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FY20 Budget Statement: Selective Reminiscences

By

Dr. Mirza Azizul Islam

The budget statement for FY20 was presented to the Parliament on 13 June 2019.
A budget is an important policy instrument through which principal
macroeconomic objectives are sought to be achieved. Those are acceleration of
economic growth, creation of employment opportunities, ensuring stability of price
level, alleviation of poverty and equitable distribution of the fruits of economic
growth. Therefore, a budget has to be a multidimensional exercise. This article
deals with selected aspects of FY20 budget statement.

Macro framework of the budget

Macro framework comprises targets of total revenues, expenditure and sources of


financing deficit. Table 1 presents the relevant information. In this context it should
be noted that the gap between targets fixed in the budgets and actual realization
has been persistently increasing. In FY12 the gap in total expenditure was Tk.11,161
crores and rose to Tk. 71,106 crores in FY17. The corresponding gaps in NBR tax
revenue collection, non-tax revenues and implementation of Annual Development
Program (ADP) also increased hugely (Table 2).

My first comment with respect to macro framework concerns tax revenue


collection by National Board of Revenue (NBR) which exceeds 85% of total revenue.
Compared to the likely realization in the current fiscal year, FY20 target would be
37% higher. It can be confidently asserted that this ambitious target will not be

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realized. The past experience suggests that non-tax revenue target will also remain
unmet.

A similar comment applies with respect to ADP. Its implementation in the first
eleven months of the current fiscal year has been Tk.120,000 crores. It is assumed
that in the last month some TK.20,000 crores will be utilized. This assumption
implies that the FY20 budget target is nearly 45% higher.

As regards financing deficit, the target of external loans is reachable provided


project implementation can be expedited. Some analysts have raised concerns that
private sector may be crowded out from the banking system in view of huge target
of government borrowing. I am not greatly concerned about this eventuality
because of two reasons. First the actual level of total deficit will be less than what
is projected in the budget statement. Second the sale of saving instruments will be
a lot higher than estimated and to that extent the need for borrowing from the
banking system by the Government will be less.

Treatment of the Financial Sector1/

Financial sector of a country encompasses a wide variety of institutions. Those


include banks, capital market, insurance companies, nonbank financial institutions
etc. In this article the focus is on the treatment of banks in the budget statement.
The subject is of special importance in the present scenario of Bangladesh
characterized by unabated increase of non-performing loans of the banking sector.

1/Thissection is based on an article of the present author published in The Financial express on
25 June.

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The budget statement notes that no mentionable reform initiative was taken in the
banking sector from the beginning. There was no exit route for the loan recipient if
he/she fails to repay the bank loan. It is claimed that exit for loan recipients through
effective insolvency and bankruptcy laws has been arranged. I am not aware of
effective implementation of these laws. The statement should have mentioned
how many loan recipients have exited as a result of enforcement of insolvency and
bankruptcy laws.

The statement rightly observes that banks in Bangladesh suffer from a maturity
mismatch as they give long term loans by collecting short term deposits. Though
not specifically mentioned in the budget statement data show a heavy reliance on
the banking system for industrial term loan and meager contribution of the capital
market (Table 3). Measures to remove such mismatch suggested in the statement
are encouragement to instruments like Wage Earners’ Bond, venture capital and a
vibrant bond market. It should be mentioned here that these instruments are
already in existence. There should have been an analysis of why these have failed
to play expected role in investment financing and on that basis specific measures
to remedy the situation should have been pointed out.

With regard to Banking Commission it is stated that there would be discussions


with all concerned in this matter and the needful would be done. I have argued on
many occasions that no Banking Commission is needed as the causes underlying
the problems of the banking sector are well known and so are the solutions. A few
comments on this will be offered later.

It is also noted in the statement that the government is thinking of a number of


reforms in the banking sector. There is no indication of a time frame for

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transforming such thinking into action. Below are some comments relevant to
suggested reforms.

First, authorized and paid up capital of banks will be gradually increase. It is not
clear as to how this step, if implemented, will make a dent in the volume of ever
increasing non-performing loans.

Second, Banking Company Act will be amended so that amalgamation, merger and
absorption of banks can be legally processed, if required. There is no doubt that
such steps are needed in the banking sector of Bangladesh with too many banks in
a rather small economy. But, it is not clear as to whether the Government intends
to enforce mandatory amalgamation, merger and absorption. If that is not done, I
am doubtful if the banks will voluntarily take these steps.

Third, the statement mentions that stern measures will be taken against the willful
defaulters. However, there is no mention of the criteria for distinguishing willful
defaulters from unintentional ones. Many of the defaulters are politically
connected or related in some way to the Sponsors/Directors of banks. In these
circumstances banks are unlikely to declare any one as a willful defaulter.
Moreover, will it be necessary to amend any laws or promulgate new laws to
ensure stern action? There is also no answer as to why stern actions were not taken
in the past on the basis of existing laws.

Fourth, it is observed that the government has been working to bring down the
interest rates of bank loans to single digits with a view to making our industries and
businesses more competitive. There was an earlier decision that the interest rates
on bank loans would not exceed 9%. Available information indicates that this has
not been implemented in practice.

