Budget Analysis of 2016-17 of Bangladesh

BUDGET ANALYSIS OF FY 2016-17 OF BANGLADESH

Rasel Ahamed 7/31/16

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JAGANNATH UNIVERSITY DEPARTMENT OF FINANCE

ASSIGNMENT ON

BUDGET ANALYSIS OF FY 2016-

17 OF BANGLADESH

SUBMITTED TO:

SK. ALAMGIR HOSSAIN

ASSISTANT PROFESSOR

DEPARTMENT OF FINANCE

JAGANNATH UNIVERSITY

SUBMITTED BY:

RASEL AHAMED

ID: B-120203047

7TH BATCH

DATE OF SUBMISSION: 31 JULY, 2016

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TABLE OF CONTENTS GOVERNMENT BUDGET ............................................................... 3

DEFICIT BUDGET ............................................................................ 3

FOREIGN RESERVE’S ROLE IN ECONOMY ............................ 4

BUDGET ANALYSIS ......................................................................... 6

SECTORAL MEASURES OF BUDGET ....................................... 13

FINDINGS OF FY 201617 BUDGET ............................................ 15

RECOMMENDATIONS .................................................................. 18

DEFICIT BUDGET AND DEVELOPING COUNTRY ............... 19

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GOVERNMENT BUDGET Government budget, forecast by a government of its expenditures and revenues for a specific

period of time. In national finance, the period covered by a budget is usually a year, known as

a financial or fiscal year, which may or may not correspond with the calendar year. The budget

is also known as the Annual Financial Statement of the country. It is approved by the chief

executive or president and presented by the Finance Minister to the nation.

DEFICIT BUDGET Government budget deficit is the difference between government revenues and expenditures.

Government has different sources of revenues. Major portion of government revenues comes

from direct and indirect taxes. Direct taxes come from income and profits of individuals and

institutions and indirect taxes come from import duty, supplementary duty and value added tax.

It can be put in different way. Direct taxes are the part of economic revenues and incomes of

individuals and institutions and indirect taxes are the part of economic transactions in the form

of buy, sale, export and import transactions. If government wants accelerate its revenues to

meet the growing public expenditures and to reduce the budget deficit without reducing the

expenditures of different influential sectors, much efforts should be made to increase economic

revenues and income as well as the economic transactions so that the government revenues can

meet the growing demand of the economy with the increase in revenues from income tax,

import duty, supplementary duty and value added tax. In this regard the concentration of the

report is on the management of deficit budget to minimize bad effects and maximize the

utilization of funds. Having budget deficit is not a problem at all. The problems lie with the

government inefficiency in the management of budget deficit. The evaluation of different

reasons behind deficit budget and the evaluation of different bad effects of deficit budget are

two crucial parts of our discussion. The impact of budget deficit on the different sectors of the

economy is addressed here with relevant information. It is further concentration point of the

report to find ways to improve the management performance of the government to achieve

different macroeconomic goals with the help of expansion of economic revenues and

transactions. The government revenues increase with the increase in economic revenues and

economic transactions. The key point of our discussion is government should not decrease the

public expenditures as the population is growing. The expenditures on different public sectors

have to be increased as the population is growing. But budget deficit should not grow to meet

the expenditures as budget deficit has some associated problems with it. For this reason

government has to concentrate on accelerating the revenue collection rapidly with the

expansion of economic revenues and economic transactions. For this reason government

should try to integrate different policies to achieve key macroeconomic goals.

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FOREIGN RESERVE’S ROLE IN ECONOMY Foreign currency reserves are vital to a nation's economic well-being. Without adequate

reserves, an economy can grind to a halt. The country may be unable to pay for critical imports

like crude oil, or service its external debt.

The International Monetary Fund (IMF) defines reserve assets as external assets that a

country’s monetary authority can use to meet balance of payments financing needs, use to

affect currency exchange rates in currency exchange markets, and other related purposes. Most

nations hold the vast majority of their foreign currency reserves in U.S. dollars and a much

smaller portion in euros.

Foreign exchange reserves are important indicators of ability to repay foreign debt. It used to

determine credit ratings of nations. It can be applied to liabilities in times of crisis include

stabilization funds, otherwise known as sovereign wealth funds.

