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Term paper on

A study on Budget deficit


AND
Its impact on the economy of Bangladesh
SUBMITTED TO:
TANVIR MOHAMMAD HAYDER ARIF
ASSOCIATE PROFESSOR
DEPARTMENT OF FINANCE AND BANKING
UNIVERSITY OF CHITTAGONG

SUBMITTED BY:
MD. SHOWEB
ID: 09303074
SESSION: 2008-2009
DEPARTMENT OF FINANCE AND BANKING
UNIVERSITY OF CHITTAGONG
AUGUST 2014

UNIVERSITY OF CHITTAGONG
1

Acknowledgement

At first I would like to thank to the almighty Allah, the merciful and the benevolent who has enabled me
to complete The report on A study on Budget deficit AND Its impact on the economy of

Bangladesh.
All the good things and successful passages are done through spirit and innate believes. Behind these
innate motives, some people are related directly or indirectly. We have touched with such extreme
personality who has given us the framework and motivation to make this effective assignment.
Especially, I would like to acknowledge my supervisor Tanvir M H Arif who taught, guided and instructed
us to make this report.
In writing this assignment I have drawn materials from a variety of sources. I owe a profound an
intellectual debt to various authors whose ideas and contributions have shaped my thinking on this
report.
At last, we remember all those people whose name are not mentioned here but lend us a hand directly
or indirectly in preparing this assignment.

Abstract

Government budget deficit is the difference between government revenues and expenditures.
Government has different sources of revenues. Major portion of government revenues comes
from direct and indirect taxes. Direct taxes come from income and profits of individuals and
institutions and indirect taxes come from import duty, supplementary duty and value added
tax. It can be put in different way. Direct taxes are the part of economic revenues and incomes
of individuals and institutions and indirect taxes are the part of economic transactions in the
form of buy, sale, export and import transactions. If government wants accelerate its revenues
to meet the growing public expenditures and to reduce the budget deficit without reducing the
expenditures of different influential sectors, much efforts should be made to increase economic
revenues and income as well as the economic transactions so that the government revenues
can meet the growing demand of the economy with the increase in revenues from income tax,
import duty, supplementary duty and value added tax. In this regard the concentration of the
report is on the management of deficit budget to minimize bad effects and maximize the
utilization of funds. Having budget deficit is not a problem at all. The problems lie with the
government inefficiency in the management of budget deficit. The evaluation of different
reasons behind deficit budget and the evaluation of different bad effects of deficit budget are
two crucial parts of our discussion. The impact of budget deficit on the different sectors of the
economy is addressed here with relevant information. It is further concentration point of the
report to find ways to improve the management performance of the government to achieve
different macroeconomic goals with the help of expansion of economic revenues and
transactions. The government revenues increase with the increase in economic revenues and
economic transactions. The key point of our discussion is government should not decrease the
public expenditures as the population is growing. The expenditures on different public sectors
have to be increased as the population is growing. But budget deficit should not grow to meet
the expenditures as budget deficit has some associated problems with it. For this reason
government has to concentrate on accelerating the revenue collection rapidly with the
expansion of economic revenues and economic transactions. For this reason government
should try to integrate different policies to achieve key macroeconomic goals.

Introduction

Bangladesh Government has been running on deficit budget since independence. It had gained
independence in December 1971 after a bloody-nine-month long war of liberation.
Consequently, the economic situation was unstable during the first 3years after independence.
The situation eased somewhat in the 2nd half of the decade when the work of restructuring a
war-ravaged economy had been completed.
In that time large fiscal deficits were evolved as the availability of resources was much less than
investment requirements. The government had no other choices but to resort deficit financing
to finance rehabilitation work.
Budget deficit is mandatory to fight the recession as it helps to stimulate the economy. But the
management of budget deficit is always crucial for a country like Bangladesh. Budget deficit is
not a problem if it is managed well. But how can the budget deficit be managed well? The
preparation of this report is to identify ways that will pave the way of managing the budget
deficit for the purpose of macroeconomic goal achievement or in other words that will pave the
way of minimizing the bad effects of budget deficit and maximizing the utilization of
government resources.
Here management means both the utilization of funds and combination of sources of funds. It
is seen that some projects have the problem of poor utilization and secondly sometimes
inefficient combination of sources of deficit budget is another problem that creates problem in
different economic sectors. Budget deficit can cause economic imbalance because of its
combination. It will be discussed in details in the respective chapter.
There exists a correlation between Deficit and Debt whereas deficit must be financed by
borrowing from external and internal resources to meet up the shortage. The further dealing of
the report is how the management of deficit and debt through borrowing from external and
internal sources could affect the economy of the country.
Deficit budget influences the overall economy in terms of Agriculture, power and energy,
infrastructure, healthcare, education and industries.

Aim and Objectives

The principle objective of this report is to study the budget deficit and its impact on important
sectors that influence the economy substantially. Under this principle objective following
specific objectives have been covered.
1. To evaluate the reasons and bad effects of budget deficit.
2. To identify the effects on different sectors influencing the economy significantly.
3. To find ways for managing the budget deficit for the purpose of macroeconomic goal
achievement.

