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Fiscal Policy in

Bangladesh








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Submitted By:
Md. Sumon Mia
ID: 08-040
Department of Management Information system
University of Dhaka




Submitted To:
Nymatul Jannat Nipa
Lecturer
Department of Management Information Systems
University of Dhaka

Submission Date- 12/05/14







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Letter of Transmittal

12 May,2014
Nymatul Jannat Nipa
Lecturer
Department of Management Information Systems
University of Dhaka

Subject: Approval of Report
Dear Madam,
With due respect i would like to inform you that its a great pleasure for me
to submit my report Fiscal Policy In Bangladesh. Throughout the
completion of this report i have earned in depth, knowledge about the Fiscal
Policy. i feel this report writing experience will help me to prepare more
quality one in future.
I would genuinely aspire any corrections and guideline as you feel necessary.
Your kind advice will lead me further to the best.


Sincerely yours,
Md. Sumon Mia
ID: 08-040





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Acknowledgement

At the very beginning we are very pleased to successfully complete my
Report writing Fiscal Policy in Bangladesh. I would like to express
mygratitude to honorable Nymatul Jannat Nipa , Lecturer, Department of
Management Information Systems, University of Dhaka,without whose
proper supervision the report would have remain incomplete.




















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Table of Contents



Contents Page
Executive summary
6
History of Fiscal policy
7
Stances of Fiscal policy
9
Fiscal policy in Bangladesh
10
Conclusion

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Executive summary
Fiscal Policy is one more important component of overall economic policy. Its
instruments broadly consist of (i) taxes (ii) Public Borrowing (iii) Public Expenditure.
The importance of fiscal policy as an instrument of economic development was first
envisaged by Keynes in his General Theory wherein he showed that the total national
income was an index of economic activity and brought out the relation between economic
activity and total spending. The direct and indirect effects of fiscal policy on aggregate
spending in the community were clearly established and as a result the budgetary policy
of the government as a weapon of economic control and development came
into prominence. But the Keynesian analysis of fiscal policy is, applicable to the
advanced and industrialized countries and it has little relevance to underdeveloped
countries. Let now look at definitions given by different economists.
According to Arthur Smithies, fiscal policy means a policy under which the government
uses its expenditure and revenue programs to produce desirable effects and to avoid
undesirable effects on the national income, production and employment GK Shaw has
defined fiscal policy in these words, We define fiscal policy to encompass any decision
to change the level, composition or timing of government expenditure or to vary the
burden, structure or frequency of the tax payment. A skilful management of fiscal policy
instruments can go long way in maintaining economic stability and ensuring higher rates
of economic growth.










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History of fiscal policy


Fiscal policy initiated from the theory propounded by John Maynard Keynes, a British
economist popularly known as Keynesian economist. He states that government can
influence macroeconomic productivity levels by increasing or decreasing tax level and
public spending. The first monetary circular in Nigeria was issued in 1969 while a new
comprehensive banking decree was promulgated these a me year, to serve as guideline for
establishing and conducting banking business in Nigeria. Later, financial system was
comprehensively reviewed in 1979. The review called for an increase in banking
supervision and regulation to encourage specialization of financial institutions; a
comprehensive compound of training and manpowered development in the banking
system, and as part of the effort to improve the monetary management function of CBN,
all financial institutions were required to make return on financial statistics to the CBN.
The implementation of various recommendations took immediate effect. However,
following the collapse of the International Oil Marketing the mild 1981, the Nigerian
economy, which was mainly oil dependent, began to nosedive with negative
consequences for the fiscal and monetary system.

Apart from the worsening economic condition in the 1980s, there was political in
stability in addition to weak socio-cultural relations. By the end of 1985, it became an
imperative evident that the economy had to beer structure din order to overcome
monumental problems such as those posed by slow economic growth, unemployment, the
debt burden and fundamental imbalance in the structure of production and consumption.
In response to this difficult circumstance, the Nigerian government undertook a structural
adjustment programmed (SAP) with respect to the economy. The financial system for
instance, was first to experience radical structural changes following the adoption of the
SAP in June 1986. It was aimed at restructuring the production base of the economy and
promoting non-inflationary economic growth. The federal ministry of finance advice the
federal government on its fiscal operation in collaborates with the central bank of Nigeria
on monetary matters. In 1991, the banks and other financial institution act (BOFID)

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formally was promulgated to replace the CBN act of 1958 and the banking degree of
1969(including later amendments). The policy brought the non-banking financial
intermediaries under the supervision of CBN on the debate that such institutions are
capable of influencing the monetary policy set and if not properly monitored can altered
the financial sector. Since then, the Nigeria banking system has evolved rapidly in a
healthy, competitive and regulative prospect till date.



















