Quasi-fiscal activities breed budgetary, fiscal distortions

There exist numerous quasi-fiscal activities in the country which adversely impact the budget, sometimes creating financial distortions.

Experts believe such factors also affect profitability of the central bank and some other regulators, leading to their poor contribution to the consolidated fund of the government.

Among the quasi-fiscals are subsidised lending, credit ceiling, bailout packages, exchange-rate guarantees, charging less than commercial prices, provision of non-commercial purposes and the like.

People familiar with the matter told the FE that these activities are also undermining transparency of the government's fiscal activities to a great extent.

The central bank of Bangladesh provides many subsidised lending to small and medium enterprises (SMEs) and the agricultural sector and these are not synchronised with the national budget and financial statements.

As a result, the government cannot assess its subsidy activities properly.

Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), told the FE that there are some quasi-fiscal activities which are required in the interest of the economy but should be incorporated into government's financial statements.

He feels that some of such activities should be stopped to ensure fair practice and give efficiency a chance to grow.

Dr Mansur said there are some credit ceilings for some sectors like the agricultural sector that also impact the economic activities as some need higher volume of loans and some others lower.

"If we give a ceiling to a particular sector that cannot be justified as some need much if they have large-size plants," he said.

"Rescue operations by the government like the recapitalisation of the state-owned banks are also examples which help grow inefficiency, and should be stopped," the economist said. Exchange-rate guarantee mostly happens with the foreign companies involved in power projects where government promises to pay at a rate which must avoid fluctuation in exchange rates.

In such cases the government has to pay from its budget at a time when the exchange rate of the local currency depreciates.

The government also charges less than commercial prices in case of food prices and in lending to the state-owned enterprises.

Dr Mansur said such type of funding by distorting the market rates bleeds the national exchequer.

The government funds many SOEs and their lending rates are too low which also cut down revenues to the national exchequer.

Dr S. R. Osmani, a visiting Professor at BRAC University, told the FE that the government should include in separate budget documents, during the presentation of the national budget, such activities.

"We know about the taxes and expenditures but there are more explicit and implicit expenditures in a financial year due to such activities, and they must be incorporated in the budget documents."

Dr Osmani, who teaches Development Economics at Ulster University in the United Kingdom, told the FE that this is very much important in terms of transparency as the people have the right to know the actual expenditures and losses for such activities.

Dr Mohammed Tareq, a former secretary at the finance division, said the Bangladesh Bank's quasi-fiscal activities need to be incorporated into the national financial statement as such activities make the regulator incur lower earnings.

If the Bangladesh Bank earns more, he noted, its contributions to the national exchequer will expand in terms of non-tax revenues.

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