Economic Programme

CPD’s Recommendations for the Caretaker Government

The document has been prepared under the CPD Programme

Independent Review of Bangladesh’s Development (IRBD)

Presented at a Media Briefing

held at CPD Dialogue Room
on
05 November 2006

CENTRE FOR POLICY DIALOGUE (CPD)

B A N G L A D E S H
a c i v i l s o c i e t y t h i n k - t a n k
 Credit

The paper has been prepared by

Debapriya Bhattacharya
Executive Director, Centre for Policy Dialogue (CPD)

Helpful inputs have been received from

Mustafizur Rahman
Research Director, CPD
Uttam Kumar Deb
Senior Research Fellow, CPD
Khondaker Golam Moazzem
Research Fellow, CPD
and
Syeed Ahamed
Senior Research Associate, CPD

Research Assistance has been provided by

Md Ashiq Iqbal
Research Associate, CPD
and
Towfiqul Islam Khan
Research Associate, CPD

CPD’s Recommendations for the Caretaker Government ii

 CONTENTS 

1. Introduction                  1 
 
1.1 Constitutional Mandate              1   

1.2 Nature of the Economic Tasks            1 

1.3 Scope of the Brief                2 

 
2. Macroeconomic Management              2 

2.1 Public Finance                2 

2.2 Credit and Monetary Policy            4 

2.3 External Sector                6 

 
3. Sectoral Development                8 

3.1 Agriculture                  8 

3.2 Industry                  8 

3.3 Power Sector                 9 

3.4 Capital Market                9 

4. Structural Issues                10 

5. Some Measures Related to Election           11 

6. Concluding Remarks              12 

CPD’s Recommendations for the Caretaker Government iii

1. Introduction

1.1 Constitutional Mandate

The economic mandate of the Caretaker Government (CTG) is informed by Article
58D of the Constitution of the People’s Republic of Bangladesh which deals with the
“Functions of Non-Party Care-taker Government.”

The first provision of Article 58D reads: “the Non-Party Care-taker Government
shall discharge its functions as an interim government and shall carry on the routine
functions of such government with the aid and assistance of persons in the services of
the Republic; and, except in the case of necessity for the discharge of such functions it
shall not make any policy decision.”

This implies that the CTG will provide a continuity to the initiatives undertaken by
the previous government(s) and may take policy decisions (of course as an exception)
in the interest of discharging its current duties including in the areas of economic
management.

The second provision of Article 58D stipulates that “the Non-Party Care-taker
Government shall give to the Election Commission all possible aid and assistance that
may be required for holding the general election of members of Parliament
peacefully, fairly and impartially.”

This suggests that the CTG may initiate and implement measures including those in
the areas of economic management, which would facilitate holding of peaceful, fair
and impartial elections.

The present Policy Brief has been prepared taking cognisance of this constitutional
guidance.

1.2 Nature of the Economic Tasks

One of the two overarching economic objectives of the CTG will be to maintain the
macroeconomic stability. To this end, the CTG will have to do the needful to keep the
price inflation under control, and the volatility of the exchange rate at a low level.

The other major economic objective of the CTG will be to continue the
developmental activities in an uninterrupted fashion. However, it is understood that in
some cases of public financing there will be a hiatus which could temporarily
decelerate the economy. At the same time, in order to create a sustainable base for
future development, the CTG will have to pursue some of the ongoing agenda of
structural (institutional) reforms, left behind by the past government.

With a view to addressing the abovementioned two objectives, the CTG will need to
(i) strengthen the government’s fiscal operation, and (ii) consolidate the balance of
payment (BOP). As our subsequent analysis will reveal, between (i) and (ii), the CTG
will have to be more mindful about the former since the BOP situation remains
relatively strong as against the fiscal balance which is showing signs of vulnerability.

CPD’s Recommendations for the Caretaker Government 1

1.3 Scope of the Brief
The present brief is not a omnibus document which provides a comprehensive “wish
list”; rather it takes a strategic view with a prioritised agenda as regards the economic
programme of the transitional government.

The brief, after laying out its frame of reference (Section 1), focuses on issues relating
to macroeconomic management in Section 2. A set of sectoral issues have been
addressed in Section 3. A number of reform measures to be pursued by the CTG have
been identified in Section 4. Section 5 flags a select set of economic and financial
measures which may contribute towards creating a congenial atmosphere for holding
of free and fair elections. The document rounds off with a few concluding
observations.

