Bangladesh’s Budget 2006-07 and Poverty Alleviation: The Strategic Mapping and Challenges for the Government.

Prepared jointly by:Md. Shamsul Alam, MA, MBA. andMd. Anwar Ullah, M. Com, MBA, ACMA.

(Published in The Cost and Management Journal, Vol.34 No.4, July-August 2006, pp 44-58.)

ABSTRACTThe growing demand and some legitimate claim from different stakeholders become a tremendous pressure for the Government to continue with the defined revenue expenditures for the financial year 2006-07. On the other hand, continuing inflation will continue to be the key challenge to Bangladesh economy in the coming days along with some other international risk factors as identified by the Bangladesh Bank. Higher inflation makes the poverty situation worse. The existing inflationary pressure is not only cost push, but also demands pull. While there is a claim that public borrowing had crowded out the private sector credit, which grew by 17 percent and money supply increased by 19 percent, above the ceiling set in the monetary policy statement by Bangladesh Bank1. The energy price is another major challenge to the economy that had already made a negative impact on different spheres of the economy. The global hike in oil prices has increased the import bill of fuel, which has compelled the BPC to borrow from nationalized Bank.

INTRUDUCTIONThe announcement of budget is a momentous annual national event which raises national aspiration and hopes as well as fears of the people – hopes that better and happier days will dawn as a result of budgetary measures – fears that rising burden of taxes will make the already unbearable cost of living more unbearable. It is therefore, budget come up with interest and expectations among a large section of the society and at the same time it reflects the economic and political philosophy of the party in power. Conventionally the Importance of National budget is recognized for the better fiscal management of every country – the developing as well as the developed. It is known the budgets of the developing countries especially the least developing countries like Bangladesh are heavily dependent on external aid for their development financing and as such aid prospects greatly influence their annual budgets. Fiscal budgets though a national affair is now a day greatly affected by the pulls and pushes generated externally. In this respect in a globally linked economy of today, the tasks of Finance Ministers have become formidable.

The role of our annual development and non- development budget is also paramount important since its main thrust is upon finding ways and means to accelerate development activities and reduction of poverty within the long-term plan frame of 2015. The budget for the govt is therefore an exercise a rather difficult exercise in mobilizing the resources to meet the development needs and allocation of these resources to such uses as may maximize the national income and welfare of the common people. The needs are many and demands are high; the task of the Finance Minister is to strike a balance between the available resources and the competing demands. This year’s budget is especially important because it is the last budget of the incumbent government, and it would overlap the 1 The Business Bangladesh, Vol - 3, issue 9. June 2006, “ Challenging inflation pressure” p20.

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incumbencies of three governments- the present government in power presenting the budget, the Caretaker government, and the government to be elected next, which is scheduled to take over the reins of power in early January, 2007.

The 36th National budget 2006-07 that bears its promises and weakness to spur discussions among the supporters, oppositions and moderates, is approved by the Parliament of Tk 697.40 billion, which is 15 percent of the estimated 4.653 trillion GDP and with an overall deficit of Tk. 146.90 billion. Based on estimates this budget would be subject to revision as we have seen revised budget for the financial year 2005-06 was Tk. 610.58 billion as against the original budget of Tk. 643.83 billion. It is also contended that without setting high expectations, achievements might be negligible. Finance Minister has expressed his hope that Bangladesh has the potential to be a self-reliant economy within the next five years and he said2 “we are now 12 percent dependent on foreign aid, while the rest is being mobilized through domestic resources.”

FY 2005-06To make comments on FY 2006-07, it requires an opportunity to look a back to see what happened, economically during the fiscal year 2005-06. The evaluation of FY 2005-06 would be where the government had succeeded and where they could not come out success and why. What were the major problems encountered in the implementation process of Revenue accumulation, execution of Development and Non-Development expenditures both in revenue and capital, with respect to functionaries, polices and prioritization.

