Post-Budget (FY 2007-08) Round Table Conference By Professor Ayubur Rahman Bhuyan Organized by ISLAMIC ECONOMICS RESEARCH BUREAU.

Post-Budget (FY 2007-08) Round Table Conference

By

Professor Ayubur Rahman Bhuyan

Organized by

ISLAMIC ECONOMICS RESEARCH BUREAU

DescriptionBudget2007-08

Revised2006-07

Budget2006-07

Revenue and Foreign Grants Revenues (Statement-1)Tax RevenueNBR Tax RevenueNon-NBR Tax RevenueNon-Tax RevenueForeign Grants/1 (Statement V)

573014583843850

198811463

4255

494723924737479

176810225

2150

525424291541055186096272508

Total 61556 51622 55050

ExpenditureNon-Development ExpenditureNon-Development Revenue Expenditure (Statement III)of whichDomestic InterestForeign InterestNon-Development Capital Expenditure/2 (Statement IV)Net Outlay for Food Account Operation (Statement VIII)Loans & Advances (Net)/3 (Statement VIA)of whichLiabilities of Government (from BPC)Structural Adjustment Expenditure (Statement VIA)Development ExpenditureEmployment Generation and Development Programmesfinanced fromNon-Development Budget/4 (Statement III and VIA)Annual Development Programme (Statement IX)Non-ADP FFW and Transfer/5 (Statement X)

5290048389

946413214511300

5115

7523300

285221558

26500464

4450442157

785413002347388

-1545

029

234601577

21600283

4228639536

629813392750202

-1211

00

284631982

26000481

Total – Expenditure Including BPCs Liability 87137 66836 69740

Total – Expenditure (Excluding BPC) 79614 66836 69740

Overall Deficit (Including Grants) -25581 -15214 -14690

(In Percent of GDP) -4.8 -3.3 -3.2

Overall Deficit (Including Grants and Including BPC) -29836 -17364 -17198

(In Percent of GDP) -5.6 -3.7 -3.7

Overall Deficit (Excluding Grants and BPC) -22313 -17364 -17198

(In Percent of GDP) -4.2 -3.7 -3.7

FinancingForeign Borrowing-NetForeign Borrowing (Statement V)Amortization (Statement IX)Domestic Borrowing (Statement VIB)Borrowing from Banking System (Net)Long-Term Debt (Net)Shot-Term Debt (Net)Non-Banking Borrowing (Net)National Savings Schemes (Net)Others/6 (Statement VII)Non-Cash Bond (Liabilities of BPC)/7

630510403-409819276

7253-744799745003778722

7523

51839048

-386510031

6531741

579035002805695

0

58569618

-376288345434427

500734002600800

0

Total – Financing Including BPCs Liability 25581 15214 14690

Memorandum Item GDP 530300 467500 465300

BUDGET AT A GLANCE(Taka in Crore)

• The Finance Adviser announced a Tk. 871.37 billion national budget for the fiscal 2007-08, setting priority for –

– accelerated economic growth

– controlling inflation

– development of power sector and infrastructure

– reducing poverty

– raising agriculture sector growth

– expanding education facilities, and

– rural development.

Introduction

• The budget has drawn mixed reaction from experts, members of the civil society, politicians, and the business community.

• No budget can satisfy all sections of the people. Like all past budgets, this budget has its brighter sides as well as areas in which improvements would be desired.

• In our presentation today, we shall look at both sides of the picture. In order, however, to set the issues in their proper perspective, we shall first highlight the main features of the budget.

Introduction Continued .......1

Main Features of the Budget Expenditure• This is for the first time that the National Budget has

internalized the liabilities of a state-owned enterprise - the Bangladesh Petroleum Corporation (BPC)

• Including BPC liabilities, the projected overall expenditure is Tk. 871.37 billion, which is 24.9 percent higher than the expenditure (Tk. 679.40 billion) in the original budget, and 30.4 percent higher than the expenditure in the revised budget (Tk. 668.36 billion) for the outgoing fiscal 2006-07.

• Excluding BPC liabilities, the budget proposes a total expenditure of Tk. 796.14 billion

• The budget proposes Tk. 75.23 billion non-cash bonds for the Bangladesh Petroleum Corporation (BPC) to pay for its loan liabilities.

• Non-development expenditure (revenue expenditure of Tk. 483.89 billion and non-development capital expenditure of Tk. 45.11 billion) proposed in the budget is Tk. 529.00 billion, which is 25.1 percent higher than in the original budget and 18.9 percent higher than in the revised budget.

