1. What are the major functions of budget?

Discuss the major components of

Bangladesh budget. Give a critical analysis of our budget of financial year 2021-22.

Functions of Budget

The budget is prepared by the government to achieve specific goals. The government 's
economical, societal, and administrative initiatives have resulted in these in these functions.
In addition to straightforward surveillance of the government's total receipts and expenditure,
the budget now serves a variety of other purposes such as controlling and monitoring funds,
management tool for national economies and policy making.

Components of Bangladesh’s Budget

Bangladesh's budget is divided into two components: revenue and development. The revenue
component is focused on current income and expenses related to the maintenance of basic
priorities and necessary services, whereas the development component is set aside for
development efforts. The two budgets are created using different methods. Their financial
structures and given authority to incur spending in various tiers are likewise distinct.
Domestic income, foreign funds, borrowings, domestic assets, extra reserves, and domestic
borrowings are all included in the revenue budget. Public and private revenues are separated
in the development budget. Revenue surpluses, income from new provisions, net domestic
assets, and additional budgetary reserves are all examples of public revenues. Foreign
assistance is a unique type of public revenue. Direct private investments, financing from the
financial system, and foreign country private investment are all sources of revenue for the
development budget under that same private category. The Finance Division is in charge of
the revenue budget, while the Planning Commission is in charge of the development budget.
The formulation of the revenue budget is a multi-step procedure that must be completed on
time. The printing of departmental estimations is followed by the production and release of
Budget Papers to the accounts officials responsible for filling them out with projections from
all controlling institutions and sending aggregated estimations to the ministry of finance. The
ministry of finance after which analyzes the estimates, acquires a schedule of new spendings
as well as details on actual spending of organizations and agencies over the previous six
months, reviews new assessments based on that data, and develops a rough version of the
budget and timetable of new expenses. The ministry also obtains predictions of foreign
development aid and development programs from the Ministry of Planning, and then after
making essential revisions, develops budget papers for presenting to parliament for debate
and authorization. The government of Bangladesh's development budget is the product of a
continual process of finding new initiatives, reviewing concept papers, and evaluating
proposals in ministries. The Economic Relations Division creates the relief memorandum,
distributes it to the ministries for review, and then revises it depending on national asset
predictions from the National Board of Revenue. Following that, the paper is delivered to the
Cabinet for confirmation. The programming committee then determines whether projects are
qualified for placement in the annual development program based on their resource status for
revenue spending and budget. Consolidated Fund and Public Account are two sections of the
federal budget. These are not independent entities, but disparities in revenues and
disbursements identify them. Flows of funds from a single entity are represented by the
transactions in both categories. The difference between total revenue and spending of the
money and account together represents the entire budget equilibrium, or excess or shortfall.

Analysis of Bangladesh’s Budget of Financial Year 2021-22

The budget for the years 21-22 was presented at a period when the nation is experiencing its
second pandemic wave. Bangladesh's economy has already been undergoing the most
difficult phase in its history since the emergence of the epidemic in the country. The budget
for year 21-22 was designed in light of a variety of developing economic indicators. Despite
obstacles, the economy was able to retain some stability in fiscal year 21, with some positive
developments. During the fiscal year, however, a variety of flaws became apparent. The
changes in the key development areas may be seen when comparing the budget to the past
fiscal year. The amount allotted to the Education and Technology Department and the Health
Sector as a proportion of the total budget has grown, but by just under 1% for each area. The
share given to the Power and Energy, as well as the Public Administration sectors, has
declined.

Health Sector

In comparison to the previous year, the health sector allocation is just a higher share of GDP
this year. The widespread anticipation was for the health sector to get a greater budget
allocation. The reason for this is the impending worry that the present COVID-19 situation
would deteriorate as a result of the Delta variant's recent entrance into Bangladesh. The
budget transcript revealed no new projects to combat the pandemic's consequences. VAT has
been eliminated from the manufacturing of sanitary products at the domestic processing
phase, resulting in an increase in the availability of quality and inexpensive sanitary products
for sub-sectors such as Women's Health. In addition, a proposal has been made to expand the
current concessional facilities, notably for the importation needed to manufacture medical
items. This will minimize the cost of manufacturing medications and, as a result, make them
more accessible to low-income people.

