July ,2011

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

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

What is National Budget? Definition and Dimensions A statement of estimated receipts and expenditures A policy instrument that allocates scarce resources among competing sectors, and economic and social needs. A managerial or administrative instrument that lays down and means of providing public services. An economic instrument that can foster nations growth An accounting instrument that holds government officials responsible for expenditure and revenue mobilization Budget: Constitutional Provisions The constitution requires that, a statement of the estimated receipts and expenditure of the government in respect of each financial year shall have to be laid before the parliament. The statement is called Annual Financial Statement-name given to the budget in the Constitution of Bangladesh.

Objectives of the National Budget: To maintain macro-economy stability To reduce Poverty Foster sustainable growth Carry on economic and structural reforms, economic liberalization, human resource development and good governance.

Benefits of Budget:
A budget is a Political instrument in which election manifesto of a government are being reflected or through which Political ideals of government are being implemented. Provides standards against which actual performance can be measured. The budget serves as a coordinating instrument by which government activities can be integrated, because it is supposed to contain all the information on the policies, objectives and activities of the government in one document. The redistribution of wealth is one of the most important functions of a public budget. It requires that total integration should exist between the two sides of the budgetrevenue policy and expenditure policyin order to comply with a fiscal policy for the redistribution of wealth.

Broad Outline of the budget process: Macro economic Forecasting

assists expenditure and resource planning by developing a macroeconomic
framework helps in the development of : aggregates of government budget and the overall fiscal deficits and its financing Composition of expenditures by the main sector spending agencies forcasts of tax and non-tax revenue consistent with macro-economic assumptions and projections estimates of resources available from domestic & external borrowing projections of current expenditure

How Budget is Prepared & Implemented?

Budget Preparation and its Implementation proceeds in four phases Executive Preparation and Submission Legislative review and enactment Executive Implementation and Expenditure Control and Auditing.

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

Revenue Budget is prepared by Finance Division and Development Budget is put together as well by Finance Division from the Annual Development Plan prepared by the planning Commission. All line Ministries and Departments under them are involved in formulation of their respective Budgets Budget as a whole is approved by the Cabinet before submission to the parliament.

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

Budget Monitoring and Resource Committee- Headed by the Finance Minister. All the relevant Ministries/Divisions are represented in the Committee. The Committee coordinates overall resource mobilization and expenditure program of the government. Resource Committee determines the estimated resource availability and expenditure package. Finance Minister holds pre-budget consultations with parliamentarians, civil society, various professional groups, NGOs etc on resource mobilization policies and inter-sectoral allocation of resources. Line Ministries submit revenue expenditure statements and estimated requirement for the revised and next years budget Budget discussion takes place between Finance division and line Ministries ADP is also finalized through similar process between Planning Ministry and Line ministries.

How Budget is prepared(contd)

On taxation proposals ,NBR receives recommendations from all chambers, business associations and professional bodies. Finance Minister interacts with chambers and professional groups on taxation proposals. For external assistance ERD coordinates with Line Ministries as well as with development partners. Budget meetings are held during March-April between the FD and the agencies, where the latter are allowed to discuss their needs with the Ministry. Taking into account the actual expenditures of the past six months and other relevant factors, estimates are finalized at the budget meetings

Budget Structure
In Bangladesh , Government Budget=Non-Development Budget + Development
Budget. Non-Development Budget= Recurrent(Revenue) Exp.+ Net lending +Capital Exp. +net Food outlay +Non-ADP Project. Non Development Budget Includes- mainly recurrent expenditure e.g. pay & allowances, supplies services, operation &maintenance etc. Capital Expenditure pertains to investment in shares and equities. Net Lending is Calculated as net payments (Payments-receipts) of loans and advances to SOEs and govt. servants Non-ADP projects are capital expenditure of development nature but historically bundled with non-development expenditure.