Literature Review

Budget deficit is a common terminology in our fiscal policy. It is termed as fiscal deficit as well.
Unnayan Onneshan (2013) a leading think tank of our country states that persistent fiscal
deficit is harmful for economic growth and affects the economy negatively. Because it leads to
high taxes, increase in price level (demand pull or cost push) and increase in the real interest
rate which creates crowding out effect for the private investor. And they further states that
when the government is not able to finance its deficit, it is forced to cut expenditure or raise
revenues. Both are harmful for an economy as cutting expenditure will create disorder in public
works and raising revenue will be harmful in materializing fiscal policy and in stabilizing the
economy. Increased public borrowing has compelled government to become dependent on
internal and external sources for financing. It has caused to result in over burden of debt. It has
been exerting significant pressure on macroeconomic stability of the country.
They opined that highest allocation for non-development expenditures have gone to interest
payment on both to the domestic and foreign sources. These unproductive expenditures
reduce the investment capacity of the government substantially and push the inflationary
pressure on the economy.
They further states that Deficit as a share of GDP is only 5 percent in 2014-15 and 4.6 percent in
FY 2013-14, which is not that much alarming. The actual matter in this regard, is the financial
management for this deficit as well as the utilization of the debt. According to them the per
capita debt burden of Bangladesh has been rapidly mounting since FY 2008-09 and stood at Tk.
3389.84 in FY 2012-13 from Tk. 2982.19 in FY 2011-12. In FY 2012-13, the rate of growth in per
capita GDP and the rate of growth in per capita debt burden stood at 11.6 percent and 13.7 per
cent respectively from 28.2 per cent and 13.8 per cent in FY 2011-12.
Similarly, total public borrowing has increased at an alarming rate in the last few years. As a
result, every citizen of the country is burdened with a debt of Tk. 3389.84 in FY 2012-13 from
Tk. 2982.19 in FY 2011-12.
Zebulun Kreiter and Tapas Kumar Paul (2010) put a study namely Deficit financing and inflation
in Bangladesh: A vector Autoregressive Analysis whereas they said the budget deficit is
sometimes responsible for increase in price level (demand pull or cost push). But in our country
the influence of controlling supply of money for the purpose of controlling inflation cannot be
justified as there are other reasons that influence the inflation rate significantly.

Prof. A.B. Mirza Azizul Islam (2014), former adviser to a caretaker government, opined high
domestic borrowing might hit the economy in terms of possible crowding-out effect and
inflationary pressure. Budget deficit should not be much dependent on domestic sectors
substantially as per his suggestions. There is a significant evidence that budget deficit can cause
inflation in terms of developing nations such as Bangladesh whereas the effects of budget
deficit are not significant in developed countries.

Table of Contents
Details

Page

1. Acknowledgement

2. Abstract

3. Introduction

4. Aim and objectives

5. Literature review

6. Chapter 1

9-12

7. Chapter 2

13-18

8. Chapter 3

19-32

9. Chapter 4

33-37

10. Conclusion and


recommendation
11. Bibliography

38
39-40

12. Appendices

41-47

Chapter 1
Reasons
Budget deficit

1. Reasons Budget deficit:


Budget deficit means the situation whereas government expenditure exceeds revenue
collection. It happens for several reasons and the reasons vary country to country. In our
country the main reasons of budget deficit are

1.1 Inefficiency of NBR in direct tax collection:


In Bangladesh NBR plays the key role in revenue collection but a significant amount is collected
from the indirect tax. The indirect tax revenue target for fiscal year 2014-2015 is 92,220 crore in
which 55,580 crore is to be collected from VAT and 36,640 crore will be collected from Import
and supplementary duty. Direct tax collection target is set at 57,500.Direct tax comprises
income tax, corporate tax and travel tax. The percentage of direct tax collection is set at 26.2
percent of total revenue and the percentage of different indirect taxes is 46.3 of total revenue.
Whereas 27.1 percent is to be collected from VAT, 11.3 percent from Supplementary duty, 7.9
from import duty.
This creates an over dependency on indirect tax which is not good because the direct tax should
be the key source of revenues.
Revenue collection of NBR
Year
Target
Collection

2009-2010
61000
62040

2010-2011
75600
79403

2011-2012
92370
94457

2012-2013
1,12,259
1,08,614

Comment

Achieved

Achieved

Achieved

Failed

2013-2014
125000
90,704.50
For first ten
month
Failed

Source: Adopted from the publication of Ministry of finance


1.2 Heavy infrastructure development:
It is seen that heavy infrastructure development is going on in our country. In current fiscal year
of 2014-2015 the expenditure on Annual Development Programme is set at 80,315 crore tk. The
revised ADP of fiscal year 2013-2014 was set at 60,000. Revised allocation for fiscal year 20122013 was set at 52,366. Because of heavy infrastructure development government need to
spend a lot of money every year.

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1.3 Reluctance in paying tax:


People are totally reluctant to pay tax in our country as a result the direct tax collection is
always lower than indirect tax. Due to this the revenue collection is not increasing at the
desired level and the deficit amount is becoming larger and larger.

1.4 Much dependence on VAT:


In the current budget of 2014-15 the revenue collection from VAT is set at 36.5 percent of total
NBR rvenue. The revenue coollectio of NBR is historically dependent on VAT. Every year VAT is
considered as the major source of NBR revenue. But this time government is trying to increase
the income tax collection which is set at 37.5 of total NBR earnings. Although the rate is
somewhat stiff for the government to collect such a high rate of income tax ,the collectin will
be dependent on goernments monitoring and determination for achieving the target. (table 6)

1.5 Huge amount of subsidy:


Every year government has to pay a lot on the different sectors as subsidy. This year
government set to reduce the subsidy by 19.5 percent. Most of the subsidy cut will be falling
on fuel subsidy in order to keep the commitment given to IMF. Total amount of subsidy is likely
to be 26053 crore comparing with 32354 at the last fiscal year.

Sector

Subsidy

Agriculture

9,000

Export

2,850

Power

7,000

Petroleum

2,800

Food

1,803

Others

3,000

total

26,053

Source: Adopted from thedailystar.net

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1.6 Inefficiency of project completion:


Because of inefficient management of government some projects of ADP remain unfinished and
these projects exceed the original estimation because of extended period. These projects are
termed as carryover project. In current budget of 2014-15 there are296 carryover projects
consist of 11.4% of the total allocation. This type of carry over projects add extra burden of
expenditure on governments shoulder.

1.7 Unnecessary expenditure due to lack of prudence:


Sometimes the government expenditure goes up because of some improper decision such as
quick rental power plants.
The subsidy has been increased substantially because of government decision of augmenting
electricity generation by Rental and quick rental power plants. Rental and quick rental power
plants are now producing 1700 megawatts (mw) of electricity.
But the problem is these Rental and quick rental power plants are paid off half of the total cost
of power production. That is why these rental and quick rental projects have been highly
criticized by the experts. Power Development Board says since its increased dependence on the
rental plants its losses in the last four fiscal years stood at about Tk 170 billion, which was
covered by subsidies.

