Economic profile of bangladesh assignment.2

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Fiscal policy

Fiscal policy is mainly decisions by the President and Congress, usually relating to taxation andgovernment spending, with the goals of full employment, price stability, and economic growth. Bychanging tax laws, the government can effectively modify the amount of disposable incomeavailable to its taxpayers. For example, if taxes were to increase, consumers would have lessdisposable income and in turn would have less money to spend on goods and services. This

difference in disposable income would go to the government instead of going to consumers, whowould pass the money onto companies. Or, the government could choose to increase governmentspending by directly purchasing goods and services from private companies. This would increasethe flow of money through the economy and would eventually increase the disposable incomeavailable to consumers.

In economics, fiscal policy is the use of government spending and revenue collection to influencethe economy. The two main instruments of fiscal policy are government spending and taxation.

Changes in the level and composition of taxation and government spending can impact on thefollowing variables in the economy:

• Aggregate demand and the level of economic activity• The pattern of resource allocation• The distribution of income.

Methods of funding

Governments spend money on a wide variety of things, from the military and police to services likeeducation and healthcare, as well as transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:

Taxation

The benefit from printing money. Such as-

1. Borrowing money from the population, resulting in a fiscal deficit.2. Consumption of fiscal reserves.3. Sale of assets (e.g., land).

Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or consol’s. These pay interest,either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nationmay default on its debts, usually to foreign creditors.

Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local (same currency)

financial instruments, until needed. When income from taxation or other sources falls, as during aneconomic slump, reserves allow spending to continue at the same rate, without incurring additionaldebt.

An economic effect of fiscal policy Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability,full employment and economic growth. Keynesian economics suggests that adjusting governmentspending and tax rates are the best ways to stimulate aggregate demand. This can be used intimes of recession or low economic activity as an essential tool in providing the framework for strong economic growth and working toward full employment. The government can implementthese deficit-spending policies due to its size and prestige and stimulate trade. Some classical and



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neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as theTreasury View [citation needed], and categorically rejected by Keynesian economics.

When governments fund a deficit with the release of government bonds, an increase in interestrates across the market can occur. This is because government borrowing creates higher demandfor credit in the financial markets, causing a lower aggregate demand (AD), contrary to theobjective of a budget deficit. This concept is called crowding out.

LEVELS OF GOVERNMENT

In a democratic system, there are two ways to organize a government: a unitary system and afederal system.

Canada is an excellent example of a federal system of government in which there is one central or federal government and there are ten provincial governments. Underneath the provincialgovernments, there is a patchwork of local government.

In a federal system, both the federal and provincial governments conduct fiscal policy. TheConstitution delineates areas of responsibility for the two levels of government and the SupremeCourt interprets the actions of the different levels of government in light of the Constitution and

other legal precedent to enforce the policy distinctions between the two levels of government.In Canada, one can access the federal government budget online, from the 1997 budget, we cansee the following:

• Federal program spending was budgeted to be C$103.5 Billion or roughly 12% of CanadianAnnual Gross Domestic product. Program spending includes all expenditures on federalareas of responsibility including national defense, external affairs, the RCMP, fisheriessubsidization, regulation, the administration of the tax regime, etc. Program spending alsoincludes transfers made to the provincial governments.

• The operating balance is the difference between program spending and budgetaryrevenues (i.e. taxation, royalties, and customs tariffs). For 1998-1999, this was estimated tobe a surplus of roughly 5% of Canadian Annual GDP. A surplus refers to an excess of revenues over outlays.

• The federal government was still in overall deficit because of interest payments on thestock of outstanding debt. Every year that the federal government has run an overall deficit,they have added to the mountain of debt payable by the people of Canada. In 1997, thetotal government deficit was forecast to be C$17 Billion.

The provincial governments also have their financial results and forecasts accessible over theInternet.

EXPENDITURES AND TAXATION

There are two types of expenditures: money spent on the delivery of goods and services and thetransfer of funds to other levels of government.

All of the money that the government spends has a simulative effect on the economy. Thegovernment is large enough that it can spend during periods of economic contraction therebyhelping to prop up the economy and consumer confidence. It is also very appealing to try andredistribute goods to one group from other groups in the society. This is a very common objectiveof fiscal policy.

The construction of the taxation system is very difficult. Another set of objectives may be to distortproduction as little as possible. That is, in designing the tax code, we may want to develop a set of rules that do not change the relative prices of goods and services (and therefore the decisionsinvestors must make about where to invest and in what industry, etc.).