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Stances of fiscal policy
The three main stances of fiscal policy are:
Neutral fiscal policy is usually undertaken when an economy is in equilibrium.
Government spending is fully funded by tax revenue and overall the budget outcome has
a neutral effect on the level of economic activity.
Expansionary fiscal policy involves government spending exceeding tax revenue, and is
usually undertaken during recessions.
Contradictory fiscal policy occurs when government spending is lower than tax revenue,
and is usually undertaken to pay down government debt.
Methods of funding
Governments spend money on a wide variety of things, from the military and police to
services like education and healthcare, as well as transfer payments such as welfare
benefits. This expenditure can be funded in a number of different ways:
Taxation
Seignior age, the benefit from printing money
Borrowing money from the population or from abroad
Consumption of fiscal reserves
Sale of fixed assets (e.g., land)












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Fiscal policy in Bangladesh
Fiscal policy in Bangladesh basically comprises activities, which the country carries out
to obtain and use resources to provide services while ensuring optimum efficiency of the
economic units. Fiscal Policy generally refers to the use of TAXATION and government
expenditure to regulate the aggregate level of economic activity in a country. Fiscal
policy in Bangladesh basically comprises activities, which the country carries out to
obtain and use resources to provide services while ensuring optimum efficiency of the
economic units. The policy influences the behaviour of economic forces through public
finance. Major objectives of the fiscal policy of Bangladesh are to ensure macroeconomic
stability of the country, promote economic growth, and develop a mechanism for
equitable distribution of income. The main tools to achieve these objectives are variation
in public revenue, variation in public expenditure, and management of public debt. These
are reflected in the budgetary operations of the government, prepared and implemented
on year-on-year basis.
In the initial years of independence, the government of Bangladesh had to spend a large
amount of its resources in reconstruction and rehabilitation work. It had negative public
savings and limited private investment. Despite large inflows of FOREIGN AID, the
increasingly large financing gap became the main concern of the government. The
situation was further aggravated by frequent internal and external shocks. Under the
circumstances, government fiscal policies during 1970s and 1980s were largely oriented
at rehabilitating the war-torn economy as well as stabilising it from various shocks. This
had gradually lead to weak fiscal structure and poor fiscal management. The tax structure
was such that any increase in taxes due to built-in consequences of economic growth was
virtually not possible. This was because of the fact that despite a moderate growth of the
economy, INCOME DISTRIBUTION was skewed, and had been pushing more and more
people below the POVERTY line each year. As such, the proportion of POPULATION
with taxable surplus went down overtime. More than 80% of the total tax revenue came
from indirect taxes, amongst which taxes on imports contributed about 60%. Since most
imports were in the government sector and basic need-oriented, it was hardly possible to
increase import duty. Despite higher production costs, prices of most public goods could
not be rationalised due to socio-economic reasons. As such, these were kept lower, which
resulted in inadequate cost recovery.

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Current expenditure had always been underestimated in the country, while current surplus
as well as foreign loans and grants were overestimated. Therefore, the overall fiscal
deficit experienced a large variability all the time. The whole scenario may be described
as such that the fiscal policies of the past could not be used as an adequate tool for 'fine-
tuning' the economy towards achieving macro-economic stability and higher economic
growth.
Regular deficit financing, normally undertaken through borrowings from abroad, from
BANGLADESH BANK, and from scheduled banks, has become a basic feature of the
fiscal policy of the country. Opportunity of borrowing from the public by the government
for financing BUDGET deficit is very limited in the country as savings capability of the
people is very low. Therefore, the opportunity of non-inflationary financing of budget
deficit does not exist here. Availability of foreign borrowing depends on the international
liquidity situation and the prevailing circumstances in the international capital market,
which is always uncertain and volatile for a country like Bangladesh.
The commercial banks, because of their potential for central bank refinancing, are also
not effective sources of non-inflationary finance. Given the circumstances, whatever is
the size of the fiscal deficit in any particular year, a part of it cannot be financed by
external borrowing and, therefore, must be financed out of central bank borrowing. As a
result, the essential element of fiscal deficit in Bangladesh has become such that once a
deficit is incurred, government borrowing from the Bangladesh Bank became inevitable.
In the early 1990s, the government of Bangladesh undertook some comprehensive steps
towards the improvement of the country's fiscal front. The major objective of the
government fiscal policy was to restrict the growth of current expenditure to a level below
the growth of the nominal GDP, thereby making more resources available to support
ANNUAL DEVELOPMENT PROGRAMME (ADP) undertaken in each year. In line
with the Enhanced Structural Adjustment Facility (ESAF) of the IMF, a number of
reforms were initiated, the most important of which was the introduction of VALUE
ADDED TAX (VAT) in July 1991.
VAT was introduced at a uniform rate of 15% at the manufacturing-cum-import level.
Together with protection-neutral supplementary duties, this system largely replaced the
earlier structure of differentiated sales tax on import and excise duties on domestic goods.

