July ,2011

• Understand the budgetary process;• Analyze the trends and patterns of its important components;• Compare the budget with some other budgets presented in different recent years and budget effectiveness;• Analyze the budgetary deficit, constraints and its sources of financing• Find out the achievement of target and to draw some suggestions.

Objectives

• Budget is the financial plan of a government for a given period.• It shows what resources are, and how they will be generated and used over the fiscal period.• It is an estimate of income and expenditure for a future period.• Budget is an essential element in the planning and control of the financial affairs of a nation. •Our National budget for 150 million people having US$ 100 billion GDP at current price, US$685 Per capita income and US$750 GNI( FY 10) •Budget reflects the vision and mission of incumbent government. The government leaders usually try to fulfill election manifesto through the budget

Introduction

What is National Budget?Definition and Dimensions

•

A statement of estimated receipts and expenditures A policy instrument that allocates scarce resources among competing sectors, and economic and social needs. A managerial or administrative instrument that lays down and means of providing public services. An economic instrument that can foster nation’s growth An accounting instrument that holds government officials responsible for expenditure and revenue mobilization

Budget: Constitutional Provisions

The constitution requires that, a statement of the estimated receipts and expenditure of the government in respect of each financial year shall have to be laid before the parliament. The statement is called ’Annual Financial Statement’-name given to the budget in the Constitution of Bangladesh.

To maintain macro-economy stabilityTo reduce Poverty Foster sustainable growth Carry on economic and structural reforms, economic liberalization, human resource development and good governance.

•A budget is a Political instrument in which election manifesto of a government are being

reflected or through which Political ideals of government are being implemented.

• Provides standards against which actual performance can be measured.

•The budget serves as a coordinating instrument by which government activities can be

integrated, because it is supposed to contain all the information on the policies, objectives

and activities of the government in one document.•The redistribution of wealth is one of the most important functions of a public budget. It requires that total integration should exist between the two sides of the budget—revenue policy and expenditure policy—in order to comply with a fiscal policy for the redistribution of wealth.

 

Objectives of the National Budget:

Benefits of Budget:

Macro economic Forecasting

• assists expenditure and resource planning by developing a macroeconomic

framework

• helps in the development of : aggregates of government budget and the overall

fiscal deficits and its financing

• Composition of expenditures by the main sector spending agencies

• forcasts of tax and non-tax revenue consistent with macro-economic

assumptions and projections

• estimates of resources available from domestic & external borrowing

• projections of current expenditure

Broad Outline of the budget process:Broad Outline of the budget process:

Budget Preparation and its Implementation proceeds in four phases

Executive Preparation and Submission Legislative review and enactmentExecutive Implementation andExpenditure Control and Auditing.

Government Budget= Revenue(or recurrent) Budget+ Development Budget

Revenue Budget is prepared by Finance Division and Development Budget is put

together as well by Finance Division from the Annual Development Plan prepared by the

planning Commission.

All line Ministries and Departments under them are involved in formulation of their

respective Budgets

Budget as a whole is approved by the Cabinet before submission to the parliament.

How Budget is Prepared & Implemented?

Budget Monitoring and Resource Committee- Headed by the Finance Minister. All the

relevant Ministries/Divisions are represented in the Committee. The Committee coordinates

overall resource mobilization and expenditure program of the government.

Resource Committee determines the estimated resource availability and expenditure

package.

Finance Minister holds pre-budget consultations with parliamentarians, civil society,

various professional groups, NGOs etc on resource mobilization policies and inter-sectoral

allocation of resources.

Line Ministries submit revenue expenditure statements and estimated requirement for the

revised and next year’s budget

Budget discussion takes place between Finance division and line Ministries

ADP is also finalized through similar process between Planning Ministry and Line

ministries.

 

How Budget is Prepared & Implemented?(Contd…..)

On taxation proposals ,NBR receives recommendations from all chambers,

business associations and professional bodies.

Finance Minister interacts with chambers and professional groups on taxation

proposals.

For external assistance ERD coordinates with Line Ministries as well as with

development partners.

Budget meetings are held during March-April between the FD and the

agencies, where the latter are allowed to discuss their needs with the Ministry.

Taking into account the actual expenditures of the past six months and other

relevant factors, estimates are finalized at the budget meetings

How Budget is prepared(contd…)

In Bangladesh , Government Budget=Non-Development Budget + Development

Budget.

Non-Development Budget= Recurrent(Revenue) Exp.+ Net lending +Capital Exp.

+net Food outlay +Non-ADP Project.

Non Development Budget Includes- mainly recurrent expenditure e.g. pay &

allowances, supplies services, operation &maintenance etc.

Capital Expenditure pertains to investment in shares and equities.

Net Lending is Calculated as net payments (Payments-receipts) of loans and

advances to SOE’s and govt. servants

Non-ADP projects are capital expenditure of development nature but historically

bundled with non-development expenditure.