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BORROWING

A government that wants to provide a great deal of goods and services to its people while nothaving the immediate tax revenue to fund that expenditure can turn to the capital markets toborrow the necessary money. They do this primarily by issuing securities, either Treasury Bills or Treasury Bonds. All levels of government will borrow money at some point. These securities areobligations compelling the government to repay the borrowed amount at maturity and also to payinterest in the form of coupons at specific points in time. Borrowing has a number of effects. If acountry borrows too much money, it has to pay a great deal of interest every year in order toservice that debt. This represents money that could have been used to pay for program spendinginstead. By borrowing money, the government has placed a greater emphasis on spending in thepresent than in the future. It has discounted the value of future expenditure. Depending on howmuch money the citizens of that country or that province save out of their own incomes, theborrowing government must sell its obligations to foreigners. By doing so, the government makesitself vulnerable to the shifting and often volatile sentiment of the international capital markets. If they have a sufficiently large external debt in relation to their GDP (as an indicator of their currentand future capacity to repay), speculators might attack their currency or their country's bondmarkets forcing interest rates higher and causing the value of their economy to degrade in

international terms.

EFFECT on BUDJET

Fiscal policy refers to the overall effect of the budget outcome on economic activity. The threepossible stances of fiscal policy are neutral, expansionary and concretionary:

• A neutral stance of fiscal policy implies a balanced budget where G = T (Governmentspending = Tax revenue). Government spending is fully funded by tax revenue and overallthe budget outcome has a neutral effect on the level of economic activity.

• An expansionary stance of fiscal policy involves a net increase in government spending(G>T) through rises in government spending or a fall in taxation revenue or a combination

of the two. This will lead to a larger budget deficit or a smaller budget surplus than thegovernment previously had, or a deficit if the government previously had a balancedbudget. Expansionary fiscal policy is usually associated with a budget deficit.

• A concretionary fiscal policy (G<T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of thetwo. This would lead to a lower budget deficit or a larger surplus than the governmentpreviously had, or a surplus if the government previously had a balanced budget.Concretionary fiscal policy is usually associated with a surplus.

The commercial banks, because of their potential for central bank refinancing, are also noteffective sources of non-inflationary finance. Given the circumstances, whatever is the size of thefiscal deficit in any particular year, a part of it cannot be financed by external borrowing and,therefore, must be financed out of central bank borrowing. As a result, the essential element of

fiscal deficit in Bangladesh has become such that once a deficit is incurred, government borrowingfrom the Bangladesh Bank became inevitable.

In the early 1990s, the government of Bangladesh undertook some comprehensive steps towardsthe improvement of the country's fiscal front. The major objective of the government fiscal policywas to restrict the growth of current expenditure to a level below the growth of the nominal GDP,thereby making more resources available to support annual development programme (ADP)undertaken in each year. In line with the Enhanced Structural Adjustment Facility (ESAF) of theIMF, a number of reforms were initiated, the most important of which was the introduction of valueadded tax (VAT) in July 1991.



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VAT was introduced at a uniform rate of 15% at the manufacturing-cum-import level. Together withprotection-neutral supplementary duties, this system largely replaced the earlier structure of differentiated sales tax on import and excise duties on domestic goods. In case of personal incometax, the major reforms involved the inclusion of entertainment allowances in the personal incometax base, deduction of investment in approved assets from the tax base, and an introduction of awithholding tax on dividend with limitation of special expenditure within a reasonable limit. Stepswere taken to reduce interest rates on government savings instruments and subsidies for food and

jute. A good number of public sector enterprises were denationalized through sales to the privatesector.

These reform measures resulted in a remarkable improvement in the fiscal situation of Bangladeshafter 1990. The growth of current expenditures was contained below the rate of GDP growth. Taxreform led to an increase in government revenues from much below 10% of GDP in fiscal year 1989-90 to 11% in fiscal year 1991-92. This trend continued and revenue collections reached morethan 12% of GDP by the FY 1994-95. This trend is continuing, although with minor fluctuations.Moreover, this was accompanied by changes in the tax structure of the country, reflected in thedecline of the shares of customs duties and increase in the share of income and profit taxes in thetotal tax revenues in the subsequent period. As a result, the shortage of local funds that hadconstrained in the project implementation capacity of the country and had shrunk the country'sabsorptive capacity for project aid for a long period was largely removed.

The improvement of the government's fiscal performance was reflected in the budgetary outcomeof the country. The overall budget deficit was 8.4% of GDP during the 1980s and came down to5.9% in 1991-92 and thus provided a breathing ground for the government. Up to 1997-98, thebudget deficit could be successfully contained to less than 6%, helping to stabilise the economy toa great extent. But this could not be maintained in the following year due to the devastating andprolonged floods that occurred in the first half of 1998-99. There was a considerable slippage inthe expenditure programme of the government due to floods while revenue collection lagged far behind the target. As a result, the overall budget deficit shot up to 7.8% in the FY 1998-99.Although the government took some steps, the overall deficit remained slightly above 6% in 1999-2000.