Excessive Foreign Reserve may reduce our international competitiveness and export may be

affected. Due to the slack in industrialization process, import of machinery has gone down

leading to piling up of the reserve.

There is a growing debate about the need to hold so many reserves. Some critics point out that

holding a lot of reserves is costly. Reserves held in U.S. Treasuries, for example, earn a modest

return, far below these countries’ own cost of borrowing either in local currency or in dollars.

Why hold cash in the bank and pay high interest on outstanding liabilities? Critics also note

that the yield on reserves is much lower than the potential return they could earn by using those

reserves to make real investments in the economy, such as building roads, bridges, and schools

Those who support holding large reserve balances argue that the cost of doing so is small

compared to the economic consequences of a sharp depreciation in the value of the currency

that is often associated with financial crises in emerging markets. A devaluation of the currency

raises a country’s costs of paying back debt denominated in foreign currency as well as its costs

of imported goods, and it also raises the spectre of inflation. With a large stockpile of foreign

exchange reserves, a country’s monetary authority can buy up its currency in the foreign capital

markets, which helps to uphold its value. By having its own ammunition to defend its currency

in a crisis, a country with large holdings of reserves also avoids being shut out of international

capital markets due to concerns that the government or the private sector will default on foreign

debt payments. Therefore, these proponents argue, holding large reserve stockpiles is prudent

policy for those occasions when defending the value of the currency makes sense.

When countries’ access to capital markets is diminished because their governments and private

sectors appear to be at high risk of defaulting and when it is costly either to raise taxes or to cut

government spending, countries will find it desirable to hold large precautionary reserve

balances. When countries attach more weight to bad outcomes than to good ones, they also find

it desirable to hold sizeable precautionary balances of international reserves, even if the return

on investing domestic capital far exceeds the return on reserves. Not all developing economies,

indeed not all emerging markets, will hold large reserve stockpiles in the aftermath of crises,

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however. Countries that strongly favor current consumption, that experience political

instability, or that suffer from political corruption face a lower effective return on holding

reserves and will acquire more modest stockpiles.

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BUDGET ANALYSIS The slogan of the national Budget 201617 was: 'marching towards growth, developme

nt and equitable society'. Finance Minister AMA Muhith on June 2 rolled out a Taka

340,605 crore national budget for 20162017 fiscal setting the GDP growth target at 7.2

per cent and delineating a set of programs to transform the country into a role model of modern

and welfare state by 2041. The Tk. 3406.06billion budget is apparently big, and albeit

ambitious, but from expenditure side it is only 17.4 per cent of gross domestic product (GDP).

Bangladesh economy is growing fast that needs to be nurtured by larger expenditure to

boost investment and growth.

Failure in tax reform and weak performance of the annual development program (ADP)

gave rise to a major concern during the previous fiscal year (201516). Implementation

of the proposed budget for the next fiscal year will depend on the success in tax collection and

improving implementation capacity of the ADP.

For FY 201617, the revenue target has been set at $31 billion (12.4 per cent) of GDP and

proposed expenditure to the tune of $43 billion (17.4 per cent of GDP), that would result in a

budget deficit of 5.0 per cent of GDP. In the revised budget of 2015/16, revenue collection

and expenditure were 10.3 and 15.3 per cent respectively, again indicating a budget

deficit of 5.0 per cent of GDP which is generally considered as a safe limit. Private investment

as a share of GDP (23.3%) is expected to rise by 1.5 percentage points. An additional (approx.)

Tk. 80,000 crore private investment will be required in FY16-17. Inflation is expected to

decline to 5.8%.

