Round Table Conferenceon

National Budget (FY2009-10)

Organized by

Islamic Economics Research Bureau

Presented byProf. A. R. Bhuyan

Introduction• The budget has been prepared in line with the government’s

Vision 2021 – high growth, stable prices, reducing human and income poverty, health and education for all, enhanced capacity building, establishment of social justice, reduction of social disparity, a firmly rooted participatory democracy, achieving capacity to tackle the adverse effects of climate change, and building ICT to give the country a new identity to be branded as Digital Bangladesh.

• To achieve that Vision, the medium-term targets set for the macro economy are:

a) Secure a sustained level of GDP growth of 10% by 2017.b) Raise the share of industry in GDP from 28% to 40%.c) Increase life expectancy to 70 years.d) Reduce material mortality to 1.5 percent.e) Scale down infant mortality to 15 per thousand births.f) Reduce unemployment rate by 15 percent.g) Reduce the percentage of poor people living below poverty line to

15 percent

Economic Scenario in FY 2008-09

• Despite the global economic meltdown and domestic natural calamities, the estimated GDP growth is 5.9 percent.

• Export growth slowed down in some sectors, and some exports showed negative growth. Overall export growth could decline to 12 percent from 15.9 percent in the previous year.

• Import growth declined to 12.4 percent from 23.9 percent in the previous year, mainly due to falling prices in the global market.

• Remittances remained buoyant and registered a 22.5% growth, amounting to $7.9 billion in April 2009. Current account surplus upto March was $1090 million, or 1.2 percent of GDP.

• Foreign exchanges reserves in May 2009 rose to $6.5 billion, worth 3 months’ imports.

Supplementary Budget 2008-09

• Revenue collection target of Tk. 69382 crore (11.3% of GDP) could not be achieved. Revised estimate is Tk. 69180 crore (11.2% of GDP). The shortage was due to the fall in NBR taxes. However, non-NBR taxes and non-tax revenue exceeded their targets.

• Total public expenditure was scaled down from the original Tk. 99962 crore (16.3% of GDP) to Tk. 94140 crore (15.3% of GDP). The reason was lower subsidy on food, fuel and fertilizer because of fall of world prices.

• ADP was revised down from Tk. 26500 crore (4.3% of GDP) to Tk. 23000 crore (3.7% of GDP) because of non-implementation owing to capacity constraints.

• The budget deficit stood at 4.1% of GDP, compared to the original estimate of 5%. Domestic sources financed 2.3 percent, and external sources financed 1.8% of the deficit.

Strategies of the New Government

• A medium-term 5-year plan starting with 2000-2015 will be formulated. The preparation of a perspective plan (2010-2021) is in progress.

• The 3-year PRSP (2009-11) shall remain force and will be vigorously pursued.

• Augmenting government revenue by widening the tax net and attracting increased investment from domestic and foreign sources are the most important aspects of the budget.

Public-Private Partnership Budget• To achieve GDP growth of 8% by 2013 and 10% by 2017 (as per

Election Manifesto) will require huge investments in infrastructure. In one estimate, $28 billion (about Tk. 190 thousand crore) investment will be needed by 2013-14 to achieve the projected GDP growth.

• Govt. does not have enough funds to meet the required expenditure. Private sector may not be readily willing to invest in infrastructure because the investment risk is high and, in many cases, not commercially viable.

• Hence, the government wants to involve the private sector under the PPP.

• Government wants to make the existing PPP framework and institutions associated with PPP more transparent.

• To facilitate new projects, the budget proposes three new expenditure heads’ under PPP: a) Tk. 100 crore for ‘PPP Technical Assistance’, b) Tk. 300 crore ‘PPP Viability Gap Funding’ as subsidy or seed money to attract private initiatives, c) Tk. 2100 crore for creating ‘Infrastructure Development Fund’.

Budget Framework for FY 2009-10

• Budget 2009-10 has been formulated on the basis of the following assumptions:

– Economic growth in FY 10 will be between 5.5 and 6.0 percent, and higher in the next two years.

– Inflation rate will come down to 6.5 percent from 7 percent of FY 09.

– Export growth will slow down due to global recession.

– Remittances, too, will slow down, but still will cross $10 billion.

– Revenue collection will increase following the expansion of tax and non-tax revenue net.