Budget Structure

Development Budget= ADP(self financing)+ Non- ADP FFW

Development Expenditure is also divided into revenue and capital expenditure.-Revenue expenditure under development budget includes pay and allowances of project employees, services etc.-Capital expenditure under development budget represents expenditure on capital goods/ investment.

Budget deficit = Total revenues - total expenditure. The Government does not generate enough revenues to meet all the expenditures, which results in an obvious budget deficit.Financing Budget DeficitsDomestic Borrowing: -Borrowing from Central Bank -Borrowing from Commercial bank -Non Bank Borrowing(e.g. Sanchaypatra)

Balancing of Budget

( ..) Contd Budget Structure

External Borrowing: Foreign Aid-Grants-LoansRevenues:

-Taxes -Non-Tax Expenditures: Current Net Lending, Capital, Food and Non-Non ADP Project Dev. Expenditure(ADP –self financing+ non ADP FFW)Overall Balance: Financing: Foreign( Net) Loans +Grants-Amortization Domestic(Net) Commercial Bank Central Bank Non Bank

Balancing of Budget(contd..)

Budget Monitoring and Evaluation

• Actual expenditure against budgets are monitored by the line Ministries and the Finance

Division on monthly basis.

• IMED and Line Ministries monitor expenditure of development budget against physical

progress of project implementation.

• IMED also carries out post evaluation of selected projects to measure outcome against

targets.

• NEC examines from time to time monitoring reports of IMED

• C& AG carries out audit and places report to the Hon’ble President for laying before the

parliament.

Medium Term Budgetary Framework (MTBF) MTBF is a multi-year approach to budgeting which links the spending plans of government to its policy objectives. The principal benefits of the MTBF approach come from integrating a ‘top down’ view on likely resource availability with a ‘bottom up’ estimate of the cost of meeting policy objectives

Medium Term Expenditure Framework (MTEF)MTEF is a transparent planning and budget formulation process within which the Cabinet and central agencies establish credible contracts for allocating public resources to their strategic priorities while ensuring overall fiscal discipline. The process entails two main objectives: the first aims at setting fiscal targets, the second aims at allocating resources to strategic priorities within these targets.

Medium Term Budget Framework (MTBF) is a new initiative, starts from FY2005- 06, iniitially four ministries were prepared under the MTBF. The coverage extended to 10 Ministries in FY2006-07 & 30 ministries in FY 2009-10 . From FY 2011-12 the coverage extended to all ministries

 

Contd…………

Budget Preparation Under MTBF

Problems with Traditional Budget

• Annual Budget-Short term• No clear links to Government’s strategic goals(NSAPR or the 5 years plan)•Lac of transparency and accoutability•Two budgets are prepared separately

Difference between MTBF and Traditional Budget

Traditional Budget MTBF

1. Budget is for only one year 1. It consists of the estimates for four years

2. Two budgets are prepared separately 2. Budget is prepared within a single ceiling

3. Receipts and expenditure estimates are .determined on the actual for previous year

3. Resources are allocated considering the priorities of programs or projects

4. Expected results are not provided in the budget

4. Indicates the expected output from theinput

5. Ministry of Finance and Planning play .dominant role

5. / Line Ministries Divisions are given additional authority and responsibility

T

O

P

D

OWN

Medium-term Macroeconomic FrameworkStrategic goals, policies and medium term target

Medium term fiscal targets Latest trend of actual revenue collection.

Aggregate expenditure limit

As projected in the macro framework.

MTEF

BOTTOMUP

Sectoral spending demandsPrioritise activities so as to fit within the sectoral resource ceiling.

Sectoral spending plansProgrammes/sub-programmes needed to achieve the agreed objectives and costing of activities linked to outcomes.

Sectoral spending policiesReview sectoral objectives, policies and strategies, and identify outputs.

(………Contd.) MTBF

- MTBF Budget Calender

Steps Expected Time Frame

-1 Budget Call Circular issued 05 Nov

/ Developing updating ministry Budget Frame work 15 jan

’ Revewing the MBF s -Feb March

/ -Finalizing and approval of Ministry Division Wise 30 March

-2 Budget call circular issued 01 April

S ubmission of detailed estimates by Line Ministries -April May

Revewing and finalizating the estimates May

National Budget presented to the National Assembly I st week of June

Objectives of MTBF

The objectives of MTBF-

•To ensure the attainment of the goals set out in the poverty reduction strategy

•To establish effective linkage between the budgetary allocation and government’s policies, strategies and priorities

•To ensure efficient utilization and effectiveness of public money

•To maintain consistency between availability of resources and government expenditure

• To improve macroeconomic stability

•To ensure stability in budget management in the short-term and contain public expenditure at a sustainable level in the medium and long term

Following are the Budget constraints:

•Fiscal policy which includes :

-Resource mobilization;

-Rate of expenditure growth;

-Investment expenditure;

-Subsidies/Grants; and

Budget deficit.

• Financial management :

-Poor timing of release of funds:

-Cost overruns: and

-Lack of flexibility in the utilization of funds.