Up to 1989-90, foreign aid had financed the lion's share of fiscal deficit of Bangladesh. Since thenthere has been a considerable shift in the sources of funds for financing budget deficit. Domesticsources could provide only 15% of the total deficit during 1989-90. In contrast, in FY 1999-2000,the comparative figures for domestic and foreign sources in funding the budget deficit were 47%and 53% respectively. However, an absolute decline in the flow of external funds on concessionaryterms is also partly attributable to this. Increased dependence on local funds has largely reducedthe uncertainties of the implementation of the budgetary programmed. But this has also increasedthe risk of additional burden of higher interest costs from domestic borrowing.

Efforts to generate increased domestic resources are generally based on various tax reforms aswell as reforms in the financial sector. On the expenditure side, the government has givenincreased emphasis on human resource development and poverty alleviation programmers. Top

priority has been given to improve the quality and coverage of the education system as well ashealth and family planning services, and social safety net programmers to serve vulnerable group.This is demonstrated in the increased budgetary allocation in these heads in recent years.

Now we are going to discuss about our “BANGLADESH BUDGET” proposed for 2009-10.

We have collected different opinions and different researches from different sources.

Here we are going to represent the research of The Financial Express in response to BangladeshBudget 2009-10 published in 13 May, 2009.



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Policy Research Institute-The Financial Express Roundtable on

Macroeconomic Challenges in 2009-10

Budget Priorities and Fiscal Space for Policy Response

13 May, 2009

Dr. Ahsen Mansur, Executive Director, PRI

MACROECONOMIC CHALLENGES IN 2009/10: BUDGET PRIORITIES AND FISCAL SPACE FOR POLICY RESPONSE

Preparations are underway to draft the first budget of the newly elected government. This budget isbeing formulated against the backdrop of global economic recession, slower economic growth andthe need for implementing the political commitments of the new government. Against thisbackground, the presentation covers four broad issues: global economic crisis and macroeconomicenvironment in Bangladesh; projected fiscal outturn for 2008/09; the macroeconomic challengesfor 2009/10; and budget 2009/10 and fiscal policy issues.

During the last several months the global economy experienced a sharp downturn, which ismanifested through severe contraction in global output and international trade, leading to fallingcommodity prices, stock and money market collapse, and an unprecedented rise in job losses.Global leaders have responded strongly to address the crisis by launching fiscal, monetary andfinancial rescue packages in a concerted manner. Coordination among the major central banksand treasury departments has been unprecedented and prompt. Almost all major economies

injected liquidity in the financial markets and engaged in rescue operations of falling financialinstitutions of systemic importance. In the second stage, most of the major economies announcedlarge fiscal stimulus packages to boost domestic demand in the face of depressed consumer sentiment and falling private sector demand at home and abroad. The fiscal stimulus packages of the USA and China are particularly sizable (Table 1).

The current macroeconomic environment in Bangladesh is however somewhat different.Real GDP growth rate will be lower at 5.5-6.0 percent, compared with 6.5 percent targeted under the budget (Figure 1). Despite this slowdown, Bangladesh’s performance has been one of bestglobally. Global recession has certainly affected Bangladesh through the export sector and generalinvestors’ sentiment, which translated into slower manufacturing and service sector activity andlower level of investment (Figure 2). Robust agricultural sector output and strong domestic

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demand, supported by continued strong inflow of workers’ remittances, helped sustain domesticeconomic activity.

Remittances have remained strong and Likely to remain steady. Bangladesh is probably thebest performer globally on the remittance front in 2008/09. The outlook still remains positive, albeitat a slower pace (Figure 3). The oil exporting Middle Eastern countries are likely to continue withtheir massive investment programs as long as crude oil prices remain above $50 per barrel. Wehave to remember that the Saudi budget was done at $52 per barrel even when oil prices wereskyrocketing. Despite the apprehensions, chances of a massive reflow of Bangladeshi workersfrom abroad are rather slim.

Bangladesh has made significant terms-of-trade (TOT) gains. The sharp drop in commodityprices has reduced the import bill by $3.7 billion or 4 percent of GDP in 2008/09 (Table 3a). Onaverage import prices have declined by about 17 percent in 2008/09 over the corresponding year.All major segments of the Bangladesh economy, the government, manufacturers and consumershave benefitted from the TOT gain.