Agriculture Sector

To boost automation in this industry, the budget announced a VAT exemption for Weeders
and Winnowers at the production and trade phases. Farmers will be able to breakdown the
soil crust, build soil mulch, and eliminate weeds from vegetable crops with the help of the
Weeders. The grain is separated from the chaff using winnowers. Manual farming work will
take less time and effort in both cases. In addition, the budget includes a tariff exemption for
the importation of important agricultural supplies, such as fertilizers, seedlings, and pesticide.
Existing farmers will save money on inputs, while agriculture-based firms will benefit. Local
farmers will have a fair chance as a result of this. Furthermore, enterprises that process local
produce fruits and veggies, produce dairy products, and manufacture agricultural gear have
been granted 10-year tax exemptions. This will assist to foster new agricultural entrepreneurs
and boost food security by lowering reliance on imports. However, the unused utilization of
the authorized budget amount is a major worry for this sector, as almost 10% of the formerly
allotted budget has remained unused in recent years.

Education Sector

Education is a key factor of long-term economic growth, which Bangladesh aspires to

achieve. The long-term advantages of education are realized in steps, and in order to
accomplish this, the budget allotment to education this year was boosted by 7%. This year's
allocation, as a percent of GDP, is smaller than last year's. Given that the amount dedicated to
Education as a proportion of GDP in Bangladesh is the least between South Asian countries,
it may not be a favorable step for the Education Sector. COVID-19 has been affecting
students over the past two years as a result of school closures. This compelled students to
begin remote learning, but not all students had accessibility to the equipment necessary to
participate in virtual classrooms. A large percentage of students originate from rural locations
and are from low-income families, therefore they are incapable of taking advantage of remote
learning options. It was also revealed that almost 70% percent of participants in primary and
secondary institutions did not attend remote learning programs.

Brief Recommendation and Concluding Remarks

In the perspective of Bangladesh, good execution is more important than a large budget
allocation. Money can be put into the market, but only when the assigned budget is used to its
full capacity will it result in increased living conditions. Bangladesh has to utilize resources
effectively and place a specific emphasis on areas that help human welfare, such as
healthcare and education, to achieve the World Bank's expected growth rate. This is
particularly critical in light of COVID-19. While developing the Sector's allocations, the
weight of COVID-19 on the Health Sector might have been emphasized even more. Prior to
COVID, the healthcare system was in a bad way. As a result, it is apparent that the Health
Sector requires greater attention when it comes to budget allocation and use.

2. What are the major types of investment? How does government budget deficit affect
private sector investment? Discuss the major government incentives to attract foreign
direct investment (FDI).

There are three major types of investment: Business Fixed, Residential Investment, Inventory
Investment.

Business Fixed

Fixed investment in businesses refers to purchases of machinery, equipment, and

infrastructure for use in the manufacturing of products and service. Fixed capital is
represented by the inventory of this machinery or industrial equipment, for example. The
phrase 'fixed' suggests that the money spent on machinery, equipment and others will be
employed for manufacturing for a long period. This is in opposed to inventory investment,
which consists of components that will either be employed for manufacturing or traded to
others for manufacturing.

Residential Investment

Residential investment means to the money spent on building or purchasing new homes or
flats for the intention of living in or rent out to anyone. The price of existent housing units
affects residential investment. The greater the value of existing apartments, the more money
will be spent on building and buying new homes.

Inventory Investment

Firms keep raw materials and semi-finished items on hand to be turned into completed goods.
The companies also have finished items on hand that will be sold soon. Inventory investment
refers to the changes in the businesses' inventories or stockpiles of these items.

Effects of Budget Deficit on Private Sector Investment

When there is a gap between the savings and investment, budget deficits occur. In this
situation, the government has to borrow from banks while crowding out the private sector
investment. To encourage economic activity, the government sometimes adopts a stimulative
fiscal policy approach and raises expenditure. Interest rates rise as a result of this. Interest
rate hikes have an impact on private investment options. With increased interest charges, the
cost of investing funds rises, limiting their access to debt financing methods. This results in
lower investment in the long run, crowding out the effects of the initial increase in overall
investment spending. Typically, the first rise in government expenditure is paid by higher
taxes or government loans.

