Central Banking Report.docx

8/10/2019 Central Banking Report.docx

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LETTER OF TRANSMITTAL

June 25, 2014

Dr. Shaikh Shamsuddin Ahmed

Professor,

Finance Department,

University of Dhaka

Subject: Submission of Report on Fiscal Budget FY15 & Its Impact on Investment.

Dear Sir,

We are pleased to submit my report titled Fiscal Budget FY15 & Its Impact on Investment.

as per the requirement of our course Central Banking & Monetary Policy. Throughout the study

we have tried with the best of our capacity to accommodate as much information and relevant

issues as possible and tried to follow the instructions as you have suggested. We have tried our

best to make this report as much informative as possible. We sincerely believe that it will satisfy

your requirements.

We are grateful to you for your guidance and kind co-operation at every step of our endeavor on

this report.

Sincerely Yours,

_____________________ _____________________ _____________________

Farahnaz Zarrin Salma Yeasmin Tanjin Hossain

ID:22033 ID: ID:

_________________ _________________


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Executive Summary

Amidst the chaotic economic situation, the budget for FY15 was presented by the honorable Finance

Minister on June 5, 2014. The budget targeted a growth of 7.3%. The proposed budget of BDT 2506.05

billion for FY 15 is an ambitious one as acknowledged by the honorable finance minister. This new

budget is 15.9% higher than revised budget of FY14.The government is highly determined to bring backeconomic growth, control inflation and infrastructural development in the economy. In order to fulfill its

goals, the government is planning to lower domestic interest rates to increase private sector credit flows

to stimulate investment. Government has targeted GDP growth of 7.3% in FY15. Given the present

economic situation and low investment level of the economy followed by weak consumer confidence,

the growth target of 7.3% seems highly optimistic. Nevertheless, efforts to stimulate economic growth

will surely bring back momentum. The budget states an inflation target of 6%. Given the deteriorating

local cost of fund along with the current stable global commodity prices, prices are expected to

moderate from this level. The government has committed to complete the construction of the Padma

Bridge by 2018 and this is likely to boost the domestic construction sector companies. The budget has

targeted growth rates of 15% for both import and export. The budget for the FY15 has set a revenue

target of BDT 1829.54 billion. This is 16.8% higher than FY14 revised budget and 13.7% of GDP. In the

budget of FY15, the total expenditure has been estimated at BDT 2,505.06 billion. This is 18.7% of GDP

and 15.9% higher than that of revised budget of FY14. Budget deficit for the FY15 is BDT 675.52 billion

which is 5.0% of GDP and 27.0% of the budget. The government has decided to provide tax rebate and

tax holiday benefits in least developed areas to enhance industrialization across the country. Moreover,

government has adjusted the import duty, supplementary duty and VAT to promote the possible growth

of local industries (e.g.; Pharmaceutical, RMG and Textile and iron and steel industry and others). The

government has again proposed to increase the tax incidence for tobacco companies. Another proposal

suggests 1% Health Development Surcharge on all imported and domestically produced tobacco

products. These initiatives are appreciable as these are to reduce tobacco uses.

Analyzing the capital market perspective the budget cannot be termed friendly. Conversely, few

initiatives were disappointing. In particular, the introduction of capital gain tax introduction on

individual level is a difficult move in the present chaotic situation of the capital market. The provision for

10% tax rebate for companies declaring more than 20% dividend has been withdrawn. Companies that

give more than 20% dividend had an effective tax rate of 24.75% after rebate of 10%. Their effective tax

rate will now rise by 275 basis points. In other words the budget has increased tax rate for good listed

companies. On top of that, government has proposed to raise tax rate for listed companies giving less

than 10% dividend from existing 27.5% to 35%. It appears that, these tax initiatives will lower the

interest of private entities to be listed in the exchanges. For our analysis purpose, we have decided to

show correlations among private sector credit growth with import, export, M2 growth, remittance and

call money rate. Assuming private sector credit growth has a positive correlation with investment, we

analyze the different factors that affect the private sector credit growth. Hence, we can relate it to the

final impact on investment. In our analysis, we show the different impacts of the policies undertaken in

the budget that can affect these variables and eventually investment.


