LETTER OF TRANSMITTAL

June 25, 2014

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

We are grateful to you for your guidance and kind co-operation at every step of our endeavor on
this report.

Sincerely Yours,

_____________________

_____________________

Farahnaz Zarrin
ID:22033

Salma Yeasmin
ID:

_________________

_________________

_____________________
Tanjin Hossain
ID:

Executive Summary
Amidst the chaotic economic situation, the budget for FY15 was presented by the honorable Finance
Minister on June 5, 2014. The budget targeted a growth of 7.3%. The proposed budget of BDT 2506.05
billion for FY 15 is an ambitious one as acknowledged by the honorable finance minister. This new
budget is 15.9% higher than revised budget of FY14.The government is highly determined to bring back
economic growth, control inflation and infrastructural development in the economy. In order to fulfill its
goals, the government is planning to lower domestic interest rates to increase private sector credit flows
to stimulate investment. Government has targeted GDP growth of 7.3% in FY15. Given the present
economic situation and low investment level of the economy followed by weak consumer confidence,
the growth target of 7.3% seems highly optimistic. Nevertheless, efforts to stimulate economic growth
will surely bring back momentum. The budget states an inflation target of 6%. Given the deteriorating
local cost of fund along with the current stable global commodity prices, prices are expected to
moderate from this level. The government has committed to complete the construction of the Padma
Bridge by 2018 and this is likely to boost the domestic construction sector companies. The budget has
targeted growth rates of 15% for both import and export. The budget for the FY15 has set a revenue
target of BDT 1829.54 billion. This is 16.8% higher than FY14 revised budget and 13.7% of GDP. In the
budget of FY15, the total expenditure has been estimated at BDT 2,505.06 billion. This is 18.7% of GDP
and 15.9% higher than that of revised budget of FY14. Budget deficit for the FY15 is BDT 675.52 billion
which is 5.0% of GDP and 27.0% of the budget. The government has decided to provide tax rebate and
tax holiday benefits in least developed areas to enhance industrialization across the country. Moreover,
government has adjusted the import duty, supplementary duty and VAT to promote the possible growth
of local industries (e.g.; Pharmaceutical, RMG and Textile and iron and steel industry and others). The
government has again proposed to increase the tax incidence for tobacco companies. Another proposal
suggests 1% Health Development Surcharge on all imported and domestically produced tobacco
products. These initiatives are appreciable as these are to reduce tobacco uses.
Analyzing the capital market perspective the budget cannot be termed friendly. Conversely, few
initiatives were disappointing. In particular, the introduction of capital gain tax introduction on
individual level is a difficult move in the present chaotic situation of the capital market. The provision for
10% tax rebate for companies declaring more than 20% dividend has been withdrawn. Companies that
give more than 20% dividend had an effective tax rate of 24.75% after rebate of 10%. Their effective tax
rate will now rise by 275 basis points. In other words the budget has increased tax rate for good listed
companies. On top of that, government has proposed to raise tax rate for listed companies giving less
than 10% dividend from existing 27.5% to 35%. It appears that, these tax initiatives will lower the
interest of private entities to be listed in the exchanges. For our analysis purpose, we have decided to
show correlations among private sector credit growth with import, export, M2 growth, remittance and
call money rate. Assuming private sector credit growth has a positive correlation with investment, we
analyze the different factors that affect the private sector credit growth. Hence, we can relate it to the
final impact on investment. In our analysis, we show the different impacts of the policies undertaken in
the budget that can affect these variables and eventually investment.

Major Budget Highlights:

Budget Review
The formulation of an annual budget in a least developed country like Bangladesh is an immensely
challenging task. It has to be underpinned by a number of considerations all of which are not necessarily
mutually consistent.
Table: Budget Overview FY15
Particulars
Budget Size
Target Revenue
Budget Deficit
Bank Borrowing
External Borrowing
Source: Ministry of Finance

Budget Overview BDT in bn

(FY15)
2,505.1
1,829.5
675.5
312.2
242.8

Table: Summary of the Budget (BDT bn)