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In my opinion the banking system of Bangladesh is plagued with the following
problems:

 There are too many banks in Bangladesh. The result is that the volume of
business is rather small for each bank and they are not in a position to reap
the benefits of economies of scale. Any business with a low volume will
understandably try to charge higher unit price to reach desired revenue
target. This is one explanation of why banks in Bangladesh charge high
interest rates on loans.
 Governance in the banks leaves a lot to be desired. Loans are often given
as a result of political influence. In many cases, loans are given to friends
or relatives without paying due attention to the prospects of repayment on
the basis of objective analysis of the loan proposals. In such cases, as the
loan recipients fail to repay as per terms of the agreements, excessive
generosity is shown in respect of recovery. The resultant high rate of
default is also an important cause for high rate of interest. In the context
of governance, it should also be mentioned that the recent decision to
allow four members of a family on the Board and enhance their tenure runs
counter to sound governance.
 There is an inordinate delay in disposal of loan related cases. Thousands of
cases have remained pending in the loan courts. A large chunk of defaulted
loan cannot be recovered because of stay orders by higher courts.
 To an extent default is caused by the lack of adequate professional
competence of bank staff responsible for evaluation of loan proposals.
Here again the excessive number of banks aggravates the problem because

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banks are forced to engage in unhealthy competition to recruit
professional staff from the limited pool.
 The imposition of 15% tax on stock dividend distributed to the
shareholders by any listed company also presages adverse consequences
for financial soundness of banks as many of them are listed on the stock
exchanges. The same comment applies with regard to imposition of 15%
additional tax on so much of retained earnings and reserves as it exceeds
50% of the paid up capital of a company.

It is crucially important to deal with the above problems. It is not necessary to set
up a Bank Commission whose diagnosis of the banking sector problems is likely to
be any different from those mentioned above. As regards solution to this problems,
the first step needed is a firm political commitment to avoid political influence in
either granting loans or recovering defaulted loans. The second step needed is to
resolve quickly the cases stuck up in the legal system. The third step needed is for
Bangladesh Bank to effectively implement sound governance principles in banks.
There is no mention of these steps in the budget statement.

Poverty and Inequality

The budget statement refers to the constitutional obligation to eliminate social and
economic inequality, to ensure equitable distribution of resources among citizens
and to attain an equal level of economic development throughout the country.
However, there is no specific mention of the fact that distribution of income has
been worsening and also there are considerable differences among different
regions of the country in respect of proportion of people below poverty line. The
statement apparently draws satisfaction from the fact that the poverty rate

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(proportion of people below poverty line) fell to 21.8% in 2018 from 40.0% in
2005.In this context one has to note a distressing reality that the annual rate of
poverty reduction has been declining. The rate was 1.8% between 2000 and 2005,
1.7% between 2005 and 2010, only 1.2% between 2010 and 2018.

The statement elaborates expansion of social safety net measures by way of


increasing the number of beneficiaries as well as their entitlement. The allocation
for this purpose amounts to 14.21% of total budget and 2.58% of GDP. While this
initiative deserves acclaim I cannot help mentioning that the allocation for social
safety net was 17.3% of total budget and 2.8% of GDP in FY 2008-09 budget. There
is a compelling need for enhancing expenditure on social safety net in view of the
falling rate of poverty reduction. Happily, the statement notes that priority is given
for ensuring the selection of genuine beneficiaries to enhance the effectiveness of
social safety net programs and steps have been taken to establish MIS for all
programs.

As regards inequality of income distribution indirect taxes (that is value added tax
and import duties) continue to be the dominant shares of total tax revenue
collection. These taxes are generally regressive in that the incidence on low income
people is much higher as proportions of their income compared to the affluent. The
decision to allow whitening of black money by paying a mere 10% tax is likely to
further aggravate income inequality Gini Index of which rose from 0.46 in 2010 to
0.48 in 2018.

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Table 1: Major Elements of Macro framework (Crores of Taka)
Elements Amount
Total Revenue 3,81,978
NBR Tax Revenue 3,25,600
Non-tax Revenue 37,710
Total Expenditure 5,23,190
Annual Development Program 2,02,721
Total Deficit 1,45,380
Net Foreign Borrowing 63,848
Borrowing from Banks 47,364
Net Sale of Saving Instruments 27,000
Source: Budget in Brief, FY 2019-2020
Table 2: Gap Between Budget Figures and Actuals (Crores of Taka)
Elements FY12 FY17
Total Expenditure 11,161 71,106
NBR Tax Revenue 275 31,516
Non-tax Revenue 4,135 9,214
Annual Development Program 8,492 26,607
Source: Budget documents for various years.
Table 3: Sources of Capital (Crores of Taka)
Fiscal Year Long term Amount Raised Total Amount from
Industrial Finance from Capital Capital Market
from Banks Market as % of Total
2011-12 80,235 13,288 93,523 14.2
2012-13 90,334 12,397 1,02,731 12.1
2013-14 1,00,395 17,840 1,18,235 15.1
2014-15 1,23,142 16,971 1,40,113 12.1
2015-16 1,46,102 13,748 1,59,850 8.6
2016-17 1,70,988 22,019 1,93,007 11.4
2017-18 2,02,844 25,101 2,27,945 11.0
Source: Bonik Barta, dated: 26 June, 2019

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