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administration, education and information technology and interest payment got higher preference

having 15.3%, 13.1%, and 12.4% allocation of total budget respectively.

The total ADP size is BDT 803.15 billion which is 33.9% higher than that of FY14 revised budget. In the

ADP for FY15, 24.3% is allocated to human resource sector (education, health and others), 25.8% to

overall agricultural sector, 14.3% to energy sector, 23.3% to communication sector and the rest 12.3% isallocated to other sectors.

From the summary table, it is evident that the government has scaled up its revenue generation target

to BDT 1829.54 billion, a rise from BDT 1674.59 billion of the FY14 revised budget. It has been increased

by 16.8% from the previous financial year revised budget. The targeted revenue is 13.7% of the GDP,

slightly up from 13.3% of GDP in previous fiscal year. Estimated 13.7% revenue to GDP ratio is still very

low. Our Tax-GDP ratio (around 11.0% as of FY14 revised budget) still lags behind many developing

countries.

The country's budget deficit in FY15 is set to be the widest at 5.0% of the GDP in seven years since

FY08. The total Budget deficit is estimated to be BDT 675.52 billion. Out of which domestic source willfinance 64.1% and external source will finance 35.9%. Out of domestic sources, government will borrow

BDT 312.21 billion from the banking system, which is 20.1% jump from the FY14 targeted bank

borrowing (but merely 4.1% up from the revised budget).

Economic Indicators and Its Targets

The FY15 budget has presented some of the most optimistic targets ever. As per the budget the

following are the targets for some of the major indicators:

Table: Targeted Economic Indicators FY15

Particulars Target

GDP Growth 7.3%

Inflation 6.0%

Export Growth 15.0%

Import Growth 15.0%

Remittance Growth n/a

Source: Ministry of Finance

Gross Domestic Product (GDP)

The government has set a GDP growth target of 7.3%. The target for FY14 was 7.2%, where as the

achieved growth in FY14 is 6.12%. In reality, the actual achieved growth is estimated to be lower than

6.0% (considering FY96 as base year). However, this year BBS (Bangladesh Bureau of Statistics) changed

its GDP calculation base to FY06.


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Table: GDP Comparison

Year Targeted Achieved

2010-11 6.70% 6.71%

2011-12 7.00% 6.23%

2012-13 7.20% 6.03%

2013-14 7.20% 6.12%


Comment: Considering the current economic condition of low investment and consumption confidence,

target of 7.3% seems to be a bit overly optimistic.

Inflation

The government had targeted to bring inflation down to 7.0% in FY14. They have been quite successful

in bringing inflation down. Inflation in Jun13 was 8.05%. Inflation came down to 7.4% in April, 2014.

Table: Inflation Comparison

Year Targeted Achieved

2010-11 6.70% 6.71%

2011-12 7.00% 6.23%

2012-13 7.20% 6.03%

2013-14 7.20% 6.12%


Comment:For FY15, inflation has been targeted 6.0%. It has been assumed that global food and energy

prices will decline slightly. We also believe that commodity prices will be favorable. Domestic interest

rates are expected to go down.

Export

Export growth target was set 15.0% in FY14 budget. Export growth in July to April, FY14 was 13.8%. It

can be assumed that if there were no political hindrance this 15% growth is achievable.

Table: Export Growth Target

Year Target

FY11 41.4%

FY12 6.1%

FY13 11.2%FY14 13.8%

FY15 15.0%


Comment:Export growth target for FY15 is 15.0%. It is assumed that global economy growth will

accelerate. We expect that if global economy remains vibrant and domestic political scenario remains

stable, this growth target is achievable.


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Import

Import growth target was set 10.0% in FY14 budget. Import growth for July to March, FY14 was 11.1%.

Import growth was non-existent in FY13. The increase in import growth is indication of increased

business activity ahead.

Table: Import Growth Target

Year Target

FY11 37.0%

FY12 2.4%

FY13 0.8%

FY14 11.1%

FY15 15.0%


Comment: The targeted import growth for FY15 is 15.0%.If the political stability persists and consumer

confidence builds up again, this growth can be achieved.

Remittance

Remittance has declined by 4.8% till April 2014 of the current fiscal against last fiscal years growth of

12.6%. There was no specific target provided in the budget for FY15. It is stated that remittance is

expected to get back to normal growth trend in this fiscal.

