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Fiscal policy
Fiscal policy is mainly decisions by the President and Congress, usually relating to taxation and
government spending, with the goals of full employment, price stability, and economic growth. By
changing tax laws, the government can effectively modify the amount of disposable income
available to its taxpayers. For example, if taxes were to increase, consumers would have less
disposable income and in turn would have less money to spend on goods and services. This
difference in disposable income would go to the government instead of going to consumers, who
would pass the money onto companies. Or, the government could choose to increase government
spending by directly purchasing goods and services from private companies. This would increase
the flow of money through the economy and would eventually increase the disposable income
available to consumers.

In economics, fiscal policy is the use of government spending and revenue collection to influence
the economy. The two main instruments of fiscal policy are government spending and taxation.

Changes in the level and composition of taxation and government spending can impact on the
following variables in the economy:

• Aggregate demand and the level of economic activity

• The pattern of resource allocation
• The distribution of income.
Methods of funding

Governments spend money on a wide variety of things, from the military and police to services like
education and healthcare, as well as transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:


The benefit from printing money. Such as-

1. Borrowing money from the population, resulting in a fiscal deficit.

2. Consumption of fiscal reserves.
3. Sale of assets (e.g., land).
Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or consol’s. These pay interest,
either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation
may default on its debts, usually to foreign creditors.

Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local (same currency)
financial instruments, until needed. When income from taxation or other sources falls, as during an
economic slump, reserves allow spending to continue at the same rate, without incurring additional

An economic effect of fiscal policy Fiscal policy is used by governments to influence the level of
aggregate demand in the economy, in an effort to achieve economic objectives of price stability,
full employment and economic growth. Keynesian economics suggests that adjusting government
spending and tax rates are the best ways to stimulate aggregate demand. This can be used in
times of recession or low economic activity as an essential tool in providing the framework for
strong economic growth and working toward full employment. The government can implement
these deficit-spending policies due to its size and prestige and stimulate trade. Some classical and

neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the
Treasury View [citation needed], and categorically rejected by Keynesian economics.

When governments fund a deficit with the release of government bonds, an increase in interest
rates across the market can occur. This is because government borrowing creates higher demand
for credit in the financial markets, causing a lower aggregate demand (AD), contrary to the
objective of a budget deficit. This concept is called crowding out.


In a democratic system, there are two ways to organize a government: a unitary system and a
federal system.

Canada is an excellent example of a federal system of government in which there is one central or
federal government and there are ten provincial governments. Underneath the provincial
governments, there is a patchwork of local government.

In a federal system, both the federal and provincial governments conduct fiscal policy. The
Constitution delineates areas of responsibility for the two levels of government and the Supreme
Court interprets the actions of the different levels of government in light of the Constitution and
other legal precedent to enforce the policy distinctions between the two levels of government.

In Canada, one can access the federal government budget online, from the 1997 budget, we can
see the following:

• Federal program spending was budgeted to be C$103.5 Billion or roughly 12% of Canadian
Annual Gross Domestic product. Program spending includes all expenditures on federal
areas of responsibility including national defense, external affairs, the RCMP, fisheries
subsidization, regulation, the administration of the tax regime, etc. Program spending also
includes transfers made to the provincial governments.
• The operating balance is the difference between program spending and budgetary
revenues (i.e. taxation, royalties, and customs tariffs). For 1998-1999, this was estimated to
be a surplus of roughly 5% of Canadian Annual GDP. A surplus refers to an excess of
revenues over outlays.
• The federal government was still in overall deficit because of interest payments on the
stock of outstanding debt. Every year that the federal government has run an overall deficit,
they have added to the mountain of debt payable by the people of Canada. In 1997, the
total government deficit was forecast to be C$17 Billion.
The provincial governments also have their financial results and forecasts accessible over the


There are two types of expenditures: money spent on the delivery of goods and services and the
transfer of funds to other levels of government.

All of the money that the government spends has a simulative effect on the economy. The
government is large enough that it can spend during periods of economic contraction thereby
helping to prop up the economy and consumer confidence. It is also very appealing to try and
redistribute goods to one group from other groups in the society. This is a very common objective
of fiscal policy.

The construction of the taxation system is very difficult. Another set of objectives may be to distort
production as little as possible. That is, in designing the tax code, we may want to develop a set of
rules that do not change the relative prices of goods and services (and therefore the decisions
investors must make about where to invest and in what industry, etc.).