2. Macroeconomic Management

2.1 Public Finance

Revenue. Total tax revenue fell short by Tk. 662 crore during the FY06 compared to
the target provided by the revised budget. The National Board of Revenue (NBR) tax
collection was Tk. 469.19 crore less than its target, of which Tk. 409.73 crore was on
account of shortfalls in the import duty. On the other hand, the revenue collection
from the Income Tax experienced an impressive 28.05 per cent of growth over FY05,
surpassing the revised target for FY06. It may be noted in this context that NBR tax
collection in FY06 (Tk. 33,987 crore) was lower than the Poverty Reduction and
Growth Facility (PRGF) target of Tk. 35,600 crore. Thus, FY07 has kicked off with a
relatively modest revenue collection benchmark.

Data covering the first quarter (July-September) of FY07 reveal that the collection by
the NBR achieved modest growth of 8.90 per cent over the matching period of FY06.
In value term, the collection was significantly below the target. Among the major
heads, high growth (19.4 per cent) was observed in the case of Income Tax collection.
Collection of VAT posted a growth of 15.9 per cent. A most disturbing trend was
observed in the case of Customs Duties which registered a very low growth of 1.4 per
cent over the corresponding period of FY06. Such low collection of Customs Duties,
notwithstanding moderate growth of import demand (see later), is quite inexplicable.
It is usually suggested that the fall in tariff rate has led to such a situation. It is also
often suggested that a large of part of Bangladesh’s import is on zero duty.
Nonetheless, it is difficult to explain such low rate of customs duty collection only on
account of lowered tariff rates; there must be some systemic leakage which is
contributing to this state of affairs.

Thus, The major challenge of the CTG in public finance will be in the field of revenue
collection, particularly in terms of raising international trade taxes. Concurrently, it
will also have to sustain the robust growth of VAT and Income Tax and will have to
identify new sources of revenue earning for strengthening the fiscal balance.

NBR usually accounts for about 79 per cent of total revenue in-take in Bangladesh,
whereas non-NBR taxes and non-tax revenues account for approximating 4 per cent
and 17 per cent of the total. As there is no real time data (i.e. for July-September

CPD’s Recommendations for the Caretaker Government 2

2006) for non-NBR taxes and non-tax revenue, we do not know the status of about
one-fifth of revenue mobilisation. The CTG will need to monitor these two important
sources of revenues earning very closely.

Public Expenditure. For FY06, the GDP-public expenditure ratio was 15.5 per cent. It
may be recalled that Bangladesh is distinguished by low public expenditure-GDP
ratio among comparable regional countries (where the matching share is about 18-20
per cent). Accordingly, there is a need to enhance the level of public expenditure, but
definitely without compromising its quality and the fiscal stability.

Revenue Expenditure. The revenue expenditure for FY06 amounted to 9 per cent of
GDP. A total of Tk. 39536 crore has been earmarked as revenue expenditure for
FY07. As there is no real time data available for the first quarter of the current fiscal
year, it is difficult to analyse the trend. Although revenue expenditures are very rigid
in structure, there is apprehension that it has overshot target particularly in the case of
debt servicing due to growing borrowing by the government, and in the case of
salaries and allowances since the government had committed to higher payments to
teachers and other government service holders. Constant monitoring of the revenue
expenditures and product expenditures decisions (e.g. in the case of Block
Allocations) should be the path to be followed by the CTG.

Containing the borrowing by the government should be a singular objective of the

CTG. It may be reminded that space of the public expenditure is getting increasingly
squeezed as debt servicing payments are eating up an incremental share of revenue
allocation.

Annual Development Programme (ADP). The ADP-GDP ratio stood at 5.2 per cent
during FY06. The achieved ratio was lower than the PRSP target of 5.9 per cent.
Thus, there remains an unmet public investment need in Bangladesh economy.
However, this does not take away our concern about inclusion of unviable projects in
the ADP arising out of political consideration in a pre-election situation.

The proposed ADP for FY07 was set at a lower target (5.6 per cent of GDP) than the
PRSP target (6.2 per cent of GDP). The prospect of having a respectable
implementation level of ADP in FY07 seems to be a remote possibility given the
evolving political transition.