Major Government Incentives to Attract Foreign Direct Investment (FDI)

The attitude regarding incoming foreign direct investment has shifted dramatically in recent
decades, as most nations have liberalized their rules in order to attract investment of
multinational firms from around the world. A growing number of developing-country
governments, such as Bangladesh's, offer various types of business incentives to attract
foreign-owned enterprises to invest in their nation. Some are briefly discussed below:

Taxation is an important incentive for FDI. Tax incentives can be used in a variety of ways to
stimulate FDI. Corporate income tax might be decreased in general. Tax holidays are also
employed, which implies a corporation will not have to incur corporate taxes for a month,
year, or other period of time. In Bangladesh some tax policy to attract FDI includes royalties
and technical know-how fees acquired by any foreign collaborator, firm, corporation, or
expert are tax-free. Some other non-tax related incentives include no restrictions on foreign
equity involvement; hence, non-resident corporate or private investors can invest in
Bangladesh's stock markets as part of a portfolio. Local banks may provide full operating
loans to foreign investors or firms. The conditions of such loans will be set by the connection
between the bank and the client. Moreover, Capital funded from foreign means will be able to
be repatriated in its entirety. Profits and dividends from overseas investments can also be
transmitted in full. Reinvestment of repatriable dividends or retained profits by overseas
investors will be viewed as fresh investment. Foreigners working in Bangladesh have the
option of remitting up to 50% of their salaries, as well as complete repatriation of their
earnings and pension benefits. Furthermore, A foreign technician working for a foreign
corporation will not be liable to personal tax for the first three years, and after that, personal
income tax pay will be determined by the presence or absence of a double tax agreements
with the country of nationality.

3. What are the objectives of monetary policy? What targets and tools are set by the

Bangladesh Bank for monetary policy? What are the major challenges for

implementation of monetary policy? Give a short summary of Bangladesh Bank’s

monetary policy of 2021-22.

Objectives of Monetary Policy

The three main objectives of Monetary Policy are Price Stability, High Levels of Production
and Employment, and High Level of Economic Growth. They are discussed below:

Monetary Policy

In an economy, price stability indicates that the overall price level does not vary considerably
over time. In other sense, prices do not rise or fall; there is no noticeable inflation or
deflation. The phrase monetary policy relates to a government's choices on rate of interest
and the amount of money available in an economy. To try to maintain prices steady,
monetary policy can be utilized. Monetary policy's overall purpose is to assist the economy in
achieving or maintaining monetary equilibrium. When the quantity of money required
matches the supply of cash provided, a financial system is in monetary equilibrium.

High Levels of Production and Employment

Economic development by itself does not always imply more and better paying jobs,
particularly for the underprivileged or disadvantaged. Economic growth, which is the
outcome of both more employment and increased labor productivity, is a requirement for
expanding productive employment. As a result, monetary policy is centered on these two
characteristics.
High Level of Economic Growth

Economic growth is described as an increase in the valuation of a country's products and

services, which leads to higher profitability for businesses. As a result, stock values climb
significantly. This enables firms to invest and hire more employees. When more employment
is created, incomes rise. People now have more money to invest on more goods and services,
resulting in increased growth. As a result, every country aspires to achieve high economic
growth.

Targets and Tools set by the Bangladesh Bank for Monetary Policy

The immediate targets of Monetary Policy are reserve money management and broad money
management. Additionally, policy targets are inflation target and growth targets. A reserve
fund is put aside to meet planned, normal, and unplanned costs that otherwise would have
been paid out of the general budget. Structures and implementations of these reserve funds
are developed by the government's monetary policy. A reserve fund is set aside to cover
anticipated, routine, and unanticipated expenses that would generally be paid from the
general budget. The government's monetary policy determines the structures and
implementations of these reserve funds. Broad money refers to the amount of money
available in a given economy. It is characterized as the most comprehensive way of
calculating a country's monetary supply, considering both lendable money and other assets
that may be quickly transformed into cash to purchase goods or services. The Department of
Monetary Policy oversees comprehensive money regulation, but it does it via establishing
policies. Monetary Policy also sets the target for inflation and growth.