• The budget proposes an ADP of Tk. 265.00 billion – 22.7 percent up from the revised ADP of the outgoing fiscal (Tk. 216.00 billion). The proposed ADP is 5 percent of GDP.

Main Features of the Budget Continued ........................1

Revenue and Grants

• Revenue earnings will contribute Tk. 573.01 billion, 9.05 percent up from the original and 15.82 percent from the revised budget for the outgoing fiscal year.

• Foreign grants make up Tk. 42.55 billion of the expenditure, 97.9 percent higher than the revised budget, and 69.7 percent higher than the original budget for 2006-07.

Budget Deficit • The projected budget deficit, including foreign grants, is

estimated at Tk. 255.81 billion, which is 68.14 percent higher than Tk. 152.14 billion in the revised budget and 74.13 percent higher than in the original budget for 2006-07.

• The overall projected deficit, including grants, is 4.8 percent of GDP, compared to 3.3 percent in the revised 2006-07 budget

• The budget deficit, including foreign grants and the non-cash bonds for the beleaguered BPC, will be Tk. 298.35 billion or 5.6 percent of GDP.

• The budget deficit, excluding grants and BPC liabilities, would be Tk 223.13 billion, or 4.2 percent of GDP.

• The deficit in the revised (as in the original) 2006-07 budget is estimated at 3.7 percent of GDP.

Budget Deficit Continued ........................1

Financing the Deficit

• For financing the deficit, domestic borrowing of the government from banking and non-banking sources will be Tk. 192.76 billion – compared to Tk. 100.31 billion in the revised budget for 2006-07.

• Targeted borrowing from the banking system is Tk. 72.53 billion (from Tk. 65.31 billion in the revised 2006-07 budget).

• Targeted non-bank borrowing is Tk. 45.00 billion (from Tk. 35.00 billion in the revised 2006-07 budget).

• Non-cash bond worth Tk. 75.23 billion to be issued to pay for BPC liabilities

• Targeted external borrowing is Tk. 63.05 (=gross Tk. 104.03 minus amortization Tk. 40.98 billion). In the revised budget, foreign net borrowing was Tk. 51.83

billion (Tk. 90.48 billion – repay Tk. 38.65 billion).

Financing the Deficit Continued ...............1

Some Budgetary Targets and Priorities • GDP growth in 2007-08 to rise to 7.0 percent from 6.6

part in 2006-07

• Inflation rate to slow down to 6.5 percent from the present 7.0 percent

• Tk. 65.91 billion more revenue to be raised in 2007-08 than the current fiscal

• 57 percent of the total budget will be spent on programmes directly or indirectly related to poverty alleviation

• Some 10.6 percent of the total budget will be spent for social empowerment and safety net programmes

• 34.4 percent of total budget to be spent on physical infrastructure

• 34.3 percent of total budget to be spent on social expenditure

• 19.3 percent of total budget to be spent on public administration

• 12.0 percent of total budget to be spent on interest payment

Some Budgetary Targets and Priorities Continued ...............1

From where the total Tk. 796.14 billion of

resources will come? (in percent)

NBR Tax Revenue : 55.1 Non NBR Tax Revenue : 2.5

Non-tax Revenue : 14.4 Domestic Financing : 14.8

Foreign Loans : 7.9 Foreign Grants : 5.3

• Resources for ADP 2007-08 : Internal 51%, External 49%

• Resources for ADP 2006-07: Internal 52.8%, External 47.2%

• Dependence on external sources has been increased

Budgetary Allocation (Total Tk. 796.14 billion) • Education gets the highest priority : 14.5%

• LGRD gets : 9.3%

• Transport and Communication : 8.5%

• Health : 6.6%

• Energy and Power : 5.8%

• Defence : 5.8%

• Agriculture : 5.6%

• Block Allocation has been cut drastically to 5% of total allocation from 16% of allocation in the outgoing budget

Social Safety Net Widened

• Existing safety net programmes for the poor, women, children, vulnerable groups such as the elderly and disabled people have been widened in terms of coverage and number

• Allocation for employment in rural areas increased

• Availability of food through imports and open market sales

• Allocation of 4 lakh tonnes of rice for 50 lakh VGF card holders

• 6 lakh tonnes of foodgrains to be distributed through test relief, food for work, and VGF programmes