Rise in Subsidy due to quick rentals


Year
subsidy

2009-10
9,534

2010-11
16,285

2011-12
28,814

2012-13
37,399

2013-14
2014-15
32,354(revised) 26,0539(proposed)

Source: Adopted from unnayan.org


Retail and bulk power prices have been hiked 11 times in the last five years to adjust with these
high costs. According to a PDB financial report, in the last four financial years it has made 20
percent of its electricity purchases from rental plants. This has cost the PDB 42 percent of its
total payments for electricity.

The PDB bought electricity from state-owned and private plants for an average price of Tk 4.52
per kilowatt-hour in the same period. Electricity from rental power plants cost Tk 9.50 per
kilowatt-hour.

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Chapter 2
Evaluation of bad
effects of budget
deficit

13

2. Evaluation of bad effects of budget deficit:


Traditionally there are some bad effects of budget deficit which are likely to be present in some
situation but these are not experienced by all the countries in the same proportion. The
traditional reasons are evaluated here in the context of relativity of different factors of our
country.

2.1 Crowding out, a dilemma of public investment:


When government will borrow a huge amount of loan from the banking sector, private sector
do not get loan for investment purposes. This situation is called crowding out effect of budget
deficit. But in our country what we see that there is a gap between the national savings and
investment and national savings is large than national investment. So crowding out effect of
theoretical discussion is obsolete here. Rather the reason behind low private sector investment
is the high cost of capital.

Source: Adopted from www.unnayn.org

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2.2 Increase in Inflation due to budget deficit or different reasons? :


Inflation rate may be increased by extra circulation of money. Budget deficit causes to increase
the circulation of money. But according to the monetarist view point the budget deficit can
cause inflation only to the extent the deficit is monetized. This theory was developed by the
Hamburger and Zwick in 1981. Actually the deficit budget is not that much monetized in our
country because government allocation for public safety framework which can influence the
inflation rate is small. In developed countries a number of people are provided with
unemployment benefits and other benefits. So the portion of budget deficit can easily influence
the inflation rate as the money is monetized by the people. But in Bangladesh a small portion of
total budget is spent on public safety framework. When people have extra money which cannot
be supported by the existing supply of money it causes the demand pull inflation. Too much
money running behind too few goods causes demand pull inflation Bangladesh bank controls
inflation by controlling money supply. But inflation is not caused by money supply in
Bangladesh which is suggested by different researchers. So deficit budget is not responsible for
inflation. In our country inflation is occurring due to increase in price level of factors of
production, lack of supply of food items caused by low production, illegal price fixing of
middleman which is termed as syndicate, transportation problems like shutdown, poor
condition of roads and bridges, storage problem and Increase in international price level.
Government cannot reduce the food price without reducing the price of factors of production.
Inflation has nothing to do with circulation of money and budget deficit. Budget deficit
increases the interest rate, inflation rate sometimes. But in Bangladesh budget deficit is not
responsible for the inflation and thus government spending or money circulation have nothing
to do with budget deficit. If government wants to reduce the rate of inflation, government has
to address the problems that are responsible for the increase in interest rate.
Supply shock

Inflation

Demand pull

Can be controlled
through money
supply

Cost push

15

Increasing
international price
level of food and
non-food items

Reasons of inflation in
Bangladesh

Increasing price of factors


of production Due to:
1. Power
2. Oil

Lack of Supply of items Due to:


Storage problems
1. Low production
2. Transportation problems
3. Illegal price fixing

3. Labor

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2.3 Interest rate Increase due to budget deficit or wrong monetary policy:
Interest rate may increase due to budget deficit. But it is seen in our country that interest rate
high due to wrong monetary policy of the Central Bank. Central bank wants to control inflation
by controlling money supply. As a result central bank follows Contractionary monetary policy.
Because of Contractionary monetary policy the interest rate or the cost of capital is much
higher. Actually the reasons behind the increase in inflation rate are different which is discussed
earlier. So controlling money supply for the purpose of restricting inflation rate at the desired
level is not working in favor of our economy as it creates difficulty in disbursement of private
sector credit. So it is actually government failure to identify the real reasons of inflation as a
result the interest rate prevails at an extreme level.
Removing lending
interest rate cap

Contractionary policy

High interest rate

High CRR, SLR, Repo


and Reverse repo rate

Low growth of
Investment

Supply shock

Rising
inflationary
pressure

Impact of wrong monetary policy


90
80
70
60
50
40

17

Government is pursuing a tight monetary policy assuming that the country is facing inflation
because of demand pull nature of inflation. In reality the inflation is cost push and there are
other problems associated with like as supply shock. Tight monetary policy cannot be a suitable
policy for our country from the perspective of economic expansion. Without economic
expansion government cannot have a sufficient amount of tax to meet the expenditures and
thus it will lead to larger budget deficit. On the other side private sector investment cannot
grow at the expected level due to the increase in interest rate which will lead to the low
production or in other words low GDP growth rate. Low production will add fuel to the existing
level of inflation which is presented by the above chart.

2.4 High debt interest payments making a debt Mountain:


Last year (2013-14) Bangladesh government paid 277.43 billion as interest and installment and
this year (2014-2015) the expenditure on this interest and installment is set at 310.4 billion.
These are creating a great debt burden on the shoulder of the future generation. This debt
burden will be a problem of our economy in long run. According to Unnayan Onneshon the per
capita debt burden of Bangladesh has been rapidly mounting since FY 2008-09 and stood at Tk.
3389.84 in FY 2012-13 from Tk. 2982.19 in FY 2011-12.

