Without augmentation of foreign aid flow, high export growth and sustained remittance flow the external balance may experience severe pressure in immediate future, says a CPD report titled "State of the Bangladesh Economy in FY06: Early Signals and Immediate Outlook."

The report released yesterday suggests that the government will need a sizeable package of foreign financing to implement its ADP (annual development programme) and sustain the normal activities of the economy.

Referring to the large imbalance in deficit financing of the budget and balance of payment, the CPD observed that the government should not take any steps, which may jeopardise economic stability putting the next caretaker government in trouble.

As a result of a drastic shortfall in foreign financing, domestic sources contributed to 90.6 percent of the overall deficit financing, while the rest 9.4 percent came as foreign financing during the July-October period of FY06.

During the comparable period of FY05, the scenario was totally opposite with a domestic and foreign financing ratio of (-) 23:123 percent, the report says.

CPD Executive Director Debapriya Bhattachariya emphasised a pragmatic transitional package for collecting foreign funds, without which the caretaker government will find itself in a helpless position. Coming to power the caretaker government should find a reasonably strong economic situation, he told the report-launching press briefing.

The CPD report that analysed the economic condition of the last six months describes the fiscal deficit situation as "...a very interesting as well as a worrying story." It cautioned that such imbalance may further flare up the inflationary pressure.

Debapriya said since 2006 is the election year, public expenditure is also going to rise significantly. "So, the government should not take any steps that spoil the development possibilities in the midterm," he suggested.

The report suggests a six-channel approach to tackle the situation. They are faster disbursement of the project aid; collecting $350-500 million from the international financial institutions for budgetary support; putting together energy-special foreign aid packages for targeted use; improving the forex reserve by inducing the friendly Middle Eastern countries to keep a couple of billion dollars with the Bangladesh Bank at a reasonable interest rate; the government may borrow foreign currencies from foreign banks provided that is spent justifiably; and the government may liberalise the foreign exchange regulations to attract foreign remittances, provided it is compatible with the Anti-Money Laundering Act.

The CPD report says total budget deficit during the July-October period of FY06 stood at 3.1 percent of GDP, compared to 2.3 percent during the corresponding period of FY05.

According to the CPD report, during the July-October of FY06, deficit in the overall balance stood at $123 million as against a surplus of $490 million during the same period of FY05. Therefore, the overall balance of payment situation has deteriorated significantly during the early months of FY06.

However, the report says the weakness of both fiscal balance and balance of payment during the early months of FY06 still persists. The common thread of concern for both the balances remains less than programmed inflow of foreign aid.

Among the outcome variables, relatively high inflation rate is the other major concern for the remainder part of the current fiscal year, the CPD observes.

"The key to the current problematic macroeconomic situation is held by the level and nature of the net foreign financing Bangladesh would receive in the next 3-4 months."

The report suggests that the government needs to revise its budgetary and PRSP targets at the earliest to evolve a pragmatic package. "The policy autonomy enjoyed by the government remains heavily constrained as the economy is pre-designed to function under adjustment loan of the international financial institutions. Nonetheless, this package has to lay a stable and secure foundation for the transitional government which is expected to take charge in the early part of FY07," the report said.