Hotel Sheraton, Dhaka June 19, 2005

1
Dialogue on
State of the Bangladesh Economy and Budget
Responses 2005
Hotel Sheraton, Dhaka June 19, 2005
Keynote Presentation by
Debapriya Bhattacharya Executive Director, CPD
2
CREDIT
3
Content
I. INTRODUCTION
II. GROWTH, SAVINGS AND INVESTMENT
III. PUBLIC FINANCE
IV. FISCAL MEASURES
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
VI. CONCLUDING OBSERVATIONS
4
I. INTRODUCTION
Benchmarks for FY06 Positive Features

• Economy experienced a respectable growth (5.5 )
  in a flood year
• Double digit export growth notwithstanding
  phase-out of the MFA
• A bumper Boro crop helped recover crop-losses due
  to flood 2004
• A 2.5 billion worth of FDI proposal from the
  Tata Group
• Reactivated Privatisation Commission with new
  off-loading mandate
• Capital market received an increased liquidity
  flow
• Robust credit expansion in the private sector
• Strong growth of agricultural credit
• High import of capital machineries
• Improvement in foreign aid off-take, albeit
  marginal

5
I. INTRODUCTION
Benchmarks for FY06 Negative Features

• Failure to implement public investment programmes
  
• Poor revenue collection effort, particularly in
  non-NBR and non-tax components
• Stressed fiscal balance in the face of runaway
  growth of revenue expenditure
• Stretched balance of payment as import greatly
  outpaced export growth
• Rising trend in consumer price index,
  particularly food price
• Deepening state of weak governance with a still
  born ACC, no progress in public administration
  reform and local government

6
I. INTRODUCTION
Major Macroeconomic Challenge for the Budget for
FY06 Sustaining private investment growth
without weakening the macroeconomic stability

• ? Macro stability expressed through -
• Sober consumers price index
• Stable exchange rate
• Sound Interest Rate

7
I. INTRODUCTION
Other Macroeconomic Challenges-Facing the Budget
for FY06

• Need to address the following six sources of
  fragility
• Slow progress in domestic revenue mobilisation
• The inability to implement public investment
  programmes
• Upsurge in inflation rate underwritten by
  cost-push factors, such as high global prices of
  food, fuel, fertiliser and steel
• The delicate balance in external payments
  situation notwithstanding the robust export and
  remittance growth
• Failure to undertake complementary reforms to
  ensure improvement of micro-conditions for
  private investment
• Widening disparity in income distribution which
  is limiting the growth prospect including its
  sustainability

8
I. INTRODUCTION
Presentation of the Budget

• Condensed Speech
• Positive re-structuring of text and issues
• Lucid presentation
• Contextualised Speech
• Summarisation in some places led to lack of
  transparency
• For example
• Budget speech did not provide net outcome of
  fiscal measures by source
• An annex on 54 allocation for poverty
  alleviation purposes
• CPD is happy to note that 4 of its fiscal
  suggestions were reflected in the new fiscal
  proposals

9
II. GROWTH, SAVINGS AND INVESTMENT
Economic Growth Performance
Bangladeshs GDP Growth FY81-05

• GDP posted a growth (provisional) of 5.38 in
  FY05 the PRSP target was 5.5 .
• BBS has revised the GDP growth rate for FY04 from
  5.52 to 6.27 .

• CPD has earlier observed that such substantial
  upward revision of GDP growth rate has renewed
  the debate as regards the empirical basis,
  estimation methodology and process transparency
  in the national income accounting.

10
II. GROWTH, SAVINGS AND INVESTMENT
Economic Growth in South Asia
However, when compared with the major South Asian
countries, Bangladeshs GDP growth rates appear
to be moderate. It seems South Asia as a whole
going through a moderately high growth spell.
South Asias GDP Growth FY04-05
11
II. GROWTH, SAVINGS AND INVESTMENT
Sources of Growth
per cent

• Following the Flood 2004, negative growth in
  Crop (-) 3.3 in FY05.
• Incremental contribution of REAL ECONOMIC SECTORS
  declined from 33.6 in FY04 to 27.3 in FY05.