• Coordination within government ;

• Non-economic considerations urged by political considerations

•.Efficiency in the use of resources

            

Constraints of Budget

, Budget Execution Accounting and Fiscal reporting

-covers the functions associated with implementing the Budget-the recording and accounting of all government transactions-development of periodic reports-highlighting major deviations

: Cash Management An Instrument of Effective Budget Management

Includes the process of developing agency and cash flow forecasts the release of fund to spending agencies monitoring of cash flows and expected cash requirements issue and redumption of government securities for financing government program

: DebtManagement an Integral Part of Budget Management

Defines the tasks associated with maintenance of records of individual loans assists economic and policy analysis by determing the debt implications Projections of debt service commitments

Components of BudgetRevenue Budget

Revenue Receipts Revenue Expenditure

GOB Revenue and Expenditure-Recent Trend

Fiscal Year 2005-06 2006-07 2007-08 2008-09 2009-10

Total revenue 448.70 494.70 605.40 691.80 794.60

Revenue Growth % 14.46 10.25 22.37 14.27 10.56

% GDP 10.79 10.47 11.09 11.25 11.48

Total Expenditure

610.58 668.36 936.08 941.40 1105.23

% GDP 14.70 14.53 17.15 15.31 15.96

GDP 4157.28 4724.77 5458.22 6147.95 6923.80

Tk.in Billion

• Growth of revenue on an average of 14.38 percent• abrupt increment of expenditure in FY 08 over previous year due to BPC’s liabilities • Revenue collection during FY 2008 gained substantial success with an 22.37 percent overall increase over preceding year.

Contribution of Tax and Non- Tax Revenue and Tax-GDP Ratio

Fiscal Year

Total Revenue(TR)

Tax Revenue Non- Tax Revenue

Amount %ofTR

% ofGDP

Amount %ofTR

% ofGDP

2005-06 448.70 361.80 80.63 8.70 86.90 13.70 2.10

2006-07 494.70 392.50 70.34 8.40 102.2 29.66 2.20

2007-/08 605.40 480.10 79.30 9.00 125.3 20.70 2.302008-09 691.80 555.30 80.27 9.00 136.5 19.73 2.20

2009-10 794.60 639.30 80.46 9.30 155.0 19.54 2.30

•Tax is a major source of revenue, Contributed more than 75 % to total Revenue• Growth rate of Tax Revenue on an average of 15 %• Av.Tax –GDP ratio is 8.88 %.• Asian Developing Countries have higher direct taxes over Revenue such as ,Pakistan 10 % , India & Indonesia 11% ,Malaysia 15% , Singapore 13 %.• Revenue receipts are dependent on external factor..About 40 % of taxes come from external sources (.Import duty & VAT at import level)• Situation of revenue receipt determines amount necessary for foreign assistance and internal borrowing. To increase Tax/GDP ratio:Tax administration should be modern,Tax evasion and corruption have to be stopped.Direct Tax should be increased to help poverty alleviation.

- Development and Non Development Expenditure ( . Tk I )n Crore

Fiscal Year Total Expenditure . Exp to GDPRatio

DevelopmentExpenditure

.NonDevExpenditure

OtherExpenditure

2005-06 61058 14.68% 22263 (36.46%) 38070 (62%) 725

2006-07 66836 14.15% 21833 (32.67%) 45412 (68%) 459

2007-08 93608 17.15% 23304 (24.9%) 57922 (62%) 4859

2008-09 94140 15.31% 24234 (25.74%) 67603 (72%) 2303

2009-10 110523 15.96% 29628 (26.81%) 78136 (71%) 2759

( ) Indicates % of Total expenditure

• Non-dev.Exp. Is roughly 67 % of Total Expenditure, whereas Development Expenditure is (avg ) 29% of Total

Expenditure.

• Non Dev. Exp. Heavily increased from 62 % to 71 % of total Exp. Dev.Exp. Is almost steady .Non Dev. Exp.

Includes pay & allowances,payment of Interest,subsidies,acquisition of assets ,investts in share & equity, Development

under Revenue budget.

• Being a developing Country need to expanding development Expenditure.

•Development Expenditure was as high as 36.46 % in FY 2005-06 , it decreased to 28.81 % in FY 2009-10.

Allocation and Expenditure of ADP

FiscalYear

Allocation % Expenditure as of % of GDPO n actual

Expenditure OriginalADP

RevisedADP

GOBContribution

ProjectAID

TotalExpenditure

Originalallocation

Revisedallocation

2005-06 24500 21500 14375 7125 19472 77% 91%4.68

2006-07 26000 21600 13650 7950 17916 70% 83%3.80

2007-08 26500 22500 13550 8950 18455 69% 82%3.38

2008-09 25600 23000 12800 10200 19701 79% 86%3.20

2009-10 30500 28500 17200 11300 25917 85% 91%3.75

• Due to lack of efficient bureautic & administrative system ADP always lack behind the allocation

• Utilization of ADP was 91 percent in FY 06 & FY 10 respectively & the average implementation rate of

ADP lagged by 15 %

• Sucessful implementation of ADP is a major challange for the government. .