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Government budget is also a significant beneficiary of the TOT gain . Potential fiscal savingsfrom this TOT gain is estimated to be about $1.1 billion (1.2 percent of GDP) in 2008/09 (Table3b). Much of this gain originates from lower prices of petroleum products and fertilizer. This largebudgetary saving has helped reduce the recurrent outlays (particularly the subsidy bill) and

contributed to a lower fiscal deficit of 3.9 percent of GDP in 2008/09, well below the budget targetof 5 percent of GDP.

The balance of payments (BOP) position will strengthen further due to the TOT gains and resilient export and remittances. The external current account will reach a record surplus of $1.3 billion (1.5 percent of GDP) due primarily to the declining import payments in the recent andcoming months (Table 4). The effect of slower export and remittance receipts will be more thanoffset by the savings in import payments. The level of foreign exchange reserves of theBangladesh bank should also reach new highs exceeding $7 billion by the end of the fiscal year.

There are however signs of economic slowdown, reflecting the impact of global economicmeltdown. Opening of letters of credit (LCs) have been declining sharply in recent months. Since[January till now], LC opening is down by 24 percent over the corresponding period last year. As aresult, import growth during March-June will be significantly negative (in double digits) over thecorresponding period last year. Export growth has also slowed down and will remain sluggish inthe coming months. Number of workers going abroad has declined from their record high pace inrecent months.

II. FISCAL OUTTURN FOR 2008/09

Despite the slowdown in economic activity and an expansionary fiscal stance originallytaken in the budget, fiscal policy in 2008/09 has not been expansionary at all. The overallbudget deficit is projected to be 3.9 percent of GDP, despite the original budget target of 5 percentand a large shortfall in NBR revenue. Failure of the government to implement the Annual



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Development Plan (ADP) and huge budgetary savings from the terms-of-trade gain arecontributing to this fiscal outturn.

Tax revenue from the National Board of Revenue (NBR) sources is going to be rather disappointing. NBR revenue shortfall through March is estimated by the PRI staff to be Tk. 20billion (Figure 5). Based on the 5-year collection pattern, actual revenue through March was 4.3percent below the 68 percent target required to achieve the budget target. The major sources of this shortfall were customs duty, domestic supplementary duty and VAT on imports. Based on the

5-year average trend, last year NBR revenue collection was consistently in surplus, whereas thisyear the picture has reversed and a large shortfall is in the making. As import values continue tofall at a rapid pace in the coming months, the NBR revenue shortfall will accelerate further andreach Tk 40 billion by the end of June.

There will be large savings on the expenditure side. Total budgetary expenditure was targetedto grow at 17.8 percent, but actual spending growth will be limited to only 7.3 percent. The major sources of saving in spending would be on account of lower petroleum subsidy, under-utilization of the block account, and slow implementation of the ADP. Actual ADP spending never reached thebudget target in the past and this year is no exception. During the first six months of 2008/09 only18.4 percent of the ADP allocation was spent (Figure 6). At the end, ADP utilization is not expectedto exceed Tk. 210 billion in the current fiscal year.



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III. Macroeconomic Outlook for FY 2009/10

The macroeconomic outlook for the coming year may be characterized as: (i) slower real economicgrowth at about 5.5 percent with significant downside risks; (ii) continued price stability due tofalling food prices, although non-food inflation may be a matter of concern; and comfortablebalance of payments position, in part due to slower growth in import payments.

Economic growth will be particularly subdued in the first half of 2009/10 (Table 5). Thesubsequent recovery in the second half will come from manufacturing and related serviceactivities, Agriculture growth will remain healthy at its historical average level following a strongrebound in 2008/09, barring natural calamities. Domestic demand growth will also be moderatedue to slower remittance inflows.

IV. The Central Issues for the Next Budget

Against the macroeconomic backdrop described above, the central issues for the next budget are:

• Formulation of a realistic budget taking into account the slowing economy, sluggishrevenue growth, and intensifying power problem.

• The government elected on a popular mandate must try to fulfill its electoral commitments,particularly with respect to poverty reduction and farm sector.

• The budget must also start addressing the structural fiscal issues to maintain fiscalsustainability, improve resource allocation, and improve public sector service delivery over the medium term.

We consider three scenarios to illustrate how the budget may look like under three different approaches:

• A typical Bangladesh budget with inflated revenues and ADP, and realistic fiscal deficitconsistent with macroeconomic stability.

• A budget that meets the economic challenges facing Bangladesh and at the same timerealistic and forward looking.

• A realistic baseline budget, along the lines outlined above, while at the same time providingfor a contingency plan in the event the global economic recession turns worse or continuesfor a much longer time with serious adverse impacts on the domestic economy throughsharp drops in exports and remittances.