The achievements of FY 2005-06 appear mixed. Although the Bangladesh Bureau of Statistics (BBS) had earlier calculated a GDP growth of around 6.8% for the FY 2005-06, donor agencies and others concerned have scaled it down to 6.3%, which is still an impressive figure. The international community however believes, and openly airs that belief, that this growth figure could easily rise by another 2% to make it around 8.3%, if the government could substantially reduce the level of corruption in the country3. Bangladesh’s commitment to the Millennium Development Goals (MDGs) of reducing poverty by half by the year 2015 needs a sustained growth rate of around that figure. It also expected that in FY 2005-06 the manufacturing sector will achieve a double-digit (10.45%) growth and contribution of industry to GDP grew to 29%. But year on year inflation rate of around 7.3% or so is a great headache to the government.

The government at the fag end of a fiscal year 2005-06 downsizes the ADP in the event of shortfall in revenues earning and resorts to increased borrowing from the banking system. In the outgoing fiscal, the Government borrowing from the banking system has been estimated at Tk 49 Billion, the amount is Tk 13 billion more than the amount projected in the original budget7. The government had to borrow such a big amount of fund even after downsizing the ADP by Tk 30 billion. This actually happened due to dropping of a number of low-priority projects, adoption of austerity measures, declining foreign aid-flow and sluggish utilization of funds in some projects, the ADP is revised and despite that it was 16% higher than the actual expenditure of last year’s ADP4.

The budget deficit stood at 3.9% in the revised budget against of 4.5% of GDP as projected in the original budget 2005-06. It was also projected in the original budget of the outgoing fiscal a substantial growth in revenue for the current fiscal and many economists and

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donors termed it very ‘ambitious’. In spite of the fact that revenue collection during the fiscal 2005-06 would be more than the previous fiscal, there will be shortfall of about TK 7.5 billion. Finance Minister also claimed in his budget speech that the deficit would be 3.5%. As regard to borrowing from domestic sources he mentioned it is within the limit of 2 percent and as a result debt stock as percentage of GDP did not increase rather it went down to 48 % from 51% of GDP. In current fiscal year domestic savings and national savings are expected to grow at 20.3% and 26.6% respectively. As regard to external sector the export income rise even in post MFA years which is about 19 % higher than that of fiscal year 2004 - 05 and at the same time due to several incentive programmes and enactment of Money laundering Prevention Act, remittance continued to rise by 20% on an average and in conjunction with other macro-economic management foreign reserves rose to US$ 3 billion5. Government also claimed that the current account balance remained positive. But it is relevant to mention here that Finance Minister has not been able to come up with solutions to the problems that he has encountered during the implementation of the budget for the fiscal year 2005-06.

Fiscal 2006-07Estimated Expenditures: Non-Development and Development The pertinent issue to the government regarding public expenditure is to encourage the outlays on productive sector and restrain over unproductive outlays with main objectives to improve living standard of the people, develop human resources and physical infrastructure and reduce poverty while maintaining the sustainable economic growth and stability. In line with main objectives government has increased allocation for different social infrastructure sectors including education, health and women development. In the Table –1 sector wise expenditure and in Table – 2 the ranking of expenditures is shown to understand estimated expenditure and the priority of allocation. The table shows that the non-development expenditure is 14% higher than the revised budget of FY 06-07 and Development budget is 21% higher than the revised budget of FY 06-07 and it is 6.1% of GDP.

Table – 1: Sector-wise Expenditures including ADP for 2006-07 (Figures in Crore Taka) Budget 2006-07 Revised Budget 2005-06 Change in

FY07 over FY06 (%)

Sectors Non-Develo-pment

Devel-opment

Total Non-Develo-pment

Devel-opment

Total

Education & Technology 7,214 3,879 11,093 6,458 2,807 9,265 19.73Public Service 7,396 1,090 8,486 4,762 815 5,577 52.16Transport & Communication 2,928 4,443 7,371 2,500 3,623 6,123 20.38Local Government & Rural Development