2.5 Increase in Tax rate and broadening the tax net:


When Government increases the expenditures which in turn become large budget deficit, it has
to increase the tax rate and broaden the tax net. Imposing more tax on people though direct
and indirect taxes can harm the economy by decreasing the disposable income of the people of
our country. It will decrease the disposable income of people which will be followed by a
decrease in aggregate demand. Expected level of growth will be difficult to attain as the lesser
the demand and the lower the amount of investment. Due to the introduction of VAT all the
people of our country are falling under VAT and paying tax. This tax burden reduces the
disposable income of the mass people.

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Chapter 3
Evaluating the effects
of deficit budget on
different sectors
influencing the
economy significantly

19

3.1 Education:

Quality of institutions in selected Asian countries

Source: Adopted from isdb.org


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3.1.1 Primary education:


The discussion of education starts with the standard of education of our country. The standard
of education is not satisfactory at all. Although the government is investing a lot on the
education sector every year, the standard of education is not improving that much. This year
government has allocated 11.7 percent of total budget for Education. There are almost 37,672
government primary schools in our country with an estimated 10.7 million primary school aged
children. The Directorate of Primary Education (DPE) proclaims that ratio of students to
teachers is 53:1 whereas the standard ratio is 30:1. According to a research carried on by
World Bank the standard of education is poor because of the concentration of our teachers are
put at memorizing the books and passing the exam. The World Bank in their report titled
Bangladesh Education Sector Review disclosed that the teaching method logy is lecturing and reading
textbook. Most teachers are reluctant to adopt innovative approaches as they fear that this will hamper
the performance in education.

3.1.2 Secondary and higher secondary:


The concentration of our education system is to increase the percentage of passing rates whereas the
standard of education is not significant at all. Government has made a significant improvement on
expansion of primary education the in terms of enrolment and gender parity. But the standard of
education and syllabus do not serve the goals of human development and poverty eradication. Our
traditional primary, secondary and higher secondary education are unable to produce quality and skilled
persons to have a standard job with respect to their education. Keeping in mind the requirements of job
market of our country and outside our country, the government needs to make a linkage between
educational sector and job market. A shortage of technically skilled human resources can make a great
impediment to the economic development of our nation.
Our secondary and higher secondary curriculum does not reflect the job oriented factors and thus the
students are unable to have satisfactory performance at the end of education. Moreover after
completion of higher secondary education 35 to 40 percent of the students are failing to have a scope
for enrolling themselves to universities or colleges.

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3.1.3 Higher Education:


Higher education in our country is somewhat memorization based as well and the universities do not
put much concentration on research because of poor fund allocation. Whereas the universities in
developed countries work as research center, in our country the universities work as a production
center of graduates. The allocation for research purposes is poor and not satisfactory at all. Without
research the standard of education cannot be improved at the university level.
Though the allocation for this sector is 11.7 percent of our total budget, its not sufficient to improve the
current problems faced by the sector. The allocation is not a big figure comparing with the population of
our country. The per capita allocation for education for the people of the country is low.
So for the purpose of improving the standard of education government has to spend more on the
education sector and making a linkage between education and job market demand government has to
take steps immediately.

3.1.4 Standard allocation:


Standard allocation for the sector should be 20 percent of the total allocation on public
expenditures or 6 percent of total GDP. But in our country the allocation is 11.7 percent of total
allocation on public expenditures and 2.2 percent of total GDP in fiscal year 2014-15. There
should be more allocation for the sector as the population is huge and per capita expenditures
on education is quite poor because of poor financial condition of the people and low
government allocation. Without sufficient investment on the sector government cannot expect
to accelerate the economic growth. Moreover to improve the standard of education the
allocation has to grow rapidly as the improvement requires more investment.

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3.1.5 Problems of the sector:


Education sector is burdened with different problems and hurdles.

Low public spending.


Poor quality of secondary education.
Gender disparity.
Inadequate infrastructure.
Lack of access to tertiary education.
Low level of spending on research and development.
Inadequate teacher training.

3.1.6 Funds for different purposes:


Education sector is facing different problems because of poor allocation on this sector with
respect to the population of our country. The sector is in need of more funds for following
purposes.

Research.
Improving the standard of education.
Improving the course curriculum.
Increasing the pay scale of the teachers.
Training for the teachers.

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3.2Health care:

Year

Health budget(in
percentage
of
total allocation)

2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

6.2%
5.9%
5.1%
4.8%
4.6%
4.45%

Source: thedailystar.net
3.2.1 Child mortality and maternal mortality:
Despite some success on the sector, government allocation for the sector is not sufficient with
respect to the population of our country. Government has become successful in
implementation of decreasing child mortality rate from 88 to 65 per one thousand and been
awarded MDG2010 award because of its achievement. Maternal mortality rate has been
decreased to 1.94 (per thousand live births). But government has to continue development
programs for the expansion of health care and to reach the mass people if it wants to increase
the quality of human resources.

3.2.2 Community clinic, medical colleges and other institutions:


Government has established 12 thousand 577community clinics, 5 medical colleges, and 12
nursing institutes, 5 institutes of health technology and 149 union health and family welfare
centers for the purpose of expanding the health facilities to the mass people. But the facilities
are not sufficient for the huge population of our country. There should be more allocation for
the mass people as a major portion of our population is living under the poverty line. Without
government concentration on this sector there can be no improvement.

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3.2.3 Standard allocation:


There should be at least 15 percent of total budget allocation for health care according to the
standard of World Health Organization. In Bangladesh there is only 4.45 percent of total budget
allocated for healthcare. The government proposed a budget of 11146 crore for health which is
increased by 1191 crore comparing with previous budget but a lower percentage of total
budget with respect to the previous one. In Bangladesh people pay 64 percent of total health
cost from their own funds against the global standard of 32 percent. It pushes a number of
people into poverty every year because of over expenditure than their income due to different
diseases. Increasing the allocation for health sector is crucial as it helps to improve the quality
of human resources of a country. In addition to this there must be concentration on the better
utilization of the money allocated for this sector. The per capita health spending is $27 which is
not satisfactory at all as this is not sufficient for meeting the present demand. As the population
is huge health sector requires more fund to provide sufficient facility to the huge population.