• Rate of allowance for widowed and destitute women increased

• Stipends for be female students extended further

• Allocation of Tk. 20 crore in microcredit to generate women employment; Tk. 10 crore for the Acid-burned Women and disabled; Tk. 25 crore for RMG workers’ welfare; and Tk. 20 crore for their training

Social Safety Net Widened Continued ............1

Power Sector Programme

• The budget proposes to increase power generation over the next three years: 345 MW in 2007-08; 900 MW in 2008-09; and 1500 MW in 2009-10

• By 2010, there will be sufficient electricity, and no load shedding

Agricultural Subsidies

• Agricultural subsidies have been raised to Tk. 22.5 billion from the current Tk. 11.00 billion (on fertilizer, diesel and electricity)

Other Fiscal Measures

• Simplification of procedures for income tax payment, withdrawal of the provision for legalizing undisclosed income, expansion of VAT net, rationalization of tariff structure, reduction of discretionary power of tax officials

• Revenue-GDP ratio to be raised to 10.8% (10.6% in FY06; 10.4% in FY07)

• Minimum tax on the basis of turnover to be reduced from 0.50 percent to 0.25 percent

• 50 percent of travel expenses of company directors in excess of four travels to be deemed as income of company directors

• Abolition of the provision of tax deduction at source on credit card bill

• 15% tax rebate on private universities and research institutions registered under Trust Law

• Raising the corporate tax rate of mobile phone operators to 45 percent (35%, if registered as public limited company)

• Raising the exemption limit from Tk. 1.2 lakh to Tk. 1.5 lakh for personal income tax payment

Other Fiscal Measures Continued ................1

Measures Proposed to Control Prices:

– Complete withdrawal of CD on some commodities (edible oil, lentils)

– Distribution of 10 lakh tonnes of foodgrains (it will also build food security)

– Duty fee imports of essential commodities, including rice, wheat, onion, etc to continue

– Establishing four wholesale markets at four corners of the city – Import of 8 lakh tonnes of foodgrains in addition to private sector

imports

– Government to import a number of essentials

Some Brighter Sides of the Budget

• It lays emphasis on tackling inflation, improving power supply and other basic infrastructures, expanding social safety nets, supporting agriculture with subsidized inputs and intensive research, and promoting rural development

• There is emphasis on human resource development – health and education

• The budget lays emphasis on poverty reduction. Fifty-seven percent of the overall budget is linked to projects linked to poverty reduction

• The provision of issuing bonds for repaying BPC’s outstanding bank loans deserves appreciation. From macroeconomic viewpoint, the internalization of BPC liabilities should have been done long ago to relieve the NCBs from their debt problem

• A 35% increase in the ADP outlay in Rajshahi, Khulna and Barisal Divisions will help reduce regional disparity and establish income equality in the society

• Withdrawal of CD and SD on crude edible oils and lentils and the continuation of the current facility of duty free import of wheat, rice, onion, peas, fertilizer etc. will help control prices

Some Brighter Sides of the Budget Continued ................1

• A good thing in the budget proposal is the reduction of block allocation from 16 percent of this year’s ADP allocation to 5 percent in the new fiscal

• A welcome feature of the proposed budget is the reduced dependence on import duty for revenue income and to earn more from income tax and VAT

• Targeting a 16% increase in tax collection may be somewhat ambitious, given the current year’s 9% revenue growth, but the targeted increase is indispensable to meet the genuine expenditure needs.

Some Brighter Sides of the Budget Continued ................2

• Other welcome measures are

– the setting up of a Tk. 1 billion SME Foundation and a Tk. 0.23 billion Trust Fund under BSCIC to boost the SME sector

– a Tk. 3.5 billion endowment to help R&D in agriculture

– allocation of Tk. 7.5 billion for diesel subsidy and Tk. 15.00 billion fertilizer subsidy for farmers

Some Brighter Sides of the Budget Continued ................3

Measures requiring Re-examination

• Some of the fiscal measures have a strong import bias and may hurt local industries.

• Withdrawal of the existing 4 percent infrastructural development surcharge (IDSC) on imports of finished and luxury goods will open up the market for cheap imports and may make local industries uncompetitive

• Import of more than 400 items, mostly raw materials used in local industry, would lose zero-tariff facility and come under 10 percent tariff

• About 1200 industrial raw materials and machinery would see tariffs double to 10 percent. Cost of production of the import intensive-industries will increase as a result.