Budget Framework for FY 2009-10 Contd. …….01

• Estimated Revenue will be Tk. 79461 crore (11.6% of GDP), which is 14.9% higher than in the revised FY 09 budget.

– The share of NBR revenue will be Tk. 61000 crore (8.9% of GDP), which is 15.1% higher than in the revised budget.

– The share of Non-tax revenue will be Tk. 15506 crore (2.3% of GDP), 13.6% higher than in the revised budget.

– The share of Non-NBR revenue will be Tk. 2955 crore (0.4% of GDP), 17% above the FY 09 budget estimates.

• Estimated total expenditure will stand at Tk. 113819 crore (16.6% of GDP), which 20.9% bigger than in the FY 09 budget.

– The size of ADP will be Tk. 30500 crore (4.4 of GDP). This a 32.6% increase over the FY 09 ADP.

Deficit and Its Financing

• Estimated budget deficit (excluding foreign grants) will be Tk. 34358 crore, or 5% of GDP (higher than in FY 09, when the deficit was 4% of GDP).

• Of the total deficit, 40.2 percent or Tk. 13803 crore (2% of GDP) will be financed from external sources, and the remaining 59.8 percent or Tk. 20555 crore (3% of GDP) will be met with domestic sources.

• In the domestic financing component, Tk. 16755 crore, or 81.5 percent of the total will be raised through borrowing from the banking system, and the remainder will come from non-bank borrowing.

• Government’s bank borrowing in FY 10 will be 56.6 percent higher than the actual borrowing of Tk. 10698 crore in FY 09.

Allocations under the Budget

• Proposed estimates under ADP: Agriculture and Rural Development gets 29.9 percent; 23.5 percent for human development (Education, Health, Science and Technology); 15.7 percent for Transport and Communication; and 14 percent for Power and Energy.

• Overall allocations by sector: Social infrastructure 32.7 percent (it includes human development); Physical infrastructure 27.7 percent (it includes agriculture, rural development, transport and communication, power and energy); General Services 22.6 percent (it includes allocation for the proposed PPP); and Interest Payments 14 percent.

• To ensure adequate implementation of ADP, there will be close monitoring, in particular of the 10 big ministries that account for 78 percent of ADP.

Some Budgetary Objectives

• Agriculture, which accounts for 22% of GDP and employs 48% of the labour force, is given a high priority.

• Food self-sufficiency to be achieved by 2012.

• Subsidy to agriculture is lowered to Tk. 3600 crore from Tk.5785 crore in FY 09, because of lower prices of inputs in the market.

• For developing high yielding variety seeds, Tk. 280 crore is allocated to BADC and DAE.

• Tk. 185.21 crore allocated for agricultural research for maintaining the growth of crop production.

• Agricultural loan is targeted to reach Tk. 10000 crore from the current year’s target of Tk. 9375 crore.

Rural Development

• Generating additional employment in agriculture and rural sectors.

• “One Household one Farm” project will generate employment for 2.9 million people and reduce poverty.

• Empowerment of Women and the Deprived through credit and training.

• Safe water for all by 2011.

• Expand the coverage under Rural Electrification Programme.

Power and Energy

• Combined allocation of Tk. 4310 crore.

• Enhancing generation and strengthening transmission and distribution.

• Addition of 5000 MW power to the national grid by 2013.

• Establishment of nuclear power plant at Rooppur with a capacity of 1000 MW being considered.

• Coal-fired power plants will be established.

• Gas exploration to begin at the coastal belt.

• Energy and Coal policy is nearing finalization.

Industrialization

• Share of industry in GDP to be raised from the present 28 percent to 40 percent by 2021. A new Industrial Policy is in the offing.

• Priority to be given to agro-based and labour-intensive industries.

• Private-sector-led growth to be pursued.

• Investment-related laws and regulations will be simplified.

• No divestment of SOEs without securing alternative jobs for the retrenched workers.

• Commitment to develop SMEs through providing credit and training. Women entrepreneurs to get priority in credit.

• Central bank’s refinancing facility to commercial banks to continue.

Human Resource Development

• Education receives the highest allocation.

• Ensure 100 percent enrolment at primary level by 2011.

• Mandatory computer education at secondary level by 2013 and primary level by 2021.