• Incremental contribution of SERVICE SECTOR
  increased from 44.6 in FY04 to 60.9 in FY05.
• Such dynamics of growth is not commensurate with
  a modern fragmentation of economy and have
  negative implications for employment generation

12
II. GROWTH, SAVINGS AND INVESTMENT
Per Capita Income

• Per capita GDP and GNI for FY05 were US 445 and
  US 470 respectively.
• BBS has revised downward the per capita GDP for
  FY04 from US 421 to US 418, despite the upward
  revision of GDP for the same year.
• This once again underscores our concern about the
  veracity of national income accounting.

Tk

Annual Growth in Percapita Income Tk Vs
13
II. GROWTH, SAVINGS AND INVESTMENT
Per Capita Income in South Asia

• The per capita income of Bangladesh is still very
  low when compared with the same of other South
  Asian countries.

Per capita Income of South Asian Countries FY04
BBS
Source IMF World Economic Outlook Database, 2004
14
II. GROWTH, SAVINGS AND INVESTMENT
National and Domestic Savings

• National savings showed encouraging movements in
  FY05, following almost a half decade of
  stagnation
• The share of national savings in GDP increased
  moderately in FY05 to reach 26.49 as against
  25.44 in FY04, registering a rise of 1.05
• Domestic savings increased marginally to 20.16
  of the GDP in FY05 from 19.53 in FY04
• The share was 28.1 in India and 17.6 in
  Pakistan
• Increasing the Domestic Savings
  Rate is the Challenge

15
II. GROWTH, SAVINGS AND INVESTMENT
New Data on Savings

• BBS has revised upward the Savings figures of
  FY03 and FY04
• Gross National Savings 24.49 to 25.44 of GDP
• Gross Domestic Savings 18.27 to 19.53 of GDP
• Given the fact that the GDP for FY04 increased
  significantly, these proportions as per cent of
  GDP are remarkably on the high side.
• Why change in GNS in lower than change in GDS ?

Revision in National Savings and Domestic Savings
Figures
16
II. GROWTH, SAVINGS AND INVESTMENT
Gross, Public and Private Investment

• During the last five years (FY01-FY05), the Gross
  Investment Rate has increased by only 0.3 of
  the GDP.
• This is significantly low (by 1.07 of GDP)
  compared to the MTMF target of PRSP which was set
  at 25.50 for FY05.
• In FY05, country recorded the lowest public
  investment ratio of the last decade 5.9
• A further (-) 0.3 per cent decline from the
  earlier lowest figure of 6.1 in FY04.

• The slack left behind by the public investment
  was however somewhat picked up by private
  investment.
• increased from 17.9 per cent in FY04 to 18.5 per
  cent in FY05

• It is significantly lower than that of India
  (26.5 ) and Sri Lanka (25.9 ), although it is
  higher than that of Pakistan (18.1 ).
• Raising the level of investment continues to be
  one of the core challenges facing the Bangladesh
  economy.

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II. GROWTH, SAVINGS AND INVESTMENT
New Data on Investment

• Figures on Gross Investment rate for FY04 has
  also been revised upward
• from 23.58 to 24.02 of GDP.
• Similarly, the private and public investment
  figures have also been correspondingly revised.

Revision in Gross, Public and Private Investment
Figures
18
III. PUBLIC FINANCE
Revenue Earnings

• Revenue Target
• Growth target of revenue for FY05 (16.7 ) fell
  short by (-) 5.08
• However, realisation in FY05 was 10.73 higher
  than FY04
• New target for revenue earnings in FY06 is 16.64
  
• Incremental contribution VAT 32 , direct tax
  17
• The relative share between Direct and Indirect
  taxes is not going to change in any significant
  way.

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III. PUBLIC FINANCE
Revenue Earnings

• Revenue GDP Ratio
• Low revenue-GDP ratio which remained stagnant at
  10.64 in FY05 (was 10.63 in FY04)
• The humble target of PRSP (10.7 ) was not
  achieved in FY05
• Thus, the target for FY06 (10.96 ) is (-) 0.24
  lower than the PRSP projection
• To achieve revenue-GDP ratio of 11.7 by FY07.
  What changes are being brought about in the tax
  administration.

Revenue GDP Ratio PRSP Vs Budget
20
III. PUBLIC FINANCE
Public Expenditure

• During FY01-05
• average annual growth of revenue earnings has
  been higher (12.9) than public expenditure
  growth (8.2 )
• In FY05
• Revenue earnings growth (7.9) was lower than
  public expenditure growth (12.7)
• For FY06
• projected public expenditure growth (15.7) is
  lower than revenue earnings growth (19.5 )

• Given the record in FY05, will the projections of
  FY06 be released, particularly in view of the
  approaching election frontier?

