According to a research report of HSBC Global Research, Bangladesh will be the 26th largest economy by 2030

 

 

According to a research report of HSBC Global Research, Bangladesh will be the 26th largest economy by 2030. The report also concluded that Bangladesh will become a country with an economy worth 700 billion USD within 2030 from the current 300 billion USD economy. The budget of Bangladesh for the fiscal year 2018-2019 has been presented on June 7, 2018, by the honorable Ex-Finance Minister AMA Muhith. Being the 41st largest economy in the world, the budget has aimed for a significant 7.8 per cent GDP growth in this fiscal year. The budget has several macro-economic variables which can be evaluated to get an overview of the budget as a whole. This report will include a brief discussion on the macroeconomic factors along with an overview of the budget as a whole.

The target inflation for the fiscal year 2019 is 5.3% to 5.6%. With a 5.55% inflation in March 2019 which is 0.08% higher than the prior month, the inflation is expected to be in the target range.

The graph shows that inflation was decreasing in the first six month of the fiscal year due to the national election in January 2019. After the election, the rate is increasing again. The probable reason for this increase is the election-related boost in private spending and an increase in remittances in January. However, it is still within the target range.

Exports and Imports

The targeted export of FY 2018-2019 is 44 billion USD. According to EPB, During July-March, FY 2018-2019, the total exports has been increased by 3.45 billion USD to 30.90 billion or 12.57% from 27.45 billion USD during July-March, FY 2017-2018. Along with exports, the imports have also been increased during July-February, FY 2018-2019 by 2.18 billion USD to 40.90 billion from 38.72 billion of July-February, 2017-2018. The largest contribution to the total export earnings is from woven garments.

The graph shows that the remittance has decreased during the last quarter in 2018 due to the national election. In January, a record 1.60 billion USD has been received as the remittance as the central bank has taken several initiatives to rationalize the legal network which has encouraged the non-resident Bangladeshis to send money to the country (source: www.dhakatribune.com).

Remittance

The gross foreign exchange reserve held by BB is 32.12 billion USD at the end of April 2019. The average monthly import liability of this fiscal year is 5.09 billion USD. The current foreign exchange reserve after deducting ACU liabilities is sufficient enough to pay off the import liability of last 6.31 months (32.12/5.09). The gross foreign reserve in commercial banks at the end of March 2019 is 4.089 billion USD which is 27.38% higher than the 3.210 billion USD in March 2018.

Key Points of the Budget

• The budget is the 12th (consecutively 10th) budget announced by Finance Minister AMA Muhith
• It is the largest budget of Bangladesh till now
• The budget is 25.05% higher than the budget in FY 2017-2018
• The target revenue in this budget has increased by 30.77% compared to the target revenue in FY 2017-2018.
• The budget has 62.76% allocation in non-developing sectors while 37.24% in ADP.
• The largest non-developing sector allocation is in salaries of government employees (13.11% of the total budget).
• In developing sector, transportation has the highest allocation of 9.78% of the total budget.

allocation in this sector. The government is also encouraging academic research and analysis with a 9.61% allocation in the education and religion sector. There are still a lot of rural areas in Bangladesh which are required to be brought under the development plans. Government has a 9.65% allocation in this sector in this fiscal year.

Though the government has a record budget of 4,645.73 billion BDT, the budgeted revenue is 3,392.80 billion BDT resulting in a budget deficit of 1,252.93 billion BDT which is 4.94% of the total expected GDP which was 4.99% in FY 2017-2018. More than 87% of the revenue will be collected from taxes generated by NBR in this fiscal year. The main sources of taxes generated by NBR are VAT, income tax, import duties etc.

The rest of the revenue will be collected from other taxes like wealth taxes, surcharges etc. and from other government income sources like different business institutions run by the government. Both of these sources will have a 2.87% and 9.83% contribution respectively in the total revenue.

In order to boost local IT industry, government reduced import duties of database and productivity software that are not developed in Bangladesh to 5 percent in FY19. Government also offered surcharge and VAT exemption for local mobile handset manufacturing while imposed 2 percent surcharge. However, ICT Division received budget allocation of BDT 0.27tn in FY19, which was 22.9% less than FY18. In contrast, Post and Telecommunication Division received budget allocation of BDT 0.34tn in FY19 compared to BDT 0.17tn in FY18.