3.2.4 Health sector constraints:


Health sector has the following constraints.

Low public spending.


High maternal mortality ratio.
Lower life expectancy
Early childbearing.
Low skills and facilities to cope with obstetric emergencies.

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Year
3.3 Agriculture:

2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08

Contribution of agriculture
sector to the GDP (%)
16.33
16.78
17.38
18.01
20.29
19.01
20.00

Source: Adopted from unnayan.org


The Agriculture sector had an increasing trend in growth from 1990 to 2010. Afterwards the
rate of growth has been falling. Agriculture sector has been allocated 7.6 percent of total
budget this year. There is an allocation of 9000 crore taka as subsidy. But the problem is the
share of this sector is decreasing over the recent years. The reasons behind this declining trend
are multidimensional.

3.3.1 Reasons of decreasing share of agriculture in total GDP:


The decreasing amount of the arable land is one of the significant reasons as it is responsible
for the decrease in production capacity substantially. The second reason is the dominance of
non-development expenditures over development expenditures. Every year the allocation of
agriculture sector is dominated by non-development expenditures. To increase the productivity
and profitability of the sector there must be development expenditures for the purpose
accelerating the rate of growth and share of the sector in total GDP.
Year

2009-10
2010-11
2011-12

Percentage of
nondevelopment
expenditure
85%
84%
85%

Source: Adopted from unnayan.org

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3.3.2 Largest sector that accounts for more than 40 percent of labor force:
This sector is accounted for more than 40 percent of total labor force. This sector significantly
influences the economy as the major portion of the labor force is employed in this sector. If
government can provide sufficient facilities to the farmers there would be more outcome that
could benefit the economy as a whole. Government should try to make sufficient expenditures
so that the sector could grow farther and the people employed in this sector can contribute
more to the economy. Without aiding the sector with more budgetary allocation the economy
as a whole cannot perform well and the government cannot achieve the macroeconomic goals
like GDP growth rate.

3.3.3 Agro based industry:


Government should provide sufficient concentration on the agro based industries to accelerate
the economic growth for the purpose of macroeconomic goal achievement. Every year there
are a lot of products spoiled because of storage problem. If the agro based industries could
grow, the storage problem would be solved quite easily. The industries could add value to the
economy with the help of the government.

3.3.4 Quality seeds for increased agricultural production:


The use of quality seeds can significantly influence the production of agricultural products. It
can influence both the food production and agricultural productivity significantly. Proper
emphasis must be given to seed multiplication programmes to produce large quantity of quality
agricultural products. Government should make a plan to improve the condition of the sector to
increase the production of agricultural products. Private sector investors can play a crucial role
in this regard. They can help to accelerate seed multiplication programme and distribute high
quality seeds to the farmer throughout the country.

3.3.5 Inadequate research and development:


Improving the institutional capacity of research organizations through deployment of adequate
manpower is essential. Human resources are the key to produce innovative product and
services. Without innovative measures agriculture sector cannot satisfy the demand of the
extra production of our excess population. Research can help to explore new cultivation
methods and new agricultural products or it can facilitate the solution of existing problems.
There are different problems prevailing in our country regarding the agricultural methods and
hurdles associated with agricultural methods. There are different problems regarding
agricultural methods and cultivation which can be addressed if government provides sufficient
fund to the researcher for research.

27

3.3.6 Problems of the agricultural sector:

Inadequate transport facilities due to poor governmental monitoring of transportation


sector.
High transportation cost due to increased oil price and poor condition of the road.
Preservation problems.
Low price at the harvesting period.
Unstable price situation because of syndicate pricing.
Poor accessibility of market information.
Weak condition of supporting institutions.

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3.4 Power:
To attain a sustainable growth of GDP government need to make sure that there is sufficient
supply of power. Without consistency in power generation there is no way to reach the desired
outcome of the nation as a whole. Power generation capacity has been increased at 10,341
megawatt and the sector has improved quite sharply. But the problem is the growth is not
sufficient to meet the existing demand and to facilitate the growth of the country. To support
the macroeconomic goals of the country there must be more allocation for the generation of
power.
In this regard there should be integrated approaches to be followed. 53 projects are included in
ADP and 11.6 percent of total ADP is allocated for power generation. Allocation of this sector
has been increased by 16.7 percent mainly due to rise in development expenditure. There are
some points to be remembered.

3.4.1 Failure to implement big power plants:


Government has to allocate more budgets for the big power plants and make sure that the
allocation is utilized efficiently. Most of the big power plants have no specific allocation. There
is an increased dependence on the quick rental power plants which the sector cannot bear as
the power plants are suitable for short period. The big projects should be given more allocation
as there is no way of improvement in this sector without the big power plants. The big projects
are less costly with respect to per unit cost of production which is mentioned earlier. The small
units are responsible for the increase in power prices as the quick rentals are consuming the
major portion of electricity generation. The big projects are helpful as these can provide long
term service to the economy. Because of quick rental power plants the cost is increased which
is causing the economy to suffer in different ways.

3.4.2 Over-dependency on gas based power plants:


The power generation of our country is largely dependent on gas because of government`s
failure to explore new alternatives to this source. As there is no other available source of power
generation the power sector cannot fulfill the growing demand of the huge population in our
country. Without more allocation government cannot accelerate the power generation of our
country because exploration of new sources requires huge investment. Government can make
a realistic plan to explore new alternatives. To improve the present condition and to fulfill the
gap between supply and demand there should be more investment and allocation for the
power sector. Over-dependency on a single source is not satisfactory at all for the present
economic condition of our country. To accelerate the economic growth of our country the need
of power is a crucial factor. Government should try to increase the power generation of our
country with new and cheaper alternative like as coal.