Tools of Monetary Policy are Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity
Ratio (SLR), Open Market Operation (OMO), Moral Suasion. Two are discussed below:

According to central bank rules, the Cash Reserve Ratio is the percentage of funds that
commercial banks must keep as cash. The reserve ratio is an important tool for regulating the
money supply in a country's economic monetary policy. When the monetary authority wants
to increase the money supply in the economy, it lowers the reserve ratio. As a result,
commercial banks have more capital to lend, increasing the money supply of an economy.

The activity of purchasing and offering treasury securities, as well as other assets, on the
open market in order to manage the availability of money is known as Open Market
Operations (OMO).
The Major Challenges for Implementation of Monetary Policy

Weaknesses in the legal framework, undeveloped financial markets, oligopolistic banking

behavior, and an excessive quantity of banks obstruct monetary policy implementation
mechanisms. The interbank market is a primitive system. Despite the fact that policy rates are
employed, changes in them have a limited impact on other interest percentages. Banking's
role in deciding how monetary policy is conveyed to the economy remains critical. In relation
to price stability, the Bangladesh Bank frequently pursues other goals. These range from
seeking to boost economic development to focusing specifically on loan expansion and
exchange rate stabilization. Despite having a specific monetary inflation target, the priority of
the inflation aim is not well defined. Because the policy scope is so short, it's hard to
concentrate on long-term pressures and patterns rather than simply recent events. In the
monetary policy context, exchange rate control plays a crucial function. Conventional reserve
and broad money designed to target frameworks are applied with great flexibility, as
evidenced by numerous departures from monetary program aims. To level out exchange rate
volatility, the Bangladesh Bank often takes action in the foreign currency market.
Furthermore, the macroeconomic environment could not have been more difficult: growing
nonfood inflation, slow private-sector credit expansion, greatly increased bank loans, and
diminishing flexibility in a non-performing borrower burdened banking system with
inadequate deposit growth. Because many of these issues are interconnected, it is hard to
resolve them all with a single policy mechanism, such as monetary policy.

Summary of Bangladesh Bank’s Monetary Policy of 2021-22

The monetary proposed policy of the Bangladesh Bank for FY22 is intended to preserve the
current expansionary and accommodating mode, which is helping the interrupted economic
process of recovery, while keeping sufficient cautions for general pricing and economic
stability. Given the ongoing destructive waves of the Covid-19 epidemic, the most pressing
issues that BB may face in the months ahead are restoring full normality in lives and
livelihoods, as well as prolonging the essential flow of funds to the intended productive
activities. Longer sustaining of the present coronavirus pandemic with further global price
rises, as well as any unforeseen crop loss in the coming seasons caused by natural disasters,
might put excessive commodity price pressure on commodities in the future. Moreover, the
existence of a large quantity of excess cash in the economy in terms of the government's
continued stimulative monetary and fiscal policies may further contribute to the formation of
rising prices in the coming days. By June 2022, annual loan growth in the public and private
sectors is expected to reach 32.6 percent and 14.8 percent, respectively. To maximize the
impact of the govt's stimulus program, a four-pronged strategy will be used. BB will take into
account all policy choices for promoting young entrepreneurs and creating new jobs,
including: (1) continuing the current loan policy with a greater emphasis on micro, small, and
employment medium enterprises, primarily for the elimination of urban poor in the road
transport, tourist industry, hotel, medical services, and smaller companies; (2) fully
operationalizing its credit assure scheme to help CMSMEs. (3) Allowing financial institutions
to access technology-driven branch in remote and rural areas by employing their
recruited workforce for the purpose of creating highly skilled jobs and promote economic
inclusion while ensuring appropriate safe and secure environment; and (4) helping to bring
the education system, maybe the most impacted sector owing to the COVID-19 pandemic, to
a refinance system so that both underprivileged teachers and schoolchildren could get their
minimum needed amount. Given the economic hurdles created by the Covid-19 outbreak, BB
will retain its expansionary and dynamic monetary policy approach in order to encourage
investment and job creation while also assisting businesses in restoring their production and
distribution systems.