According to Bangladesh Bureau of Statistics (BBS) survey, total youth labor force (aged 15-24) was 11.0mn in FY17, while Bangladesh Bureau of Educational Information and Statistics (BANBEIS) reported 2.92mn students were enrolled in tertiary education in 2017, compared to 1.57mn in 2010. UNESCO reports that tertiary education enrollment to gross enrollment rate ratio was 17.0% for Bangladesh, compared to 19.0% in Sri Lanka and 27.0% for India in 2016. Unemployment rate at tertiary education level stands at 11.2% in FY17, compared to 9.0% in FY16 according to Labor Force Survey (LFS) 2016-2017. Classifying tertiary education into university, college and polytechnic, Bangladesh Institute of Development Studies (BIDS) reveals unemployment for college graduates was highest (46%), followed by university graduates (39%).
Employment rate was highest for polytechnic graduates (49%), followed by university graduates occupations, followed by 17.4% in craft-related occupations. Meanwhile 4.9% of the population are employed in service and sales occupation, 0.9% in technician occupations and 5.6% in professional occupations.

Overall assessment indicates even though the ratio of graduates from tertiary education are relatively lower compared to gross enrollment, it becomes even more depressing when compared with skilled-based occupation, as a significant portion of potential employment is possibly taking place in agriculture instead of professional and service-oriented occupations.

In terms of research, Bangladesh lags behind its South Asian neighbors in terms of innovation and human capital according Global Innovation Index Report 2018. Bangladesh ranked 116th in the index, while India ranks 57th, Vietnam 45th, Sri Lanka 88th, Nepal 108th and Pakistan 109th. In the same report, Bangladesh ranked 124th in human capital and research segment, which India ranks 56th, Vietnam 66th, Sri Lanka 111th, Nepal 120th, and Pakistan 117th.

ICT sector contributed 1.0% of national GDP in FY17, while supplies 16.8 percent of outsourced online workers globally, according to a study from Oxford University. The sector brought in USD 0.8bn in exporting ICT products and services in FY17. Business process outsourcing (BPO) industry, a sub-sect of IT industry, currently employs 40,000 employees in 120 companies as of FY2018. According to Bangladesh Association of Call Center and Outsourcing (BACCO), Bangladesh earned USD 210.0 mn in revenue through BPO in 2017, which was USD 12.0mn in 2012. Industry experts cite cheap labour as competitive advantage for Bangladesh to compete with India, Malaysia and the Philippines, and they project the industry is poised to earn USD 1.0 bn within 5 years through BPO. Considering the success of BPO industry, government gradually undertook steps to bolster the industry since 2012. Government plans to create 200,000 jobs and earn USD 2.0bn within in 2021.

Government has already installed 8,000 km of optical cable lines, reduced internet prices, and is developing 12 IT parks, and introduced ICT as mandatory subject in S.S.C to introduce students with elementary knowledge on computer and IT. Government currently provides 7-year tax break for registered ICT businesses up-to 2024, along with 10% cash incentives for ICT exporters. Government is undertaking initiatives to create awareness among young entrepreneurs through launching programmes (e.g. ICT Expo, Digital World, National Hackathon, Connecting Startups Bangladesh) in order to bring them into a platform to providing incentives to help them spear-head launching businesses.

for registered SMEs in order to reduce their startup costs. The database and productivity software imported are subject to 5 percent duty from FY18, which we propose to reduce to nil in FY20. We also propose to start new HSCode for importing software through e-delivery, while modify current definition of ITES to include new services i.e. IT Training, System Integration, Platform/Cloud service, CIS/ID assessment and Audit Services, Software as a service and Annual Software Maintenance Contacts (AMC).

• We additionally propose to provide 2.0-5.0% tax incentives for telecom operators (MNOs), local IT businesses, logistics services and service companies toincentivize them bringing in new IT-oriented SMEs and startups or assimilating them into their platform.
• We also propose to extend the tax break for registered IT/ITES companies till 2024, along with issuing three-year tax exemption certificate through BASIS since current tax filing activities eats away 2-3 months. In addition, we seek government’s policy initiatives to integrate/prioritise local firms more into providing IT/ITES services for government projects, since government had been receptive of appointing 11 firms into VAT automation system that will be implemented in FY20. BASIS, in partnership with leading local banks, issued outsourcing-oriented cards, which leads us to propose to Bangladesh Bank to provide specialized banking services for IT/ITES firms for Digital Marketing Payment System in order to facilitate smooth transactions.

 

For the FY20 budget, we propose to allocate additional BDT 0.1tn for ICT Division to establish “one-stop facility” huge amount of allocation. Though the budget has a target GDP growth rate of 7.8%, the impact of the inflation rate, high remittances, high per capita income etc. may result in a GDP growth rate of 8.25% at the end of this fiscal year. Besides, Bangladesh Bank currently holds enough foreign exchange reserves which can pay off the import liability of the last 6 months. Besides, the incoming funds for Roopur Nuclear Plant have resulted in a decrease in the opening of new LCs. This budget mainly focuses on increasing the investment in private sectors to ensure that the targeted GDP growth rate and the inflation rate is achieved and decrease the unemployment rate.

