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Govt’s borrowing goes up amid falling revenue
SOHEL PARVEZ and MD ASADUZ ZAMAN
The government’s dependence on borrowing to finance national budgets has increased over the past decade as revenue collection has failed to keep pace with the ballooning public expenditure.
Finance ministry data showed that taxes raised by the National Board of Revenue (NBR) and other public agencies could fund 74 per cent of the government’s total expenditure of Tk 174,013 crore in the fiscal year of 2012-13.
The rest of the expenditure was met through debts from the domestic source and foreign loans and grants, which accounted for 22 per cent and 4 per cent, respectively.
A decade later, in 2021-22, the contribution of revenue generation to actual expenditure declined to 65 per cent. On the other hand, the share of borrowing from internal and foreign sources rose to 35 per cent. The trend continued in the subsequent years as well.
The government plans to meet 34 per cent of its expenses set for 2023-24 on the back of borrowing, mainly from the domestic banking system.
Sadiq Ahmed, vice-chairman of the Policy Research Institute of Bangladesh, said by and large, fiscal deficits have been kept at below 5 per cent of gross domestic product.
“However, the inability to mobilise adequate revenues despite securing rapid GDP growth has weakened the quality of fiscal management. This issue has become important over the past several years as the tax-to-GDP ratio continues to fall, whereas fiscal deficit, public debt and interest cost as shares of GDP are rising.”
The fiscal deficit increased from 3.7 per cent of GDP in FY19 to 5.1 per cent in FY22.
Total revenues are expected to remain at 8.5 per cent of GDP in FY23. Although revenues are expected to gradually increase, this ratio remains among the lowest in the world.
According to Ahmed, a matter of immediate concern is the ongoing macroeconomic instability reflected in a persistently high inflation rate and pressure on the balance of payments.
“In this environment, the government needs to reduce aggregate demand pressure to reduce inflation and contain the pressure on the balance of payments.”
The new budget proposes to keep the fiscal deficit at 5.1 per cent of GDP.
But Ahmed thinks the actual fiscal deficit for the next fiscal year could be higher since the lofty target of increasing tax revenues is not likely to be achieved.
Revenue growth averaged 10 per cent annually between FY2017 and FY2023 and the NBR has not been able to reach its revenue generation goal in the past one decade.
“This approach to fiscal policy management is clearly inconsistent with the task of restoring macroeconomic stability. Growing fiscal deficit and the use of bank financing will both put additional pressure on aggregate demand and on the balance of payments,” said Ahmed.
“The correct policy stance should be to reduce the fiscal deficit to around 4 per cent of GDP by cutting subsidies and rephasing spending on large infrastructure projects.”