(Contd..) Budget Structure Development Budget= ADP(self financing)+ Non- ADP FFW Development Expenditure is also divided into revenue and capital expenditure. -Revenue expenditure under development budget includes pay and allowances of project employees, services etc. -Capital expenditure under development budget represents expenditure on capital goods/ investment. Balancing of Budget

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

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

Budget Monitoring and Evaluation

Actual expenditure against budgets are monitored by the line Ministries and the Finance Division on monthly basis. IMED and Line Ministries monitor expenditure of development budget against physical progress of project implementation. IMED also carries out post evaluation of selected projects to measure outcome against targets. NEC examines from time to time monitoring reports of IMED C& AG carries out audit and places report to the Honble President for laying before the parliament.

Budget Preparation Under MTBF

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

Medium Term Expenditure Framework (MTEF) MTEF is a transparent planning and budget formulation process within which the Cabinet and central agencies establish credible contracts for allocating public resources to their strategic priorities while ensuring overall fiscal discipline. The process entails two main objectives: the first aims at setting fiscal targets, the second aims at allocating resources to strategic priorities within these targets.
Medium Term Budget Framework (MTBF) is a new initiative, starts from FY2005- 06, iniitially four ministries were prepared under the MTBF. The coverage extended to 10 Ministries in FY2006-07 & 30 ministries in FY 2009-10 . From FY 2011-12 the coverage extended to all ministries

Contd

Problems with Traditional Budget Annual Budget-Short term

No clear links to Governments strategic goals(NSAPR or the 5 years plan) Lac of transparency and accoutability Two budgets are prepared separately

Difference between MTBF and Traditional Budget Traditional Budget

1. Budget is for only one year 2. Two budgets are prepared separately 3. Receipts and expenditure estimates are determined on the actual for previous year. 4.Expected results are not provided in the budget 5. Ministry of Finance and Planning play dominant role.

MTBF
1. It consists of the estimates for four years 2.Budget is prepared within a single ceiling 3. Resources are allocated considering the priorities of programs or projects 4. Indicates the expected output from the input 5. Line Ministries/Divisions are additional authority and responsibility given

(Contd.)
T O P D OWN

MTBF
Strategic goals, policies and medium term target Latest trend of actual revenue collection. As projected in the macro framework.

Medium-term Macroeconomic Framework Medium term fiscal targets Aggregate expenditure limit

MTEF
B O T T O M U P

Sectoral spending demands Sectoral spending plans

Prioritise activities so as to fit within the sectoral resource ceiling. Programmes/sub-programmes needed to achieve the agreed objectives and costing of activities linked to outcomes. Review sectoral objectives, policies and strategies, and identify outputs.

Sectoral spending policies

MTBF-Budget Calender
Steps Budget Call Circular -1 issued Developing/updating ministry Budget Frame work Revewing the MBFs Finalizing and approval of Ministry/Division-Wise Budget call circular-2 issued Submission of detailed estimates by Line Ministries Revewing and finalizating the estimates National Budget presented to the National Assembly Expected Time Frame 05 Nov 15 jan Feb-March 30 March 01 April April-May May Ist week of June

Objectives of MTBF

The objectives of MTBFTo ensure the attainment of the goals set out in the poverty reduction strategy To establish effective linkage between the budgetary allocation and governments policies, strategies and priorities To ensure efficient utilization and effectiveness of public money To maintain consistency between availability of resources and government expenditure To improve macroeconomic stability To ensure stability in budget management in the short-term and contain public expenditure at a sustainable level in the medium and long term

Constraints of Budget
Following are the Budget constraints: Fiscal policy which includes : -Resource mobilization; -Rate of expenditure growth; -Investment expenditure; -Subsidies/Grants; and Budget deficit. Financial management : -Poor timing of release of funds: -Cost overruns: and -Lack of flexibility in the utilization of funds. Coordination within government ; Non-economic considerations urged by political considerations .Efficiency in the use of resources

Budget Execution,Accounting and Fiscal reporting

-covers the functions associated with implementing the Budget -the recording and accounting of all government transactions -development of periodic reports -highlighting major deviations Cash Management : An Instrument of Effective Budget Management Includes the process of developing agency and cash flow forecasts the release of fund to spending agencies monitoring of cash flows and expected cash requirements issue and redumption of government securities for financing government program DebtManagement: an Integral Part of Budget Management Defines the tasks associated with maintenance of records of individual loans assists economic and policy analysis by determing the debt implications Projections of debt service commitments

