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April-June 2010

The Bangladesh A

ccountant A

pril-June 2010 Vol. 67

No. 38

Mobilization of Resources for SustainableEconomic Development

Published by the Editorial Board of the Council, the Institute of Chartered Accountants of Bangladesh (ICAB)100 Kazi Nazrul Islam Avenue, Dhaka 1215

Tel: 9117521, 9112672, 9115340, 9137847 Fax: 880-2-8119399 E-mail: [email protected] Website: www.icab.org.bd

CONTENTS

Chairman: M Farhad Hussain FCA

Associate Editor: Harun Mahmud FCA

Members Md. Abdus Salam FCA

Md. Shahjahan Majumder FCA

Showkat Hossain FCA

Masih Malik Chowdhury FCA

Anwaruddin Chowdhury FCA

ASM Nayeem FCA

Dr. Md. Abu Sayed Khan FCA

Md. Humayun Kabir FCA

Akhter Matin Chaudhury FCA

Parveen Mahmud FCA

Abdur Razzaque Mollah FCA

Md. Abdur Rashid FCA

M A Baree FCA

Md. Nurul Haque FCA

Kazi Ehsanul Huq FCA

Md. Akbar Hossain FCA

Md. Sayeed Ahmed FCA

Md. Jakir Hossain FCA

M. Abu Bakar FCA

Mohammad Kamrul Hasan FCA

Md. Kahir Mahmood FCA

Mizanur Rahman Khan FCA

Pradip Paul FCA

Mohammed Jashim Uddin ACA

Md. Rokonuzzaman ACA

Md. Selim Reza ACA

Md. Yasin Miah ACA

Mohammad Mazharul Haque ACA

Member Secretary N I Chowdhury FCA, Secretary-ICAB

Editorial Board Global Branding of Chartered Accountancy Profession in Bangladesh 03Dr. Jamaluddin Ahmed FCA

Role of Chartered Accountants in the Mobilization of National Resources 06Dr Atiur Rahman

Audit Committee, Independent Director, Bangladesh Perspective 08Md Abdus Salam FCA FCS

Mobilization of Resources for Sustainable Economic Development 01

EDITORIAL

ACCOUNTANCY

Macroeconomic Situation 25An overview of the Ministry of Finance, GOB

A Comparative Analysis of Interest Rate Parity and Sticky Price Model of Exchange Rate 36Chowdhury Rajkin Mohsin

How to Increase Tax Revenue: Improvement of Enabling Environment, Application of Strategic Management Approach 42Moslehuddin KhaledImproving Financial Resources Mobilization in Developing Countries and Economies in Transition 48Suresh N Shende

FINANCE & BANKING

Development Strategies, Governance and Human Development-Bangladesh Perspective 61Dr. Shamsul Alam

Human Resource Accounting in the Context of External Financial Reporting—An Analytical Study 68Dr Dilip Kumar Sen

HR Practices in Industrial Enterprises in Bangladesh: An Approach to Factor Analysis 79• Dr. Mir Mohammed Nurul Absar• Balasundaram Nimalathasan and• Ratna Dutta ACA

HUMAN RESOURCES

Value Added Tax in Bangladesh - An Effective Way of Internal Resource Mobilization 11M. A. Baree FCA

Marginal Workers’ Benefits: The Lone fat inCompany’s Income Statement! 16Mohammad Zahid Hossain FCA

Analysis of the National Budget of Bangladesh 2010-11: Excellences and Constraints 18• Md. Hafij Ullah• Monir Ahmmed• Abu Hanifa Md. Noman Bin Alam

BUDGET & ECONOMICS

April-June 2010Vol. 67 No. 38

esource mobilization is the fundamentalprerequisite to achieve a balancedeconomic growth and just and equitablesociety free of poverty. Resource

mobilization and investment have been highlightedas the most vital input of the budget strategy in fiscal2010-2011 aiming to achieve a GDP growth rate of6.7% by the end of the fiscal and reduce poverty toat least 50% by the year 2015.Growth, Humandevelopment and Governance are the threefundamental factors that influence employmentgeneration, nutrition, maternal health, quality ofeducation, sanitation, safe water, local governanceand human resource development. But without asuccessful resource mobilization strategy and itsimplementation, growth, human development andgovernance are very difficult to achieve. To stimulatepro-poor growth, huge investment is required inboth urban and rural areas. More so investment inthe power sector is the number one priority toproject any development program of the countryand strike an economic growth averaging 7-8% perannum as contemplated, otherwise, the vision 2021will be a far cry.

The country needs domestic investment to morethan 32% of the GDP as projected in the currentfiscal to support the target growth rates. Thisprojection of the government can be supported withthe mobilization of resources through domesticrevenues, reducing losses and subsidies of the stateowned enterprises and increasing external fundinflows such as remittances, aids, borrowings, grantsetc. The tax-GDP ratio can be made further healthierby expanding tax bases, minimizing exemptions andexclusions of items which have prospects to

generate revenues, detecting tax evaders, expandingthe tax net and undertaking procedural andadministrative reforms.

The budget for the fiscal 2010-2011 outlined somestrategies to gear up resource mobilization asfollows:

1. Imposition of Value Added Tax on any purchaseof goods or services through tender byGovernment organizations, Semi-Governmentorganizations, autonomous bodies, NGOs,Banks, Insurance companies or any otherfinancial institutions, limited companies andeducational institutions.

2. Inclusion of some additional goods and servicesunder the VAT net. -Increase of Tariff Value ofsome items for charging Value Added Taxes.

3. Imposition and enhancement of supplementaryduty on some goods at manufacturing stage andincrease of the minimum VAT rate on smallbusiness.

Similarly steps are in process to widen the tax net toincrease the number of tax payers by another at leastfive lacs.The entire Income Tax Ordinance 1984 andVAT Act is under revision containing therein moreeffective measures to strengthen the strategies ofresource mobilization. The National Board ofRevenue (NBR) has chalked out programs to holdsymposiums, seminars and workshops andexchange views on widening the tax net and makethe people aware and more conscious about theresponsibility to pay taxes. A fund titled BangladeshInfrastructure Finance Fund (BIFF) has been createdand a bond would be issued to raise funds from theindividuals and organizations on payment of only10% taxes within the period of 2012.

Editorial

The Bangladesh Accountant/April-June 2010

R

1

Mobilization of Resources for SustainableEconomic Development

It is thrilling to recollect that the size of the firstnational budget of the country presented in 1972-1973 was Taka 786 Crore (7.86 billion) while thesize of the national budget for the fiscal 2010-2011is 1.32 trillion which is 168.155 times biggercompared to the size of the first budget of thecountry. This indicates the unimaginable support ourpeople have been providing to our Government tomobilize resources for the development of thecountry. But this is a hard reality that the country hasnot been able to build the required infrastructure forsustainable economic growth and per capita incomehas not increased in the same proportion.

The Power sector of the country is still one of theweakest in the world. Bangladesh’s position is below180 in the World ranking of Per Capita ElectricityConsumption. Even we are not at par with ourneighboring countries. In India the per capitaelectricity consumption is more than 470 Kwh, inPakistan more than 440 Kwh and in Sri Lanka morethan 350 Kwh whereas in Bangladesh the per capitaelectricity consumption is slightly more than 145Kwh. But power and energy Sector plays the mostvital role in developing the economy of a country.The development infrastructure of the country is stilllagging far behind in spite of huge increase in thesize of the national budgets.

Bangladesh is still an undeveloped/Least Developedcountry as ranked by the World Bank/UnitedNations and other organizations. To enable theGovernment to mobilize resources the people of thissmall country have been making huge contributionsto the national exchequer since liberation in 1971.Starting with a national budget of Taka 7.86 millionthe country has gained the strength to finance abudgetary projections of Taka 1.32 trillion. But why

then the growth rate in the GDP is still logged withinthe range between 5% to 6% over a period of about39 years after independence? As a nationappreciably advanced in intellect we must read ourfaces on the mirror and try to find out the causes ofour failings and locate the causes either incorruption or in inefficiency or in leadership crisis.

The Honourable Finance Minister of course hasmade a brave target to strike a GDP growth rate of6.7% and raise investment to up to 32% of the GDP.Allocations made for investment in power, energyand education sector are all encouraging butalarmingly the record of implementation of theprevious Annual Development Programs are notsatisfactory. In spite of that, a bigger ADP around thesize of Taka 390 billion has been announced for thefiscal 2010-2011 which is an increase of about 35%over the ADP of the fiscal 2009-2010.

The unofficial rate of inflation is believed to bearound a double digit figure although theGovernment claims the inflationary rate isfluctuating between 6% to 7%.With such a hugeexpenditure based budget the Government mustmobilize resources as projected ,make a sizableamount of productive investment and allow theprivate sector to play their role to increaseproduction and create job opportunities for theunemployed which may be the appropriate answerto the economic gaps and lapses since theindependence of the country.

The Bangladesh Accountant/April-June 2010

Editorial

2

M Farhad Hussain FCAChairman, Editorial Board

The Bangladesh Accountant/April- June 2010 3

Accountancy

Introduction:Accountancy is a critical component of the infrastructure fora market economy. Sound economic activities are notpossible without accountancy. Accountancy providesinformation on the financial position and profitability ofoperations. It is the foundation of a country’s fiscal systemand it plays a key role in corporate governance. Accountancyis relied on when enforcing prudential requirements forbanks, insurance companies, securities, dealers and othermarket participants. As a result, the accountancy sector isamong the most regulated in the world’s advanced economiesin terms of its liabilities towards the society. Immediatelyafter independence of Bangladesh, accountancy professionalsplayed a key role in establishing accounting system of theCentral Bank and all nationalized and private sector entities.Similarly, soon after the change of national economicphilosophy from regimented to open market system, theaccountancy professionals ensured and exerted their highestefforts in presenting financial reports in compliance to therequirements of International Financial Reporting Standards(IFRS) in addition to the requirements of Securities andExchange Commission and Central Bank. The CharteredAccountants render their services in the process of collectionof fiscal revenues through certifying taxable profit andreporting on the accuracy of taxable profit and VAT incompliance to fiscal regulations. The first initiative of developing a Professional Accountancybody came from Scotland. A group of accountants obtainedrecognition of the Royal Charter for their body in 1854.Following this, the English Institute obtained theirs in 1880.Gradually professional bodies for accountants started formingacross countries. Kettle (1958) reported that from the late19th century British accounting firms started establishingoffices in other countries. Deloitte, Deve, Griffiths and Co.,opened offices in 17 foreign cities during 1890-1914. Withthe start of the British industrialization, UK became thebirthplace of the accounting profession. The British assisted

the Americans with capital to shift to an industrial economy.British auditors accompanied the investors to provide reliablefinancial information, as there was no organized Americanaccounting body. The British auditors started organizing theaccounting profession and training the Americans. The USaccounting profession gradually grew under the leadership ofBritish Accountants (Carey, 1970, pp. 53-58). Finally theAmerican Association of Public Accountants was founded in1887 with its first President being a Briton (Samuels andPiper, 1985, p.20). Gradually the emergence of suchprofessional bodies in developing countries representingnationally qualified accountants grew in number and theybegan competing with those having foreign qualifications.Influence over Accounting in Bangladesh:Accountancy Profession in Bangladesh has been transplantedthrough British auditors accompanying investors duringcolonization. Soon afterwards branches of British affiliatedaccounting societies were established in India and Burma in1932, and Bengal in 1933 {Johnson and Caygill (1971)}.Setting up of the East India Company in Surat during 1608 isconsidered having significant influence over the developmentof British accounting methods throughout the IndianSubcontinent. Therefore, the East India Company’s rule inBengal from 1757-1857 and then direct British rule up to1947 has significantly influenced the accounting andreporting of this region. Moreover, the commercial code,education, training, along with business education andprofessional training of accountants was highly influencedwith the establishment of UK accounting societies likeBriston (1978) and Johnson & Caygill (1971). Since WorldWar II, the Americans have replaced the British as the engineof capitalist development. They have influenced accountingand reporting standards worldwide through increasedactivities of multilateral donor agencies such as IMF and theWorld Bank. In 1945 the Americans changed Japaneseaccounting code after the War. Similarly, accounting codeand SEC of South Korea, Philippines and Taiwan were

Global Branding of Chartered Accountancy Profession in Bangladesh*

Dr. Jamaluddin Ahmed FCA

*Reproduced is the paper authored by Dr. Jamaluddin Ahmed FCA, President, ICAB in published in the Souvenir of the InternationalConference of Chartered Accountants-2010.

modeled following the US Accounting System after USinvestment flowed to these countries post World War IIperiod. Canadian, Hong Kong and Singaporean accountingsystem initially modeled under the British system then shiftedtowards the US and IAS methods, after the InternationalAccounting Standards (IAS) Committee formed in 1973.Since the fall of the command economies of Eastern Europeand the former Soviet Union during the 1990s, Anglo-American dominated and IFRS/IAS prescribed accountingand reporting policies were implemented there in order toattract funds from the IMF, WB and ADB for reforming theireconomic systems. These countries then designed theaccounting systems of their utilities in line with the US utilitycompanies. This theory illustrates: “Trade follows Flag’ andwith that ‘Accounting follows the Trade’. Moreoveraccounting and reporting methods for Banks and FinancialInstitutions in the name of IAS 30 have been modeled underthe G-7 dominated Bank of International Settlement (BIS)made unilaterally compulsory for the banks of DevelopedIndustrialized Countries and for the Least Developed.Chartered Accountancy Profession in Bangladesh: In Bangladesh the Institute of Chartered Accountants (ICAB)was founded in 1972 with only 80 members. As of 2010 thenumber has grown to 1,015, out of which 299 are in practiceand the reminder are either serving for the Government,public enterprises, NGOs, donor organizations and differentcorporate houses. Out of the total number only 33 are femaleChartered Accountants. There were 25 practicing CharteredAccountant firms in 1972 which has grown to 169 in the year2010. Of the total members 238 from them are allowed totrain articled students. There are 16 firms with foreignqualified partners and who are members of UK Institutes.Beyond affiliation with Big Four International firms another 6practicing firms of Bangladesh have formal links with theforeign auditor firms. In most cases, the firms having partnersqualified from foreign institutes and having links with foreignaudit firms become auditors of multinational companies inBangladesh. It is said that the quality of work also depends onthe size of the firm, qualification and training of the partnersin practice.Distinguished Chartered Accountants since 1972 served asCabinet members of the Government of the Peoples’Republic of Bangladesh. One served as the CommerceMinister in the first government of Bangladesh afterindependence, one as Deputy Prime Minister and another asCommerce Minister and subsequently for 3 terms (1980,1991 and 2001) as Finance Minister in the earlier

government. Six are serving at the World Bank and AsianDevelopment Bank, 44 have qualified from foreign Institutesand a considerable number of CAs is CEOs in differentbusiness houses. Moreover 150 members of ICAB are nowworking in foreign assignments.Demand Forecast for Chartered Accountants in Bangladesh: No forecast for Chartered Accountants exists in Bangladesh,though the second five-year plan says that financialadministration should be given a high priority (para 20.44).The two-year plan (1978-80) set a target for the number ofChartered Accountants to be 3,200 (table 11.6, p: 246). InIndia the ratio of Chartered Accountants to overall populationis 1: 23,333. Applying this as a standard, in Bangladesh(Parry, 1990) the estimated figure would entail an increase ofmore than 4,000 Chartered Accountants, which obviouslyneed reassessment. Currently, Bangladesh has more than 800hundred CAs, whereas Pakistan has more than 3,000, SriLanka has over 2,700 and Nepal has around 270. In terms ofthe current size of Bangladesh economy following the growthof banking, insurance, industry and other service sectors, therequired number of qualified accountants is estimated to bemore than 12,000 in terms of the Bangladeshi economy’s size. Common Perception on Accountancy Profession: In Bangladesh, in the eye of layman, auditors are believed tobe responsible for the accounts. The users of accounts inBangladesh sometimes confuse this view. The directors of theentity are statutorily responsible for the accounts. Theauditor’s responsibility begins and ends with their expressionof an opinion on the audit report. Thus the audit report is theformal communication about the accounts between theauditors of the enterprise and the person to whom they reportto either shareholders or the government, as appropriate. Thisconcept has yet to work properly in the case of Bangladesh. Public enterprises have proved surprisingly disappointing asproviders of accounts (Howladar and Parry, 1984). Onewould have normally expected the public sector to set anexample to the private sector, but in Bangladesh this is not so.Public enterprises generally produce their published accountson request. In some cases the accounts are only producedafter much persuasion. Despite the requirements of thelegislation in creating the enterprises, accounts simply do notexist. In other cases, the Annual Reports of the enterprises areprepared which do not contain accounts. Initiatives of the Institute of Chartered Accountants ofBangladesh (ICAB): The British rule for 190 years and that


