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Challenges reign high

Sajjad ur Rahman
The budget for fiscal year 2012-13 comes at a critical time when the economy is facing a good number of challenges, which if not addressed, are likely to stunt growth and bring disorder in themacroeconomicmanagement.
Of the challenges, the most important one is uncertainty about investment. The World Bank (WB) and the Centre for Policy Dialogue (CPD) this week have pointed to this concern.
How the finance minister addresses other challenges -- high inflation, rising subsidies, growing public expenditure and bank borrowing, gas and electricity crisis, infrastructure deficiencies, unemployment, declining foreign aid and investment -- would be of great interest to see in his budget proposal.
The government is facing a challenging macroeconomic environment with the need to address conflicting
issues such as tackling inflation without hurting growth, reverting private investment without fuelling inflation and stressing financial and social inclusion without affecting fiscal consolidation.
The government's mechanism to unearth black money would also be crucial.
The budget worth Tk 192,000 crore willbe unveiled in parliament today. Inflation:
Bangladesh has so far witnessed a high rate of inflation, which has affected people badly. Though point-to-point inflation fell by 0.68 percentage point to 9.15 percent in May compared to the previous month, itis sti 11 high.
Non-food inflation decreased to 12.72 percent in May from 13.77 percent in the previous month. But the April non-foo d inflatio n rate was a two -decade high, which the WB blamed on expansionary monetary and fiscal policies.
The continued high inflation also slowed economic growth by 0.4 percentage point to 6.3 percent.
Despite a hike in policy rates by 325 basis points in the last 18 months, inflation remained higher and above the comfort level of the central bank (7.5 percent) throughout the outgoing fiscal year.
“From all indications, it seems that inflationary pressure will sustain in the upcoming fiscal year," the CPD said on Monday.
Global commodity prices, which are relatively stable at the moment, may exhibit uptrend anytime fuelled by the Middle East and Eurozone crises.
Private investment:
Private investment declining from 19.5 percent of GDP in 2010-11 to 19.1 percent of GDP in the outgoing year is a concern. According to the WB, volatilities in the global economic environment, high variability in inflation, tighter credit conditions and energy shortages have caused for this decline. According to the CPD, it would be the biggest challenge for the government to revert private investment.
Despite a liberal regime for foreign direct investment, the country is failing to attract it.
Fiscal consolidation:
Fiscal consolidation should be on the top of the government's list of priorities as it is likely to play a significant role in controlling inflation. Though the budget deficit for fiscal 2011-12 remained within the target of 5 percent of GDR it was mainly because of the failure to imple-
ment development programmes.
The finance minister is likely to set deficit at neatly 5.1 percent of GDP for the coming year. To meet the target, finance ministry officials said Tk 33,000 crore would have to be brought from domestic sources, meaning the government may have to borrow heavily from banks.
Subsidies:
Another vital issue is the government's rising subsidy bill. With increasing subsidies on petroleum, food items and fertilisers, it is estimated that the subsidy bill for the outgoing year was Tk 46,000 crore from original estimate of Tk 29,000 crore.
Though the government is committed to keep the subsidies within Tk 15,000 crore as per the International Monetary Fund's prescription, it seems impossible as the government has already carried over aroundTk 11,000 crore to the next year.
Moreover, a rise in crude oil prices on the international market from the present level of $100 a barrel would further swell the subsidy bill.
Social safety net:
This year as well, the spotlight is likely to be on the existing schemes in supporting the poor The government presently runs around 90 programmes under safety nets and if it not increased in the coming budget, the spending would rise consideringtherate of inflation.
Infrastructure investment:
Increasing investments in infrastructures has become the most important aspect of the budget. In the outgoing year, the allocation for energy and physical communication was dose to 35 percent of the outlay.