29

3.4.3 Subsidy dilemma:


As it is mentioned earlier the subsidy burden is increased by a significant portion. It has caused
multidimensional problems to the economy. Because of the increased expenditure on subsidy
the price of oil and power has been adjusted several times. Oil based power plants are found as
costlier because oil is subsidized substantially. The generation of one kilowatt hour power by a
gas-based power plant costs only Tk. 2.59, whereas the costs become Tk. 20.73 and Tk. 16.37
for the diesel oil-based power plants and oil-based power plants respectively. Instead of
facilitating the coal and gas based power plants government is relying on quick rental power
plants which has increased the power price by 163 percent from FY2008-09 to FY 2012-13. In
FY2008-09 the cost of one unit power generation was 2.55 taka and in the FY 2012-13 the cost
of one unit power generation is 6.7 taka. Moreover it will increase more as the government is
installing more quick rental power plants.

3.4.4 The gap between installed capacity and maximum generation:


There is a high mismatch between the installed capacity and maximum generation. The gap was
1004 megawatt in FY2008-09 and in FY2013-14 it was at 3271 megawatt. There is a high
demand for electricity as the economy is suffering for the lack of power. There are some
investors waiting for power connection. The gap is increasing as the installment of quick rental
power plants are not replaced by big power plants in time.
Government must try to replace the small power plants to exploit economies of scale. Without
implementing the big power projects the present situation cannot be improved. The gap
between these two can only be decreased by the installment of big power projects.

year

2013-14
2012-13
2011-12
2010-11

Installed
capacity
(Megawatt)
10241
8525
8100
6639

Maximum
generation
(Megawatt)
6970
6675
6066
4890

Source: Adopted from mof.gov.bd

30

3.4.5 Inadequate access to electricity:


Despite some noteworthy progresses in power generation there are huge people who are out
of reach on the part of the government. The beneficiary coverage of power has been raised to
60 percent from 47 percent. Per capita power generation has increased from 220 kilo watt hour
to 292 kilo watt hour. New power connections have been given to more than 3 million people
but this is not sufficient at all.

3.4.6 Low allocation causing problems for the exploration of new sources of
energy:
Low allocation is causing problems for the exploration of new sources of energy. If government
put much concentration on exploration of natural resources so as to maximize the power
generation to meet the demand of huge population. Without utilizing the present resources the
supply of power cannot be increased significantly and the power crisis cannot be met. Power
crisis is the crucial issue for the government right now as it is causing to slow the economic
growth and economic expansion. To accelerate the economic growth and economic expansion
the generation of power should be increased to meet the huge demand.

3.4.7 Limited role of coal:


Limited role of coal is one of key problems causing the low production and high cost of the
power which is not helpful for the economy at all. For the purpose accelerating the power
generation and lowering the cost of power generation government must allocate necessary
funds to install new projects that will both lower the cost and increase the capacity
substantially. To extract coal government needs to make some immediate steps to make the
power generation user friendly and cost effective. With the existing high cost quick rental
projects government cannot continue to supply power to the huge population. The reduction of
cost is largely dependent on coal based power plants. Without installing the coal based power
plants government cannot reduce the power generation cost and subsidy expenditures on
quick rental projects. In this regard the coal based power plants can play a great role to
maximize the power generation and minimize the power generation cost on the part of the
government.

31

3.5 Subsidy:
Budget deficit is growing beyond the ability of the government to finance. Government is trying
to reduce the budget deficit and in this regard the allocation for subsidy is decreasing day by
day. Subsidy reduction is responsible for the increase in oil price and power price. To reduce the
burden of subsidy government adjusting the power and oil price substantially which adds fuel
to the current level of inflation. Subsidy reduction causes serious difficulty at the different
sectors as it puts burden on the shoulders of the mass people and makes it harder to maintain
the living standard as a major portion of the people living below the poverty line. As a result the
cost of production and transportation is increasing alarmingly which cannot be met by the
people living below the poverty line. Subsidy reduction has some bad effects associated with it.

3.5.1 Bad effects of subsidy reduction:


3.5.1.1 Inflation:
Increase in oil prices will lead to an increase in transportation cost as well as production cost
whereas electricity prices will be increased as well. These two crucial factors will have
determined total effect on the economy in terms of increase in prices. To reduce the amount of
subsidy is going to increase the inflation rate and it is anticipated that the target of containing
inflation at 7.3 percent in the coming fiscal year will be difficult to achieve.

3.5.1.2 Education Subsidy:


The public universities in our country are subsidized. Every huge amount of subsidy is provided
for these universities. Govt. is providing free books for students up to S.S.C level as well. In this
way ever year govt. is to spend a lot on education sector. If subsidy is decreased substantially
by the government then education sector will face trouble to keep pace with the increasing
expenditure structure.

3.5.1.3 Agricultural Subsidy:


Due to the increasing price of fertilizer in international market govt. may increase the price of
fertilizer as budgeted subsidy is expected to fall short this year. But agriculture sector will be in
great trouble if the prices of different fertilizers increase. It will lead to increase in inflation
which will be very much unexpected.

32

Chapter 4
To find ways for
managing budget
deficit for the purpose
of macroeconomic
goal achievement

33

4.1 Management of budget deficit:


Budget deficit is not a problem if it is managed well. Management means the utilization of
funds and combination of different sources of funds. Utilization of funds means the efficient
use of funds. Funds are often used inefficiently which turns into larger budget deficit. Such as
the carryover projects which cause more budget deficit can be the best example of
mismanagement problem of funds. Another problem which is encountered by government is
inefficient combination of different sources of funds. There are several sources of funds which
are available for the government to finance budget deficit. But government relies on banking
sector much as the other sources cannot supply sufficient funds to finance huge budget deficit
and in this regard government needs to restore the balance by putting some burden on other
sector and removing the existing pressure of the banking sector. Because of the pressure
created on banking sector sometimes it becomes difficult for the sector to provide sufficient
fund to the private sector.

4.2 Macroeconomic goal achievement:


There are several macroeconomic goals government pursues. Government has to try to
accelerate the economic growth, to increase the rate of unemployment and to control the
inflation rate. The goals are somewhat problematic to pursue as the change in one factor can
cause to change the other negatively. Whenever money supply is increased for the purpose
increasing private sector investment, the rate of inflation may increase. Government has to
make some trade-off between the goals. In this regard government needs to use the deficit
budget as a tool of achieving the macroeconomic goals and to restore the imbalance in the
sectors that need more funds.

