LETTER OF TRANSMITTAL

June 25, 2014

Dr. Shaikh Shamsuddin Ahmed
Professor,
Finance Department,
University of Dhaka
Subject: Submission of Report on Fiscal Budget FY15 & Its Impact on Investment.
Dear Sir,
We are pleased to submit my report titled Fiscal Budget FY15 & Its Impact on Investment.
as per the requirement of our course Central Banking & Monetary Policy. Throughout the study
we have tried with the best of our capacity to accommodate as much information and relevant
issues as possible and tried to follow the instructions as you have suggested. We have tried our
best to make this report as much informative as possible. We sincerely believe that it will satisfy
your requirements.
We are grateful to you for your guidance and kind co-operation at every step of our endeavor on
this report.
Sincerely Yours,

_____________________
Farahnaz Zarrin
Hossain
ID:22033

_________________

_____________________

_____________________

Salma Yeasmin
ID:

_________________

Tanjin
ID:

Executive Summary
Amidst the chaotic economic situation, the budget for FY15 was presented by the
honorable Finance Minister on June 5, 2014. The budget targeted a growth of 7.3%.
The proposed budget of BDT 2506.05 billion for FY 15 is an ambitious one as
acknowledged by the honorable finance minister. This new budget is 15.9% higher
than revised budget of FY14.The government is highly determined to bring back
economic growth, control inflation and infrastructural development in the economy.
In order to fulfill its goals, the government is planning to lower domestic interest
rates to increase private sector credit flows to stimulate investment. Government
has targeted GDP growth of 7.3% in FY15. Given the present economic situation
and low investment level of the economy followed by weak consumer confidence,
the growth target of 7.3% seems highly optimistic. Nevertheless, efforts to stimulate
economic growth will surely bring back momentum. The budget states an inflation
target of 6%. Given the deteriorating local cost of fund along with the current stable
global commodity prices, prices are expected to moderate from this level. The
government has committed to complete the construction of the Padma Bridge by
2018 and this is likely to boost the domestic construction sector companies. The
budget has targeted growth rates of 15% for both import and export. The budget for
the FY15 has set a revenue target of BDT 1829.54 billion. This is 16.8% higher than
FY14 revised budget and 13.7% of GDP. In the budget of FY15, the total
expenditure has been estimated at BDT 2,505.06 billion. This is 18.7% of GDP and
15.9% higher than that of revised budget of FY14. Budget deficit for the FY15 is
BDT 675.52 billion which is 5.0% of GDP and 27.0% of the budget. The government
has decided to provide tax rebate and tax holiday benefits in least developed areas
to enhance industrialization across the country. Moreover, government has
adjusted the import duty, supplementary duty and VAT to promote the possible
growth of local industries (e.g.; Pharmaceutical, RMG and Textile and iron and steel
industry and others). The government has again proposed to increase the tax
incidence for tobacco companies. Another proposal suggests 1% Health
Development Surcharge on all imported and domestically produced tobacco
products. These initiatives are appreciable as these are to reduce tobacco uses.
Analyzing the capital market perspective the budget cannot be termed friendly.
Conversely, few initiatives were disappointing. In particular, the introduction of
capital gain tax introduction on individual level is a difficult move in the present
chaotic situation of the capital market. The provision for 10% tax rebate for
companies declaring more than 20% dividend has been withdrawn. Companies that
give more than 20% dividend had an effective tax rate of 24.75% after rebate of
10%. Their effective tax rate will now rise by 275 basis points. In other words the
budget has increased tax rate for good listed companies. On top of that,
government has proposed to raise tax rate for listed companies giving less than
10% dividend from existing 27.5% to 35%. It appears that, these tax initiatives will
lower the interest of private entities to be listed in the exchanges. For our analysis

purpose, we have decided to show correlations among private sector credit growth
with import, export, M2 growth, remittance and call money rate. Assuming private
sector credit growth has a positive correlation with investment, we analyze the
different factors that affect the private sector credit growth. Hence, we can relate it
to the final impact on investment. In our analysis, we show the different impacts of
the policies undertaken in the budget that can affect these variables and eventually
investment.