Reserve

Foreign currency reserve has hit 20.2 billion USD at the end of May 2014 which was only 15.3 billion USD

at the end of last fiscal. This reserve is sufficient to foot the import bill of approximately six months. The

government expects trade deficit to widen and foreign exchange reserve to moderate a bit.


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Deficit Financing

The budget deficit for the FY15 will be BDT 675.52 billion or 5.0% of GDP. Thoughbudget deficit has

increased by 13.4% from the revised budget of FY14, deficit to GDP ratio has notincreased. Deficit to

GDP ratio in India, Pakistan and Sri Lanka in the FY15 is 4.1%, 4.9% and 4.5% respectively. Considering

that Bangladeshs deficit is not that high, financing the deficit is challenging butstill possible.

Table: Deficit Financing Sources as a % of Total Deficit

Particulars FY15 FY14

Foreign Financing 35.9% 31.2%

Non-Bank Borrowing 17.8% 18.5%

Bank Borrowing 46.2% 50.3%


Foreign Financing

The government has set target on high foreign financing in the FY15. The total budget deficits 35.9% or

BDT 242.75 billion will be financed through foreign loan and grants which was BDT 185.69 billion or

31.2% in the FY14s revised budget. The growth intargeted foreign financing is 30.7% as compared to

FY14 revised budget.

Bank & Non Bank Borrowing

Bank will be a major source of funds to finance the budget deficit. There is a plan to borrow BDT 312.21

billion or 46.2% of deficit from banking sector which was BDT 299.82 billion or 50.3% of deficit in the

FY14 revised budget. At present, there is ample liquidity in the banking system. In fact, data suggests

with BDT 1382.01 billion excess liquidity as of Mar14. Interest rate has been on a declining trend and

private sectors' credit demand is yet to pick up. So, it is highly unlikely of a crowding-out effect due tothe government's increased borrowing from the banking system. Financing through non bank borrowing

has been set at BDT 120.56 billion which is 9.6% higher than the revised budget of FY14 and 17.8% of

total deficit.

Tax Proposals

Income Tax for Individuals

The minimum slab for general tax player remains same in the FY15 budget whereas the minimum slab

for Women tax payer and tax payers of 65 years of age and above has increased from BDT .25 million to

.275 million. The minimum slab for physically handicapped and war-wounded gazetted freedom fighters

has also increased by .05 million and .18 million respectively. Tax rate for individual income taxpayers

also changed in FY15 budget. In FY15 budget, a new slab has been introduced. Due to that, tax rate for

rich people increased in FY15s budget. Individuals income surpassing BDT 44.20 million will be taxed at

30.0% which was not in act in FY14s budget. The government has introduced new slabs for surcharges

on individuals wealth. Individuals having more than BDT 200.00 mn but less than BDT 300.00 mn have

to pay 20.0% surcharge on this incremental wealth. Individuals having more than BDT 300.00 mn have


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to pay 30.0% surcharge on this incremental wealth.

Table: Minimum Slab for Individual Tax Payer

Type of Taxpayer Threshold of Taxable Income

Existing Proposed

General Tax Payer BDT .22 mn BDT .22 mn

Women tax payer and tax

payers of 65 years of age and

above

BDT .25 mn BDT .275 mn

Physically handicapped BDT .30 mn BDT .35 mn

War-wounded gazetted

freedom fightersBDT .22 mn BDT .40 mn


Corporate Tax

In FY15 budget, there is a little change in the corporate tax rate. Only non-publicly traded

manufacturing companies get a 2.5% tax cut becoming 35.0% in FY15 budget which was 37.5% in FY14

budget. The tax rate for publicly traded company remains same. However, the listed company will not

be entitled 10.0% tax deduction if they declare more than 20.0% dividend. The tax rate for all

autonomous bodies has been cut down to 25.0% from 37.5%. It is also proposed to raise tax rate for

companies giving less than 10.0% dividend from existing 27.5% to 35.0%

Table: Corporate Tax Rate

Company Tax Payer Existing Proposed

Publicly Traded Company

(subject to certain conditions)27.5% 27.5%

Non-Publicly Traded Company 37.5% 35.0%

Bank, Insurance and Financial

Institution (other than

Merchant Bank)