A total number of 886 projects amounting to Tk. 26,000 crore are being financed
under the ADP in FY07, of which 428 were included without approval and allocation.
A total of 66 projects amounting to Tk. 21,059 crore were approved in seven meetings
of ECNEC held during the first four months of the current fiscal (July-October of
FY07). The CTG needs to take a close look at these projects and reconfirm their
economic justification before fund disbursement. The approved amount equals to
more than 80 per cent of the total amount earmarked for ADP for FY07. On the other
hand, the purchase sub-committee in its six meetings held between July 2006 and
October 2006 approved a total number of 29 projects.

Budget Deficit. Net fiscal deficit during the FY06 stood at (-) 3.2 per cent of GDP
which was lower than the target set by the PRSP (4.5 per cent of GDP). Domestic
financing underwrote about 60 per cent and foreign financing about 40 per cent of the

CPD’s Recommendations for the Caretaker Government 3

fiscal deficit. Between the sources of the domestic financing, the banking system
contributed double the amount provided by the non-bank system. The domestic
financing was substantially higher, at Tk. 8,426.70 crore in FY06, when compared to
the matching amount for FY05 (Tk. 6,014.16 crore), registering 40.1 per cent of
growth.

During the first two months of FY07, budget deficit experienced a growth of 41.3 per
cent over the matching period of the previous fiscal year, i.e. Tk. 2354.27 crore in
July-August of FY07 compared to Tk. 1666.58 crore in July-August FY06. The
budget deficit was 0.57 per cent as a share of GDP vis-à-vis 0.40 per cent for the same
period of FY06. One is surprised by such an extraordinary growth of budget deficit in
the early part of FY07. Such a shortfall cannot be explained only by shortfall in
revenue collection and by a low off-take of foreign aid (see later). There must have
been a high spending spree during the first three months of the current fiscal year
which led to such high domestic borrowing.

Domestic financing posted a robust 111.6 per cent growth. The figure of domestic
financing was already higher in the first two months (Tk. 20.51 billion) compared to
the PRGF target of Tk. 16 billion for July-September of the current fiscal year.

A more worrying picture is that net borrowing by the government from the banking
system experienced a growth of 130.7 per cent, while the non-banking source posted a
88.4 per cent growth over the matched figure of the previous year. On the other hand,
net foreign financing experienced a negative growth of (-) 56.55 per cent during July-
August of FY07.

Thus, reducing the budget deficit will be one of the most important fiscal objectives
of the CTG. CTG will need to pursue this objective by increasing revenue
(particularly more customs duty), curbing expenditure, curtailing government
borrowing and increasing foreign financing.

2.2 Credit and Monetary Sector

Domestic Credit Expansion. Fiscal year 2006 was characterised by a high growth of
domestic credit. Total domestic credit as compared to that of the previous fiscal year
posted a rise of 20.2 per cent. While credit to Government (net) increased by about 22
per cent, credit to other Public Sector increased by about 35 per cent. Credit to the
Private Sector marked relatively low increase of 18.3 per cent.

During the initial two months of the current fiscal year, point to point growth of the
total domestic credit stood at 19.8 per cent. This marginal slowing down of the credit
growth was mostly due to the slower increase of credit to the Other Public Sector
(22.2 per cent). Growth of credit to the Private Sector remained steady at 18.1 per
cent. However, credit to the government (net) during the July-August period went up
by 25.6 per cent which was mentioned in our earlier discussion on financing of fiscal
deficit.

The Bangladesh Bank should be encouraged to pursue an overall cautious monetary

policy where aggregate credit expansion would remain moderately high (particularly
given the inflation rate). The prime challenge before the CTG in the monetary sector

CPD’s Recommendations for the Caretaker Government 4

will be to sustain around 18 per cent credit growth in the private sector, while
bringing down the demand for credit on the part of the government.

Government Borrowing. During FY06, government borrowing tended to move away

from the non-bank sources to banking sources. While in June of FY05 the share of
non-bank sources within the total outstanding borrowing was 59.0 per cent, at the end
of FY06 (June 2006) the share had decreased to 55.8 per cent.

Sale of National Savings Deposit (NSD) certificates during FY06 registered a 35.6
per cent growth and repayment of the principal amount increased by about 41.0 per
cent. Growth of net sale of NSD stood at 18.9 per cent. Borrowing from the banking
sources increased by 23.3 per cent.