A government that wants to provide a great deal of goods and services to its people while not
having the immediate tax revenue to fund that expenditure can turn to the capital markets to
borrow the necessary money. They do this primarily by issuing securities, either Treasury Bills or
Treasury Bonds. All levels of government will borrow money at some point. These securities are
obligations compelling the government to repay the borrowed amount at maturity and also to pay
interest in the form of coupons at specific points in time. Borrowing has a number of effects. If a
country borrows too much money, it has to pay a great deal of interest every year in order to
service that debt. This represents money that could have been used to pay for program spending
instead. By borrowing money, the government has placed a greater emphasis on spending in the
present than in the future. It has discounted the value of future expenditure. Depending on how
much money the citizens of that country or that province save out of their own incomes, the
borrowing government must sell its obligations to foreigners. By doing so, the government makes
itself vulnerable to the shifting and often volatile sentiment of the international capital markets. If
they have a sufficiently large external debt in relation to their GDP (as an indicator of their current
and future capacity to repay), speculators might attack their currency or their country's bond
markets forcing interest rates higher and causing the value of their economy to degrade in
international terms.

Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three
possible stances of fiscal policy are neutral, expansionary and concretionary:

• A neutral stance of fiscal policy implies a balanced budget where G = T (Government

spending = Tax revenue). Government spending is fully funded by tax revenue and overall
the budget outcome has a neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves a net increase in government spending
(G>T) through rises in government spending or a fall in taxation revenue or a combination
of the two. This will lead to a larger budget deficit or a smaller budget surplus than the
government previously had, or a deficit if the government previously had a balanced
budget. Expansionary fiscal policy is usually associated with a budget deficit.
• A concretionary fiscal policy (G<T) occurs when net government spending is reduced either
through higher taxation revenue or reduced government spending or a combination of the
two. This would lead to a lower budget deficit or a larger surplus than the government
previously had, or a surplus if the government previously had a balanced budget.
Concretionary fiscal policy is usually associated with a surplus.
The commercial banks, because of their potential for central bank refinancing, are also not
effective sources of non-inflationary finance. Given the circumstances, whatever is the size of the
fiscal deficit in any particular year, a part of it cannot be financed by external borrowing and,
therefore, must be financed out of central bank borrowing. As a result, the essential element of
fiscal deficit in Bangladesh has become such that once a deficit is incurred, government borrowing
from the Bangladesh Bank became inevitable.

In the early 1990s, the government of Bangladesh undertook some comprehensive steps towards
the improvement of the country's fiscal front. The major objective of the government fiscal policy
was to restrict the growth of current expenditure to a level below the growth of the nominal GDP,
thereby making more resources available to support annual development programme (ADP)
undertaken in each year. In line with the Enhanced Structural Adjustment Facility (ESAF) of the
IMF, a number of reforms were initiated, the most important of which was the introduction of value
added tax (VAT) in July 1991.

VAT was introduced at a uniform rate of 15% at the manufacturing-cum-import level. Together with
protection-neutral supplementary duties, this system largely replaced the earlier structure of
differentiated sales tax on import and excise duties on domestic goods. In case of personal income
tax, the major reforms involved the inclusion of entertainment allowances in the personal income
tax base, deduction of investment in approved assets from the tax base, and an introduction of a
withholding tax on dividend with limitation of special expenditure within a reasonable limit. Steps
were taken to reduce interest rates on government savings instruments and subsidies for food and
jute. A good number of public sector enterprises were denationalized through sales to the private

These reform measures resulted in a remarkable improvement in the fiscal situation of Bangladesh
after 1990. The growth of current expenditures was contained below the rate of GDP growth. Tax
reform led to an increase in government revenues from much below 10% of GDP in fiscal year
1989-90 to 11% in fiscal year 1991-92. This trend continued and revenue collections reached more
than 12% of GDP by the FY 1994-95. This trend is continuing, although with minor fluctuations.
Moreover, this was accompanied by changes in the tax structure of the country, reflected in the
decline of the shares of customs duties and increase in the share of income and profit taxes in the
total tax revenues in the subsequent period. As a result, the shortage of local funds that had
constrained in the project implementation capacity of the country and had shrunk the country's
absorptive capacity for project aid for a long period was largely removed.

