Fiscal Policy of

Bangladesh

Jamshed uz Zaman

When budget is declared

z

Opposition Parties claim: Budget against

the poor;
Government Parties claim: Welfare
oriented budget.
Some declares hartal.

How to understand a budget

favors whom?
z

A budget may favor

poor or rich class;
Importers or exporters;
Primary producers or manufacturers; etc.
Government claims that the budget is
surplus, but most often it is true. Govt.s
claim it because
Political popularity,
People are afraid of inflation.

Is deficit budget always

unacceptable?
z

No. Deficit budget are prepared

In deflationary situation,
When resources fall short of needs,
To help implementation of monetary
policy.

Deficit does not necessarily mean

imposition of new taxes.

Components of Budget
z

Revenue Budget

Revenue Receipts
Revenue Expenditure
Surplus/Deficit

Food Budget
Food Aid
Counterpart Fund
Food Import
VGD, FFW
Subsidy
Surplus/Deficit

Capital Budget
Receipts
Payments
Surplus/Deficit

+
-

Development Program

Expenditure
Receipts

Revenue Surplus
New Tax Measures
Net Domestic Capital
Extra Budgetary Resource

Counterpart fund
Net food aid

Foreign Assistance
Foreign Direct Investment
Borrowing from the public
Borrowing from Banking
System
- Central Bank
- Commercial banks

Total Budget has to be deficit to

achieve the long term goals
z

We have to check whether the budget is

inflationary,
ADP if helps productivity no inflation.
ADP if does not helps productivity inflation.
We have check dependence on foreign
assistance
Is increasing or not
Whether there is long term goals
Anti terrorism
Anti drug abuse
Law and order situation improvement
Socio-economic development.

Tax/Revenue Ratio has to be

increased to finance the deficit
Tax/Revenue

86

Non-Tax/Revenue

84
82

25
20
15

80
78

10

76

74

88 9 89 9 90 9 91 9 92 9 93 9 94 9 95 9 96 9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04 0 05 0 06 0 07
9
1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2

Non tax revenue

are vulnerable
and not
dependable.
Tax revenue
ratio should be
increased.
But how? Our
tax base is very
low.

Whether newly imposed taxes

are always bad?
z

Not always bad

Are they against poor

Ratio of direct and indirect tax.

Social
Economic
Religious

Check Incidence

It is difficult to increase
Tax/GDP Share in a poor country
Tax/GDP Ratio in Bangladesh

Share of Revenue
in GDP 1987

9.5
9

Bangladesh

9.5

8.5
8
7.5
7
6.5

India

14.5

Pakistan

16.7

Indonesia

23.1

6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

To increase Tax/GDP ratio

z
z
z

z
z

Fiscal Sector reform is necessary,

Tax administration should be modern,
Tax evasion and corruption have to be
stopped.
Sometimes new taxes are imposed.
DIRECT TAX should be increased to
help poverty alleviation.

Asian Developing countries have

much higher direct taxes over
revenue
Direct Tax in Total Revenue
Bangladesh

Pakistan

10

India

17

Singapore

27

Malaysia

34

Indonesia

58

Direct Tax to Total Tax. Increase in

this ratio does not prove budgets are
pro-poor
Direct tax toTotal tax
22
20
18
16
14
12

20
06

20
04

20
02

20
00

19
98

19
96

19
94

19
92

19
90

19
88

10

Revenue receipts are dependent

on external factor
Sources of Revenue: Percentage of Total
FY

2004

2005

2006

Import Duty

27

26

23

VAT (import)

17

18

17

SD (import)

50

51

45

Subtotal

z
z

z
z

Excise

VAT (local)

16

17

19

SD (local)

14

12

14

Subtotal

31

30

33

Income

18

19

21

100

100

100

Other
Grand Total

About 45-50 percent taxes

come from external sources
Economy is heavily
dependent on external
factor,
Receipts are vulnerable to
external factor,
Proportion of income tax
should immediately be
increased.
Fear of political hazard.
Those who should pay
higher income tax are very
powerful. They may even
topple a government.

Original Allocation vs. Actual

Expenditure
Original Allocation

30000

Actual Expenditure

25000
20000
15000
10000
5000

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

Dependence on Foreign
Assistance
Foreign Financing

Domestic Financing

90
80
70
60
50
40
30
20

20
06

20
05

20
04

20
03

20
02

20
01

20
00

19
99

19
98

19
97

19
96

19
95

10
0

Borrowing from the central bank is

inflationary which is against the poor
Public

Bangladesh Bank

Commercial Banks

150

100

50

0
1995

- 50

- 100

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

BB controls inflation through

controlling money supply. Most often
BB target
z

z
z
z
z

M2 = NDA + NFA
NDA = Credit to Govt. + Credit to
Public Sector + Credit to private sector +
others.
When Credit to Govt. credit to private
When Credit to Govt. M2
When M2 inflation .
THERFORE better COORDINATON between
fiscal and monetary policy is necessary.

To Summarized issues relating

to Deficit Budget
z
z
z
z

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.

Characteristics of Fiscal System

in Bangladesh

Falling/Tax/GDP ratio,
Tax base is narrow,
Dominance of indirect tax,
Customs + VAT (import) 50% of total tax
Vulnerable to external fluctuations
Growth in Non-development expenditure
Heavy dependence on Foreign Aid
Dependence on Deficit Financing
No Far-sightedness.

These calls for a

FISCAL
SECTOR
REFORM