Major Budget Highlights:

Budget Review
The formulation of an annual budget in a least developed country like Bangladesh is
an immensely challenging task. It has to be underpinned by a number of
considerations all of which are not necessarily mutually consistent.
Table: Budget Overview FY15
Particulars
Budget Overview BDT in
bn (FY15)
Budget Size
2,505.1
Target Revenue
1,829.5
Budget Deficit
675.5
Bank Borrowing
312.2
External Borrowing
242.8
Source: Ministry of Finance
Table: Summary of the Budget (BDT bn)
Particulars
FY15
Revenue
1,829.5
Earnings
NBR tax revenue
1,497.2
Non-NBR tax
1,497.2
revenue
Non-tax revenue
276.6
Total
2,505.1
Expenditure
Nondevelopment
1,282.3
expenditure
Development
863.5
Expenditure
Other
359.3
Expenditure
Budget Deficit
675.5
Financing Sources
Domestic
432.8
Sources

Growth over FY14

Revised Budget
15.9%
16.8%
13.4%
4.1%
30.7%

FY14

FY14 (revised)

1,674.6

1,566.7

1,360.9

1,250.0

1,360.9

1,250.0

262.4

264.9

2,224.9

2,162.2

1,134.7

1,160.0

722.8

651.5

367.5

350.8

550.3

595.5

339.6

409.8

Bank Borrowing
312.2
Non-Bank
120.6
borrowing
External Sources
242.8
Source: Ministry of Finance

259.9

299.8

79.7

110.0

210.7

185.7

The budget size of FY15 is BDT 2505.06 billion which is 15.9% higher than the
FY14 revised budget and largest of its history. The budget has revenue target of
BDT 1829.54 billion which is 16.8% higher than the FY14 revised budget. Projected
deficit of the budget is BDT 675.52 billion which is 5.0% of GDP and 27.0% of the
budget.
Non-development expenditure is BDT 1282.31 billion which is 51.2% of the budget
and development expenditure is BDT 863.45 billion, 34.5% of the budget. Among
the types of total expenditures, public administration, education and information
technology and interest payment got higher preference having 15.3%, 13.1%, and
12.4% allocation of total budget respectively.
The total ADP size is BDT 803.15 billion which is 33.9% higher than that of FY14
revised budget. In the ADP for FY15, 24.3% is allocated to human resource sector
(education, health and others), 25.8% to overall agricultural sector, 14.3% to energy
sector, 23.3% to communication sector and the rest 12.3% is allocated to other
sectors.
From the summary table, it is evident that the government has scaled up its
revenue generation target to BDT 1829.54 billion, a rise from BDT 1674.59 billion of
the FY14 revised budget. It has been increased by 16.8% from the previous
financial year revised budget. The targeted revenue is 13.7% of the GDP, slightly up
from 13.3% of GDP in previous fiscal year. Estimated 13.7% revenue to GDP ratio is
still very low. Our Tax-GDP ratio (around 11.0% as of FY14 revised budget) still lags
behind many developing countries.
The country's budget deficit in FY15 is set to be the widest at 5.0% of the GDP in
seven years since FY08. The total Budget deficit is estimated to be BDT 675.52
billion. Out of which domestic source will finance 64.1% and external source will
finance 35.9%. Out of domestic sources, government will borrow BDT 312.21 billion
from the banking system, which is 20.1% jump from the FY14 targeted bank
borrowing (but merely 4.1% up from the revised budget).

Economic Indicators and Its Targets

The FY15 budget has presented some of the most optimistic targets ever. As per
the budget the following are the targets for some of the major indicators:
Table: Targeted Economic Indicators FY15
Particulars

Target

GDP Growth
Inflation
Export Growth
Import Growth
Remittance Growth
Source: Ministry of Finance

7.3%
6.0%
15.0%
15.0%
n/a

Gross Domestic Product (GDP)

The government has set a GDP growth target of 7.3%. The target for FY14 was
7.2%, where as the achieved growth in FY14 is 6.12%. In reality, the actual
achieved growth is estimated to be lower than 6.0% (considering FY96 as base
year). However, this year BBS (Bangladesh Bureau of Statistics) changed its GDP
calculation base to FY06.

Table: GDP Comparison

Year
2010-11
2011-12
2012-13
2013-14
Source: Ministry of Finance

Targeted
6.70%
7.00%
7.20%
7.20%

Achieved
6.71%
6.23%
6.03%
6.12%

Comment: Considering the current economic condition of low investment and

consumption confidence, target of 7.3% seems to be a bit overly optimistic.
Inflation
The government had targeted to bring inflation down to 7.0% in FY14. They have
been quite successful in bringing inflation down. Inflation in Jun13 was 8.05%.
Inflation came down to 7.4% in April, 2014.
Table: Inflation Comparison
Year
2010-11
2011-12
2012-13
2013-14
Source: Ministry of Finance

Targeted
6.70%
7.00%
7.20%
7.20%

Achieved
6.71%
6.23%
6.03%
6.12%

Comment: For FY15, inflation has been targeted 6.0%. It has been assumed that
global food and energy prices will decline slightly. We also believe that commodity
prices will be favorable. Domestic interest rates are expected to go down.