The improvement of the government's fiscal performance was reflected in the budgetary outcome
of the country. The overall budget deficit was 8.4% of GDP during the 1980s and came down to
5.9% in 1991-92 and thus provided a breathing ground for the government. Up to 1997-98, the
budget deficit could be successfully contained to less than 6%, helping to stabilise the economy to
a great extent. But this could not be maintained in the following year due to the devastating and
prolonged floods that occurred in the first half of 1998-99. There was a considerable slippage in
the expenditure programme of the government due to floods while revenue collection lagged far
behind the target. As a result, the overall budget deficit shot up to 7.8% in the FY 1998-99.
Although the government took some steps, the overall deficit remained slightly above 6% in 1999-

Up to 1989-90, foreign aid had financed the lion's share of fiscal deficit of Bangladesh. Since then
there has been a considerable shift in the sources of funds for financing budget deficit. Domestic
sources could provide only 15% of the total deficit during 1989-90. In contrast, in FY 1999-2000,
the comparative figures for domestic and foreign sources in funding the budget deficit were 47%
and 53% respectively. However, an absolute decline in the flow of external funds on concessionary
terms is also partly attributable to this. Increased dependence on local funds has largely reduced
the uncertainties of the implementation of the budgetary programmed. But this has also increased
the risk of additional burden of higher interest costs from domestic borrowing.

Efforts to generate increased domestic resources are generally based on various tax reforms as
well as reforms in the financial sector. On the expenditure side, the government has given
increased emphasis on human resource development and poverty alleviation programmers. Top
priority has been given to improve the quality and coverage of the education system as well as
health and family planning services, and social safety net programmers to serve vulnerable group.
This is demonstrated in the increased budgetary allocation in these heads in recent years.

Now we are going to discuss about our “BANGLADESH BUDGET” proposed for 2009-10.

We have collected different opinions and different researches from different sources.

Here we are going to represent the research of The Financial Express in response to Bangladesh
Budget 2009-10 published in 13 May, 2009.

Policy Research Institute-The Financial Express Roundtable on

Macroeconomic Challenges in 2009-10

Budget Priorities and Fiscal Space for Policy Response

13 May, 2009

Dr. Ahsen Mansur, Executive Director, PRI



Preparations are underway to draft the first budget of the newly elected government. This budget is
being formulated against the backdrop of global economic recession, slower economic growth and
the need for implementing the political commitments of the new government. Against this
background, the presentation covers four broad issues: global economic crisis and macroeconomic
environment in Bangladesh; projected fiscal outturn for 2008/09; the macroeconomic challenges
for 2009/10; and budget 2009/10 and fiscal policy issues.

During the last several months the global economy experienced a sharp downturn, which is
manifested through severe contraction in global output and international trade, leading to falling
commodity prices, stock and money market collapse, and an unprecedented rise in job losses.
Global leaders have responded strongly to address the crisis by launching fiscal, monetary and
financial rescue packages in a concerted manner. Coordination among the major central banks
and treasury departments has been unprecedented and prompt. Almost all major economies
injected liquidity in the financial markets and engaged in rescue operations of falling financial
institutions of systemic importance. In the second stage, most of the major economies announced
large fiscal stimulus packages to boost domestic demand in the face of depressed consumer
sentiment and falling private sector demand at home and abroad. The fiscal stimulus packages of
the USA and China are particularly sizable (Table 1).

The current macroeconomic environment in Bangladesh is however somewhat different.

Real GDP growth rate will be lower at 5.5-6.0 percent, compared with 6.5 percent targeted under
the budget (Figure 1). Despite this slowdown, Bangladesh’s performance has been one of best
globally. Global recession has certainly affected Bangladesh through the export sector and general
investors’ sentiment, which translated into slower manufacturing and service sector activity and
lower level of investment (Figure 2). Robust agricultural sector output and strong domestic

demand, supported by continued strong inflow of workers’ remittances, helped sustain domestic
economic activity.

Remittances have remained strong and Likely to remain steady. Bangladesh is probably the
best performer globally on the remittance front in 2008/09. The outlook still remains positive, albeit
at a slower pace (Figure 3). The oil exporting Middle Eastern countries are likely to continue with
their massive investment programs as long as crude oil prices remain above $50 per barrel. We
have to remember that the Saudi budget was done at $52 per barrel even when oil prices were
skyrocketing. Despite the apprehensions, chances of a massive reflow of Bangladeshi workers
from abroad are rather slim.

Bangladesh has made significant terms-of-trade (TOT) gains. The sharp drop in commodity
prices has reduced the import bill by $3.7 billion or 4 percent of GDP in 2008/09 (Table 3a). On
average import prices have declined by about 17 percent in 2008/09 over the corresponding year.
All major segments of the Bangladesh economy, the government, manufacturers and consumers
have benefitted from the TOT gain.