Tk. In Crore

Budget Deficit and Financing

Budget Deficit

Fiscal year Excluding ForeignGrants

Including ForeignGrant

% of GDP( . )Incl Grant

% of GDP( . )Exclu Grant

FY 2004-2005 -164.3 -137.9 -3.72 -4.4

FY 2005-2006 -161.9 -137.1 -3.29 -3.9

FY 2006-2007 -173.6 -152.1 -3.22 -3.7

FY 2007-2008 -330.7 -286.8 -4.92 -6.2

FY 2008-2009 -249.6 -200.3 -3.25 -4.1

FY 2009-2010 -310.4 -273 -3,93 -4.5

• Budget Deficit means government can’t collect enough revenue from taxes and other sources to cover annual expenditure i.e. Budget deficit is the difference between total expenditure and total receipts.• The increase in Budget deficit is due to food ,fertilizer and petrolium imports,increase in administrative cost, trade imbalance and other social welfare activities.•The budget deficit in FY 2005-06 stood at taka 161.9 billion or 3.9% of the GDP , this is somewhat lower than the previous year and remains close to this level with the next fiscal year.•In FY 2007-08 budget deficits increased due to emergency assistance to cope with the impact of natural disasters.

Tk. In Billion

Fiscal Year

Borrowing from Banking

System

Non Bank Borrowing

Total Domestic Financing

Foreign Financing Total Financing

Total Financing as % of GDP

Loan Grant Repayment(% of Loan)

Net

1 2 3 4 5 6 7 8 9 102005-06 60.40

(66%)31.0 91.43

(55.78%)68.6 36.6 32.7(48%) 72.5 163.9 3.94

2006-07 44.20(48.5%)

46.8 91.10(54.45%)

71.6 40.5 36.2(51%) 75.9 167.0 3.53

2007-08 109.60(77.73%)

31.4 141.0(58.45%)

91.8 48.2 39.8(43%) 100.2 241.2 4.41

2008-09 106.90(75.33%)

35.0 141.9(56.85%)

102.2 49.3 43.8(43%) 107.7 249.6 4.06

2009-10 86.60(50%)

86.6 173.20(55.80%)

144.9 37.4 45.2(31%) 137.1 310.40 4.50

Trend in Financing of Budget Deficit (In Billion Tk.)

• The trend of Budget deficit remains below 5 percent of GDP , except those years when there were natural calamities• Share of domestic financing were :- Average 63.5 percent from banking system and the remaining from non-banking instrument.•Share of Net foreign financing to total financing were 44% in FY 06 & remain same in (as % ) in FY 10.Implications: more dependence on borrowing from banks would result crowding out effect, to reduce bank borrowing high interest rate on NSD certificates will be contained. Issues relating to Deficit Budget:Financed by foreign assistance is dependence and uncertain,Financing by public, not inflationary,Borrowing from commercial banks not inflationary.Borrowing from Bangladesh Bank is inflationary. 

Colm -4 ( ) indicates percent of total FinancingColm. 2 ( ) indicates percent of total Domestic Borrowing Colm -7 ( ) indicates percent of foreign Loan

Performance of Some Macroeconomic Indicators

GDP Growth Trend

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

GDP at constant prices 284673 302971 321726 340652 360047

Growth (%) 6.63 6.43 6.19 5.74 5.83

Agriculture 4.94 4.56 3.2 4.12 4.67

Industry 9.74 8 8.38 6 6.78 6.46 6.01

Service 6.40 6 6.92 6 6.49 6.32 6.38

GDP at current prices 415728 472477 545822 614800 692380

Growth (%) 12.14 13.65 15.52 12.6 12.62

GNI at current prices 442935 507752 594212 670696 758684

Per capita GDP (Tk.) 29955 33607 38330 42628 47405

Per capita GNI (Tk.) 31915 36116 41728 46504 51945

Per capita GDP (US$) 447 487 559 620 685

Per capita GNI (US$) 476 523 608 676 751

GDP Growth Trend (Contd…)

• GDP - GDP is the total market value of all the goods and services produced in a given period of time in a country.• In Bangladesh context, GDP is mainly divided into three sectors, i.e. Agriculture, Industry and Service sector. • Percentage Change in GDP during the recent years from 2005/06 onwards is not steady due to unfavorable economic and political conditions. • From the last couple of years industrial sector left agricultural sector and remains ahead in contribution in GDP composition and the gap is increasing steadily.•The Service Sector’s GDP in the study period was bigger than the agricultural percentage.•The total GDP reached the highest peak in FY 2005-06 with 6.63 Percent and it was 6.19 per cent in FY 07-08 i.e. immediately before the effect of recession. Latter the growth rate slowly declined to 5.74 percent in FY 2008-09 due to the global financial crisis.