• Revenue targets in a typical Bangladesh budget are always inflated. A typicalBangladesh budget may be characterized as setting a high revenue target, a very highlevel of ADP spending and a fiscal deficit in the range of 3.5-5 percent of GDP (Table 6). Inthe event, a large revenue shortfall in revenue is generally offset by a large ADPimplementation shortfall, thereby broadly achieving the target for the overall budget deficit.This practice should change this time with the formulation of a realistic budget. If done in



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the typical manner, the budget will show: (i) high revenue growth in the range of 16-18percent; (ii) high ADP allocation, 20 percent or more over the actual spending of the currentyear; (iii) some provisions for fiscal stimulus for the affected industries; and (iv) fiscal deficitin the range of 4.5-5.5 percent of GDP (Table 6).

In a year when the government needs a high level of revenue to cover its ambitiousspending plans, the revenue potential will be negatively affected by a number of factors:

• A very low tax base due to the huge shortfall in NBR revenue and also a low nontax baseafter adjusting for one-time factors like the large transfer from the BTRC (BangladeshTelephone Regulatory Commission).

• Growth in import-based NBR taxes would be subdued due to lower import prices and theeffect of slower economic growth.

• Domestic-based NBR taxes will also be less buoyant as domestic demand may besubdued due to slower growth in remittance inflows.

Accordingly, revenue growth should not be more than 10 percent, even with some measures toincrease revenue and adjusting for the base for nontax revenue. A higher proportion of revenueshould be realized from domestic based taxes (income tax and domestic VAT) throughstrengthened tax administration.



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At present there is no need for a large fiscal stimulus to boost general economic activity.The government would however need to continue the announced incentives for the affectedsectors at least through the first half of 2009/10. The case for financial support for the textile sector is still not clear cut, but budgetary support through the “Financial Crisis Mitigation Fund” may beconsidered if needs arise in the coming months. Data for Bangladesh’s textile exports to theEuropean Union (EU) and the USA shows that both volume and unit values of exports to bothregions have been higher than the corresponding period in the previous year (Table 7).

Given the significant uncertainties and downside risks, the budget should also have acontingency plan. The contingency plan should only be activated in the unlikely event that theglobal economic recession turns worse and/or continues for a much longer time than envisageunder the current baseline macro scenario discussed earlier. Such a contingency plan shouldentail:

• A generalized fiscal stimulus package (of 2 percent of GDP) to boost domestic demand,which could be implemented on a short notice.

• Mobilization of support from the donor’s community under the various new facilitiesestablished at the World Bank, IMF, ADB and IFC.

• The objective would be to reach preliminary understandings with bilateral and multilateraldonors so that an additional $1.5-2 billion can be mobilized within a short time.

• The budget deficit would have to be increased (approximately 2 percent of GDP or so).

Such an expansionary fiscal stance for one year would not be a problem from fiscal sustainability,but external financing will be key to preventing a crowding out of private sector bank credit andavoiding emergence of balance of payments pressures (Table 8).

Excluding the contingency plan, the baseline realistic budget, after taking into account thefactors noted above would look like (as shown in Table 8):

The government should go for PPP-based infrastructure program, because of the failure of traditional ADP-based approach. The size of ADP has declined by half in relation to GDP inrecent years (Figure 7). Any further decline in public sector investment is not acceptable, given the



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state of infrastructure in Bangladesh. ADP-based investment program should be limited to areaswhere private sector investment would be difficult to attract (e.g., rural roads, health centers,schools, etc.).

The Government’s bold move on a PPP-based infrastructure program should entail:

• Establishing a PPP investment fund (perhaps $1 billion) to create an impact, with theobjective to catalyze total investment of $4-5 billion in the infrastructure sector.

• Establishing a dynamic PPP Cell at the Ministry of Finance or Prime Minister’s office, withauthority to promote investment in projects, capacity to evaluate their economic viability,and develop relations with potential investors.

• Adopting policies to encourage establishment of infrastructure funds by domestic andforeign entities.

If properly implemented and leveraged, this approach may potentially generate 4 to 5 percent of GDP in infrastructure investment, well above what could be done through the current ADP

arrangement.

Bangladesh’s expenditure to GDP ratio is very low by international standard. The small sizeof the government is attributable to Bangladesh’s low tax-GDP ratio. Currently it is one of thelowest in the world and stagnant at less than 10 percent of GDP over many years. Thecomposition of revenue has improved somewhat, with dependence on trade-based taxes decliningand that on domestic-based taxes increasing. The reliance on trade-based taxes however is stilltoo high by international comparison and a further reduction would be desirable.