During July-August period of the current fiscal, sale of NSD certificates experienced
a growth of 32.6 per cent. During the same period, growth of repayment of the
principal amount experienced a drastic fall (8.9 per cent), resulting in a whooping
growth in net sales (152.3 per cent). Outstanding non-bank borrowing stood at Tk.
40,362.82 crore, registering a growth of 9.5 per cent.

During the first two months, outstanding borrowing from the banking sources stood at
Tk. 32,588.80 crore, registering a 25.6 per cent growth. Total government borrowing
from both bank and non-bank sources amounted to Tk. 72,951.62 crore, recording a
growth of 16.2 per cent. One can readily see the need for taming the government
borrowing need.

Industrial Loan. During FY06, against the sanction of Tk. 13,582.27 crore, an amount
of Tk. 9,650.02 crore was disbursed as term loan, registering a 5.9 per cent growth
over the previous fiscal year (i.e. negative growth in real term). An amount of Tk.
6,759.52 crore was recovered during the period, resulting Tk. 2,890.50 crore as net
inflow. The PCBs (Domestic) were the largest contributor (about 63 per cent),
followed by Nonbank Financial Institutions (NBFIs) (a little more than 18 per cent).

On the other hand, disbursement of working capital during FY06 recorded a

substantial growth of 28.3 per cent, while the sanction of working capital registered a
30.5 per cent growth during this period. During FY06 an amount of Tk. 28,448.53
crore was disbursed against the sanctioned amount of Tk. 24,691.92 crore. In terms of
disbursement, PCBs (Domestic) accounted for three-fourth of the total disbursement
of working capital.

No data on industrial term loan and working capital loan are available for the first
quarter of FY07. However, taking note of the current state of play of public finance
and trends in domestic credit expansion, and further being aware of the pre-election
behaviour, it can be safely recommended that one should follow a cautious approach
in industrial loan disbursement, without penalising good projects.

Agricultural Credit. Data on credit disbursement to the agricultural sector shows that
Tk. 5,789.71 crore was disbursed during FY06, which is 16.8 per cent higher than the
disbursement of the previous year (FY05). With the recovery of an amount of Tk.
4,123.91 crore, a net amount of Tk. 1,665.80 crore flowed into the rural economy
during this period.

CPD’s Recommendations for the Caretaker Government 5

Initial data of the current fiscal year (FY07) mark a negative growth of agricultural
credit disbursement. During the July-August period, total disbursement stood at Tk.
515.52 crore, which is about (-) 4.0 per cent lower than the disbursement of the
matching period of FY06. Conversely, recovery stood at Tk. 497.55 crore, which is
6.3 per cent higher than the corresponding figure of the previous fiscal year. This
resulted in marginally positive inflow of credit to the agricultural sector.

Consumer Price Index (CPI). Inflation rate at the national level showed an alarming
rising trend during the FY06. The highest inflation rate (on point to point basis) for
the last 77 months, i.e. about 8 per cent, was recorded in November 2005. Since then
a steady decline was observed till February 2006 when it came down to 5.7 per cent.
However, from March 2006 the inflation rate started to move up again and reached
7.54 per cent at the end of that fiscal year (June 2006).

Two major features of the price increase during FY06 can be identified. First, except
in the month of March 2006, rise in price was higher in the rural areas than in the
urban areas. Second, during FY06, other then January, February and March, inflation
rate on point to point basis was much higher in food items than in the non-food items.

However, the first two months of FY2007 show some positive signs in the inflation
rate trends. While in June (FY06), the general, food and non-food inflation rate on
point to point basis was 7.54 per cent, 8.81 per cent and 5.73 per cent respectively, in
the month of August (FY07), these rates were 6.67 per cent, 7.42 per cent and 5.64
per cent respectively. This happened largely because of the fall in food prices.

The 12-month moving average inflation rate for the general and food items also
showed improvement as they went down from 7.16 and 7.76 per cent in June FY06 to
6.99 and 7.45 per cent in August FY07 respectively. However, for non-food items, it
went up from 6.40 per cent to 6.43 per cent over the same period.