Particulars
FY15
Revenue Earnings
1,829.5
NBR tax revenue
1,497.2
Non-NBR tax revenue
1,497.2
Non-tax revenue
276.6
Total Expenditure
2,505.1
Non-development
1,282.3
expenditure
Development
863.5
Expenditure
Other Expenditure
359.3
Budget Deficit
675.5
Financing Sources
Domestic Sources
432.8
Bank Borrowing
312.2
Non-Bank borrowing
120.6
External Sources
242.8
Source: Ministry of Finance

Growth over FY14 Revised

Budget
15.9%
16.8%
13.4%
4.1%
30.7%

FY14
1,674.6
1,360.9
1,360.9
262.4
2,224.9

FY14 (revised)
1,566.7
1,250.0
1,250.0
264.9
2,162.2

1,134.7

1,160.0

722.8

651.5

367.5
550.3

350.8
595.5

339.6
259.9
79.7
210.7

409.8
299.8
110.0
185.7

The budget size of FY15 is BDT 2505.06 billion which is 15.9% higher than the FY14 revised budget and
largest of its history. The budget has revenue target of BDT 1829.54 billion which is 16.8% higher than
the FY14 revised budget. Projected deficit of the budget is BDT 675.52 billion which is 5.0% of GDP and
27.0% of the budget.
Non-development expenditure is BDT 1282.31 billion which is 51.2% of the budget and development
expenditure is BDT 863.45 billion, 34.5% of the budget. Among the types of total expenditures, public

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

Economic Indicators and Its Targets

The FY15 budget has presented some of the most optimistic targets ever. As per the budget the
following are the targets for some of the major indicators:
Table: Targeted Economic Indicators FY15
Particulars
GDP Growth
Inflation
Export Growth
Import Growth
Remittance Growth
Source: Ministry of Finance

Target
7.3%
6.0%
15.0%
15.0%
n/a

Gross Domestic Product (GDP)

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

Table: GDP Comparison

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

Targeted
6.70%
7.00%
7.20%
7.20%

Achieved
6.71%
6.23%
6.03%
6.12%

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

Targeted
6.70%
7.00%
7.20%
7.20%

Achieved
6.71%
6.23%
6.03%
6.12%

Comment: For FY15, inflation has been targeted 6.0%. It has been assumed that global food and energy
prices will decline slightly. We also believe that commodity prices will be favorable. Domestic interest
rates are expected to go down.
Export
Export growth target was set 15.0% in FY14 budget. Export growth in July to April, FY14 was 13.8%. It
can be assumed that if there were no political hindrance this 15% growth is achievable.
Table: Export Growth Target
Year
FY11
FY12
FY13
FY14
FY15
Source: Ministry of Finance

Target
41.4%
6.1%
11.2%
13.8%
15.0%

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

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

Target
37.0%
2.4%
0.8%
11.1%
15.0%

Comment: The targeted import growth for FY15 is 15.0%.If the political stability persists and consumer
confidence builds up again, this growth can be achieved.
Remittance
Remittance has declined by 4.8% till April 2014 of the current fiscal against last fiscal years growth of
12.6%. There was no specific target provided in the budget for FY15. It is stated that remittance is
expected to get back to normal growth trend in this fiscal.
Reserve
Foreign currency reserve has hit 20.2 billion USD at the end of May 2014 which was only 15.3 billion USD
at the end of last fiscal. This reserve is sufficient to foot the import bill of approximately six months. The
government expects trade deficit to widen and foreign exchange reserve to moderate a bit.

Revenue and Financing

Revenue Estimates and Financing Sources
The budget for the FY15 has set its revenue target of BDT 1829.54 billion. The budget states a projected
deficit of BDT 675.52 billion. Historically if seen, the government cannot achieve its revenue target. On
average the deviation of actual revenue from target revenue for the last five fiscal years (FY10-FY14)
stands at 4.43%. It is only in FY11 the target revenue was achieved.
Chart: Deviation of Actual Revenue from Target Revenue
1.0%
0.2%
0.0%
FY'10