Target achievement: The GDP growth rate for FY06 was reasonably within the targeted (6.5%) limit, but the GDP growth rate came down at 6.43 % against targeted limit of 6.8 % in FY 2006-07 & gradually decreases to 5.74 percent in FY 2008-09 against the targeted limit of 6.5 % The GDP attained at .5.83 % in FY 2009-10 but it was far below than the targeted limit of 7 percent. •Constraints to growth: Energy deficit, Low Tax Collection, Inadequate trade logistic, Political instability, constraints in private sector investment,corruption etc.

Inflation

Inflation Rate 2005-06 2006-07 2007-08 2008-09 2009-10

General 7.21 7.22 9.93 6.66 7.31

Food 7.76 8.12 12.28 7.18 8.53

Non Food 6.40 5.90 6.32 5.91 5.45

• In FY2005-06 and FY2006-07, the inflation rate were closer to 7 per cent.•The inflation rate in FY 2007-08 stood at a high of 9.93% in the review period. The corresponding food inflation rate was 12.28 percent . Higher inflation was due to higher domestic price of food and higher global commodity prices.•Average inflation dropped to 6.66% in FY2009 with the fall in food prices steeper than that in nonfood prices. Inflation rate declined in 2009, also due to a rapid fall in commodity prices including fuel prices in the international market and bumper production of boro crop in the countryCauses of higher inflationary rate:•The historical movement of inflation indicates that inflation in Bangladesh varies proportionately with food prices•. The situation of quick rises in international prices during 2006-2008 attributed to higher cost of domestic food production. •The prices of fuel, seeds, fertilizers, labor wages, insecticides and transport cost went up•. In 2007 two consecutive floods and devastating cyclone Sidr and activities of business syndication contributed to higher food inflation• Oil price hike in the international markets prompted the government to increase its administered prices in the domestic market . This fuel price hike caused higher inflation in the domestic market.

National CPI Inflation

The following measures can help to control the price of essential goods:• Widening the area of food security program.•Continuation of zero customs duty rate on commodities such as rice, wheat, onion, pulse and edible oil, seeds, fertilizer, medicine and cotton.•To reduce the inflationary pressure CRR and SLR of scheduled banks have to reduced.

Total Export, Import and Trade Balance

Year Targeted Export (Billion US $ )

ActualExport (Billion US $ )

Total Import (Billion US $ )

Trade Balance

(Billion US $ )2005-06 10.16 10.53 14.75 -4.22

2006-07 12.50 12.18 17.16 -4.98

2007-08 14.50 14.11 20.37 -6.26

2008-09 16.30 15.57 21.44 -5.87

2009-10 17.60 16.21 21.34 -5.18

• During FY 06 & FY 07 , the trade deficit was US$ 4.22 & 4.98 billion.•The country's trade gap widened to a large extent in 2007-08 fiscal year because of the soaring cost of fuel and food imports following the super cyclone Sidr and two consecutive floods in the second half of 2007. •Both export & import is on rising trend in each fiscal year, but increasing rate of import cost is much higher than export earnings & causing huge trade deficit every year. •The liberalization of trade is likely to increased the overall import volume.Causes of Trade deficit:• Limited export base, backward industries, inadequate infrastructure, lower productivity• Earlier and faster trade liberalization program in Bangladesh compared to other country, tariff and NTBs imposed by other country, huge illegal trade, diversified exports and technologically advanced industrial base of other country. • A country which saves more than its investments would have a trade surplus and vice versa. Bangladesh stands in the vice versa zone, i.e. gross domestic savings is lower than the investments. Our domestic savings are not adequate to meet the investments demand. • Product quality-Proper quality of exportable items must be maintained to meet foreign demand. Better education and training to the workers and managers in the export industries, establishment of more technical schools and colleges, import of improved technology for export industries, and closed and regular product supervision can ensure the quality of exportable items.  

(…. Contd)Total Export, Import and Trade Balance

Limited export base, backward industries, inadequate infrastructure, lower productivity

Flow of Remittances

Fiscal Year 2005-06 2006-07 2007-08 2008-09 2009-10

Remittances 4801.88 5978.47 7914.78 9689.26 10987

Growth 24.78 24.50 5 32.39 22.42 13.4

As % of GDP 6.89 8 8.83 1 10.02 10.82 11.06

As % of Export 45.62 4 49.09 5 56.09 62.25 67.65 5

•Bangladeshi workers working abroad have played a notable role as a source of foreign exchange earnings and, also as an investible resource, augmenting national savings.•In 2005-06, the ratio of remittances to GDP was 6.9 per cent & 45.62 percent to export.•There has been a sharp rise in remittances, as a result, the share of remittances to GDP became 11.06 per cent of GDP in FY10•. Remittances represent around 60% of export values, and play a critical role in providing foreign currency and financing the country’s trade deficit.

