Twin deficits in Bangladesh
The twin deficits hypothesis says that when a government runs up debt (that is, budget is continuously in deficit), the country also runs up debts to foreigners (that is, the current account deficit widens) — see here for detail. Of course, this being a macroeconomic concept, there are many caveats. Like everything else in the discipline, whether the hypothesis holds depends on a lot of things.
Does it hold for today’s Bangladesh? The popular story around the country’s current economic woes goes like this — government is buying expensive electricity from the rental power suppliers and selling to the households cheaply at a subsidised price, widening the budget deficit; meanwhile, the power suppliers are buying expensive fuel from overseas, which is driving up imports, and pushing the current account into deficit.
Can we see this in the data?
Answers over the fold, but first some gripe. CEIC has stopped publishing whole bunch of things from Bangladesh. This means I have to troll through pdf versions of Bangladesh Bank or government publications. Not fun.
Firstly, according to pdf files from the Bank and the Ministry of Finance, the government is continuing to rake up debt — unfortunately, I don’t have excel friendly data to update this analysis, but much of it still holds.
Why is the government raking up debt? Not because of taxes. In the first eight months of 2011-12, the government collected 537 billion taka in taxes, compared with 458 billion taka in the equivalent period in 2010-11. This is an increase of 17%, faster than the annual average of 15% in the past decade – see the chart below: red line decade average, blue bars yearly growth, black bar year-to-date Feb 2012 compared with a year earlier.
What about expenditure? The chart below provides the same analysis. In the first six months of the year, the government spent 487 billion taka, 32% higher than similar period last financial year. That growth rate is much faster than the 7% average over the past decade. And both development and non-development expenditure are growing at similar paces.
Okay, what’s driving the spending frenzy? And what the hell was the 1/11 regime spending their money on?
CEIC used to give breakdown by ministries. But they don’t do it any more. Finance Ministry does publish it, but, you guessed it, pdf …. I’ll look into it, but no promises.
What that means is, revenue is doing alright, but expenditure is growing much faster than the norm. So far, this is consistent with the popular story.
What about the other deficit? Well, that’s where it gets a bit murky.
Bangladesh ran its largest monthly current account deficit on record in September 2011. The 75 billion taka monthly deficit is a cause for alarm? Maybe. But the previous month was a record current account surplus of 65 billion taka.
Monthly current account data is very volatile, and recent quarterly data isn’t available yet. However, I do have monthly exports, imports, private current transfer (a good proxy for remittance — CEIC used to publish detailed remittance data, but has stopped).
Smoothing the data by taking three month moving average, through the year growth in all three variables seem to have been moderate in recent months. Both exports and imports growth have eased compared with 2010-11. And remittances growth isn’t as high as it was in the mid-2000s.
But neither export nor remittance seem to have collapsed. And imports haven’t really spiked
So, where does all this leave us?
It seems to me that there is as yet no smoking gun supporting the popular story. Government definitely seems to be spending a lot, but it’s not clear on what. And there is nothing in the external sector that causes immediate alarm.