Components of Budget
Revenue Budget
Revenue Receipts Revenue Expenditure

GOB Revenue and Expenditure-Recent Trend

Fiscal Year 2005-06 2006-07 2007-08

Tk.in Billion

2008-09

2009-10

Total revenue
Revenue Growth %

448.70 14.46 10.79 610.58 14.70 4157.28

494.70 10.25 10.47 668.36 14.53 4724.77

605.40 22.37 11.09 936.08 17.15 5458.22

691.80 14.27 11.25 941.40 15.31 6147.95

794.60 10.56 11.48 1105.23 15.96 6923.80

% GDP Total Expenditure % GDP GDP

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

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

Fiscal Year 2005-06 2006-07 2007-/08 2008-09 2009-10 Total Revenue(TR) 448.70 494.70 605.40 691.80 794.60 Tax Revenue Amount 361.80 392.50 480.10 555.30 639.30 %of TR 80.63 70.34 79.30 80.27 80.46 % of GDP 8.70 8.40 9.00 9.00 9.30 Amount 86.90 102.2 125.3 136.5 155.0 Non- Tax Revenue %of TR 13.70 29.66 20.70 19.73 19.54 % of GDP 2.10 2.20 2.30 2.20 2.30

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

Development and Non-Development Expenditure (Tk. In Crore)

Fiscal Year Total Expenditure Exp.to GDP Ratio Development Expenditure NonDev. Expenditure Other Expenditure

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

61058 66836 93608 94140 110523

14.68% 14.15% 17.15% 15.31% 15.96%

22263 (36.46%) 21833 (32.67%) 23304 (24.9%) 24234 (25.74%) 29628 (26.81%)
expenditure

38070 (62%) 45412 (68%) 57922 (62%) 67603 (72%) 78136 (71%)

725 459 4859 2303 2759

( ) Indicates % of Total

Non-dev.Exp. Is roughly 67 % of Total Expenditure, whereas Development Expenditure is (avg ) 29% of Total Expenditure. Non Dev. Exp. Heavily increased from 62 % to 71 % of total Exp. Dev.Exp. Is almost steady .Non Dev. Exp. Includes pay & allowances,payment of Interest,subsidies,acquisition of assets ,investts in share & equity, Development under Revenue budget. Being a developing Country need to expanding development Expenditure. Development Expenditure was as high as 36.46 % in FY 2005-06 , it decreased to 28.81 % in FY 2009-10.

Allocation and Expenditure of ADP

Fiscal Year Original ADP Revised ADP

Tk. In Crore

Allocation
GOB Contribution Project AID Total Expenditure

Expenditure as % of Original allocation Revised allocation

% of GDP On actual Expenditure

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

24500 26000 26500 25600 30500

21500 21600 22500 23000 28500

14375 13650 13550 12800 17200

7125 7950 8950 10200 11300

19472 17916 18455 19701 25917

77% 70% 69% 79% 85%

91% 83% 82% 86% 91%

4.68 3.80 3.38 3.20 3.75

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

Utilization of ADP was 91 percent in FY 06 & FY 10 respectively & the average implementation rate of ADP lagged by 15 % Sucessful implementation of ADP is a major challange for the government. .

Budget Deficit and Financing

Budget Deficit
Fiscal year Excluding Foreign Grants Including Foreign % of GDP Grant (Incl.Grant)

Tk. In Billion

% of GDP (Exclu.Grant)

FY 2004-2005 FY 2005-2006 FY 2006-2007 FY 2007-2008 FY 2008-2009 FY 2009-2010

-164.3 -161.9 -173.6 -330.7 -249.6 -310.4

-137.9 -137.1 -152.1 -286.8 -200.3 -273

-3.72 -3.29 -3.22 -4.92 -3.25 -3,93

-4.4 -3.9 -3.7 -6.2 -4.1 -4.5

Budget Deficit means government cant collect enough revenue from taxes and other sources to cover annual expenditure i.e. Budget deficit is the difference between total expenditure and total receipts. The increase in Budget deficit is due to food ,fertilizer and petrolium imports,increase in administrative cost, trade imbalance and other social welfare activities. The budget deficit in FY 2005-06 stood at taka 161.9 billion or 3.9% of the GDP , this is somewhat lower than the previous year and remains close to this level with the next fiscal year. In FY 2007-08 budget deficits increased due to emergency assistance to cope with the impact of natural disasters.

