Wednesday, 6 July, 2022

Budget 2022-23: Financing Deficit More Challenging

Nironjan Roy

Finance Minister, A. H. M Mustafa Kamal has unveiled the national budget for the fiscal year 2022-23. In the budget preparation, the trend of the current development pace has been well maintained. The size of the current budget is Tk 6 lac 78 thousand 64 crore, which is Tk 74 thousand 383 core higher than the previous budget. In fact, the current budgetary allocation is about 14.25% higher than the previous year which implies an expansionary fiscal policy with a focus on maintaining economic growth. The time is not in favour of the govt to present a national budget keeping pace with economic growth because of the volatile situation prevailing in the international arena. The world economy has not fully recovered from the setback caused by the coronavirus pandemic that kept the whole world economy at almost a standstill for the last two years. As soon as the world economy started coming out of the pandemic, the Russia-Ukraine war erupted leaving the world with severe volatility as well as uncertainty in the political and economic arena. The price spiral has engulfed the whole world inviting recession in the developed economies that, if happened, may impact developing countries as well, so our country is not immune. Under this volatile and uncertain situation, people expected that the govt may prepare a budget in contract from downsizing the budgetary allocation this year. However, govt did not move in that direction, rather has taken the challenge and presented a national budget with a higher outlay with the objective of maintaining economic growth. Amidst such uncertainty and volatility, presenting a national budget with higher allocation once again proved that the present govt led by the daughter of Bangabandhu, Sheikh Hasina is determined to keep country’s economic development up at any cost.

Economic development & deficit budget: Budget is a kind of forecast, so full utilisation as always criticised over is an unlikely situation. However, greater allocation ensures higher utilisation which positively contributes to the country’s GDP (Gross Domestic Product). Like previous years, the budget for the fiscal year 2022-23 has been presented as a deficit budget. Total outlay is estimated Tk 6 lac 78 thousand 64 crore against which total inflow has been estimated Tk 4 lac 33 thousand crore, so the projected deficit is taka 2 lac 45 thousand 64 crore. The budget deficit is 5.5% of GDP which seems to be within an acceptable standard. It is undeniable fact that a deficit budget is inevitably required for keeping country’s economic development up and most countries of the developed as well as developing world follow the same procedure. Some countries, however, segregate their development programmes from the yearly budget and undertake separate development plan with special funding arrangement that is not then reflected in the yearly budgetary allocation. In order to maintain the trend of current economic development, our country will have to accept the deficit budget that the present govt has rightly done. Adopting a deficit budget is not a problem at all, but financing budget deficit is a kind of a challenge particularly in the current uncertain situation. From what source financing will be arranged to meet the budgetary deficit is the key factor. In the developed world, there are enormous internal sources for mobilising fund to finance budget deficit which is completely absent in our country. So our govt has to rely on internal as well as external sources to mobilise funds for meeting the deficit. 

Foreign debt must be minimum: The proposed budget has a total deficit of Tk 2 lac 45 thousand 64 crore out of which, taka 1 lac 6 thousand 334 crore will be mobilised from domestic bank borrowing while taka 1 lac 12 thousand 458 crore will be arranged from foreign debt. Financing such a huge amount of deficit seems to be the most challenging part of this budget. The present world is passing through a very uncertain situation and amidst such critical conditions, keeping foreign debt as minimum as possible would have been the ideal strategy.  In this context, obtaining foreign debt of such a huge amount will of course create some sort of pressure. It should be wise to limit foreign debt to the amount of deficit exclusively required for disbursing in foreign currency and the remaining amount should be mobilised from domestic sources. Even, obtaining foreign debt through the issuance of sovereign bonds instead of direct borrowing from international institutions should be more effective and convenient, particularly in the present volatile world economic condition.               Impact of govt’s massive bank borrowing: Mobilising taka 1 lac 6 thousand 334 crore from bank borrowing will expose another type of challenge that should be avoided. Substantial govt borrowing from commercial banks will adversely affect private sector investment, which will eventually impact this sector’s GDP (Gross Domestic Product) contribution. Achieving the budgetary goal of maximising private sector contribution to the GDP will be adversely impacted following the extensive bank borrowing by the govt. We have to keep in mind that banks disburse loans, either in private sector or public sector, from deposit mobilisation. So, every bank has the highest ceiling of loanable funds which is tied to total deposit mobilisation. Therefore, banks cannot disburse the loan breaching that maximum cap. Govt borrowing from banks will use up banks’ loanable funds leaving banks with no room to fund the private sector. Some may argue that govt usually borrows from nationalised banks whereas private enterprises borrow from private banks, so govt borrowing for meeting deficit finance will not impact private sector investment. But it is not true. Regardless of borrowing from the public or private sector, the total loanable fund readily available in the country’s banking sector is always reduced by the amount to be borrowed by govt. Consequently, the private sector will have less opportunity to borrow from banks, which will badly affect the growth of the private sector. If private sector investment is affected due to a paucity of bank loans that will arise out of substantial govt borrowing, new employment opportunities may not be created, even unemployment may rise in some cases and the overall contribution of the private sector to our GDP may also be affected.

Issuance of bond instead of bank borrowing: Instead of direct borrowing from local banks, the govt may consider issuing bonds to mobilise funds for financing budget deficit. In order to meet short-term funding requirements, the govt may issue bonds with one year tenor while for long-term funding requirements, it may issue long-term bonds even with 30, 40 and 50 years of maturity. The bond is always considered sovereign bond which bears minimum or a zero default risk, so there is always a high demand for govt bonds in the market. Issuance of bonds enjoys multiple advantages compared to bank borrowing. Firstly, sovereign bond has high demand among the investors, particularly institutional investors, so the interest rate on bonds is relatively less than the interest rate on bank loans. Consequently, the govt has to incur less expense on interest payments. Secondly, the govt can issue bonds for any amount as this instrument enjoys sovereign risk, but the private sector cannot avail of that type of opportunity due to the lack of an effective bond market. So, govt’s mobilizing funds through the issuance of sovereign bonds instead of direct borrowing from banks will keep the funding avenue of the private sector open. Thirdly, the govt has to bear the blame or criticism for extensive borrowing from banks, which can easily be avoided by mobilising funds through the issuance of bonds. The mobilisation of funds through the issuance of bonds instead of bank borrowing will not reduce loanable funds, so the private sector’s investment will not be impacted, which will eventually maximize this sector’s contribution to GDP.

Bank can issue bond for lending to the govt: In the event, the govt may not go for issuance of bonds in the market due to time constraints and have to rely on borrowing from banks. An alternative arrangement can also be made. For lending to the govt sector, banks will not be allowed to utilise depositors’ money; instead, they will be encouraged to sell bonds in the market to mobilise funds for lending to the govt sector. Loan granted to the govt will charge minimum or zero default risk, so govt borrowing from banks will be considered a secured loan that can easily be used as collateral security against bank’s issuance of bonds. In fact, banks will bundle up all loans granted to the govt to form collateral security, which will back the bond that bank will issue to mobilise funds for lending to the govt. The process is defined as securitisation, which is not practiced in our country although very common in the developed world and some developing countries as well. However, now the time has come to introduce such a sophisticated financing mechanism. The world scenario has changed in both the political and economic arena and our country’s economy has achieved tremendous development with rising per capita income and massive infrastructural development. In order to support this development, the size of our national budget has been enormous which requires modern financial techniques that, if successfully adopted, will remove financing challenges and will thus achieve the budgetary target.


The writer is a banker based in Toronto, Canada and can be reached at: [email protected]