Export
Export growth target was set 15.0% in FY14 budget. Export growth in July to April,
FY14 was 13.8%. It can be assumed that if there were no political hindrance this
15% growth is achievable.
Table: Export Growth Target
Year
FY11
FY12
FY13
FY14
FY15
Source: Ministry of Finance

Target
41.4%
6.1%
11.2%
13.8%
15.0%

Comment: Export growth target for FY15 is 15.0%. It is assumed that global
economy growth will accelerate. We expect that if global economy remains vibrant
and domestic political scenario remains stable, this growth target is achievable.

Import
Import growth target was set 10.0% in FY14 budget. Import growth for July to
March, FY14 was 11.1%. Import growth was non-existent in FY13. The increase in
import growth is indication of increased business activity ahead.
Table: Import Growth Target
Year
FY11
FY12
FY13
FY14
FY15
Source: Ministry of Finance

Target
37.0%
2.4%
0.8%
11.1%
15.0%

Comment: The targeted import growth for FY15 is 15.0%.If the political stability
persists and consumer confidence builds up again, this growth can be achieved.
Remittance
Remittance has declined by 4.8% till April 2014 of the current fiscal against last
fiscal years growth of 12.6%. There was no specific target provided in the budget
for FY15. It is stated that remittance is expected to get back to normal growth trend
in this fiscal.
Reserve

Foreign currency reserve has hit 20.2 billion USD at the end of May 2014 which was
only 15.3 billion USD at the end of last fiscal. This reserve is sufficient to foot the
import bill of approximately six months. The government expects trade deficit to
widen and foreign exchange reserve to moderate a bit.

Revenue and Financing

Revenue Estimates and Financing Sources
The budget for the FY15 has set its revenue target of BDT 1829.54 billion. The
budget states a projected deficit of BDT 675.52 billion. Historically if seen, the
government cannot achieve its revenue target. On average the deviation of actual
revenue from target revenue for the last five fiscal years (FY10-FY14) stands at
4.43%. It is only in FY11 the target revenue was achieved.
Chart: Deviation of Actual Revenue from Target Revenue

Source: Ministry of Finance

NBR Tax Revenue
The budget for the FY15 has targeted BDT 1497.20 billion revenue from NBR tax
which is 81.8% of the target revenue. This is 19.8% higher than that of FY14s
revised budget. In the revised budget of FY14, this target was BDT 1250.00 billion
which was 79.8% of total revenue. Of the total target, 38.4% will come from income
tax, corporate tax and travel tax, 37.7% from Value Added Tax (VAT) and 23.9%
from customs and supplementary duty. In order to achieve these targets, steps will
be taken to develop taxpayers friendly administration by digitalizing the process.
Non NBR Tax Revenue & Non Tax Revenue
There is target for BDT 55.72 billion or 3.0% of total revenue to collect from NonNBR tax which is 3.3% of total revenue in the current fiscal. Revenue from non-tax
sources is estimated to be BDT 276.62 billion or 15.1% of total revenue which was
BDT 264.93 billion or 16.9% of total revenue in the FY14s revised budget.
Deficit Financing
The budget deficit for the FY15 will be BDT 675.52 billion or 5.0% of GDP. Though
budget deficit has increased by 13.4% from the revised budget of FY14, deficit to
GDP ratio has not increased. Deficit to GDP ratio in India, Pakistan and Sri Lanka in
the FY15 is 4.1%, 4.9% and 4.5% respectively. Considering that Bangladeshs
deficit is not that high, financing the deficit is challenging but still possible.
Table: Deficit Financing Sources as a % of Total Deficit
Particulars
FY15
Foreign Financing
35.9%
Non-Bank Borrowing
17.8%
Bank Borrowing
46.2%
Source: Ministry of Finance

FY14
31.2%
18.5%
50.3%

Foreign Financing
The government has set target on high foreign financing in the FY15. The total
budget deficits 35.9% or BDT 242.75 billion will be financed through foreign loan
and grants which was BDT 185.69 billion or 31.2% in the FY14s revised budget.
The growth in targeted foreign financing is 30.7% as compared to FY14 revised
budget.
Bank & Non Bank Borrowing
Bank will be a major source of funds to finance the budget deficit. There is a plan to
borrow BDT 312.21 billion or 46.2% of deficit from banking sector which was BDT

299.82 billion or 50.3% of deficit in the FY14 revised budget. At present, there is
ample liquidity in the banking system. In fact, data suggests with BDT 1382.01
billion excess liquidity as of Mar14. Interest rate has been on a declining trend and
private sectors' credit demand is yet to pick up. So, it is highly unlikely of a
crowding-out effect due to the government's increased borrowing from the banking
system. Financing through non bank borrowing has been set at BDT 120.56 billion
which is 9.6% higher than the revised budget of FY14 and 17.8% of total deficit.

