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An unrealistic budget?

  • Published at 07:44 pm June 6th, 2013
An unrealistic budget?

The finance minister unveiled the last budget of this government’s 5-year term yesterday. The FM proposed has proposed a Tk 222,491-crore annual budget outlay for fiscal 2013-14, 16 percent higher from the current fiscal year, so it is fair to say that this is an expansionary budget, which comes as no surprise in the final run-up to the election. The revenue target of the budget has been set at Tk 1,67,459 crore.

Fiscal crowding out to increase but mitigated by weak investment demand/private sector credit growth: The overall budget deficit will be Tk55,032 crore which is 4.6% of GDP. Of this amount, Tk21,068 crore (1.8% of GDP) will be financed from external sources and Tk33,964 crore (2.9% of GDP) from domestic sources. Of the domestic financing, Tk. 25,993 crore (2.2% of GDP) will come from the banking system and Tk7,971 crore (0.7% of GDP) from savings certificates and other non-banking sources.

So the inability of the government to increase financing from the bond market or savings certificates has resulted in a major prospective rise in borrowing from the banking system. The only mitigating factor is that private sector credit growth of 12% in April was the lowest in 10 years. The private investment to GDP ratio – 19% – is also the lowest in 6 years.

7.2% growth target unrealistic: The FM has set an ambitious, but more accurately unrealistic, GDP growth target at 7.2%. A sub-6% GDP growth outturn still seems more likely. The FM wants to see a 26% bigger ADP compared to this year’s revised one. He also eyes a 7% inflation rate in the next fiscal year. His revenue collection target is 20% higher.

The major drivers of GDP growth for the balance of this year are likely to the extent and severity of political economic disruptions via hartals. All indications are that the opposition BNP has promised to increase the length, severity and frequency of strikes, both in the month before the month of Ramadan due to start July 10 and in the aftermath in the run up to the election.

Another factor will be the adjustment in the RMG sector to the post-Rana Plaza reform process, but there may be some negative impact/loss of capacity as unsafe factories are closed. Weak investment demand is another factor.

BIDS a government economics think-tank estimates 7.2% growth would require from 25% of GDP to around 30% of GDP. Also infrastructure bottlenecks will likely persist to the end of the year.

Another factor likely to influence the growth outlook will be when monetary policy is eased again. But it appears that excess liquidity from remittances and lower imports versus exports, and the challenges for Bangladesh Bank of Sterlizing this, has made them nervous about excess liquidity in the banking system.

But perhaps aggressive borrowing from the government from the banking system might alleviate these concerns and encourage BB to consider a further rate change at the July semi-annual Monetary Policy Statement. But a rate move still seems more likely at year end unless we see a further deceleration in private sector credit growth.

Power sector production increased but not enough to offset growth: Muhith said: “A total of 54 power plants have been installed in this time period, generating 3,845MW of additional electricity to the national grid.” However, a power deficit of almost 2,000MW persists as energy demand has continued to grow even as supply has increased.

Capital markets positive: Tax incentives were given to boost retail investment in the stock market and the budget also contained proposed tax benefits for mutual funds and IPOs. The tables below outline the major benefits. Thus, despite some increases in tax rates for certain kinds of companies, in the telecoms and tobacco sectors, the net overall impact of the budget on the stock market fundamentals is mildly positive when you consider the tax benefits for retail investors, IPOs and mutual funds.

Proposal of Tax Rebate on Investment for Individual





Investment ceiling in taka

1 crore 

1.5 crore

Investment ceiling as percentage of total income



Percentage of tax rebate








Tax deductible at source on the premium over face value of share of a company



Tax deductible at source on bond sale



Tax rebate on the investment in private mutual fund



Tax exempted dividend income threshold



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