Accountancy

of Pakistani for 24 years without any significant modificationor change had helped transplantation of British accountingover Bangladesh. Bangladesh also is shifting towards USsystem following inflow of US led donor funds, FDI, andformation of USA modeled SEC requiring listed securitiesfollow IAS/IFRS. The IAS/IFRS is taking shape inBangladesh in terms of measurement; recognition, reportingand disclosures of accounting information in compliance toUS modeled SEC requirements. The Institute of Chartered Accountants of Bangladesh withlegacy of pre and post 1961 had been positively responding tothe development challenges by accepting the improvementsin the professional field. Since the formation in 1972, theICAB had been heading towards internationalization fromcolonization by entering into regional and internationalforums like South Asian Federation of Accountants (SAFA),Confederation of Accountants in Asia and Pacific (CAPA)and International Federation of Accountants (IFAC). TheICAB is the second most junior professional accounting bodywithin SAARC region has so far adopted more than 30 lASsand over 27 ISAs. It has also established Quality AssuranceBoard to monitor and supervise the implementation of theseStandards including those of Companies Act 1994, SEC,Banking Companies Act, and Financial Institution Act andPrudential requirements required by the Central Bank. ICABallows special exemption of its course for the members ofICMAB and graduates from some specific universities. Thisis a significant development of Foreign Loan SyndromeEconomy of Bangladesh compared to India, Pakistan, Nepal,and Myanmar where the index of adopting IAS/IFRS and ISAare low. The country rating of adopting IAS/IFRS reveal abetter picture in Bangladesh (67) compared to more organizedeconomy of Argentina (45), Egypt (24), Turkey (51),Venezuela (40), EU member country Portugal (31), Peru (38)and Austria (54). The ICAB has also adopted the latestversion of IFAC code of ethics, all the 8 IFRS as BFRS and28 IAS as BAS then published those standards in the contextof Bangladesh. The ICAB also opened Chartered Accountancy education forthe English stream students with GCSE O-Level & A-Levelbackgrounds. The ROSC (Report on Observance ofStandards and Codes) sponsored by the World Bankrecommended under the Economic Management TechnicalAssistance Program (EMTAP) a “Twinning Project” whichbrought the ICAB syllabus, examination and corporategovernance in line with the Institute of CharteredAccountants in England and Wales (ICAEW). In this

program trainers and consultants from the ICAEW educatedthe trainers of the ICAB. In addition, 9 ICAB membersreceived training on IFRS at the ICAEW. In 2009 the ICABsigned a MoU with the ICAEW under the Twinning Projectand developed a new syllabus in line with IFACrequirements. The new syllabus has been drawn according tothe requirements of ICAEW, abandoning the old syllabus. Itis effective from January 2010 with its first examination atthe Knowledge Level to be held in May 2010. The first examsfor the Application Level and Advanced Stage will be held inNovember 2010 and May 2011 accordingly. Under the newsyllabus the Knowledge Level (KL) must be completedwithin 4 years. Application Level (AL) and Advanced Stage(AS) need to be completed with a maximum of sixconsecutive attempts each. On completion of one year’sarticleship a candidate can appear at the Knowledge Level.On passing of the Knowledge Level (7 papers) students cantake the Application Level (7 papers). After passing theApplication Level students can appear for the Advance Stagewhich comprises of 3 papers and a case study. ExistingICAB members who are interested to become members ofICAEW can qualify by fulfilling certain conditions.Implementation of this syllabus will open the doors forBangladesh Accountancy Professionals in the global market.The Twinning Project expects that once the current reformprocess is fully implemented it would increase the pass rate ofcandidates, meeting the local and international demand foraccountancy professionals.Furthermore ICAB has agreed upon new organizational andgovernance structures and approved its strategy for the periodof 2008-2010. It has also taken the initiative to recruit newtalent in the post of senior managers. The learning materialsfor the CA students have been contextualized for theBangladeshi environment to support the new syllabuscurriculum. The ICAB library has been expanded to providemembers and students with more books, periodicals and alsointernet access. Steps are underway to automate the librarymanagement system. A quality assurance department hasbeen established to monitor and offer guidance to CA firms inBangladesh. Moreover the IFAC SMO Action plan has beenupgraded after undertaking certain projects by the ICAB. TheIFAC SMO includes quality assurance, education,international standards on auditing, code of ethics, accountingstandards, investigation and discipline. With such plans fordevelopment the ICAB is aiming to make CA professionalsfrom Bangladesh compete in the global market withinternationally qualified chartered accountants. n


Accountancy


Accountancy

1. Assalamu Alaikum, good afternoon, and my best regardsand greetings to the chief guest the Honorable President,People’s Republic of Bangladesh, ICAB President,distinguished guests and delegates from home and abroad.It certainly is a privilege and honor to be asked to present thekeynote paper in this conference of apex level accountingprofessionals, with exalted personages including theHonorable President of Bangladesh in audience. Myself notbeing an accounting professional, my presentation on theconference theme, the role of chartered accountants inmobilization of national resources, will necessarily be anoutsider’s view. I would ask the professional accountants inthe audience to bear with any lack of insider perspectives thatthey may notice in the presentation.2. To begin with, why are we concerned about mobilizationof national resources? We are concerned because we need toinvest these resources towards faster economic and socialgrowth. These investible national resources include income ofhouseholds and businesses tapped by the government as thetax base; and the financial savings of households, farms andbusinesses tapped by investors as their financing sources. Thegovernment needs true, reliable accounts and financialstatements of households and businesses for correctlyestimating the base of taxation income. The savers feel safe inplacing their savings only with those financial and non-financial businesses that have reliable accounts and financialstatements with adequate and transparent disclosures. Smallinvestors flocking in the capital market in huge numberswould benefit greatly with credible, properly disclosedfinancial statements of listed companies drawn up andcertified by esteemed members of your professionalcommunity. These are where the value of well developedprofessionalism in your trade comes in, as accountants andauditors maintaining and certifying accounts and financialstatements according to accepted standards. Adherence with

local standards were once sufficient, but with globalization oftrade and investments in intricate webs of cross borderrelationships, adherence to uniform international standards isnow becoming unavoidably necessary. Where do we Bangladeshis stand in efficiency of nationalresource mobilization? Unhappily, down close to bottom ofglobal league table, with tax-GDP ratio at meager 9.2 percentin FY 10 after some improvement from 8.6 percent of FY09.These levels look dismal against 19.5 percent tax-GDP ratioof neighboring India. The domestic saving rate in Bangladeshstagnates at around 20 percent of GDP, well below levels inour neighbors and other comparator economies. Only partlyare these low levels attributable to low income, the mainreason is poor and dubious accounting and auditing practices.Affluent households get off paying pittance as income taxeswith dodgy financial disclosures; thriving businesses evadetaxes understating income, even reporting fictitious losses.The widespread public perception now is that taxpayers,accountants, auditors and tax collectors are acting incollective collusion depriving the government of duerevenues; banks and financial institutions collude by lendingto tax evading businesses based not on their declared weakbalance sheets but on private knowledge about their actualfinancial health. Are these practices of collective collusion in misreportingaccounts and income actually rewarding us? Certainly not.Tax evading households and businesses get paid back indeficient, poor quality services from under-funded publicestablishments, and end up paying additional sums inprivately arranged services for security, garbage disposal andso forth. Businesses understating income to evade taxescannot access capital markets with their disclosed supposedlyweak financial statements, and crowd into banks and financialinstitutions for borrowing, pushing up interest costs to theperennially complained about high levels. FDI inflows

Role of Chartered Accountants in the Mobilization of National Resources*

Dr Atiur Rahman

*Reproduced is the theme paper presented by Dr. Atiur Rahman, Governor, Bangladesh Bank in the Inaugural Session of theInternational Conference of Chartered Accountants-2010.

languish as foreign investors hesitate about investments in thenon transparent graft-ridden environment, shy of jointventures with local businesses having dodgy non-transparentfinancial disclosures. The tax evading well-off are thus paidback in the same coin, while the less well-off populationsegments suffer with the most under high burdens ofregressive indirect taxes like VAT and tariffs imposed due tolow collection of direct taxes from the better off. Investmentand economic growth continue to lag below potential, justwhile the neighboring economies are powering ahead withbetter financial disclosures, higher resource mobilization andhigher rates of economic growth. 3. For the reasons outlined above, I am looking forward tothis conference today initiating a campaign in breaking out ofthe vicious circle of accounting and financial misreportingthat is holding down resource mobilization, investment,economic growth and poverty eradication in Bangladesh. Thiswould clearly be a very major undertaking in reeducating andmotivating all of us as individuals, households, businessesand public authorities in transforming our individual as wellas collective social behavior and practices. Urgency of theneed for this campaign is just as great, with the country’sSixth Five Year Plan (SFYP) 2011-2015 targeting tax-GDPratio of 12.9 percent by year 2015, to raise domesticinvestment to 32.5 percent of GDP and annual real GDP

growth rate to 8.0 percent. Successfully brought about, thedesired reforms in accounting and financial disclosurepractices will lead to major acceleration in development offinancial and capital markets channeling higher domestic andexternal investments into the real sectors, leading to fastereconomic growth and poverty reduction.I would look forward to audit reports of chartered accountantson individual businesses, and to the Journal of the ICABbeing informative, effective learning and motivational tools tothis end for all of us. On behalf of Bangladesh Bank Ipromise you all cooperation, with open communication andconsultation channel for the ICAB in all aspects of thisendeavor. The government is seriously considering enactment of a newlaw creating an oversight authority for the accountingprofession. I am looking forward to ICAB to play role as anintegral auxiliary in the new regulatory structure, forimplementing in letter and spirit the evolving internationalbest practices of accounting and auditing in Bangladesh;towards higher resource mobilization, higher investment,poverty eradication and eventual prosperity for Bangladesh. 4. Let me conclude here, with my thanks and gratitude to youall for your patient attention, and with thanks to ICAB for theinvitation to address this congregation of accountingprofessionals and invited dignitaries. n


Accountancy


Accountancy

An Audit Committee charged with oversight responsibility offinancial reporting and disclosure. is an important operatingorgan of the Board of Directors of a publicly-traded companyregistered under the laws of the country and enlisted with thestock exchanges in Dhaka and Chittagong. Committeemembers and the Chairman of the Committee are drawn andselected from among the members of the company’s board ofdirectors. A qualifying audit committee is required for aBangladeshi publicly-traded company listed with a stockexchange as per the Notification dated 20 February, 2006, ofthe Securities and Exchange Commission,. To qualify, thecommittee must be composed of independent directorsnominated from outside with at least one qualifying as afinancial expert. Audit committees are typically empoweredto acquire the consulting resource persons with expertisedeemed necessary to perform their responsibilities. The roleof audit committees has become predominant as a result ofthe passage of the Sarbanes-Oxley Act of 2002. Many auditcommittees also have oversight responsibility of regulatorycompliance and risk management activities. All banks inBangladesh must have audit committees, vide BangladeshBanks’ circular No: 12, 23 December 2002. Not for profit(NGOs) entities may also have an audit committee.Boards of Directors and their committees rely onmanagement to run the daily operations of the business. TheBoard’s role is better described as oversight or monitoring,rather than execution. Responsibilities of the audit committeetypically include: • Overseeing the financial reporting and disclosure process.• Monitoring choice of accounting policies and principles.• Overseeing hiring, performance and independence of the

external auditors.• Oversight of regulatory compliance, ethics, and

whistleblower hotlines.

• Monitoring the internal control process.• Overseeing the performance of the internal audit function.• Discussing risk management policies and practices with

management.The duties of an audit committee are typicallydescribed in a committee charter. Role in oversight of financial reporting and accountingAudit committees typically review financial reports quarterly,half yearly and annually in publicly-traded companies. Inaddition, members will often discuss complex accountingestimates and judgments made by management and theimplementation of new accounting principles or regulations.Audit committees interact regularly with senior financialmanagement such as the CFO and Controller and are in aposition to comment on the capabilities of these managers.Should significant problems with accounting practices orpersonnel be identified or alleged, a special investigation maybe directed by the audit committee, using outside consultingresources as deemed necessary.External auditors are also required to report to themanagement or committee on a variety of matters, such astheir views on management’s selection of accountingprinciples, accounting adjustments arising from their audits,any disagreement or difficulties encountered in working withmanagement, and any identified fraud or illegal acts. Role in oversight of the external auditorAudit committees typically approve selection of the externalauditor. The external auditor (also called a public accountingfirm) reviews the entity’s financial statements quarterly andissues an opinion on the accuracy of the entity’s annualfinancial statements. Changing an external auditor typicallyalso requires audit committee approval in line with localcompany law such as Companies Act 1994. Audit committees

Audit Committee, Independent Director, Bangladesh Perspective

Md Abdus Salam FCA FCS

Md Abdus Salam, FCA, FCS, a Council Member and Vice President of the Institute of Chartered Accountants of Bangladesh (ICAB) andalso a Director and Audit Committee Member of the Board of Directors, Islami Bank Bangladesh Limited. He is also a Council Memberof Institute of Chartered Secretaries of Bangladesh.

also help ensure the external auditor is independent, meaningno conflicts of interest exist that might interfere with theauditor’s ability to issue its opinion on the financialstatements.Role in oversight of regulatory complianceAudit committees discuss litigation or regulatory compliancerisks with management, generally via briefings or reportsfrom the top lawyer in the entity. Larger corporations mayalso have a Chief Compliance Officer or Ethics Officer thatreport incidents or risks related to the entity’s code ofconduct.Role in monitoring the internal control processInternal control includes the policies and practices used tocontrol the operations, accounting, and regulatory complianceof the entity. Management and both the internal auditingfunction and external auditors provide reporting to the auditcommittee regarding the effectiveness and efficiency ofinternal control1.Role in oversight of risk managementEntities have a variety of functions that perform activities tounderstand and address risks that threaten the achievement ofthe organization’s objectives. The policies and practices usedby the entity to identify, prioritize, and respond to the risks(or opportunities) are typically discussed with the auditcommittee. Many organizations are developing their practicestowards a goal of a risk-based management approach calledEnterprise risk management. Audit committee involvement innon-financial risk topics varies significantly by entity.Experts have argued for risk management early warningsystems at the corporate board level. Impact of the Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002 increased audit committees’responsibilities and authority. It raised membershiprequirements and committee composition to include moreindependent directors. Companies were required to disclosewhether or not a financial expert is on the Committee.Further, the Securities and Exchange Commission, USA andthe stock exchanges proposed new regulations and rules tostrengthen audit committees.HistoryBelow are a few key milestones in the evolution of auditcommittees:• 1939: The New York Stock Exchange (NYSE) first

endorsed the audit committee concept.• 1972: The U.S. Securities and Exchange Commission

(SEC) first recommends that publicly held companiesestablish audit committees composed of outside (non-management) directors.

• 1977: NYSE adopts a listing requirement that auditcommittees be composed entirely of independentdirectors.

• 1988: AICPA issues SAS 61 “Communication with AuditCommittees” addressing communications between theexternal auditor, audit committee and management ofSEC reporting companies.

• 1999: NYSE, NASD, AMEX, SEC and AICPA finalizemajor rule changes based on Blue Ribbon Committee onImproving the Effectiveness of the Corporate AuditCommittee.

• 2002: Sarbanes-Oxley Act is passed in the wake ofcorporate scandals and includes whistleblower andfinancial expert disclosure requirements for auditcommittees.

Best practicesManaging the audit committee's agendaAudit committees typically use a full year agenda to ensurecoverage of the various topics they are required to address.The agenda for each meeting, which is typically quarterly ormore often, is then adjusted as necessary. Establishing theagenda is a collaborative effort between the Board, seniormanagement, legal counsel, and both the internal and externalauditors. It is important that the committee have its ownperspective on what key issues it should address and theseshould be reflected in the agenda.Frequency of interaction with managementMany audit committee chairpersons conduct interim callswith key members of management between quarterlymeetings. Key contacts may include the CEO, CFO, ChiefAuditor, and external audit partner. Many boards alsoschedule dinners prior to formal meetings that allow informalinteraction with management. Some companies also requiretheir boards to spend a certain amount of time learning theiroperations beyond board meeting attendance.Executive sessionsThese are formally scheduled private meetings between theaudit committee and key members of management or the


Accountancy

external auditor. These meetings typically are unstructuredand provide the opportunity for the committee to obtain thefeedback of these managers in private. A key question auditcommittee members ask in such sessions is: “Is thereanything you would like to bring to our attention?”EvaluationAudit committees should complete a self-evaluation annuallyto identify improvement opportunities. This involvescomparing the committee’s performance versus its charter,any formal guidelines and rules, and against best practices.Such a review is confidential and may or may not includeevaluations of particular members. Survey resultsVarious independent consulting and public accounting firmsperform research on audit committees, to providebenchmarking data. Some global results are identified below:• 54% of committee members surveyed felt the audit

committee was “very effective,” while 38% indicated“somewhat effective.”

• Risk management, internal control, and accountingestimates and judgments were the top priority areas for2007.

• Most audit committees have 3-4 members and are usuallychaired by persons with experience as a CFO, externalauditor, or CEO.

• Audit committees meet 6-10 times per year, either face-to-face or via teleconference, with the former lasting from1-4 hours and the latter 1-2 hours.

• Audit committee members devote 50-150 hours to theirresponsibilities each year.

• The percentage of audit committees with oversightresponsibility for IT compliance (66%), businesscontinuity (50%), and information security (45%).

• 41% were “very satisfied” with the internal auditfunction, while 52% were “somewhat satisfied.”

• Two-thirds felt the Chief Internal Audit position was for aprofessional internal auditor, rather than as a “steppingstone” to other roles.

• 93% indicated the audit committee was “somewhat” or“much more” effective since the Sarbanes-Oxley Act wasimplemented in 2002.

• 58% of committee members were “somewhat satisfied”

that they understood management’s processes to identifyand assess significant business risks.

• Only 17% of audit committees had primary responsibilityfor oversight of non-financial risk; the full board had thisresponsibility in 56% of companies.

Independent directorA non-executive director (NED) or outside director is amember of the board of directors of a company who does notform part of the executive management team. He or she is notan employee of the company or affiliated with it in any otherway. They are different from inside directors and aremembers of the board either serve or previously served asexecutive managers of the company.Non-executive directors have responsibilities in the followingareas: • Strategy: Non-executive directors should constructively

challenge and contribute to the development of strategy.• Performance: Non-executive directors should scrutinize

the performance of management in meeting agreed goalsand objectives and monitoring, and where necessaryremoving, senior management and in successionplanning.

• Risk: Non-executive directors should satisfy themselvesthat financial information is accurate and that financialcontrols and systems of risk management are robust anddefensible.

• People: Non-executive directors are responsible fordetermining appropriate levels of remuneration ofexecutive directors and have a prime role in appointing,and where necessary removing, senior management andin succession planning.

NEDs should also provide independent views on:• Resources• Appointments• Standards of conductNon-executive directors are the custodians of the governanceprocess. They are not involved in the day-to-day running ofbusiness but monitor the executive activity and contribute tothe development of strategy.RecommendationsIn Bangladesh, under the corporate governance framework, itrequires an independent evaluation on the formation andperformance of the audit committee established in thepublicly listed companies. n


Accountancy


Budget & Economics

Introduction:Government needs resources mainly to meet administrativeexpenses and to undertake growth and poverty reductionprogramme. Taxation is one way of generating requiredrevenue, the other way is to borrow from internal or externalsources. Government can not undertake sizeable developmentprojects without sufficiently large discretionary fund.Unlimited public borrowing is of course, risky as has beenwitnessed recently in UK, Spain, Greece etc. BangladeshGovernment however, has been very cautious in this respectand over the years the budget deficit has been kept within 5%of GDP. In the last concluded fiscal 2009-10 the deficit was4.5% of GDP. Out of this 2% has been financed from externalsources and the rest 2.5% from domestic sources.One way of ascertaining whether Government has been ableto mobilize adequate interval resources through basicallytaxation, is to examine its tax- GDP ratio and the trendthereon. The ratio in Bangladesh has been improving but at asnails pace and with this increase it might take us decades ifnot years, to reach any reasonable and respectable standard.

Tax- GDP ratio in Bangladesh2005-06 8.702006-07 8.402007-08 8.962008-09 9.032009-10 9.30

This compares very badly against our regional standard, letalone other developed or fast developing nations where theratio is 15.6%, 10.6%, 18% and 10.9% in the case of SriLanka, Pakistan, India and Nepal respectively.In the backdrop of this phenomena, the Government does nothave much of a choice other than improving the ratio quitesubstantially. Collection of more VAT is one of the answersand this paper is all about discussions, suggestions centeringaround various aspects of VAT in Bangladesh.