Tax Proposals
Income Tax for Individuals
The minimum slab for general tax player remains same in the FY15 budget whereas
the minimum slab for Women tax payer and tax payers of 65 years of age and
above has increased from BDT .25 million to .275 million. The minimum slab for
physically handicapped and war-wounded gazetted freedom fighters has also
increased by .05 million and .18 million respectively. Tax rate for individual income
taxpayers also changed in FY15 budget. In FY15 budget, a new slab has been
introduced. Due to that, tax rate for rich people increased in FY15s budget.
Individuals income surpassing BDT 44.20 million will be taxed at 30.0% which was
not in act in FY14s budget. The government has introduced new slabs for
surcharges on individuals wealth. Individuals having more than BDT 200.00 mn but
less than BDT 300.00 mn have to pay 20.0% surcharge on this incremental wealth.
Individuals having more than BDT 300.00 mn have
to pay 30.0% surcharge on this incremental wealth.
Table: Minimum Slab for Individual Tax Payer
Type of Taxpayer
Threshold of Taxable Income
Existing
General Tax Payer
BDT .22 mn
Women tax payer and
tax payers of 65 years
BDT .25 mn
of age and above
Physically handicapped
BDT .30 mn
War-wounded gazetted
BDT .22 mn
freedom fighters
Source: Ministry of Finance

Proposed
BDT .22 mn
BDT .275 mn
BDT .35 mn
BDT .40 mn

Corporate Tax
In FY15 budget, there is a little change in the corporate tax rate. Only non-publicly
traded manufacturing companies get a 2.5% tax cut becoming 35.0% in FY15
budget which was 37.5% in FY14 budget. The tax rate for publicly traded
company remains same. However, the listed company will not be entitled 10.0% tax
deduction if they declare more than 20.0% dividend. The tax rate for all
autonomous bodies has been cut down to 25.0% from 37.5%. It is also proposed to

raise tax rate for companies giving less than 10.0% dividend from existing 27.5% to
35.0%
Table: Corporate Tax Rate
Company Tax Payer
Publicly Traded
Company (subject to
certain conditions)
Non-Publicly Traded
Company
Bank, Insurance and
Financial Institution
(other than Merchant
Bank)
Merchant Bank
Cigarette Manufacturer
Publicly Traded
Non-Publicly Traded
Mobile Phone
Publicly Traded
Non-Publicly Traded
Dividend Income
Minimum Turnover Tax
Source: Ministry of Finance

Existing

Proposed

27.5%

27.5%

37.5%

35.0%

42.5%

42.5%

37.5%

37.5%

40.0%
45.0%

40.0%
45.0%

40.0%
45.0%
20.0%
0.5%

40.0%
45.0%
20.0%
0.3%

Tax deduction at Source

Tax rate for quick rental has been increased from 4.0% to 6.0%. In case of life
insurance, distributed profit in excess of paid premium will be taxed at 5.0%.
Interest income on treasury bills, treasury bonds and debentures will be taxed at
5.0%. Tax rate on bills received by gas transmission companies has been decreased
to 3.0% from 5.0%. Oil distribution companies have to pay source tax of 1.0% on
the bills of oil supplied to the dealers and agents (except petrol pumps). For the
export sector, government has proposed to reduce tax at source on cash incentive
from 5.0% to 3.0%. There is proposal for 1.0% Health Development Surcharge on
all imported and domestically produced tobacco products. The government has
imposed a fixed tax of Tk. 100 on the supply of every single piece of replacement
SIM. Tax at source on garments export has been reduced from .8% to .3%. These
preferential rates will be effective till June 2015. For all other sector, tax at source
for export has been reduced from .6% to .3%.
Import Duty