1,171 5,624 6,795 1,130 5,373 6,503 4.49

Agriculture 3,195 2,611 5,806 2,772 1,722 4,494 29.19Defence 4,746 158 4,904 4,411 75 4,486 9.32Fuel & Energy 26 4,260 4,286 23 3,747 3,770 13.69Health 2,409 2,375 4,784 2,065 2,047 4,112 16.34Public Order and Safety 3,451 226 3,677 3,197 266 3,463 6.18Social Security & Welfare 2,339 914 3,253 1,925 1,014 2,939 10.68Total Expenditure of the above 10 Sectors

34,875 25,580 60,455 29,243 21,489 50,732 19.17

Recreation, Culture & Religious Affairs

463 412 875 429 311 740 18.24

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Housing 559 46 605 566 70 636 -4.87Industrial & Economic Services 186 443 629 287 393 680 -7.50Total Expenditure of the above 3 Sectors

1,208 901 2,109 1,282 774 2,056 2.58

Interest 7,637 7,637 7,545 7,545 1.22Net Outlay for Food Account Operation

202 202 207 207 -2.42

Loans and Advances -1,211 -1,211 -32 -32 3684.38Non-ADP Employment Generation Program

548 548 350 350 56.57

Structural Adjustment Expenditures 0 0 200 200 -100.00Total Non-Sectoral Expenditure 7,176 7,176 8,270 8,270 -13.23Total Expenditure 43,259 26,481 69,740 38,795 22,263 61,058 14.22Non-ADP FFW and Transfers 481 763 -36.96Total ADP 26,000 21,500 20.93

FFW = Food for Work ADP = Annual Development ProgramSource: GOB (2006), Annual Budget 2006-07: Budget in Brief.

Table – 2: Sector-wise Ranking of Expenditures for 2006-07

SectorsBudget 2006-07 Revised 2005-06

Non-Develop

ment

Development

Total Non-Developme

nt

Devel-opment

Total

1 Education & Technology 2 4 1 1 4 12 Public Service 1 7 2 2 8 43 Transport &

Communication6 2 3 6 3 3

4 Local Government & Rural Development

9 1 4 9 1 2

5 Agriculture 5 5 5 5 6 56 Defense 3 12 6 3 12 67 Fuel & Energy 13 3 8 13 2 88 Health 7 6 7 7 5 79 Public Order and Safety 4 11 9 4 11 910 Social Security & Welfare 8 8 10 8 7 1011 Recreation, Culture &

Religious Affairs11 10 11 11 10 11

12 Housing 10 13 13 10 13 1313 Industrial & Economic

Services12 9 12 12 9 12

Projected cash flow/ Financing the Budget 2006-07Table – 3: Cash flow statement for FY 2006-07 including revised cash flow of FY 2005-06.

Financing Total ExpendituresBudget 2006-07 Revised 2005-06 Increase

(in %) over Last FY

Amount Percent Amount Percent

NBR Taxes 41,055 58.87 34,456 56.43 19.15Non-NBR Taxes 1,860 2.67 1,719 2.82 8.20Non-Tax Revenue 9,627 13.80 8,693 14.24 10.74Foreign Grants 2,508 3.60 2,476 4.06 1.29Foreign Borrowing 5,856 8.40 5,574 9.13 5.06Domestic Borrowing form Banking System 5,434 7.79 4,911 8.04 10.65Domestic Non-Bank Borrowing 3,400 4.88 3,229 5.29 5.30

Total inflow - A 69,740 100.00 61,058 100.00 14.22

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Financing Overall Deficit (Excluding Foreign Grants)

Foreign Grants 2,508 14.58 2,476 15.29 1.29Foreign Borrowing 5,856 34.05 5,574 34.43 5.06Domestic Borrowing form Banking System 5,434 31.60 4,911 30.33 10.65Domestic Non-Bank Borrowing 3,400 19.77 3,229 19.94 5.30

Deficit Financing - B 17,198 100.00 16,190 100.00 6.23ADP Financing Tax Revenue 42,915 36,175 18.63Non-Tax Revenue 9,627 8,693 10.74

ADP Financing - C 52,542 44,868 17.10Total outflow D (B + C) 69,740 61,058 14.22

Note: Resources for ADP Financing.Total Domestic Resources 14,682 56.47 10,800 50.23 35.94Total Foreign Resources 11,318 43.53 10,700 49.77 5.78

Total ADP 26,000 100.00 21,500 100.00 20.93Source: GOB (2006), Annual Budget 2006-07: Budget in Brief.

