Govt gearing up to tackle 3 fiscal risks

A model study forearms the government to face three major risks to Bangladesh's fiscal outlook from macroeconomic volatility, sovereign guarantees extended to state-owned enterprises (SOEs) and disaster-related shocks.

According to risk analytics laid down in the latest budget document, under the macroeconomic category, the main concerns are inflation, exchange rate volatility, and export performance.

The Finance Division analysed these risks using a customised tool called Financial Programming and Policy Model, developed by the International Monetary Fund (IMF).

The model suggests a spike in inflation would lead to reduced government spending capability.

With lower expenditure, the fiscal deficit narrows, improving the overall budget balance and helping reduce public debts, according to the analysis.

However, in the case of a policy-rate shock, that is, an increase in interest rates, the model forebodes significant spikes in interest payments with a resultant worsening of the fiscal balance.

Government expenditure is projected to increase rapidly in this scenario on the financial front of the economy.

Regarding exchange-rate shocks, the model indicates that depreciation of the local currency could improve government's fiscal position as a percentage of nominal GDP.

However, it would also increase foreign interest payments and create inflationary pressures on the economy.

"A close relationship was observed between exchange-rate depreciation and annual average point-to-point inflation in the country," it is stated in the analysis.

Potential risks concomitant with the recently adopted floating exchange-rate regime are also taken into account in doing the risk arithmetic.

And a predicted end-result is that the overall impact on public debt and government expenditure would remain moderate.

"Given the steady inflow of remittances, along with moderate export growth and controlled import expansion, the shift to a market-based exchange system is not expected to significantly affect government's fiscal position in the medium term," the risk analytics notes.

Taking into account the recent tariff hikes imposed by the U.S. administration, the official analysts also examined how export shocks affect public finance and the real economy.

They observe that public expenditure tends to rise being fed by export shocks.

The analysis further highlights fiscal risks stemming from sovereign guarantees provided to SOEs.

The government issues sovereign guarantees for loans negotiated by various state-owned enterprises. As of the end of FY2024-25, the total outstanding sovereign guarantees accounted for Tk 1,190.82 billion or over Tk 1.19 trillion.

Natural disasters, particularly floods, were also flagged as a key Achilles' heel in the fiscal ecosystem drawn up by the post-uprising government in the process of economic rebound.

The analysis forecasts disasters could damage infrastructure, reduce agricultural output, and lower private consumption, all of which contribute to a wider fiscal deficit.

However, the impact on the ready-made garment (RMG) sector -- Bangladesh's prime export earner -- is expected to be minimal.

jasimharoon@yashoo.com