15.0% VAT on mobile phones is imposed at the import stage which was previously
10.0%. For the textile sector, 10.0% duty chargeable to a few raw materials used in
this sector is proposed to be reduced to 5.0% In order to create favorable
production environment compatible with international standards, it is proposed to
allow the export-oriented Readymade Garments sector (RMG) to import the raw
materials necessary for the manufacture of prefabricated buildings without duties
on certain conditions. In addition to that, the existing duties on fire resistant door,
emergency light, sprinkler system etc. are being proposed to be fully exempted
Tax Holiday
To create investment friendly atmosphere for industrialization and economic
progress, it is proposed to extend the existing tax holiday facilities from Jun15 to
Jun19. Moreover, the facility of accelerated depreciation alternative to tax holiday
for the new industrial entrepreneurs is also proposed. Both DSE & CSE will get tax
exemption for 5 years in graduated rate as they become demutualized.
Supplementary Duty
SD rates on 40 (forty) basic raw materials of pharmaceutical industry are proposed
for reduction to 5.0% concessionary rate from existing 10.0% and
25.0%. Supplementary duty on Low, Medium and High segment cigarettes has been
raised to 43%, 60% an 61% from existing 39%, 56% and 59% respectively. With the
intention to reduce supplementary duty, government has proposed to change the
current supplementary duty slab from 10 to 12 slabs which would reduce
government revenue of BDT 5000.00 million.

Impact of Budget on Different Sectors:

Pharmaceutical Sector
Budget Proposal
Supplementary Duty (SD) rates
on 40 (forty) basic raw materials
are proposed for reduction to 5
percent concessionary rate from
existing 10 percent and 25
percent.
The customs duties on 14
(fourteen) items used as raw
materials in the manufacture of

Impact
Bangladesh pharmaceutical industry
imports around 90% of the raw
materials. Therefore, reducing SD on
forty basic raw materials and
fourteen raw materials of anti-cancer
drugs and medicines will slightly
improve the Gross profit margin of
the industry, as the respective
molecules have market share around

anti-cancer drugs and medicines

are proposed to be fully
exempted.
Withdrawal of retail level VAT on
contraceptives.
Increasing VAT on Erythromycin
ethyl succinate; Erythromycin
stearate and Azithromycin
(compacted or micronised) from
5% 10%

8% of pharmaceutical industry.
It will reduce the cost of consumer.
Some local API producers have
significantly substituted
Azithromycin and Erythromycin
import by producing it locally.
Accordingly, government raises VAT
on these two APIs so that local API
producer can compete with the
foreign manufactures.

Impact on Investment
According to news report, GLAXOSMITH and Novertise Ltd have been planning for
merger for further investment on anti-cancer drugs and other medicine. If the
proposed reduction of Supplementary Duty and Custom Duty get approved,
potentials investment would catch eyes of foreign and local investors in this sector.
Furthermore, for the existing operating listed companies this measure would
improve the profit margin, which would translate into higher return to the capital
market investors.

Tobacco Industry

Value slab for all the segments have been raised. Supplementary duty for Low, Mid
and High segment has been raised. These are pass-through costs. Historically,
Supplementary duty raise has not impacted margins of companies operating in this
industry. In the premium segment value slab has been raised, but supplementary
duty has not been raised. So premium segment gross margin will improve. In all
other segments also value slab rise is higher than supplementary duty rise. So,
gross margin will be impacted positively. One percent Health Development

Surcharge on all imported and domestically produced tobacco products has been
imposed. We believe tobacco companies will pass through this cost also.Budget
proposed fixation of price of 25 sticks non-filter bidis at Tk. 6.14 and 20 sticks filter
bidis at Tk. 6.94 from 5.35 and 6.05 respectively.
Table: Value slab and Tax incidence of Cigarette containing Tobacco
2013-14
2014-15
2013-14
2014-15
2013-14
2014-15
Existing
Proposed
Existing
Proposed
Existing
Proposed
Value
value slab Supplement Supplement Supplement Supplement
slab for
for (10
ary Duty
ary Duty
ary Duty
ary Duty
(10
sticks)
plus VAT
plus VAT
sticks)
13.6915-16.50
39%
43.00%
54%
58%
13.91
28-30
32.5-50
56%
60.00%
71%
75%
42-45
50-54
59%
61.00%
74%
76%
80 &
90 &
61%
61.00%
76%
76%
Above
Above
Source: Ministry of Finance
Impact on Investment
Historically pass-through cost could not reduced the use of tobacco products, thus
with no changes in Supplementary Duty on premium segment and increase in value
slab in all segment would increase the companys margin, which would benefit the
company and capital market investors both. Thereby, we can expect rally in stock of
company under this industry and buying interest of traders on the stock.

Textile Industry
Tax at source on cash incentive has been reduced to 3.0% from existing 5.0%. Tax
at source on garments export has been reduced from .8% to .3%. These preferential
rates will be effective till June 2015. Reduction of CD on flex fiber (from 10.0% to
5.0%) and artificial staple fiber (from 5.0% to 3.0%) would likely to reduce
production cost of specific textiles companies. The Budget proposes to reduce
supplementary duty on woven fabrics from the existing 30.0% to 20.0%, on most

knitted or crocheted fabrics from 45.0% to 30.0%, on track suits and other garments
from 45.0% to 30.0%, and on various clothing accessories form 60.0% to 45.0%.
Impact on Investment
All measures has been proposed keeping in mind the benefit of the consumer of
textile products, no specific trigger can be seen for this sector. This has nothing to
do with domestic woven and knit fabric manufacturers. This is beneficial for
domestic consumers.