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In case of personal income tax, the major reforms involved the inclusion of entertainment
allowances in the personal income tax base, deduction of investment in approved assets
from the tax base, and an introduction of a withholding tax on dividend with limitation of
special expenditure within a reasonable limit. Steps were taken to reduce interest rates on
government savings instruments and subsidies for food and jute. A good number of public
sector enterprises were denationalised through sales to the private sector.
These reform measures resulted in a remarkable improvement in the fiscal situation of
Bangladesh after 1990. The growth of current expenditures was contained below the rate
of GDP growth. Tax reform led to an increase in government revenues from much below
10% of GDP in fiscal year 1989-90 to 11% in fiscal year 1991-92. This trend continued
and revenue collections reached more than 12% of GDP by the FY 1994-95. This trend is
continuing, although with minor fluctuations. Moreover, this was accompanied by
changes in the tax structure of the country, reflected in the decline of the shares of
customs duties and increase in the share of income and profit taxes in the total tax
revenues in the subsequent period. As a result, the shortage of local funds that had
constrained in the project implementation capacity of the country and had shrunk the
country's absorptive capacity for project aid for a long period was largely removed.
The improvement of the government's fiscal performance was reflected in the budgetary
outcome of the country. The overall budget deficit was 8.4% of GDP during the 1980s
and came down to 5.9% in 1991-92 and thus provided a breathing ground for the
government. Up to 1997-98, the budget deficit could be successfully contained to less
than 6%, helping to stabilise the economy to a great extent. But this could not be
maintained in the following year due to the devastating and prolonged floods that
occurred in the first half of 1998-99. There was a considerable slippage in the expenditure
programme of the government due to floods while revenue collection lagged far behind
the target. As a result, the overall budget deficit shot up to 7.8% in the FY 1998-99.
Although the government took some steps, the overall deficit remained slightly above 6%
in 1999-2000.
Up to 1989-90, FOREIGN AID had financed the lion's share of fiscal deficit of
Bangladesh. Since then there has been a considerable shift in the sources of funds for
financing budget deficit. Domestic sources could provide only 15% of the total deficit
during 1989-90. In contrast, in FY 1999-2000, the comparative figures for domestic and

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foreign sources in funding the budget deficit were 47% and 53% respectively. However,
an absolute decline in the flow of external funds on concessionary terms is also partly
attributable to this. Increased dependence on local funds has largely reduced the
uncertainties of the implementation of the budgetary programme. But this has also
increased the risk of additional burden of higher interest costs from domestic borrowing.
Efforts to generate increased domestic resources are generally based on various tax
reforms as well as reforms in the financial sector. On the expenditure side, the
government has given increased emphasis on human resource development and poverty
alleviation programmes. Top priority has been given to improve the quality and coverage
of the education system as well as health and family planning services, and social safety
net pogrammes to serve vulnerable group. This is demonstrated in the in
The policy influences the behavior of economic forces through public finance. Major
objectives of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the
country, promote economic growth, and develop a mechanism for equitable distribution
of income. The main tools to achieve these objectives are variation in public revenue,
variation in public expenditure, and management of public debt. These are reflected in the
budgetary operations of the government, prepared and implemented on year-on-year
basis.
In the initial years of independence, the government of Bangladesh had to spend a large
amount of its resources in reconstruction and rehabilitation work. It had negative public
savings and limited private investment. Despite large inflows of FOREIGN AID, the
increasingly large financing gap became the main concern of the government. The
situation was further aggravated by frequent internal and external shocks. Under the
circumstances, government fiscal policies during 1970s and 1980s were largely oriented
at rehabilitating the war-torn economy as well as stabilizing it from various shocks. This
had gradually leaded to weak fiscal structure and poor fiscal management. The tax
structure was such that any increase in taxes due to built-in consequences of economic
growth was virtually not possible. This was because of the fact that despite a moderate
growth of the economy, INCOME DISTRIBUTION was skewed, and had been pushing
more and more people below the POVERTY line each year. As such, the proportion of
POPULATION with taxable surplus went down overtime. More than 80% of the total tax
revenue came from indirect taxes, amongst which taxes on imports contributed about

