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Post-Budget (FY 2008-09) Round Table Conference

Post-Budget (FY 2008-09) Round Table Conference. Organized by ISLAMIC ECONOMICS RESEARCH BUREAU 14 June 2008. Talks Initiated By Professor Ayubur Rahman Bhuyan. BUDGET AT A GLANCE (Taka in Crore). BUDGET AT A GLANCE. (Taka in crore, Tk. 100cr = Tk. one billion).

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Post-Budget (FY 2008-09) Round Table Conference

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  1. Post-Budget (FY 2008-09) Round Table Conference Organized by ISLAMIC ECONOMICS RESEARCH BUREAU 14 June 2008 Talks Initiated By Professor Ayubur Rahman Bhuyan

  2. BUDGET AT A GLANCE (Taka in Crore) BUDGET AT A GLANCE (Taka in crore, Tk. 100cr = Tk. one billion)

  3. BUDGET AT A GLANCE CONTD. (Taka in crore, Tk. 100cr = Tk. one billion)

  4. BUDGET AT A GLANCE CONTD. (Taka in crore, Tk. 100cr = Tk. one billion)

  5. BUDGET AT A GLANCE CONTD. (Taka in crore, Tk. 100cr = Tk. one billion)

  6. Introduction • Preparing a budget for fiscal 2008-09 has been a daunting task for the government. • It has been prepared at a time when there is a mounting demand on government expenditure in the backdrop of sky-high prices of essentials and the devastation of two floods and a cyclone. • The size of the budget is therefore bound to be large – nearly a trillion taka. • The budget in fact is one of increased expenditure and large deficit.

  7. Budget Objectives • The Finance Adviser announced a Tk. 992.62 billion national budget for the fiscal 2008-09. The broad objectives are: • Maintaining macroeconomic stability • Accelerated economic growth • Poverty reduction

  8. Maintaining price level of essentials within tolerable limit Employment generation Widening and deepening of social safety-net programmes Reducing regional disparity Increasing agricultural production Ensuring food security Increasing power generation Overall development of communication network, including IT Budget Priorities

  9. Main Features of the Budget Expenditure • The projected total government expenditure is Tk. 999.62 billion, which is 14.7 percent higher than the expenditure (Tk. 871.37 billion) in the original budget, and 6.8 percent higher than the expenditure in the revised budget (Tk. 936.08 billion) for the outgoing fiscal 2007-08. • Non-development expenditure proposed in the budget is Tk. 667.53 billion, which is 26.2 percent higher than in the original, and 16.2 percent higher than in the revised, budget for FY 2007-08. • The budget proposes an ADP of Tk. 256.00 billion, which is 3.4 percent lower than the original ADP, but 13.8 percent higher than the revised ADP of the outgoing fiscal (Tk. 225.00 billion). The proposed ADP for FY09 is 4.2 percent of GDP, the lowest in the country’s history.

  10. Revenue and Foreign Grants • Revenue receipts will contribute Tk. 693.82 billion, which is 21.08 percent higher than the original, and 14.61 percent higher than in the revised budget for the outgoing fiscal year. • The total revenue for FY 09 (Tk. 693.82 billion) is estimated at 11.3 percent of GDP (NBR revenue 8.9 percent, non-tax revenue 2.1 percent, and non-NBR revenue 0.4 percent). • Foreign grants are projected to provide Tk. 63.46 billion to the resources of the budget, which is 44.6 percent higher than in the revised budget, and 49.1 percent higher than in the original budget for 2007-08.

  11. Budget Deficit • The projected budget deficit, excluding foreign grants, is estimated at Tk. 305.80 billion, which is 19.7 percent higher than in the revised budget and 37.0 percent higher than in the original budget for 2007-08. • The budget deficit, excluding grants, would be 4.99 percent of GDP, compared to 4.77 percent of GDP in the revised budget. • The deficit in the revised 2007-08 budget, excluding grants and including BPC liabilities is 6.18 percent of GDP.

  12. Financing the Deficit • For financing the deficit, the targeted domestic borrowing from the banking system is Tk. 134.98 billion as against Tk. 72.53 billion in the original 2007-08 budget and Tk. 103.98 billion in the revised budget. The targeted increase in bank borrowing is 29.8% and 86.1% higher than in the revised and the original FY08 budget, respectively. • Targeted non-bank borrowing is Tk. 35.00 billion as against Tk. 45.00 billion in the original 2007-08 budget, and Tk. 20.02 billion of the revised budget. • Targeted foreign borrowing is Tk. 72.36 billion (=gross Tk. 114.57 minus amortization Tk. 42.21 billion). In the revised FY08 budget, foreign net borrowing was Tk. 87.56 billion (Tk. 130.24 billion – repayment Tk. 42.68 billion).

