The devil is in the details
Once the law goes into effect, what may be the impact on liquidity in the banking system, the SOEs and the central government budget?
The draft law passed on September 2, 2019 to siphon off the “excess” cash of 68 self-governed agencies has raised a lot of questions on its likely impact. As is always the case, the devil is always in the details that are yet to be available. Based on what is so far known, we can speculate about what may happen and get some idea about what are the known unknowns in this case.
Once the law goes into effect, what may be the impact on liquidity in the banking system, the SOEs and the central government budget?
The money is currently being held in the commercial banks mostly in the form of term deposits. Anecdotally, the information is that 60 percent is with the state-owned banks and the rest in private banks. When the SOEs make the transfer, the money will move from the commercial banking system to the government’s Treasury Single Account held with the Bangladesh Bank. This will cause a significant loss of liquidity in the banking system until the government spends the money. Other things equal, it will further strain the ability of the banking system to meet the demand for credit from the private sector and the government, thus exacerbating the upward pressure on deposit and lending rates.
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The SOE capital base will be eroded no matter what accounting label is used to describe the fund transfer. This will constrain their ability to finance their self-financed projects. In the FY20 budget, their investment programme amounts to Tk123.9 billion and the total cost of the projects underlying this investment programme is likely to be order of magnitude larger. Since the transferable surplus will be determined taking into account their operational costs and contingency needs (to be assessed as 25 percent of their estimated operational cost), general provident fund and pension, it will not be too surprising if these institutions relax somewhat whatever discipline they maintained on the operational expenditures. Perhaps get some better furniture and interior decoration or have a more comfortable staff retreat and so on. Raising the level of operating expenditure will have the additional benefit of enabling them to retain a larger proportion of their own funds.
The impact on the government budget will depend on how the government decides to use the money. In theory, it could either finance the expenditures already budgeted or take on additional expenditures in the revised FY20 budget (assuming the law goes into effect soon enough) or in the FY21 budget. If it chooses to finance the existing expenditure plan, the budget deficit will decline and, consequently, the government’s need for borrowing from the banking system will also decline. This will alleviate, at least partially, the erosion of bank liquidity due to transfer of the surplus to the government’s consolidated fund.
However, what is most likely is that the government will use the money to take on additional expenditures either to fund development projects and/or the recurrent expenditures such as subsidies and social transfers. In doing so it will be important to keep in mind that this additional money is a one-off transfer. It will not be prudent to take on multi-year expenditure programmes based on this transfer unless such programmes are fully funded from the surplus available from the self-governed agencies. Equally important, experience shows while it is not too difficult to come up with new expenditure plans, prudent execution is not as easy. Horror stories on Rooppur pillows and, more recently, health ministry books aside, if the usual time over-runs cause delays in spending, why take liquidity away from the banking system when liquidity is already short?
One of the known unknowns is when the law will be finalised and get implemented. Sometimes, it takes years to get a law finally approved and then passed in parliament and sometimes it takes only a few days or months. Another known unknown is how the transfer will be accounted for both in the accounts of the self-governed agencies and in the government budget. Last but not the least, what prompted this move? After all, it goes against the ethos of operational and financial autonomy allowed to these institutions. The whole idea of such autonomy was to subject them to the discipline of operating within their own budget constraints.