VAT Conceptual FrameworkMeaning: VAT is a general consumption tax assessed on thevalue added to goods and services. It is a general tax thatapplies in principle, to all commercial activities involving theproduction and distribution of goods and the provision ofservices. It is a consumption tax because it is borne ultimatelyby the final consumers. It is not a charge on business housesor service providers, it is charged as a percentage of price,which means that the actual tax burden is visible at each stageof production and distribution chain.It is collected fractionally, via a system of deductionswhereby taxable persons can deduct from their VAT liabilitythe amount of tax they have paid to other taxable persons onbusiness purchases. This mechanism ensures that the tax isneutral regardless of how many transactions are involved.In other words, it is a multi-stage tax, levied only on valueadded at each stage in the chain of production of goods andservices with the provision of a set off for the tax paid atearlier stages in the chain. The objective is to avoid cascadingwhich can have a snowballing effect on prices. It is furtherassumed that due to inbuilt cross checking in a multi stagedtax, evasion would be checked resulting in more revenues tothe Government. Over the last few decades around 160countries have introduced VAT.VAT was invented because very high sales taxes and tariffsencourage cheating and smuggling. However, critics raise thepoint that it is regressive since it disproportionately taxes themiddle and low income group.Personal and consumer of products and services can notrecover VAT on purchases, but businesses are able to recoverVAT (input tax) on the products and services they bought inorder to produce further goods and services to be sold to yetanother business in the supply chain or directly to a finalconsumer. In this way, total tax levied at each stage in thechain is a constant fraction of the value added by a business

Value Added Tax in Bangladesh - An Effective Way of Internal Resource Mobilization*

M. A. Baree FCA

*Reproduced is the paper presented by Mr. M. A. Baree FCA, Past President-ICAB in the International Conference of Chartered Accountants-2010

to its products and most of the cost of collecting the tax borneby the business rather than by the state.Classification of goods and services under VAT systemFor VAT purpose goods and services are classified into three;1. Taxable, where all goods and services are subject to

VAT the rate may be uniform or variation thereof ondifferent socio-economic considerations. Thebusinessman or service provider has to calculate hisoutput tax based on sales or turnover. Therefore, he candeduct the input tax paid on the goods or services tomake his final product or services.

ii. Exempt, some goods or services may be exempt fromVAT. It may differ from jurisdictions to jurisdictions butthe fundamental remains that suppliers of exempt goodsand services are not subject to output tax and as suchthey can not charge VAT and they can not also offset orclaim back input VAT on purchases.

iii. Zero-rated, this is a variation of taxable goods orservices but the rate of VAT has been kept at zero-rate.Export is one of such example. On the output side thereis no VAT payable but input taxes paid in the purchaseof goods and services can be claimed back.

Origin/destination principleSome might wonder why in case imports, when all value hasbeen added across the border VAT is levied by the receivingcountry and exports where all value has been added withinthe country are not charged VAT. The answer lies in theprinciple, origin or destination. Under the origin principlevalue added domestically on all goods and services whetherexported or internally consumed is subject to tax.Consequently, tax can not be levied on value added abroadand this principle confines VAT only to goods originating inthe country of consumption. In short, exports are taxableunder this principle while imports are exempt.Under destination principle value added irrespective of theplace of origin is taxable. All goods are taxed if they areconsumed within the country. Under this, exports are exemptwhile imports are taxed. Destination principle is normallyused along with consumption VAT. It treats imported goodsat par with domestic products unlike the origin principlewhich gives in direct protection even preference to theproducers abroad. All EEC and other countries includingBangladesh now follow destination principle.

VAT regime in BangladeshVAT was introduced in Bangladesh from 01 July 1991.Before that it was the regime of sales tax and excise duties.The system was introduced rather very quickly at theinsistence of the World Bank who thought it appropriate forhigher internal resource mobilization by the Government. TheVAT Act, 1991 along with VAT Rules 1991 was drafted andpassed in the Parliament within a very short space of time.The Act contains some-73 sections and number of Rules inBengali which are too complex and confusing. The structuresoften are unnecessarily lengthy, cumbersome and obscured.The sections are often interlocked and even a particularsection runs a full page with a single sentence. By anystandard the Act and the Rules were not user friendly and theshadow or spirit of old customs, sale and excise law prevailallover. To meet the growing demand of time the Act and theRules have been proved to be basically inadequate and tocope with even increasingly complex scenario, the NBRresorted to issuing of Statutory Regulatory Orders (SRO) andby this time on various matters where the Act could notanswer, NBR issued innumerable SROs, numbering perhaps500, some are alive, some are redundant.Structure of VAT Act, 1991Basically it contained three parts, VAT, Turnover Tax andSupplementary duty - the rate has been fixed at 15%.Turnover TaxFor small manufacturers or traders with an annual turnover ofcertain amount, the present threshold is Tk 50 lakhs, the rateof output VAT has been fixed at 4%. However, they can notdeduct the input taxes paid on their purchases.Supplementary dutyThe rationale stated in the Act for charging supplementaryduty is to discourage the use of luxurious or sociallyundesirable goods or services. The duty is indeed quite heavyranging from 30% to 500%. It is levied at import stage and atlocal stage. The list is quite lengthy and thousands of items atimport stage attract supplementary duty.Local products attracting supplementary duty includecigarettes, sampoo, coconut oil, soft drinks, mineral water,paint, jorda, ceramic tiles, bath tubs, basins commodes, fruitjuice etc. Services attracting VAT are hotel and restaurants ofcertain specifications, supply of SIM cards, cinema halls and


Budget & Economics

satellite channel distributors.The reason for the levy of supplementary duty at both importand local stages though appears sound, it has neverthelessused as an additional source of revenue. In essence at importstage it is a surrogate to custom duty and at local level it isalike sales tax. Since Bangladesh is a signatory to WTOagreement to rationalize custom tariff into 4 tier theGovrnment can not include it with custom duties. But therevenue out of supplementary duty both at import and locallevels are about 25% of total VAT revenue.

As a matter of fact, supplementary duty can not be a part ofVAT Act. It is included there in 1991 by default to fill up therevenue gap in 1991 and since then it goes on like this and noalternative has been evolved within the last 20 years.Furthermore, it appears that there lies a tax on tax mischiefsince to calculate the VAT base at both levels, supplementaryduty is added. Since the provisions of supplementary duty arewithin the main VAT Act 1991, anything paid under this is inessence VAT.


Budget & Economics

VAT including supplementary duty at various stages accountfor 58% of the tax revenue, the biggest source. Besides asmall amount, around 1% is collected as excise duties fromtwo sectors, air ticket and bank deposit/accounts. The reasonis not however, clear why these two items have been stillunder excise.

From the above picture the collection scenario appears verymuch skewed. 40 multinationals accounting about 25%included in LTU contribute more than 60% of LTU revenuewhereas 165 LTU units contribute more than 60% of totalVAT revenue. Again two cigarette manufacturing and sixmobile phone companies account for 69% of LTU revenue.

%VAT at import stage 17Supplementary duty at import stage 5Excise 1VAT - Local stage 23Supplementary duty - local stage 13Import duty 17Other taxes and duties 1Income tax 23

100

Composition of revenue

The collection from other thousands of registered persons isindeed insignificant when compared with LTU units, multi-nationals and large manufacturers.Import dutyOver the period 2004-05 to 2008-09 import duty collectionwhich does not need any extra effort rather to apply the fixedrate has been within 0.6% of import value on average. Itappears to have been managed as such.Contribution to GDP

It can be imagined which sectors are payingdisproportionately lower amount of VAT. There are of coursetax rebates or exemption. Nevertheless, an exercise analyzingVAT generated from 15 main sectors of our economy mayprovide important policy guidelines.Collection specially from 80,000 – 90,000 retailers has beenludicrously low at Tk 37 crores, Tk 28 crores and Tk 32crores in the 2006-07, 2007-08 and 2008-09 fiscalsrespectively. The figures on wholesale also are equally bad.whereas it is an accepted fact that retailers’ turnover hasincurred significantly because of firstly population growthand secondly because of increase in purchasing power. Thereare lot of retailers around who should pay substantial amountof VAT and income tax neither of which they now pay.Chartered Accountants’ roleIt seems that VAT has got tremendous potentials in

Bangladesh and further study in required to ascertain theextent of it. The chartered accountants, when their servicesare obtained by the authorities, can assist in collecting moreVAT. They can-• educate the taxpayers about VAT• educate and train taxpayers about maintenance of proper

books, records and documents relating to VAT• assist preparation and submission of VAT returns• certify the VAT returns of at least LTU if it is made

mandatory• audit VAT deduction at source and its timely deposit• assist the authorities to detect large VAT frauds• survey the whole range of VAT activities in a circle on

pilot basis• undertake and complete VAT audit if so authorized

specially LTURecommendations• collection targets must be made considering the

potentiality in each sector rather than 10% last yearsyndrome

• the target should meet the potentialities not the revenuerequirement and staff performances should be evaluatedaccordingly

• services of chartered accountants should be outsourced tomeet the skill shortage of NBR.

• VAT Act, Rules etc must be rewritten in a more userfriendly and functional manner (preferably in Englishsince foreigners are involved in VAT matters)

• computerize all VAT operations including onlinesubmission of VAT returns

• limit the use of SROs, notices and circulars tomanageable level


Budget & Economics

Registered VAT persons and Large Taxpayers Unit (LTU) At present there are reportedly about 650,000 registered persons (last year 450,000) and about 90,000 retailers in the wholejurisdiction. Out of this 165 are placed under LTU. Perhaps the activities thereon are carried on functional basis. Followingfigure summarily would provide an idea of LTU;

Tk (Figure in Crore)

2006-07 2007-08 2008-09 2009-10VAT collected from all persons 15560.01 18858.8 21911.95 22795Collected from LTU 7710.62 10037.44 11028.29 13506.50As a percentage 49.55% 53.22% 50.33% 59.24%40 multinationals within 165 (25%) 56.18% 58.31% 52.77% 62%2 cigarettes and 6 mobile companies within 165 65.49% 66.34% 61.5% 68.79%

2006-07 2007-08 2008-09Manufacturing 17.55% 17.77% 17.90%Contribution in VAT 3.8% 3.8% 4.4%Wholesale and retail 14.24% 14.37% 14.41%VAT collection .012% .011% .011%

• disproportionably low yield sectors or persons should bebought under close and careful monitoring

• introduce gradually risk based audit identifying thosetaxpayers who are most likely to be non-compliantthrough the use of risk scoring techniques and taxpayersprofiling as the concept is applied by banks and financialinstitutions. Core principles of risk based audit are:- trust but verify- self assessment of taxes- compliant taxpayers treated with respect non-

compliant with severity- promote a culture of voluntary tax payment- reduce opportunities for rent seeking behavior- reduce interface between tax staff and taxpayers

• use of electronic cash register (ECR) with fiscal memoryearlier made twice mandatory for selected medium andsmall traders within all City Corporations from 01January 2009 and from 01 July 2009 in all district town.It seems the policy has been shelved.

• VAT exemption schedules for goods and servicesincluded in the Act and made through SROs, circulars etcto be further rationalized.

• Presumptive tax system which mostly depends on thesweet will of the leaders of small traders should be . Theirvoices must be heard carefully but the authority shouldnot yield to their pressures. Unlike recent bad incidenceof 4.5% VAT on private universities, the Governmentshould make the law on sound legal footing and muststick to the policy.

ConclusionOur long term development goals would not be achievedwithout substantial public investments which in turn dependson the ability of the Government to raise adequate internalresources mainly through taxation. Import duty as a sourcehas been declining sharply as a result of WTO agreement toreduce and rationalize import tariff. Income tax though apotential source is difficult to collect since it is a direct tax.Resistance often grows amongst the taxpayers who may alsoresort to evasion. VAT on the other hand, has wider base andbeing indirect tax, is not difficult to collect. As a matter offact, the final consumers of vatable goods and services payVAT at consumption point and it is the duty of the authorityto collect this efficiently and effectively.


Budget & Economics

2006-07 2007-08 2008-09 2009-10 2010-11% % % % (budget) %

Income tax 8924 23.81 11005 23.93 13538 25.54 16560 27.14 21005 28.93VAT 13683 36.5 17013 37.0 20116 37.95 22795 37.36 27092 3732Import duty 8279 22.08 9300 2083 9570 1805 10430 17.09 10885 14.99Excise 185 .0041 213 .005 237 .006 261 .0061 275 .003Supplementary duty 6095 16.26 7970 17.33 9121 17.20 10485 17.18 12866 17.72

It is evident from the above that import duty as a source of revenue has been on the decline and VAT though increasing inabsolute term, the percentage in relative term has been hovering around 37%. Perhaps, above has been designed as such at thebudget preparation stage so that the collecting authorities do not have to bear additional load.

Revenue scenario – NBR administeredTk (Figure in Crore)


Budget & Economics

Resources are limited while the complexities for businesshouses are getting increased which is leading to the hike inproduction cost. Despite that, due to the tough competition inthe market, hiking of product price cannot be a solution tocope with the changed cost structure. To manage this criticalsituation, many business houses all over the world conduct“Cost Containment Plan”. Such plans are operated within theorganization to identify the fats in cost and remove them fromexpense statement. This practice has become so popular in theworld that many professional firms are now fullyconcentrated in this area of working wherein they developedcore competencies. They are developing different methods ina scientific way to cater services to the business housesworking in various industries. Such professionals haveindustry specific guidelines as well to control the cost andbring efficiency therein.But in developing such methods, these firms always keep thefollowing issues as constraints in their mind:1. Local and international legislations2. Generally acceptable industry practices3. Public interest or social impact4. Environmental impact etc.In Bangladesh, local companies are not yet very muchfamiliar with this sort of strategy to manage cost in anefficient manner. Some renowned Multinational Companiesare running this project taking expert knowledge from theiroverseas offices. This is surely adding value to the businessand keeping them very competitive in the market. Like them,local companies specially the export-oriented business housesshould also think to reshape their cost structure to be morecost competitive in international market. It has been experienced from some local companies’ practicesthat they control cost either by compromising with the qualityof the product or simply slashing the benefits of marginal

workers without giving any decent, legitimate compensation.The first one is sometimes difficult if such action creates badimpression about the product in the mind of customers or thelaw enforcers take any legal action against it. In that case,only the second option remains as last resort! Like many other sectors, this is largely happening in RMGsector, the major FOREX earning sector of the country wherean indecent amount of salary or delayed payment thereof isthe main reason of frequent unrest. Both owners and Govt. isaddressing such unrest as “conspiracy” of third party. Yes,conspiracy! This third party is their stomach, landlord,transporters, families, diseases and so on.Companies intended to rationalize the cost-base of thecompany don’t look into the below areas of expense inconnection with senior executives and owners:1. Air travel in business class : cost can be reduced by

traveling in economy class2. Membership in expensive club at home and abroad: for

personal amusement. So, it should be paid from thebeneficiary’s pocket

3. Riding expensive cars: one car is enough and BMW isnot needed for business

4. Frequent pleasure tour outside the country: simplywastage!

5. Premium overseas Medical services including familymembers: they are capable enough to pay from their ownhuge income

This list is not exhaustive and it’s really as big as a laundrylist! But the misery, the owners only see the small list ofexpenses (like overtime and evening snacks) in connectionwith marginal workers. It is found from differentorganization's income statement that the topmost seniorexecutives contribute 33% in total personnel expense thoughthey are less than 3% in total number! It cannot be negated

Marginal Workers’ Benefits: The Lone fat inCompany’s Income Statement!

Mohammad Zahid Hossain FCA

Author is Fellow Member of the Institute of Chartered Accountants of Bangladesh (ICAB).

that the salary of top executives should be higher than theworkers as the former is superior to the latter from differentpoint of views and their nature of work is more critical also.But the workers at least should be given sufficient salary andbenefits to have a human life! The dispersion between theexecutives and workers should not be so big!The low-cost laborer has been considered as the main sellingtool of the exporters as well Govt. of Bangladesh to foreignbuyers and potential investors respectively. In creating themarket and increasing the FDI for the country, the marginalworkers’ back now against the wall. How long they need tofight for their basic requirements? They are not dreaming tosend their baby in any International school. If they only desireto get sufficient payment to send their babies in a Govt.primary school, will it be considered as a luxury? We need tounderstand the need to arrange shelter, medical support etcfrom their wages. The below table shows the minimum monthly wages ofworkers in different countries of Asia which are comparablewith Bangladesh from cost of living point of view: Bangladesh USD 23Vietnam USD 36 Nepal USD 64.60 to 69.51Sri Lanka USD 59.41Pakistan USD 83.22India No national rate, varies according to the state

and to the sector of industryIf the other competing countries (like, Vietnam) can getbusiness from developed countries even paying higher wagesto its workers, why Bangladesh cannot do that? These higher

paying countries must have some other selling factors to thebuyers which are making them competitive. Bangladeshshould also develop their core competency in other areas. Theproblem remains elsewhere! A major driving force of Govt.has been Business Community and they rule the Govt. systemfor their own benefit. Business community always creates apanic of shutting down the business leading to theunemployment of the workers. But they should perceive theirown interest attaching to this situation also, if arises. Withoutpeople, they cannot run their factory too. They spend huge in maintaining the machine to get seamlessoutput while they are very careless about the people becausethis is the most abundant petty machines available in thecountry! If the workers cannot lead a minimum decent life, they willlose their interest in their work. Such demoralized peoplecannot give good output to create further demand of theproduct. Hence, the current situation is highly vulnerable andGovt. should take immediate action considering the long-termimpact on the export as well as work force. Govt. should come forward and take stern action especiallyon the below issues:1. Minimum wages in line with current macro economic

factors which will be revised time to time takinginflation into account

2. Timely payment of wages3. Spread between the top and marginal workers’ payment4. Minimum basic facilities General people don’t want “Business” as a very ruthless bookwhich does not keep the word “humanity” in its pages.