Cautiously moderate expansionary monetary policy was effective at the margin in

bringing down the inflation rate. The recent appreciation of Taka may also have a
sobering effect on the inflation rate. However, the CTG should rather strongly
monitor and supervise the markets, especially the markets for essential products to
locate the “syndicates” controlling the markets and take necessary measures against
them. Since the Finance Adviser is also holding the portfolio of Ministry of
Commerce, there should not be any problem regarding coordination among these two
ministries. Regular monitoring of major distribution channels, such as importing and
wholesaling points, would give positive results.

2.3 External Sector

The robust performance of external sector, experienced in FY06, has continued into
the early months of FY07, providing the economy with some cushion in the current
context. This is reflected in improvements in trade balance, current transfers and
remittance and overall current account balance during the first few months of the
current fiscal. This has also resulted in an increase in the reserve position in end-
September 2006 compared to corresponding period of 2005.

Trade Balance. Thus, export growth, which posted a high growth of 21.6 per cent in
FY06, has experienced a further growth of 32.6 per cent in the first two months of

CPD’s Recommendations for the Caretaker Government 6

FY07, at US$ 2,302 million. All major sectors have been experiencing high growth
including knitwear (35.8 per cent) and woven-wear (30.3 per cent).

Over the corresponding period import posted a growth of 17.3 per cent, to reach US$
2,450 million. The negative balance in trade in the first two months in the current
fiscal year has reduced to (-) US$148 million from the (-) US$352 million of last year,
thanks to higher growth of exports compared to that of import.

Although it appears that the spiralling petroleum price seems to have stabilised, and
is even showing some downward trend in recent months from the highs of a few
months back, it will be advisable for the Caretaker Government to keep a sharp eye on
movements in the price of oil.

Higher L/C opening for consumer goods (22.4 per cent) against a relatively lower
growth rate of L/C openings for industrial raw materials (7.3 per cent) and capital
machinery (1.9 per cent) could be a cause for concern in the subsequent months. What
is also somewhat disquieting is the low growth in the L/C opening (4.6 per cent) in
the first two months of FY07 compared to the corresponding period of FY06 – to
compare L/C opening in FY06 was 19.6 per cent higher compared to FY05.

As regards the export, the appreciation of the Taka by about 3.4 per cent over the last
few months could have a negative impact on export competitiveness of Bangladesh in
the global market. In the context of the fact that most of the export earnings are being
accrued on account of the volume rather than the price, the appreciation of taka was
likely to have a depressing impact on profit levels for the export-oriented sector. In
view of this, Bangladesh will need to give careful attention to exchange rate
management in the coming few months.

Remittance income during the first three months of FY07 was US$1,328 million
which was 24 per cent higher than that of matched period of last year. Remittance
flow may increase further with the advancement of Eid and elections.

Current Account. In combination, all these have led to considerable improvement in

the current account balance in the first two months, from US$99 million to US$414
million.

Forex Reserve. Accordingly, foreign exchange reserves at the end of September 2006
stood at US$3,447 million which was about 25 per cent higher compared to
September 2005.

Prospect. Opening of L/Cs during the first two months of FY07 was 13.2 per cent
higher than the corresponding period of last year, whereas L/C settlement was 15.5
per cent higher. These figures appear to be considerably higher compared to FY06
over FY05 when L/C opening and L/C settlements posted growth rates of 8.4 per cent
and 10.2 per cent, indicating some pressure from the import side. In addition, higher
growth rates of L/C openings and L/C settlements for petroleum and petroleum
products, at 26.3 per cent and 20.7 per cent, during the first two months are also
indicative of the pressure from the import side.

CPD’s Recommendations for the Caretaker Government 7

The overall BOP situation is sound and comfortable. The CTG will have to see that
the current robust trends in export and remittances are sustained, whereas import
demand remains moderate.

Foreign Aid Flow. One can observe from the figures on financing of fiscal deficit that
off-take of foreign aid during FY06 as well as during the first two months (July-
August) of FY07 was at its lowest ebb. Gross flow of foreign aid during July-August
2006 had been lower than US$ 96.0 million which is less than 41.5 per cent over the
comparable period in FY06. Indeed, if one accounts for payment of the principal, the
net flow turns out to be about 60 per cent less.

Under the circumstance, the CTG would need to take initiative to release, as much as
possible, the project aid stuck in the pipeline and improve its access to budgetary
support. (e.g. US$ 40.0 million of policy loan by the WB’s Railway project).