• The proposal to raise duty on imported raw materials, intermediate inputs and capital machinery, particularly textiles machinery, will hinder industrialization efforts, in particular the backward linkage industries.

• The rationale for imposing 10 percent duty on computer and computer accessories in stead of zero tariffs is not easily understood when so much importance is attached in the budget to ICT as a thrust sector

Measures requiring Re-examination Continued ................1

• It is not clear how the proposed increase in the rate of specific import duty on raw sugar by Tk. 1750 a metric ton fits in with the government’s efforts to bring down the soaring prices of commodities. [In stead, such a measure may lead to the closure of some of the local sugar refineries].

• The 10% reduction of CD on newsprint import (from 25% to 15%) is welcome but it should have been brought down, at the least, to 5% if not to zero. In the neighboring countries, the duty varies between 2.5% and 6%. The domestic industry does not meet even one-third of the country’s needs and hence there is no compulsion to protect domestic industry from foreign competition.

Measures requiring Re-examination Continued ................2

• Diesel subsidy of Tk. 7.5 billion will be given to the card-holding farmers. But there is no indication in the budget about who the card-holders are or which farmers will get the cards.

• The targeted 7 percent GDP growth in 2007-08 is slated to come from higher growth in industry and services sectors and a surge in domestic demand. However, increased production cost and higher product prices resulting from the proposed tariff measures may hinder industrial growth and squeeze domestic demand. The proposed duty measures will also impede employment generation

• The budget made no allocation for the ailing jute industry and also for the machinery industry that has developed over the years in the northern districts

Measures requiring Re-examination Continued ................3

Poverty Reducing Measures

• Fifty-seven percent of the budgetary allocation is for poverty alleviation but the budget does not spell out how poverty will be reduced

• For poverty reduction, the government relies mainly on allowances. A significant part of the allocation is in the form of allowances and safety net measures for the distressed people

• Poverty can, however, be reduced only by employment generation but the safety net measures merely help meet the short-term needs of the poor and hardly contribute to creation of employment and income

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

beneficiaries

Poverty Reducing Measures Continued ................1

Power Sector Development

• The 31% increase in the allocation for the power sector is encouraging but the projected annual increase in power generation – by 345 MW, 900 MW, and 1050 MW in the next three years – is unlikely to make Bangladesh load-shedding free by 2010.

• The present daily load shedding in the country is variously estimated at between 1000-1500MW. With continuous increase in industrial and consumer demand for power, substantially larger generation of power will be needed.

• Well-conceived short and medium term plans to develop the power sector will be needed for the idea of a load-shedding free Bangladesh to materialize by 2010.

Power Sector Development Continued ................1

Other Budgetary Provisions requiring attention

• The budget neglects the judiciary and the Anti-Corruption Commission although the interim government has declared a war against corruption and serious crimes

• No development project for the ACC and no significant new development project under the law ministry are included in the 2007-08 ADP

• Total allocation for ACC stands at Tk. 152.7 million, as against Tk. 153.1 million for the outgoing fiscal

• Allocation for the expenditure of the Supreme Court is Tk. 270 million in the new fiscal, compared to Tk. 290 million in the outgoing fiscal.

• No steps seen to have proposed for rehabilitation of street hawkers and small traders evicted by the law and order forces. There should be enough provision in the budget for their rehabilitation in terms of physical facilities and capital.

• The NGOs may be brought under the tax net.

Other Budgetary Provisions requiring attention Continued ................1

Concluding Remarks

• The projected 4.8 percent budget deficit, compared to the current year’s 3.3 percent, may appear high but acceptable if the resources are put to their most productive uses.

• Increased domestic borrowing from banks may not have any crowding out effect on private sector credit, given the excess liquidity of the banking system, but effort should be intensified to improve revenue collection so that the government does not need to take recourse to further borrowing from the banking system.

• Greater reliance on external sources, both grants and loans, for financing the budget is open to question, given the declining availability of such funds in the recent years. Any shortfall in foreign finances will force the government to go for further borrowing from the banking system, which may disturb macroeconomic stability.

• Serious efforts should be made to improve the ADP implementation capacity of the line ministries and agencies.

Concluding Remarks Continued ................1

• The budget has drawn comments and suggestions on various fiscal measures from different quarters. The Finance Adviser may consider them on the merit of each before finalizing the budget.

Concluding Remarks Continued ................2

THE END