42.5% 42.5%

Merchant Bank 37.5% 37.5%

Cigarette Manufacturer

Publicly Traded 40.0% 40.0%

Non-Publicly Traded 45.0% 45.0%

Mobile Phone

Publicly Traded 40.0% 40.0%

Non-Publicly Traded 45.0% 45.0%

Dividend Income 20.0% 20.0%

Minimum Turnover Tax 0.5% 0.3%



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Tax deduction at Source

Tax rate for quick rental has been increased from 4.0% to 6.0%. In case of life insurance, distributed

profit in excess of paid premium will be taxed at 5.0%. Interest income on treasury bills, treasury bonds

and debentures will be taxed at 5.0%. Tax rate on bills received by gas transmission companies has been

decreased to 3.0% from 5.0%. Oil distribution companies have to pay source tax of 1.0% on the bills ofoil supplied to the dealers and agents (except petrol pumps). For the export sector, government has

proposed to reduce tax at source on cash incentive from 5.0% to 3.0%. There is proposal for 1.0%

Health Development Surcharge on all imported and domestically produced tobacco products.

The government has imposed a fixed tax of Tk. 100 on the supply of every single piece of replacement

SIM. Tax at source on garments export has been reduced from .8% to .3%. These preferential rates will

be effective till June 2015. For all other sector, tax at source for export has been reduced from .6% to

.3%.

Import Duty

15.0% VAT on mobile phones is imposed at the import stage which was previously 10.0%. For the textile

sector, 10.0% duty chargeable to a few raw materials used in this sector is proposed to be reduced to

5.0% In order to create favorable production environment compatible with international standards, it is

proposed to allow the export-oriented Readymade Garments sector (RMG) to import the raw materials

necessary for the manufacture of prefabricated buildings without duties on certain conditions. In

addition to that, the existing duties on fire resistant door, emergency light, sprinkler system etc. are

being proposed to be fully exempted

Tax Holiday

To create investment friendly atmosphere for industrialization and economic progress, it is proposed toextend the existing tax holiday facilities from Jun15 to Jun19. Moreover, the facility of accelerated

depreciation alternative to tax holiday for the new industrial entrepreneurs is also proposed. Both DSE

& CSE will get tax exemption for 5 years in graduated rate as they become demutualized.

Supplementary Duty

SD rates on 40 (forty) basic raw materials of pharmaceutical industry are proposed for reduction to

5.0% concessionary rate from existing 10.0% and 25.0%. Supplementary duty on Low, Medium and High

segment cigarettes has been raised to 43%, 60% an 61% from existing 39%, 56% and 59%

respectively. With the intention to reduce supplementary duty, government has proposed to change the

current supplementary duty slab from 10 to 12 slabs which would reduce government revenue of BDT

5000.00 million.


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Tobacco Industry

Value slab for all the segments have been raised. Supplementary duty for Low, Mid and High segment

has been raised. These are pass-through costs. Historically, Supplementary duty raise has not impacted

margins of companies operating in this industry. In the premium segment value slab has been raised,

but supplementary duty has not been raised. So premium segment gross margin will improve. In allother segments also value slab rise is higher than supplementary duty rise. So, gross margin will be

impacted positively. One percent Health Development Surcharge on all imported and domestically

produced tobacco products has been imposed. We believe tobacco companies will pass through this

cost also.Budget proposed fixation of price of 25 sticks non-filter bidis at Tk. 6.14 and 20 sticks filter bidis

at Tk. 6.94 from 5.35 and 6.05 respectively.

Table: Value slab and Tax incidence of Cigarette containing Tobacco

2013-14 2014-15 2013-14 2014-15 2013-14 2014-15

ExistingValue slab

for (10

sticks)

Proposedvalue slab

for (10

sticks)

ExistingSupplementary

Duty

ProposedSupplementary

Duty

ExistingSupplementary

Duty plus VAT

ProposedSupplementary

Duty plus VAT

13.69-13.91 15-16.50 39% 43.00% 54% 58%

28-30 32.5-50 56% 60.00% 71% 75%

42-45 50-54 59% 61.00% 74% 76%

80 & Above 90 & Above 61% 61.00% 76% 76%


Impact on Investment

Historically pass-through cost could not reduced the use of tobacco products, thus with no changes in

Supplementary Duty on premium segment and increase in value slab in all segment would increase the

companys margin, which would benefit the company and capital market investors both. Thereby, we

can expect rally in stock of company under this industry and buying interest of traders on the stock.