• Healthcare infrastructure to be expanded

• Drug policy 2005 is being made more pragmatic.

Poverty Reduction and Employment Generation

• Poverty rate to be reduced by 15 percent by 2021.

• Expanding all four categories of Social Safety Net:

– Special allowances for different groups of underprivileged and disadvantaged people.

– Micro-credit for employment generation and poverty reduction.

– Food-security based activities.

– Providing education, health, training and technical assistance to make the new generation capable and self-reliant.

Poverty Reduction and Employment Generation Cont. ……01

• Allocation of Tk. 92 crore for implementing the Ghare Fera (Back Home) and One Home One Farm Programmes.

• Allocation of Tk. 1176 crore for the propgramme titled Employment Generation for the Hard Crore Poor. This will create jobs for 49 lakh man-months.

• In FY 2009-10, an additional employment of 77 lakh man-months (6.4 lakh for the whole year) will be created under non-development and development budget.

• Women’s participation in all spheres of activity will be ensured.

• For expatriate citizens, an Expatriate Welfare Bank will be set up.

• A Tk. 70 crore Skill Development Fund is proposed to be created for retention and expansion of labour market abroad, exploring new labour markets, training the prospective workers, and retraining the workers that returned home after losing jobs.

Revenue Mobilization: Income Tax

• Age bar lowered from 70 to 65 to lessen tax burden on senior citizens.

• Lower tax rate of 35% for mobile telephone companies if they are listed in the Stock Exchange and at least 10% of their shares are off-loaded to the public.

• Reduction of Capital gains tax deducted at source for land registration.

• Income of pensioners’ Savings Certificates to be tax-free.

• Acceptance of undisclosed money on payment of 10% tax, if invested in specific sectors.

Revenue Mobilization: Income Tax Contd. …..01

• Tax holiday not to be extended beyond 2012. Instead, reduced tax rates will be allowed for certain sectors, which will vary from location to location.

• Imposition of tax on personal cars at a specific rate on the basis of engine capacity.

• Deduction of tax at source from certain export sectors to be considered as final liability.

• A Tax Tribunal to be set up to dispose of cases related to income tax, VAT and customs.

Indirect Taxes

• In the 4-tier import duty structure (3%, 7%, 12% and 25%), the duty on basic raw materials is reduced to 5% from 7%, in order to make industries more competitive. The other slabs of 3%, 12% and 25% on capital machinery and parts, intermediate raw materials, and finished products, respectively, remain unchanged.

• Zero duty on major food items and fertilizer will continue.

• Regulatory duty of 5% imposed on luxury items.

• Supplementary duty on luxury vehicles at varying rates depending on the basis of engine capacity.

• Concessionary duty on the import of taxi-cabs.

• 25% import duty on mobile phones instead of the previous specific duty of Tk. 300/set.

Indirect Taxes Contd. …..01

• Customs duty on solar panel reduced from 3% to 0%.

• Zero tariff and VAT on parts of energy saving lamps to facilitate industries producing energy saving lamps.

• Import duty of 5% imposed on newsprint to protect local industry. To the same end, VAT applicable for pulp import is also withdrawn.

• Text books will fetch zero import duty as before but the duty on other books will be reduced from the present 12% to 5%.

• To protect the local dairy industry, a regulatory duty of 5% is imposed on milk powder imported in bulk.

• To protect a number of local industries, supplementary duty ranging from 20% to 100% is imposed, including the fixation of tariff value for the import of biscuits and dry-cell batteries.

Indirect Taxes Contd. …..02

• The 12% CD and 15% VAT on phosphoric acid are withdrawn to facilitate production of DAP fertilizer.

• SD of 20% on pharmaceutical grade DOP is withdrawn, and CD of 25% reduced to 15%. The 12% CD on compound plasticizer is reduced to 5%.

• To promote domestic manufacture of Fero Manganese and Silicon Manganese, the 15% VAT on the import of Manganese ore is withdrawn.

• To meet the demand of the business community of Chittagong, the budget proposes the unification of Chittagong Customs House (Export and Import) and the establishment of a full-fledged Bond Commissionerate and one bench of Appellate Tribunal in Chittagong.

Value Added Tax (VAT)

• VAT on services of specialist doctors is withdrawn.

• VAT on domestic production of drugs used by cancer patients is withdrawn.