Major Expectations in the fiscal 2006-075

The target of revenue receipt estimated is 17% higher than the revised revenue estimate of FY 2005-06.

Budget deficit in the proposed budget has been scaled down to 3.7% of GDP. Due to reforms in monetary sector, the price inflation is expected to come down

below 6%. The economy will remain resilient to both internal and external shocks. Trade,

commerce and investment will remain buoyant and the growth will reach in the neighborhood of 7%.

Remittances will grow to US$ 4600 million and Gross Official reserve will stand at US$ 3491million.

Gross domestic investment will reach up to 24.5% of GDP. External and Domestic borrowings will gradually decrease which is projected 3.7% of

GDP and interest cost their in projected Tk 76.4 billion. Tax Revenue Target in the Budget. Table – 4.

Table – 4: Revenue target for FY 2006-07.

Tax Revenue Budget 2006-07 Revised 2005-06 % Increase

overFY06

National Board of Revenue (NBR) Portion

Tk. (Crore)

% Tk. (Crore)

%

Taxes on Income and Profit: 8,500 19.81 6,960 19.24 22.13 Companies 5,650 13.17 4,610 12.74 22.56 Other than companies 2,850 6.64 2,350 6.50 21.28Value Added Tax (VAT): 14,729 34.32 12,398 34.27 18.80 VAT on Imports 7,135 16.63 6,198 17.13 15.12 VAT on Domestic Goods and Services

7,588 17.68 6,195 17.12 22.49

Turnover Tax (TT) 6 0.01 5 0.01 20.00Import Duty: 9,485 22.10 8,235 22.76 15.18

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Customs Duty 8,285 19.31 7,135 19.72 16.12 Infrastructure Development Surcharge (IDSC)

1,200 2.80 1,100 3.04 9.09

Excise Duty 185 0.43 163 0.45 13.50Supplementary Duty (SD): 7,701 17.94 6,394 17.67 20.44 SD on Imports 2,003 4.67 1,739 4.81 15.18 SD on Domestic Goods and Services 5,698 13.28 4,655 12.87 22.41Electricity Duty 1 0.00 1 0.00 0.00Other Taxes and Duties: 454 1.06 305 0.84 48.85 Advertisement Tax 1 0.00 1 0.00 0.00 Travel Tax 452 1.05 304 0.84 48.68 Other Taxes & Duties 2 0.00 1 0.00 200.00

Sub-Total: NBR Portion 41,055 95.66 34,456 95.25 19.15Non-NBR Portion Narcotics and Liquor Duty 50 0.12 45 0.12 11.11Taxes on Vehicles 382 0.89 331 0.91 15.41Land Revenue 415 0.97 384 1.06 8.07Stamp Duty (Non-Judicial) 1,014 2.36 960 2.65 5.63

Sub-Total: Non-NBR Portion 1,860 4.34 1,719 4.75 8.20Total Tax Revenue 42,915 100.00 36,175 100.00 18.63

Source: GOB (2006), Annual Budget 2006-07: Budget in Brief and GOB (2006), Annual Budget 2006-07: Consolidated Fund Receipts.

Main Policy and strategic issues of Budget 2006-07

Policy issues Meeting the MDG by achieving the annual targets embodied in PRS is the

fundamental basis of budget 2006-07. Budgetary measures for highest allocation for human resource development with

emphasis on education and IT. Tax exemption and rebate for agro-processing, jute and textile industries and for

agriculture sector the duty free import of seeds, fertilizers, capital Machinery and other agricultural implements. .

Increased allocation and expansion of social safety net.

Expanded step has been taken to introduce Medium Term Budget Framework (MTBF), replacing the traditional budget system. For FY 2006-07, 10 ministries brought under MTBF and there is commitment that this medium term perspective will gradually be rolled out to all ministries and divisions.