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Textile Industry

Tax at source on cash incentive has been reduced to 3.0% from existing 5.0%. Tax at source on

garments export has been reduced from .8% to .3%. These preferential rates will be effective till June

2015. Reduction of CD on flex fiber (from 10.0% to 5.0%) and artificial staple fiber (from 5.0% to 3.0%)

would likely to reduce production cost of specific textiles companies. The Budget proposes to reducesupplementary duty on woven fabrics from the existing 30.0% to 20.0%, on most knitted or crocheted

fabrics from 45.0% to 30.0%, on track suits and other garments from 45.0% to 30.0%, and on various

clothing accessories form 60.0% to 45.0%.


All measures has been proposed keeping in mind the benefit of the consumer of textile products, no

specific trigger can be seen for this sector. This has nothing to do with domestic woven and knit fabric

manufacturers. This is beneficial for domestic consumers.

Fuel and Power Industry

Budget Proposals Impact

Theres proposal to raise the import duties on LPG

cylinders from 5% to 25%. But theres also

proposal to withdraw the rebate facility on import

of LPG making industrys capital machinery.

These propositions will make the import more

costly hence increasing local demand. On the other

hand setting up new LPG making companies will be

more expensive.

Gas transmission companies maximum tax at

source on bill receipts is proposed to be reduced

from 5% to 3%.

Gas transmission companies profitability will

increase.

Oil distribution companies have to pay source tax

of 1% on the bills of oil supplied to the dealers and

agents (except petrol pumps).

This source tax will require some fund engagement

which they could otherwise have deposited in

banks. This amount will not be significant.


Rise in import duty and withdrawal for rebate facility on import of LPG would restrain further

investment on LPG production and it would increase the cost of related companies. Thereby, listed LPGmaking stock might get spooked if this proposition comes into effect. On the contrary stock of Gas

Transmission Company may see buying interest as tax expense on bill receipt is proposed to reduce.


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The net effect of imposition of tax on replacement on SIM and reduction of VAT on import of SIM card is

subject to financial analysis. However, telecom companies would face difficulties to expand business

through market penetration. No new operator in the industry is provided any incentive in budget and

capital market investment can only be benefited if listed telecom companies can mobilize the growth by

aggressive market policy.

Construction and Building Material Industry


Real estate sector would see a rise in demand in the industry, thus margins of Cement and buildingmaterials provider may increase. No new entry can be expected as the real estate business is already

highly saturated and competition is intense. However, capital market investors might gain from

investment on listed real estate and cement companies, which are currently undervalued.

Capital Market

Budget FY15 did not have much to offer to boost the capital market. On the contrary some decisions

are going to lower corporate profitability of listed companies and incentive to get listed in the process

by prospective companies.

Budget Proposal Impact

Theres a total allocation of BDT 187.12 billion for

communication infrastructure in ADP which is 84.5%

higher than the FY14 revised budget. 46.7% of this

allocation has been reserved for bridge division due to

the construction of Padma Bridge.

This allocation will boost the demand of Cement, Steel,

Electrodes and related industry.


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Negative Impacts:

Tax rate of non-listed companies has been reduced to 35.0% from existing 37.5%. Tax rate for

publicly traded companies has been kept unchanged at 27.5%. These sorts of decisions

discourage listing. Many companies get listed to get tax advantage.

The provision for 10.0% tax rebate for companies declaring more than 20.0% dividend has been

rescinded. This will increase effective tax rate for companies that used to pay more than 20.0%

dividend. Companies that give more than 20.0% dividend had an effective tax rate of 24.75%

after rebate of 10%. Now their effective tax rate will rise by 275 basis points.

It is also proposed to raise tax rate for companies giving less than 10.0% dividend from existing

27.5% to 35.0%.

Capital gain tax has been introduced at individual level. Previously only companies had to pay

capital gain tax of 10.0%. In the proposed budget a capital gain tax of 3.0% has been introduced

for capital gain exceeding BDT 1 million but not exceeding BDT 2 million. For capital gainexceeding BDT 2 million capital gain tax of 5% is proposed.