Fuel and Power Industry

Budget Proposals
Theres proposal to raise the import
duties on LPG cylinders from 5% to
25%. But theres also proposal to
withdraw the rebate facility on
import of LPG making industrys
capital machinery.
Gas transmission companies
maximum tax at source on bill
receipts is proposed to be reduced
from 5% to 3%.
Oil distribution companies have to
pay source tax of 1% on the bills of
oil supplied to the dealers and
agents (except petrol pumps).

Impact
These propositions will make the import
more costly hence increasing local
demand. On the other hand setting up
new LPG making companies will be more
expensive.
Gas transmission companies profitability
will increase.
This source tax will require some fund
engagement which they could otherwise
have deposited in banks. This amount will
not be significant.

Impact on Investment
Rise in import duty and withdrawal for rebate facility on import of LPG would
restrain further investment on LPG production and it would increase the cost of
related companies. Thereby, listed LPG making stock might get spooked if this
proposition comes into effect. On the contrary stock of Gas Transmission Company
may see buying interest as tax expense on bill receipt is proposed to reduce.

Engineering Industry
Budget Proposals

Impact

Customs duties on raw materials

used in domestic paper, glass and
ceramics, rubber, furniture, paint,
electrical and plastic industries are
being proposed to be re-fixed at 5%
and 10% which is currently fixed at
10% and 25% respectively.
It has been proposed to allow the
export-oriented RMG sector to
import the raw materials necessary
for manufacturing prefabricated
buildings without duties on certain
conditions. At present there are 5%
to 25% duties applicable on these
materials. In addition to that, the
existing duties on fire resistant door,
emergency light, sprinkler system
etc. are being proposed to be fully
exempted.
Concessionary duty rates on most
inputs of ship building industry is
proposed to be extended. The
existing duties on navigation light,
broadcasting equipment and fire
extinguishers are proposed to be
fixed at 5 percent only from existing
15%.

Local industries will be more competitive

as the cost of raw materials will be
decreased.

Prefabricated building industry is

currently at its initial stage. This facility
will decrease cost of raw materials of
those firm which supply their products to
export oriented companies. It will
accelerate the industry growth.

These facilities will help the industry to

sustain and lure demand from buyers as
their cost will decrease. Once the
demand gets back backward linkage
industry will also be benefitted.

Impact on Investment
Investment opportunity in ship-building industry, prefabricated building industry and
glass and furniture manufacturing would rise.

Telecom Industry
Budget Proposals
Fixed tax of BDT 100 on the supply of
every single piece of replacement SIM is
imposed.
Import tax on SIM card has been
reduced to 15.0% from 20.0%

Impact
It is proposed to impose BDT 100 as a fixed
tax for SIM replacement which was previously
nothing. Eventually it will slightly increase
operating expenses of mobile operators.
Import tax on SIM card has been reduced to
15.0% from 20.0% in FY15 budget which was
30.0% in FY13. This decrease might reduce
operating expenses of telecom operators
marginally.

15.0% VAT on mobile phones is imposed

at the import stage which was
previously 10.0%

The increase of import tax on mobile phones

might make it difficult for the rural population
to buy a mobile handset. Ultimately, telecom
operators will face difficulties in rural
penetration which is the current growth
segment for telecom operators.

Impact on Investment
The net effect of imposition of tax on replacement on SIM and reduction of VAT on
import of SIM card is subject to financial analysis. However, telecom companies
would face difficulties to expand business through market penetration. No new
operator in the industry is provided any incentive in budget and capital market
investment can only be benefited if listed telecom companies can mobilize the
growth by aggressive market policy.

Construction and Building Material Industry

Budget Proposal

Impact

Theres a total allocation of BDT 187.12

billion for communication infrastructure
in ADP which is 84.5% higher than the
FY14 revised budget. 46.7% of this
allocation has been reserved for bridge
division due to the construction of
Padma Bridge.

This allocation will boost the demand of

Cement, Steel, Electrodes and related
industry.

Impact on Investment
Real estate sector would see a rise in demand in the industry, thus margins of
Cement and building materials provider may increase. No new entry can be
expected as the real estate business is already highly saturated and competition is
intense. However, capital market investors might gain from investment on listed
real estate and cement companies, which are currently undervalued.