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III. PUBLIC FINANCE
Public Expenditure
Macroeconomic Stance development expenditure
should grow at a faster pace than revenue
expenditure
During FY01-05 Average annual growth of ADP was
lower (4.8) than revenue expenditure growth
(12.6 ) In FY05 Revenue expenditure registered
a whooping 17.4 growth against a 7.9 ADP
growth However, Health, Education (including
Primary Mass Education), Rural Development and
Cooperatives are among the lowest performers of
ADP. For FY06 Projection of growth in
development expenditure (19.5 ) is higher than
revenue expenditure (15.7 ) If the targeted
volume of public expenditure is realised in FY05,
ADP and non-ADP ratio would be an unfavourable
3862
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III. PUBLIC FINANCE
Public Expenditure
Sector wise Distribution of Total Expenditure
(Non-Development and Development)
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III. PUBLIC FINANCE
Public Expenditure

• Education and technology Top of the list of
  allocation (9686 crore taka)
• Public Service Gigantic growth (46) with
  highest incremental allocation (2698 crore taka),
  Major contribution comes from non-development
  expenditure of Finance Division (54.4) which
  includes parts of subsidy and unexpected
  expenditure
• Health Significant growth of 33.5 with
  incremental allocation of 1065 crore taka
• Defence Sectoral share in total allocation
  declined from 7.4 in FY05 to 6.7 in FY06.
• A moderate growth of 5.0 with incremental
  allocation of 205 crore taka.
• However, lack of information and transparency in
  other defence oriented allocation under Defence
  Ministry inhibits proper analysis of the defence
  spending

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III. PUBLIC FINANCE
Public Expenditure Development Expenditure (ADP)

• FY05
• ADP for FY05 was fixed at Tk 22,000 crore
• 15.8 higher than revised ADP of FY04
• 30.3 higher than actual ADP of FY04
• Only 47 implementation in 9 months
• Thus, target has been revised at Tk 20,500 crore,
  7 reduction from original target
• FY06
• New ADP target for FY06 is Tk 24,500 crore,
• 11.4 higher than original ADP of FY05
• 19.5 higher than revised ADP of FY05
• Implementation of a fuller ADP is now the major
  challenge as against targeting a larger ADP
• Issue of quality is no less important than the
  issue of size of the ADP.

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III. PUBLIC FINANCE
Public Expenditure Development Expenditure (ADP)

• FY91-05 FY01-04
• Revised ADP as of Original ADP (-) 4.5 (-)
  7.3
• Actual ADP as of Original ADP (-) 14.4 (-)
  18.3
• In dollar terms, the ADP is nearly equivalent to
  or sometimes even lower than that of the earlier
  years

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III. PUBLIC FINANCE
Public Expenditure Development Expenditure (ADP)

• ADP 2005-06
• Education, power and local government received
  the highest allocation
• Local government received the highest increase in
  allocation compared to the previous years
• Share of Block Allocation increased
  significantly in the new ADP
• Tk 2041.1 crores 73 higher than the original
  ADP of FY05.

27
III. PUBLIC FINANCE
Public Expenditure Revenue Expenditure

• Revenue expenditure in FY05
• 17.4 higher than FY04 (revised) 9.2 higher
  than the target for FY04
• Share of major three heads increased from 78.3
  in FY04 to 79.1 in FY05

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III. PUBLIC FINANCE
Public Expenditure Revenue Expenditure

• Major Features
• Pay of officers projected to increase 27.7 in
  FY06, largely due to the increase in government
  salary
• High growth of Repairs, Maintenance and
  Rehabilitation (43.8) in FY05, largely because
  of the flood 2004
• Interest Payment (foreign) during FY05 recorded
  19.9 growth, higher than growth of domestic
  Interest Payment (9.5 ). Most foreign financing
  is through loan
• High growth of Block Allocation 43.8 in
  FY05 181 projected for FY06. Why would one
  need so much block allocation in Revenue
  Expenditure when the Pay and Allowance issue is
  settled?

