Fiscal risks are rising in Bangladesh as also other low income countries as a new report released yesterday raised the concern.
This is due to declined fiscal space as revenue mobilisation has lagged fast spending growth, according to the International Monetary Fund report titled “April 2014 Fiscal Monitor.”
Officials in Bangladesh said the country’s fiscal deficit would increase to 5% of GDP in the current fiscal year ending in June 2014 from its annual budget estimate of 4.6% due to increased expenditure outlay in the revised annual development programme (ADP).
It would force the government to go for increased borrowing from the banking system as the revenue collection remains well below the target, a senior official told the Dhaka Tribune yesterday. “It would create a crowding out effect.”
According to the IMF’s fiscal report Bangladesh’s overall fiscal balance remains negative and it would deepen further to (–) 3.8% of GDP in the current fiscal year while government revenue would be 13% of GDP and expenditure 16.8% of GDP.
The report said, in about half of the low-income country sample, debt ratios are projected to keep increasing through 2019. In the Bangladesh case, the gross debt would stand at 38.7% of GDP.
“The increase in debt is expected to be sizeable in some of the so-called Frontier LICs,” Sanjeev Gupta, IMF Fiscal Affairs Department’s acting director, said in an initial statement of a press conference in Washington yesterday.
Debt build up has had adverse consequences for LICs in the past because it was not used for growth-enhancing investments; so it seems warranted to wonder whether the story will be different this time.
“In other words, has the new borrowing been used to increase productive spending?” Gupta said. The evidence is mixed. In many countries, large increases in debt have not been associated with higher capital spending (e.g., Honduras, Sudan, and Zambia).
This raises concerns about the quality of spending in some low-income countries, and point out to the need to strengthen institutional capacity to raise the efficiency of spending.
The low-income countries should step up revenue mobilisation and higher expenditure efficiency to restore fiscal buffers and to create room for much needed public services, Gupta said.
In the emerging economies, the vulnerabilities are also on the rise while remaining elevated in the advanced economies.
In emerging economies and low-income countries, expenditure reform can help respond to growing demands for better delivery of public services. The challenge for policymakers around the globe is to ensure the sustainability of expenditure programs, maximise the efficiency of public spending, and foster an equitable access to public services.
“Reaching these goals is not easy and will require mobilising political and social support,” said Gupta.
The report suggested that any spending reform must ensure the sustainability of the major budget items, particularly the government wage bill and social benefits. In emerging markets and low-income countries these two items constitute 60% of total spending.
The expenditure reforms should seek to achieve efficiency gains, while preserving equity. For instance, this could be achieved through better targeting of social programs and promoting greater competition in the health care and education sectors.