The good news is that the IMF Board in its meeting held on 27 October 2006 has
released about USD 50.0 mln under PRGF. But this disbursement will not diffuse the
resource constraint of the government, as this is a BOP which is not available for
spending.

3. Sectoral Development

3.1 Agriculture
Crop Sector. Low rainfall during the early months of Aman season had negatively
affected sowing of the Aman rice. Good rainfall in September and October has largely
offset the negative effects of low rainfall in July-August and therefore, production
prospect of Aman rice is good. However, substantial reduction in rice price after
harvest of Aman rice is unlikely. Considering high price of agricultural commodities,
particularly that of rice in the international market, Bangladesh has to ensure its food
security through increased domestic production in the coming Rabi season.

During the last week of October 2006, wholesale price of per metric tonne of coarse
rice was Tk. 17,500 in Dhaka, Rs 13,000 (equivalent to Tk 20,088) in New Delhi and
US$ 307 (equivalent to Tk 21,490) in Bangkok. Therefore, the government has to
ensure quality, supply and price of agricultural inputs such as fertiliser, diesel and
HYV seeds so that production of Boro rice, potato and other winter crops is not
hampered.

Monga. For employment creation in Monga stricken areas of northern districts, CTG
must spend money allocated in the current budget of FY07 (Tk. 55 crore). If needed,
the government may take assistance of organisations such as the Grameen Bank,
BRAC, RDRS, PKSF working in those areas with the help of special programmes. It
is pertinent to mention here that the government also allocated Tk. 50 crore in last
year’s (FY06) budget for seasonal employment creation, but failed to spend any
money from this fund.

3.2 Industry
After a long debate, the seven-tiered minimum wage structure for garment workers
had been approved by the tripartite body. This accord should now be properly
implemented at the factory level. In this context, CTG should closely monitor

CPD’s Recommendations for the Caretaker Government 8

implementation of the approved wage-structure in all factories and should take
necessary measures against the garment owners who would refuse to follow it. The
CTG should also be vigilant against any resumption of workers’ discontent and
industrial violence. In case the RMG sector in Bangladesh faces any outward
movement of international buyers, all concerned parties including government,
entrepreneurs and workers will have to jointly and urgently tackle the situation.

Financing Industrial Sector. Industrial sector requires adequate funding in order to

enhance the existing level of growth (QIP grew at a rate of 12.8 per cent during July-
June of FY06). According to the available figure for July-August, 2006, public sector
took almost half of the total domestic credit (Tk. 1250 crore); the amount was 2.7 per
cent higher than that of the comparable period of the previous year. Conversely, credit
flow to the private sector is only 0.96 per cent higher than that of the previous year.
CTG should take necessary measures to control alarmingly high government
borrowing and encourage Bangladesh Bank to ensure sufficient fund for the
productive sector. It may be recalled here that the existing rate of interest for
commercial borrowing is very high in Bangladesh; this should come down with the
decline in the inflation rate.

3.3 Power Sector

One should not expect that the CTG will approve new projects (both short and long
term projects) to ease the current power crisis. However, it is expected that CTG will
give special attention on issues such as load management and system loss, etc. in
order to ensure maximum possible electricity supply to ease the sufferings of the
people.

At the same time, power development projects that have been approved recently by
the immediate past government (e.g. 20-megawatt skid-mount power plant in
Barabkundu, 20 MW skid-mount plant in Feni, 50 MW barge-mount plant in
Baghabari, and 20 MW plant at Kumargaon) have come under public scrutiny. A
number of issues and concerns have been raised in the public domain (i.e. award of
patronage contract; projects are costlier than standard power projects). CTG should
carefully scrutinise all these hastily-approved projects, and whether there are gross
flaws or violation of rules and regulations before giving any positive nod in support of
the approved companies. It may be recalled here that the CTG of 2001 did undertake
similar measures by withholding a number of suppliers’ credit-financed dubious
projects.

While the government has taken a ‘stop and watch’ policy regarding the Asia Energy
Project, it has awarded a coal project to another company without any tender. This
project also needs to be reviewed in the interest of the country’s economy.