Government budget is also a significant beneficiary of the TOT gain. Potential fiscal savings
from this TOT gain is estimated to be about $1.1 billion (1.2 percent of GDP) in 2008/09 (Table
3b). Much of this gain originates from lower prices of petroleum products and fertilizer. This large
budgetary saving has helped reduce the recurrent outlays (particularly the subsidy bill) and
contributed to a lower fiscal deficit of 3.9 percent of GDP in 2008/09, well below the budget target
of 5 percent of GDP.

The balance of payments (BOP) position will strengthen further due to the TOT gains and
resilient export and remittances. The external current account will reach a record surplus of
$1.3 billion (1.5 percent of GDP) due primarily to the declining import payments in the recent and
coming months (Table 4). The effect of slower export and remittance receipts will be more than
offset by the savings in import payments. The level of foreign exchange reserves of the
Bangladesh bank should also reach new highs exceeding $7 billion by the end of the fiscal year.

There are however signs of economic slowdown, reflecting the impact of global economic
meltdown. Opening of letters of credit (LCs) have been declining sharply in recent months. Since
[January till now], LC opening is down by 24 percent over the corresponding period last year. As a
result, import growth during March-June will be significantly negative (in double digits) over the
corresponding period last year. Export growth has also slowed down and will remain sluggish in
the coming months. Number of workers going abroad has declined from their record high pace in
recent months.


Despite the slowdown in economic activity and an expansionary fiscal stance originally
taken in the budget, fiscal policy in 2008/09 has not been expansionary at all. The overall
budget deficit is projected to be 3.9 percent of GDP, despite the original budget target of 5 percent
and a large shortfall in NBR revenue. Failure of the government to implement the Annual

Development Plan (ADP) and huge budgetary savings from the terms-of-trade gain are
contributing to this fiscal outturn.

Tax revenue from the National Board of Revenue (NBR) sources is going to be rather
disappointing. NBR revenue shortfall through March is estimated by the PRI staff to be Tk. 20
billion (Figure 5). Based on the 5-year collection pattern, actual revenue through March was 4.3
percent below the 68 percent target required to achieve the budget target. The major sources of
this shortfall were customs duty, domestic supplementary duty and VAT on imports. Based on the
5-year average trend, last year NBR revenue collection was consistently in surplus, whereas this
year the picture has reversed and a large shortfall is in the making. As import values continue to
fall at a rapid pace in the coming months, the NBR revenue shortfall will accelerate further and
reach Tk 40 billion by the end of June.

There will be large savings on the expenditure side. Total budgetary expenditure was targeted
to grow at 17.8 percent, but actual spending growth will be limited to only 7.3 percent. The major
sources of saving in spending would be on account of lower petroleum subsidy, under-utilization of
the block account, and slow implementation of the ADP. Actual ADP spending never reached the
budget target in the past and this year is no exception. During the first six months of 2008/09 only
18.4 percent of the ADP allocation was spent (Figure 6). At the end, ADP utilization is not expected
to exceed Tk. 210 billion in the current fiscal year.

III. Macroeconomic Outlook for FY 2009/10

The macroeconomic outlook for the coming year may be characterized as: (i) slower real economic
growth at about 5.5 percent with significant downside risks; (ii) continued price stability due to
falling food prices, although non-food inflation may be a matter of concern; and comfortable
balance of payments position, in part due to slower growth in import payments.

Economic growth will be particularly subdued in the first half of 2009/10 (Table 5). The
subsequent recovery in the second half will come from manufacturing and related service
activities, Agriculture growth will remain healthy at its historical average level following a strong
rebound in 2008/09, barring natural calamities. Domestic demand growth will also be moderate
due to slower remittance inflows.

IV. The Central Issues for the Next Budget

Against the macroeconomic backdrop described above, the central issues for the next budget are:

• Formulation of a realistic budget taking into account the slowing economy, sluggish
revenue growth, and intensifying power problem.

• The government elected on a popular mandate must try to fulfill its electoral commitments,
particularly with respect to poverty reduction and farm sector.

• The budget must also start addressing the structural fiscal issues to maintain fiscal
sustainability, improve resource allocation, and improve public sector service delivery over
the medium term.

We consider three scenarios to illustrate how the budget may look like under three different

• A typical Bangladesh budget with inflated revenues and ADP, and realistic fiscal deficit
consistent with macroeconomic stability.

• A budget that meets the economic challenges facing Bangladesh and at the same time
realistic and forward looking.

• A realistic baseline budget, along the lines outlined above, while at the same time providing
for a contingency plan in the event the global economic recession turns worse or continues
for a much longer time with serious adverse impacts on the domestic economy through
sharp drops in exports and remittances.