Positive Impacts:

Corporate tax rate reduction of non-listed companies will benefit conglomerate companies with

number of unlisted subsidiaries and associate companies. As tax burden of those unlisted

subsidiaries will decrease, overall consolidated profit will increase.

Tax free dividend income limit has been raised to BDT 15000 from existing BDT 10000.

Demutualized exchanges have been given five year tax rebate.


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Qualitative Analysis

GDP:

The gross domestic product or the GDP is a measure of the total productivity of a country. It is aquantifiable figure that tells how much better the country and its people are at that point of time. GDP

is defined as the market value of all the total goods and services produced in the country for the given

period of time.

Consumption (C)

Investment (I)

Government spending (G)

Exports (X)

Imports (M)

Investment:

Investment is time, energy, or matter spent in the hope of future benefits actualized within a specified

date or time frame. Investment has different meanings in economics and finance.

In economics, investment is the accumulation of newly produced physical entities, such as factories,

machinery, houses, and goods inventories.In finance, investment is putting money into an asset with the expectation of capital appreciation,

dividends, and/or interest earnings. This may or may not be backed by research and analysis. Most or all

forms of investment involve some form of risk, such as investment in equities, property, and even fixed

interest securities which are subject, among other things, to inflation risk. It is indispensable for project

investors to identify and manage the risks related to the investment.

Impact of Different Factors on Investment

1) Private Credit Growth: Private credit growth has a positive relationship with investment. If private

credit growth increases then people will have more opportunity to invest, as they have more funds.

Therefore if private credit growth increases investment increases and vice versa.


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2) Import: Imports contribute to all GDP components, which mean it contributes to investment.

Increasing in imports will causes increase in investment. As a GDP component from the current domestic

expenditure side, investment has an immediate impact onGDP.An increase of consumption raises GDP

by the same amount, other things equal. Moreover, since income (GDP) is an important determinant of

consumption, the increase of income will be followed by a rise inconsumption:apositive feedback loop

has been triggered (between consumption and income) by investment. Because of this mechanism,

imports will grow as well. More directly, investment is often directed to foreign machineries and goods,

with an immediate increase of imports.

3) Export: The increase of export will increase production, GDP, employment, therefore, as a component

of GDP investment also increases. More exports mean more profits, to support the exports procedures

investment increases simultaneously.

4) M2 Growth: In short run if money supply increases (interest rate decreases) investment will also

increase and if M2 decreases investment will decrease.

5) Remittance: Remittance increases countrys profit/cash inflow. Thus they help in investment.

Investment increases when remittance increases. Remittances complement national saving to form a

bigger pool of resources available for investment.

6) Call Money Rate: Inter-bank call money transactions make the stream of funds convenient and

affordable for financial intermediaries. Consequently commercial banks get involved in the investment

in and borrowing from call money market. This arrangement plays a significantly vital role to strengthen

the liquidity base of a bank and also provides ample avenue of investment of fresh funds. Therefore, if

the call money rate is very high it will decrease investment and if it is low it will increase investment.
http://www.economicswebinstitute.org/glossary/gdp.htmhttp://www.economicswebinstitute.org/glossary/cons.htmhttp://www.economicswebinstitute.org/glossary/feedback.htmhttp://www.economicswebinstitute.org/glossary/imports.htmhttp://www.economicswebinstitute.org/glossary/imports.htmhttp://www.economicswebinstitute.org/glossary/feedback.htmhttp://www.economicswebinstitute.org/glossary/cons.htmhttp://www.economicswebinstitute.org/glossary/gdp.htm


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Historical Analysis

For our analysis purpose, we have decided to show correlations among private sector credit growth

with import, export, M2 growth, remittance and call money rate. Assuming private sector credit

growth has a positive correlation with investment, we analyze the different factors that affect the

private sector credit growth. Hence, we can relate it to the final impact on investment. In our analysis,

we show the different impacts of the policies undertaken in the budget that can affect these variables

and eventually investment.