3.4 Capital Market

The DSE general price index was 1562.5 in September 2006, which was 1.6 per cent
lower than the previous month. All Share Price Index cannot be substantially reverted
unless more fund flow can be ensured to the capital market. In the backdrop of high
level of oversubscription of IPOs, the CTG may continue, through the SEC, the effort
to pursue blue chip companies, particularly the mobile telephone companies to off-
load shares in the stock market. The Securities and Exchange Commission (SEC)
should also expedite scrutiny of the pending applications so that new IPOs can come

CPD’s Recommendations for the Caretaker Government 9

into the market shortly. These issues have particularly become important in order to
shift the investment demand from debt to equity market with a view to make space for
government borrowing, if need be.

4. Structural Issues

a. Privatisation of Rupali Bank

The process of privatisation of Ruapli Bank has progressed satisfactorily in the recent
past with receipt of the Letter of Interest (LOI) and initiating of the Sale and Purchase
Agreement (SPA). Necessary vetting of the Law Ministry regarding the SPA has
already been obtained. The major outstanding work relates to determination of the
amount of bad debt and future of the pension scheme of the bank. The CTG should
not allow the process to slacken and should complete the discussion on bad debt and
pension scheme, and consequently sign the final sale deed at the earliest and receive
the sale proceeds. In the absence of an adequate head of the Privatisation Commission
during the interim period, this task will demand special attention on the part of the
Finance Advisor (although formally the PC is under the Chief Advisor).

b. Investigation of Oriental Bank

The CTG needs to put in its full support towards implementation of the
recommendations put forward by the Bangladesh Bank’s Special Inspection Team
regarding the frauds committed by Oriental Bank. Bangladesh Bank should seriously
consider initiating criminal proceedings against the persons who have committed the
frauds. The issue should not get politicised and should be pursued in the best interest
of the depositors (e.g. by restructuring equity by adjusting the incurred losses against
the shares held by the owners). It should be a test case for demonstrating the resolve
of the central bank in strengthening discipline in the banking sector.

c. Corporatisation of NCBs
The process of corporatisation of the two Nationalised Commercial Banks (NCBs),
viz. Agrani and Janata needs to proceed as per schedule. To this end, the draft
Corporatisation Act sent for vetting (via Finance Ministry) needs to be cleared by the
Law Ministry at the earliest. On the other hand, towards implementation of the Long
Term Management Plan, the bank managements need to be given clearance regarding
necessary recruitments. It may be recalled that Sonali Bank is currently not slated for
corporatisation as it performs an important role in the financial market, including
treasury functions for the government.

d. Energy Pricing
Due to the simultaneous effect of recent upward adjustment of domestic prices and
increase in global price of oil, effective subsidy given by the government to the
Bangladesh Petroleum Corporation (BPC) has declined, although there is a large debt
overhang in the NCBs on account of non-payment of dues by the BPC. The CTG
would need to regularly monitor the fuel price scenario, particularly with a view to
ensure steady supply of fuel to the domestic market and to stop cross-border
smuggling of petroleum products. With a view to depoliticising the energy pricing
policy, the CTG will be well advised to explore the pros and cons of institutionalising
a formula approach in determining fuel price for domestic market. The CTG should
also continue to explore the prospect of introduction of a voucher system for
extending financial support to the farmers for purchase of diesel.

CPD’s Recommendations for the Caretaker Government 10

e. Strengthening Tax Collection
As the major challenge to macroeconomic management is coming from the fiscal
front, particularly from moderate level of revenue generation, the CTG may seriously
consider to review the current tax policy and administration to enhance collection.
This is possibly the most opportune moment to generate countervailing force to
revamp the tax administration, strengthen LTU, expand collection from non-VAT
domestic sources, revisit tax code etc. Given the upcoming (in December 2006)
performance indicator in revenue sector under the PRGF, the CTG should feel
inclined to do all these.

f. Issuance of Licence to NBFI

It goes to the great credit of the past government that it did not issue any licences for
setting up of new commercial banks notwithstanding strong demand from powerful
quarters. The past government also needs to be complimented for not giving new
licences for insurance companies. However, it has been reported that Bangladesh
Bank is contemplating giving green signal to two new NBFIs. Without going into the
merit of the selection process of these two companies out of the 50 applications, one
may suggest that the central bank should seriously consider the granting of permission
to these applicants and leave the decision for consideration to the new incumbent
government.

