Deficit financing falls

The deficit financing fell 117 percent year-on-year in the first six months of the current fiscal year, on the back of lower subsidy expenditure.
In the July-December period of fiscal 2012-13, deficit financing stood at Tk 14,353 crore, down from the Tk 22,331 crore in the same period a year ago.
Deficit financing, essentially, is the practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.
Deficit financing in Bangladesh, where capital markets are underdeveloped, may place the government in debt to foreign creditors
“The positive aspect in this year's deficit financing is the higher foreign financing and the lower bank borrowing,” a finance ministry official said.
The cost of borrowing from foreign sources is low. In most cases, it is below 1 percent, while for domestic sources the interest rate is about 7 percent on average.
Borrowing from domestic sources increases the government expenditure in the budget as interest payment soars up, and is discouraged by economists.
In the past six months, net foreign financing increased 117 percent -- but domestic borrowing fell about 65 percent.
Net foreign financing stood at Tk 7,871 crore in the first seven months, up from Tk 3,627 crore recorded for the same period last fiscal year.
The government borrowed Tk 6,482 crore from domestic sources between July and December 2012, while the amount in the same period last fiscal year was Tk 18,703 crore, according to central bank statistics.
Of the sum, Tk 5,244 crore came from banks, down 70 percent year-on-year.
“Subsidy expenditure on petroleum, fuel, fertiliser, electricity has yet to take off in full swing, but bank borrowings will increase when it does in the coming months,” the official said.
The government set a target to borrow Tk 20,100 crore from the banking system for the current fiscal year.
“Bank borrowing will remain within the budgetary target this time as foreign aid disbursement and sale of savings instrument have also increased.”
Sales of savings instrument increased 44 percent year-on-year to Tk 11,558 crore in the first seven months of the current fiscal year, while net foreign aid receipts rose 58 percent to $870.82 million.
The government in a commitment to the IMF has said it will contain subsidy cost by making timely adjustments of fuel, electricity and fertiliser prices along with necessary social safety guards, to avoid crowding-out priority spending and pushing up domestic borrowing.