• Revenue targets in a typical Bangladesh budget are always inflated. A typical

Bangladesh budget may be characterized as setting a high revenue target, a very high
level of ADP spending and a fiscal deficit in the range of 3.5-5 percent of GDP (Table 6). In
the event, a large revenue shortfall in revenue is generally offset by a large ADP
implementation shortfall, thereby broadly achieving the target for the overall budget deficit.
This practice should change this time with the formulation of a realistic budget. If done in

the typical manner, the budget will show: (i) high revenue growth in the range of 16-18
percent; (ii) high ADP allocation, 20 percent or more over the actual spending of the current
year; (iii) some provisions for fiscal stimulus for the affected industries; and (iv) fiscal deficit
in the range of 4.5-5.5 percent of GDP (Table 6).

In a year when the government needs a high level of revenue to cover its ambitious
spending plans, the revenue potential will be negatively affected by a number of factors:

• A very low tax base due to the huge shortfall in NBR revenue and also a low nontax base
after adjusting for one-time factors like the large transfer from the BTRC (Bangladesh
Telephone Regulatory Commission).

• Growth in import-based NBR taxes would be subdued due to lower import prices and the
effect of slower economic growth.

• Domestic-based NBR taxes will also be less buoyant as domestic demand may be
subdued due to slower growth in remittance inflows.

Accordingly, revenue growth should not be more than 10 percent, even with some measures to
increase revenue and adjusting for the base for nontax revenue. A higher proportion of revenue
should be realized from domestic based taxes (income tax and domestic VAT) through
strengthened tax administration.

At present there is no need for a large fiscal stimulus to boost general economic activity.
The government would however need to continue the announced incentives for the affected
sectors at least through the first half of 2009/10. The case for financial support for the textile sector
is still not clear cut, but budgetary support through the “Financial Crisis Mitigation Fund” may be
considered if needs arise in the coming months. Data for Bangladesh’s textile exports to the
European Union (EU) and the USA shows that both volume and unit values of exports to both
regions have been higher than the corresponding period in the previous year (Table 7).

Given the significant uncertainties and downside risks, the budget should also have a
contingency plan. The contingency plan should only be activated in the unlikely event that the
global economic recession turns worse and/or continues for a much longer time than envisage
under the current baseline macro scenario discussed earlier. Such a contingency plan should

• A generalized fiscal stimulus package (of 2 percent of GDP) to boost domestic demand,
which could be implemented on a short notice.

• Mobilization of support from the donor’s community under the various new facilities
established at the World Bank, IMF, ADB and IFC.

• The objective would be to reach preliminary understandings with bilateral and multilateral
donors so that an additional $1.5-2 billion can be mobilized within a short time.

• The budget deficit would have to be increased (approximately 2 percent of GDP or so).

Such an expansionary fiscal stance for one year would not be a problem from fiscal sustainability,
but external financing will be key to preventing a crowding out of private sector bank credit and
avoiding emergence of balance of payments pressures (Table 8).

Excluding the contingency plan, the baseline realistic budget, after taking into account the
factors noted above would look like (as shown in Table 8):

The government should go for PPP-based infrastructure program, because of the failure of
traditional ADP-based approach. The size of ADP has declined by half in relation to GDP in
recent years (Figure 7). Any further decline in public sector investment is not acceptable, given the

state of infrastructure in Bangladesh. ADP-based investment program should be limited to areas

where private sector investment would be difficult to attract (e.g., rural roads, health centers,
schools, etc.).

The Government’s bold move on a PPP-based infrastructure program should entail:

• Establishing a PPP investment fund (perhaps $1 billion) to create an impact, with the
objective to catalyze total investment of $4-5 billion in the infrastructure sector.

• Establishing a dynamic PPP Cell at the Ministry of Finance or Prime Minister’s office, with
authority to promote investment in projects, capacity to evaluate their economic viability,
and develop relations with potential investors.

• Adopting policies to encourage establishment of infrastructure funds by domestic and

foreign entities.

If properly implemented and leveraged, this approach may potentially generate 4 to 5 percent of
GDP in infrastructure investment, well above what could be done through the current ADP

Bangladesh’s expenditure to GDP ratio is very low by international standard. The small size
of the government is attributable to Bangladesh’s low tax-GDP ratio. Currently it is one of the
lowest in the world and stagnant at less than 10 percent of GDP over many years. The
composition of revenue has improved somewhat, with dependence on trade-based taxes declining
and that on domestic-based taxes increasing. The reliance on trade-based taxes however is still
too high by international comparison and a further reduction would be desirable.

