Govt borrowing from banking sector to fuel inflation
ET Report

The World Bank (WB) on Thursday said achieving the country's growth target as proposed in the budget for 2010-2011 fiscal year would largely depend on 'fortune', enhanced public investment and prudent financial management. Terming the proposed budget an ambitious and expansionary one, the multilateral lending agency in its post-budget reaction said the 'deficit budget' if financed by the banking sector would lead to higher inflationary trend.
The WB, however, said the revenue target is achievable if reforms in revenue administration are undertaken, while the Annual Development Programme (ADP) can be implemented if a roadmap for the purpose is chalked out immediately. "The government will go a long way in implementing and achieving the budgetary forecasts if fortune saves them from natural calamities and political unrest," Dr. Zahid Hussain, Acting Country Director, WB, told a post-budget briefing at the WB office in the city.
"Two other factors-one is investment, particularly enhanced public investment, and the other is management skill at implementation level, must be simultaneously borne in mind to see the ambitious budget translated into reality," Zahid added. The World Bank's Acting Chief said problems and crises in the areas of gas and energy are needed to be solved to achieve the projected GDP growth target. Laying out a record spending plan, Finance Minister AMA Muhith in his budget speech said the economy would experience a 6.7 per cent Gross Domestic Product (GDP) growth in 2010-11 financial year, helped by global economic recovery, continued growth in agriculture, and sustained domestic demand.
In his budget document, the minister detailed a five-year roadmap to produce 9,425 megawatt of electricity by 2015 with furnace oil and diesel as new fuel sources apart from natural gas.
Despite his lavish spending plan, Mr. Muhith has promised to keep his budgetary deficit within 5.0 per cent of gross domestic product (GDP), relying mainly on domestic borrowing from banks and non-banking sources.
Mr. Muhith has earmarked Tk 385 billion for ADP and Tk 611 billion for the energy and power sector in the budget document for 2010-2011 fiscal year. Dr. Zahid advised the government for not resorting to banking sector on a large scale to finance budget deficit.
"Lack of adequate investment is a major constraint to growth as national savings is higher than national investment in recent times," he told the meet. Asked whether the macro-economic stability will be affected due to enhanced 5 per cent proposed budget deficit, the WB's Acting Country Director said he finds no strong reason for such a situation as debt-GDP ratio is not going to be increased in the next fiscal year. The WB in its budget reaction said the proposed budget is inclusive as it has consolidated the social safety programme and broadened the employment opportunity. Dr. Zahid Hussain urged the government to make an assessment on financial burden in terms of costs of producing power compared to its tariffs. "The rigorous assessment of the financing burden on energy sector is foremost, while decision on the mix of tariff adjustment in power and energy sectors and subsidies in two areas are needed to be examined for balanced economic fundamentals," he told the press briefing.
The WB praised the government for development in Public-Private Partnership (PPP) initiative in the proposed budget, but cautioned that the outcome of PPP related activities depends on how these are implemented.
It, however, criticised the government for maintaining 'protectionism' in the area of import level duties.
Another World Bank economist, Khurshid Alam, said the growth challenge remains in the area of investment, where public investment in the area of power and infrastructure is much needed.
"Growth should be driven by investment, instead of being consumer driven," the WB's Acting Chief said, adding that how and where the public spending takes place in the next fiscal year is an important issue for economic growth.
Asked about the money whitening facility, Mr Zahid said the opportunity had been offered several times in the country, but it did not work.