The budget 2015-16 carries significant importance in the wake of recent political turmoil. Due to the instability, the nation has grossly suffered, facing slow economic growth. What’s more alarming is the steady decline of private sector investments, wrought about by dampening investor confidence.
Apart from the stagnating private sector growth, government performance has significantly been impacted, accounting for lower revenue collection and inadequate ADP implementation rate. As a result, the government had to revise the 2014-15 budget, which is still not expected to be fulfilled. Other economic indicators, including FDI inflow as well as export growth, have experienced significant slowdown.
What the proposed budget entailed
The proposed budget, announced on June 4, has been earmarked at Tk295,100 cr, the highest in the country’s history. Although the country’s 44th budget can been deemed ambitious, questions abound pertaining to the government’s ability in fully implementing the budget.
Budget allocation: For a pro-growth budget, as affirmed by the finance minister, significant resources have been allocated for infrastructure development. Chief investments are allocated for energy (18.7%) and transport and communications (23.8%) sectors. Investments in infrastructure play a dual role in building a conducive environment for private investments, as well as stimulating growth through direct government expenditure.
As part of government’s efforts in ensuring income equality, budget has been allocated for local government and rural development (18.4%) with the agriculture sector (6.5%) receiving allocation mainly for subsidy. Budget allocation in healthcare and education contributes a combined 17.7%. This figure is inadequate and thus requires further allocation in the amended budget. To summarise, the development budget received Tk985.87 cr as fund allocation.
Budget implementation has been a chronic problem as the government had consistently missed implementing Annual Development Program (ADP) targets. Over the last three years, ADP implementation has hovered at around 66%, leaving humongous scope for improvement. Last year’s low ADP implementation has been attributed to an uncertain political climate and a heavy monsoon. However, corruption, nepotism, and bureaucratic red tape remain perennial challenges to ADP implementation.
Budget financing: Given the size of the budget, financing is bound to be a major challenge. Revenue collection growth over the years has been stagnating. The last fiscal was particularly disappointing, as revenue collection missed the revised budget target. Revenue projections for the current budget have been set assuming that all revenue targets were being met in the last fiscal.
Even with a stable political scenario in 2015-16, meeting the steep revenue target of 59% of the total budget will be a major hurdle for the National Board of Revenue (NBR). The budget for 2015-16 is expected to have a deficit of Tk77,750 cr, which is set to be financed through alternate modes of investments.
A major financing source includes foreign loans and grants accounting for 10% of the budget. Donor agencies, however, are unwilling to commit significant budgetary funds. The government expected the World Bank to allocate $500m, but WB representatives recently visiting Bangladesh have expressed their unwillingness in extending budgetary support.
Government lending from the domestic banking system (19%) is another major source for financing the deficit. Government borrowing can potentially have a knock-on effect in terms of “crowding away” funding from the private sector. This may further increase interest rates and aggravate the already sagging private investments.
How budget will impact entrepreneurs
The proposed budget has given rise to mixed feelings among entrepreneurs. While some are going to directly benefit, many more are, sadly, expected to receive the short end of the stick. Corporate taxes have been relaxed for publicly listed companies with proposed taxation rate lowered to 25%. This can be attributed to the government’s willingness and effort to rejuvenate our moribund capital market.
RMG: The RMG sector is Bangladesh’s highest export-generating sector, contributing $26bn (81% of export). As the world’s third biggest apparel exporter, employing 4.2 million people, the sector has significant clout on the country’s economy. The RMG sector has recently undergone turbulent times due to a series of industrial accidents as well as political maladies.
This has led the government to waive the source tax in the budget for 2014-15. However, in the latest budget, our finance minister proposed imposing a source tax of 1% on all exports. This will adversely impact the sector. BGMEA, the association of RMG entrepreneurs, will have to play a pivotal role in ensuring withdrawal of the tax.
ITES & e-commerce: As part of the government’s vision to promote “Digital Bangladesh,” the nation has increasingly focused on promoting the IT sector. In line with that, the government has accorded tax holidays of up to 10 years to IT companies in an act to promote sectoral growth. However, a fledgling e-commerce sector has been imposed with 4% VAT, which is detrimental to its growth. The apparent contradiction certainly leaves a bad taste in the mouth for stakeholders in this rising sector.
Light engineering: The government is looking to further develop the light engineering sector, which has the potential for saving foreign currency in the coming years. Imported tyres have been levied with 20% custom duties while tax holidays are being provided for companies planning to manufacture within Bangladesh. Taxes have also been imposed on the import of motor cycle in an effort to promote locally manufactured/assembled motorcycles.
Other sectors: Some sectors will directly be impacted by the proposed budget in terms of higher customs duty. Products to be directly impacted include: Billets for re-rolling mill, tempered safety glass and laminated safety glass tube pipes and hollow profiles of cast iron, seamless made of cast iron or steel, line-pipe used for oil-gas distribution, stainless steel tableware, kitchenware, sinks, wash basins, water taps and bathroom fittings, copper sanitary ware and aluminum sanitary ware etc.
The recent visit of India’s Prime Minister Narendra Modi, and the subsequent four national connectivity deals involving Bangladesh, India, Nepal, and Bhutan can significantly boost regional connectivity and trade relations.
However, regional integration may give way to intense competition in Bangladesh, leading to potential closure of vulnerable local players. Greater budgetary measures are imperative for protecting local companies and encouraging international companies to set up operations in Bangladesh.
The article was originally published at DhakaTribune.
Zahedul Amin is the Co-founder and Director of Finance at LightCastle Partners, an emerging market specialized business planning and intelligence firm. Earlier, he worked as the Assistant Vice President, Risk Analysis Unit, in HSBC. He completed his E-MBA at the Institute of Business Administration (IBA), University of Dhaka, and completed his undergraduate degree from the same institute. He can be reached at [email protected], Twitter: @amin_zahed