The central bank fears a higher budget deficit this time due to recent floods that induced net additional expenditure. However the impact on domestic financing of deficit is likely to be limited, in case the additional expenditure is financed by incremental foreign assistance, Bangladesh Bank (BB) said in its latest quarterly.

It said since two spells of floods have apparently left a relatively small effect on export activities, external trade and balance of payments are likely to experience a minimal impact.

The quarterly said a number of downside risks remain in the 2007-08 fiscal, which includes adverse impact of hike in oil and commodity prices in the international market.

The quarterly remarked that in light of the floods, the near-term economic outlook in FY08 can be characterised as cautiously optimistic.

While focusing on a substantial human distress, infrastructure damage and immediate economic dislocation because of the floods, the central bank has found that the economy has developed and the authorities’ capacity to manage and deal with natural calamities improved.

Thus, the overall macroeconomic impact is likely to be limited given the adequate and timely public and private sectors response: in particular to restore public services (health, sanitation and water) and rehabilitate damaged infrastructure, supported by additional international assistance, the BB pointed out.

The government’s macroeconomic policy is thus geared towards targeted increase in public expenditure for rehabilitation of infrastructure and public services facilitated by reallocation of existing ADP (annual development programme) and additional quick disbursing international assistance, the quarterly added.

In the short run, Bangladesh Bank has already put some directives in place so that allocation of credit to agriculture sector remains smooth to the demand of that sector.