Budget & Economics


Budget & Economics

Analysis of the National Budget of Bangladesh 2010-11: Excellences and Constraints

Md. Hafij UllahMonir Ahmmed

Abu Hanifa Md. Noman Bin Alam

Abstract:National Budget is actually signposts and directions to thevision of the government and therefore, it is necessary toanalyze the annual budget along with its figures to manageimplementation and looks at what is being done to deliverexisting obligations. The present study is an endeavor toanalyze the national budget of Bangladesh highlighting itsexcellences, constraints, future implications, challenges of thegovernments in implementation. The study mainly finds thatthe allocations are almost justified but roadmap forimplementation is insufficient. This article also provides somepolicy recommendations at the end to help successfulimplementation and achievement of maximum benefits fromthe scares resources. Key Words: Budget, Excellences, Constraints, Analysis andImplementation. Introduction:The National Budget for the financial year 2010-11 wasplaced and finally passed in the parliament with a vision ofdigital and prosperous Bangladesh. The national budget isalways more than a mere accounting exercise. NationalBudget is actually signposts and directions to the vision of thegovernment. Therefore, it is necessary to analyze the nationalbudget along with its figures. The Government passed abudget which is 35 percent higher than that of the revisedbudget of the financial year 2009-10 but it cannot be said thatthe national budget for the next fiscal year (FY 2010-2011) ataround Tk. 132.17 billion, which is 16.9 percent of theproposed Gross Domestic Product (GDP) worth Tk 780.29billion, is too ambitious given the overall size of the economy

and the population. The government has rolled out aprospective budget for 2010-11 which seeks to achieve anoverall 6.7 per cent growth rate for the economy. For thisgrowth target, the government emphasized on increasedrevenue collection, enhancing private sector investment andstabilizing the exchange rate mechanism in order to make theexternal sector competitive. The high growth target is alsorelevant to addressing the core concerns of Bangladesh, i.e.,poverty alleviation, increased social safety net and robusteducation for human resources development, strong healthservices, agriculture, power and energy and ruraldevelopment. The development-oriented national budget forthe financial year 2010-11 is ‘exceptional to some extent’ forthe inclusion of analysis of success and failures of previousyear’s budget but it found some lacking as there isinsufficient roadmap of its implementation. Therefore, thegovernment requires making appropriate policies throughcritical and comparative study for successful implementationof the budget to achieve maximum benefits with these scaresresources. The focus on budget analysis takes the implied desire of theexecutives and legislature to manage implementation andlooks at what is being done to deliver existing obligations (1).Budget analysis are more important in our country becausebudget institutions in low-income countries are much lessdeveloped than in developed and emerging market countries(2) and weak capacity, ineffective institutions of civil society,political economy factors act as a severe constraints on themodernizing budget institutions (3). The present study is anoble endeavor to analyze the budget of the financial year2010-11 highlighting the potential implications in the macro

Md. Hafij Ullah, Lecturer in Accounting, Department of Business Administration, Faculty of Business Studies, International IslamicUniversity Chittagong, Monir Ahmmed, Assistant Professor in Economics, Department of Business Administration, Faculty of BusinessStudies, International Islamic University Chittagong and Abu Hanifa Md. Noman Bin Alam, Lecturer in Finance, Department ofBusiness Administration, Faculty of Business Studies, International Islamic University Chittagong.

economic perspective of the country and to facilitate thepolicy makers for successful implementation of the budget. Objectives and Methodology of the Study: The main objective of the study is to analyze the budgetpassed for the financial year 2010-11. To achieve the mainobjective, the study sets the following specific objectives:1. To Analyze the National Budget of Bangladesh passed

for the Financial Year 2010-11. 2. To predict the future implications and challenges for the

government in this regard.3. To suggest some policy recommendations for successful

implementation of the budget to get the maximumbenefits from the scares resources.

The study was completed based on secondary data only. Themethodology followed in this study is mainly of library workbasically based on critical analysis and comparative study ofthe budgets passed and related literatures. Limitations of the Study:This study of analyzing the budget was completed withinvery short period of time. Therefore, it was not possible tohighlight all the areas of the budget. Analysis of the Budget:The analysis of budget was performed under different headshighlighting the macro-economic perspective of Bangladeshas below: 1. Effects of Budget on Revenue Collections:Total revenue Collections budgeted for the financial year2010-11 is Tk. 92,847 crore out of which Tk. 72,590 crorefrom NBR tax revenue, Tk. 3,452 crore from Non-NBR taxrevenue and Tk. 16,805 crore from Non-tax revenueincreasing 19 percent, 16.8 percent and 8.2 percentrespectively from revised budget. Whether it would bepossible to collect these amounts is a question because aimingat a big increase over a big benchmark may prove difficultbut the revenue collections position in the last year may makeus optimistic in this regard. If Government can add more5,00,000 people under the tax network as stated in budgetspeech and can collect VAT appropriately from the widenedareas then it may be expected to collect the budgeted amount.But challenge would remain due to taking time for expectedpower generation and instability in RMG sector and also dueto slow growth continuation in the Euro-zone countries

(where maximum of the export is made). It is a matter ofpleasure that Government has taken some steps to increaserevenue collections through widening tax-net in case of bothIncome tax and VAT, reducing tax evasion by revising VATAct and Income Tax Ordinance 1984, motivating tax payersby creating client friendly environment in the tax offices,setting one-stop service centers, increasing efficientemployees in the tax offices, and reorganizing tax appellatetribunal for reducing tax related cases. But collection of thehigher amount of revenue may increase pressure on thegeneral people.

Graph-1: Sources of Total Resource Collections of theBudget 2010-11. 2. Effects of Budget on Power and Energy Sector: The new budget aims to attain a 6.7 percent GDP growth bynext fiscal, and for that it has focused more on infrastructuredevelopment, especially power generation, to facilitateinvestment and expansion of business and that is why theallocation for power and energy sectors in the new budget hasbeen enhanced by (Tk 6,115 crore) about 61.5 percent overwhat it was in the outgoing fiscal year. But stress on rentalpower generation means very high cost of power, and there isno clear indication in the budget as to how the electricity thusgenerated would come within the reach of the commonconsumers. The budget gave due importance to these power and energysector describing its real scenario of the present crisis andever highest amount were allocated for stimulating from theirpresent position. A vision is also stated in the budget toeliminate difference between supply and demand ofelectricity by 2012 and to generate more 9,426 Megawattelectricity by 2015 and ensuring electricity for all by 2021.But the previous experience of implementation of the projectswas not so as it was planned. Many projects and proposals are


Budget & Economics

still in dark or delayed to be implemented. Therefore, theexpected improvements in these sectors depend on thesuccessful implementation of the budget.Though allocation was consecutively increasing for electricityfor two years, that is, in 2008-09 it was 2.5 percent; in 2009-10 it was 3.4 percent and in 2020-11 it is 4.6 percent of thetotal budget but subsidies are not sufficient as per the presentcrisis and its importance to the economy of the countrythough the Government emphasized that private investmentwould increase in this sector. Moreover, gas is gettingscarcer; the government meanwhile would do well toannounce a comprehensive policy on off-shore gas and oilexploration, and especially on extraction of coal andestablishment of coal-fired power plants to produce cheaperelectricity for the general consumers and the industries.3. Effects of Budget on Annual DevelopmentProgram (ADP):The increase of about 35 percent in ADP (Tk. 42,770 crore)may be taken to eradicate the present economic crisis but itwas 26 percent (Tk. 31,817 crore) in the last year’s revisedbudget. The allocation in ADP is justified but due to lack ofspeediness in activities the budget in maximum cases remainsidle and therefore the activities of the public administrationshould be made speedier to achieve the target of developmentbut budget did not mention much about that capacityenhancement and therefore any variance in these arenaswould certainly take a toll on the growth figure.The challenge would expect to face is implementation of theAnnual Development program in 2010-11 (total 910) andtherefore, emphasis are to be given on the quality of theprojects implemented not on the number of projectsimplemented and on the sectors that have high proportion ofthe carried over projects and those to be completed by thisfinancial year. In presenting the earlier budget in 2009-10, thegovernment emphasized on taking some reforms measuresand using Critical Path Method for monitoring projectimplementation advancement but nothing was observed so farin this regard. However, the success in achieving the targetsas stated in the national budget requires that theadministration is transparent and accountable and thetaskforce formed for monitoring the 10 majorMinistries/Divisions working actively.

Graph-2: Sector wise Resource Distribution of the Budget2010-11. 4. Effects of Budget on Social Security and Welfare:As per the budget statement, poverty reduction throughacceleration of economic growth, ensuring social security andempower people through employment are the prime focusingareas of the government and hence the social security andwelfare program was divided into four categories namely:special allowances to different underprivileged sections,employment generation through micro-credit or differentfunds/programs, food security programs and finally, supportto the new generation in the areas of education, health,training and vocational competence. Government again increased the budget allocation for socialsecurity and welfare to Tk.19,497 crore which is 14.8 percentof ADB and Non-ADB budget allocation and for the firsttime a fund of Tk. 5 crore was allocated for the acid-affected,physically autistic and self-employed activities of the women.Old-age beneficiaries coverage was 22,50,000 in 2009-10 andproposes to cover 24,75,000 in 2010-11 and allocated Tk. 891crores to support the program. Allocation of food grain of2.65 lakh MT as VGD against the Ministry of Women andChildren Affairs, 75 thousand MT as TR against the Ministryof Chittagong Hill Tracts Affairs, 4.10 lakh MT as TR, 80thousand MT as GR, 5.50 lakh MT as VGF against theMinistry of Food and Disaster Management has been made. Due to increase in number of beneficiaries additionalallocation has been made under a number of social security-net programs namely: Allowance for widowed, Divorced andDestitute Women, Old age allowances, Allowance forInsolvent Persons Disabilities, Honorarium for the InsolventFreedom Fighters, and Maternity allowance for the PoorLactating mothers. On the other hand, consistency in thesocial security program is really a good step of thegovernment but increment in allocation has been watered


Budget & Economics

down by its expansion and the allocation in the social securityprogram for the year 2010-11 in proportion to the total budgethas actually reduced compared to that of the previous year.Though these programs are helpful for living but thecondition of those people would expect to improve if thegovernment could provide them permanent employment. 5. Effects of Budget on Agriculture Sector: For achieving the vision of being self sufficient in food by theyear 2012, various steps were stated in the budget forimprovement of agriculture namely: distribution of agri-inputassistance cards to 1.82 crore farmer families and openingaccount in a bank by Tk. 10 only so that government canprovide other subsidies fairly to the doorstep of the farmersthrough bank, distribution of organic, green and bio fertilizerto 97 lakh farmer families, producing and distributing varietyof high yielding seeds, increasing seed storage capacity,testing soil quality, ensuring fair prices of agro-products, andincreasing the target of distribution of agricultural loan, etc. But a total of Tk. 7,492 crore was allocated for (both revenueand development budget) agriculture which is reduced to 8.6percent of the total budget consecutively for two years. Thisfigure was 9.7 percent in 2009-10 and it was 11 percent in2008-09. Moreover, a total of Tk. 4,000 crore has beenallocated to meet the demand of subsidy for agriculturalinputs (fertilizer, and other agricultural activities) which wasTk. 4,950 crore in the previous year. Agricultural subsidiesare not sufficient as per its importance to the economy of thecountry because due to reduced supply of gas the productionof fertilizer may also reduce and hence the import if urea is tobe increased and it would be difficult for the government tocontrol the fertilizer prices as stated in the budget. On theother hand, irrigation received poor attention, and farm creditfor the next fiscal year is very poorly higher. If surface waterutilization is high in priority, dredging of rivers was not givendue attention. Agriculture insurance for the loss of thefarmers due to natural calamities and production of salinityand flood tolerant paddy were introduced in the budget but nospecific roadmap was given for implementation of theseplans.6. Effects of Budget on Business/Industrial Sector:As per the vision of the government, the budget 2010-11again emphasized on raising the contribution of the industrialsector to GDP to 40 percent and the level of absorption of thelabor force in this sector to 25 percent by 2021. To promotelabor-intensive and environment-friendly industrialization ofthe country, various significant steps have been taken by the

government namely: determining the priorities of theindustries to be emphasized, site and land development forleather and pharmaceutical industrial parks, promoting role ofgovernment for private sector development, determiningpolicy for restructuring or exiting the sick private industries,financing for reviving and exporting of jute products torestore the lost pride of the sector, enacting ‘BangladeshParjatan Board Act 2010’ and The ‘Bangladesh Conservationand Preservation of Tourism Areas and Exclusive TouristZone Ordinance 2010’ for development of tourism industries,providing training to workers of the nationalized industries toenhance their productivity, determining loan target for SMEs& increasing the ceiling for 4 percent turnover tax from Tk 40lakh to Tk 60 lakh, providing directives to establish a‘Women Entrepreneur Dedicated Desk’ in each bank toensure better opportunity for women entrepreneurs andstepping toward formulating ‘Competition Act 2010’ toensure fair competition in the free market economy. The budget for fiscal year 2010-11 can be called industry-friendly, and therefore, the businessmen may be happy forcontinuation of the protection for local industries,continuation of core stimulus subsidies of the existing yearand expecting that the problem of electricity will be resolveddue to taking remarkable steps by the government in thisregard. Government kept Tk. 2,000 crore stimulus packagefor industry to overcome the consequences of the recession.This looks like a sound policy stance in the face of the globaltrend of phasing out stimulus now. However, it is hard to understand the logic of taking away theopportunity given to small businesses to pay VAT at a lowfixed rate. And so is not factoring in the effect of inflation onincome tax slabs. And production costs in the textile sectorwould be higher for continuation of duty on the import ofcapital machinery and if present power crisis stays longer. Ifthe tax on the export of knitwear, woven and other products israised to 1 percent from the existing 0.25 percent, it will havea negative impact on overall export growth. Loandisbursement in the private sector might be squeezed becauseof the government’s high borrowing from the bankingsystem.7. Effects of Budget on Information andCommunication Technology:The budget allocated only Tk. 112 crore (which is slightlyhigher than Tk. 100 crore of the last year’s budget) for theICT sector development and Tk. 200 crore in the existingEquity and Entrepreneurship Fund to promoteentrepreneurship in the IT sector but according to ICT Policy


Budget & Economics

2009, (action plan no-100), the government had to allocate 5percent of the total annual development program and 2percent of the total revenue budget (it should be about Tk3,800 crore). Therefore, the allocation for ICT is insufficientas per the plan of the government to build a DigitalBangladesh by 2021. And it is really surprising that thegovernment plans imposition of VAT on e-commerceindustry when the industry is yet to launch services inBangladesh properly. But the plan and steps taken fordevelopment of this sector is appreciable like establishing ‘HiTech Parks’, ‘ICT Village’, E-Governance, Digital-basedFiling System, ‘Community E-Centers’ in the rural areas,enhancing research facilities for science & technology,undertaking ‘South Asian Sub-regional EconomicCooperation (SASEC) information Highway project tostrengthen regional cooperation and establish connectivityamong India, Nepal, Bhutan and Bangladesh.8. Effects of Budget on Investment and EmploymentGeneration:The investment position in the last two years is notsatisfactory for the government and again the target ofachieving 6.7 percent GDP (Gross Domestic Product) growthin the fiscal year 2010-11 would be possible if thegovernment can raise investment, implementation capacityand the fate remain in favor of the government, that means,free from political crisis and natural disaster. Emphasizing onForeign Direct Investment and on reducing cost of doingbusiness, remarkable steps for power and infrastructure,formulating ‘Bangladesh Economic Zones Act 2010’ and thebudgeted allocation of Tk. 1,600 crore to the BangladeshInfrastructure Financing Fund would expect to encourageinvestment. The plan for establishment of ‘BangladeshInstitute of Stock Market’ is appreciable but imposing a 3percent tax on the premium value of shares that are sold at apremium, and the 10 percent tax on the income of listedcompanies earned from trading of shares, may affect stockmarket negatively. The premium is not an income of thecompany; it is absolutely a capital receipt. If expectedinvestment in energy and infrastructure is materialized then itis expected that there would be improvement in business andindustries resultantly would increase in employmentopportunities. Though overseas employment was reduced forabout two years, government has taken some steps to recoverthe job market again and to find new job markets. 9. Public Private Partnership (PPP): Though the earlier budget of Tk. 500 crore remains unused

due to not starting the PPP in the last year but again a total ofTk. 3,000 crore (2.2 percent) has been allocated for the publicprivate partnership initiatives for the next year expecting thatprivate entrepreneurs would come forward because offormulating new PPP guidelines and establishing a separateoffice that would deal with PPP. However, private entrepreneurs may not respond with muchenthusiasm to PPP projects of the next fiscal year due to thelack of profitability guarantee, priority projects, clearprovision regarding guidelines about private entrepreneurs’involvement in projects and their involvement in the new PPPoffice. Moreover, high dependability of the government onPPP for power and energy projects may prove risky. 10. Effects of Budget on Income Tax and ValueAdded Tax (VAT):There are very few changes in income tax provisions in thebudget and some steps are stated to increase the number oftaxpayers but various steps have been expressed to widen thescope of VAT in a massive way. Therefore, the small traderswould now come under VAT net. As an important source ofgovernment revenue, VAT target again increase by 19.23% inthe current budget as like as last year. To achieve higheramount of revenue income from VAT, base prices have beenincreased in some cases. Truncated VAT rate was increasedto actual (that is, 15%) in case of the services of dockyard,advertising agency, printing press, courier service,consultancy and supervisory firm, audit and accounting firm,architect and interior designer, etc. Digitalization of VATsystem is a good step, simultaneously the efficiency andtransparency is also to be ensured to achieve the target.Government should also take some programs for increasingthe morality of the traders to ensure the payment of VATwhat they collect from the customers and maintain accuraterecords of the purchase of raw materials, other ingredientsand sale of products. All the proposed hikes, like increasing the tolerable level ofVAT at traders’ level to 20 percent from 10 percent and 15percent VAT on rented houses for commercial purposes willpush prices upwards. And the withdrawal of the cottageindustrial facilities and imposing a VAT of 15 percent onchanachur, juice, energy drinks, bidi, gul and jarda willnegatively impact the prices. In addition, the tax hike from4.5 percent to 5.5 percent in the construction sector, and 6percent tax on furniture at production level and 3 percent atdistribution level will increase prices in the sectors.