  13. Some Budgetary Targets • GDP growth in 2008-09 is to rise to 6.5 percent (from 6.2 percent in 2007-08) and to 7-8 percent in the medium term (FY 2009-11). • Inflation rate to slow down to 9.0 percent from the present 11.0 percent. • Tk. 88.43 billion or 14.6 percent more revenue is to be raised in 2008-09 than in the outgoing fiscal (FY2007-08).

  14. Some Budgetary Targets Contd. • In ADP Allocation, Agriculture, rural development and water resources receives 29.7%; power and energy sector 15.7%; education 12.8%; transportation sector 12.7%; health sector 8.9%; and the rest, including social security and welfare, 20.2%. • 70 percent of the budget will be spent on non-development and 30 percent on development expenditure. • 58.3 percent of the total budget will be spent on programmes directly or indirectly related to poverty alleviation. • Some 8.2 percent of the total budget will be spent for social empowerment and safety net programmes.

  15. 29.0 percent of the total budget will be spent on physical infrastructure. • 32.4 percent of total budget will be spent on social expenditure. • 21.4 percent of total budget will be spent on public administration. • 12.6 percent of the total budget will be spent on interest payment. Some Budgetary Targets Contd.

  16. From where the total Tk. 999.62 billion of resources will come? (in percent) NBR Tax Revenue : 54.5 Non-NBR Tax Revenue : 2.3 Non-tax Revenue : 12.6 Domestic Financing : 17.0 Foreign Loans : 7.2 Foreign Grants : 6.4 • Resources for ADP 2008-09 : Internal 43%, External 57%. • Resources for ADP 2007-08: Internal 51%, External 49%. • Dependence on external sources has thus increased in FY09.

  17. Budgetary Allocation (Total Tk. 999.62 billion) • Interest payment is at the top: 12.6% • Education gets the next highest priority : 12.3% • Energy and Power : 11.3% • Agriculture and Rural Development : 16.4% • Public Administration : 9.1%

  18. Budgetary Allocation Contd. • Social security and Welfare : 8.2% • Transport and Communication : 6.1% • Defence : 6.4% • Health : 5.9% • Public order and security : 5.6%

  19. Social Safety Net Widened • Existing safety net programmes for the poor, women, children, vulnerable groups such as the elderly and disabled people have been widened in terms of coverage and number. • Allocation for this purpose has been raised to Tk. 169.32 billion, which is 48 percent higher than the revised allocation of Tk. 114.67 billion in FY08. • To increase employment in rural areas a Tk. 20.00 billion new programme titled 100 Days Employment Generation has been proposed, which will create jobs for 2 million unemployed poor. • The budget proposes a further allocation of Tk. 15.78 billion for the FFW programme, which will generate another 14.4 crore mandays of employment.

  20. Social Safety Net Widened Contd. • The provision for distribution of 30 kg rice/wheat per head for 750 thousand women under the VGD programme will continue. This programme will be extended to provide a monthly allowance of Tk. 400 per head to an additional 40 thousand women of eight northern districts. • A new programme titled Rural Employment and Road Maintenance Programme (RERMP) at a cost of Tk. 9.43 billion would be launched from the next fiscal year, which will generate 80 thousand jobs annually in 4926 unions. • The number of beneficiaries under the Allowance for Poor Lactating Mothers programme introduced last year will be raised from the existing 45 thousand to 60 thousand. The budget proposes a similar programme for poor lactating working mothers in the urban areas in the next fiscal.

  21. Social Safety Net Widened Contd. • Allocation of funds to PKSF, NGO Foundation, Social Development Foundation, BRDB, and several other government Departments and organizations that channel micro-credit through NGOs has been raised by Tk. 6.57 billion. • Employment for 15 million families will be generated through these micro-credit operations. • Other social safety nets that will be enhanced include the Old Age Allowance, and Allowances for the Wounded Freedom Fighters, Insolvent Freedom Fighters, and insolvent persons with physical debility.

  22. Social Safety Net Widened Contd. • Rate of allowance for widowed, deserted and destitute women has been increased from Tk. 220 to Tk. 250, and the number of beneficiaries has been raised from 825 thousand to 900 thousand. • The subsistence allowance for children of orphanages has been enhanced. • The allocation to finance the stipend programme for the disabled students will be increased from the current year’s Tk. 5 crore to Tk. 6 crore in the next fiscal. • The schooll-feeding programme for about 6 lakh primary school-going children of 3 monga-affected districts will be expanded to another 10 districts of 6 divisions in the next fiscal year.