Growth, Investment and Inflation

Indicators FY2015-16 (B) FY2015-16 (R) FY2016-17

GDP Growth (%) 7.0 7.1 7.2

Investment (as % of GDP) 30.1 29.4 31.0

Private Investment ( as % of GDP) 22.8 21.8 23.3

Public Investment (as % of GDP) 7.3 7.6 7.7

CPI Inflation 6.2 6.2 5.8

Both revenue and total expenditure (as % of GDP) to grow in FY17 by about 2.1 percentage

points. Revenue (36.8%) projected to grow faster (to collect additional Tk. 65,351 crore) than

public expenditure (28.7%) which will spend additional Tk. 76,040 crore -

Total budget expenditure is set at 17.4% of GDP (15.3% in RBFY16)

Revenue income will be 12.4% of GDP (10.3% in RBFY16)

Development expenditure (22.0%) programmed to grow slower than non- development

revenue expenditure (25.7%) – impact of full implementation of pay scale! ADP: 32.5% of

total public expenditure (34.4% in the RBFY16) Budget deficit has been projected at 5.0% of

GDP (same in RBFY16, actual may be about 4.5% of GDP) Balance in financing budget deficit

will be corrected, if implemented –

High foreign financing target (45.3% growth over the RBFY16) has been set with

anticipated gross foreign aid flow of USD 5.7 billion (highest in history – USD 3.1

billion in FY15)

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Government’s net bank borrowing will increase by only 22.9%

Implementation of the proposed fiscal framework is challenging!

Fiscal Framework (as % of GDP)


Revenue 12.1 10.3 12.4

NBR Revenue 10.3 8.7 10.4

Non NBR Revenue 0.3 0.3 0.4

Non Tax Revenue 1.5 1.3 1.6

Expenditure 17.2 15.3 17.4

Of which ADP 5.7 5.3 5.6

Budget Deficit 5.0 5.0 5.0

Domestic Financing 3.3 3.6 3.1

Of which banking 2.2 1.8 2

Foreign Financing 1.8 1.4 1.9

Public debt as % of GDP is at a reasonable state for Bangladesh – may increase insignificantly

in FY17 largely due to rise in domestic debt. Currently about 57% of the public debt is

attributable to domestic source and 43% to foreign finance. The composition is expected to

change further – by FY19 about 63% of the total debt will be incurred from domestic sources.

Government needs to use low-cost borrowings – this is not the case in recent years. Interest

payment for domestic debt has already risen substantially. Debt servicing for borrowing for

large infrastructure projects may put further pressure in future.

Public Debt (as % of GDP)


Total Debt 35.0 33.9 34.5

Domestic 20.2 19.2 20.4

External 14.8 14.7 14.2

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Total Public Expenditure

Sector Share in

BFY 16-17

Share in

BFY 15-16

Change in FY17B over

FY16R

% Crore TK %

Education and Technology 15.5 14.9 13588.0 34.6

Public Service 13.9 9.0 23523.0 99.0

Interest 11.7 12.0 8282.0 26.2

Transport and Communication 10.9 10.1 10467.0 39.1

LGRD 6.9 8.1 2075.0 9.7

Agriculture 6.7 7.0 4207.0 22.7

Defense Services 6.5 7.8 1436.0 6.9

Public Order and Safety 6.2 6.6 3643.0 20.9

Social Security and Welfare 5.8 6.4 3004.0 17.8

Health 5.1 5.6 18.1

Fuel and Energy 4.4 6.3 -1579.0 -9.5

Industrial and Economic Services 1.0 1.0 823.0 30.1

Housing 0.9 1.5 -817.0 -20.8

Recreation, Culture and Religious

Affairs

0.8 0.9 325.0 13.7

Others(Memorandum Item) 3.5 2.9 4388.0 57.8

Total Expenditure 100.0 100.0 76040.0 28.7

Economic Analysis of Non-Development Revenue Expenditure

Indicators

Growth

FY17/R

BFY16 (%)

Share B

FY17 (%)

Share RB

FY16 (%)

Increment al

Share

FY17B (%)

Change

FY17/R

BFY16

(Crore)

Pay and Allowances 19.5 25.5 26.5 21.6 8286

Goods and Services 7.1 10.4 12.0 3.6 1365

Interest Payments 26.2 20.1 19.7 21.6 8282

Domestic 27.3 19.2 18.7 21.4 8196

Foreign 5.3 0.9 1.0 0.2 86

Subsidies and Current

Transfers

32.9 37.9 35.3 48.7 18647

Block Allocation 719.4 1.1 0.2 5.2 2007

Acquisition of Assets

and Works

14.0 4.9 5.4 3.2 1209

Transaction with IMF -100.0 0.0 0.9 -3.9 -1500

Total Augmented Non-

Development Revenue

Expenditure

23.9 100.0 100.0 100.0 38296

Highest incremental share to Subsidies and Current Transfers, followed by Pay and

Allowances

Interest payment remains the sector with third highest allocation

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Domestic interest payments will increase by 21.4% in FY17– about 19.2% of total

augmented non-development revenue expenditure – effect of domestic borrowing

based deficit financing!