4.3 Acceleration of economic growth:


Government needs to accelerate the economic growth and in this regard infrastructure
development, employment creation, health care facility, power generation, agricultural
production and education facilities should be improved to make the economic growth
sustainable. Government is to work as the bridge among the different components of the
economy to maximize the economic revenues and economic transactions to maximize
government revenues. In this regard government needs to integrate all of policies including
economic, financial and monetary policy.

34

Economic transactions
(Indirect taxes are
Import duty,
supplementary duty,
VAT etc.)

Government
revenues
(Major sources are
direct tax and
indirect tax)

Economic revenues
(Direct tax on income
and profits)

Government
revenues

Economic
revenues
And
Economic
transactions

Economic
revenues
Government
revenues

And
Economic
transactions

35

Financial policy
(For implementing
economic policy)

Economic policy

Monetary policy

(Evolved from economic


condition)

(For controlling money


Supply)

Integration
Among all the policies

Research

Economic expansion
(Innovative products and
services)

36

Economic policies mean the actions that influence the economy. Economic policies evolved
from economic condition of a country. For example our economic condition requires more
expenditure on infrastructure development, education, power, healthcare, employment
generation as our economy is developing one and a number of people of our country are living
under the poverty line. So the government has to make a lot of expenditure to improve the
infrastructure such as building new roads, bridges. Government has to give subsidy on different
prioritized sector like agriculture, education, power health care.
Financial policy of government is a tool to implement different economic policy. As it is
mentioned earlier the government spends on different sector for infrastructure development,
education power, healthcare, employment generation actually government spend on the
sectors because of its economic policy. For example our economy is in need of infrastructure
development. As a result government spends more on infrastructure development every year.
Government wants to have a GDP growth rate of 7.3 percent in 2014-2015. To achieve this rate
public sector investment has to grow significantly. But with existing monetary policy it is not
possible to grow at the desired level as the monetary policy is based on the assumption that
inflation is caused by money supply and because of this wrong assumption private sector
investors have to pay more interest which is helpful for the private sector investors.
Because of wrong monetary policy the private sector investment is not growing at the desired
level. To grow at the desired level government must make the monetary policy expansionary.
The integration between these policies is the only way to have a growth rate at the desired
level. If there is significant growth in private sector investment than there will be generation of
revenues and profit from those investments and government will have sufficient tax revenue
from those profits generated by investors.
To find the ways of integration and to expand the economic activities government must spend
more on research projects. Research can help to grow the economy with innovative products
and services. On the other side with the help of research government can find the ways of
integration of different economic, financial and monetary policy.

37

Conclusion:
From the above discussion the conclusion we can make is that Government should try to
reduce the budget deficit without reducing the public expenditure as the reduction will
definitely hamper the economic revenues and transactions negatively. In addition to this the
interest rate burden that has been put on the shoulder of the investors should be removed so
that they can invest more which will help to expand the private sector investment as the
private sector investment is the key to increase the government revenue with the help of
increased economic transactions and revenues.

Recommendation:
Modernization of taxing policy is the single factor that can influence the economy and
revenue collection significantly.
To reduce the budget deficit government must try to expand the economic activities as
expansion of economic activities can pave the way of sufficient revenue collection.
Coal based power plant should be built to reduce over-dependency on gas based power
plants that can reduce the burden of budget deficit substantially.
Direct tax collection is low and it is not the major part of government revenues rather VAT
dominates the total revenue collection as percentage of total revenues.
People put different financial papers for loan and tax purposes. This is one of the reasons
for which direct tax collection is low in our country.
Economic expansion can be possible through research as research facilitates exploration of
new and innovative products and services.
There should be more allocation for exploration of new sources of power to accelerate
economic growth so that the economic expansion can aid the government with increased
revenue.
Uniform code for every institution should be introduced so that the organizations and
persons cannot put different statements at different places as uniform code can aid to
accelerate the direct tax collection substantially.
Over-dependency on VAT should be replaced by direct tax collection through NBR as direct
tax collection should be the key source of revenue collection.
Interest rate should be lowered to accelerate the economic growth as economic expansion
can help to accelerate the revenue collection of government.
The reasons behind inflation should be evaluated intermittently as there are different
reasons behind inflation.

38

Bibliography:
1. Sadia Afrin (2013). Fiscal deficits and Inflation: The case of Bangladesh
Available at: http://www.bb.org.bd/pub/research/workingpaper/wp1303.pdf (Accessed 19
June)
2. Zebulun Kreiter and Tapas Kumar Paul (2010). Deficit financing and inflation in Bangladesh:
A vector Autoregressive Analysis.
Available at: http://mpra.ub.uni-muenchen.de/45981/1/MPRA_paper_45981.pdf (Accessed 19
June)
3. Unnayan Onneshan (2013). Dynamics Of deficit And Debt: Bangladesh Economic Update.
Available at:
http://www.unnayan.org/reports/meu/August_13/MEU%20on%20Deficit%20and%20Debt.pdf
(Accessed 20 June)
4. Bangladesh GDP Annual Growth rate (2014)
Available at: http://www.tradingeconomics.com/bangladesh/gdp-growth-annual (Accessed 13

July)
5. The bdnws24.com, Reazul Bashar (2014). No signs of escaping rental trap
Available at: http://bdnews24.com/economy/2014/02/13/no-signs-of-escaping-rental-

trap(Accessed14july)
6. Unnayan Onneshan (2014). LONG ON TARGETS, SHORT ON REALITIES: A Rapid Assessment of
National Budget 2014-15.
Available at: http://www.unnayan.org/reports/Budget/Budget_FY_2014-15/Budget_FY_2014-

15.pdf (Accessed 16 July)


