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CENTRE FOR POLICY DIALOGUE (CPD) B A N G L A D E S H a c i v i l s o c i e t y t h i n k – t a n k Dialogue on State of the Bangladesh Economy and Budget Responses 2005 Hotel Sheraton, Dhaka June 19, 2005 Keynote Presentation by

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CENTRE FOR POLICY DIALOGUE (CPD)

B A N G L A D E S H

a c i v i l s o c i e t y t h i n k – t a n k

Dialogue on

State of the Bangladesh Economy and Budget Responses 2005

Hotel Sheraton, DhakaJune 19, 2005

Keynote Presentation

by

Debapriya Bhattacharya

Executive Director, CPD



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Content

I. INTRODUCTION

II. GROWTH, SAVINGS AND INVESTMENT

III. PUBLIC FINANCE

IV. FISCAL MEASURES

V. SOCIAL SECTORS AND SAFETY NET PROGRAMMES

VI. CONCLUDING OBSERVATIONS


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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

  • Buoyant remittance flow continued


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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


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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


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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


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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


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II. GROWTH, SAVINGS AND INVESTMENT

Economic Growth Performance

Bangladesh’s 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.


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II. GROWTH, SAVINGS AND INVESTMENT

Economic Growth in South Asia

However, when compared with the major South Asian countries, Bangladesh’s GDP growth rates appear to be moderate. It seems South Asia as a whole going through a moderately high growth spell.

South Asia’s GDP Growth FY04-05


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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


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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 $


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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


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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


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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


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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


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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


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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 38:62


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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.


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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.


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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

?


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IV. FISCAL MEASURES

Tax on Real Estate

  • Taxing of investment in real estate at a flat rate of 175 Tk/M2and 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


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IV. FISCAL MEASURES

Budget Proposals for Rationalisation of Income Tax Measures

  • Consideration as final settlement:

  • Deduction of tax @ 4% on freight charges of resident ocean going ships;

  • Deduction of tax at source @ 0.25% on total export proceeds of knit-wear & readymade garments;

  • Deduction of tax at source @ 0.015% on the transaction value of shares for members of stock exchange;

  • Collection of tax on sale of apartments @ Tk 175 per square meter and for land @ 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?


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IV. FISCAL MEASURES

Other Direct Taxes

Positive

  • 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%.

  • Reduced rate of tax @ 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.


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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


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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.


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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 @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.


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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.


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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


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IV. FISCAL MEASURES

Power and Energy

Negative

Negative

Ambiguous

ØIn 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.

  • ØIn 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.

ØAlthough 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.


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IV. FISCAL MEASURES

SMEs

Positive

Negative

Negative

  • ØUnder 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.


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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.


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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.


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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!


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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


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IV. FISCAL MEASURES

Telecommunication

Leather and Leather goods industries

Positive

Negative

Positive

  • ØImposition 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.


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IV. FISCAL MEASURES

Manufacturing Items

Vehicle

Tax Base Under VAT

Positive

Concerns

Ambiguous

  • Ø Reduction of customs duty on some raw materials needed for the manufacture of transformer.

    • Itcould 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.


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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)


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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.


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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%.


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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


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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


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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)


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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.


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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.


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Budget 2005-06

A Budget of

CARE

COMPROMISE

&

COLLUSION


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VI. CONCLUDING OBSERVATIONS

Budget of Care

Carehas 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


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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


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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


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VI. CONCLUDING OBSERVATIONS

Fiscal Balance

The economy is already under-performing when juxtaposed to the targets set by the MTMF of the PRSP.


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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.


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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.


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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 ?


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Thank You

for

Your Attention