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III. PUBLIC FINANCE
Budget Deficit and Financing

• A systematic fall in budget deficit was observed
  during FY01-04
• From (-) 7.0 in FY01 to (-) 4.2 in FY04
• The economy once again experienced a rise in
  budget deficit in FY05 (-4.5)
• However, lower than the PRSP target of (-) 4.7
• This increase in deficit is due to low domestic
  resource mobilisation following the flood 2004
• Perversely, lower implementation of ADP also
  saved the economy from even a higher deficit.
• Lower deficit is not a sign of strength, but as a
  sign of weak implementation of public investment
  programme.

Budget Deficit MTMF Vs Budget
Note Figures in the parentheses indicates share
of each items in total fiscal financing.
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IV. FISCAL MEASURES
Personal Income Tax
Implications of Revised Income Tax rate for
Individual Assesses for the Income of 2005-06

• Salaried income tax payers will pay relatively
  less in income year FY06 than they did in FY05.
  But high income brackets will pay relatively less
  than relatively low income brackets.

31
IV. FISCAL MEASURES
Tax Amnesty for Undeclared Income

• In FY05 this was reintroduced ostensibly to
  stimulate investment
• In FY06, this benefit has been continued, albeit
  with payment of 7.5 tax
• Is it justified when lower middle class people
  in the lowest income bracket are asked to pay
  income tax of 10?

• An UNETHICAL and INEFFICIENT policy for
  mainstreaming Black Money
• It can noted that, in 1997 India under a
  Voluntary Disclosure of Income Scheme (VDIS),
  netted tax collections estimated at Rs. 10050
  crore

?
32
IV. FISCAL MEASURES
Tax on Real Estate

• Taxing of investment in real estate at a flat
  rate of 175 Tk/M2 and imposition of 2.5 tax on
  the price of land to be deducted at source at the
  time of registration.
• This to be considered as final settlement.

• Another way of whitening the Black Money
• Government should withdraw the proposal

33
IV. FISCAL MEASURES
Budget Proposals for Rationalisation of Income
Tax Measures

• Consideration as final settlement
• Deduction of tax _at_ 4 on freight charges of
  resident ocean going ships
• Deduction of tax at source _at_ 0.25 on total
  export proceeds of knit-wear readymade
  garments
• Deduction of tax at source _at_ 0.015 on the
  transaction value of shares for members of stock
  exchange
• Collection of tax on sale of apartments _at_ Tk 175
  per square meter and for land _at_ 2.5 on deed
  value at the time of registration from persons
  engaged in real estate business.
• At present, the rates of advance income tax
  applicable to "Royalty Technical Know-how fee"
  and "Professional Technical service fee" are 10
  percent and 5 percent respectively, which very
  often cause confusion because the "fees" are of
  same nature. In order to remove this confusion,
  the rates of tax for all these fees are re-fixed
  in the proposed budget at 10 percent.
• Can this be considered as Final Settlement?

34
IV. FISCAL MEASURES
Other Direct Taxes
Positive

• Reduced rate of tax _at_ 10 on income from computer
  software business will be continued up to 30 June
  2008.
• Tax-rebate for donations to philanthropic and
  educational institutions by any individual or
  industrial enterprise.
• Caution should be exercised against any abuse of
  such rebate.

• Banks are allowed to make provisions for bad and
  doubtful debts up to 1 in place of 2 of the
  total outstanding loans till assessment year
  2006-07.
• Rate of advance income tax applicable to profits
  from approved Securities and Bonds are proposed
  to be reduced to 10 from the prevailing 20.

35
IV. FISCAL MEASURES
Tariff Structure
Positive

• The three-tire tariff structure has been retained
  with marginal rate of 25
• The five Supplementary Duty Structure has been
  revised and brought down to three
• Infrastructure Development Surcharge continues
• These measures will bring clarity to the
  structure of indirect tax and will promote
  transparency in mobilisation of indirect taxes
• The new indirect tax measures indicate a
  conscious policy to support import-substituting
  domestic industries (particularly through SDs)
• However, extension/expansion of VAT, SDs and
  indirect taxes are also likely to put pressure on
  purchasing power of consumers.