7. Centre for Policy Dialogue (2014). Analytical review of Bangladeshs Macroeconomic
Performance.
Available at: http://cpd.org.bd/wp-content/uploads/2014/01/IRBD-FY14-Second-Reading.pdf
(Accessed 16 July)

39

8. Budget Speech 2014-15.


Available at: http://www.mof.gov.bd/en/budget/14_15/budget_speech/speech_en.pdf

(Accessed 16July)
9. Budget speech 2013-14
Available at: http://www.mof.gov.bd/en/budget/13_14/budget_speech/speech_en.pdf
(Accessed 16 July)
10. Budget speech 2012-13
Available at: http://www.mof.gov.bd/en/budget/12_13/budget_speech/speech_en.pdf
(Accessed 16 July)
11. Budget Speech 2011-12
Available at: www.mof.gov.bd/en/budget/11_12/budget_speech/speech_en.pdf (Accessed 16
July)
12. Centre for Policy Dialogue (2014). An Analysis of the National Budget for FY 2015.
Available at: http://cpd.org.bd/wp-content/uploads/2014/06/CPD-An-Analysis-of-the-NationalBudget-for-FY2015_Final_June.pdf (Accessed 16 July)
13. Unnayan Onneshan (2014). Recent Trends of Growth in Agriculture, Industry and Power
Available at:
http://unnayan.org/reports/meu/MEU_March_2014/Final%20MEU%28Edited%29_29%20Marc
h14.pdf (Accessed 16 July)
14. Islamic Development Bank Group (2013). Country Economic Work: Diagnostic Analysis of
Bangladesh Economy.
Available at:
http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IDB/CM/P
ublications/Parnership_Strategies/Bangladesh_EcoWork_April13.pdf (Accessed 16 July)
15. Centre for Policy Dialogue (2014). Bangladesh Economy In Fiscal Year 2014.
Available at: http://cpd.org.bd/wp-content/uploads/2013/10/Bangladesh-Economy-in-FY2014.pdf
(Accessed 18 July)

40

Appendices

Table 1
Total revenue, expenditure and budget deficit
Financial years
FY98-99
FY99-00
FY00-01
FY01-02
FY02-03
FY03-04
FY04-05
FY05-06
FY06-07
FY07-08
FY08-09
FY09-10
FY10-11
FY11-12
FY12-13
FY13-14
FY14-15

Total Revenue
19767
20074
24342
24893
31120
35400
39200
44868
49472
59479
64568
75905
92993
114693
128128
156671
182954

Total
Expenditure
29779
34464
37399
40757
42075
47184
53903
59030
66836
90696
89194
102977
128249
152428
174013
216222
250506

Budget Deficit
10012(actual)
14390(actual)
13057(actual)
15864(actual)
10955(actual)
11784(actual)
14703(actual)
14162(actual)
17364(actual)
31217(actual)
24626(actual)
27072(actual)
35256(actual)
37735(actual)
45875(actual)
59551(revised)
67552(proposed)

Source: Adopted from mof.gov.bd

41

Table 2
Year
GDP
growth
rate
GDP In
Billion$

2004
6.27

2005
5.96

2006
6.63

2007
6.43

2008
6.19

2009
5.74

2010
6.07

2011
6.71

2012
6.32

2013
6.01

56.56

60.28

61.9

68.42

79.55

89.36

100.36

111.91

116.03

129.86

Source: Adopted from tradingeconomics.com

Table 3
RATIO OF GDP TO REVENUE AND % OF TAX TO GDP
particulars

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

GDP at
current
price(in
crore taka)

370710

415730

467500

535415

613111

685009

787590

Revenue

39200

44868

52542

60539

69382

79461

95188

Tax

31950

36175

42915

48012

56789

63955

79052

Revenue as
% of GDP

10.57

10.79

11.24

11.31

11.32

11.60

12.09

8.62

8.70

9.18

8.96

9.26

9.33

10.04

81.50

80.62

81.67

79.30

81.85

86.77

83.05

Tax as % of
GDP
Tax as a %
of revenue

Source: Adopted from mof.gov.bd

42

Table -4
THE CONTRIBUTION OF DIRECT AND INDIRECT TAX

particulars

2005 -06

2006 -07

2007 -08

2008 -09

2009 -10

2010 -11

Total revenue

44868

52542

60539

69382

79461

95188

Tax revenue

36175

42915

48012

65789

63955

79052

%of tax to
revenue

80.63

81.68

89.31

81.85

80.48

83.05

Direct tax

7344

8915

11500

13604

17220

23541

% of direct tax to
total tax

20.30

20.77

23.95

23.95

26.92

29.78

Indirect tax

28831

34000

36512

43185

46735

55511

% of indirect tax to
total tax

89.30

89.23

76.05

76.05

73.08

70.21

Source: Adopted from mof.gov.bd

43

Table-5
PERCENTAGE OF INCOME TAX TO TOTAL TAX

Particular
Income Tax
Tax revenue
Revenue
receipts
%of income
tax to total tax
% of income
tax to revenue

2005-06
6960
36175
44868

2006-07
8500
42915
52542

2007-08
11005
48012
60539

2008-09
13054
56789
69382

2009-10
16560
63955
79460

2010-11
22105
79052
95188

19.24

19.81

22.92

22.92

25.89

27.96

15.51

16.18

18.17

18.81

20.84

23.22

Source: Adopted from mof.gov.bd

Table -6
PERCENTAGE OF VAT TO TOTAL TAX REVENUE
Particular
Total revenue
Tax revenue
Vat
%of vat to total
revenue
% of vat to total tax

2004-05
39200
31950
10605

O50-06
44868
36175
12398

06-07
52500
42915
14729

08-09
69382
56789
20249

09-10
79461
63955
22795

27.06

27.63

28.03

29.18

28.51

33.19

34.27

34.32

35.65

35.64

Source: Adopted from mof.gov.bd

44

Chart 1

Source: Adopted from isdb.org

45

Chart 2

Source: Adopted from isdb.org

46

Chart 3

Source: Adopted from cpd.org.bd


47