Days are passing very fast to start a new ground for upcoming budget implementation. At this moment two troubles are giving vexation to policy maker so far external and internal economists are concerned. One is current account deficit continues to break record in the external expenditure. The resultant impact is to get minimised dollar reserve and volatility in exchange market and on the other rising trend in subsidy might compel government more to go to internal borrowing with result in nose-diving private investment scenario to be continued. Our subsidy in the economy has become equivalent to construction cost of Padma Bridge or to say nearly Tk 31 thousand crore.
But it is not denying that the country like ours will always see favourable current account position in the face of volatility in international market, particularly for an import prone economy. But what is to be seen is the safe limit to avoid pressure on reserve. The same is true for subsidy also. Our economy needs subsidy for keeping market prices of goods and services within the reach of the end users.
The soaring up of prices of imports due to price escalation in international market and imposition of tariff and non-tariff barrier fuel cost of production and rise in the prices of essentials. Then subsidy is necessary to rein in price rise and avoiding knock on impact. But it has limit. Why? Additional money channelled in the name of subsidy would have been used in other more desired social sectors such as health and education sectors. Not only that, dependency much on subsidy gives birth to one type of inefficiency in the economy. So it would be an execrable decision for a big subsidy.
But the reality tells, subsidy expenditure is set to increase 80.26 per cent to Tk 37,804 crore in fiscal 2018-19 as the government looks to bank roll lower gas and fuel prices keeping an eye on the national election due to be held at the end of this year. It is the media news. As we told earlier that the upcoming financial year is set to start with these two troubles.
Bangladesh's current account deficit surpassed USD 8.51 billion for the first time in history at the end of April as the country's capacity to export continues to lag behind the appetite for imports. At this point last fiscal year, the deficit was USD 1.79 billion, according to data from central bank. The deficit has already weakened the local currency against the US dollar and can deplete the country's foreign exchange reserve. Financial experts doubt, the current account deficit will cross the USD 10 billion mark this fiscal year if the central bank does not backtrack from its ongoing policy for the foreign exchange market.
The central bank has already injected more than USD 2 billion into the market and also put a cap on the bills for collection selling rate to keep the exchange rate stable. Exchange market still has not stuck to standstill. But some economists argue, central bank's such policy will require a long time to cool down the ongoing volatility in the foreign exchange market. Turbulence will subside within the shortest possible time if the central bank stops its intervention into the market. According to media report, last week the interbank exchange rate exchange rate was Tk 83.70 per dollar, up from Tk 80.60 from a year earlier. Three reasons are identified for the ongoing volatility in the foreign exchange market. Capital flight, opening of huge letters of credit by importers and some exporters depositing dollars for the rainy days. Some importers have been afraid of the exchange rate appreciating further in the coming days.
So, they are now opening LCs in bulk. Trade deficit also widened 87.53 per cent year on year to USD 15.33 billion in the first 10 months of the fiscal year. A higher import payment against the lower export earnings was responsible for the large trade deficit. Between July last year and April this year, imports surged 25.18 per cent year on year whereas exports grew 6.99 per cent. Foreign direct investment has recently declined which also fuelled the current account deficit. FDI decreased 7.35 per cent year on year to USD 2.37 billion in July-April.
As we told earlier excessive subsidy is another question in the entire financial management. Subsidy is necessary but when it way past the target a trade- off effect is pronounced in the economy. Other social sectors might be deprived of getting due share due to crunch in money. Already subsidy expenditure is set to increase 80.26 per cent to Tk 37,804 crore in fiscal 2018-19 and it crosses the budgetary allocation of Tk 31 thousand crore.
We have told it such enhanced rate of subsidy is needed for government is planning to subsidize gas price for the first time. LNG is getting huge amount of subsidy. The subsidy in power sector has been kept at Tk 9,200 crore in fiscal 2018-19 up from Tk 6000 crore in the outgoing year. Subsidies to the agriculture sector has been raised to Tk 9000 crore from Tk 6000 crore, while export and jute goods subsidy has been kept the same at Tk 4,500 crore. In the next fiscal year, food subsidy will be Tk 4,606 crore, which was Tk 2729 crore this fiscal year. Cash loan directly is given to BPC and PDB.
IMF is vehemently opposing our trend of rising subsidy. We also see that agriculture sector is getting higher amount of subsidy for irrigation, quality seeds purchase and quality fertilizer. This is a prudent decision of the government. But too much subsidy not only raises the question of efficiency in the economy, government's dependency in bulk on internal borrowing might dampen the private sector credit growth. Already it has been surfaced. Private sector credit growth saw a dramatic shortage in April as banks put the brakes on their lending activities to adjust their loan-deposit ratio ceiling as per central bank's instruction.
If government borrows more from banking sources for giving more subsidies, then banks will lose capacity to invigorate private sector in manufacturing. What do we want -- a prudent balance in subsidy regime. But rising trade gap and current account deficit are being left with us as a headache. Let us see what happens.
