is highly inflationary unlike money mopped out from the commercial banks. In other words, the central bank's loan actually acts as newly printed money (although money printing for expenditure is no longer in vogue).
To make things worse, taka has been gradually losing ground against dollar (it has already lost value by about 7 percent), making imports costlier.
One way of mitigating both these malaise could be to speed up foreign aid disbursement. But the torpor in the aided projects also serves a blow to that hope. Alternately, the government could spend from its own funds and then ask for disbursement from donors. With the current high borrowing, that has little prospect now.
When the situation was going this way, the government had no way but to increase fuel price. This will certainly have inflationary impact as transport and irrigation cost will go up. But one may ask if the government had any alternative and what could have been the ultimate outcome of not increasing fuel price. Ultimately, the government would have gone bust unable to bear the subsidy in fuel. This could have led to unbridled inflation, more
than what it is causing today after fuel price increase.
However, there is still a faint silver lining in the horizon. Import demand is slowly easing and a bumper world agriculture production is also pulling down commodity prices. Oil price is also expected to fall because of the weak US economy. That would help stymie the worsening balance of trade situation. But with a falling remittance from workers abroad and stagnant foreign aid, the ultimate current account balance would deteriorate putting further pressure on the exchange rate.
And in the middle of all this, investment is suffering. In the last two and a half years, very little investment has taken place in sectors other than power. This again is mainly because of power and gas shortage. A large dyeing factory owner told me he cannot increase capacity despite demand because once electricity goes off, the whole dyeing process stops, spoiling the cloths in dyeing process. The government could have earmarked a part of the extra power generation from quick rental plants for export-oriented industries. This could have generated extra foreign currency to pay off fuel import and created employment. But the government did not have that foresight, leaving the industry still in the dark. Now the other danger has emerged in the government's rampant borrowing which can choke investment.
So in short the story is this. If you have to check inflation, you have to stop borrowing. If you have to stop borrowing you have to cut subsidy. For subsidy to be cut, you have to raise fuel prices. You have to increase aid disbursement and cut unnecessary ADP projects. (Scope for such ADP trimming is plenty. For example, this year, Roads and Highways Department has 143 projects, up from last year's less than 100, although the sector's allocation has decreased. This means thinly funded projects with low impact which
can easily be chopped off.)
For growth to be retained, one has to spur manufacturing. But the dilapidated roads, a result of years of neglect, are posing a serious threat to growth today as it is taking longer time to transport products. And growth is related with employment.
As it seems today, all these crucial issues have got entangled in a messy way. Some say things are in such a state that it might not be able to come out of it for quite some time. And if that happens, people like Rahman and others will continue to get shocking bank notices.