On the tax policy side, the current VAT system has effectively turned into an excise system, with
numerous rates and no input tax credit mechanism. The VAT system as it was originally
implemented with full credit mechanism and unified rate would help improve elasticity tax
compliance, and revenue generation.

On the expenditure side the composition of expenditure has worsened. While current
expenditure has increased steadily due to pressures to deliver social services (health and
education) and expand transfer programs (social safety net and subsidies), capital spending has
steadily declined in relation to GDP due in part to lack of implementation capacity.

While all components of current expenditure have increased over the years, subsidies and
current transfers and interest payments grew the most (Table 8). Although current levels of all
the major components of recurrent outlays are not unmanageable, the government should be
cautious about the rapid growth in domestic interest payments and subsidies and current transfers.

Although more expensive, reliance on domestic borrowing has been increasing over time.
With the steady decline in foreign financing, the government has rightly become more dependent
on domestic financing (Figure 12). Over the last 5 years, net foreign financing declined by 1
percentage point while domestic financing covered between 1.8-2.2 percent of GDP (Figure 12). In
2007/08, domestic financing however jumped to 3.5 percent of GDP from 1.9 percent in the
previous year.

Expensive domestic financing is creating pressures on the budget through a rapid growth in
interest payments. Although at 2 percent of GDP total interest payments is certainly manageable,
the rapid growth of the domestic component is a matter of concern (Figure 13). In the early 1990s,
total interest payments was in the range of 0.5-1.0 percent of GDP but now it amounts to 2 percent
of GDP. The surge in interest payments is entirely on the domestic front:

• External interest payments never exceeded 0.4 percent of GDP.

• While domestic interest payments were below 0.5 percent in early 1990s, it has now
increased by more than threefold to more than 1.5 percent of GDP.

Dr. Mustafizur Rahman, Executive Director, CPD

Global crisis and Bangladesh. Now with respect to the global crisis and its implications, it is true
that we are seeing, and it has been mentioned in the paper that Bangladesh is an outlier in the
sense that its growth performance is one of the best I think in Asia and around the world, but my
concern will be that we are receiving the advantages of being the Wal-Mart Economy in the sense
both the goods and services catered to the lower end of demand curve and you are not impacted
by the global crisis because you are catering to the lower end. You are also saved because you
are not integrated in the financial market of the world both through FDI and through the portfolio
investment. But these weaknesses which become strength in the time of crisis, and it could
become weakness when it is time to see the upturn in the global market. So for the 2009-10 I
would say that the weaknesses which has perhaps saved us we should prepare ourselves so that
we can overcome the weaknesses which has saved us and then take the advantages of the
economy, which we will see in 2009-10 and 2010-11. That is the challenge before us so rather
than being reactive to the crisis I think the policy stance in the budget 2009-2010 is that we take
the proactive measures so that we can take advantages of the global market that will be emerging
after 2010 or at the end of 2010. I think that’s where the concluding the policies and not being
reactive is so important. That’s where the productivity and the enhancement that will be required to
move out of this one month range is so important. If we look at the global performance, we’ll see
that although for example that our exports, which the paper has pointed out.. our exports in USA
and EU have gone up and our market share have also gone up. But if you go to the disaggregated
analysis you will see that the concentration at the very lower end and even in the RMG. And the
outcome that we were witnessing before the crisis that Bangladesh was trying to move a bit up
market that has been halted and the structure has somewhat changed. We are once again
concentrating on the very low end of the market. So I think that is where one has to look at very
carefully and how we can enhance the productivity and that’s why the suggestion that we created a
technology up gradation fund to really move up market becomes very important as we prepare
ourselves for the upturn that we can expect in one year and a half.

On fiscal policy stance. Second point that is important to note is that when we are talking about
the expansionary fiscal policy stance in 2008-09 before that 2007-08 fiscal deficit was 5%, and the
real fiscal deficit was 4.9%. So it was in line with that so I would not be very much concerned with
the deficit and we all have to remember that this is a particular crisis year that we are talking
about. I think some bold measures in terms of expenditure and fiscal space will need to be there. If
we look at the revenue target, the paper has it is mentioned that the import duties have come
down, the target was 13% growth and it is 1.3% growth. But if you go into some details import VAT
has increased by 12.1%, but I am really flabbergasted that how the import VAT registered that
12.1% during July –March is really something enigmatic to me. What we look at the VAT local, as
the paper has pointed out the domestic economy the strong demand has really helped us and VAT
local growth rate was 18.8 % from July to March. But what is interesting is the income tax
collection has gone up by 20.1% compared to 11.1% to target that should be the focus in the next
budget should be, how can we really build on the growth in the income tax that we have seen.