Youth unemployment was 7.3 percent in 2011, which increased to 11.4 percent in FY17 according to Bangladesh Bureau of Statistics. The Sustainable Development Goal 8 (SDG-8) requires Bangladesh to ensure full employment and decent work for its population. As young people coming from tertiary education system fail to manage conventional employment both in private and public sectors, government can create skilled workers to help them enter the global IT market. Even though government is right-on-track on realizing its Digital Bangladesh roadmap, we believe the government should also provide concentration towards developing more skilled youths.

The honorable Prime Minister Sheikh Hasina has assured that the GDP growth rate in the 2018-2019 fiscal year will increase to 7.8%. The average GDP growth rate for the last five years is 6.97%.

The graph shows that the GDP growth rate is following an upward trend during the last five years. According to an article published in Dhaka Tribune on 4th April 2019, World Bank has estimated Bangladesh as one of the five fastest growing economies in the world with anticipated GDP growth of 7.3%. However, current Finance Minister AHM Mustafa Kamal in a press briefing in March 2019 has stated that the GDP growth rate will increase to 8.13% at the end of this fiscal year.

Consumption-based Tax

Tax is the major revenue source of the government of Bangladesh. In this portion, the largest contributor is the consumption-based taxes like VAT, supplementary taxes and import duties. In the revenue budget, 58% of the total tax revenue is from consumption-based taxes (source: thefinancialexpress.com.bd). Due to high poverty in Bangladesh, this creates inequality in income distribution.

The LC settlement in this period has also been increased by 7.32% to 41.22 billion USD from 38.41 billion USD of July-March, FY 2017-2018. The opening of fresh LCs during this period has been decreased by 20.89% to 44.27 billion USD from 55.96 billion USD of July-March, 2017-2018. The main reason for this decrease is the Rooppur Nuclear Power Plant for which a large amount has come in November 2017 (source: Bangladesh Bank Report)

 

Foreign Exchange Reserve

The remittance from the Bangladeshi workers has been increased by 1.11 billion USD in July-March, 2018-2019 to 11.87 billion USD or 10.30% from 10.76 billion USD of July-March, 2017-2018.

Per Capita Income

In March 2018, Bangladesh has graduated to a middle-income country with a per capita income of 1752 USD. According to a news published on the Daily Star on March 20, 2019, the per capita income of Bangladesh has increased to 1909 USD which means that the income has increased by over 9% from the last year income. The graph shows that the per capita income in 2019 has been increased by almost 152% of the per capita income in 2010.

Honourable Finance Minister, AMA Muhith has announced his record consecutive 10th budget and altogether 12th budget as the Finance Minister of Bangladesh on June 7, 2018. With the aim to graduate to the developed country within 2041, the heading of the budget speech was “Somriddho Agamir Pothojatrai Bangladesh”.

The total size of the budget in this fiscal year is 4645.73 billion BDT which is 16.09% higher than the budget of 4,002.66 billion in FY 2017-2018. Two third of the total budget (2,915.73 billion BDT) in this fiscal year has been allocated in non-developing sectors like salaries of government employees, interests of the loans, subsidies etc. With an allocation of 60.93 billion BDT, the government employee sector is the largest non-developing sector in this fiscal year. The government has also had an allocation of 51.34 billion BDT for the interests along with a 31 billion BDT allocation in subsidies.

There are several other small sectors with a total allocation of 14.8 billion BDT. With a 1,730.00 billion BDT allocation in developing sectors, the government is really focusing on the development activities. Government has allocated more than 25% in the transportation sectors. Bangladesh government is also trying to ensure development in the power and energy sector with 13.35%

The government has to take loans from both internal and foreign institutions to cover up the deficit budget. The government has to take a loan of 500.16 billion BDT from foreign agencies. 712.26 billion BDT will be collected by selling government savings certificates and from bank loans. The government has target inflation of 5.6% which is intended to be acquired by investing 8.39% in the government sector and 25.15% in the private sector which means that it will cover more than 33.5% of the total GDP.