Subsidy (loans, subsidies and fiscal incentives)

Total subsidy allocation is expected to be about 1.2% of GDP in FY17 (1.1% in

RBFY16)

About 6.8% of total public expenditure

These are reflected in loans and advances ((-) 19.5% reduction)

Agriculture subsidy will be Tk. 9,000 crore for FY16-17– same as the previous year

with unchanged subsidy structure agriculture may not need the full amount

In RBFY15-16 subsidy budget for agriculture was reduced to Tk. 7,000 crore – it may

be similar in FY16-17

For export sector, allocation is Tk. 3,000 crore

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Annual Development Program (ADP)

ADP of Tk. 110,700 crore has been proposed for FY16-17. 45,163 crore (46.6% of original

ADP FY15-16) was implemented up to April 2016 (last year it was 51.8%). 14.1% higher than

RADP for FY15-16 and 21.6% higher than ADP for FY15-16. Project Aid component is 36.1%

of total ADP (32% in RADP of FY15-16 and 35.6%in original ADP of FY15-16). Tk. 2,977

crore has been provided to development assistance program.

Sectors

No of

Projec

ts ADP

FY16-

17

Share (%)

ADP

FY16-17

Share

(%)

RADP

FY15-16

Share (%)

ADP

FY15-16

Growt

h (%)

ADP

FY16-

17 over

RADP

FY16

Total Five Sectors 636 71.0 71.4 70.6 21.1

Transport 188 25.8 21.1 22.4 48.9

Education & Religious

Affairs

95 13.1 11.1 10.7 43.1

Physical Planning, Water

Supply

&Housing

170 12.1 12.2 11.5 20.7

Power 69 11.8 17.0 17.0 -15.6

Rural Development &

Institutions

114 8.2 9.9 8.9 0.7

Other 12 Sectors 505 29.0 28.6 29.4 23.0

Development Assistance NA 2.7 4.3 2.6 -24.0

Total 1

,

1

4

1

100.0 100.0 100.0 21.6

The top 5 sectors have received 71% of total ADP allocation concentration

ratio increased

Transport Sector once again has received the highest amount of allocation (25.8%

of total allocation) for the highest number of projects – 48.9% growth over RADP

FY15-16

Within transport sector, railway received 10.1% of total allocation

Allocation for power sector was reduced by 15.6% in FY16-17 over RADP FY15-16

The ADP for FY17 contains 1,123 projects (999 for ADP of FY16)

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Personal Income Tax

No change was seen in tax-exempted personal income threshold or slabs. Tax-free income will

be Tk. 25,000 higher for parents or legal guardians of persons with disabilities – promoting

social equity. Perquisite ceiling has been raised to Tk. 4.75 lakh from Tk. 4.50 lakh – will

benefit the salaried employees. Minimum amount of tax for individual assessees remains the

same. Tax credit on investment. An assessee can invest 20% (previously 30%) of total personal

income. Additional tax burden as a share of income will be higher for lower income groups.

Tax liability will be higher for the current tax payers – individuals within the net are being

taxed more

Total Taxable Income Tax Liability Increased by

When an assessee’s income will be Tk. 10 lakh 32%

When an assessee’s income will be Tk. 11.5 lakh 29%



Wealth Surcharge

Minimum net wealth exemption limit remains the same at Tk. 2.25 crore. 4 slabs have been

changed, now 6 in total. Tax on net wealth above Tk. 20 crore has been raised to 30% (from

20%) - progressive taxing for Tk. 5 crore and above net assets, higher revenue collection.