On the tax policy side, the current VAT system has effectively turned into an excise system, withnumerous rates and no input tax credit mechanism. The VAT system as it was originally

implemented with full credit mechanism and unified rate would help improve elasticity taxcompliance, and revenue generation.

On the expenditure side the composition of expenditure has worsened. While currentexpenditure has increased steadily due to pressures to deliver social services (health andeducation) and expand transfer programs (social safety net and subsidies), capital spending hassteadily declined in relation to GDP due in part to lack of implementation capacity.



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While all components of current expenditure have increased over the years, subsidies andcurrent transfers and interest payments grew the most (Table 8). Although current levels of allthe major components of recurrent outlays are not unmanageable, the government should becautious about the rapid growth in domestic interest payments and subsidies and current transfers.

Although more expensive, reliance on domestic borrowing has been increasing over time.

With the steady decline in foreign financing, the government has rightly become more dependenton domestic financing (Figure 12). Over the last 5 years, net foreign financing declined by 1percentage point while domestic financing covered between 1.8-2.2 percent of GDP (Figure 12). In2007/08, domestic financing however jumped to 3.5 percent of GDP from 1.9 percent in theprevious year.

Expensive domestic financing is creating pressures on the budget through a rapid growth ininterest payments. Although at 2 percent of GDP total interest payments is certainly manageable,the rapid growth of the domestic component is a matter of concern (Figure 13). In the early 1990s,total interest payments was in the range of 0.5-1.0 percent of GDP but now it amounts to 2 percentof GDP. The surge in interest payments is entirely on the domestic front:



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• External interest payments never exceeded 0.4 percent of GDP.

• While domestic interest payments were below 0.5 percent in early 1990s, it has nowincreased by more than threefold to more than 1.5 percent of GDP.

Dr. Mustafizur Rahman, Executive Director, CPD

Global crisis and Bangladesh. Now with respect to the global crisis and its implications, it is truethat we are seeing, and it has been mentioned in the paper that Bangladesh is an outlier in thesense that its growth performance is one of the best I think in Asia and around the world, but myconcern will be that we are receiving the advantages of being the Wal-Mart Economy in the senseboth the goods and services catered to the lower end of demand curve and you are not impactedby the global crisis because you are catering to the lower end. You are also saved because you

are not integrated in the financial market of the world both through FDI and through the portfolioinvestment. But these weaknesses which become strength in the time of crisis, and it couldbecome weakness when it is time to see the upturn in the global market. So for the 2009-10 Iwould say that the weaknesses which has perhaps saved us we should prepare ourselves so thatwe can overcome the weaknesses which has saved us and then take the advantages of theeconomy, which we will see in 2009-10 and 2010-11. That is the challenge before us so rather than being reactive to the crisis I think the policy stance in the budget 2009-2010 is that we takethe proactive measures so that we can take advantages of the global market that will be emergingafter 2010 or at the end of 2010. I think that’s where the concluding the policies and not beingreactive is so important. That’s where the productivity and the enhancement that will be required tomove out of this one month range is so important. If we look at the global performance, we’ll seethat although for example that our exports, which the paper has pointed out.. our exports in USAand EU have gone up and our market share have also gone up. But if you go to the disaggregatedanalysis you will see that the concentration at the very lower end and even in the RMG. And theoutcome that we were witnessing before the crisis that Bangladesh was trying to move a bit upmarket that has been halted and the structure has somewhat changed. We are once againconcentrating on the very low end of the market. So I think that is where one has to look at verycarefully and how we can enhance the productivity and that’s why the suggestion that we created atechnology up gradation fund to really move up market becomes very important as we prepareourselves for the upturn that we can expect in one year and a half.

On fiscal policy stance. Second point that is important to note is that when we are talking aboutthe expansionary fiscal policy stance in 2008-09 before that 2007-08 fiscal deficit was 5%, and thereal fiscal deficit was 4.9%. So it was in line with that so I would not be very much concerned withthe deficit and we all have to remember that this is a particular crisis year that we are talking

about. I think some bold measures in terms of expenditure and fiscal space will need to be there. If we look at the revenue target, the paper has it is mentioned that the import duties have comedown, the target was 13% growth and it is 1.3% growth. But if you go into some details import VAThas increased by 12.1%, but I am really flabbergasted that how the import VAT registered that12.1% during July –March is really something enigmatic to me. What we look at the VAT local, asthe paper has pointed out the domestic economy the strong demand has really helped us and VATlocal growth rate was 18.8 % from July to March. But what is interesting is the income taxcollection has gone up by 20.1% compared to 11.1% to target that should be the focus in the nextbudget should be, how can we really build on the growth in the income tax that we have seen.