FY'11

FY'12

FY'13

FY'14

-1.0%

-2.0%
-3.1%
-3.0%
-4.0%

-4.5%

-5.0%

-6.4%

-6.0%
-7.0%
-8.0%

-8.3%

-9.0%

Source: Ministry of Finance

NBR Tax Revenue
The budget for the FY15 has targeted BDT 1497.20 billion revenue from NBR tax which is 81.8% of the
target revenue. This is 19.8% higher than that of FY14s revised budget. In the revised budget of FY14,
this target was BDT 1250.00 billion which was 79.8% of total revenue. Of the total target, 38.4% will
come from income tax, corporate tax and travel tax, 37.7% from Value Added Tax (VAT) and 23.9% from
customs and supplementary duty. In order to achieve these targets, steps will be taken to develop
taxpayers friendly administration by digitalizing the process.
Non NBR Tax Revenue & Non Tax Revenue
There is target for BDT 55.72 billion or 3.0% of total revenue to collect from Non-NBR tax which is 3.3%
of total revenue in the current fiscal. Revenue from non-tax sources is estimated to be BDT 276.62
billion or 15.1% of total revenue which was BDT 264.93 billion or 16.9% of total revenue in the FY14s
revised budget.

Deficit Financing
The budget deficit for the FY15 will be BDT 675.52 billion or 5.0% of GDP. Though budget deficit has
increased by 13.4% from the revised budget of FY14, deficit to GDP ratio has not increased. Deficit to
GDP ratio in India, Pakistan and Sri Lanka in the FY15 is 4.1%, 4.9% and 4.5% respectively. Considering
that Bangladeshs deficit is not that high, financing the deficit is challenging but still possible.
Table: Deficit Financing Sources as a % of Total Deficit
Particulars
FY15
Foreign Financing
35.9%
Non-Bank Borrowing
17.8%
Bank Borrowing
46.2%
Source: Ministry of Finance

FY14
31.2%
18.5%
50.3%

Foreign Financing
The government has set target on high foreign financing in the FY15. The total budget deficits 35.9% or
BDT 242.75 billion will be financed through foreign loan and grants which was BDT 185.69 billion or
31.2% in the FY14s revised budget. The growth in targeted foreign financing is 30.7% as compared to
FY14 revised budget.
Bank & Non Bank Borrowing
Bank will be a major source of funds to finance the budget deficit. There is a plan to borrow BDT 312.21
billion or 46.2% of deficit from banking sector which was BDT 299.82 billion or 50.3% of deficit in the
FY14 revised budget. At present, there is ample liquidity in the banking system. In fact, data suggests
with BDT 1382.01 billion excess liquidity as of Mar14. Interest rate has been on a declining trend and
private sectors' credit demand is yet to pick up. So, it is highly unlikely of a crowding-out effect due to
the government's increased borrowing from the banking system. Financing through non bank borrowing
has been set at BDT 120.56 billion which is 9.6% higher than the revised budget of FY14 and 17.8% of
total deficit.

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

to pay 30.0% surcharge on this incremental wealth.

Table: Minimum Slab for Individual Tax Payer
Type of Taxpayer
Threshold of Taxable Income
Existing
General Tax Payer
BDT .22 mn
Women tax payer and tax
payers of 65 years of age and
BDT .25 mn
above
Physically handicapped
BDT .30 mn
War-wounded
gazetted
BDT .22 mn
freedom fighters
Source: Ministry of Finance

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

Corporate Tax
In FY15 budget, there is a little change in the corporate tax rate. Only non-publicly traded
manufacturing companies get a 2.5% tax cut becoming 35.0% in FY15 budget which was 37.5% in FY14
budget. The tax rate for publicly traded company remains same. However, the listed company will not
be entitled 10.0% tax deduction if they declare more than 20.0% dividend. The tax rate for all
autonomous bodies has been cut down to 25.0% from 37.5%. It is also proposed to raise tax rate for
companies giving less than 10.0% dividend from existing 27.5% to 35.0%
Table: Corporate Tax Rate
Company Tax Payer
Publicly Traded Company
(subject to certain conditions)
Non-Publicly Traded Company
Bank, Insurance and Financial
Institution (other than
Merchant Bank)
Merchant Bank
Cigarette Manufacturer
Publicly Traded
Non-Publicly Traded
Mobile Phone
Publicly Traded
Non-Publicly Traded
Dividend Income
Minimum Turnover Tax
Source: Ministry of Finance