Corporate Tax

Most of the company tax rates exist same. All tobacco products (cigarette, bidi, zarda, chewing

tobacco, gul, and other smokeless tobacco) manufacturers will be charged tax at 45%, which

was 25% & 35% - tax revenue will be higher. Minimum corporate tax at source revised from

uniform rate of 0.3%. 1% for tobacco manufacturers welcome move considering health issues.

0.75% for mobile phone operators – revenue will increase; may get passed on to the consumers.

0.60% for others – will increase the revenue. Tax deduction rates on receipts from international

calls has been raised from 1% to 1.5%.

Tax deduction at source (TDS)

RMG and accessories, terry towel, jute goods, frozen food, vegetables, leather goods

and packed food exporters have to pay advance income tax at the rate of 1.5%

(increased from 0.6%) [53BBBB]

Interest payments on approved savings instruments, superannuation fund, pension fund,

gratuity fund, recognised provident fund or workers’ profit participation fund will be

taxed at 5% [52D]

5% will be deducted from interest income from pensioners’ savings certificates

exceeding Tk. 5 lakh of investment [52D]

Payments to contractors will be taxed at a fixed rate of 10% (15% if not eTIN-

registered) [52]

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Payments from royalties and certain services (such as professional services,

consultancy, event-management, supply of manpower etc.) will be taxed at 10% if base

amount is below Tk. 25 lakh, and at 12% for exceeding amount (50% higher if not

eTIN-registered) [52A, 52AA] –a good move

15% TDS for non-resident courier businesses – will generate more revenue

Reduced costs of registering small apartments [53FF] – low-income earners will be

benefited

Rate of registration will be 20% lower for 70 sq.m (750 sft) apartments, & 40% lower

for 60 sq.m (645 sft) apartments

Tk. 70,000 worth registration cost will now be Tk. 14,000 less & Tk. 60,000 worth will

now cost Tk. 24,000 less (in Dhaka north & south & Chittagong city corporations

(excluding rich areas))

Advance tax on motor vehicles is no longer refundable

Value Added Tax (VAT) at Local Level

The new VAT and SD Act 2012 has been deferred to 1 July 2017 – finalization

of necessary preparatory works for full implementation of the Act will remain as a

challenge

Package VAT has been significantly revised! – will create burden on small traders.

Tax-exempted turnover limit for SMEs has been proposed to increase from Tk.30 lakh

to Tk. 36 lakh – the change will support business growth and encourage

entrepreneurship

Location

Existing VAT VAT

(Tk. to be paid annually)

Dhaka and Chittagong city corporation area 14,000 28,000

Other city corporations 10,000 20,000

Municipalities in district towns 7,200 14,000

Other areas 3,600 7,000

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SECTORAL MEASURES OF BUDGET

Agriculture

The share of Agriculture is only 4.6% in ADP for FY17 (5.1% in FY16, 5.7% in FY15)

Like other ADP sectors, Agriculture also faces the classical project implementation

challenges (time and cost overrun)

Agricultural subsidy remains constant at Tk. 9,000 crore

It constitutes 39.6% of total budget allocation for agriculture in FY17

Around Tk. 2,000 crore remain unutilized in FY16 providing the government some

fiscal space

The fiscal space will also be available for FY17

ICT

Total allocation for Ministry of Science and Technology and ICT Division is Tk.3,904

crore (75.8% and 41.2% higher than RBFY16 and BFY16 respectively)

Higher allocation for development budget (39.1% more than RBFY16) is contributing

to the rise

OIL, GAS AND ELECTRICITY

Total allocation for the power and energy sector in FY17 is Tk. 15,035 crore ( 9.5 %

lower than RB16, mainly driven by lower allocation for development project).

Share in total budget has reduced (from 6.3% in FY16 to 4.4% in FY17)

About 87% of total allocation for the sector will go to the power sub-sector

Only 13.1% of total sectoral allocation is for energy sub-sector

DEFENSE

The budget allocation for Defense for FY17 is Tk. 21,144.6 crore, which is 20.4%

higher than the allocation for the previous year Of this amount, 98.2% (Tk. 21,738.8

crore) is non-development expenditure, while only 1.8 percent (Tk. 405.8 crore) is

development expenditure.

ENVIRONMENT

Total allocation for the Ministry of Environment and Forests in FY17 budget is Tk.

