Country caught in ‘debt trap’: UO

Huge govt borrowings will jack up inflation, it says
The proposed budgetary measures will not help achieve the poverty reduction target as mentioned in the election manifesto of the present grand alliance government, local development think-tank Unnayan Onneshawn (UO) said in its budget response released yesterday.
It said that huge government borrowing will create adverse impact on the macro-economic balance of the country and in the long run would jack up inflation.
“As per the budgetary proposal, the government has to rely heavily on borrowings -external and domestic – to meet the budget deficit that is set at Tk 34,358 crore or 5 per cent of GDP, which is the highest in Bangladesh. This huge deficit financing would certainly have macroeconomic impacts. Besides the proposed budget estimated a revenue generation of Tk79461crore, which will be a difficult task to achieve,” the think tank pointed out.
  “The uncertainty on future investment still looms large as the proposed measures do not follow any comprehensive investment strategy nor it has strategic link between growth and poverty reduction, though prima facie it looks that the size of public investment as well as incentives to the private sector would expect to help increase in future investment” UO said.
Though there are some measures in the budget for expanding the social safety net, UO said that it would not be enough to bring down poverty at 25 per cent by 2013 as envisaged by the government in its election manifesto.
“One of the reasons is that the number of additional poor that will incorporate into the government social safety-net programme for the next one year is far less than the number of people that required to be graduated out of poverty each year to achieve the target” it added.
Outlining the negative impact of the huge government borrowing proposed in the budget the UP report said if the government borrow from the commercial sources, this would definitely crowd out private investment impeding the government’s objective to increased investment and disturbing the money in the market due to increase in credit demand.
Excess money supply to met the borrowing would reduce the value of money relative to that of goods and services as there would be too much money to chase few goods and services creating inflation.
The report said, since the current fiscal has already run down with high public borrowing, especially, that from the domestic sources, an even higher budget deficit would clearly worsen the public debt situation.
“In fact, the country is effectively caught in a ‘debt trap’ whereby a high existing level of outstanding debt implies a high level of interest payments, which will lead to a large budget deficit in the subsequent years that has to be financed  correspondingly by large borrowings. The result is increasing growth in debt and budget deficits which creates fundamental macro economic imbalances.
On government’s pledge to vibrate the agriculture and rural sector, it said, decrease in agriculture subsidy is unexpected when the government pledged to ensure self sufficiency in food. When farmers are struggling with increasing cost of production and deprived of fair prices, decrease of subsidy is a shocking blow. 
 
Courtesy of The Independent