Ambiguous
36
IV. FISCAL MEASURES
Incentives for Investment

• To encourage investment, the budget has proposed
  a number of steps
• (a) Recasted tax holiday facility for selected
  industries
• (b) Continued cash compensation scheme
• (c) Widened the gap between listed and unlisted
  companies
• (d) Provided preferential treatment for import
  of raw materials
• (e) Allowed in several cases, tax deduction at
  source as final settlement of tax
• In the same manner, reduction of import tariffs
  for some intermediate inputs would help to combat
  price hike in both domestic international markets
• For example, import duty on newsprints increased
  to 25 in FY05 deserves consideration for
  reduction.

37
IV. FISCAL MEASURES
Incentives for Investment
Tax holiday
Enhancing dispersion between listed and
non-listed company

• Government went for continuation of tax holiday
  facility for 18 selected sectors.
• This is likely to have positive impact on
  investment.
• However
• High Value RMG is ambiguous.
• Computer hardware has been included, but not
  computer software.
• Why there is no Energy Sector?
• Government could have taken additional measures
  to plug the loopholes.

• The budget has proposed to increase tax rate for
  non-listed companies from 37.5 to 40.
• to encourage companies to be listed in the stock
  exchange.
• It is likely to harm small and medium enterprises
  whose scale of operation does not allow them to
  go public.
• Revise downward keeping the dispersion say
  37.5 and 30

Tax deduction at source as final settlement

• Deduction of tax at source _at_0.25 on total export
  proceeds of knit-wear and ready made garments as
  final settlement of tax holiday.
• It will be helpful to exporters.

38
IV. FISCAL MEASURES
Enhancing Domestic Production Agriculture
Positive
Positive
Ambiguous
Crop Decrease of interest rate from 8 to 2 on
loan for production of pulses, mustard seeds,
spices and maize Seed supply Increase of seed
production, preservation, and distribution
activities of BADC Small loan Extension of
repayment period for agri loan (upto Tk 5,000)
without interest up to 30 March 2006
Subsidy and Assistance for Agriculture Tk. 1200
crore, against Tk. 600 crore in FY05 (original)
and Tk. 1315 crore in FY05 (revised) Total
Allocation (Rev.Dev.) for Agriculture
Ministry Tk. 2213 crore - 24.5 less than FY05
(original) and 6.7 less than FY05 (revised).
Cash incentive Continuation of 30 cash
incentive for export of agro-products, fruits and
vegetables Subsidy for Electricity Continuation
of 20 subsidy for electricity Fertilizer
Withdrawal of all duties and taxes on selected
fertilisers (Magnesium Sulphate, Disodium
Tetraborates, Zinc Sulphate). This will help to
reduce micro-nutrient deficiency in soil.
39
IV. FISCAL MEASURES
Enhancing Domestic Production Non-Crop and
Non-farm
Positive

• Rural Non-farm Allocation of Tk. 2214 crore for
  implementation of 113 projects related to
  non-farm sector and rural employment
• Agro-processing and agro-based Industry
• Additional allocation of Tk. 150 crore as EEF
• Increased SD from 25 to 35 on some processed
  food and fuit juice
• Continuation of 20 subsidy on electricity used
  by agro-based industries
• Tax holiday for agril machinery industry

Livestock Withdrawal of all duties and taxes on
the raw materials of dairy and poultry feed,
medicine, other medical inputs and capital
machinery required by livestock sector Fisheries
and Livestock Extension of tax exemption period
(up to 30 June 2008) on income from fish farming,
poultry and dairy farms, poultry feed production,
etc.

• CONCERNS
• 83 irrigation is done through diesel operated
  engines, no measures proposed
• Bangladesh needs a comprehensive road map and
  action plan for promotion of agricultural
  diversification focusing on pulses, oilseeds,
  spices, vegetables, new crops with export
  potentials (such as maize), fruits, flowers,
  dairy, poultry and fisheries

40
IV. FISCAL MEASURES
Power and Energy
Negative
Negative
Ambiguous

• Ø  In power sector, a total of 51 projects are on
  stream. For these, only 22 fund was allocated
  for generation, 17 for transmission and the rest
  56 for distribution.
• Hardly any substantial improvement in the power
  situation could be expected in near future.

• Ø  In FY 2006, allocation was only 0.47 higher
  than the revised allocation of FY05.
• To compare, India has increased the allocation by
  33.4 in FY06.
• Proposed reduction of customs duty and
  supplementary duty on crude petroleum and POL
  products has no welfare implication for
  consumers.