Capital Market

Budget FY15 did not have much to offer to boost the capital market. On the
contrary some decisions are going to lower corporate profitability of listed
companies and incentive to get listed in the process by prospective companies.

Negative Impacts:

Tax rate of non-listed companies has been reduced to 35.0% from existing
37.5%. Tax rate for publicly traded companies has been kept unchanged at
27.5%. These sorts of decisions discourage listing. Many companies get listed
to get tax advantage.
The provision for 10.0% tax rebate for companies declaring more than 20.0%
dividend has been rescinded. This will increase effective tax rate for
companies that used to pay more than 20.0% dividend. Companies that give
more than 20.0% dividend had an effective tax rate of 24.75% after rebate of
10%. Now their effective tax rate will rise by 275 basis points.
It is also proposed to raise tax rate for companies giving less than 10.0%
dividend from existing 27.5% to 35.0%.
Capital gain tax has been introduced at individual level. Previously only
companies had to pay capital gain tax of 10.0%. In the proposed budget a
capital gain tax of 3.0% has been introduced for capital gain exceeding BDT 1
million but not exceeding BDT 2 million. For capital gain exceeding BDT 2
million capital gain tax of 5% is proposed.

Positive Impacts:

Corporate tax rate reduction of non-listed companies will benefit

conglomerate companies with number of unlisted subsidiaries and associate
companies. As tax burden of those unlisted subsidiaries will decrease, overall
consolidated profit will increase.
Tax free dividend income limit has been raised to BDT 15000 from existing
BDT 10000.
Demutualized exchanges have been given five year tax rebate.

Qualitative Analysis
GDP:
The gross domestic product or the GDP is a measure of the total productivity of a
country. It is a quantifiable figure that tells how much better the country and its
people are at that point of time. GDP is defined as the market value of all the total
goods and services produced in the country for the given period of time.

Consumption (C)

Investment (I)

Government spending (G)

Exports (X)

Imports (M)

Investment:
Investment is time, energy, or matter spent in the hope of future benefits actualized
within a specified date or time frame. Investment has different meanings in
economics and finance.
In economics, investment is the accumulation of newly produced physical entities,
such as factories, machinery, houses, and goods inventories.
In finance, investment is putting money into an asset with the expectation of capital
appreciation, dividends, and/or interest earnings. This may or may not be backed by
research and analysis. Most or all forms of investment involve some form of risk,
such as investment in equities, property, and even fixed interest securities which
are subject, among other things, to inflation risk. It is indispensable for project
investors to identify and manage the risks related to the investment.

Impact of Different Factors on Investment

1) Private Credit Growth: Private credit growth has a positive relationship with
investment. If private credit growth increases then people will have more
opportunity to invest, as they have more funds. Therefore if private credit growth
increases investment increases and vice versa.
2) Import: Imports contribute to all GDP components, which mean it contributes to
investment. Increasing in imports will causes increase in investment. As a GDP
component from the current domestic expenditure side, investment has an
immediate impact on GDP. An increase of consumption raises GDP by the same
amount, other things equal. Moreover, since income (GDP) is an important
determinant of consumption, the increase of income will be followed by a rise in
consumption: a positive feedback loop has been triggered (between consumption
and income) by investment. Because of this mechanism, imports will grow as well.
More directly, investment is often directed to foreign machineries and goods, with
an immediate increase of imports.
3) Export: The increase of export will increase production, GDP, employment,
therefore, as a component of GDP investment also increases. More exports mean
more

profits,

to

support

the

exports

procedures

investment

increases

simultaneously.
4) M2 Growth: In short run if money supply increases (interest rate decreases)
investment will also increase and if M2 decreases investment will decrease.
5) Remittance: Remittance increases countrys profit/cash inflow. Thus they help in
investment.

Investment

increases

when

remittance

increases.

Remittances

complement national saving to form a bigger pool of resources available for

investment.
6) Call Money Rate: Inter-bank call money transactions make the stream of funds
convenient and affordable for financial intermediaries. Consequently commercial
banks get involved in the investment in and borrowing from call money market. This

arrangement plays a significantly vital role to strengthen the liquidity base of a bank
and also provides ample avenue of investment of fresh funds. Therefore, if the call
money rate is very high it will decrease investment and if it is low it will increase
investment.