5. Some Measures Related to Election

a. Support to Disclosure Provisions under RPO (1972)

The CTG will need to provide necessary institutional support to the Election
Commission as it proceeds to implement different disclosure provisions contained in
the Representation of People Order (RPO) (1972) and in its subsequent amendments.
These provisions include, on the one hand, electoral financing and expenditure related
issues and, on the other hand, background information on the candidates. For
example, the NBR will have to cooperate on ascertaining the information submitted
on asset and liability of the prospective candidate to the Election Commission;
Bangladesh Bank will have to confirm the candidates loan repayment status; utility
providing agencies will have to certify that the candidate has paid all his dues on
account of telephone, gas, electricity, water, etc. The Auditor and Comptroller
General’s office will have to do capacity building work to help the Election
Commission to process the financial statements submitted by the candidates.

b. Beneficiaries of Tax Amnesty

It may be recalled that a special tax amnesty scheme was implemented during FY06
which allowed people to declare their unaccounted wealth and get it legalised by
paying tax at the rate of 7.5 per cent instead of the highest rate of 25 per cent. It has
been reported that more than 7,000 tax payees took advantage of this scheme and
declared unaccounted wealth amounting more than Tk. 4,000 crore. The NBR has, till
date understandably declined to divulge the identity of these privileged people.
However, in the interest of fair play in election financing, it is perfectly logical to
demand that the NBR publishes, from the full list of people who took advantages of
tax amnesty in FY06, only name of these people who will be participating in the
upcoming national election. This measure will definitely allow the voters to make
their choice in favour of “clean” candidates.

CPD’s Recommendations for the Caretaker Government 11

c. Bank Account for Election Expenses
The total amount of money which will be transacted in connection with the elections
is anybody’s guess. However, with a view to streamline these expenditures, the CTG,
through the Election Commission, has to ensure that the candidates open a mandatory
bank account to finance their respective election expenses. This measure will not only
bring in more transparency in election financing, but will also discourage credit
expansion in private sector, facilitating implementation of a cautions monetary policy.
Such a measure may protect the PCB (D) from shadow election financing, while there
remains a cap on the volume on advances to be made by the NCBs.

d. CIB Reports for Election Candidates

As per current provisions of the RPO (1972), candidates are obliged to get a “clean”
CIB report from the central bank to prove their eligibility to participate in the election.
Experience suggests that most of the candidates receiving adverse CIB report in the
High Court are able to get a stay order. Indeed, a stay order (keeping the case in
abeyance) makes the prospective candidate “eligible” to participate in the election.
Under the circumstances, the CTG may pursue the Chief Justice to add a couple of
benches (over and above the current one) for speedy hearing of these cases for final
disposal, instead of issuing stay orders. The bench may also like to notify and hear the
banks before issuing stay order, if at all.

e. Anti-Money Laundering
The Anti-Money Laundering Act needs to be effectively used to pre-empt “black”
financing of elections. Bangladesh Bank has identified a number of cases involving
financial frauds, but has not been able to prosecute them as yet due to inadequacy of
the CrPC. In fact, the Anti Corruption Commission (ACC) has also not been vested
with specific powers relating to prosecution of money laundering activities. This issue
needs to be urgently addressed by the CTG.

6. Concluding Remarks
While the BOP remains in a comfortable state, some strains are showing up in public
finance system. The CTG needs to keep a watchful eye on the external sector
transactions, but it will be imperative on its part to reduce expenditure and increase
revenue collection to relax the pressure on fiscal balance. Indeed, for that matter, the
economy in the coming months will have to be stabilised at a lower equilibrium.

The major test of macroeconomic management of the CTG will be in December 2006
when it will have to account for all the performance indicators agreed under the PRGF
loan document. Although Bangladesh missed a number of these targets in September
2006, this did not matter since those were not binding. In fact, the CTG will have to
make up for that part to meet the half-yearly indicators.

The Finance Advisor will have to take a close and fresh look at the pre-determined
spending priorities as well as at the ongoing reform agenda. He will also have to
consider some creative steps to make a contribution in improving the prospect of a
free and fair election. In this context, we trust that he and his colleagues of the
Economic Affairs sub-committee of the Council of Advisors will consider the
proposals contained in this document.

CPD’s Recommendations for the Caretaker Government 12