Economy may be at high risk

Depreciation of taka against dollar

Mahfuz Emran: In the future, the country’s economy may be at great risk if the value of the taka against the dollar falls. Because the government’s debt and subsidy costs will increase. Import costs will also come under pressure. This will increase the huge financial burden of the government. Such concerns are highlighted in the Financial Risk and Mitigation Strategy Paper. The report was prepared by the Ministry of Finance on the advice of the International Fund (IMF). which is expressed in medium-term macroeconomic policy statements. Highlighting the risk of currency devaluation, it is said that if the value of domestic currency decreases by one taka against the US dollar, additional subsidy on electricity will have to be paid to the tune of Tk 473 crore in the next financial year. And if the value of taka falls by 10 percent, the total debt of the government will increase by Tk 3 thousand 800 crore, which may create a huge liability for the government.
The report titled ‘Financial Risks and Mitigation Strategies’ highlights the risks that may come to the economy in the next financial year and strategies to mitigate them. There, the risks associated with the main financial activities of the government have been discussed. The IMF framework (IMF-2008) is followed in identifying these financial risks.
Economist MK Mujeri said that currency exchange rates are fluctuating. Another risk is that in the future the exchange rate will be market based ie left to the market. At that time, the value of the dollar may increase slightly. If that happens, the government’s subsidy expenditure, revenue sector, import sector, debt will give a big shock to the overall economy.
An official of the finance department involved in this process said that what kind of risk may come in the economic sector has been highlighted; In addition, the strategies to eliminate it are also said. This can be called a kind of advance preparation. And it has been done.
Incidentally, during the formulation of the budget in the current financial year (Appeal-May-2022), all calculations were made with the value of the US dollar at Tk 86. But the global crisis put pressure on the reserves. Along with this, there is a dollar crisis. This causes a huge change in the currency exchange rate. As a result, there is a huge pressure on the financial sector.
According to sources, the Financial Risk and Mitigation Strategy report states that currency exchange rate fluctuations can create a variety of risks. The recent devaluation of the taka has affected the fiscal balance and the overall volume of credit. Not only this, it is having a negative impact on revenue collection and government expenditure. In terms of expenditure, subsidy payment on import of fertilizers, additional payment to BPC for import of fuel oil, annual development program (ADP) share of foreign financing (capital expenditure) and foreign debt repayment expenditure increased. In addition, Russia-Ukraine war, Covid-19, decline in exports and remittances and devaluation (depreciation) increase the cost of imports and debt servicing.
In the strategy paper, there is concern about subsidy expenditure. That said, currency exchange rates can trigger subsidy spending at any time. At the beginning of the current (2022-23) fiscal year, due to the devaluation of the taka and the increase in prices in the world market, Tk 40 thousand 265 crores of subsidy has been allocated. But it was seen that the value of the dollar increased from 86 taka to 115 taka. Due to the further increase in the subsidy cost, the allocation in the current revised budget has been increased to Tk 50 thousand 926 crores. In this way, Tk 66 thousand 762 crores have been allocated for subsidy in the proposed budget. Apart from this, the currency exchange rate has a negative impact on the mega project. Because these projects are heavily dependent on imported goods. The report further states that this increase in cost may create additional financial burden on the projects.
The finance department is conducting a study on the negative impact of currency exchange rate fluctuations on government and government-guaranteed loans. It is shown there that the target of taking government and government guaranteed loans in the next fiscal year 2023-24 is Tk 36 thousand 400 crores. In addition, the loan targets for 2024-25 and 2025-26 financial years are Tk 36,600 crore and Tk 37,100 crore. The survey shows the debt calculation for the financial year 2023-24. It is said that in the next fiscal year, if the value of the domestic currency against the dollar falls by 10 percent, then the government’s debt target will increase from Tk 36,400 crore to Tk 40,200 crore. This will increase the additional debt by Tk 3 thousand 800 crores. On the opposite side, if the value of the taka falls by 10 percent at the same time, the debt cost of the government will decrease by Tk 3 thousand 100 crores. It said that this erratic currency exchange rate could increase the financial burden in the medium term.