Existing

Proposed

27.5%

27.5%

37.5%

35.0%

42.5%

42.5%

37.5%

37.5%

40.0%
45.0%

40.0%
45.0%

40.0%
45.0%
20.0%
0.5%

40.0%
45.0%
20.0%
0.3%

Tax deduction at Source

Tax rate for quick rental has been increased from 4.0% to 6.0%. In case of life insurance, distributed
profit in excess of paid premium will be taxed at 5.0%. Interest income on treasury bills, treasury bonds
and debentures will be taxed at 5.0%. Tax rate on bills received by gas transmission companies has been
decreased to 3.0% from 5.0%. Oil distribution companies have to pay source tax of 1.0% on the bills of
oil supplied to the dealers and agents (except petrol pumps). For the export sector, government has
proposed to reduce tax at source on cash incentive from 5.0% to 3.0%. There is proposal for 1.0%
Health Development Surcharge on all imported and domestically produced tobacco products.
The government has imposed a fixed tax of Tk. 100 on the supply of every single piece of replacement
SIM. Tax at source on garments export has been reduced from .8% to .3%. These preferential rates will
be effective till June 2015. For all other sector, tax at source for export has been reduced from .6% to
.3%.
Import Duty
15.0% VAT on mobile phones is imposed at the import stage which was previously 10.0%. For the textile
sector, 10.0% duty chargeable to a few raw materials used in this sector is proposed to be reduced to
5.0% In order to create favorable production environment compatible with international standards, it is
proposed to allow the export-oriented Readymade Garments sector (RMG) to import the raw materials
necessary for the manufacture of prefabricated buildings without duties on certain conditions. In
addition to that, the existing duties on fire resistant door, emergency light, sprinkler system etc. are
being proposed to be fully exempted
Tax Holiday
To create investment friendly atmosphere for industrialization and economic progress, it is proposed to
extend the existing tax holiday facilities from Jun15 to Jun19. Moreover, the facility of accelerated
depreciation alternative to tax holiday for the new industrial entrepreneurs is also proposed. Both DSE
& CSE will get tax exemption for 5 years in graduated rate as they become demutualized.
Supplementary Duty
SD rates on 40 (forty) basic raw materials of pharmaceutical industry are proposed for reduction to
5.0% concessionary rate from existing 10.0% and 25.0%. Supplementary duty on Low, Medium and High
segment cigarettes has been raised to 43%, 60% an 61% from existing 39%, 56% and 59%
respectively. With the intention to reduce supplementary duty, government has proposed to change the
current supplementary duty slab from 10 to 12 slabs which would reduce government revenue of BDT
5000.00 million.

Impact of Budget on Different Sectors:

Pharmaceutical Sector

Budget Proposal
Supplementary Duty (SD) rates on 40 (forty)
basic raw materials are proposed for
reduction to 5 percent concessionary rate
from existing 10 percent and 25 percent.
The customs duties on 14 (fourteen) items
used as raw materials in the manufacture of
anti-cancer drugs and medicines are proposed
to be fully exempted.
Withdrawal of retail level VAT on
contraceptives.
Increasing VAT on Erythromycin ethyl
succinate; Erythromycin stearate and
Azithromycin (compacted or micronised) from
5% 10%

Impact
Bangladesh pharmaceutical industry imports
around 90% of the raw materials. Therefore,
reducing SD on forty basic raw materials and
fourteen raw materials of anti-cancer drugs
and medicines will slightly improve the Gross
profit margin of the industry, as the
respective molecules have market share
around 8% of pharmaceutical industry.
It will reduce the cost of consumer.
Some local API producers have significantly
substituted Azithromycin and Erythromycin
import by producing it locally. Accordingly,
government raises VAT on these two APIs so
that local API producer can compete with the
foreign manufactures.