On expenditure. With respect to the expenditure side one point that we will have to remember oneis the pressure on budget for some of the price stability measures that the government will have to



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take, we have already seen large procurement of price at higher than market prices and perhapsgovernment will have to sell most of it lower than market prices so there is a pressure onexpenditure side and we have to remember it and the second point that we have to take intoaccount is that the new salary the pay commission report, that will also entail another two thousandcrore taka perhaps even if it is implemented in two years, these pressures on expenditure side wasnot mentioned in the paper. If we look at the term loan disbursement, net term loan disbursementhas gone down by 40% July to march, agriculture net growth rate of credit is -54 %. If that be the

case then what is the impact of next fiscal year in terms of manufacturing production and alsoagricultural production, I think one will have to look at particularly non crop agriculture because-40% net disbursements in term loan in 9 months and -54% agriculture net growth rate credits thatis something disquieting. LC opening growth of capital goods and machineries, -32% and importgrowth of capital goods -12% these combined will have adverse knock on effect on performance of the economy in the next year

On quality of ADP. Lastly I would say the quality of ADP has become a major issue, if you look atthe IMED which is a major player over here, I think although the ADP size has increased over thelast thirty years by fifty times I don’t know what factor of strength IMED has been strengthened. Ithink there has to be in the budget specific allocations for strengthening the institutions which willoversee. Otherwise there will be destructive allocations.

Dr M. A. Taslim, CEO, Bangladesh Foreign Trade Institute

Small budget relative to GDP . Now every government in the world has a budget; In mostdeveloped countries the budget has a far bigger weight in the national economy than Bangladesh,say in the European countries the budget of the government would be well over 50 percent of GDPwhereas in Bangladesh it is less than 15 percent. So a very small government and very smallgovernment expenditure and yet we have this extraordinary amount of interest in the budget butnot so much discussion, I have lived overseas for a long time in a developed country and I saw notmuch attention was being paid to the budget in those countries. Despite the fact that the populationis extremely well-educated and there is no shortage of economic view. “Now why with the budget”-there is so much attention in Bangladesh.

Honorable Finance Minister, Mr. Abul Maal Abdul Muhith

On economic performance next fiscal year. The other point he mentioned is the impact of reduction in term-loan, poor performance of agriculture loan and decline in capital machineryimports; these are all very important issues and they would have impact on the next year’s growthrate and that is why I thought the GDP growth rate projection rather is very appropriate. Eventhough we put perhaps a growth rate of six percent this year, the impact is almost invisible rightnow but next year it’s going to be a substantial decline. I can’t say the figures that you have quotedbut it’s likely to be quite a decline. Also the analysis that perhaps in the second half in the year there might be signs of good fortune and therefore we should be prepared with some contingencyplans I take your advice very seriously.



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On strategy for power generation. I have a position now on energy and power which I explainedtoday to the chamber people; we are in the position to indicate as to where we shall be going andhow difficult to sort out problems, how difficult it is. But we believe that our target for the final year -- seven thousand and five hundred megawatt of production -- that we shall achieve, but inbetween how the progression will take place is still an issue and we should be able to saysomething on it. We will put forward an outline of a five year plan. Because we find that in theenergy and power sector it’s not simply the generation of power but it also a transmission which is

extremely difficult. You can’t set up any plant in Tongi today because the Tongi transmission linewill not take a single megawatt of additional power. You can’t give power today to the ruralelectrification board simply because they can’t carry it. So this is very very difficult area.

On fiscal deficit . We worked on your deficit figures even given 4.7 to 5; but we have been verylucky that it’s going to be extremely low. But this may not be the situation next year mainly becauseof the downside effects, we shall work on 5 percent may be ultimately would not need it and also alarge allocation for PPP, you don’t know how reliable it will be. But the point is well taken that it hasto be large allocations to make a difference. I am counting on this for a longer term of five years,we have promised to take public expenditure to 20 percent in the next five years from the presentlevel of 16 percent (or less than 16). We are also committed to have an investment of 30 percent;these are tall targets and must shoot for them.

Overview of Total research

The Budget has encompassed a number of policy concepts, some are new and some have beenin talks for year.

Perspective plan for 2010-2021 next year

The finance minister say the government has already started to work out the details of the vision2021. In order to realize the vision, he feels the need of a medium-term five year plan for 2010-2015.



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Public-private partnership Budget

The finance minister is well aware of the fact that the huge investment, estimated at $28 billion infive years to 2014, would be quite unmanageable for the government. But this investment ininfrastructure is a must to chase the sky-high growth targets set in the elections. He acknowledgedthe capacity constrains in domestic financing as well to bankroll an avalanche of projectsenvisaged in power and energy, ports, communications, supply and drinking water and health.