Budget & Economics

11. Effects of Budget on Inflation and Consumers:As the budget is comparatively bigger which is rationale foreradication of the poverty from the country but itsimplementation and if private sector come forward then thereis a possibility of increasing the rate of inflation highlythough government want to reduce the rate of inflation. The expectation of the people in the middle and lower-income brackets from the new national budget is very poorbecause there is really very little good news for them. Onlythe intention of the government is stated regardingstrengthening of TCB and few words are stated for protectionof the consumer rights. But increase in Compressed NaturalGas (CNG) price on the grounds that it is one-third of that ofpetroleum is not really persuasive. The resulting impact willbe a further increase in the cost of transport, which is alreadybeyond the range of the daily travelers. And higher transportcost will go to move up the prices of goods and services asthey are hauled from one place to another. VAT (value addedtax) on small and mid-size businesses has been increasedfrom one and a half percent to three, which may be an extraburden for consumers. Except for some essentials, industrialraw materials, and capital machinery, advance income taxeson others have been increased to five percent from three. As aresult, prices of around 3,000 essential items may go up.Another bad news is that the tariff on power will go up in thenext fiscal year. But, except presentation of the wish list ofsteps to ensure economic growth, no instant measures arevisible to enhance the people’s level of income so that theymay foot the bill of fare inflated by the hike in cost of living.Again, middle class buyers might have to pay more for carsfrom 1001cc to 1500cc as import duty on cars in that rangehas been upped from 30 to 45 percent in the proposed budget.Import duty on microbus up to 1,800cc has been increased by10 percent. 12. Effects of Budget on Climate Change Fund:The most talked and extremely important issue of concern inthis time is climate change and environment. But Governmenthas allocated Tk. 700 crore for climate change fund which isequal to the allocation of the last budget. As per theimportance of the issue, the allocation should be higher thanthe allocated amount. According to statements of budget,Bangladesh Climate Change Resilience Fund of US $110million has been created, Climate Change Trust Fund policyhas been approved in the cabinet, refinancing fund of Tk. 300crore has been created to facilitate installation of effluenttreatment plant in the industries to reduce level of air and

industrial pollution, Medical Waste Management andAdministration Act 2010 has been enacted and MedicalWaste Management Rules 2010 has been framed to improvedisposal of waste management by medicals and clinics, 16investment projects have been undertaken for the next fiscalto increase forestation to 20 percent land of the country andmodernization process of forecasting and warning system forclimate change effects are continuing to reduce the loss fornatural calamities. 13. Effects of Budget on Education Sector:The government gave top priority to the sector consideringeducation as one of the core strategies to alleviate poverty andfacilitate development and therefore, government has raisedallocation in the education sector by 13.5 percent in thebudget for the next fiscal year. It is stated in the budget thatthe allocation in the education sector is the highest in thecountry’s history and almost doubles that of any other sector.Moreover, government took projects such as school feedingprogram, giving stipends at primary level and installation ofteaching centres at char, haor, and remote areas to achieve thetarget of 100 percent enrolment at primary level by 2010. Butout of the budgeted allocation, a big portion would expect tobe used for the salaries and remuneration of the teachers dueto increasing the MPO listed organization and due to increaseof the prices of the educational materials. Therefore, theallocation for the education especially for developmentactivities is poor. On the other hand, it is more important toensure quality of education than to increase allocation. But nosignificant initiative to improve the quality of educationremain absent in the budget.14. Effects of Budget on Corruption: One important area is neglected in the budget that iscorruption. The anti-corruption chapter was probably insertedjust for the sake of recognizing its existence; no specificmeasure is cited in the budget to eliminate its root. Though itis stated that Anti-Corruption Commission (ACC) isindependent but there is a shaded control of the governmenton it in the name of Accountability, allocation of funds,appointment of the manpower. Therefore, all achievements ineconomic or other affairs may go in vain if the diseases of alltypes of corruption cannot be rooted out.Policy Recommendations:After placement of the budget in the Parliament, one questionis raised from different corners whether government would beable to implement the budget or not. For successful


Budget & Economics

implementation of the budget and to achieve the targeteddevelopment, the following policy recommendations may beconsidered worthwhile: 1. The government should monitor the implementation

growths using Critical Path Method, increase manpowerin the relevant case, providing performance basedpromotion, taking motivational programs, and increasingefficiency and dynamism in the activities of the publicadministration. For increasing rate of ADPimplementation, the participation of the local governmentmay be increased and appropriate steps are to be takenfrom the beginning of the fiscal year.

2. The projected 5 percent fiscal deficit, will require biggergovernment borrowings, and could create a criticalsituation for the capital requirements for the privatesector. The appropriate way to avoid heavy borrowing,particularly from external sources, may be to try toincrease remittances from NRBs, increase exports andrationalize imports.

3. Budget for energy and power sector is sufficient but theway of implementation should be given more emphasizedreducing high dependency on private sector and rentalpower station. Government should make BangladeshPetroleum Corporation (BPC) more strong, transparent,and efficient and should give emphasis on solar energyand hydro-electric projects.

4. Though the target of the budget is high but achievablethrough ensuring high implementation rate of investmentprograms in key growth areas like energy, roads andrailways, bridge, shipping, water resources andinformation & communication technology.

5. To eliminate or reduce corruption from the country,government should make the Anti-CorruptionCommission (ACC) independent in real sense; providesufficient funds, manpower and equipments so that theycan play an effective role in this regard.

6. Exercising political power by different political unitscreating negative environment regarding projectimplementation. Government should handle these types

of activities very strictly and on-line tendering is to beintroduced at all levels.

7. Manpower and their efficiency and morality are to beincreased for increasing the collection of Tax and VAT.Public awareness programs may be undertaken to reducetax evasion and electronic cash register may be madecompulsory for all business concerns and awarenessamong the customers is to be increased for collection ofactual Receipts for purchasing any products because, inmost cases, shopkeepers are collecting VAT fromcustomers but hide it from VAT records.

8. The newly established Public Private Partnership (PPP)office is to be activated, fair and concrete policies are tobe formulated, trust of the Private sector is to beincreased regarding profitability, risk of investment andparticipation in the projects, and more lucrative projectsare to be offered to increase private investment.

9. Government should take necessary steps to strengthenTrading Corporation of Bangladesh (TCB) in real senseby increasing its manpower and funds. TCB shouldincrease buffer stock of essential goods importing fromforeign market to reduce price hike. To reducetransportation cost for goods and for the individuals,public transports may be made more active by increasingtransparency and accountability of the management of therespective authorities.

10. Government should take necessary steps to achieve thetarget of the social security and welfare programs reallybenefiting the actual poor hands. Food security programsmay be intensively continued for the whole year.

Conclusion:Though there may have some constraints and challenges inimplementation of the budget but this budget has shown away forward for the economy of Bangladesh. It may beexpected that this budget may guide the government as wellas the nation to the target of its development if it can beimplemented effectively. n


Budget & Economics

REFERENCES:1. Allen, Richard (2009), The challenge of Reforming Budgetary Institutions in Developing Countries, IMF Working Paper-WP/09/96,

(Washington: International Monetary Fund).2. Dabla, E. and et.al. (2010), Budget Institutions and Fiscal Performance in Low-Income Countries, IMF Working Paper-WP/10/80,

www.ssrn.com, Date: 21/08/2010.3. Harvey, C. and Rooney, E. (n.b.), Integrating Hunan Rights? Socio-Economic Rights and Budget Analysis,

www.ssrn.com/abstract=1590214, Date: 21/08/2010.4. Ministry of Finance of GOB: http://www.mof.gov.bd/en/ 5. News Papers: http://www.onlinenewspapers.com/banglade.htm for News Papers published from Bangladesh: (The Daily Star, The Daily

New Nation, The Daily Independent, Daily Prothom-Alo, Daily Ittefaq, Daily Noya Diganta).


Finance & Banking

Macroeconomic SituationAn overview of the Ministry of Finance, GOB

After an impressive growth performance for almost six years,the world economy has entered a period of uncertainty due toa financial turmoil triggered by the sub prime mortgage crisisin the United States of America (USA). During 2002 to 2007,the world economic growth averaged 4.5 percent per annumcompared to 3 percent in the 1990s. The sudden gloom inworld economic prospects has come as a surprise in view ofthe persistent economic growth and stability. The crisisinitially affected advanced economies and then its contagionspread over emerging markets and low-income countries,albeit, in varying degrees. Advanced economies were first hitmainly by the systemic banking crisis in the USA andEurope. Emerging markets with well-developed financialsystems were initially affected, in most cases, by cross-borderfinancial linkages through capital flows, stock marketinvestors, and exchange rates. In less-developed countries, thegrowth and trade experienced major setbacks. The WorldEconomic Outlook of April 2008 projects global growth toslow from 1.5 percent in 2008 to 3.9 percent in 2009 beforerecovering somewhat in 2010. A year later, April 2009 issueof Outlook forecasts the global growth to contract by 1.3percent in 2009, lowest ever in last 60 years. The economy of Bangladesh continue to demonstrateconsiderable resilience during FY2008-09 despite the twinshocks arising from global recessions and the adverse effectsof the consecutive floods and the cyclone-Sidar of the lastfiscal year (FY2007-08). The economy is estimated to havegrown at a rate of 5.9 percent, slightly below the growth rate(6.2 percent) of FY2007-08. The key feature of the economicperformance during FY2008-09 is the strong recovery inagriculture sector coupled with moderate growth in industryand service sector.The impact of the ongoing global financial crisis onBangladesh economy has not been as severe as it wasanticipated, thanks to its well-managed financial sector.However, some adverse impacts were noted in certain areas.Although growth in key areas of potential impact-remittancesand exports remained satisfactory, some weakening inremittance inflows and export earnings was observed in themonths towards the end of the fiscal year. Since thebeginning of the global economic crisis, the Government has

been on high alert and has been monitoring its impact on theeconomy with the help of a Task Force involving theconcerned stakeholders from both the public and privatesector. Besides, a Technical Committee has also been formedby the Ministry of Finance to monitor and analyse themacroeconomic impact of the crisis, and to identify necessaryshort-term macroeconomic and fiscal management responses.After detailed examination in line with the recommendationsof the Task Force, the Government declared an incentivepackage together with fiscal, monetary and policy support.Growth, Savings and InvestmentAmidst the risk of low export earnings and the remittanceinflows coupled with the lowering of domestic demand, theeconomic growth demonstrated strong recovery bolstered byagriculture along with the contributions by industry andservices sector. The contributions of the agriculture, industryand services sectors are estimated respectively at 4.6 percent,5.9 percent and 6.3 percent, indicating strong performance ofall the three broad sectors. The share of services in GDPamounted to 49.7 percent followed by industry at 29.7percent and agriculture by 20.6 percent at constant prices.The dominance of the services sector in terms of itscontribution to economic growth is largely attributable to theperformance of both agriculture and industry sectors.The growth in the agriculture sector during FY2008-09rebounded strongly in crops and horticulture sub-sector from2.9 percent in FY2007-08 to 4.8 percent in FY2008-09. Thegrowth rate of the large and medium scale manufacturingsector, however, moderated to 5.9 percent from 7.2 percentgrowth rate of previous year, with an uneven performance ofits major sub sectors. On the expenditure side, total consumption as a share of GDPincreased slightly to 80.0 percent in FY2008-09 from 79.7percent in FY2007-08. The investment climate slightlyaffected during FY2008-09, as indicated by a deceleration inthe ratio of total investment to GDP to 24.18 percent from24.21 percent in FY2007-08. With an upsurge in remittanceinflows, gross national savings in FY2008-09 grew to 32.4percent of GDP. The per capita GDP exceeded US$ 600 forthe first time. The per capita GNI and GDP stood at US$ 690and USD 621 respectively during FY2008-09.

InflationThe rising trend of inflation in FY2007-08 is not onlyattributable to the higher prices of oil but also to theunprecedented price increase of some essential importedcommodities such as rice, lentils, wheat and soybean oil inthe international market. There had been supply constraintdue to decline in production of rice, lentils and wheat all overthe world. The crisis was further aggravated due to use ofsome agricultural commodities as raw materials for producingfuel by some developed countries in recent times. Theinflation rate, therefore, rose to 9.93 percent in FY2007-08compared to 7.22 percent of the previous year.To check this upward trend of inflation and also to keep theprices of essentials within the reach of the consumers, severalsteps were taken by the Government which include, amongothers, open market sale of the essential commodities, marketmonitoring, and ban on hoarding. Side by side, theGovernment pursued an accommodative monetary policy tokeep the inflation at the tolerable level.As a result, on a point-to-point basis, inflation declined from10.82 percent in July’08 to 2.25 percent in June’09, with anannual average of 6.66 percent in 2008-09, slightly lowerthan the projection of 7.0 percent in the Medium-TermMacroeconomic Framework.Fiscal SectorFiscal performance was stable in FY2008-09 with a moderaterise in revenues receipts accompanied by a substantial rise inoverall expenditure. In the revised budget of FY2008-09, totalrevenue receipts was projected to rise by 17.3 percent (11.3percent of GDP) over the previous year’s revenue earnings.Total public spending was projected to rise by 15.0 percentover FY2007-08, implying an expenditure-GDP ratio at 15.3percent, slightly higher (0.4 percent of GDP) than the ratio ofFY2007-08. The budget deficit was projected at 4.1 percentof GDP, of which 2.3 percent was to be financed fromdomestic source and the remining 1.8 percent from externalsources.NBR tax revenues increased by 10.7 percent over theprevious year, with a decline by 2.6 percent in customs dutiesmainly due to the price fall of imported commodities and themoderate growth in Value Added Tax (VAT) at import leveland income tax. NBR direct tax collection recorded a modestgrowth of 17.4 while the indirect tax collection increased by

8.4 percent in FY2008-09 over the last fiscal year. Therevised target for revenues from NBR source was set atTk.530.00 billion as per against which Tk.525.3 billion wasmobilised implying 99.1 percent achievement of the revisedtarget.Non-NBR sources of tax revenue increased by 14.7 percentamounting Tk. 26.5 billion in FY2008-09 compared to 24.2percent growth in FY2007-08. The non-tax revenues grew byonly 0.90 percent to Tk. 111.2 billion from 110.2 billion inFY2006-07. Overall, the tax-to-GDP ratio and revenue-to-GDP ratio decreased respectively by 0.2 and 0.4 percentagepoints from 8.8 percent and 10.8 percent in FY2007-08.On expenditure side, the total expenditure fell by 2.1 percentto Tk. 851.0 billion in FY2008-09, compared to 37.3 percentrise in FY2007-08. As a percentage of GDP, total expenditurefell to 13.8 percent from 15.9 percent of GDP in FY2007-08.The reason for higher expenditure in FY2007-08 was mainlyon account of assumption of the liabilities of BangladeshPetroleum Corporation (BPC) by the Government to the tuneof Tk. 75.2 billion. However, Annual DevelopmentProgramme (ADP) expenditure increased by 7.2 percentcompared to the 4.4 percent decline in FY2007-08. Therevised allocation for the ADP was Tk 230.00 billion (3.7percent of GDP) and the expenditure during the fiscal yearwas Tk 195.9 billion, which is 85.2 percent of revisedallocation.Due to the underutilization of ADP allocation by 0.5 percentof GDP and the 0.2 percent of Non-Development Budget(Recurrent Budget), budget deficit decreased to 3.4 percent ofGDP from the projected deficit of 4.1 percent.Monetary and Financial SectorMoney and CreditBangladesh Bank continued to pursue cautious andaccommodative monetary policy stance during FY2008-09.The, year-on-year growth of broad money during FY2008-09reached 19.2 percent from 17.6 percent in FY2007-08, mainlydriven by the increase of net foreign asset of banking system(26.7 percent), while the growth in net domestic assets ofbanking system was 17.8 percent. Year-on-year growth indomestic credit was 16.0 percent during FY2008-09 which iswell below from 20.9 percent during FY2007-08. Privatesector credit growth was 14.2 percent in FY2008-09 which issignificantly lower than the year-on-year growth of 24.9


Finance & Banking

percent in previous fiscal year. The reserve money recordedyear-on-year increase of 31.5 percent in FY2008-09, bothdriven by the increase of net foreign assets (31.1 percent) andnet domestic assets (32.0 percent) of Bangladesh Bank.Capital MarketsDuring FY2008-09, the general share price index and marketcapitalization of Dhaka Stock Exchange (DSE) showed somevolatility. The general index increased by 9.0 percent, whilethe market capitalization increased by 35.3 percent at the endof June 2009 over July 2008. There is hardly any presence offoreign capital stock as portfolio investment in the capitalmarkets of Bangladesh and as such the possibility of drain-out of capital through this channel is less likely. Thevolatility in the capital market during the period is mainly dueto the investors’ behaviour with higher expectation ofearnings, market manipulation by some merchant banks andbig investors. To overcome the situation, the Securities andExchange Commission (SEC) has strengthened itssupervision and issued license to some commercial banks tooperate merchant banking.The number of securities listed with the Dhaka StockExchange (DSE) reached 443 as of June 2009 from 412 as ofJune 2008. By the end of June 2009, the issued capital oflisted securities and debenture stood at Tk. 457.9 billion,which is 23.1 percent higher than Tk. 372.2 billion registeredat the end of June 2008.The number of securities listed with the Chittagong StockExchange (CSE) reached 245 as of June 2009 from 231as ofJune 2008. The issued capital of listed securities anddebenture of this stock exchange stood at Tk. 142.5 billion,which is 39.4 percent higher than Tk. 102.2 billion recordedat the end of June 2008. As of June 2009, marketcapitalisation of securities reached Tk. 975.0 billion. Generalshare price index of the CSE reached 10,477.7 at the end ofJune 2009, which was 9,050.6 at the end of June, 2008.External SectorExportsAlthough the performance of export sector was robust (42.4percent growth) in the first quarter of FY2008-09, exportsdeclined by 1.6 percent in the second quarter and increasedfurther by 6.0 percent in third quarter. On a cumulative basishowever, export growth in FY2008-09 was still satisfactory at10.3, as against 15.8 percent in the previous fiscal year in the

context of the contraction of global trade volume.Among the exported items, woven garments rose by 14.5percent and knitwear by 16.2 percent, while raw jute, jutegoods, leather and frozen food showed negative growthduring the period, partly due to recession and partly due tonon-compliance of required international (mainly frozenfoods) standards. In the face of the global slowdown, thesatisfactory growth in ready-made garments (RMG) isattributable to the fact that Bangladesh being a low-endproducer and rising volumes of readymade garment exports,although the deepening of the global recession indicatesdecline in export earnings in the coming months.ImportsDuring the first half of FY2008-09, imports rose by 23.0percent over the same period of FY2007-08, but declinedsharply by 11.1percent in the second half of the fiscal yearposting 4.4 percent growth over the previous fiscal year. Thelower growth in imports driven by the sharp decline in food-grains imports and the record fall of oil price after first half of2008. Based on the settlement of Letter of Credits (LCs) inFY2008-09, import payments of consumer goods declined by21.7 percent, mainly due to the lower international foodprices. Import of intermediate goods and industrial rawmaterials recorded moderate growth of 20.2 percent and 10.5percent respectively compared to FY2007-08, while import ofcapital machinery declined only by 0.8 percent.RemittancesTotal remittance receipts during FY2008-09 grew by 22.4percent and number of manpower export decreased by 43.4percent compared to the preceding fiscal year. However, thegrowth in remittance earnings and manpower exports areslowing as the year progresses. It is to be noted that the trendson both counts have been showing robust growth for the lastcouple of years, higher than normal trends. In FY2006-07, theremittances from expatriate Bangladeshi workers stood atUS$ 5,978.5 million reflecting 24.5 percent growth over theprevious year. In FY2007-08, remittances stood at US$7,914.9 million registering 32.4 percent increase over theprevious year. A total of 564 thousand Bangladeshis wentabroad for employment in FY2006-07, which is 51 percenthigher than the number registered in the previous year. InFY2007-08, the number of manpower export stood at 981thousand, which is 73.9 percent higher than that of the


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previous year.The major share of remittances comes from the Gulf region,where growth prospects have remained largely unchanged in2008 but are projected to be marginally low in 2009. Most ofthe Bangladeshi workers are unskilled/semi-skilled and areemployed in the construction sector. The current crisis mayaffect them in the context of fall in oil revenues, prompting aslowdown in the construction sector.Balance of PaymentsThe trade deficit reduced by 15.0 percent during FY2008-09compared to the deficit of 60.2 percent in FY2007-08.Despite the deficits in trade and service payments during theperiod, the robust growth in remittances caused the currentaccount stood surplus to US$ 2,536 million from a surplus ofUS$ 680 million in FY2007-08. The deficit in the capital andfinancial accounts, mainly due to decrease in portfolioinvestment, other capital, trade credits, the overall balanceshowed a larger surplus of US$ 2,058.0 million against asurplus of US$ 331.0 million in the previous fiscal year.Gross foreign exchange reserves rose to USD 7471.0 millionat the end of FY2008-09, equivalent to about 3.9 months ofimport payments.