Two manuals titled “Public Expenditure Management Manual” and “Internal Control Manual” are being implemented to achieve appropriate value for money from each taka spent by the government. Within the main government account, arrangement has been made for separate preparation of monthly accounts and Annual Financial Statement by each ministry. The Government, meanwhile, has taken steps to separate cash management from public debt management.

At the initiative of the present Government a “Public Procurement Regulations” was framed in 2003 to ensure competition, transparency and accountability in

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government procurement system. To bring about procurement practice in alignment with international best practices, a bill has been placed before Parliament to convert the Regulation into an Act.

A Tax Ombudsman Act. 2005 has been enacted in the Parliament to ensure transparency in tax administration and accountability. Main emphasis has been given on the improvement of management, increasing efficiency and on modernization of revenue administration and bringing high level of discipline in this respect. The Tax Ombudsman has assumed his office and start functioning from July 2006. The fiscal Act is also under active consideration of the government.

Strategic issues Accelerate economic growth by further streamlining the strong macroeconomic

framework that is in place through continuous reforms and create employment opportunities;

Elevate Human Development Index (HDI) with the increased allocation in education; health and other social sectors along with qualitative improvement;

Ensure financial security of the disadvantaged by widening social safety nets; Promote private sector initiatives and investment by adopting prudent fiscal and

monetary policy; Reduce the cost of doing business by developing physical infrastructure; Ensure economic good governance; Improve law and order; Maintain internal security and Enhance public management capacity.

Salient features of Resources allocation for FY 2006-075

56.3 percent of total resources have been directed towards direct and indirect poverty-reducing spending.

The total size of the budget, development and non-development, which is 15 percent of the estimated GDP. Out of this, the non-development outlay has been estimated 14 percent higher than the revised budget 2005-06.

The size of the ADP has been proposed at Tk. 26000 crore, which is 5.6 percent of GDP and 21 percent higher than the revised ADP of FY2005-06.

Tk. 1982 crore for development programmes financed from revenue budget for employment generation programmes.

Consistent with our economic goals, there is an increased allocation for different social infrastructure sectors including education, health and women development, which is 43 percent of the total budget.

Allocation for human resource development has been proposed to rise to 23 percent of the total budget.

For education and technology sector it is proposed to allocate 20 percent higher than the allocation made in the revised budget of FY 2005-06.

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In FY 2006-07, it is proposed to allocate Tk 4784 crore for this sector, which is 16 percent higher than the allocation made in the revised budget.

For the Ministry of Agriculture, which is 42 percent higher than the allocation of revised budget for FY 2005-06.

For the Ministry of Fisheries and Livestock, allocation is 36 percent higher than the revised allocation of FY 2005-06.

For Development of Small and Medium Enterprise (SMEs), Special fund allocated for - Refinancing Scheme, Equity Development Fund, Agro-based Industries Assistance Programme and Fund for Assistance to Small Farmers Affected by Natural Disasters.

Allocation for local government and rural development is Tk. 6427 crore, development and non-development combined.

About Tk 450 crore allocated for widening social safety nets. This groups belong to “Senior Citizen Allowance”, “Fund for Rehabilitation of the Acid-burnt and the Physically Handicapped”, “Fund for Mitigating Risks due to Natural Disasters”, “Honorarium Programme for Insolvent Freedom Fighters”, “Programme for the Assistance to the Fully Retarded”, “Seasonal Unemployment Reduction Fund”, “Retraining and Employment of Voluntarily Retired/Retrenched Employees/ Labourers”, “Skill Development Fund for the Readymade Garments Workers” and “Fund for Housing the Homeless”

Allocated Tk 148 crore to create employment opportunities for the poor under Special Credit Programmes that will be implemented through Rural Development and Cooperatives Division, Ministry of Fisheries and Livestock, Ministry of Youth and Sports, Ministry of Liberation War Affairs and Ministry of Women and Children Affairs.

Under Palli Karma Shahayak Foundation (PKSF) Tk 417 crore allocated for “ Special Fund for the Employment of the Hardcore Poor” and “Credit Assistance to Small Entrepreneurs” and under NGO Foundation again Tk 100 crore allocated to raise the endowment fund to Tk 125 crore.