  23. Agriculture and Rural Development • Attaching highest priority to agriculture and rural development, the budget proposes to allocate Tk. 164.11 billion in the next fiscal year, which is 16.4 percent of the total budget outlay. • The Endowment Fund of Tk. 3.5 billion created last year to strengthen agricultural research has been activated. • To strengthen efforts to innovate, the budget allocates Tk. 2.72 billion in the development and non-development budget apart from the regular allocation for agricultural extension and research. • There is an allocation of Tk. 5.40 billion for paying direct cash subsidy to the farmers using diesel-powered irrigation pumps in the coming fiscal, compared to Tk. 2.50 billion in the current fiscal.

  24. Other Fiscal Measures • Revenue-GDP ratio will be raised to 11.3% (from 10.4% in FY08) • Tax-GDP ratio will be raised by strengtheing tax collection efforts, by expanding coverage by identifying new tax-payers. • No new tax will be imposed, nor will the prevailing tax rates be raised. Moreover, the turnover tax has been abolished. • Tax collection will be improved by simplification of procedures for revenue collection, avoidance of all sorts of discriminatory provisions, expansion of VAT net, and elimination of discretionary power of tax officials to the maximum extent possible.

  25. Other Fiscal Measures Contd. • The budget provides opportunity to declare undisclosed legal income with the payment of 7.0 percent penal tax in addition to the normal tax rate. This opportunity will remain in force for only four months till 31 December 2008. • The tax threshold remains unchanged at Tk. 1,50,000, except for female tax payers as well as senior tax payers aged 70+, for whom the limit for tax-exempt income has been raised to Tk. 1,65,000. • Tax holiday facility currently enjoyed by certain industries is extended till 30 June 2011. • Some new sectors are included under the tax holiday provision. These are agro-processing, diamond cutting, steel production from billet, jute industries, different units of textile sector, underground rail, monorail, and telecom infrastructure except mobile phone.

  26. Other Fiscal Measures Contd. • The tax rate for companies listed in the stock market has been revised down from 30 percent to 27.5 percent, and for non-listed companies from 40 percent to 37.5 percent. • For corporate tax payers, income tax on divided income will be imposed in accordance with the applicable scheduled rates for companies, instead of the existing 15 percent. • The current tax exemption for income from non-crop farms has been extended to incomes of SMEs having annual turnover not exceeding Tk. 2.4 million, export of handicrafts, and development of computer software, data processing, data entry and call centres. The tax free facility will be available upto 30 June 2011.

  27. Measures to Increase Food Security • The government will procure 3.2 million tonnes of foodgrains through domestic procurement, import and food aid in the next fiscal year. • Three million tonnes of these foodgrains will be distributed through OMS at concessional prices and through programmes like FFW, VGF, VGD, Test Relief and Gratuitous Relief. • New wholesale markets will be built in Dhaka and main cities to improve distribution of foodgrains.

  28. Some Brighter Sides of the Budget • Priorities on food security, agriculture and employment generation are welcome measures. • The budget lays emphasis on tackling inflation, improving power supply and other basic infrastructures, expanding social safety nets, supporting agriculture with subsidized inputs and intensive research, and promoting rural development. • There is emphasis on human resource development – health and education. • The budget lays emphasis on poverty reduction. Fifty-eight percent of the overall budget is linked to poverty reduction projects.

  29. Some Brighter Sides of the BudgetContd. • The provision of special allocations for the backward regions (in Rajshahi, Khulna and Barisal Divisions) will help reduce regional disparity. • However, the impact of increased ADP outlay in the same Divisions in the current year’s budget needs to be assessed and made public. • The continuation of the current facility of duty free import of wheat, rice, onion, peas, fertilizer etc. will help control prices. • The continuation of the provision on accelerated depreciation allowances until 30 June 2010 is a welcome step.

  30. Some Brighter Sides of the BudgetContd. • Duty reduction on capital machinery and spare parts from 5 percent to 3 percent, on basic raw materials from 10 percent to 7 percent, and on intermediate inputs from 15 percent to 12 percent will promote domestic industrialization. • Extension of the tax free facility to rural non-farm activities by another three years and the inclusion of agro-processing industries in the list of industries enjoying tax holiday will benefit the agriculture sector. • Reduction of duty on printing paper to 12 percent from 25 percent and the raising of the duty on printed papers from 15 percent to 25 percent will benefit the printing sector, which faces uneven competition.