Exchange RateThe nominal exchange rate during FY2008-09 remainedmostly stable against USD, depreciated only by 0.3 percent,but appreciated against some other currencies like PoundSterling (23.7 percent), Euro (6.4 percent) and Indian Rupee(15.2). Both the Nominal Effective Exchange Rate (NEER)and Real Effective Exchange Rate (REER) indicesappreciated during FY2008-09. Although REER basedexchange rate fell in June 2009 compared to July 2008, thenominal exchange rate is still higher than REER basedexchange rate indicating that Bangladesh enjoys some exportcompetitiveness.Medium Term Macroeconomic Framework (MTMF)Medium Term Macroeconomic Framework is an importantpolicy instrument for effective linking of the resources of thefour macroeconomic sectors, viz. real sector, fiscal sector,monetary sector and Balance of Payments (BOP) sector.MTMF has been updated by Finance Division in order toprepare budgets using a Medium Term Budget Framework(MTBF). Some important macroeconomic indicators havebeen projected for 3-years taking into account the recentmacroeconomic trends, future potentials and uncertainties.The trends and projections of key indicators ofmacroeconomic framework have been shown in Table 1.1:


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Stimulus Packages To provide support to the private sector in the context of theglobal financial crisis, the Government of Bangladeshannounced a stimulus package on April 19, 2009. Thepackage includes both fiscal and policy supports. Some of thesupports were meant to be implemented immediately duringthe last quarter (April-June) of FY2008-09 while the otherswere to be implemented in FY2009-10 and thereafter.The stimulus package for Tk. 34.2 billion covering the periodfrom April-June of FY2008-09 was intended to stimulateexport and domestic demand. The allocation was provided for(i) export incentives for jute goods, leather goods and frozenfoods; (ii) recapitalization of three commercial banks workingon the agriculture credit; (iii) subsidy for electricity; (iv)refinancing the agriculture credit and (v) social safety (foodsecurity) programme. Some of the immediate supports to theexporters include: (i) disbursement of 70 percent of incentivesimmediately after primary assessment of the claims and therest 30 percent after audit;(ii) refinancing the commercial banks for export credit; (iii)raising the Export Development Fund (EDF) to USD 150million and credit for a single borrower to USD 1.5 millionfrom USD 1.0 million; (iv) expansion of export credit at 7percent for all the exported commodities and the time limitfor repayment to 120 days, up from 90 days at present; (vwithdrawal of fuel surcharge on carrying fruits and vegetableon international route; (vi) introducing rationing system forgarments workers to provide rice at subsidized rate; (vii)bringing down the lending rate below percent and allowingrescheduling facility without down payment; (viii) helpingthe export oriented industries to get through the economicturmoil on a case-case basis.Reform ProgrammesFiscal SectorWithin the remit of ongoing financial reforms, 16ministries/divisions have been brought under the coverage ofMedium-Term Budget Framework (MTBF) in FY2008-09. Inthe FY2009-10, 4 more ministries/divisions would beincluded. There is a plan to include all ministries/ divisions inthe fold of MTBF within next three years. As part of thisplan, MTBF approach in budget setting process will beimplemented in12 more ministries in FY2009-10. These 12ministries/divisions will be brought under the full MTBFprocess in FY2010-11.

Reforms in Banking, Monetary and Credit PoliciesLegal ReformsThe financial institutions are now taking steps within theambit of Artho Rin Adalat Ain, 2003 (the Money Loan CourtAct, 2003) to expedite the settlement of disputes regardingthe loan recovery. Side by side, steps have been taken toimplement the recommendations of the committee formed bythe Government for quick recovery of default loans.Reforms in the Bangladesh BankTo strengthen the role of Bangladesh Bank as the regulatoryauthority of the monetary and financial sector of the countryand also to enhance its authority, a project ‘Central BankStrengthening Project’ is being with the support fromInternational Development Agency (IDA). Starting from late2003, the project is expected to be completed by 2011. Thekey focus of the project:• Restructuring and modernising Bangladesh Bank

(structural re-organisation, automation and humanresource development);

• Capacity building (strengthening research division;prudential regulation and supervision; accounting andauditing standards); and

• Strengthening the legal structure.Reforms in State-owned Commercial Banks (SCBs)Following corporatisation of SCBs, the Government, with aview to create an enabling environment, has taken thefollowing measures for enhancing their institutional capacityand managerial efficiency as well as bringing capitaladequacy of these financial institutions:• A Memorandum of Understanding (MOU) 2009 for the

SCBs (Sonali Bank Ltd., Janata Bank Ltd., Agrani BankLtd. And Rupali Bank Ltd.) has been signed to review theprogress of reforms;

• A transition plan of has been put in place for smooth takeover;

• Following the advice from the Finance Division theRecapitalisation and Progressive Five Year DevelopmentPlan has been revised to minimise the capital deficit..

Monetary and Financial Sector Reforms• New guidelines has been issued by the Bangladesh Bank

for the appointment of directors to the Board ofDirectors of a bank company from the depositors undersub-clause 15(5) of Bank Company Act, 1991.

• Guidelines for recognition of eligible External CreditAssessment Institutions (ECAIs) has been issued byBangladesh Bank. Now, under the Standardized


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Approach of the Risk Based Capital Adequacyframework (Basel II), credit rating is to be determinedon the basis of risk profile assessed by the ExternalCredit Assessment Institutions (ECAIs) duly recognizedby Bangladesh Bank. All scheduled banks will berequired to nominate recognized ECAI for their own aswell as their counterpart credit rating.

• To comply with the international best practices and tomake the bank’s capital more risk sensitive as well as tobuild the banking industry more resilient and stable, arevised regulatory capital framework titled ‘Risk BasedCapital Adequacy for Banks’ in line with Basel II hasbeen devised and sent to the banks for implementationfrom January 2009. Along with the existing capitaladequacy rules and reporting to Bangladesh Bank, bankswill start quarterly reporting as per reporting formatenclosed in the Guidelines. A new anti-moneylaundering law titled Money Laundering Prevention Act,2009 is in place by amending Money LaunderingPrevention Act, 2002 was enacted on February 24, 2009.This law was made effective from April 15, 2008, asthere was Money Laundering Prevention Ordinance,2008 from the date.

• The Government, for the first time, promulgated anti-terrorism law (Anti- Terrorism Act, 2009) whichincluded a stipulation that financing of terrorism is apunishable offence. This law was given effect from June11, 2008, as there was Anti Terrorism Ordinance, 2008from the date.

Agriculture‘Food for all’ is the prime commitment of the presentGovernment and therefore the Government has given toppriority on agriculture sector to achieve self sufficiency infood again by 2013 through increased production. The overallcontribution of the broad agriculture sector at constant priceis projected at 20.60 percent of GDP in FY 2008-09. Thecontribution of this sector was 20.83 percent in FY 2007-08.Within the broad agriculture sector, the contribution ofagriculture & forestry and fisheries are estimated at 16.03percent and 4.57 percent respectively in FY 2008-09.According to the final estimate released by BBS, the volumeof food grain production in FY 2008-09 stood at 328.96 lakhmetric tons of which Aus accounted for 18.95 lakh metrictons, Aman 116.13 lakh metric tons, Boro 178.09 lakh metric

tons and wheat 8.44 lakh metric tons.The target of domestic food grains procurement for FY 2008-09 was 13.35 lakh metric tons (Rice: 13 lakh metric tons andWheat: 0.35 lakh metric tons). The actual quantity of riceprocured under the domestic procurement programme in thisyear was 14.49 lakh metric tons as on June 2009 (Boro rice:12.87 lakh metric tons and Aman rice: 1.62 lakh metric tons).Price of Aman paddy procurement was fixed at Tk. 16 /Kgwhile Aman rice at Tk 26 /Kg. Price for Boro paddyprocurement was fixed at Tk.14 /Kg and rice 22 Tk/Kgrespectively. The budget provision of food grain importsusing Government’s own resources for FY 2008-09 was 7.90lakh metric tons (Rice: 4.0 lakh metric tons and Wheat: 3.90lakh metric tons). The total quantity of public import of foodgrains for FY 2008-09 was 6.80 lakh metric tons (rice: 3.86lakh metric tons and wheat: 2.94 lakh metric tons). In FY2008-09 private import reached at 22.16 lakh metric tons(rice: 1.87 lakh metric tons and wheat: 20.29 lakh metrictons).The target of agriculture credit disbursement has been set atTk.9379.23 crore for FY 2008-09. Out of which, Tk.9284.46crore has been disbursed which is 99 percent of the target.Different measures such as increase of subsidy on inputs toagriculture, making agriculture inputs more available, moreavailability of irrigation facility, sufficient steps forpreserving the harvest and ensuring fair price of crops andagro-products have been taken with the aim to increaseagriculture productivity. Bangladesh Bank has allocatedTk.1183 crore for refinancing agricultural credit with an aimto widen the scope of agricultural credit and simplify thedisbursement procedure of agricultural credit. An allocationof Tk.1500 crore has been provided in the revised budget forthe recapitalization of Bangladesh Krishi Bank (BKB),Rajshahi Krishi Unnoyon Bank (RAKUB) andKarmashanthan Bank in order to revamp the rural economyby increasing access to credit, thereby supporting self-employment.IndustryAccording to provisional estimate, the contribution of themanufacturing sector to GDP is 17.78 percent in FY2008-09,which is marginally higher than that of the previous year. InFY2008-09, the growth rate in the manufacturing sector isestimated at 5.92 percent, which as a cosequence of the globaleconomic crisis stands 1.29 percent lower than that of theprevious fiscal year. The government has taken upprogrammes to provide financial assistance to expand SMEsthrough commercial banks. Alongside the disbursement of


Finance & Banking

loans, Bangladesh Bank has widened its’ refinancing schemeof Tk.100 crore with an enhanced allocation of Tk.600 crore.Up to June 2009, Tk.716.44 crore has been disbursed amongdifferent scheduled banks and financial institutions forrefinancing potential entrepreneurs. In addition, IDA hasprovided US$10 million and the Government has providedTk.112.32 crore through ‘Enterprises Growth and BankModernisation Project (EGBMP)’. ADB has also provided anadditional US$30 million to the Bangladesh Bank.The disbursement and recovery of the industrial loan wasTk.65001 crore and Tk.52,900 crore respectively in FY2008-09 which is 8.13 percent and 24.55 percent higherrespectively than those of the previous fiscal year. Thisslower growth in disbursement of industrial loan isattributable to the current global economic crisis.There are eight EPZs in which total investment stood atUS$1,582.47 million up to June 2009. In FY2008-09, totalinvestment in the EPZs was US$ 148.03 million. BEPZA’sexport proceeds stood at US$ 2.58 billion, as against thetarget of US$2.83 billion set for the fiscal year. EPZs havealready employed about 2,34,693 Bangladeshi nationals intheir attempt to contribute to the national poverty alleviationefforts. Among them 64per cent are female. It is to be notedthat by the end of FY2008-09, a total of 33 countries haveinvested in these EPZ’s. In FY2008-09, goods worth of US$2,581.71 million have been exported from the EPZs whichaccount for 17per cent of total export. In addition to FDIpromotion, export development and employment generation,Bangladeshi EPZs have also been making specialcontribution to the development of backward linkage andsupportive industries of the country. State-Owned Enterprises (SOEs)State-Owned Enterprises (SOEs) of Bangladesh still makemajor contribution towards industry, power, gas, transportand communication and service sectors of Bangladesheconomy. The contribution of SOEs in GDP, value addition,employment generation and revenue earning is stillsubstantial though privatization of public enterprises is wellin progress to develop the private sector. The annual growthrate of total operating revenue of all existing SOEs during FY2004-05 to FY 2007-08 was 17.96 percent but value additionof production in FY 2004-05 was Tk. 951.00 crore whichwent up to Tk. 7,612 crore in FY 2007-08. According toprovisional accounts, the 12 net profit of SOEs is estimated atTk. 2,049.00 crore in FY 2008-09. All the SOEs togethercontributed Tk.44.38 crore to the public exchequer during FY2007-08 which is estimated at Tk. 414.45 crore in FY 2008-

09. In FY 2007-08, Government provided grant/subsidyamounting to Tk.494.25 crore to 14 public entities which hasbeen estimated at Tk 836.83 crore in FY 2008-09.Up to June2008, the total DSL outstanding against 56 SOEs stood atTk.72,694.11 crore and the total borrowing of 30 SOEs fromthe state-owned commercial banks amounted Tk.14,172.88crore where classified loan was Tk. 1,425.21 crore. Theoperating profit on total assets of SOEs was 1.99 percent in2004-05 but it reached 3.05 percent in FY 2007-08. The netprofit on operating revenue was also negative all the yearssince FY 2003-04 but it stood at 13.95 percent in FY 2007-08. On the other hand, the rate of dividend on equitydecreased to 0.97 percent in 2007-08 from 1.10 percent in2006-07.Human Resource DevelopmentThe cardinal purpose of economic development is humandevelopment. Human well-being is therefore at the heart ofthe UN Millennium Development Goal (MDG). Humanresource development is also gaining prominence in thecontext of meeting the MDGs. As basic tools for humandevelopment, the importance of education, training, healthand social services is immense.The government is allocatingsubstantial resources to social sector to bring about humandevelopment. Realizing the importance of education, primaryeducation has been made compulsory since 1990. To promotefemale education, a stipend scheme for the girl students hasbeen introduced. An informal education system has beenevolved to provide literacy to the aged and illiterate. Different programmes including teacher’s training, revisionof curricula, building physical infrastructure have beenintroduced in order to build quality education. Additionalemphasis has been laid on vocational as well as science andtechnology based education. It has been outlined in the“Literacy Assessment Survey-2008”, published byBangladesh Bureau of Statistics that female literacy rate(49.1) is greater than that of male (48.6). Alongsideeducation, efforts are under way to build an effective andsound health services system to ensure productive health forthe people. Health, Nutrition and Population Sector Program(HNPSP) has already been started from July 2003.Government is taking a range of measures through theMinistry of Women and Children Affairs for the developmentof women and children. A wide array of programmes hasbeen adopted at government level to remove gender disparityand to involve women with the mainstream developmentactivities.


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A comprehensive programme is being implemented in orderto turn the youth into an efficient and productive work forceby organizing skilled development training; providing inputstogether with loans and grants. A number of programmeshave been undertaken for the welfare and socio-economicdevelopment of the groups of people who 13 are landless,distressed, vagabond, orphans, disabled and also otherdisadvantaged group of people. In both sports and culturalarena development activities at government level arecontinuing.Transport and CommunicationIn the current context of globalisation and market economy,there is a critical need for evolving a developed and well-knittransport and communication system that should be able tointegrate Bangladesh with the international transport andcommunication network. The transport and communicationnetwork in Bangladesh has evolved around road, rail and airtransport system including post, telecommunication andinformation technology. In FY2008-09, the total allocation innon-development and development budget together was Tk.4,278.83 crore for the Ministry of Communication. Thecontribution of this sector to GDP at constant price in FY2008-09 is 10.61 percent. A total of 113development/investment projects including 2 technicalassistance projects have been included in the RADP of Roadsand Highways Department for FY 2008-09. Tk.1,399.28crore has been allocated for a total of 115 investmentprojects, of which GoB component recorded at Tk. 855.63crore and project aid recorded at Tk. 543.65 crore. There is anetwork of 20,948 km. roads under the jurisdiction of Roadsand Highways Department. RHD has under its control a totalnumber of 4,507 bridges and 13,751 culverts. RHD arecurrently operating about 153 ferry boats in 60 ferry ghats onits road network throughout the country. For infrastructure development of urban and rural areas,LGED is implementing a series of programmes with foreignand local funding. During FY 1991-92 to FY 2008-09 a totalof 1,31,290 km. (64,691 km dirt road and 66,599 km pavedroads), upazila road and union road as well as 9,53,295 meterbridge/culverts have been constructed. The Bangabandhu Bridge is playing a vital role in roadtransport system. The Bridge has been constructed toestablish direct road and rail link between the north-west andeastern zone of the country, which was separated by themighty river Jamuna. Besides, the road and railwaycommunication facilities, electricity and gas pipelines havealso been laid on the Bridge. Revenue from toll collection at

the Bangabandhu Bridge during FY 1997-98 was Tk.0.99crore which stood at Tk. 212.45 crore during FY 2008-09. Inorder to establish direct transport link between Dhaka andMunshigonj, construction of Mukterpur (6th Bangladesh-China Friendship) Bridge over the river Dhaleswari has beencompleted in February 2008. The total project cost stands atTk. 197.36 crore which includes Tk. 121.87 crore (US$18.19) as technical and financial assistance from the People’sRepublic of China.Chittagong Port is the major sea port ofBangladesh. As the dominant seaport of Bangladesh, ithandles about 92 percent of country’s maritime trade. Thegrowth rate of import-export through Chittagong port is about10 percent of imports and 80 percent of exports are handledby this port. Mongla is the second largest seaport ofBangladesh. About 13 percent of total export and 8 percent ofthe imports are handled by this port. In FY 2008-09, 9.30 lakhmetric tons of goods have been imported and 2.08 lakh metrictons of goods have been exported through this port.Bangladesh Inland Water Transport Corporation (BIWTC) isa service-oriented government-owned organisation. It is alsothe largest inland water transport organisation. Currently,there are 189 vessels in this organisation. To meet up theincreasing trend of traffic demand, BIWTC has rehabilitated4 Ro-Ro ferries and 3 Ro-Ro Pontoons at a cost of Tk. 22.48crore by using its own resources. The Civil AviationAuthority of Bangladesh (CAAB) as part of its responsibilityis putting in place necessary infrastructural facilities formovement of domestic and international aircrafts. Biman isoperating flights to 3 domestic and 18 internationaldestinations. Out of the International destinations, Biman nowis operating to cover 4 destinations in the SAARC countries,3 in South-East-Asia, 1 in Far-East, 8 in Gulf and the MiddleEast and 2 in Europe.The Bangladesh Telecommunications Company Limited(BTCL) has taken a series of measures to promote the ICTsector for the overall development of the country. Itcontributes a considerable amount of revenue to the nationalexchequer, facilitates rapid flow of information for othersectors of economy. The BTCL has been implementing twodevelopment projects under ADP during FY2008-09 havingan allocation of TK.140 crore. Besides BTCL isimplementing a ILDTS (International Long DistanceTelecommunication Services) project from its own fund withan allocation of Tk180.00 crore. In order to ensuredevelopment of telecommunication services in Bangladeshand to regulate it, all relevant powers, responsibilities andpertinent matters related to telecommunication regulation has


