Public Expenditure. For FY06, the GDP-public expenditure ratio was 15.5 per cent. It may be recalled that Bangladesh is distinguished by low public expenditure-GDP ratio among comparable regional countries (where the matching share is about 18-20 per cent). Accordingly, there is a need to enhance the level of public expenditure, but definitely without compromising its quality and the fiscal stability.

Revenue Expenditure. The revenue expenditure for FY06 amounted to 9 per cent of GDP. A total of Tk. 39536 crore has been earmarked as revenue expenditure for FY07. As there is no real time data available for the first quarter of the current fiscal year, it is difficult to analyse the trend. Although revenue expenditures are very rigid in structure, there is apprehension that it has overshot target particularly in the case of debt servicing due to growing borrowing by the government, and in the case of salaries and allowances since the government had committed to higher payments to teachers and other government service holders. Constant monitoring of the revenue expenditures and product expenditures decisions (e.g. in the case of Block Allocations) should be the path to be followed by the CTG.

Containing the borrowing by the government should be a singular objective of the CTG. It may be reminded that space of the public expenditure is getting increasingly squeezed as debt servicing payments are eating up an incremental share of revenue allocation.

Annual Development Programme (ADP). The ADP-GDP ratio stood at 5.2 per cent during FY06. The achieved ratio was lower than the PRSP target of 5.9 per cent. Thus, there remains an unmet public investment need in Bangladesh economy. However, this does not take away our concern about inclusion of unviable projects in the ADP arising out of political consideration in a pre-election situation.

The proposed ADP for FY07 was set at a lower target (5.6 per cent of GDP) than the PRSP target (6.2 per cent of GDP). The prospect of having a respectable implementation level of ADP in FY07 seems to be a remote possibility given the evolving political transition.

A total number of 886 projects amounting to Tk. 26,000 crore are being financed under the ADP in FY07, of which 428 were included without approval and allocation. A total of 66 projects amounting to Tk. 21,059 crore were approved in seven meetings of ECNEC held during the first four months of the current fiscal (July-October of FY07). The CTG needs to take a close look at these projects and reconfirm their economic justification before fund disbursement. The approved amount equals to more than 80 per cent of the total amount earmarked for ADP for FY07. On the other hand, the purchase sub-committee in its six meetings held between July 2006 and October 2006 approved a total number of 29 projects.

Budget Deficit. Net fiscal deficit during the FY06 stood at (-) 3.2 per cent of GDP which was lower than the target set by the PRSP (4.5 per cent of GDP). Domestic financing underwrote about 60 per cent and foreign financing about 40 per cent of the fiscal deficit. Between the sources of the domestic financing, the banking system contributed double the amount provided by the non-bank system. The domestic financing was substantially higher, at Tk. 8,426.70 crore in FY06, when compared to the matching amount for FY05 (Tk. 6,014.16 crore), registering 40.1 per cent of growth.

During the first two months of FY07, budget deficit experienced a growth of 41.3 per cent over the matching period of the previous fiscal year, i.e. Tk. 2354.27 crore in July-August of FY07 compared to Tk. 1666.58 crore in July-August FY06. The budget deficit was 0.57 per cent as a share of GDP vis-à-vis 0.40 per cent for the same period of FY06. One is surprised by such an extraordinary growth of budget deficit in the early part of FY07. Such a shortfall cannot be explained only by shortfall in revenue collection and by a low off-take of foreign aid (see later). There must have been a high spending spree during the first three months of the current fiscal year which led to such high domestic borrowing.

Domestic financing posted a robust 111.6 per cent growth. The figure of domestic financing was already higher in the first two months (Tk. 20.51 billion) compared to the PRGF target of Tk. 16 billion for July-September of the current fiscal year.

A more worrying picture is that net borrowing by the government from the banking system experienced a growth of 130.7 per cent, while the non-banking source posted a 88.4 per cent growth over the matched figure of the previous year. On the other hand, net foreign financing experienced a negative growth of (-) 56.55 per cent during July-August of FY07.

Thus, reducing the budget deficit will be one of the most important fiscal objectives of the CTG. CTG will need to pursue this objective by increasing revenue (particularly more customs duty), curbing expenditure, curtailing government borrowing and increasing foreign financing.

(concluded)

The writer is the executive director of the Centre for Policy Dialogue (CPD).