• To promote dairy industry, the applicable VAT is reduced.

• VAT on local production of hard board is withdrawn.

• VAT exemption for one year is proposed for complete manufacture of refrigerators and motor cycles.

Value Added Tax (VAT) Cont. ….01

• The threshold level for imposing excise duty on bank deposits is raised to Tk. 20000 from Tk. 10000/.

• VAT on the use of internet in educational institutions is withdrawn.

• The special privilege for small and cottage industries regarding VAT exemption is widened. Industries having plants and machineries valued upto Tk. 25 lakh will now be entitled to VAT exemption instead of the existing threshold of Tk. 15 lakhs.

• VAT net has been widened by bringing new sectors under VAT net and withdrawing exemption from others.

• VAT on domestic power generation and the import of solar panels is withdrawn.

• VAT and SD on local production of tobacco products and other luxury goods are increased.

Evaluation of the Budget

• The budget has several positive elements.

• It provides a direction for the economy over the next five years, and a vision for the coming decade- e.g., raising GDP growth and the share of industry in GDP, achieving food autarky, creating new jobs etc.

• The proposal to revert to a planning mechanism is welcome. A medium-term plan will facilitate achieving specific economic targets.

• The size of the budget is large compared to the current fiscal, but it cannot be called ambitious, given the fact that it constitutes only 16% of GDP and that it has been prepared to boost the domestic economy and avert the fallout of the deepening global recession.

Evaluation of the Budget Cotd. ……01

• The enlargement of the size of ADP is a positive step because public development expenditure has a strong crowding- in effect on private investment. What is needed is sincere and determined effort to implement the projects, giving attention to their quality.

• The budget aims at achieving a sustained agricultural growth, protecting the domestic industry, developing infrastructure, increasing employment, and reducing poverty.

• The proposal to involve the private sector through the PPP is commendable.

• Enhancing allocations for various ongoing social safety net programmes will contribute to reducing poverty.

Evaluation of the Budget Cotd. ……02• We welcome the provision of mandatory tax of Tk. 5000 on companies

irrespective of earning profits or incurring losses. This will force loss-making companies that use the nation’s scarce resources to become efficient and profitable. Companies are known to artificially inflate their expenses, spending lavishly on management’s pay and allowances, richly decorated office premises, luxury motor cars etc. and end up showing losses and no profit. This culture needs to be stopped. Companies that incur losses year after year should better be closed down.

• The projected deficit of 5% of GDP is quite appropriate, given the need for boosting domestic demand in the face of the slowing down of the foreign demand for exports. What is important for the government is to energize the implementation machinery and enhance its capability to fulfill the implementation targets.

• The projected government borrowing is unlikely to crowd out private investment, given that the commercial banks have now a huge excess liquidity worth around Tk. 270 billion, whereas the targeted bank borrowing in the budget is a much smaller amount of Tk. 167.55 billion.

Evaluation of the Budget Cotd. ……03

• The budget is market friendly. It gives importance to raising funds from the capital market than from syndicated bank loans.

• The revised duty structure and imposition of new regulatory and supplementary duties will protect the domestic industry. The budget is therefore essentially pro-industry.

• The Tk. 50 billion stimulus package will rescue the recession-hit sectors from the spillover effects of the global economic recession.

Some Grey Areas Requiring Attention

• The provision of whitening undisclosed, and hence black, money is unethical. It will frustrate the honest taxpayers and encourage tax evasion. How can government expect a taxpayer to pay tax @ 20-25 percent now, when he has got the opportunity to hold off and legalize his money by paying only 10% tax in the third fiscal year? Such a budgetary policy will negate efforts of the Anti-Corruption Commission and the Anti-Money Laundering Department of the Bangladesh Bank to detect and punish the tax-evaders.

• The 5.5-6.0 percent GDP growth assumed for FY 10 is highly conservative. Such a low rate of growth is unlikely to generate savings of the desired magnitude and hence investment will not increase. The realization of the revenue target, which is set at 15% above the current year’s estimate, will also be difficult if GDP growth remains at such low level.

Some Grey Areas Requiring Attention Contd. …..01

• Tariff reduction on raw materials and intermediate inputs for industries is a welcome move but, given the low investment scenario this year, the import duty on capital machinery should have been cut as well.