FiscalYear

TotalInvestmet

Public Investmet

PrivateInvestmet

Growth Rate

public investment

as % of total investment

private investment as

% of total investment

Investment as% of GDPPublicInvestmet

PrivateInvestmet

Public Private

2005-06 1024.8 249.3 775.5 8.34 14.18 24 76 6 18.7

2006-07 1137.3 257.3 898.6 3.21 15.87 22 78 5.5 19

2007-08 1321.3 270.4 1050.9 5.09 16.95 20 80 4.9 19.3

2008-09 1498.4 284.9 1202 5.36 14.38 19 81 4.6 19.6

2009-10 1681.6 318.8 1362.8 11.9 13.38 19 81 4.6 19.7

Situation of public & private Investment(In billion taka)

• Contribution of public sector in total investment is gradually decreasing whilst the contribution of private sector investment is gradually increasing. • In the study period, the growth rate of private investment was 14.95 percent. On the other hand, the growth rate of public investment was declining. It attained a growth rate of 11.90 percent in FY 2009-10, which was highest value.

Fiscal Management

Involve:• Domestic revenue mobilization from the value added tax (VAT), direct taxes• Rationalization of the tax structure• Gearing revenue collection to budget targets through better forecasting of revenues•. Public expenditure management is a very important aspect of fiscal management•In order to have a balanced mix of sources of deficit financing, efforts should be intensified for enhancing revenue surplus, accessing foreign aid, enhancing National savings certificate and mobilization of bank deposits by way of interest rate limiting bank borrowing so as to accommodate private sector’s demand for investment.

Over the study period, budget deficits remained below as a consequence of the under spending of the ADP. This helped the fiscal deficit under control.

Characteristics of Fiscal System in Bangladesh

• LowTax/GDP ratio,• Tax base is narrow,• Dominance of indirect tax,• out of total tax ,major portion is indirect tax• Vulnerable to external fluctuations• Growth in Non-development expenditure•Dependence on Foreign Aid• Dependence on Deficit Financing

Monetary Management

• Managing money supply to achieve specific goals, relating to the inflation, exchange rate, as well as economic growth.•Central banks control the economic management by restriction of broad money growth path, adjustment in cash reserve ratio (CRR) and statutory liquidity requirements (SLR) , restriction in the capital accounts and trading in foreign exchange markets. •Governments often use expansionary policy to tackle unemployment during a recessionary period by lowering interest rates, whereas contractionary monetary policy dictates raising interest rates to handle inflation at times, even at the cost of curtailing credit expansion in a growth economy like Bangladesh.•Tools to influence the growth of money stocks are: restriction of broad money growth, adjustment in cash reserve ratio (CRR) and statutory liquidity requirements (SLR) and restriction in the capital accounts.

(….Contd)Monetary Management

Instruments (in%)

Current Rate Last Rate Changed Remarks

CRR 5Increased from 4.5 per cent in 2006 • Current excess liquidity in the banking

system, the central bank may opt or using one of the instruments. However, excess liquidity in the banking system also gives flexibility to the government for increasing amount of borrowing from the banking system. • In order to streamline liquidity management and effective control of money supply, the Bangladesh Bank introduced Repo and Reverses Repo instruments in 2003

SLR 18Increased from 16.0 per cent in 2006

Bank Rate 5Decreased from 6.0 per cent in 2004

Repo 8.5

Decreased from 8.75 per cent March, 2009

Reverse repo 6.5

Decreased from 6.75 per cent March, 2009

STATUS OF MONETARY POLICY INSTRUMENTS

•Central Bank controls inflation through controlling Broad money supply • Bangladesh Bank uses short term interest rates e.g., Repo and Reverse Repo rates as indirect instruments of monetary policy more frequently to inject liquidity or to reduce excess liquidity respectively from the market to smooth money market operations and ensure liquidity management and bring stability in relation to reserve money targets.

FY 06 FY07 FY08 FY09 FY10Trade balance -2,889 -3,458 -5,541 -4,708 -5,152Merchandise export f.o.b. (inc. EPZ) 10,412 12,053 13,945 15,583 16,236Ready made garments 7,903 9,211 10,700 12,348 12,497Marchandise import f.o.b.(inc. EPZ) -13,301 -15,511 -19,486 -20,291 -21,388

Of which : Crude Petroleum 604 524 695 584 535Services (net) -1,023 -1,255 -1,525 -1616 -1237Income (net) -702 -905 -1,005 -1,361 -1487Current transfers 5,438 6,554 8,743 10,226 11,610 Official 125 97 127 72 122 Private 5,313 6,457 8,616 10,154 11,488 Of which: Workers' remittance 4,802 5,979 7,915 9,689 10,987CURRENT ACCOUNT BALANCE 824 936 672 2,536 3734Capital account (net) 375 490 576 451 442Financial account -141 762 -457 -825 -755 Foreign direct investment ( net ) 743 793 748 961 636 Portfolio investment (net) 32 106 48 -159 -117 Other investment -916 -137 -1,252 -1,627 -1,274 MLT loans 1,023 1,037 1,338 1,204 1,601 MLT amortization payments -488 -525 -580 -641 -687 Other long term loans (net) -37 -24 -6 -70 -156 Other short term loans (net) -256 493 -160 -169 231 Other Assets* -495 -535 -581 -660 -903 Trade Credit (net)** -898 -481 -1,`108 -1,277 -1045ERRORS & OMISSION -720 -695 -468 16 -556OVERALL BALANCE 338 1,493 331 2,058 2865

Reserve Assets -338 -1,493 -331 -2,058 -2865

Bangladesh Bank -338 -1,493 -331 -2,058 -2865 Assets -554 -1,593 -799 -1,883 -3,616 Liabilities 216 100 468 -175 751

Balance of Payments ( )in millionUS$

Balance Of Payment

Balance of payments (BOP) accounts are an accounting

record of all monetary transactions between a country and

the rest of the world.