Ø      Although power generating companies enjoy
tax exemption on income for 15 years, it is to be
noted that the sector has not been in the tax
holiday list.
41
IV. FISCAL MEASURES
SMEs
Positive
Negative
Negative

• Ø  Under the proposed tax holiday facility,
  major SME oriented industries such as plastic,
  melamine, ceramic and sanitary ware, insecticide
  pesticide, computer hardware, agricultural
  machineries, boilers compressors, textile
  machinery etc. have been included.
• This will have positive impact on investment in
  these sectors.

• Under SME Refinancing Scheme an amount of Tk
  .250 crore had been allocated at 5 interest,
  which was fully utilized.
• There is no new budgetary allocation to finance
  small and medium enterprises as government did in
  the last fiscal year (FY05).
• Software industries has not been included under
  tax holiday scheme. A 10 tax (waived in 2002)
  has been imposed

• Proposed tax rate for non-listed companies at 40
  instead of 37.5 is likely to negatively impact
  on the growth of small and medium enterprises.
• A substantial difference of 10 in the corporate
  tax between large and small enterprises is
  against the spirit of the PRSP.

42
IV. FISCAL MEASURES
RMG and Textiles

• However, no news about whether required funds
  could be mobilised
• High value RMG has been awarded tax holiday
  facility- But there is no particular criteria
  proposed to identify such industries.
• The budget has proposed setting up of a special
  fund of Tk 20 crore for retraining and creating
  employment opportunities for employees/labourers
  of garment industries.

Positive Measures

• Cash compensation for backward linkage textiles,
  currently at 5 to be continued.
• Package of support for deemed export
• Import of spare parts for machineries and waste
  cotton RMG have been zero-tariffed.
• Duty rebate on import of dyes and chemicals
• Post-MFA Action Programme has been formulated
  with an estimated cost of US 40 million with the
  assistance from development partners.

Negative

• There is no special allocation for handloom
  industry which is a large rural employer.
• India has allocated Tk 58 crore to adopt and
  promote cluster development approach for
  production and marketing of handloom products.

43
IV. FISCAL MEASURES
RMG and Textile What others are doing?
India
Sri Lanka

• Ø   In Sri Lanka, government has proposed
  establishment of a SME Bank by this year to
  provide required working capital and investment
  needs of the apparel industry, and to modernize
  the factories.
• Sri Lanka has also allocated support for
  productivity improvement measures and promotion
  of markets for apparel exports.

• In its FY2005-06 budget India has offered a
  number of incentives to apparels/textile sector
• Created a Rs 435 crore Technology Upgradation
  Fund
• Instituted a 10 capital subsidy scheme
• Pronounced cluster development approach
• Made provision for more than Rs 4000 crore
  support for textile sector.

44
IV. FISCAL MEASURES
RMG and Textiles Concerns in the Context of
Post-MFA Trading Regime

• The Finance Minister has noted in his budget
  speech that inspite of quota phase-out since
  January 2005, there was no adverse impact on
  export of RMG.
• However, things are not as good as the latest
  data show
• Export caring five woven-RMG in the first four
  months (January-April) has decreased by (-) 7.1
  compared to last year.
• Although knit-RMG is showing robust growth (32.1
  in the first four months), the overall growth of
  RMG (6.92) has slowed down.
• Competitive pressure from China and other
  countries is pulling down the prices
  significantly how long can Bangladesh compete
  through expansion of volume!

45
IV. FISCAL MEASURES
RMG and Textiles

• Required
• More investment in technology upgradation and
  productivity growth (create a textile / RMG
  technology upgradation fund)
• More support to backward linkage activities.
• Support the restructuring in the sector.
• Promote cluster approach for textile/RMG
• Put in place a comprehensive plan for RMG
  workers, both for skill upgradation and
  rehabilitation

46
IV. FISCAL MEASURES
Telecommunication
Leather and Leather goods industries
Positive
Negative
Positive

• Ø Imposition of a tax of Tk 1200 for SIM/RIM
  Card.
• This is likely to create distortions in the
  mobile telephone market
• A disincentive for lower income group
• Create entry barrier for new entrants and may
  encourage anti-competitive behaviour.
• However, on their part the mobile operators,
  rather than passing the whole burden on the
  customers, could take up steps towards
  burden-sharing, e.g. reduce call rates

• Ø  Reduction of import duty on telephonic
  machinery and reduction of supplementary duty on
  telephone answering machines and dictating
  machines.
• Increase in import duty on mobile phone battery
  from 7.5 to 15.
• Local producers will be benefited.