We have used the data of FY 2013-14 for our analysis purpose to show the correlation of private

borrowing with the independent variables:

FY 2013-14 Private

Borrowing

Export Import Government

Borrowing

Remittance M2

July 452268.3 18349 20577 158809.8 160000.66 613500.1

August 456406.4 15434 17002 153868.9 7820.23 619996.7

September 461577 18984 22190 152731.0 172527.69 626723.9

October 464282.9 16127 20797 157979.5 161697.93 640317.2

November 467058 17623 22310 160432.8 173462.18 642576

December 474473.5 16302 23698 163027.4 9409.50 653966.6

January 473893.3 18006 25488 161810.6 9801.70 653765.5

February 475964.2 17784 20823 163492.1 9121.34 662311.4

March 482167.3 18517 25173 168109.5 10014.03 667709.6

*Source: Bangladesh Bank *Amounts in BDT Crore

Using correlation analysis we have obtained the following results:

Variables Private

Borrowing

Private Borrowing 1

Export 0.185085427

Import 0.727200448

Government

Borrowing

0.831912085

Remittance -0.584812345

M2 0.989060513

Interpretation:

From the analysis it can be inferred that import, government borrowing and M2 have the greatest

positive correlation with private borrowing. The import (import of raw materials) has a positive impact


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on private credit growth. This is because for the purpose of import of raw material and capital

machinery money has to be borrowed from the bank. This increases private borrowing and also

increases investment in the economy. Apart from these variables, another variable that has impact on

private credit growth is government borrowing. The credit growth rate in the private sector increased

slightly in April from the previous month but still remained very low as investors maintained their wait-

and-see stance because of continued political uncertainty. These estimates show that the private

consumption to GDP ratio declined from 72.85 percent in FY13 to 71.38 percent in FY14 while the

private investment to GDP ratio declined from 21.75 percent to 21.39 percent. General government

consumption increased from 5.12 percent in FY13 to 5.2 percent in FY14 while public investment

increased from 6.64 percent to 7.3 percent. Part of the explanation may be an over-estimated public

investment, amounting to Tk 986 billion (about $12 billion) in FY14. The governments net bank

borrowing came down to BDT 45.70 billion during July-December period of the FY `14 from BDT 67.26

billion in the corresponding period of the last fiscal, according to the central bank statistics. The

governments net bank borrowing has decreased significantly during the period under review because of

hindrances to the overall development activities across the country amid political uncertainty in the

recent months. Apart from this, the large amount of liquidity in the market did not cause the crowding

out effect on private borrowing. Foreign currency reserve has hit 20.2 billion USD at the end of May

2014 which was only 15.3 billion USD at the end of last fiscal. This reserve is sufficient to foot the import

bill of approximately six months. Government expects trade deficit to widen and foreign exchange

reserve to moderate a bit.

Particulars FY2013 FY2014

Private investment to GDP 21.75% 21.39%

Public investment to GDP ratio 6.64% 7.35%

Jul-Dec 2013 Govt borrowing

bn

45.2 67.26

Increase in M2 is will also increase private borrowing as more fund is available for lending. Thereby the

final impact will be on investment.

On the other hand, export has weak correlation with private borrowing and remittance has a negative

correlation with private borrowing. The negative correlation of remittance can be explained through the

fact that when remittance increases people tend to borrow less from banks as they have ample source

of fund for consumption and investment. The weak correlation of export also proves that when there

are increased exports in the economy, inflow of money is greater and thus people need to borrow less.

Though remittance and exports may not have significant impact on private borrowing but they surely

affect the investment in a positive way. In other words, if there is inflow of fund people are bound to

invest thereby increasing investment.


21/21

Though these variables are set to impact private borrowing of the economy and thereby

investment but in reality most of the targets set by the government were not attained in

FY2013-14:

Particulars Target FY2013-14 Achieved FY2013-14

Export 15% 13.8% (April)

Import 10% 11.1% (March)

Government Borrowing

(Domestic Sources)

BDT 409.8 billion BDT 145.283 billion

M2 17% 8.84%

Analyzing the targets and end results of the previous year it can be deduced that most of the

targets have been unattained in the past year given the scenario of the country. As a result,

investment was low in FY 2013-14. Given these variables will see growth in the upcoming year,the investment may increase in FY 2014-15.

Central Banking Report.docx

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