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

Tobacco Industry

Value slab for all the segments have been raised. Supplementary duty for Low, Mid and High segment
has been raised. These are pass-through costs. Historically, Supplementary duty raise has not impacted
margins of companies operating in this industry. In the premium segment value slab has been raised,
but supplementary duty has not been raised. So premium segment gross margin will improve. In all
other segments also value slab rise is higher than supplementary duty rise. So, gross margin will be
impacted positively. One percent Health Development Surcharge on all imported and domestically
produced tobacco products has been imposed. We believe tobacco companies will pass through this
cost also.Budget proposed fixation of price of 25 sticks non-filter bidis at Tk. 6.14 and 20 sticks filter bidis
at Tk. 6.94 from 5.35 and 6.05 respectively.
Table: Value slab and Tax incidence of Cigarette containing Tobacco
2013-14

2014-15

2013-14

2014-15

2013-14

2014-15

Existing
Value slab
for (10
sticks)

Proposed
value slab
for (10
sticks)

Existing
Proposed
Existing
Proposed
Supplementary Supplementary Supplementary Supplementary
Duty
Duty
Duty plus VAT Duty plus VAT

13.69-13.91

15-16.50

39%

43.00%

54%

58%

28-30

32.5-50

56%

60.00%

71%

75%

42-45

50-54

59%

61.00%

74%

76%

80 & Above

90 & Above

61%

61.00%

76%

76%

Source: Ministry of Finance

Impact on Investment
Historically pass-through cost could not reduced the use of tobacco products, thus with no changes in
Supplementary Duty on premium segment and increase in value slab in all segment would increase the
companys margin, which would benefit the company and capital market investors both. Thereby, we
can expect rally in stock of company under this industry and buying interest of traders on the stock.

Textile Industry

Tax at source on cash incentive has been reduced to 3.0% from existing 5.0%. Tax at source on
garments export has been reduced from .8% to .3%. These preferential rates will be effective till June
2015. Reduction of CD on flex fiber (from 10.0% to 5.0%) and artificial staple fiber (from 5.0% to 3.0%)
would likely to reduce production cost of specific textiles companies. The Budget proposes to reduce
supplementary duty on woven fabrics from the existing 30.0% to 20.0%, on most knitted or crocheted
fabrics from 45.0% to 30.0%, on track suits and other garments from 45.0% to 30.0%, and on various
clothing accessories form 60.0% to 45.0%.
Impact on Investment
All measures has been proposed keeping in mind the benefit of the consumer of textile products, no
specific trigger can be seen for this sector. This has nothing to do with domestic woven and knit fabric
manufacturers. This is beneficial for domestic consumers.

Fuel and Power Industry

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

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

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

Engineering Industry

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

Impact
Local industries will be more competitive as the
cost of raw materials will be decreased.

Prefabricated building industry is currently at its

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

These facilities will help the industry to sustain and

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

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

Telecom Industry

Budget Proposals
Fixed tax of BDT 100 on the supply of every single piece
of replacement SIM is imposed.

Import tax on SIM card has been reduced to 15.0%

from 20.0%

15.0% VAT on mobile phones is imposed at the import

stage which was previously 10.0%

Impact
It is proposed to impose BDT 100 as a fixed tax for SIM
replacement which was previously nothing. Eventually it
will slightly increase operating expenses of mobile
operators.
Import tax on SIM card has been reduced to 15.0% from
20.0% in FY15 budget which was 30.0% in FY13. This
decrease might reduce operating expenses of telecom
operators marginally.
The increase of import tax on mobile phones might
make it difficult for the rural population to buy a mobile
handset. Ultimately, telecom operators will face
difficulties in rural penetration which is the current
growth segment for telecom operators.

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

Construction and Building Material Industry

Budget Proposal

Impact

Theres a total allocation of BDT 187.12 billion for

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

This allocation will boost the demand of Cement, Steel,

Electrodes and related industry.

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

Capital Market

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

Negative Impacts:

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

Positive Impacts:

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

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

Consumption (C)

Investment (I)

Government spending (G)

Exports (X)

Imports (M)

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

Impact of Different Factors on Investment

1) Private Credit Growth: Private credit growth has a positive relationship with investment. If private
credit growth increases then people will have more opportunity to invest, as they have more funds.
Therefore if private credit growth increases investment increases and vice versa.

2) Import: Imports contribute to all GDP components, which mean it contributes to investment.
Increasing in imports will causes increase in investment. As a GDP component from the current domestic
expenditure side, investment has an immediate impact on GDP. An increase of consumption raises GDP
by the same amount, other things equal. Moreover, since income (GDP) is an important determinant of
consumption, the increase of income will be followed by a rise in consumption: a positive feedback loop
has been triggered (between consumption and income) by investment. Because of this mechanism,
imports will grow as well. More directly, investment is often directed to foreign machineries and goods,
with an immediate increase of imports.