A Power Rehabilitation Programme with an outlay of Tk.100 crore financed from non-development budget has been undertaken for repair and maintenance of old power plants and to improve power generation, transmission and distribution, an allocation of Tk. 3586 crore has been earmarked for 52 projects including 2 new projects in the ADP.

Allocation of Tk 100 crore for the “Energy Development Fund” to promote use of solar power and other renewable sources of energy for inaccessible localities where people are deprived of power supply.

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Table – 5: Non-Development and Development Expenditures for FY 2006-07

Source: GOB (2006), Annual Budget 2006-07: Budget in Brief and GOB (2006), Annual Budget

Non-Development ExpenditureNon-Development Revenue expenditure : Tk 39536 crore.Non-Development Capital expenditure : Tk 2750 crore. Total : Tk 42286 crore.

Development ExpenditureIn the Budget summary there is no separate presentation for revenue and capital expenditure of Development budget. Total Development expenditure is Tk 28463 crore.

Medium Term Budgetary Framework (MTBF)6

Introduction of Medium Term Budget Framework (MTBF) from FY06 is a new initiative for the Government of Bangladesh. In consideration of the implementation capacity initially, the budgets for four ministries were prepared under the MTBF and from FY2006-07 the coverage extended to 10 Ministries.

Objectives of MTBF

These Ministries were to formulate a medium term expenditure framework which will be consistent with the ceiling provided to them and the expenditures are also to be consistent with the strategic goals, policies and priorities that have been identified in NSAPR and/or ministry relevant sectoral policies.

6 Government of Bangladesh, Ministry of Finance, “Medium-Term Budget Framework 2006/07-2008/09” p01-28.7 National savings Directorate (NSD) and Bangladesh Bank (BB)

Position Major sector Allocation (Tk. in crore)

13 Housing 60912 Industrial and Economic Services 63211 Recreation, culture and Religious affairs 87510 Social Security and welfare 34619 Public order and safety 36888 Fuel and Energy 42837 Health 47946 Defense services 49085 Agriculture 58204 Local government and rural Development 67983 Transport and Communication 75452 Education and Technology 111071 Public services 15220******* Total 69,740

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These Ministries were to establish an effective link between government’s strategic goals, policies and priorities with budget allocations.

Features of MTBF:

Three-year budgeting was introduced instead of usual budgeting for one year; A single ceiling was given for Non-Development and Development expenditure and

the Budget Management Committee of the respective ministry determined the total amount to be allocated to Non-Development and Development expenditure;

Effort was made so that the line ministries could link budgetary allocation with government policies, strategies and priorities;

Performance indicators were established in order to ensure that the output achieved from the public expenditure could be measured.

Expenditure ceilings determined on the basis of the following assumptions: The expenditure of the line ministries are consistent with GDP growth so that they

can maintain continuity in their work; The ministries/divisions can continue their activities and achieve their medium term

target and goals on the basis of their medium term strategies and existing policies; The ministries/divisions are able to increase expenditure allocation so that they are

consistent with poverty reduction strategy and can undertake pro-poor activities and improve and strengthen service delivery for the poor;

With the given expenditure ceiling, the relevant ministries can implement the new pay scale of 2005.

The experience of implementing MTBF suggests that, in future govt. have to

successfully face the challenges outlined below:

Enhance financial management capability of the line ministries; Retain the trained personnel; Develop appropriate information system necessary for budget preparation,

implementation and achieving the desired objectives of poverty reduction strategy; Ensure more participation of senior policy makers of line ministries in budget

processes; Further enhance coordination among Planning Commission, Finance Division and

line ministries; Strengthen integration of internal and statutory audit functions with budgeting.

