An Analysis of Budget 2013-14

Prepared For: Dr. Sujit Saha Former Professor & Director (Training) Bangladesh Institute of Bank Management Course Instructor, East West University Prepared By: Nur Uddin Sabuj ID: 2011-3-90-013 School of Business Master of Bank Management Course Title: Financial Management Course Code: MBM 507

Assignment 02 : 21st June, 2013

Introduction Budget provides an indication of how a country manages its public finances so as to maximize the benefit for its citizens. Budget is also reflective of the road map for national development. A huge amount of information is contained in the Budget Documents. However, while every citizen is, one way or other, affected by the budget, only a few fully understand its significance. For the citizens to have a comprehensive understanding of the national budget, it is essential that they understand the basics of budgeting, budget terminology, key components of the budget cycle, budget data and the implications the budget has for national development. The National Budget The National Budget is an account of how the Government proposes to collect revenue and spend the collected money over a period of one year. The budget usually sets out expenditure plans in accordance with the Governments priorities. The Finance Division of the Ministry of Finance is responsible for the preparation of the national budget and its presentation to the Parliament. It is also responsible for monitoring the implementation of the budget. The budget must be approved by the Parliament before it can be implemented. The ministries/divisions have their budget allocations in two categories namely Non development and Development. Non-development budget allocations are finalized by the Finance Division in consultation with the Line Ministries. Annual Development Program (ADP) allocations are finalized by the Planning Commission in consultation with Ministries and Divisions and then forwarded to the Finance Division for translation into the Development Budget. Some Essential features of the national budget: The budget is prepared using the Medium Term Budget Framework (MTBF), an approach to budgeting that integrates policy, planning and budgeting within a medium term framework (estimates for 1 year, and projection for 4 years); Budget preparation (allocations of resources) is carried out in accordance with the governments strategic priorities; The budget process focuses on the services (outputs) delivered as well as the resources required (inputs); and

The budget process promotes predictability and creates opportunities to harmonize recurrent and capital spending.

The National Budget consists of 4 main components: Revenue Expenditures Deficit Financing

National Budget for FY2013-14 The budget for FY14 is the last one prepared by this government which will be implemented by three regimes This is also the last chance for the incumbent government to fulfil (or make progress towards fulfilling) the pledges in the run up to the forthcoming national election The budget has been prepared in the backdrop of o Enhanced public investment o Moderated inflation o Substantial Surplus in BoP o Stable inflow of remittances The objectives of the budget for FY14 seems to be o Undertaking fiscal consolidation backed up by high growth of revenue o Reverting the downturn of private investment o Further control of inflation o Revitalising economic growth momentum Macroeconomic Targets Target for GDP growth rate in FY14 has been set at 7.2% (6.0% in FY13) which was 7.6% in SFYP To cover the present gap between SFYP target and record of GDP growth performance, 9.6% GDP growth in FY14 will be required Implication of GDP growth being below target the road to LMIC status has become a bit longer!

Private Investment is substantially below the SFYP target in FY13 o 19.0% against 22.7% 3.7 percentage point short o Target for private sector credit in FY14 (16.0%) was kept well above the present level (12.7% in March 2013) projected growth is reported to be 18.5% in FY13!

Public investment on the other hand is one percentage point higher than SFYP target o 7.9% (FY13 provisional) against 6.9% Missing 2.7% investment (as % of GDP) Export is expected to increase by 15% in FY14 (over 12% in FY13 upto April 2013, 10.1% growth was attained) Import on the other hand is anticipated to grow by 10% in FY14 (over 3% in FY13 (-) 6.1% upto March, 2013)

[Source- CPD] Where does the money come from? The Government raises revenue from various sources in order to fund government activities and development programs. These revenues are divided broadly into tax and non-tax revenues. Tax revenues are those received from taxes on goods, services and international trade. Examples include personal income tax, profit tax, custom duties, value-added tax (VAT), and tax on export. The revenue collection for FY 201314 has been estimated at TK 1,67,459 crore. The National Board of Revenue (NBR), aims to collect tax revenues up to the total amount of Tk 1,36,090 crore. Revenue from Non-NBR sources has been estimated at Tk. 5,129 crore. The target for Non-Tax Revenues for FY 2014 is Tk 26,240 crore. This includes revenues from amongst others dividends and profits, interest, administration fees, and charges and capital revenues. Revenues Distribution
NBR Tax 81% Non-NBR Tax 3% Non-Tax Revenue 16%

Graph I: Revenues

How is this public money spent? In FY 2014, total Government expenditure is planned to be Tk 2,22,491 crore.

