Question of deficit financing has always been judged by its getting into its extent of rationality to address the macro-economic variables-(a) unemployment (b) growth (c) interest rates (d) exchange rates and (e) inflation. But recently some critics are raising questions on our ongoing nature of deficit financing and to them it is imbalanced.
Even Prime Minister Sheikh Hasina was asked in press conference on her China visit whether economy is falling into debt trap. She informed the inquirer that foreign debt only stands to 14 percent, so far off being fallen into trap. Not to speak of external resources only, the matter needs some articulations to see whether our entire scenario of deficit financing is running on right track or not and deserving any alternate approach.
Say for example the ongoing financial year will have the total expenditure is being estimated to be TK. 5, 23,190 crore which is 18.1 percent of GDP and allocation for the annual development programme is TK.2, 2721 crore. Whereas TK. 3, 20,469 crore is earmarked for operating and other expenditures.
Ok, but how to make up this expenditure, right or wrong? Finance minister told us, even after all efforts of resource mobilization, deficit will be to the extent of TK. 1, 45,380 crore which is 5 percent of GDP.
In resource mobilization, total revenue collection has been estimated to be TK.3, 77,810 crore and out of this, TK 3, 25,660 crore will be collected through the NBR. Tax revenue from non-tax sources have been estimated at TK.14, 500 crore. Besides, non-tax revenue is estimated at TK. 37,710 crore.
However, the way to replenish the perennial 5 percent gap is being frowned by many. In financing the deficit, TK.68, 016 crore will come from external sources and TK.77, 363 crore from domestic sources. Amongst the financing from domestic sources, TK. 47,364 crore will come from the banking system and TK.30, 000 crore from savings certificates and other non-banking sources.
Critics are whipping on this way of deficit financing and particularly non market rates of savings instruments are being heavily and mechanically chastised. But alternate ways are not coming up in front. For resource mobilization two ways are seemingly followed, one inflationary and another non-inflationary method of resource mobilization. Definitely non-inflationary methods are ideal for achieving economic target and growth with stability. Taxation, surpluses of public enterprises and borrowing fall mainly in non- inflationary ways. But countries like us and perhaps no countries within our knowledge could have followed this. Particularly we are under strong political pressure to hasten economic development and for that purpose adopt ambitious plans of economic development. For the implementation of such big plans, only non-inflationary resources are not enough. The gap might be too wide to be bridged by external resources including foreign aid, foreign direct investment (FDI) and internal resources including private investment and government borrowing.
Generation of surpluses of public enterprises in Bangladesh are questionable. A substantial portion of these are gaining losses and keeping up existence by spoon feeding from people's money. But sadly said, this constant blood -letting or drainage of public money from government exchequer is failing to attract the viewing of those are setting on savings instruments with one-eyed discourse.
Hence resort to inflationary resource mobilization becomes necessary and we know that deficit financing may not necessarily be inflationary when it results in increase in production of goods and services. We have proved it by our reining in inflation within 5 to 6 percent despite huge pump priming into the economy in the name of bridging the deficit. In Bangladesh economy we come across an often market failure, market distortions and unresponsiveness of market players in time of needs due to oligopolistic trends in the market.
Yet critics of our financing of gap replenishing should know about a mild inflation has a forced saving mechanism. Though painful in the short-run, yet our inflationary trend is transferring income from those who have lower propensity to save to those having higher propensity to save. Many dare to say this for political counts. But in our economy, inflation thus acts as a disguised taxation "inflationary tax" on consumers and savers work to the advantage of investors and the government. Where the government acquires in this way real resources for development, people are forced to save. It is a hidden tax and evokes no opposition and the government is able to raise resources for development easily.
Hence the more emphasize is seen to be given by the government on social safety net programmes with the aim of narrowing down the gap prevalent in different strata in the society which is due to market failure and turning to create big problems ending up social unrest. We want reform and strong vigilance here.
In our economy the growth process is hampered by the existence of several rigidities and immobility. Rise in prices and wages compel the workers to move from the traditional subsistence sector to the expanding industrial sector. In this way, labour and other resources tend to be optimally allocated and fully utilized so that economic growth is promoted. There is no fear of agricultural production falling as a result of the movement of these workers because their marginal productivity is zero or near to zero. Recent scenario of dearth of workers in agriculture and bumper rice production proves that.
Moderate degree of inflation is the logical concomitant of efficient economic mobilization. But care has to be taken that it remains moderate and does not become hyper-inflation. Such inflation can be "self-liquidating"as Prof. A. Lewis puts it. It will lead to increase in the output of consumer goods and bring down the prices.In this way, inflation will disappear. On the other hand, spiraling inflation has a tendency to go out of control. We see that our monetary authority is to some extent over conscious about money supply. Over the couple of years our restrictive monetary policy only tries to hold onto controlling inflation but they fail to break the shyness of private investment.
As regards of government borrowing -another way of deficit financing by which the saving of the community is mobilized. Bangladesh has been suffering from organized money and capital markets. It is too small to meet the needs of both the private and public sectors. Further in the capital market the competition for funds between government and private sectors are raising the rate of interest and this has highly disincentive effect on the increase of investment in the private sector. Economists and financial experts are demanding for long to reform capital market for lessening government dependency on bank finance and savings instruments. Hence judicious reforms in savings instruments are turning to burning. Here needs diversified decision making keeping eyes on beneficiaries who need it most in its true sense. Here sources of external resource for financing in the form of foreign capital are not touched upon.
To the critics to the way of deficit financing is operating, our argument tilts to inflationary resource mobilization provided stern reforms for governance are to be pre-fixed. Our economy is showing the good example of adjustment, though challenges are there. But non-inflationary resource mobilization though desirable, is far off reality.