Historical Analysis
For our analysis purpose, we have decided to show correlations among
private sector credit growth with import, export, M2 growth, remittance
and call money rate. Assuming private sector credit growth has a positive
correlation with investment, we analyze the different factors that affect
the private sector credit growth. Hence, we can relate it to the final
impact on investment. In our analysis, we show the different impacts of
the policies undertaken in the budget that can affect these variables and
eventually investment.
We have used the data of FY 2013-14 for our analysis purpose to show the
correlation of private borrowing with the independent variables:
FY 2013-14

Private
Borrowing

Export

Import

July

452268.3

18349

20577

Govern
ment
Borrowi
ng
158809.8

August

456406.4

15434

17002

153868.9

September

461577

18984

22190

152731.0

October

464282.9

16127

20797

157979.5

November

467058

17623

22310

160432.8

December

474473.5

16302

23698

163027.4

Remitta
nce

M2

160000.6
6
7820.23

61350
0.1
61999
6.7
62672
3.9
64031
7.2
64257
6
65396
6.6

172527.6
9
161697.9
3
173462.1
8
9409.50

January

473893.3

18006

25488

161810.6

9801.70

February

475964.2

17784

20823

163492.1

9121.34

March

482167.3

18517

25173

168109.5

10014.03

65376
5.5
66231
1.4
66770
9.6

*Source: Bangladesh Bank *Amounts in BDT Crore

Using correlation analysis we have obtained the following results:
Variables
Private
Borrowing
Export
Import
Government
Borrowing
Remittance
M2

Private
Borrowing
1
0.185085427
0.727200448
0.831912085
-0.584812345
0.989060513

Interpretation:
From the analysis it can be inferred that import, government borrowing and M2 have
the greatest positive correlation with private borrowing. The import (import of raw
materials) has a positive impact on private credit growth. This is because for the
purpose of import of raw material and capital machinery money has to be borrowed
from the bank. This increases private borrowing and also increases investment in
the economy. Apart from these variables, another variable that has impact on
private credit growth is government borrowing. The credit growth rate in the private
sector increased slightly in April from the previous month but still remained very low
as investors maintained their wait-and-see stance because of continued political
uncertainty. These estimates show that the private consumption to GDP ratio
declined from 72.85 percent in FY13 to 71.38 percent in FY14 while the private
investment to GDP ratio declined from 21.75 percent to 21.39 percent. General
government consumption increased from 5.12 percent in FY13 to 5.2 percent in
FY14 while public investment increased from 6.64 percent to 7.3 percent. Part of the
explanation may be an over-estimated public investment, amounting to Tk 986
billion (about $12 billion) in FY14. The governments net bank borrowing came down
to BDT 45.70 billion during July-December period of the FY `14 from BDT 67.26
billion in the corresponding period of the last fiscal, according to the central bank
statistics. The governments net bank borrowing has decreased significantly during
the period under review because of hindrances to the overall development activities

across the country amid political uncertainty in the recent months. Apart from this,
the large amount of liquidity in the market did not cause the crowding out effect on
private borrowing. Foreign currency reserve has hit 20.2 billion USD at the end of
May 2014 which was only 15.3 billion USD at the end of last fiscal. This reserve is
sufficient to foot the import bill of approximately six months. Government expects
trade deficit to widen and foreign exchange reserve to moderate a bit.
Particulars
Private investment to
GDP
Public investment to
GDP ratio
Jul-Dec 2013 Govt
borrowing bn

FY201 FY20
3
14
21.75
21.39
%
%
6.64 7.35%
%
45.2
67.26

Increase in M2 is will also increase private borrowing as more fund is available for
lending. Thereby the final impact will be on investment.
On the other hand, export has weak correlation with private borrowing and
remittance has a negative correlation with private borrowing. The negative
correlation of remittance can be explained through the fact that when remittance
increases people tend to borrow less from banks as they have ample source of fund
for consumption and investment. The weak correlation of export also proves that
when there are increased exports in the economy, inflow of money is greater and
thus people need to borrow less. Though remittance and exports may not have
significant impact on private borrowing but they surely affect the investment in a
positive way. In other words, if there is inflow of fund people are bound to invest
thereby increasing investment.

Though these variables are set to impact private borrowing of the economy
and thereby investment but in reality most of the targets set by the
government were not attained in FY2013-14:
Particulars
Export
Import
Government
Borrowing

Target FY2013-14
15%
10%
BDT 409.8 billion

Achieved FY2013-14
13.8% (April)
11.1% (March)
BDT 145.283 billion

(Domestic Sources)
M2

17%

8.84%

Analyzing the targets and end results of the previous year it can be deduced
that most of the targets have been unattained in the past year given the
scenario of the country. As a result, investment was low in FY 2013-14. Given
these variables will see growth in the upcoming year, the investment may
increase in FY 2014-15.