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60%. Since most imports were in the government sector and basic need-oriented, it was
hardly possible to increase import duty. Despite higher production costs, prices of most
public goods could not be rationalized due to socio - economic reasons. As such, these
were kept lower, which resulted in inadequate cost recovery.
Taxation one of the major sources of public revenue to meet a country's revenue and
development expenditures with a view to accomplishing some economic and social
objectives, such as redistribution of income, price stabilization and discouraging harmful
consumption. It supplements other sources of public finance such as issuance of currency
notes and coins, charging for public goods and services and borrowings. Bangladesh
inherited a system of taxation from its past British and Pakistani rulers. According to
Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any
tax, rate, duty or impost, whether general, local or special, and tax shall be construed
accordingly. To develop manpower for efficient tax administration, the government runs
two training academies - BCS (Tax) Academy at DHAKA for direct tax training and
Customs, Excise and Value Added Tax Training Academy at Chittagong for indirect tax
training. The NATIONAL BOARD OF REVENUE (NBR) is the apex tax authority of
Bangladesh and it collects around 93% of total taxes or 76% of total public revenues. The
NBR portion of total taxes includes CUSTOMS DUTY, VALUE ADDED TAX (VAT),
supplementary duty (SD), EXCISE DUTY, income tax, foreign travel tax, electricity
duty, wealth tax , turnover tax (TT), air ticket tax, advertisement tax, gift tax and
miscellaneous insignificant taxes. Public revenue also comes from non-tax receipts such
as surplus of sector corporations, financial institutions, railways, postal department,
telegraph and telephone, judicial stamp, etc, and these non-tax revenues represent around
19% of total revenues.
In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level rises, each unit of currency buys
fewer goods and services; consequently, annual inflation is also erosion in the purchasing
power of money a loss of real value in the internal medium of exchange and unit of
account in the economy. A chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index (normally the Consumer Price
Index) over time. Although the present situation of inflation in Bangladesh is not very
good, it is better then the previous year.

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The fiscal stance is a term that is used to describe whether fiscal policy is being used to
actively expand demand and output in the economy (a reflationary or expansionary fiscal
stance) or conversely to take demand out of the circular flow (a deflationary fiscal
stance).
A neutral fiscal stance might be shown if the government runs with a balanced budget
where government spending is equal to tax revenues. Adjusting for where the economy is
in the economic cycle, a neutral fiscal stance means that policy has no impact on the level
of economic activity.
A reflationary fiscal stance happens when the government is running a large deficit
budget (i.e. G>T). Loosening the fiscal stance means the government borrows money to
inject funds into the economy so as to increase the level of aggregate demand and
economic activity.
A deflationary fiscal stance happens when the government runs a budget surplus (i.e. G
From budget scenario it is seen that government of Bangladesh is running a large budget
deficit (i.e. G>T). As a result, the government borrows money to inject funds into the
economy so as to increase the level of aggregate demand and economic activity.










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Conclusion

Today Bangladesh is exactly 41 years old today. However, even after four decades of her
independence Bangladesh still remains as one of the most impoverished countries in the
world. Even though from day one of her independence government fiscal policy was
targeted to improve the living standard of its people, till today poverty remains as its key
challenge as its per capita income is one of the lowest in the world. Adaption of
democratic free market policy back in 1990s was seen to be a major breakthrough for
Bangladesh towards its economic growth and prosperity as various liberalized economic
policies including its fiscal policy changes has been made to achieve the economic
objectives. Therefore, this study intends to focus on identifying the impact of various
fiscal policy determinants of Bangladeshi economic growth along with drawing a
comparative analysis of the impact of fiscal policy variables on the economic growth of
Bangladesh during the pre economic liberalization and post economic liberalization
periods. Using fiscal policy variables data set from 1972 to 2009, the study concludes that
government expenditure, development assistance and export are the most important
factors leading to economic growth. Moreover, the study reveals is no significant
difference between the economic performances measured by GDP in post liberalization
and pre liberalization regime.

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