• The imposition of 5% import duty on newsprint to protect the highly inefficient domestic industry is ill-judged and will hurt the interest of the large print media. This duty needs to be withdrawn.

• The allocation for the power sector is grossly inadequate. The combined allocation for power and energy is Tk. 4278 crore, which is quite insufficient to create the targeted additional capacity of 5000 MW by 2013.

• Two-fifths of the budget deficit are to be financed with foreign funds worth more than $2 billion. Securing that money may become uncertain in the present uncertain global economic environment. Failure to obtain foreign funds in time will force the government to go for more borrowing from the banking system.

Some Grey Areas Requiring Attention Contd. …..02

• The government should try to obtain a share of the global recession package of $1.1 trillion committed at the April Summit of the G-20 nations in London.

• Complaints are pouring in that RMG and leather goods exporters have been left out of the purview of the stimulus package of Tk. 5000 crore, even though these are affected most by the global recession. Their grievances need to be carefully examined and addressed.

• Contrary to the claim that agriculture has been given a high priority in the budget, the ADP allocation for agriculture and water resources has come down to 7.8% from 13.0% in 1996-97. More funds need to be allocated to agriculture to increase the government’s storage capacity so that farmers can sell their crops to the government direct and come out of the grip of middlemen and mill owners.

Some Grey Areas Requiring Attention Contd. …..03

• There should be a greater allocation to agriculture for carrying out research to develop high yielding crop varieties that can grow in adverse climating conditions.

• The decision to allow duty-free import of solar panels is welcome but it will be more desirable to facilitate setting up solar panel manufacturing plants in the country.

• The restructuring of supplementary duty on personal motor cars has been necessary to raise revenue but it will be appropriate to limit the supplementary duty on 1001-1500 cc cars, which are used mostly by the middle class, to at most 20-30 percent so that the price of such motor cars can be kept at a minimum.

Some Grey Areas Requiring Attention Contd. …..04

• The budget does not present any specific target of poverty reduction in the next fiscal although the government’s election manifesto has set the target of bringing 20 million people out of poverty by 2013.

• The budget allocates Tk. 17300 crore or 15.2 of total expenditure on the safety net programme. The safety net measures are, however, merely transfers, which would help meet the short-term needs of the poor but hardly contribute to the creation of employment.

• There is also the need for proper surveillance to ensure that the allowances are properly distributed to the targeted beneficiaries.

Some Grey Areas Requiring Attention Contd. …..05

• Climate change, frequent occurrence of natural calamities, and their adverse effect on the country’s coastal areas are a burning issue but these have received only a passive emphasis in the budget.

• There are allegations of leakage of sensitive budget-related information during the Finance Minister’s pre-budget exchanges with the press and the media. Such leakage must not recur in future. The Finance Minister has initiated an investigation in this regard. Corrective actions will need to be taken if it is revealed that undue benefits have accrued to individuals or groups as a result of the information leakage.

Summary and Concluding Remarks

• The proposed budgetary measures are in line with the government’s commitments to the people.

• It proposes measures to energize the agriculture sector and protect local industries.

• It has enhanced allocation for social security and human development.

• It proposes a Public-Private Partnership to involve the private sector in infrastructure development, in particular in power, roads, ports and human resource development.

• It has also laid emphasis on women’s empowerment.

Summary and Concluding Remarks Contd. …….01

• The budget has proposed some measures to address the impact of climate change even though insufficiently.

• Measures to reduce poverty and increase job opportunities may fall short of the requirement but there is no lack of sincerity on the part of the Finance Minister in this regard.

• The Finance Minister had to consider two main issues when preparing the budget : One is to fulfill the commitments made to the people and the other is to strengthen domestic economic activities to withstand the adverse effects of the global economic recession.

• To accomplish this twin responsibility, there has been no alternative to greatly increasing the government’s expenditure.

Summary and Concluding Remarks Contd. …….02

• The challenge for the government now is to raise necessary resources to meet the vastly increased expenditure target and at the same time ensure an efficient use of these resources.

• If the government fails to meet these challenges, the budget FY 2009-10 will turn into a useless document.

• The budget has drawn sharp comments, criticism, and also constructive suggestions from different quarters.

• The Finance Minster may be pleased to consider the suggestions before finalizing the budget for approval of the parliament.

Thanks