3) Export: The increase of export will increase production, GDP, employment, therefore, as a component
of GDP investment also increases. More exports mean more profits, to support the exports procedures
investment increases simultaneously.

4) M2 Growth: In short run if money supply increases (interest rate decreases) investment will also
increase and if M2 decreases investment will decrease.

5) Remittance: Remittance increases countrys profit/cash inflow. Thus they help in investment.
Investment increases when remittance increases. Remittances complement national saving to form a
bigger pool of resources available for investment.

6) Call Money Rate: Inter-bank call money transactions make the stream of funds convenient and
affordable for financial intermediaries. Consequently commercial banks get involved in the investment
in and borrowing from call money market. This arrangement plays a significantly vital role to strengthen
the liquidity base of a bank and also provides ample avenue of investment of fresh funds. Therefore, if
the call money rate is very high it will decrease investment and if it is low it will increase investment.

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

Private
Borrowing
452268.3
456406.4
461577
464282.9
467058
474473.5
473893.3
475964.2
482167.3

Export

Import

18349
15434
18984
16127
17623
16302
18006
17784
18517

20577
17002
22190
20797
22310
23698
25488
20823
25173

Government
Borrowing
158809.8
153868.9
152731.0
157979.5
160432.8
163027.4
161810.6
163492.1
168109.5

Remittance

M2

160000.66
7820.23
172527.69
161697.93
173462.18
9409.50
9801.70
9121.34
10014.03

613500.1
619996.7
626723.9
640317.2
642576
653966.6
653765.5
662311.4
667709.6

*Source: Bangladesh Bank *Amounts in BDT Crore

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

Private
Borrowing
1
0.185085427
0.727200448
0.831912085
-0.584812345
0.989060513

Interpretation:

From the analysis it can be inferred that import, government borrowing and M2 have the greatest
positive correlation with private borrowing. The import (import of raw materials) has a positive impact

on private credit growth. This is because for the purpose of import of raw material and capital
machinery money has to be borrowed from the bank. This increases private borrowing and also
increases investment in the economy. Apart from these variables, another variable that has impact on
private credit growth is government borrowing. The credit growth rate in the private sector increased
slightly in April from the previous month but still remained very low as investors maintained their waitand-see stance because of continued political uncertainty. These estimates show that the private
consumption to GDP ratio declined from 72.85 percent in FY13 to 71.38 percent in FY14 while the
private investment to GDP ratio declined from 21.75 percent to 21.39 percent. General government
consumption increased from 5.12 percent in FY13 to 5.2 percent in FY14 while public investment
increased from 6.64 percent to 7.3 percent. Part of the explanation may be an over-estimated public
investment, amounting to Tk 986 billion (about $12 billion) in FY14. The governments net bank
borrowing came down to BDT 45.70 billion during July-December period of the FY `14 from BDT 67.26
billion in the corresponding period of the last fiscal, according to the central bank statistics. The
governments net bank borrowing has decreased significantly during the period under review because of
hindrances to the overall development activities across the country amid political uncertainty in the
recent months. Apart from this, the large amount of liquidity in the market did not cause the crowding
out effect on private borrowing. Foreign currency reserve has hit 20.2 billion USD at the end of May
2014 which was only 15.3 billion USD at the end of last fiscal. This reserve is sufficient to foot the import
bill of approximately six months. Government expects trade deficit to widen and foreign exchange
reserve to moderate a bit.
Particulars
FY2013
FY2014
Private investment to GDP
21.75% 21.39%
Public investment to GDP ratio
6.64%
7.35%
Jul-Dec 2013 Govt borrowing
45.2
67.26
bn

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

Though these variables are set to impact private borrowing of the economy and thereby
investment but in reality most of the targets set by the government were not attained in
FY2013-14:
Particulars
Export
Import
Government
Borrowing
(Domestic Sources)
M2

Target FY2013-14
15%
10%
BDT 409.8 billion

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

17%

8.84%

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