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

Fiscal Year Borrowing from Non Bank Banking Borrowing System Total Domestic Financing
4

Loan

Foreign Financing Grant Repayment (% of Loan)

Net

Total Financing

Total Financing as % of GDP

1 2005-06 2006-07 2007-08 2008-09 2009-10

2 60.40
(66%)

3 31.0 46.8 31.4 35.0 86.6

(55.78%)

91.43 91.10

5 68.6 71.6 91.8 102.2 144.9

6 36.6 40.5 48.2 49.3 37.4

7 32.7(48%) 36.2(51%) 39.8(43%) 43.8(43%) 45.2(31%)

8 72.5 75.9 100.2 107.7 137.1

9 163.9 167.0 241.2 249.6 310.40

10 3.94 3.53 4.41 4.06 4.50

44.20
(48.5%)

(54.45%)

109.60
(77.73%)

141.0
(58.45%)

106.90
(75.33%)

141.9
(56.85%)

86.60
(50%)

173.20
(55.80%)

Colm. 2 ( ) indicates percent of total Domestic Borrowing

Colm -4 ( ) indicates percent of total Financing

Colm -7 ( ) indicates percent of foreign Loan

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

Performance of Some Macroeconomic Indicators GDP Growth Trend Particulars GDP at constant prices Growth (%) Agriculture Industry Service GDP at current prices Growth (%) GNI at current prices Per capita GDP (Tk.) Per capita GNI (Tk.) Per capita GDP (US$) Per capita GNI (US$) 2005-06 284673 6.63 4.94 9.74 8 6.40 6 415728 12.14 442935 29955 31915 447 476 2006-07 302971 6.43 4.56 8.38 6 6.92 6 472477 13.65 507752 33607 36116 487 523 2007-08 321726 6.19 3.2 6.78 6.49 545822 15.52 594212 38330 41728 559 608 2008-09 340652 5.74 4.12 6.46 6.32 614800 12.6 670696 42628 46504 620 676 2009-10 360047 5.83 4.67 6.01 6.38 692380 12.62 758684 47405 51945 685 751

GDP Growth Trend (Contd) GDP - GDP is the total market value of all the goods and services produced in a given period of time in a country. In Bangladesh context, GDP is mainly divided into three sectors, i.e. Agriculture, Industry and Service sector. Percentage Change in GDP during the recent years from 2005/06 onwards is not steady due to unfavorable economic and political conditions. From the last couple of years industrial sector left agricultural sector and remains ahead in contribution in GDP composition and the gap is increasing steadily. The Service Sectors GDP in the study period was bigger than the agricultural percentage. The total GDP reached the highest peak in FY 2005-06 with 6.63 Percent and it was 6.19 per cent in FY 07-08 i.e. immediately before the effect of recession. Latter the growth rate slowly declined to 5.74 percent in FY 2008-09 due to the global financial crisis.
Target achievement: The GDP growth rate for FY06 was reasonably within the targeted (6.5%) limit, but the GDP growth rate came down at 6.43 % against targeted limit of 6.8 % in FY 2006-07 & gradually decreases to 5.74 percent in FY 2008-09 against the targeted limit of 6.5 % The GDP attained at .5.83 % in FY 2009-10 but it was far below than the targeted limit of 7 percent. Constraints to growth: Energy deficit, Low Tax Collection, Inadequate trade logistic,

Political instability, constraints in private sector investment,corruption etc.