The budget size of Bangladesh is expected to reach BDT 5.24tn in FY20, representing around 18.0 percent of GDP. Government plans to collect revenue of BDT 3.8tn in FY20, of which BDT 3.3tn is expected to be collected through NBR. Budget deficit in FY20 is expected to reach around BDT 1.45tn or 5.0 percent of GDP. Government previously financed its FY19 budget deficit through external financing (43.2 percent), borrowing from banking system (33.0 percent), and the rest from non-banking sources (e.g. net sales of savings certificate).

For FY19, government allocated 26.9 percent of ADP for human resources development (education, health and others), 21.8 percent for overall agriculture, 14.3 percent for power and energy, 26.3 percent for communication infrastructure and the rest 10.8 percent for other sectors.

Government provided special tax incentives for RMG sector, among them reducing corporate tax rate to 15 percent, and increasing cash incentives on export to 10 percent for non-traditional markets. Government also extended VAT exemption for local motorcycle manufacturers, exemptions and concessionary rate for importing raw materials for pharmaceuticals and 100% export-oriented businesses.

(39%). World Bank reveals Bangladesh ranks 131 out of 140 countries for university-industry collaboration in R&D, much behind than India and Sri Lanka. United Nations Development Programme (UNDP) ranks Bangladesh 136 out of 189 countries in Human Development Index 2018, slight improvement from 2014 ranking of 142. Moreover, a BIDS survey reveals on average, >71% of the employers expect tertiary institutions to train their graduates with ICT skills, much higher than English speaking skill (ranges 48% to 68% due to institution differences). The above-mentioned statistics conforms one point: there is acute mismatch between skills developed and skills required in the job market.

World bank projects 3.5mn youths will enroll in tertiary education on the hope of improved job prospect during 2020-25. However, the LFS 2016-2017 indicates agriculture sector employs 40.6% of the population (aged 15 or older), followed by 39.0% in service sector and 20.4% in industry sector. The same survey reveals 51.8% of the population are engage in skilled agriculture, fishery and forestry

According to World Intellectual Property Organization indicator, 144 patent applications were granted for Bangladesh in 2017, which was 12,387 for India, 1,745 for Vietnam, 178 for Sri Lanka, and 169 for Pakistan. According to Department of Patents, Designs & Trademarks (DPDT), among the 144 granted patents, seven were originated locally in 2017. The dire situation can be traced back to Science, Technology, Engineering, and Mathematics (STEM) STEM enrollment, which was 21% in proportion to higher education enrollments for Bangladesh in 2015, much lower than other India (40%) and Sri Lanka (28%).

One of ICT Division’s initiative is Startup Bangladesh, a national incubator for young entrepreneurs to provide startups with access to venture capital, entrepreneurs, mentors and advisers in order to accelerate innovation. Bangladesh Bank established a BDT 1.0 bn refinancing fund in 2015 to offer collateral-free loan up-to BDT 1.0 mn at maximum 10 percent interest rate. Innovation Design and Entrepreneurship Academy (iDEA) promotes innovation and design, and develop entrepreneurs.

• We propose to increase the budget allocation for ICT Division to BDT 0.2tn for FY20 budget. Since the government is poised to achieve the milestones in its Digital Bangladesh roadmap, we propose the government to narrow its current concentration towards skill acquisition in terms of both communication and IT-oriented skills. IT industry heavily relies on English-speaking people to communicate clients from North America and Europe. Moreover, current IT industry is experiencing technological disruption as large tech giants like IBM, Google, Microsoft are shifting towards more sophisticated IT-oriented services e.g. IT-Application Development and Maintenance (ADM), Artificial Intelligence, Internet of Things (IoT), Virtual/Augmented Reality, Cloud servicing and Big Data analytics. The ICT Division will utilize the fund to bring in resource personnel, establish dedicated training facilities at divisional level while create platform for IT giants to outsource some of their activities.
• We also propose to eliminate all import duties levied on IT accessories in FY20, and extend this facility only service, similar to the facility that BIDA offers. The One-stop Facility will offer the SMEs and startups in Bangladesh with services including incorporation certificate, trade licenses and VAT registration, entering into commercial rental contract, low-cost electricity, documents for bank accounts and more, all completed within 7-10 business days. We also propose to implement progressive corporate tax rate starting from 0-15% for SMEs, down from 35%, while extend bonded warehouse facility for all registered SMEs to facilitate duty-free raw material import and promote export diversification.We propose to reduce import duties on spare parts and raw materials of agricultural machinery to facilitate growth of SMEs operating in light-engineering. In addition, we propose 5.0% tax cut for both local and foreign venture cap firms to incentivize them into funding local labour-oriented SMEs.

With a view to graduating to a developed country, a budget with a record amount has been announced. Though the budget has a significant portion allocated in non-developing sectors, the developing sectors have yet a