Discuss the domestic sources of government borrowing in Bangladesh and their likely effect on the economy?

 The acquisition of funds through the financial markets by the government sector which are used to finance government expenditures. In terms of the simple circular flow model, this is one of two basic demands for household saving diverted into financial markets. The other is investment borrowing. Government borrowing is also one of two methods of financing government expenditures. The other is taxes.

 Government borrowing is one of two sources of funds used by the government to pay for government expenditures. The primary source of financing comes from taxes. Government borrowing is necessary when the government sector spends more than it  collects in taxes.

Government borrowing by the government sector can be illustrated with the circular flowmodel. The circular flow captures the continuous movement of

production, consumption, income, and factor payments between producers and consumers.

The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers. The government sector is positioned in the middle of the diagram and the foreign sector is at the very top.

The product markets near the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite

direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction. The financial markets located just above the resource markets divert saving from the household sector to business and government borrowing.

There are some economic risks associated with a high level of government borrowing:

•    If the economy has only a small supply of savings, increased government borrowing may force up interest rates and crowd out private sector investment

•    Higher borrowing in the long-run requires an increase in the tax burden - this may dampen demand and economic growth

•    If the national  debt increases,  annual  interest  payments  on the debt goes up - money that might have been spent in priority areas

Why does government borrow?

There are many different reasons for government borrowing

 •    Tax revenues are less than predicted. Borrowing means the government can meet a temporary shortfall by borrowing, rather than having to immediately cut back on spending. Like an overdraft facility, government borrowing gives the government more flexibility and means they can maintain wages and spending commitments without having to keep cutting spending.

•    Automatic fiscal stabilizers. In a recession, government tax revenues fall (e.g. people earn less so pay less income tax). Also the government has to spend more on unemployment benefits. Therefore, in an economic downturn, borrowing rises. To eliminate borrowing in a recession would make the recession worse and increase inequality. If the government couldn’t borrow in a recession, the unemployed may not get any benefits and have no income.

•    Investment. The government may invest in public sector investment. For example, building schools, hospitals, better roads. This investment can give a return on the investment which helps to boost productive capacity and increase economic growth.  In this case, the government is acting like a firm who takes out a loan to finance investment. 

•    Political. The biggest tendency to borrow comes from political pressures. Voters generally like to hear the promise of lower taxes  and increasing spending. A manifesto to tackle a budget deficit (higher taxes and lower spending) is unlikely to be popular. Voters often are supportive of the general idea of reducing government debt, but when it comes to actual policies like lower benefits, higher pension age, increased VAT rate, then it is likely to hit some particular pressure group with a vested interest in maintaining low tax and spending. 

•    War. During a war, government spending is stretched leading to higher borrowing. The highest rates of borrowing occurred during the two world wars. Also, during wars, it may be easier to sell bonds as you can play the patriotic card to encourage people to finance government borrowing. 

•    It’s Cheap. Governments like the UK can usually borrow at very low interest rates, especially during an economic downturn. This is because people have confidence government bonds are secure and so are willing to lend at low interest rates. 

•    Economic Growth tends to reduce real debt burden. In the early 1950s, UK public sector debt was over 200% of GDP. However, over next few decades, economic growth helped to reduce the burden of debt. Assuming constant economic growth of 3% a year, the government can borrow more, but maintain the same % of tax revenue on interest payments

State and explain the component of money supply in Bangladesh

 Economics defines money supply as the total assets of stock that is accepted as an exchange media at a given time in an economy. Money supply has a standardized representation with three monetary components which has been delineated as M0, M1 and M2.

  

The M0 component comprises of the currency which is in the hands of the public, the statutory deposits of the banks held by the central bank and itscash reserves. This component represents central bank’s monetary liabilities. The M0 is, thus, generally referred to as the reserve money or monetary base of the economy. The next standard component, M1 includes the currency that is present outside the banking system and the transaction currency of the commercial bank current account liabilities. This component may include foreign currency deposits which are needed in domestic transactions.

 

 The M2 component of money supply tries to expand the liquid assets range to add up few interest earning items like fixed deposits, saving deposits or time deposits. This is a broad component of money supply and takes into account M1, short term savings, deposit certificates, transferable foreign currency deposits as well as repurchase agreements. Some countries have extended the broad component of money supply beyond M2.

 

The M0, M1 and M2 are considered the primary money supply components or monetary aggregates which satisfy the liquidity criteria. However, there can be other cases where the broader measurements are required. For example, when there are less liquid financial assets, M3 and M4 components are taken into account.