• Concessionary rate of customs duty for dyes and
  chemicals.
• This is likely to have positive impact on
  investment in this sector.

47
IV. FISCAL MEASURES
Vehicle
Tax Base Under VAT
Manufacturing Items
Positive
Concerns
Ambiguous

• Ø Reduction of customs duty on some raw materials
  needed for the manufacture of transformer.
• It could not only help meet the demand of the
  local need but also stimulate export.

• No major change in the existing tax regime.
• Government emphasized the need to consolidate
  the present VAT system.
• CPD has earlier proposed for broadening of the
  VAT net to include the professionals however,
  this has not been done.

• Customs Duty of vehicles within the range of
  1500cc 1649cc in CKD (and also for vehicles
  exceeding 1649CC in CKD) has been raised.
• Will it stimulate local vehicle body building
  industry?

• Reduction of customs duty on some raw materials
  for local Bicycle Industries.

48
IV. FISCAL MEASURES
Local Government

• Allocation Tk 120 crore for Union Parishads and
  Tk 60 crore for special programme under Gram
  Sarker
• LGED will build 10,000 km paved roads, 9,500 km
  kutcha road, 20 cyclone centres and 346 Union
  Parishad complexes, and develop 435 growth
  centres/hat-bazzars
• Total of block allocation of Tk 826.5 crores for
  various local government institutions under 11
  heads in ADP
• 5.3 per cent higher than FY04 (revised)
• Tk 244 cores earmarked for the CHT as investment
  project in FY06
• 31.1 higher than FY05 (revised)
• Under revenue budget, Tk 126 crores in FY06,
• 10.5 higher than FY05 (revised)

49
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Social Sector

• EDUCATION
• Education received the highest allocation (14.9
  of the total budget)
• Of which 34 (Tk 3227 crore) will be spent from
  development budget to implement 61 projects.
• In line with PRSP, budget has put emphasis on
  girls education.
• New target to bring 29 lakh more students under
  the stipend programme.
• Budget has increased the number of scholarships
  at various levels.
• No new project was included in education sector.
• However,
• Only 88 implementation in FY04
• In FY05, expenditure upto March was only 44 .
• None of the 13 projects were completed in due
  time.
• Ministry of education has been brought under
  the Medium Term Budgetary Framework (MTBF).
• Hopefully the targets can be better monitored.

50
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Social Sector

• HEALTH
• Combined allocation in Health (Tk 4240 crore) is
  33.5 more than FY05 (revised)
• Development budget increased by 58.7 compared to
  FY05 (revised)
• Only one new project has been included which was
  under the local government division
• However,
• In FY 04, only 71 of ADP was implemented.
• Expenditure up to March 05 has been only 33 of
  the allocated amount.
• On the whole, allocation in social sector
  (i.e. health, education) in FY06 as percentage of
  total budget has increased by 1.39.

51
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Social Sector

• Others
• A 'Char Livelihood Project' in 5 districts with
  an outlay of Taka 475 crore is being implemented
  to raise the living standards of extreme poor
  people, belonging to some disaster prone
  districts
• 'Abashan Project' (with an outlay of Tk 447
  crore) being implemented by the Office of the
  Prime Minister to provide land, housing, credit
  facility, education, health, family planning
  services and employment opportunities to 65
  thousand landless and extreme poor people

52
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Social Safety Net

• Allocation increased from Tk. 34.59 crore to Tk.
  41.75 crore (20.67 increase)
• Number of beneficiaries of allowance increased
  from 19.75 lakhs to 21.95 lakhs (20.67 increase)
• 47.9 of the total old age rural poor (57 years
  and above) covered

The Budget mentions these as additional amount
but does not mention anything about actual
utilisation in FY05
Increase of 1.62 lakh tons (18.6 increase)
13.6 increase
Concern Downward revision for allocation of
allowances in the revised budget
53
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Social Safety Net
New Programmes in FY06
Programmes for Mitigating Economic Shocks