Inflation
Inflation Rate General Food Non Food 2005-06 7.21 7.76 6.40 2006-07 7.22 8.12 5.90 2007-08 9.93 12.28 6.32 2008-09 6.66 7.18 5.91 2009-10 7.31 8.53 5.45

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

National CPI Inflation

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

Total Export, Import and Trade Balance

Year 2005-06 2006-07 2007-08 2008-09 2009-10 Targeted Export ActualExport Total Import Trade Balance (Billion US $ ) (Billion US $ ) (Billion US $ ) (Billion US $ ) 10.16 12.50 14.50 16.30 17.60 10.53 12.18 14.11 15.57 16.21 14.75 17.16 20.37 21.44 21.34 -4.22 -4.98 -6.26 -5.87 -5.18

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

(. Contd)Total

Export, Import and Trade Balance

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

Flow of Remittances
Fiscal Year Remittances Growth As % of GDP As % of Export 2005-06 4801.88 24.78 6.89 8 45.62 4 2006-07 5978.47 24.50 5 8.83 1 49.09 5 2007-08 7914.78 32.39 10.02 56.09 2008-09 9689.26 22.42 10.82 62.25 2009-10 10987 13.4 11.06 67.65 5

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

Situation of public & private Investment

(In billion taka)
Fiscal Year Total Investmet Public Investmet Private Investmet Growth Rate Public Investmet Private Investmet public investment as % of total investment private investment as % of total investment

Investment as% of GDP Public Private

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

1024.8 1137.3 1321.3 1498.4 1681.6

249.3 257.3 270.4 284.9 318.8

775.5 898.6 1050.9 1202 1362.8

8.34 3.21 5.09 5.36 11.9

14.18 15.87 16.95 14.38 13.38

24 22 20 19 19

76 78 80 81 81

6 5.5 4.9 4.6 4.6

18.7 19 19.3 19.6 19.7

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

Fiscal Management

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

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

Characteristics of Fiscal System in Bangladesh

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

Monetary Management
Managing money supply to achieve specific goals, relating to the inflation, exchange rate, as well as economic

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

(.Contd)Monetary Management STATUS OF MONETARY POLICY INSTRUMENTS

Instruments (in%) Current Rate Last Rate Changed Remarks

CRR SLR Bank Rate Repo Reverse repo

5 18 5 8.5 6.5

Current excess liquidity in the banking system, the central bank may opt or using Increased from 16.0 per cent in 2006 one of the instruments. However, excess liquidity in the banking system also gives Decreased from 6.0 per cent in 2004 flexibility to the government for increasing amount of borrowing from the banking Decreased from 8.75 per cent March, 2009 system. In order to streamline liquidity Decreased from 6.75 per cent March, 2009 management and effective control of money supply, the Bangladesh Bank introduced Repo and Reverses Repo instruments in 2003 Increased from 4.5 per cent in 2006

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

Balance of Payments
Trade balance Merchandise export f.o.b. (inc. EPZ) Ready made garments Marchandise import f.o.b.(inc. EPZ) Of which : Crude Petroleum Services (net) Income (net) Current transfers Official Private Of which: Workers' remittance CURRENT ACCOUNT BALANCE Capital account (net) Financial account Foreign direct investment ( net ) Portfolio investment (net) Other investment MLT loans MLT amortization payments Other long term loans (net) Other short term loans (net) Other Assets* Trade Credit (net)** ERRORS & OMISSION OVERALL BALANCE Reserve Assets Bangladesh Bank Assets Liabilities FY 06 -2,889 10,412 7,903 -13,301 604 -1,023 -702 5,438 125 5,313 4,802 824 375 -141 743 32 -916 1,023 -488 -37 -256 -495 -898 -720 338 -338 -338 -554 216

(in millionUS$)

FY07 -3,458 12,053 9,211 -15,511 524 -1,255 -905 6,554 97 6,457 5,979 936 490 762 793 106 -137 1,037 -525 -24 493 -535 -481 -695 1,493 -1,493 -1,493 -1,593 100

FY08 -5,541 13,945 10,700 -19,486 695 -1,525 -1,005 8,743 127 8,616 7,915 672 576 -457 748 48 -1,252 1,338 -580 -6 -160 -581 -1,`108 -468 331 -331 -331 -799 468