Non-Development expenditure Non-development expenditures refer to the funds used to keep services operational. This encompasses salaries of public officials, goods needed to provide services (such as medicines and school books) and other services. Other examples of recurrent expenditures include social or economic interventions, interest payments and unexpected expenditures. Nondevelopment expenditure in FY 2014 is planned at Tk 1,55,163 crore. Development expenditure Development expenditures mainly include financing of public investment projects, which include the construction of public infrastructure, such as roads, bridges, electricity grids and telecommunication. The Annual Development Program (ADP) specifies the list of projects to be implemented during a particular fiscal year. The ADP details the development expenditure programs sector-wise, ministry-wise and agency-wise. At a very early stage in the budget process, agreement is reached at the highest level, with the participation of Budget Monitoring and Resource Committee (BMRC) headed by the Minister of Finance, on overall resources and expenditures for any particular year. Development expenditure is estimated at Tk. 67,327 crore for this years budget. The ADP is financed from the following sources Revenue surplus Foreign grants and assistance Own resources of various autonomous agencies Domestic loans

Sector-wise Distribution of Total Expenditure

Budget Deficit and Financing

Key point Net bank borrowing will decline by Tk. 2,507 crore from RBFY13

Tax increase and decrease Personal income tax threshold has been increased to Tk. 220,000 from 200,000 o Will be helpful for low income earners Threshold for women and senior citizens have been revised upward to Tk. 2,50,000 from Tk. 2,25,000 Tax for publicly traded mobile phone company has been increased from 35% to 40% Tax rate increased for cigarette companies o Good move for revenue mobilization and public health Corporate tax remains unchanged for other cases The present 3% customs duty on the import of capital goods reduced to 2% and 12% on raw materials reduced to 10% o Should be helpful in terms of stimulating private investment o Will reduce the investment cost and working capital cost Changes in various duties in FY2013-14

Key Challenges of Implementation of Budget FY2014 FY2014 will be operationalised at a time when three governments are expected to successively take charge of implementing the Budgetary proposals. The current political uncertainties will likely continue till a compromise is reached as regards holding of the parliamentary elections. This will seriously undermine the possibility of taking advantage of the various proposals in FY2013-14 budget to stimulate investment in the economy. Bangladesh has not been able to attain more than 7% GDP growth in the past. Attaining the targeted growth of 7.2% will critically hinge on raising investmentGDP ratio and lowering capital-output ratio. Both of these will be a challenge, will not work. The issue of Padma Bridge financing and the generation of the required resources and its likely implications for fiscal-monetary management will likely remain a continuing distraction in FY2014.

The increasing share of bank borrowing in deficit financing could crowd-out private sector borrowing and is likely to further raise interest burden in the economy particularly at a time of high nonperforming loans afflicting the banking system.

Conclusion THE fiscal budget for 2013-14 has been unveiled. It stands at a staggering Tk2.22trillion. GDP growth rate has been set an ambitious 7.2 per cent. Getting that level of growth will require a significant surge in private investments that include foreign direct investment. To what extent that will be possible in the prevailing political climate and inadequate infrastructure remains to be seen. Increased revenue from taxation is set to rely from direct and value added tax to the tune of Tk130billion and Tk95billion from the former and latter. Any failure to achieve desired target will force the government to borrow heavily from the banking sector. It is interesting to note that inflation has been capped at 7 percent in the budget. How this will be attained has not been thoroughly spelt out, especially since point-to-point inflation in April, stood at 8.37 percent. Individual incomes are set to increase with a revised income taxation regime. Tax exempted threshold increased to Tk220,000 against Tk200,000. Investment incentives have received a boost with an increase in tax rebate for investment, etc. A major disappointment for policy watchers is the keeping of provision for legalising black money. This has been linked to the ailing real estate sector in the form of purchasing land and apartments. Looking beyond the facts and figures presented in the budget, some questions loom large. The higher growth can only come from savings and investments. Domestic savings have dropped to 12 percent, the lowest in a decade. Private investment to GDP ratio stands at 19 percent is the lowest in 6 years. Private sector development has been hampered due to weaknesses like graft in the banking sector. The budget presented is an electoral budget. However, the national budget ought to reflect ground realities and not mere populism.