On expenditure. With respect to the expenditure side one point that we will have to remember one
is the pressure on budget for some of the price stability measures that the government will have to

take, we have already seen large procurement of price at higher than market prices and perhaps
government will have to sell most of it lower than market prices so there is a pressure on
expenditure side and we have to remember it and the second point that we have to take into
account is that the new salary the pay commission report, that will also entail another two thousand
crore taka perhaps even if it is implemented in two years, these pressures on expenditure side was
not mentioned in the paper. If we look at the term loan disbursement, net term loan disbursement
has gone down by 40% July to march, agriculture net growth rate of credit is -54 %. If that be the
case then what is the impact of next fiscal year in terms of manufacturing production and also
agricultural production, I think one will have to look at particularly non crop agriculture because
-40% net disbursements in term loan in 9 months and -54% agriculture net growth rate credits that
is something disquieting. LC opening growth of capital goods and machineries, -32% and import
growth of capital goods -12% these combined will have adverse knock on effect on performance of
the economy in the next year

On quality of ADP. Lastly I would say the quality of ADP has become a major issue, if you look at
the IMED which is a major player over here, I think although the ADP size has increased over the
last thirty years by fifty times I don’t know what factor of strength IMED has been strengthened. I
think there has to be in the budget specific allocations for strengthening the institutions which will
oversee. Otherwise there will be destructive allocations.

Dr M. A. Taslim, CEO, Bangladesh Foreign Trade Institute

Small budget relative to GDP. Now every government in the world has a budget; In most
developed countries the budget has a far bigger weight in the national economy than Bangladesh,
say in the European countries the budget of the government would be well over 50 percent of GDP
whereas in Bangladesh it is less than 15 percent. So a very small government and very small
government expenditure and yet we have this extraordinary amount of interest in the budget but
not so much discussion, I have lived overseas for a long time in a developed country and I saw not
much attention was being paid to the budget in those countries. Despite the fact that the population
is extremely well-educated and there is no shortage of economic view. “Now why with the budget”-
there is so much attention in Bangladesh.

Honorable Finance Minister, Mr. Abul Maal Abdul Muhith

On economic performance next fiscal year. The other point he mentioned is the impact of
reduction in term-loan, poor performance of agriculture loan and decline in capital machinery
imports; these are all very important issues and they would have impact on the next year’s growth
rate and that is why I thought the GDP growth rate projection rather is very appropriate. Even
though we put perhaps a growth rate of six percent this year, the impact is almost invisible right
now but next year it’s going to be a substantial decline. I can’t say the figures that you have quoted
but it’s likely to be quite a decline. Also the analysis that perhaps in the second half in the year
there might be signs of good fortune and therefore we should be prepared with some contingency
plans I take your advice very seriously.

On strategy for power generation. I have a position now on energy and power which I explained
today to the chamber people; we are in the position to indicate as to where we shall be going and
how difficult to sort out problems, how difficult it is. But we believe that our target for the final year
-- seven thousand and five hundred megawatt of production -- that we shall achieve, but in
between how the progression will take place is still an issue and we should be able to say
something on it. We will put forward an outline of a five year plan. Because we find that in the
energy and power sector it’s not simply the generation of power but it also a transmission which is
extremely difficult. You can’t set up any plant in Tongi today because the Tongi transmission line
will not take a single megawatt of additional power. You can’t give power today to the rural
electrification board simply because they can’t carry it. So this is very very difficult area.

On fiscal deficit. We worked on your deficit figures even given 4.7 to 5; but we have been very
lucky that it’s going to be extremely low. But this may not be the situation next year mainly because
of the downside effects, we shall work on 5 percent may be ultimately would not need it and also a
large allocation for PPP, you don’t know how reliable it will be. But the point is well taken that it has
to be large allocations to make a difference. I am counting on this for a longer term of five years,
we have promised to take public expenditure to 20 percent in the next five years from the present
level of 16 percent (or less than 16). We are also committed to have an investment of 30 percent;
these are tall targets and must shoot for them.

Overview of Total research

The Budget has encompassed a number of policy concepts, some are new and some have been
in talks for year.