FY09 -4,708 15,583 12,348 -20,291 584 -1616 -1,361 10,226 72 10,154 9,689 2,536 451 -825 961 -159 -1,627 1,204 -641 -70 -169 -660 -1,277 16 2,058 -2,058 -2,058 -1,883 -175

FY10 -5,152 16,236 12,497 -21,388 535 -1237 -1487 11,610 122 11,488 10,987 3734 442 -755 636 -117 -1,274 1,601 -687 -156 231 -903 -1045 -556 2865 -2865 -2865 -3,616 751

Balance Of Payment
Balance of payments Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. BoP includes all payments between a country and its trading partners and is made up of the balance of trade, private foreign loans and their interest, loans and grants by governments or international organizations, and movements of capital.. Balance of payments transactions are classified into 4 main categories: 1. Goods,services, and income 2 . Current Transfers 3 . Capital and financial account 4. Net errors and omissions Major Strengths of BOP: Healthy BOP because of Current account surplus: The balance of payments (BOP) remained in a healthy position because of the current account balance has been in surplus in recent years. Trend in current account balance is also Positive. Despite deficit in the trade balance, current account balance recorded a larger surplus of US$ 3,737 million in FY 10 compared with the surplus of US$ 2,416 million in FY 09. This strengths is coming from remittance and positive export growth Major weakness of BOP: Narrow Export Base Dependence on single product: like the RMG sector. Narrow export market: North American and European markets dominate. Remittance is also vulnerable: Most of the remittance comes from Middle East countries.. Services accounts is deteriorating sharply and is projected to weaken further.

Performance of Targeted Budget:

GDP growth above 6% during the last few years, despite the global downturn and high fuel and food prices. The introduction of the value added tax (VAT) has led to an increase in government revenue collection. Some improvements in revenue collection as well as some discipline in current expenditure were responsible for improved fiscal trend in Bangladesh. The tax and non-tax revenue surpassed current or non-development expenditures and progressively left a higher revenue surplus. Average Growth rate of Tax revenue on an around of 15 percent. The average tax collection during the review period was 99.37 percent of the targeted budget. ADP implementation has always been much lower than its target. A review of the 2006-10 fiscal years' actualagainst-targets shows an average 15 percent shortfall in ADP implementation. The trend of budget deficit in Bangladesh clearly shows that deficit remains below 5 percent of GDP except those years when there were natural calamities. Growth in investment during the review period was not satisfactory. During the study period, the growth rate of private investment was 14.95 percent. On the other hand, the growth rate of public investment was fluctuating and its overall share was declining. On the expenditure side, the capital expenditure has declined from 36.46 percent to 26.81 percent of total expenditure , on the other hand the non- development expenditure increased from 62 percent to 71 percent of total expenditure at the end of review period. Healthy BoP

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

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

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

(Contd...) SWOT Analysis

Opportunities
Closer collaboration of the Public/Private Sectors Leverage new culture of Revenue collection Simplification of policies/Rules/Regulations. Reform/ restructuring of the accountability Framework and mechanisms for financial management and operations. Amend legislation to facilitate alignment of responsibility /authority/accountability.

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

Key Findings
Following are the major findings of the study. It was found that the total GDP reached the highest peak in FY 2005-06 with 6.63 Percent and it was 6.19 per cent in FY 07-08 i.e. immediately before the effect of recession. Latter the growth rate slowly declined to 5.74 percent in FY 2008-09 due to the global financial crisis. It is observed that, Agricultural and Industrial GDP are small in recent years, but Service Sectors GDP is swelling. This kind of imbalanced swell of one sector except other two causes inflation. The contribution of all sectors to GDP needs to increase equally. Non-Development expenditure heavily increased during the review period. The percentage share gives clear idea of the very trend of Non-Development expenditure. But Development expenditure of government is almost steady. The Revenue-GDP ratio has not been increased significantly Total revenue, tax revenue and non-tax revenue all are linearly increasing during the period of study. Tax revenue has always contributed more than the non tax revenue in total revenue. VAT has contributed substantial amount for the growth of tax on consumption and production of goods and services.