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been vested with the Bangladesh TelecommunicationRegulatory Commission (BTRC). According to BTRCforecast, telephone subscribers will rise to 5 crore by 2010.The teledensity now stands around 34 percent, which ismore than three times than that of predicted density.The Government within its limited resources has alreadytaken initiatives to introduce e-governance in the country.Major Ministries, Divisions and Departments have alreadylaunched their websites. Currently, software & IT servicecompanies in Bangladesh are exporting software and theirservices to different countries.Power and EnergyPower is the key to development. The demand for power as asource of energy is rising in many spheres starting fromindustries to day-to-day demand of the general public,agriculture and service sector.Government has given the highest priority to the developmentof power sector and has committed to make electricityavailable to all by 2021. For this purpose, the government hasinitiated reforms in power sector along with variousexpansion programmes. In FY 2008-09, the total installedgeneration capacity of electricity was 5719 MW including3812 MW in public sector and 1907 MW in private sector ofwhich dependable generation capacity is 4162 MW. In orderto complement the government efforts, an enablingenvironment has been created to attract private investment inthis sector. Currently, the public sector accounts for 66.66percent of the total installed capacity of power generation.The remaining 33.34 percent of power generation is handledby the private sector. On the other hand, 58.49 percent of thenet power generation is carried out by the public sector andthe private sector accounts for the remaining 41.51 percent.Of the net power generation 88.79 percent is gas based, 1.57percent is hydraulic and 5.74 percent is oil based. At presentpower generation per capita is 182 kwh and the number ofbeneficiaries is about 47 percent.Bangladesh Power Development Board (PDB) is the mainsource of electricity generation. At present, PGCB owned byPDB is responsible for entire transmission and maintenanceincluding future expansion. Besides this, REB, DPDC andDESCO have been working for management of distributionsystem.Natural gas is an important source of energy that accounts for75 Percent of the commercial energy of the country. Till date23 gas fields have been discovered in the country whichcontains 29.234 trillion cubic foot (tcf) of gas, of which

21.055 tcf is recoverable. As of June 2009, a total of 8.37 tcfhas been produced. With a view to explore and expand gasresources at a faster pace, the country has been divided into23 blocks. So far production sharing contracts have beenconcluded for 12 gas fields. The private sector is also comingup alongside the public sector to meet the increasing demandof gas resources.In order to minimize environmental pollution, there is anongoing process of converting transports into CNG. This isplaying a positive role in the economy and is also savingforeign exchange worth Tk.7,500 crore per year required forfuel import. Bangladesh Petroleum Corporation has beenworking to develop and expand energy system to put at parwith the international level.Poverty AlleviationDespite there have been remarkable attempts to reduceendemic poverty since independence, people living below thepoverty line is still significant and according to the HumanDevelopment Report 2009 of UNDP, Bangladesh ranked112th in respect of human poverty.However, according to the Household Income andExpenditure Survey (HIES) 2005, the incidence of poverty atthe national level declined from 48.9 percent in 2000 to 40.0percent in 2005 in the Cost of Basic Needs (CBN) method.According to DCI (Direct Calorie Intake) method, theincidence of absolute poverty was 44.3 percent in 2000 at thenational level which went down to 40.4 percent in 2005.During this period, incidence of absolute poverty also showedthe downward trend. In the case of Division wise povertysituation, Barisal Division has the highest incidence ofpoverty scoring 35.6 percent while the Chittagong Divisionhas the lowest incidence of poverty of 16.1 percent followedby Dhaka and Sylhet Divisions using Head Count Ratio(HCR) in the lower poverty line. Using the upper povertyline, the incidence of poverty has also significantly gonedown at the national level in head count ratio. The incidenceof poverty in rural areas of Dhaka Division declined from55.9 percent in 2000 to 39.0 percent in 2005. The reduction ofHCR is also significant in the urban area. It came down to20.2 percent in 2005 from 28.2 percent in 2000 in the urbanarea. The incidence of poverty slightly went up in KhulnaDivision in FY 2005 from FY 2000. In 2005, the estimates ofincidence of poverty by ownership of land using the upperpoverty line were found to be 46.3 percent for landlesshouseholds, 56.4 percent for owners of less than 0.05 acre.


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Examining the monthly household nominal income,expenditure and consumption, it is seen that it had anincreasing trend in the previous years. The monthlyhousehold nominal income was estimated at Tk.7,203 at thenational level, whereas it was estimated at Tk. 6,096 in therural area and Tk. 10,463 in the urban area. The averagemonthly household expenditure was estimated at Tk. 6,134 atthe national level, whereas it was Tk. 5,319 in the rural areaand Tk. 8,533 in the urban area. Per capita nominalexpenditure in 2005 at the national level was Tk.5,964 whichwas Tk. 5,165 in the rural area and Tk. 8,315 in the urbanarea.To achieve fully the goals of Millennium Development Goals(MDGs) by 2017, the present government has given toppriority to eradicate poverty and disparity (disparity inincome and within region). To meet these targets, PovertyReduction Strategy Paper (PRSP) titled ‘Unlocking thePotential: National Strategy for Accelerated PovertyReduction’ (for the period of 2004/2005-2006/2007) wasadopted and extended up to June/2008. As a sequel of the firstPRSP the second PRSP titled ‘Moving Ahead: NationalStrategy for Accelerated Poverty Reduction’ for 2008/09-2010/2011 (NSAPR-II) was approved and at present, revisionof this document is under process to align this nationaldocument with the development agenda of the presentgovernment. Moreover, preparation of Sixth Five Year Plan(SFYP) for 2011-2015 is under way where poverty is an issueof importance.To attain the annual target as specified in the PovertyReduction Strategy Paper (PRSP), directly and indirectlyabout 58 percent of development and non-developmentbudget resources were allocated for poverty reductionactivities in FY2008-09. Both the government andnongovernment organisations have been implementing anumber of programmes for employment and incomegeneration for the upliftment of the poor segment such associal safety net programme, cash transfers programme, foodsecurity programme, micro-credit programmes. Under old-age allowance programme there are17 lakh beneficiaries, 9lakh beneficiaries under the widowed and women deserted bytheir husbands allowance programme and 1.25 lakhbeneficiaries under insolvent freedom fighters’ honorarium.These beneficiaries are receiving financial assistance directly.Moreover, under the Abashan Project being implemented at acost of Tk. 715.98 crore 65 thousand landless, homeless androotless families are receiving benefits of health and family

welfare services and other facilities including employment.In rural micro-credit sector, PKSF usually provides loanfacility such as rural and urban microcredit, micro-credit forthe poorest of the poor, micro-enterprise-credit, agriculturesector microfinance, programme initiatives for ‘Monga’Eradication (PRIME) to manage micro-credit in greaterRangpur district. Till June 2009 PKSF disbursed micro-creditto the tune of Tk. 7,484.46 crore to its 257 partnerorganisations, while Bangladesh Rural Development Board(BRDB) disbursed Tk.7,530.26 crore among 5,360,408members. Through Two-Tier Cooperative model (TCCA-KSS), BRDB is working for agricultural development byorganizing and providing credit and other agriculturalinstruments to the small and marginal farmers. During thesame period, the scheduled banks disbursed Tk.19,761.51crore whereas other specialised commercial banks disbursedTk. 4,520.1 crore. The administrative departments of theGovernment disbursed credits amounting Tk. 61,139.92 croreup to June 2009. Private Sector DevelopmentPrivate sector’s contribution to the total investment inBangladesh economy is remarkable. Of the total 24.2 percentinvestment in the provisionally estimated GDP of FY 2008-09, the share of private investment has been computed to be19.6 percent which was recorded at 13.58 percent of GDP inFY1995-96. Government has brought reforms in theprivatisation scheme to strengthen, galvanise and modernisethe privatisation process. Government has put in placenecessary institutions and infrastructure to create a privatesector investment-friendly environment. The governmentplans to earmark a significant allocation in the next year’sbudget to facilitate Public Private Partnership (PPP) to in anattempt to take the country to higher trajectory of growth. Thegovernment has taken a number of programmes to attractprivate local-foreign investors to facilitate infrastructuredevelopment. In this respect, government intends to gobeyond the traditional public-private interrelationships andestablish strategic, target-oriented functional relationshipswhich are evident in the recent policy initiatives. The ElectionManifesto of the government envisages that GDP growth ratewill accelerate to 8 percent in 2013 and to 10 percent by 2017which will then be maintained till 2021. Preliminaryassessment of the required investment to boost growth ratehas been prepared.The number of subscribers of the 6 cellular mobile companiesin the country was about 4.7 crore as of June 2009. In 2001,


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the mobile teledensity recorded 0.58 percent which rose to34.00 in June 2009. Currently, a total of 43 privately ownedgeneral insurance companies and 17 life insurance companiesare operating in the country. Premia realised by the state-owned Sadharan Bima and 43 private general insurancecompanies together stood at Tk.1,404.33 crore in 2007compared to Tk. 907.17 crore in 2006. As of December 2008,376 cotton and synthetic spinning mills were in the country ofwhich 352 units belonged to private sector. Moreover, 1,098weaving units (large, medium & small), 1,48,342 handlooms,1,200 knitting and knit-dyeing units, 310 18 woven dyeing-finishing units and about 2000 local hosiery units exist in thecountry. Majority of the textile industries of the countrymainly belongs to the private sector. Only 24 old textile millsare now under public sector (BTMC), some of which havebeen put into operation by the private entrepreneurs underService Charge System. At present, there are 88 Jute millsunder BJMA (Bangladesh Jute Mills Association) including38 denationalized and 50 mills established by the members ofBJMA. In the private sector, the production and exportactivities of jute mills are being run by Bangladesh Jute MillsAssociation (BJMA), at present there 80 mills under BJMAincluding 38 decentralized and there are 50 mills underBangladesh Jute Spinners Association (BJSA). Out of 38denationalized mills, 12 mills are in operation, 15 mills are inpartia operation and 11 mills have been closed. Out of 50mills, 3 mills are closed and the remaining is in operation.Presently, there are 40 registered private Medical Colleges,11 private Dental Colleges, 11 private Medical AssistantTraining School and 15 private Institute of HealthTechnology in the country. Moreover, a total of 239pharmaceutical product manufacturing units are producing17,433 brands of medicines and raw materials of worth Tk.5,334.00 crore annually. More than 96 percent of the totaldomestic’s requirements is fulfilled by local production. Atpresent, Bangladesh is exporting 182 brands of medicines to71 countries manufactured by 27 companies.Environment and DevelopmentIn order to protect environment and also to ensuredevelopment, the Government is taking steps having legalcompulsions including sensitising people of all strata. Theglobal environment is also facing many threats due to varioushuman activities. With this end in view, a number of policieslike national land use policy, national water policy, national

environmental policy, national environment law and rules,national forest policy and national agriculture policy havebeen formulated. Side by side with these, the Government isimplementing the conventions and protocols signed atinternational and regional levels in order to protect anddevelop environment.The Government has been implementing a range ofprogrammes, which are playing a critical role in protectingand developing environment. Included among them are:making compulsory the use of catalytic converter, oxidationcatalyst and diesel particulate filter in the petrol, diesel andgas driven vehicles; encouraging introduction ofenvironment-friendly block bricks; taking action againstillegal cutting of hills; issuing certificates in favour of theindustrial enterprises giving assurance that the level ofpollution from these industries remains within the reasonablelimit; issuing certificates in favour of the industrialenterprises that install effluent treatment plants. Besidesthese, creating reserved area for protecting bio-diversity,taking actions leading to drawing up national strategy to facethe climatic change, taking initiative to frame laws to managebiomedical waste, introducing training for managing clinicalwaste, inclusion of environment 19 education in the coursecurriculum of primary and secondary level to createawareness about the environmental and ecological balance.Along with the government, a good number of NGOs havebeen working to face environmental problems and to improveenvironmental system of the country since 1980s. The NGOsplay an important role in motivating people at grass root levelto protect environment and to take coordinated efforts insolving environmental problems. Ministry of Agriculture isinspiring farmers a new technique to uses of super/megagranules (guti urea) instead of urea, which have positiveimpact to protect pollution and misuse of urea fertiliser.The activities of the forest department and the department ofenvironment that deal with environment pollution, forestmanagement, aforestation, preservation of wildlife,management of reserved areas, establishment of eco-parksetc. are contributing towards preservation of biodiversity andenrichment of depleted forest resources, to ensure supply ofraw materials to wood based industries, to expand eco-tourism for the recreational facilities of the people and todevelop environment. n


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A Comparative Analysis of Interest Rate Parity and StickyPrice Model of Exchange Rate

Chowdhury Rajkin Mohsin

AbstractThis study is a comparative test to determine how accuratelythe Sticky Price equation and Interest Rate Parity model canforecast the value of the currency of Bangladesh. It is both atest as well as investigation to find out the best fit modelbetween the two in predicting the value of the local currency.This study can also be viewed as a comparison of aregression model with a non-linear model. To derive at theempirical results, common macro-variables of Bangladeshand United States has been utilized including the value ofTaka in terms of a foreign currency which, in this study is theU.S Dollar. The nature of this study is exploratory and it isdivided into five sections. The opening paragraph exploresthe historical significance and performance of BDT(Bangladesh Taka) in terms of United States Dollar over thepast twenty years followed by the discussion of the most wellknown exchange rate models which covers the literaturereview. The third and fourth corners of this paper analysesthe study design and empirical findings from the equations.The paper concludes with the winner of the two models with athorough critical analysis of existing models and sheds lightover the areas that need exploration.Keywords: International Finance, Exchange rate, RegressionAnalysis, Forecasting and Macro-Economics. IntroductionIn the field of Economics and Finance, exchange rate can bedefined as the price of a currency in terms of another. In otherwords, how much is a country’s currency worth. The value ofa Currency cannot be determined by itself except via acurrency from another country. Since the inception of theBretton Woods agreement, the gold standard of measuring thevalue of exchange rate had been the sole commodity todetermine the exchange rate of a country. According to thissystem, exchange rates were fixed and this system lasted from

1944 till 1971. Rather than create a smooth flow of tradingand ease of capital transfer, the fixed system created moreproblems than solutions. Currencies were basically pegged tothe gold standard. Thus nations heavy on gold reserves had acompetitive advantage. The fixed system that lasted over twodecades became obsolete only to be replaced by a new systemwhich would value the goods and services by the invisibleforces of demand and supply. The end of the Bretton Woodsera also marked the beginning of the birth of Bangladesh. Acountry poised with famine, over population and corruption.The currency of Bangladesh gave birth in the year 1972. Overthe past thirty years, the only direction the currency hasmoved is towards the south with slow economic growth andGDP per capita significantly less than its neighboringcountries India and Pakistan.

The above chart highlights BDT in terms of Dollar for pasttwenty years. The chart displays an upward trend whichtechnically is an appreciation of the dollar denotingdevaluation of the home currency. Economists argue this fallin price is due to the deficit in the domestic country’s balanceof payments and unstable economic growth. As to itscontinued devaluation, it must be noted that the localcurrency has not yet set its foot in international territory as

The author is lecturer, Independent University, Bangladesh.

there is simply is no demand for the local currency by foreigninvestors. Its economy has been subject to severe criticism byoutside agencies for lack of infrastructure development,frequent political turmoil, power shortages and policymisgivings. All the above factors among others couldpossibly play a role in the continuous devaluation for thecurrency. Asia’s emerging tigers, Malaysia, China, India andThailand, all lagged behind Bangladesh in the early 1980’s ineconomic growth. Within less than twenty years, all four nations emerged aspioneers in Asian economies with impressive strengtheningof their respective currencies. The Taka has continued to loseits value since its inception whereas Indian Rupees, ThailandBaht and Malaysian Ringgit have shown impressiveappreciation in recent years.This study however is not about exchange rate comparisonbetween neighboring countries. It is geared towards justifyingwhat ought to be the price of BDT in early 2010 based on twowell known models. It is financial forecasting in simplestterms using regression analysis and interest rate parity model.Financial forecasting takes in many forms. Estimatingcurrency price and foreign exchange trading is over a trilliondollar business. Corporations of developed nations tend toutilize currency forecasting for the sole purpose ofminimizing losses as both payments and revenue received bythe parent company can fall short due to exchange ratevariation. To offset such losses, respective analysts forecastcurrency price by various models and utilize derivativeinstruments to hedge prospective future losses. ExxonMobil,American Express, Wal-Mart and IBM are among severalmajor corporations that cater a foreign exchange divisionsimply to estimate future currency price as a slight change inexchange rate can either cost millions or benefit the firm byadditional revenue. What determines the rates at whichcurrencies exchange with another? To put in more simplewords, what determines the price of one currency in terms ofanother currency? The issues, underlying this debate has beensubject to severe criticisms and controversies, some of whichhas been discussed in the following literature.Literature ReviewIn the universe of exchange rate forecasting, numerousliterature and empirical studies have been carried out only toarrive at a puzzling end. It has puzzled academics and yet stillremains unresolved as to what factor or factors actually

contribute to exchange rate determination and itspredictability. Studies performed have mostly covereddeveloped nations. In this section, five of the most commontheories have been discussed. The Sticky-Price monetarymodel of Dornbusch (1976) and Frankel (1979) can beexpressed as:

Where e is the exchange rate, m is log of money, g is realGDP, i represents the interest rate and f denotes the inflationrate denotes the inter-country difference; ‚ is the measure ofvolatility for the respective variable and is the error term. Inthis model market prices of goods are sticky in the short runand adjust accordingly. Financial markets are assumed toadjust instantly in the market. Purchasing power parity is alsoassumed to hold in the long run. If the supply of moneyincreases, interest rate will decrease, causing capital outflowof the country and thus depreciation of the exchange rate. Onthe opposite end, if the money supply decreases, interest raterises resulting in capital inflow and appreciation of theexchange rate. Empirical studies have given various results.Some supporting the theory and others having no relevant.Countries geographically close tended to have shownsignificance. Behavioral Equilibrium Exchange Rate (BEER) of Clark andMacdonald (1999) hypothesis is based upon uncoveredinterest rate parity and can be expressed as:

In this equation, e the exchange rate, v is a unitary coefficient,c represents the consumer price index, n corresponds to theprice on non-tradables, r is the real interest rate, y denotesratio of government debt to GDP, t is the log of terms of tradeand a is the foreign asset ratio. This equation indicates thatan increase in real interest rate differential coincides with areal appreciation of corresponding size for a given expectedexchange rate. The expected real exchange rate is assumed tobe equal to the equilibrium exchange rate in the long run. Theconcept of un-covered interest rate parity has been rejected inexchange rate movements.The above two theories are based upon certain assumptionsand limited variables. The concept of interest rate parity isless complicated and contains one variable that solelydetermines exchange rate movements. The underlying


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assumption behind the theory is the ideology of coveredinterest arbitrage. Investors take advantage of the discrepancyof interest rates between countries and hedge their positionvia a forward contract. Under this theory, it will not bepossible to engage in arbitrage transaction as the forward ratewill offset the interest rate advantage.

