Crowding Out?

The inability of a government to tax and spend appropriately i.e. commandeer fiscal prudence optimally, leads to unsustainable levels of public borrowing. This of course means less funds for the private sector which is the dominant sector in mixed economies like Bangladesh. What is the evidence on record of recent trends in public borrowing? According to Bangladesh Bank (the central monetary authority) sources, the public sector has borrowed more than the private in the first three months of the current fiscal year (2005-2006).

Bangladesh is under a tight IMF monetary programme which restricts public borrowing to a certain specified limits. More often than not the monetary authority of Bangladesh fails to conform to these limits because of fiscal compulsions. The government tends to spend more than it earns in taxes, resulting in a hefty fiscal deficit and resort to borrowing - from the banks, the central bank and the members of the public. This pattern of borrowing, with minor deviations, has been there for as long as I can remember. The tax to GDP ratio never reached 10 percent, which makes the country one of the least taxed in the region. This is low even by the least developed country norms. The root cause of excessive public borrowing interest rate increases, inflation and crowding out of private sector borrowing must be sought here.

Needless to say this also dampens the exchange rate, compelling continuous adjustments in the currency value. The monetary policy of Bangladesh never specifies its objectives clearly. It has been dictated by the imperatives of fiscal and commercial policies. Monetary policy can not address real sector entities, money being only a nominal instrument. It can a) contain inflation, b) help promote growth of nominal GDP and c) follow a rule, a la Friedman, of letting the monetary aggregate grow by a fixed percentage. It (monetary policy) can do nothing else. The rulers make the mistake of pitching monetary policy to achieve social and real sector goals, which is beyond its purview.

On the question of recent growth in public borrowing, let us examine the numbers we have. During the period under report, public borrowing increased by 2.4 percent in the period July/September, 05. According to BB figures quoted in the Daily Star (November 29) net borrowing of the government was Taka 37000 million in November, 2005. Credit to the private sector, however, grew 3.4 percent. This must be considered inadequate in view of the predominant role this sector plays in the economy.

Administered interest rates and directed credit make Bangladesh economy a financially repressed one where the forces of competition are not allowed their role of setting prices and equilibrating the market. Financial assets held by the banks, financial intermediaries and the members of the public are negligible and hence the only resort they have is to bank borrowing. The concept of financial deepening, promoted by the academics of the USA in the 70s, needs to be introduced more thoroughly. The financial sector does matter in economic growth, assisting its acceleration. The lagging economy, like Bangladesh or Laos, which confines itself to poverty partly by imposing upon its markets patterns of financial, fiscal and international economic policies that in fact instruct market forces and participants to keep the aggregate level of income and wealth where they happen to be (i.e., below their potentials).

A regime of administered interest rates and directed credit resist liberalisation of financial markets where decentralised decisions could advance growth, equity and justice. It is in this context that all agreed monetary programmes need to be assessed. IMF advice has been stereotyped and pro-cyclical and can not help the long term goals of sustained economic growth. Rulers would do well to remember that financial deepening and liberalisation would raise domestic savings, improve expectations of high income through better returns on savings and other forms of financial assets. Liberalisation would also give a fillip to financial intermediation, reduce costs and “to displace in some degree the fiscal process, inflation and foreign aid" (Ed Shaw). We have observed from the financial crisis of the south east Asian economies (1997) that liberalisation and reliance on indigenous wisdom can contribute to recovery, stability, income and employment growth. Malaysia is the prime example. It refused IMF assistance and resorted to a fixed exchange rate and limited capital controls. Liberal western economists opposed to both however praised the results that such policy mix led to.

Credit to the private sector must be adequate even if it means lower public borrowing and spending. The follies of the rulers have been in their lack of full trust in the market forces and the private sector. The government can help both- to perform better, rather than crowd out private borrowings and enterprise. Bangladesh must learn how to tax and spend better. Our public spending does not give best value for money. This has been widely acknowledged. The marginal taka must go to where it can be put to its best valued (from a total national point of view) uses. I am not doctrinal about private - public divide. But an eclectic approach needs to be followed with strong independent and autonomous regulation to help all market players. If the government wants to spend more then of course it must be prepared to tax more- the rich and the powerful rather than borrow from captive sources of repressed finance.

Syed Abdus Samad Author is an economist. He worked in the Ministry of Finance& President/Prime Minister's Office, government of Bangladesh, and UNAPDC, in the 1980s and late 90s. Views are personal.