• To allocate Tk 30 crore to the special fund
  introduced in FY 2004-05 for retraining and
  Employment of the Voluntarily Retired/ retrenched
  Employees/Labourers
• Earmarked Tk 20 crores for retraining and
  employment of workers/ eployees of Readymade
  Garments Industries (mentioned earlier)

54
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Concerns for social safety net measures

• The test of the actual efficacy of these
  allocations will be in their implementation and
  capacity to reach the target groups.
• Taka allocated as special block allocation for
  poverty reduction in FY05 (Tk 230 crore) under
  ADP was not spent at all until March 2005.
• Data on utilisation level of targeted programmes
  for poverty eradication and employment creation
  during the FY05 are not available.
• In the absence of utilisation level, it is not
  known how far they were implemented in FY05 and
  what will be the fate of these allocations in
  FY06.
• The budget speech says Fifty-four per cent of
  revenue and development budget will be spent to
  finance direct and indirect poverty reduction
  programmes in next fiscal (FY06).
• It is not known how this figure is obtained and
  which ministries/agencies/ programmes/ projects
  are included in this. A separate annex at the end
  of the speech could have addressed this concern
  and allowed us to compare pro-poorness of the
  budgets in future.

55
V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES
Special Credit Programmes for Employment
Generation
Data not available

• Concern
• The test of the actual efficacy of these
  allocations will be in their implementation and
  capacity to reach the target groups.

56
Budget 2005-06
A Budget of CARE COMPROMISE COLLUSION
57
VI. CONCLUDING OBSERVATIONS
Budget of Care

• Care has been taken to follow allocative priority
  from poverty alleviation consideration.
• These include
• Maximum increase in the area of health and
  education
• Inducement to stimulate agriculture and rural
  development
• Effort to expand and deepen the social safety net
  programmes

58
VI. CONCLUDING OBSERVATIONS
Budget of Compromise

• Budget for FY06 has made a number of compromises
  including
• Continuation of a tax holiday provisions
• Continuation of cash incentive scheme for certain
  sectors (textile, leather, agro-processing)
• Rationalisation of tariff and para-tariff
  structure that provided protection to particular
  sectors

59
VI. CONCLUDING OBSERVATIONS
Budget of Collusion

• The third trend in the proposed budget for FY06
  suggests that the fiscal measures were in fact
  generated through collusive behaviour. These
  include
• Tax Amnesty for Undeclared Income

60
VI. CONCLUDING OBSERVATIONS
Fiscal Balance
The economy is already under-performing when
juxtaposed to the targets set by the MTMF of the
PRSP.
61
VI. CONCLUDING OBSERVATIONS
Addressing the Emerging Macro Situation

• No single policy instrument can fully diffuse the
  gathering clouds on the horizons of macroeconomic
  situation.
• Possibly, a combination of three major approaches
  will be necessary to address domestic demand,
  external demand and aggregate demand to their
  allowable maximum limits. These instruments are
• Adjustment of nominal interest rate in line with
  the inflation rate making the real rate
  marginally positive
• Downward revision of the exchange rate of Taka to
  attain its equilibrium value and
• Moratorium on governments recurrent expenditures
  and streamlining of ADP.

62
VI. CONCLUDING OBSERVATIONS
Hazards in economic policy making in the time of
political transition
All over the world, pre-election political
correlates do influence the nature of economic
decisions. However, in many countries, thanks to
the presence of strong oversight institutions,
the scope for expedient tampering with economic
policies is greatly reduced. Regrettably,
Bangladesh is not endowed with such institutions
and regulatory frameworks. Thus, one observes
that successive regimes in Bangladesh have
manipulated public resources and overstretched
their decision-making authority to improve their
chance of electability, some time with ambiguous
consequences.
63
VI. CONCLUDING OBSERVATIONS

• It is in this context that we conclude our review
  by identifying eight hazards of policymaking
  during a period of political transition which
  Bangladesh is bracing for in 2006.
• Bloated Public Investment Programme
• Adverse Selection of Projects and Programmes
• Tendentious Award of Tax and Tariff Relief
• Contracting of Questionable Suppliers Credit
• Patronage Distribution through Public Procurement
• Patronage Distribution through Privatisation of
  State-Owned Enterprises
• Issuance of New Bank Licences
• Issuance of New Insurance Licences
• To what extent we shall be able to avoid these
  this year ?

64
Thank You for Your Attention