He pointed at the government’s limitations in ensuring ‘Economic use of public resources and thequality of service delivery’ of public sector infrastructure projects. He also mentioned about the

huge investment risks and fears of commercial viability of such projects that keep privateentrepreneurs away.

He also proposed-

• Tk 100crore PPP Technical Assistance

• Tk 300crore PPP viability GAP funding as seed money

• Tk 2100crore PPP infrastructure in investment fund.

He proposes an institution for preparation and implementation of PPP budget which will insureinnovative ways, independent options and accountability of planning and budget process of the

private sector.

The PPP position paper mentions some of the projects expected in the PPP: Dhaka-Chittagonghighway on BOOT basis at a cost of $3.02 billion sky train in Dhaka on BOOT basis at $2.8 billion,Dhaka city subway at $3.10 billion and Dhaka city elevated expressway at $1.23 billion- at thetransportation sector, four power plants of 450MW capacity at $1.80 billion in energy sector anddeep sea port in Chittagong with no estimation of cost.

Unified Budget

Mutith plans to initiate a few reforms in budget preparation and execution from the next fiscal year as he finds that the dichotomy between non-development and development “essentially artificial.”



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District Budget next year

The Financial Minister has rightly pointed out that the centrally-prepared national budget does notcapture the hopes and aspirations of the grassroots people, and cannot ensure transparency andaccountability in use of resources across the country. He has proposed gradual decentralization of budget with separate budget for each district to bring transparency in public expenditure andaccountability in implementation of development schemes.

Priorities

To achieve short term and long term development goals, the finance minister sets out in thebudget the government priorities like massive employment generation, enhancement of socialsafety net, creation of self employment, reduction of regional disparity, increasing emphasis onagricultural development, achieving the target of power generation, acceleration of industrializationand building necessary infrastructure for “Digital Bangladesh.”

In this budget,

• 7.8 percent allocation has been kept for agriculture sector (agriculture, fisheries, andlivestock, rural development and water resource)

• 22.1 percent for local government

• 14 percent for Power and energy

• 15.7 percent for communication(roads, railways, bridges, waterways, airways andtelecommunications)

• 23.5 percent for human development(health, education and science and technology)

Agriculture

sector,

7.80%

Local

governme

nt, 22.10%

Communic

ation,

15.70%

Human

development,

23.50%

Power

energy,

14%Agriculture sector

Local government

Communication

Human developmentPower energy



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Agriculture and Rural development

Muhith proposes an allocation of Tk 59.65 billion, development and non-development and combined. Agricultural loan has been raised to Tk 100 billion forthe next fiscal from Tk 93.79 billion this year.

He also proposes an allocation of Tk 7.16 billion for livestock and fisheries sector.

Water resources

An allocation of Tk 14.83 billions has been proposed for water resourcesdevelopment, which includes river management, dredging embankment protectionand checking sanitary and erosion.

Rural development

An allocation of Tk 12.46 billion has been proposed for rural development. A totalof 578400 rural families will be brought under this program.

Energy

Only 45% of the country’s entire population has across the power. With a meager5000MWgeneration, the finance minister hopes to meet minimum electricitydemand by 2011.

Communications

Tk 61 billion has been proposed for roads and railway division and bridge division.

Tele-communication

In order to building Digital Bangladesh, the government has planned to extend ICT

facilities to villages. All Upazilas will be brought under internet coverage in nextfive years with the Second Submarine Cable Network.

Housing

Providing home for all by 2021 is one of the targets of the Vision 2021. The Ministryof Housing and Public works has worked out a plan for develop 22800 plots andconstruct 26000 apartments in next three years foe the lower middle incomegroups.

Human resource Development

Human Resource Development gets the highest priority with an allocation of Tk

213.67 billion or 19 percent of total budget.

Health and family welfare

The govt. decided to set up a total of 13500 community clinics for each 6000people, in the rural area across the country. Five new medical colleges and sixhealth technology institutes will be established by next fiscal year.

Employment Generation



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The govt. will take steps to employ at least one member of each family by 2014 asthe country has total labor force of 5 crore, out of which only 20 lacks areemployed in the public sector.

All plans are good for the nation for the nation if those are implemented as said inthe budget. The people are to wait to see what actually happens.

SOURCE:

http://www.thefinancialexpress-bd.com/search_index.php?news_id=68417&page=detail_news

www.business report-bd.com


http://opt/scribd/conversion/tmp/scratch6081/www.business%20report-bd.com


http://opt/scribd/conversion/tmp/scratch6081/www.business%20report-bd.com

Economic profile of bangladesh assignment.2

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