1033 Cr., which is 5.2% higher than that of Revised FY16 (Tk.982 Cr.)

EDUCATION

Allocation for the ‘Education and technology’ sub-sector (Tk.52914 cr.) has jumped up

by 35% during FY17 (Figure). This is a welcome development.

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Allocation for the education sector is 2.7% of GDP and 15.5% of the total FY17 budget:

remains short of UNESCO’s suggested share of 3.8% of GDP and 20% of total budget.

HEALTH

Allocation for the health sector (Tk. 17,487 cr) has increased by 18.1% over RBFY16

(37.7 % higher than BFY16)

Proposed allocation is far behind the strategic financing target: 5.1% of total budget

against 10% target set for FY16 (12% for FY21) in “Health Care Financing Strategy

2012-2032”

GENDER

Allocation for ‘Gender Budget’ in FY17 (Tk. 92765 Crore) has increased by 29.1%

against RBFY16.

Out of the 40 ministries under the gender budget in FY17, allocation has increased for

34 ministries and decreased for 6 ministries

Highest allocation for women is in “Ministry of Primary and Mass Education” (Tk.

10938 Crore or 11.79 % of Gender Budget) and lowest in “Ministry of Commerce” (Tk.

38 Crore or 0.04% of Gender Budget).

As percentage of total allocation Ministry of Women and Children Affairs has the

highest share (76.99% of total ministry budget).

Budget FY17 proposes increase in allowance and number of female beneficiary for 4

social safety net program (Program for the Widow, Deserted and Destitute Women,

VGD, Maternity allowances, Working Lactating Mother Assistance program).

CHILD AND SENIOR CITIZEN

Child budget has been announced for the second time; coverage has increased Tk.

49612 cr. worth of child budget will be implemented by 7 ministries and department.

Number of ministry & department increased to 7 in BFY17 (5 in BFY16). Allocation

has marginally increased (14.6% of total budget in BFY17 from 14.5% in RBFY16).

Per capita child budget is Tk. 7,736.2 (FY17) and Tk. 5,938.0 (FY16). Highest

allocation under Ministry of Primary and Mass Education (Tk. 220.29 bn) lowest under

Ministry of Social Welfare Tk. 795 crore (18.61% of the ministry)

FY17 budget — additional resources for aged Freedom Fighters by doubling monthly

allowance to Tk.10,000, speedy construction of rehabilitation facilities and increased

access to micro-credit.

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FINDINGS OF FY 201617 BUDGET

EXCESSIVE TAX BURDEN FOR LOWER INCOME GROUP: The budget has no

strategy to enhance revenue collection efficiently, but the contents of finance bill exposes some

brutality in collecting tax from lower income group. These are:

(A) Taxable limit has not been increased as per finance bill 2016 and the limit of

investment allowance has been decreased to 20 from of 30 per cent in 20152016. The rate of

tax rebate has been refixed from 15 to 10 per cent depending on the level of income instead of

flat 15 per cent. As a result of these provisions, tax increase of individual assesses, particularly

those in the lower income group will be affected significantly. Salaried employees are paying

taxes fully as their company pays salary after deducting tax at source, as required. They have

no way of paying taxes, or evading payment, like other professional groups and businessmen.

In the latter's case, we see very little effective efforts or strategic planning to bring them under

tax net.

(B) In case of persons with salary up to BDT 16,000 from the government under Monthly

Payment Order (MPO), which is not taxable, there is the need to have Tax Identification

Number (TIN). This is really ridiculous and contradictory to the slogan to create an

equitable society.

(C) Paying tax on car based on the capacity of motor would be considered as tax on

income of the assessees and allowed to adjust with tax payable in 201516. By inserting a new

section 68B in the proposed finance bill 20162017, this facility has been diluted as having

a car will be treated as deemed income and tax shall be paid on this in line with the

capacity of motor stated in that section. As such, asseesees will have to pay additional tax

on this deemed income.

(D) A new section 82c has been incorporated stating that minimum tax will not be less than the

tax deducted at source. In other words, no tax will be refunded or allowed to adjust in

the next year.

(E) In Value Added Tax (VAT), tax collection at equal rate irrespective of the economic

standings of the people is a regressive method.