(Contd..) Key Findings

The trend of budget deficit in Bangladesh clearly shows that deficit remains below 5
percent of GDP except those years when there were natural calamities. Overall budget deficit as a percentage of GDP is increasing each year, which clearly shows that government revenue is even not sufficient to finance the recurrent expenditure and principal repayment expenditure. Development activities carried out in the economy are wholly based upon the foreign sources (grant and loan) and internal borrowings. During the study period, the growth rate of private investment was 14.95 percent. On the other hand, the growth rate of public investment is fluctuating and its overall share is declining. The dependence of the economy on foreign assistance has declined in recent years. This indicates that national priority setting processes and domestic efforts to attain them has enabled Bangladesh to design development projects and policies with relatively less conditionality from outside. Balance of payment was healthy during the review period.

Conclusion
The present government aims to establish Bangladesh as a middle income country by 2021. The required amount of investment to increase GDP growth rate to 8 percent by fiscal year FY 2015 in accordance with the governments Medium Term Macroeconomic Framework 2011-2015 (MTMF) of the government. In order to move the economy to a higher growth path, significant efficiency and productivity gains are required to meet the challenge of limited resources, particularly land (and thus food) and energy. Moreover, effective implementation of reform agendas is imperative to strengthen competitiveness, foster growth, and generate productive and job opportunities. To attain the Vision 2021 and to carry out the development process the country needs to rationalized its revenue collection composition with great emphasis on collection from internal resource. The Investment growth rate is insignificant, the creation of an investment friendly environment and a competitive market system, adoption of innovative technology and provision of infrastructural facilities that are able to attract entrepreneurs and expand domestic market are essential. The MTBF approach is encouraging ministries to plan their programs for the medium term, thus giving them a greater voice and decision making power in how resources are allocated. At the same time it has placed new demands on them with regard to budget planning and management.

Recommendations
Some general recommendations can be outlined as follows: Government revenue is only 11 percent of GDP in the context of Bangladesh. Though it is as

high as 40 percent in developed economies. Hence tax base in the economy is to be expanded. The following measures may be adopted to increase the tax net and collection include: Restructuring of manpower and other facilities of income tax department; Motivational programme for taxpayers of income tax and VAT; Reforms in judicial process for easy settlement of VAT related cases; Reforms in VAT administration including setting up more VAT offices, setting up VAT offices in each upazilla To Strengthening public expenditure management, mechanisms must be developed for ensuring transparency and accountability in public procurement To enhance Agricultural GDP, Modernization in agriculture, distribution of subsidies, interest-free loans among peasants can be helpful. On the other hand, for the balance between the growth rates of Large Scale Industries and Small & Cottage Industries, it is necessary to bring them under government care. Government should increase domestic investments in proper areas with efficient hands Expenditure on recurrent activities is increasing at the faster rate. Unnecessary recurrent expenditure should be discouraged. loan from external sources should be received only when needed. Foreign aid must be utilized in more productive sector and infrastructural development.

(Contd..) Recommendations
A complete and vigorous cost-benefit analysis must be done before receiving loan for any project from external sources as well as from domestic borrowings. It will ascertain the benefit from any project. The preparation of our national budget is a highly centralized. Participatory budgeting through which citizens deliberate and negotiate over distribution of resources is almost absent. The participatory budgeting includes a process where local governments have a say in the matters of regional income and expenditure. Such involvement also strengthens accountability, transparency of the government. The parliamentary standing committees of the parliament should be active so that they can scrutinize the budgets of their respective ministries and place their recommendations A public budget hearing by the Parliament Standing Committee every year should start with a review of recommendations of the previous year, which will create moral pressure on the government. It would ensure effectiveness to discuss budgetary policies with various stakeholders such as academicians, chambers of commerce, media and civil society members. The amendments to budget by NBR through Statutory Regulatory Order (SRO) is not a good practice for any democratic country. The bureaucratic process should not have

THANK YOU