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Thursday, November 22, 2007
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Economy Sidr-struck

Call for more subsidy for ultra-poor, review of large budget by December

Sidr came as a nightmare to Finance Adviser Mirza Azizul Islam, turning his plan for implementing the large national budget with the goal of a high economic growth into a veritable pipe dream within the first five months of the current fiscal.

The cyclone brought an extra burden to the country's sluggish economy, which had been facing a tough time since the beginning of the fiscal due to repeated floods and price hikes of petroleum products on the international market.

As can be expected in such circumstances, economists suggested the government to subsidise foodstuffs for the extreme poor at least for the next four months, and also to review the budget by December.

"The government should review the budget as early as possible, if possible it should be reviewed by December," former finance adviser Akbar Ali Khan told The Daily Star on ways to face the economic challenge.

Analysing the present situation, Akbar Ali Khan predicted that the government will have to spend more money as subsidies for relief and rehabilitation programmes, and for the prices of fuel and fertilizer.

He suggested the government to take up rehabilitation programmes immediately in sectors like agriculture, fisheries, and small and medium industries in cyclone-hit areas, which would generate income for the affected people.

Sources in the finance ministry said the cyclone has already forced them to review the budget, for shifting money from less important sectors in a bid to generate funds for emergency food supply to the poor.

"We have yet to get the actual assessment of damage, but we can assume that the economic loss from the recent cyclone is immense, which coupled with the damage from the recent floods and high prices of fuel on the international market, will put pressure on the national economy," said an official of the finance ministry.

He said the adviser already had talks with high officials of the ministry on ways to face the economic pressures and on resizing the budget.

Finance Adviser Mirza Azizul Islam placed the national budget of Tk 87,137 crore in June with an estimated gross domestic product (GDP) growth of 7 percent for the current fiscal, which also has a target of keeping the inflation rate below 7 percent.

But, many quarters termed the growth target as too ambitious and the International Monetary Fund (IMF) in September projected that the GDP growth will not go beyond 5.5 percent.

In August, Finance Secretary Dr Mohammad Tareque said the state of the economy was facing major shocks from both sides internal as well as external. External shocks resulted from international price hikes of essential commodities and petroleum products while he identified the floods of July to August as the cause for the internal shock.

The price of a barrel of oil on the international market had been around $70 in July when the fiscal year started, reaching $100 a barrel last week. Bangladesh spent $20 billion to import petroleum products last year, with a huge subsidy from its government, prompting Bangladesh Petroleum Corporation (BPC) sources to say that their net loss in the current fiscal might exceed Tk 4,000 crore.

According to the data available at the end of October, government subsidies for purchasing and distributing petroleum products increased by 40 percent a litre compared to the figure in April.

For urea, the government currently provides Tk 25 a kilogram as subsidy, with the chance of subsidising an amount of Tk 3,600 crore by the end of the current fiscal for the purpose, agricultural ministry sources said.

Finance ministry sources said the government had a plan to curb losses from subsidising fuel and fertiliser, by adjusting the prices of petroleum products and natural gas by the mid-fiscal.

"The government is in a dilemma over increasing the prices of oil and natural gas, considering public reaction," said a source adding if the government hikes up fuel prices, it will trigger another spate of price spiral of commodities.

"The government walks a tightrope with public sufferings on one side and a huge budgetary pressure on the other," said a high official of the finance ministry.

Amid demands for additional allocation from different ministries, the finance division in a note to the finance adviser in September said the budget deficit is likely to reach Tk 36,468 crore by the end of the current fiscal if the government does not adjust the prices of various subsidised products.

The note said the current fiscal had begun with a budget deficit of Tk 29,836 crore which would force the government to borrow abnormally large sums from the banking sector, increasing the interest rate and inflation rate.

Sources said the situation became more complicated in recent times.

Besides, food production in the country was not satisfactory in the last fiscal while food prices are getting higher almost by the day on the international market. Food import increased by 269 percent between July and September compared to the same period of the last fiscal.

Opening of letter of credits increased by 400 percent in the same period, the data show.

Prices of petroleum products and the increase in food import are putting pressures on foreign currency reserve also, which was reduced to $5 billion on Monday from the $5.5 billion in the beginning of the month.

According to government data, the July-August floods brought a damage of about Tk 2,700 crore. During the two phases of the floods, the loss in aman rice production was about 10 lakh metric tons, the data show. The agricultural ministry has a preliminary estimate that Sidr has caused a loss of at least 6 lakh metric tons of aman crops in the coastal areas.

Prices of rice, and other staple food of the country, have been increasing every month amid low domestic production and high prices on the international market.

A look into the current prices of essential food items on the local market revealed that prices of rice increased between 29 percent and 37 percent in the last one year.

The price of wheat flour increased by 49 to 63 percent, while the price of soybean oil increased by 50 to 62 percent in the last one month, Trading Corporation of Bangladesh (TCB) data show.

Responding to the floods, the government reallocated a food safety net budget of Tk 2,100 crore to meet the immediate relief requirements while another Tk 2,100 crore as maintenance budget was reallocated for post-flood rehabilitation programmes.

In such a situation, Mustafizur Rahman, executive director of the Centre for Policy Dialogue (CPD) said the government needs to re-fix its priority projects in the budget to save money. He also suggested increasing food import both in public and private sectors to maintain steady food supply.

He asked the government to restart open market sale (OMS) of food, targeting the poor across the country, and to provide free food to the cyclone affected people at least for the next few months.

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