• BoP includes all payments between a country and its

trading partners and is made up of the balance of trade,

private foreign loans and their interest, loans and grants by

governments or international organizations, and movements

of capital..

• Balance of payments transactions are classified into 4

main categories:

1. Goods,services, and income

2 . Current Transfers

3 . Capital and financial account

4. Net errors and omissions

Major Strengths of BOP:

●Healthy BOP because of Current account surplus: The balance of payments (BOP) remained in a healthy position because of the current account balance has been in surplus in recent years.

● Trend in current account balance is also Positive.

● Despite deficit in the trade balance, current account balance recorded a larger surplus of US$ 3,737 million in FY 10 compared with the surplus of US$ 2,416 million in FY 09.

● This strengths is coming from remittance and positive export growth

Major weakness of BOP:

•Narrow Export Base

• Dependence on single product: like the RMG sector.

Narrow export market: North American and European markets dominate. Remittance is also vulnerable: Most of the remittance comes from Middle East countries.. Services accounts is deteriorating sharply and is projected to weaken further.

Balance of payments

•GDP growth above 6% during the last few years, despite the global downturn and high fuel and food prices.

The introduction of the value added tax (VAT) has led to an increase in government revenue collection. Some improvements in revenue collection as well as some discipline in current expenditure were responsible for improved fiscal trend in Bangladesh.

The tax and non-tax revenue surpassed current or non-development expenditures and progressively left a higher revenue surplus.

Average Growth rate of Tax revenue on an around of 15 percent. The average tax collection during the review period was 99.37 percent of the targeted budget.

ADP implementation has always been much lower than its target. A review of the 2006-10 fiscal years' actual-against-targets shows an average 15 percent shortfall in ADP implementation.

The trend of budget deficit in Bangladesh clearly shows that deficit remains below 5 percent of GDP except those years when there were natural calamities.

Growth in investment during the review period was not satisfactory. During the study period, the growth rate of private investment was 14.95 percent. On the other hand, the growth rate of public investment was fluctuating and its overall share was declining.On the expenditure side, the capital expenditure has declined from 36.46 percent to 26.81 percent of total expenditure , on the other hand the non- development expenditure increased from 62 percent to 71 percent of total expenditure at the end of review period.Healthy BoP

Performance of Targeted Budget:

SWOT Analysis

The SWOT of the ministry in terms of internal and external operational situations are:

Strengths

● Facilitates comparisons with prior years’ budgets and actual results of operations.● Provides prescribed accounting and reporting guidelines.● Annual growth averaging 6.16% per annum in FY 2006-2010, despite the adverse impact of global recession in 2008-2009.● Existence of a IT unit in the Ministry which gives support to all wing.● There is an established network with local and foreign training and placement institutions which help staff gain local as well as international expertise.● MoF produces many publications with statistics.● MoF has a functional digital resource centre that is accessible to its stakeholders.

Weaknesses

● Lack of adequate, complete, timely and correct data in the Ministry● Delay in publication of the necessary reports. ● Obsolete financial regulations●Lack of effective accounting & auditing systems●Weak expenditure monitoring & control●Staffing constraints and limited skilled human resource capacity to collect analyze and disseminate quality data on a timely and regular basis.● Some data providers whose input is a requirement for data aggregation by the Ministry submit late information. This affects timely production and dissemination of information to users.

Opportunities

● Closer collaboration of the

Public/Private Sectors

● Leverage new culture of Revenue

collection

●Simplification of

policies/Rules/Regulations.

●Reform/ restructuring of the

accountability Framework and

mechanisms for financial management

and operations.

●Amend legislation to facilitate alignment

of responsibility /authority/accountability.

Threats● Late submission of quarterly budget performance reports from line Ministries, Departments and Agencies. ● Bangladesh is vulnerable to external environment including global economic developments, and global climate change.●The country is dependent on imports (24% of GDP in recent years) of food and fuel products.● Dependent on remittances ● Hardening of international food and fuel prices may have adverse impact on the current account deficit, terms of trade, foreign exchange reserves and consumer price inflation.●IMF conditionalities ●Garment exports competition● Erroneous interpretation of the statistics, which limits the credibility of the Ministry’s publication. 

( ...) Contd SWOT Analysis

Key Findings

Following are the major findings of the study.