  31. Some Brighter Sides of the BudgetContd. • The proposed 2.5 percent reduction in tax rate for listed companies will encourage companies to be listed on the stock market. • The proposal to provide bonded warehouse facilities to all 100 percent export-oriented industries and to allocate Tk. 10.50 billion as export subsidy (Tk. 3.5 billion in the current fiscal) will encourage the country's export industries. • The minimum threshold of income tax and VAT for SME entrepreneurs will boost the growth of the SME sector.

  32. Weaknesses of the BudgetPower Sector Programme • There is no concrete plan for new generation of power. • The budget merely says that by 2020, the country will be able to reach the level of generation of power commensurate with the increasing demand. • This is in sharp contrast with the Finance Advisor’s assurance given in his budget speech last year that “by 2010, there will be sufficient electricity, and no load shedding.” • The allocation to this sector, despite getting the third highest priority, is grossly inadequate. • Well-conceived short and medium term plans to develop the power sector will be needed for overcoming the problems of the power sector.

  33. Weaknesses of the Budget Contd. • Financing a large part (55.6 percent) of the budget’s Tk. 305.80 billion deficit through domestic borrowing may crowd out the private sector from the credit market. High government borrowing may cause a liquidity crisis in the banking sector, raise interest rates, and hamper the normal growth of the industrial sector. • High government borrowing may also aggravate the inflationary pressure and destroy macro-economic instability. • The proposed budget says very little about how to curb the inflation, except stating that the prices of essential items like rice, wheat, edible oils, lentils, onion and garlic shall be kept at a normal level.

  34. Weaknesses of the Budget Contd. • It is not clear as to how the budgetary objective of creating employment will be achieved. The safety net programmes are merely instruments of income transfer, which provide short-term relief to the poor but do not create any job. • A low ADP, which is just a fourth of the government’s total expenditure in the next fiscal does not promise any significant increase in employment in rural areas • ADP is crucially important to encourage private investment, promote growth and create jobs. The low size of the proposed ADP denies that opportunity.

  35. Weaknesses of the Budget Contd. • The provision of farm subsidy and other safety-net programmes are steps in the direct direction, but care should be taken to ensure their proper implementation. • It is as well to mention that none of the commitments made by the Finance Advisor in his budget speech last year – e.g., macroeconomic stability, accelerating economic growth, ensuring food security, increasing power generation, rural development etc. – has been fully met. • High priority given to social sectors is welcome but giving attention to quality education and health is important. It is also necessary to give priority to primary education and primary health care because their benefits go mainly to the poor.

  36. Weaknesses of the Budget Contd. • The fixed income, and more so the lower middle income, group are unhappy at the continuation of the existing level of tax-exempt income. The Finance Adviser himself admitted in his budget speech the plight of the fixed income group of people due to high inflation. Raising the level of tax tax-exempt income from the existing Tk. 1,50,000 would therefore be advisable. • The budget targets a 6.5 percent GDP growth, which is achievable, but that will require an increase in investment. • The withdrawal of the tax concession to dividend income of corporate taxpayers is injudicious. The existing provision should be restored in the interest of the capital market. • The provision of regularizing the undeclared income tantamounts to rewarding the corrupt, although the government is bent upon eradicating corruption from the society.

  37. Poverty Reducing Measures Weaknesses of the Budget Contd. • Fifty-eight percent of the budgetary allocation is for poverty alleviation but the budget does not spell out how poverty will be reduced. • Poverty can be reduced only by employment generation but the safety net measures merely help meet the short-term needs of the poor and hardly contribute to creation of employment and income. • There is the need for proper surveillance to ensure that the allowances are properly distributed to the targeted beneficiaries.

  38. Concluding Remarks • The projected 4.99 percent budget deficit, compared to the current year’s 4.77 percent, is not high, given the high inflation rate and the inevitable need for payment of subsidies, interest, and higher pay and allowances. • Care should, however, be taken to ensure that increased domestic borrowing from banks does not have any crowding out effect on private sector credit. • Also effort should be intensified to improve revenue collection so that the government does not need to take recourse to further borrowing from the banking system. • Greater reliance on external resources for financing the budget is not very desirable, given the declining availability of foreign aid in the recent years. Any shortfall in foreign finances will force the government to go for further borrowing from the banking system, which may disturb macroeconomic stability.

  39. Concluding RemarksContd. • Serious efforts should be made to obtain timely availability of the projected aid, including releasing the amount of aid that is lying on the pipeline. • The budget has drawn comments and suggestions on various fiscal measures from different quarters. The Finance Adviser may consider them on the merit of each before finalizing the budget. • The Finance Adviser will need to consult the politicians and political parties and get their feedback on the budget because it is they that will be responsible for implementing the budget when the CTG will relinquish their office half-way through the fiscal year.

  40. Thank You

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