Strategic Mapping and Challenges for the government- Some Comments:

Poverty Alleviation Issues FY 2006-07 is the first year of the implementation of the National Poverty Reduction Strategy. The government has finalized the full-blown poverty reduction strategy titled “National Strategy for Accelerated Poverty Reduction – Unlocking the Potential”. In fact this is the national document on which all development initiatives and priorities should be based, designed and implemented to achieve the targets as determined. The budget proposal contains 56.3% of the total allocation for initiatives and approaches directly and

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indirectly related to poverty reduction, this is also a sizeable allocation considering the priorities to address the poverty with multidimensional approaches. The positive side of the budget 2006-07 is that it does not create any pressure on general people, social safety net was widened, agricultural sector was given importance, and local production was encouraged. In all, the budget was drawn up in a way that the people can’t take it negatively. Some few measures have taken in the Budget 2006-07 that might have positive impact on rural economy and poverty alleviation like Tk 1200 crore subsidy to agriculture and proposed withdrawal of infrastructure Development Surcharge. The exemption of duty and tax on agriculture machinery, accessories, agri-inputs, fertilizer will help rural Farmers and non-crop farmers. The increased allocation to Tk. 150 crore for Agro-based Industries Assistance programme would definitely benefit the small and Medium enterprises. Allocation that has been increased in the FY2006-07 for ‘Seasonal Unemployment Fund’ and ‘Fund for Housing of Homeless’ is considered insufficient. No commitment or direct measures were taken for the land less poor that constitutes around 56% of the population. Through private and public initiatives there must have provisions for creating employment opportunity for vast segment of the population living below the poverty line in productive sectors. In FY 2006-07 Tk. 1982 crore set a side for employment generation apart from additional allocation of Tk. 481 crore for ‘Food- for- Work’. But it requires integration of policies like export, import, industrial and SMEs policies for smooth growth and investment to create productive employment opportunities.

Challenging Issues for the GovernmentDespite some positive measures taken in the FY 2006-07 for poverty alleviation, the economy of Bangladesh still have to face following tremendous pressures and challenges.

Containing inflationary pressure: Even under normal conditions the most challenging tasks for the govt. will be to contain the inflationary pressure on the economy, which is now estimated at around 6.5%. With a view to providing some relief to the consumers it is proposed reduction in duty on some daily necessities. But much would depend on the exchange rate situation and the monetary policy of the central bank. The impact of recent hike in fuel and oil prices coupled with possible inflow of huge election related funds into the market might make thing really hard for the caretaker and next elected govt. Available statistics say Bangladesh needs more than 60 percent diesel of its total gasoline consumption annually to back the agriculture and communication sectors. Farmers will be affected if the government goes ahead with it’s planned upward oil prices adjustment plan. The economists said that the government should provide subsidy for the farmers during the irrigation period so that higher cost of agricultural outputs could not push up the inflation.

Achieving revenue Target: It might be really challenging to achieve a 17 percent growth in revenues as has been projected in the budget for the fiscal 2006-07 in view of the continuous fall in revenues flow from a very important traditional source- import duty. The finance minister has banked on higher mobilization of revenue from income tax and VAT; but this would depend on reforming the tax administration and activating management.

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Public Expenditure Management: To keep the finances in control and to achieve the budget objectives what is essential is the efficient management of government’s financial affairs. In attaining expected growth of 7% in FY 2006-07 the Investment – GDP ratio will need to be raised to at least 30-35 percent from the current 25 percent9. The additional amount of savings needed to meet higher investment must come in the form of public savings through the reduction of the government’s current expenditure.

Deficit Financing: There remains a huge uncertainty about how the emerging budget deficits can be financed consistent with the overall monetary policy. The government has to borrow Tk 54.34 billion from the banking system to meet the budget deficit in the fiscal 2006-078. That would not be an easy task if the liquidity problem in the banking sector persists. Besides, such a large-scale borrowing by the government will reduce the availability of funds for the private sector entrepreneurs and there may be liquidity crisis for the bank. This has also the potential of dilution the effect of the pro-growth fiscal measures that have been proposed in the budget. The deficit financing by printing money or from public borrowing or borrowing from banking system may trigger the inflation. So, the resort to printing money should be the last one and the public borrowing should be kept at a level consistent with the GDP growth i. e the ratio of Debt to GDP should remain constant and borrowing should be for productive investment.