● It was found that the total GDP reached the highest peak in FY 2005-06 with 6.63 Percent and it was 6.19

per cent in FY 07-08 i.e. immediately before the effect of recession. Latter the growth rate slowly declined to

5.74 percent in FY 2008-09 due to the global financial crisis.

● It is observed that, Agricultural and Industrial GDP are small in recent years, but Service Sector’s GDP is

swelling. This kind of imbalanced swell of one sector except other two causes inflation. The contribution of

all sectors to GDP needs to increase equally.

● Non-Development expenditure heavily increased during the review period. The percentage share gives

clear idea of the very trend of Non-Development expenditure. But Development expenditure of government

is almost steady.

● The Revenue-GDP ratio has not been increased significantly

● Total revenue, tax revenue and non-tax revenue all are linearly increasing during the period of study. Tax

revenue has always contributed more than the non tax revenue in total revenue. VAT has contributed

substantial amount for the growth of tax on consumption and production of goods and services.

● The trend of budget deficit in Bangladesh clearly shows that deficit remains below 5

percent of GDP except those years when there were natural calamities.

● Overall budget deficit as a percentage of GDP is increasing each year, which clearly

shows that government revenue is even not sufficient to finance the recurrent expenditure

and principal repayment expenditure. Development activities carried out in the economy

are wholly based upon the foreign sources (grant and loan) and internal borrowings.

● During the study period, the growth rate of private investment was 14.95 percent. On the

other hand, the growth rate of public investment is fluctuating and its overall share is

declining.

● The dependence of the economy on foreign assistance has declined in recent years. This

indicates that national priority setting processes and domestic efforts to attain them has

enabled Bangladesh to design development projects and policies with relatively less

conditionality from outside.

● Balance of payment was healthy during the review period.

( ..) Contd Key Findings

Conclusion

•The present government aims to establish Bangladesh as a middle income country by 2021. The required amount of investment to increase GDP growth rate to 8 percent by fiscal year FY 2015 in accordance with the government’s Medium Term Macroeconomic Framework 2011-2015 (MTMF) of the government.

• In order to move the economy to a higher growth path, significant efficiency and productivity gains are required to meet the challenge of limited resources, particularly land (and thus food) and energy. Moreover, effective implementation of reform agendas is imperative to strengthen competitiveness, foster growth, and generate productive and job opportunities.

• To attain the Vision 2021 and to carry out the development process the country needs to rationalized its revenue collection composition with great emphasis on collection from internal resource.

•The Investment growth rate is insignificant, the creation of an investment friendly environment and a competitive market system, adoption of innovative technology and provision of infrastructural facilities that are able to attract entrepreneurs and expand domestic market are essential.

• The MTBF approach is encouraging ministries to plan their programs for the medium term, thus giving them a greater voice and decision making power in how resources are allocated. At the same time it has placed new demands on them with regard to budget planning and management.

Recommendations

Some general recommendations can be outlined as follows:

● Government revenue is only 11 percent of GDP in the context of Bangladesh. Though it is as high as 40 percent in developed economies. Hence tax base in the economy is to be expanded. The following measures may be adopted to increase the tax net and collection include:

Restructuring of manpower and other facilities of income tax department; ● Motivational programme for taxpayers of income tax and VAT; ● Reforms in judicial process for easy settlement of VAT related cases; ● Reforms in VAT administration including setting up more VAT offices, setting up VAT offices in each upazilla

● To Strengthening public expenditure management, mechanisms must be developed for ensuring transparency and accountability in public procurement

● To enhance Agricultural GDP, Modernization in agriculture, distribution of subsidies, interest-free loans among peasants can be helpful. On the other hand, for the balance between the growth rates of Large Scale Industries and Small & Cottage Industries, it is necessary to bring them under government care. Government should increase domestic investments in proper areas with efficient hands

● Expenditure on recurrent activities is increasing at the faster rate. Unnecessary recurrent expenditure should be discouraged. loan from external sources should be received only when needed. Foreign aid must be utilized in more productive sector and infrastructural development.

●A complete and vigorous cost-benefit analysis must be done before receiving loan for any project from external sources as well as from domestic borrowings. It will ascertain the benefit from any project.

● The preparation of our national budget is a highly centralized. Participatory budgeting through which citizens deliberate and negotiate over distribution of resources is almost absent. The participatory budgeting includes a process where local governments have a say in the matters of regional income and expenditure. Such involvement also strengthens accountability, transparency of the government.

● The parliamentary standing committees of the parliament should be active so that they can scrutinize the budgets of their respective ministries and place their recommendations

● A public budget hearing by the Parliament Standing Committee every year should start with a review of recommendations of the previous year, which will create moral pressure on the government. It would ensure effectiveness to discuss budgetary policies with various stakeholders such as academicians, chambers of commerce, media and civil society members.

● The amendments to budget by NBR through Statutory Regulatory Order (SRO) is not a good practice for any democratic country. The bureaucratic process should not have supremacy over legislatures. Any changes through SRO should be subjected to approval of the parliament standing committee on finance.

( ..) Contd Recommendations

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