Perspective plan for 2010-2021 next year

The finance minister say the government has already started to work out the details of the vision
2021. In order to realize the vision, he feels the need of a medium-term five year plan for 2010-

Public-private partnership Budget

The finance minister is well aware of the fact that the huge investment, estimated at $28 billion in
five years to 2014, would be quite unmanageable for the government. But this investment in
infrastructure is a must to chase the sky-high growth targets set in the elections. He acknowledged
the capacity constrains in domestic financing as well to bankroll an avalanche of projects
envisaged in power and energy, ports, communications, supply and drinking water and health.

He pointed at the government’s limitations in ensuring ‘Economic use of public resources and the
quality of service delivery’ of public sector infrastructure projects. He also mentioned about the
huge investment risks and fears of commercial viability of such projects that keep private
entrepreneurs away.

He also proposed-

• Tk 100crore PPP Technical Assistance

• Tk 300crore PPP viability GAP funding as seed money

• Tk 2100crore PPP infrastructure in investment fund.

He proposes an institution for preparation and implementation of PPP budget which will insure
innovative ways, independent options and accountability of planning and budget process of the
private sector.

The PPP position paper mentions some of the projects expected in the PPP: Dhaka-Chittagong
highway on BOOT basis at a cost of $3.02 billion sky train in Dhaka on BOOT basis at $2.8 billion,
Dhaka city subway at $3.10 billion and Dhaka city elevated expressway at $1.23 billion- at the
transportation sector, four power plants of 450MW capacity at $1.80 billion in energy sector and
deep sea port in Chittagong with no estimation of cost.

Unified Budget

Mutith plans to initiate a few reforms in budget preparation and execution from the next fiscal year
as he finds that the dichotomy between non-development and development “essentially artificial.”

District Budget next year

The Financial Minister has rightly pointed out that the centrally-prepared national budget does not
capture the hopes and aspirations of the grassroots people, and cannot ensure transparency and
accountability in use of resources across the country. He has proposed gradual decentralization of
budget with separate budget for each district to bring transparency in public expenditure and
accountability in implementation of development schemes.

To achieve short term and long term development goals, the finance minister sets out in the
budget the government priorities like massive employment generation, enhancement of social
safety net, creation of self employment, reduction of regional disparity, increasing emphasis on
agricultural development, achieving the target of power generation, acceleration of industrialization
and building necessary infrastructure for “Digital Bangladesh.”

In this budget,

• 7.8 percent allocation has been kept for agriculture sector (agriculture, fisheries, and
livestock, rural development and water resource)

• 22.1 percent for local government

• 14 percent for Power and energy

• 15.7 percent for communication(roads, railways, bridges, waterways, airways and


• 23.5 percent for human development(health, education and science and technology)

Power sector,
energy, 7.80%
Agriculture sector
14% Local
Local government
Human nt, 22.10% Communication
developm Human development
ent, Communic
ation, Power energy

Agriculture and Rural development

Muhith proposes an allocation of Tk 59.65 billion, development and non-

development and combined. Agricultural loan has been raised to Tk 100 billion for
the next fiscal from Tk 93.79 billion this year.

He also proposes an allocation of Tk 7.16 billion for livestock and fisheries sector.

Water resources

An allocation of Tk 14.83 billions has been proposed for water resources

development, which includes river management, dredging embankment protection
and checking sanitary and erosion.

Rural development

An allocation of Tk 12.46 billion has been proposed for rural development. A total
of 578400 rural families will be brought under this program.


Only 45% of the country’s entire population has across the power. With a meager
5000MWgeneration, the finance minister hopes to meet minimum electricity
demand by 2011.


Tk 61 billion has been proposed for roads and railway division and bridge division.


In order to building Digital Bangladesh, the government has planned to extend ICT
facilities to villages. All Upazilas will be brought under internet coverage in next
five years with the Second Submarine Cable Network.


Providing home for all by 2021 is one of the targets of the Vision 2021. The Ministry
of Housing and Public works has worked out a plan for develop 22800 plots and
construct 26000 apartments in next three years foe the lower middle income

Human resource Development

Human Resource Development gets the highest priority with an allocation of Tk

213.67 billion or 19 percent of total budget.

Health and family welfare

The govt. decided to set up a total of 13500 community clinics for each 6000
people, in the rural area across the country. Five new medical colleges and six
health technology institutes will be established by next fiscal year.

Employment Generation

The govt. will take steps to employ at least one member of each family by 2014 as
the country has total labor force of 5 crore, out of which only 20 lacks are
employed in the public sector.

All plans are good for the nation for the nation if those are implemented as said in
the budget. The people are to wait to see what actually happens.