Maintaining forex reserve: The govt. will need external credit desperately - in spite of a healthy growth in export earning and inward flow of remittances – to maintain the forex reserve at a satisfactory level.

Implementation of Development projects: The implementations of development budget remain a great challenge for the government. In this respect the standard and quality of projects must be ensured keeping with national priority. For example, Subsidy in agriculture or highest allocation in education sector will be of no use if the subsidy is not given at the right time to the right users or education sector projects are poor in standard. So, govt. should pay attention to the quality of the projects, carry out capacity building, and give emphasis on enforcing effective monitoring. The implementation of the Development budget remains a challenging task for the govt. due to large number of new unapproved projects including low-priority projects included in the development budget.

Accounting policy: Indeed, it is necessary to comment again that the Government accounting system is at present based mainly on cash inflow and outflows. The accrual principle of inunciated in the Generally Accepted Accounting Principles (GAAP) playing practically no role therein. Further, no recognition is given to assets held and liabilities owed in the accounts except those relating to public sector enterprises. As a result, a statement of the financial position of the government at any point of time cannot be drawn. Yet budgets should be guided by the rule that the net worth of the government should not fall. This net worth cannot be calculated without following the GAAP.

Concluding Remarks

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The budget has been drawn up amid much limitations and pressure. There is the pressure of the election. There is donor pressure. There is the pressure from the rise in fuel prices. And, again there are the expectations of the PRS and MDG to be met. If the budget is to be based on realistic projections and strike balance between estimated revenue income and overall public expenditure, as the tricky exercise demands, and also pragmatic and workable, then the government has, surely a tough task in implementing the budget for the FY2006-07. The Implementation of Budget 2006-07 is considered under most likely socio-economic condition. In this regard political stability and efficient fiscal management system is pre-condition. The cost of ‘Poor Governance’ and political programmes like ‘Hartal’ is so high for the economy. The cost of Hartals to the economy was estimated about 3 to 4 percent of GDP (UNDP, 2005). In addition to that Hartal/strikes/road seize programme impose considerable psychological stress, insecurity, uncertainty of routine work and aboveall rigorous negative impression to the foreign investors and thus country loses her image. So, irrespective of any political affiliation/opinion, every section of the society must have positive role to carry out the economic activities of the country without interruption with an ultimate objective of fulfillments of expectations as set out in the FY 2006-07. In implementing budget it should be kept in mind that it is made not only to forecast revenue but also to control expenditure. Resource mobilization can be effected not only by increasing taxes but also by reducing expenditures. There is also no denying that political events of the coming days would shape up much of the economic future of the country. Many donors do not hide their surprise over the resilience of the Bangladesh economy in the face of so many negative things such as poor governance, corruption, and poor physical infrastructure. Bangladesh could have really emerged as a South Asian tiger had there been only one factor in place – that is good governance. So, together with economists’ ingenuity, we need bold political visions because only the later can ensure the successful application of the former. Let us hope sooner or later, sooner rather than later, we shall be on the track that will lead us to our cherished goal.

(Note: This is not an official documents or opinion it purely an academic discussion)

Endnotes

2 The Business Bangladesh, Vol - 3, issue 9. June 2006, “ Finance Minister defends own move” p263 The Business Bangladesh, Vol - 3, issue 8. May 2006, “Editorial”7

4 Government of Bangladesh, Ministry of Finance, Minister ‘Ministry of Finance and Ministry of Planning’ Budget speech 2006 –07, date: June 08, 2006. Para24 of page 14.5 Government of Bangladesh, Ministry of Finance, Minister ‘Ministry of Finance and Ministry of Planning’ Budget speech 2006 –07, date: June 08, 2006. p 10-15.5

9 The Business Bangladesh, Vol - 3, issue 9. June 2006, “ Views on Budget” p31.8 Probe, a weekly English Magazine of Bangladesh, Vol – 4, Issue 51, Date: June 15-22, 2006 “Budget for FY’07 on track, but Challenges daunting” page 16-17.9 The Business Bangladesh, Vol - 3, issue 9. June 2006, “ Views on Budget” p31.

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