IRRATIONAL REVENUE TARGET FOR 201617: Total revenue target for 201617

is BDT 2427.52 billion which is 37 per cent higher compared to the revised target of

201516. to try to achieve the big target, there should be well planned strategies. It is

simply incremental by imposing taxes, increasing taxes and bringing more products and

services under VAT. Rather, as stated earlier, appropriate step should be to widen the

tax net by brining all taxable persons under it with prudent assessment of taxes.

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BOOSTING PRIVATE INVESTMENT STILL A BIG CHALLENGE:

In order to achieve 7.2 per cent GDP growth target in the next fiscal, private investment has to

b 23.3 per cent of the GDP or Tk 800 billion, which is 1.5 percentage points higher than the

current level. But there is nothing in the budget about the source of this additional money.

As per the finance minister's budget statement, during 20102015, 4.7 million people entered

the labour market, 98 per cent of them in the local market. But the fact remains that the pace

of additional job creation in 2014 and 2015 came down to only 0.3 million a year from average

1.3 million a year during 201013.

What is surprising is that banks' lending rates have already come down, yet private investments

is not picking up. Added to this, banks and capital markets, the two major sources of borrowing,

have weakened in recent years. On the one hand, the government wants to boost private

investment and on the other, it has reduced the investment limit of total personal income

to 20 per cent from previous 30 per cent. This might put an extra pressure on lower income

groups.

The current macroeconomic stability of the country is very much in favour of investment

and employment led GDP growth. But the government is unable to take the full advantage of

the situation. Besides, a large amount of capital is being siphoned off, mainly through over

invoicing. The latest amount of capital flight is higher than the net foreign aid.

Stagnation in private investment is obviously a major concern. Uncertainty relating to

investment has yet to be over for dearth of confidence. In fact, continued problems of

electricity and gas supply to industries, land availability and transport infrastructure, slow

progress of reform in financial, institutional and administrative sectors, and political

uncertainty had caused the failure to pick up investment confidence.

The corporate tax remains unchanged in the proposed budget, which might discourage

potential and existing investors from taking up new ventures or expanding their plant

sizes. The country hires skilled manpower from abroad but there is no initiative spelt out

in the budget to make local people skilled in order to meet growing demand in the

different sectors.

According to the International Monetary Fund (IMF), the weakness in financial sector and

infrastructure deficit are the major factors affecting the country's private sector investment and

its economic growth. In a recent report, it said the constraints in the case with Bangladesh

stem in part from low-quality public investment and inadequate infrastructure maintenance.

Perception about uncertainties of the Bangladesh polity and governance related problems,

according to analysts, are failing to tap in private investments. Private investment in terms

of the country's gross domestic product (GDP), according to them, dropped in the current

fiscal for an unsure business ambience, coupled with its troubled polity.

The latest provisional data of Bangladesh Bureau of Statistics (BBS) an agency of the

government show that the private investmentGDP ratio at current prices has fallen by 0.39

percentage points to 21.78 so far during this fiscal year (FY), 201516.

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Although public investment has been on the rise over the recent years, the people are

yet to get the expected positive results from it. Lack of quality public investment, as the

analysts believe, is one of the major reasons for an inadequate level of private investment.

Government investments have recorded a rise but their desired benefits have continued

to delude the people primarily for reasons of questionable quality of the development

works on many counts as well as poor capacity of the public agencies, they noted.

Due to the long lingering constraints to ensuring access to power and gas connections,

private investment is failing to pick up. There are examples that many industries that were set

up in the country some years back, are still waiting in the wings to go for commercial

operations due to lack of power and gas connections. Many applications for new ventures

are still pending, whereas the banks are sitting on tones of money.

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RECOMMENDATIONS Considering past performance of failure in reaching the target of revenue generation,

the proposed budget is indeed ambitious. But the target is not unattainable if

(a) Reforms are implemented,

(b) VAT law is passed,

(c) NBR (National Board of Revenue) activities are automated and modernized,

(d) A dedicated team of trained manpower overlooks the generation process, and

(e) Tax base is expanded. It appears that the Tk.450.00 billion of additional taxes is to come

by raising the rate of taxes rather than expanding the base.

