Country in the grip of ‘twin deficits’

Fiscal deficits in developing economies including Bangladesh have direct impact on the current account imbalance, reflecting the 'twin-deficits'.

This new relationship was found in the latest study conducted by the International Monetary Fund (IMF) on 114 developing economies, including Bangladesh.

When an economy goes through both the fiscal deficit and the current account deficit (CAD) it is referred to as having 'twin deficits'.

Twin deficits phenomena returned to Bangladesh in the fiscal year, 2016-17, (FY'17) after five years and further widened in FY'18.

The country last experienced the twin deficits in FY'12.

Economists familiar with the development told the FE that the current deficit has been worsening since the mega projects were taken up, which in turn had been boosting the imports.

Many of them said that the capital flight might be involved in worsening the twin deficits.

In the meantime, the 'twin deficits' situation is expected to worsen further, as the central bank projects the current deficit may exceed US$ 10 billion or equivalent to over 3.5 per cent of the GDP this fiscal year.

The Bangladesh Bank (BB), in its latest Monetary Policy Statement, said the current account is widening due to higher trade deficit despite a rebound in the receipt of remittances.

The fiscal deficit is projected at nearly 5.0 per cent this fiscal year to June 30 next.

The central bank, in its latest monetary policy statement, predicted the current deficit may stand at approximately $ 10.12 billion.

Dr Ahsan H Mansur, executive director at the private think-tank Policy Research Institute of Bangladesh (PRI), told the FE there is a direct and visible relationship between the fiscal deficit and the current imbalance.

"The relationship is direct and instantaneous," he said, analysing the IMF study.

This has emerged since 2017 when many mega projects were launched, he noted.

"The current account surplus, which is now a past event and the present reality has been evident since 2017."

There is no breakdown for the Padma bridge imports.

But almost all materials including steel structures are imported from China. The payment for services required for the construction of the large bridge is also high.

All technical persons were hired from China.

There is another mega project -- Karnaphuli tunnel -- is being constructed in the port city of Chittagong and the materials are being imported from China, so are services.

The BB statistics show that the import payment for iron, steel and other base metals have risen by more than 24 per cent in 11 months to May 2018 from the same period in fiscal year 2017.

It shows that import payment for the head stood at $ 4.39 billion in July-May, 2017-18 period against $ 3.534 billion during the same period a year earlier.

Similarly, the import trend of clinker also remained upward.

The raw material is used for making cement and it is believed to be an important indirect import.

Dr Mansur said the government should now be careful about taking up its projects, especially against those which raise the imports.

"The IMF study is a message for Bangladesh although Bangladesh mostly fails to spend its allocation which it earmarks in the budget estimation."

The PRI economist, who was the IMF's middle-east division chief, said Bangladesh is slowly moving towards being debt-trapped if the present situation of its lending is considered.

The cheap funding, especially from the World Bank, is also a thing of the past, so projects funding is critically important for Bangladesh and should avoid 'reckless' borrowing, he said.

Dr Mansur, however, suggested ensuring economic viability of mega projects.

"We need to be ensured there will be a good rate of return from the projects and there will no future burden."

He also said Bangladesh should now focus on equity financing for its projects instead of debt.

"This is true for Bangladesh as higher economic growth is likely to lead more deficits in government budget as well as in the current account imbalance, which will put more stress on our foreign exchange reserves," Dr AK Enamul Haque, chairperson and a professor of Economics at East-West University, told the FE

Dr Haque said for Bangladesh there is another risk because the current growth in the GDP is led by significant public investment in mega projects and in many cases expenditure in these projects are not linked with increase in employment growth in the economy.

"To my view, for Bangladesh, the most difficult issue is to ensure higher employment growth as we proceed to be one of middle-income countries in the world", Dr Haque said.

On the other hand, Dr Zahid Hussain, of Dhaka office of the World Bank, said Bangladesh's savings is less than that of investment implying that the money may siphon-off money from the country.

The gross national savings in the just-concluded fiscal year (2017-18) was just 28.07 per cent of the GDP against investment (public and private) of 31.47 per cent of the GDP.

Dr Hussain, lead economist at the Dhaka office of the WB, told the FE the 'unusual behaviour' in the country's gross national savings and investment reflects that there is a capital flight.

He hinted that there are many risks associated with twin-deficits; it may erode foreign exchange reserves, depreciate exchange rate and push up inflation in the economy.

"Due to worsening current account deficit the authorities may rapidly depreciate the currency or increase foreign borrowings to finance the external gap".

However, by using unanticipated government spending shocks for an unbalanced panel of 114 developing economies from 1990 to 2015, the IMF found that a one per cent of GDP unanticipated improvement in the government budget balance improves, on average, the current account balance by 0.8 percentage point of the GDP.

The study released more than a week back, provides the new evidence of the existence of the twin deficits in developing economies.

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