However, two steps need urgent attention if the finance minister desires to go near the

goalpost. First, roughly 2.0 million people have TIN but returns are submitted by 1.2 million.

The task is to bring those defaulters into the net. Second, it is being argued that in Bangladesh,

about 15 million people have a per capita income of $5000. The taxmen should chase

them and see whether they pay taxes.

Our Tax/GDP ratio (NBR tax) at only 8.7 per cent of GDP in FY2016 is one of the

lowest in the world and. Undoubtedly, this points to a fundamental flaw in tax

administration and in tax collection. Tax/GDP ratio in neighboring countries is much

higher (India 16.6 per cent, Nepal 10.9 per cent, Sri Lanka 11.6 per cent and Pakistan

10.2 per cent).

The government should not recapitalise stateowned banks which are involved in scam

and should not subsidise lossmaking stateowned enterprises. The tax at source for

RMG may be fixed at 1.0 per cent, tax of interest earned by pensioners should be

withdrawn, VAT law should be strictly implemented, VAT should be 10 per cent across

the board and access to credit for small and mediumsized enterprises should be made easier in

the interest of boosting private investment.

Bring more transparency in budget formulation, implementation and assessment procedures:

Establish a Public Expenditure Review Commission

Formulate appropriate follow up mechanisms for monitoring government tax incentives

Disclose financial accounts of state-owned enterprises including BPC and contingent

liabilities in detail

Establish transparency in government’s asset acquisition

Formulate an appropriate foreign aid policy in view of the changed global aid

architecture and Bangladesh becoming the (lower) middle income country

More sunshine in defense economy

Introduce separate but integrated budget for local government

Integrate NGO financing in the public expenditure structure

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DEFICIT BUDGET AND DEVELOPING COUNTRY

There is no simple answer to whether a budget deficit is helpful or harmful because it depends

on quite a few factors.

1. It depends when the deficit occurs. Basic Keynesian analysis suggests that a rise in the budget

deficit during a recession is a good thing. In a recession, private sector spending falls, and

saving rises – leading to unused resources. The deficit spending can help promote higher

growth, which will enable higher tax revenues and the deficit will fall over time. If government

try to balance the budget in a recession, it can make the recession deeper.

If the deficit occurs during a period of strong economic growth, then the government deficit

will be crowding out the private sector. Government borrowing will reduce private sector

investment and spending, and you could argue the government spending is more inefficient

than the private sector. One example, is India. In 2012, the Indian economy was growing

quickly, but the budget deficit was 5.5% of GDP. In this economic circumstance, India would

be advised to be reducing the budget deficit

2. It depends why government is borrowing. If the government borrowed to invest in

improving infrastructure, it may be able to overcome market failure and improve the productive

capacity of the economy. The return from public sector investment may be greater than the cost

of borrowing and so in the long-term the economy benefits from government borrowing and

investment (like a firm borrowing to invest in a new factory). However, if the government

borrows and miss-spends the money or spends it on transfer payment, there may be very limited

increase in productive capacity.

3. It depends on the future prospects for economic growth

A big issue for the importance of a budget deficit, is what are the economic prospects for the

economy? If one economy is predicted to have a stagnating economy, debt to GDP is likely to

continue to rise. If another economy is forecast to have strong growth – 2 or 3%, this will

automatically cause rising tax revenues and falling government spending on unemployment

benefits. Markets will worry about a budget deficit much more, if they feel that the economy

is likely to stagnate and unable to grow. Low growth prospects are one of the major concerns

over several Eurozone economies.

Yes, the budget deficit matters. But, there is no simple answer. It is reasonable to suggest that

over the course of the economic cycle, governments should seek to get close to balancing the

structural deficit. However, there can be good reasons to run a deficit – at least in the short

term. – For example, if the government wishes to fund public investment which offers a decent

rate of return. Also in a recession, a budget deficit can play an important role in managing

aggregate demand. In a recession, the traditional fears of a budget deficit – inflation, interest

rates, crowding out – often just don’t occur. But, government spending financed by borrowing

from the private sector can return the economy to full employment quicker.

Economy & Finance

Budget Analysis of 2016-17 of Bangladesh