The theory determines the forward rate of the foreigncurrency by either a premium or discount that is equal to thedifference in interest rates between the two countries. Ifinterest rate is less than a foreign country, home investors willtake the advantage of investing in the foreign country. As aresult, the foreign exchange rate will increase which willoffset the interest rate advantage. On the reverse situation, ifinterest rate is greater in home nation than foreign nation, theforeign rate will decrease as foreign investors would trycapitalizing from the higher interest rate offered in the homenation, which will be offset due to the increase in homeexchange rate. In both the situation, covered interest ratearbitrage will provide a return that will be no less, no morethan the domestic return. Empirical tests conducted betweenthe actual relationship between interest rate and forward ratesupported the theory in certain studies. The tests werefocused on arbitrage feasibility more than the determinationof actual forward rates. If the forward rate does indeed reflectthe actual difference in interest rate, arbitrage is not feasible.The potential flaw in this theory is that actual forward rate isnot determined by the difference in interest rate but by theforces of demand and supply. There are deviations from thetheory and not large enough to make covered interestarbitrage worth while if transaction costs, tax laws andgovernment regulations are accounted for. The minimaldifference in interest rate causes arbitrage to be negligible.However, in today’s globalised financial markets, investorsare venturing in various markets and capitalizing forminterest rate advantages due to the leveraged trading andforward contracts. Similar to the BEER and sticky price model, BalassaSamuelson hypothesis incorporates productivity in themodel:

In the above equation, money is expressed by m, GDP by g,interest rate by i and productivity by p. A rise in factorproductivity in the tradable sector raises wages both in thetradable sector as well as non-tradable sector. This isaccompanied by economic growth which is accompanied byhigh interest rate causing real exchange rate appreciation dueto the differential productivity growth between the twosectors. A fall in factor productivity will decrease wages andeconomic growth accompanied by low interest rate and fall inexchange rate. A well known implication of this model isdemand cannot affect real exchange rate. However, there isevidence that demand does influence real exchange ratesbased on tests performed. Empirical evidence has providedsupport for the hypothesis; however the results were stronglyinfluenced by the nature of the tests. The Balassa Samuelsonhypothesis proved true for industrialized nations with highgrowth. Under developed countries remains a goodinvestigation ground for this model.The theory of Purchasing power parity originated in 1918 byGustav Cassel that exchange rates were primarily based uponthe price levels of two countries. In the absolute form, thepurchasing power of different currencies is equal for a givenbasket of goods.

The equation for the relative version is displayed above. Thespot rate of one currency to another will change to thedifferential in inflation rates between the two countries.According to the theory, if a good in a particular country iscostly due to inflation, consumers will try purchasing thesame good from another country with lower inflation. As aresult, the exchange rate for the foreign country will shootupwards as investors will require foreign currency to buy theforeign good. Hence, the price paid for the good in thedomestic market as well as foreign good should be equal dueto the appreciation of the foreign currency. The PurchasingPower Parity theory assumes inflation rate between twocountries is the sole driver for exchange rates. Empirical testshave shown this parity does not hold due to lack of substitutesfor traded goods. Due to lack of substitute goods, consumersnecessarily resort to foreign goods due to high domesticinflation. Based on the confounding effects, exchange rate isinfluenced by the inter country difference of several factors


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including inflation, interest rates, national income,government control and future expectations as a resultexchange rates do not solely move due to inflationdifferences. MethodologyTo derive at the price of the currency of Bangladesh for 2010,regression analysis for the sticky price monetary exchangerate model and the equation for interest rate parity have beenutilized. Regression analysis can be used for both correlationanalyses as well as forecasting. This study focuses on thelatter. Regression analysis contains four steps which includesspecifying the model, data compilation, estimating theregression coefficients and data interpretation. Data has beencollected for GDP, inflation, interest rate and money for pastten years for U.S and Bangladesh. The inter-differencebetween the variables of the two countries was calculated toderive the values of the equation. Primary sources were usedwhich include both the Central Bank of Bangladesh andFederal Reserve of U.S. Regression analysis have been usedto derive at the respective coefficients of the macro-economicvariables listed in the sticky price model. The coefficientsshow the relationship between the dependent and independentvariables. The coefficients were then inserted in the equationalong with latest data of the variables to arrive at thepercentage change of the local currency. To derive the valuesof the second model used in this study, one year lending rateof both Bangladesh and U.S banks have been inserted in theequation. Solving for both the equations, the empiricalfindings have been compared to the actual exchange ratebeginning of the year to arrive at the purpose of the study.Empirical FindingsListed in the appendix section are the post regression dataextracted from the sticky price model. Data posted containsboth correlation data and coefficients of the four variablesused in the linear model. The coefficient of determinationalso known as R square, measures the variation in thedependent variable that can be explained by regressionmodel. In this case 60.9% of the variation in the dependentvariable can be explained by the independent variable.Interpreting the coefficients, both the inflation and interestrate are negatively correlated to the exchange rate. A onepercent increase in the inflation and interest rate results in -1.905% and -2.136% decrease in the exchange rate.

Simultaneously a decrease in the independent variables willresult in an increase in the dependent variable. However,GDP and money variables have been found to be positivelyrelated to the dependent variable. A one percent change inGDP and money supply results in an increase of 1.578% and0.028% increase in the exchange rate. Thus both the GDP andmoney supply are positive correlated to the exchange rate. Using the beta coefficients and solving for the equation givesa net change of -0.25% for the foreign currency.Incorporating this change, actual price for one dollar shouldbe 68.0295 taka base on the sticky price model. Interest rateparity model provides a result of revaluation of 7.98% for thehome currency which gives a price of 73.64 taka for thedollar. Both findings are for the beginning of 2010. Actualrate for beginning of January 2010 has been 69.35 taka perdollar. It can be concluded that none of the models have beenaccurate in predicting the accurate price of the currency ofBangladesh in terms of U.S dollar. Several theories can bedrawn from here. Both linear and interest rate parity does nothold for BDT although the sticky price relatively came closeto the actual.

Actual (01/2010) Interest Rate Parity Sticky Price Model

69.35 BDT Per $ 73.64 BDT per $ 68.0295 BDT per $

According to the parity theory, when home (Bangladesh)interest rate is greater than foreign (USA), foreign investorswould take the initiative to invest in home nation and thiswould cause upward pressure on the value of the homecurrency or devaluation of the foreign currency. On the flipside, when foreign interest rate is greater than home, investorswould tend to invest in the foreign nation to take advantage ofthe high interest rate which would put upward pressure on thevalue of the foreign currency and downward pressure on thevalue of home currency. The change in the currency will beequal to the difference between the two countries interest rate.In this case, taka would pose to get stronger due to higherinterest rate as outside investors would have to buy thecurrency to invest. However, in this study the opposite hastaken place. Although Bangladesh banks offer higherinvestment rates than USA banks, the local currency hasdevalued, which in this case should appreciate. The strictestconclusion that can be drawn is interest rate parity theorydoes not hold in Bangladesh. Several factors can be attributed


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as to why the theory does not hold. The most common beinginterest rate cannot be the sole determinant for pricingexchange rates. Although interest rates are far more attractivein Bangladesh than U.S banks, most out side investors wouldnot take the initiative to invest in local banks due to thetransaction cost, inflation, limitation in currency flows andthe hassle of currency conversion among others. Mostinvestors residing out side of the country are probably notaware of the high interest offered by banks in Bangladesh andgiven the barriers, there is every possibility of not taking theinitiative to invest.Much closer to the actual value has been the sticky pricemodel, although inaccurate to the actual rate. Sticky priceproposes a negative relation between exchange rates andmoney supply. In this study, it has been found to be positive.The theory proposes that as money supply increases, interestrate will move in the opposite direction, causing capitaloutflow from the country and thus devaluing exchange rate. Ifthe supply of money decreases, interest rate will increase as aresult capital inflow injection will take place strengtheningthe local currency. Capital outflow will result due to lack ofinvestment opportunities in home nation as investors seekfinancial products that offer higher return. The empiricalfindings promote a reverse relation. As money supplyincreases, interest rate decreases which should cause capitaloutflow which in turn should cause exchange rate toincreases. The empirical findings are contradictory to thetheory, which states as capital outflow occurs due to fall ininterest rates causing currency depreciation whereas in thisstudy capital outflow causes currency appreciation and viceversa. The rationale for this theory can be rejected in thecontext Bangladesh; capital outflow would not occur ifinterest rates decrease as the country. As one of the leastdeveloped countries in the world, stricken with poverty andcorruption, investors in Bangladesh do not engage inarbitrage transactions and even if it were possible, it wouldnot be possible to transfer more than three thousand dollarsthrough legal means according to government regulations. Concluding RemarksThe sole purpose of this paper was to investigate howaccurately the Interest Rate Parity Model and Sticky PriceExchange Rate can predict the price of a particular currencyover a particular time. Neither the sticky price model nor the

interest parity model has been able to justify exchange ratemovement for the currency of Bangladesh. Not only theempirical data failed to match the actual, but the underlyinghypothesis of the models as well could not be incorporatedinto the context of Bangladesh which could possibly explainthe failure of the models' empirical findings. The rationalefor capital outflow and inflow due to changes in interest ratecannot be infused in least developing nations. Both themodels' predictability had no scope in this study. It can bewisely concluded that the two existing models used in thispaper for exchange rate determination are more appropriatefor developed countries, as both money supply and interestrate tend to have a profound impact for capital flows whichcan affect the price of the developed nation’s currency. Asmuch impact the variables are posed to have, tests performedusing the models in countries in the western hemisphere havenot provided the best of results. Other variables requireserious attention as well as investigation. Very little work hasbeen done incorporating leading, lagging, coincidentalindicators and shadow economy in exchange rate forecasting.

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How to Increase Tax Revenue: Improvement of EnablingEnvironment, Application of Strategic Management Approach

Moslehuddin Khaled

AbstractTax is one of the main sources of internal revenue for anygovernment. Most of the time, we see the finance minister ispressing tax administration (NBR) for increasing the taxcollection for more government revenue. Personalexperiences of the citizen with the tax offices and tax relatedformalities show that environment is not enabling for the taxofficials and for the tax payers. If government is comparedwith a good business organization and tax officials asmanagers, and increasing tax revenue is a business target,then applying business like strategic management approachwould entail two major tasks: Create enabling environment -streamline the TIN application and tax filing procedure,reward tax officials for innovative and customer orientationapproach and Improve management capability of the taxdepartment - train the tax officials in basic marketing, servicemarketing, ICT, statistical packages etc. The strategic actionplan should be declared by the prime minister, not the financeminister or NBR chairman. If government takes a strategicapproach – consistent, integrated, enabling, the tax revenuecan be increased at an increasing rate with active citizenparticipation. IntroductionWhy the states need tax anyway? Tax is one of the mainsources of internal revenue for any government. Taxation isone medium of participation in government by the citizen –whatever the form of government is. But collecting taxmoney has never been an easy job?A finance minister headache? Most of the time, we see thefinance minister is clamoring tax administration (nationalboard of revenue - NBR) for increasing the tax collection formore government revenue. The logic is simple. Bangladesh,like many other so called developing countries need to

finance their operations more and more through their internalrevenue, thus reducing their dependence on external aid andgrants. From the latest data of 2008, World Bank developmentindicators show that tax revenue as a % of GDP is only 8.8.(World Bank, 2009). If we look at the previous 5 to 10 years,we will see that it was always less than 10%. Though thereare other developing countries which have similar lowpercentage, it will be better indicative of our backwardness ifwe compare with the OECD and EU countries which aremostly developed countries. EU average is 39.8% and OECDaverage is 35.9% of GDP. So it is easily understandable, thatwe have enough room for improving our tax revenue.Articles about different aspects, problem, evasion, andreforms are found with a simple internet search. For example,Sarkar, Basher (2002). There are many studies and reportsand ongoing seminar about the importance of increasing taxrevenue. But how to increase the tax collection in reality hasalways remained a great challenge. Personal experiences of the citizen with the tax offices andtax related formalities and matters reveal the state of taxationin our country. Added to it, perusal of the newspapers orbrowsing their online versions and other internet sources willreveal that both government and citizens are aware of theproblem. But there is a lack of integrated and cohesiveapproach from the government. In line with the above, this article will suggest a business likestrategic management approach of increasing the tax revenue.We call it business like in the sense that this approach doesnot depend only on the NBR officials or the finance minister.In a corporate business, the management would take it as acentral organization concern and would try an integratedstrategic approach.

Author is Faculty member, School of Business, Independent University Bangladesh and teaches Management, HRM, and marketingcourses in BBA and MBA program and is enrolled in MPhil/PhD program in management of University of Chittagong. His research areais improving management environment and capability in public sector.

Current State and Future Strategy of Taxation: As told by NBR In this section we will get a snapshot of the current state oftaxation and strategic intent of the concerned governmentauthority. The concept of strategic intent means goingbeyond solving current problems and realizing futureopportunities for increasing tax revenue. Strategiesformulated with only the present in mind, argue Prahalad andHamel (1994), tend to be more concerned with today’sproblem than with tomorrow’s opportunities. Now, is there a strategic intent in NBR? Quoting the NBRChairman, a Daily Star newspaper report presented thestrategic intent of the NBR. If we summarize the facts we getthe following: • The government in the current fiscal year (2009) has set a

target of collecting higher revenue than the previous year— 38 percent growth in revenue from import, 33 percentin VAT and 27 percent growth in income tax.

• NBR is trying to improve the tax collection system byintroducing simpler methods and technology.

• The number of taxpayers has increased to around 7.53lakh until November (2009) from 6.56 lakh last year.However the number of the taxpayer identificationnumber (TIN) holders is around 2.4 million.

• A tax survey is ongoing to increase the number oftaxpayers by 4 lakh within the current fiscal year.

• It is trying to enhance the board’s strength, and bringmore transparency and accountability.

• A move is under way to set up ‘dedicated benches’ in theSupreme Court to handle NBR-related cases andpromptly collect the revenues in due (around taka 8000crore). Also, there is a plan to introduce AlternativeDispute Resolution for out-of-court settlement of cases.

• The tax administrator is working to introduce an onlinetax payment system by next month to upgrade theexisting tax returns submission procedure. In this process,the taxpayers will be able to pay tax online from January.

• The board now works to rationalize the tariff structureand remove anomalies in the taxation to encourage moretaxpayers to submit VAT, customs duties and incometaxes.

• The NBR chief said they will set up a national datacentre to provide adequate information to help taxpayersavoid hassles.

(Source: NBR chairman, found in a daily start report,December, 2009).

These steps seem natural for setting a strategic approach tomanaging the taxation system. It shows us the good intention(strategic intent) of the government. It provides a road map ora broad action plan to achieve organizational objectives (i.e.,increasing tax revenue).General Perception of Customers (citizens) about tax payingThough the NBR strategic plans and actions are desired andgive us hope for a well managed taxation system, ourexperience and observation shows a contradictory picture ofthe realities which undermine the good intention of thegovernment. General perception about the systemThe media reports (print, television, web) about anomaly andinconsistencies in the overall tax system are widespread andthey form a general perception. In addition to it, there arepersonal experiences of the individual citizens and smallbusiness persons. The overall perception can be summarizedas follows:• Our tax rules and regulations need to be updated with the

need of the time. That they have to be customer (citizen)friendly.

• There are many TIN holders but not many tax payers. (TINis needed for different kind of business, e.g. submittingtender etc.)

• There are not any centralized computerized systems thatcan identify the tax payer and/ or TIN holders as uniquereference. (Many people hold more than one TIN,whenever they need they get one.)

• The environment is not enabling for the tax official thatmeans, they cannot apply innovative ways of motivatingtax payers or, on the other hand, there are many rooms forconcerned tax official to misuse their discretion.

• Our tax officials are not well trained in dealing withpeople, even if they are non-corrupted and honest. Inmost cases they are not well behaved.

• Sometimes the tax rules are found to be too rigid to beaccepted as just and fair. Along those rigid rules, taxofficials also are rude. So sometimes it happens that anhonest tax payer is caught in the net of rules, on the otherhand, smart evasive tax payer manage to escape anyway.

All of the above may be confirmed with measuring the


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frequency or magnitude of the incidence or occurrences. Weleave it here for further researches.General perception about the Tax office InteractionsWhat is the problem with current scenario? Do citizens feelfree to walk in to tax offices any time for consultation aboutthe rules and procedures? The perception is ‘NO’. Personalexperiences of the citizens show that • Before being a tax payer

• Tax officials are not easily reachable or accessible tothe citizens.

• No call center or customer help line works in reality. • Applying for the TIN is not a hassle free one stop

solution. That means wanting to be a tax payer ishassle some.

• After being a tax payer• Filing return is even more hassle some for the

individual tax payer.• No authorized list of personal income tax

practitioners or tax consultants available publicly. • Rather than catching the real gross evaders,

sometimes genuine tax payers are caught fortrivial discrepancies and documentations.

• Very little mechanism to ensure a user friendly taxreturn system.

• In general • Going to the office and talking to the officials is a

matter of fear and hesitation. • Behavior of the tax office staffs is intimidating and

confusing.• Very little guidelines available to the public about

how to fill the tax return and submit the relevantdocuments.

In many cases, it is not the fault of the individual tax officialsthat they cannot improve the above mentioned scenario. It istrue that they need more training in leadership, change, andorganizational development (business managementprinciples). But more importantly they need strategic support(enabling environment) from the government just like, in abusiness, middle or business unit mangers need strategicsupport from the top management or corporate management.Enabling Environment: What it isOur fundamental concern is: is there an enablingenvironment where people can smoothly pay the tax, if they

want to pay - abiding by all the existing tax rules andregulations?Currently we see finance minister and/ or NBR chairmanhaving frequent meeting with tax collecting officers. Onemajor objective is to pressurize them in these meetings? Buthow would they increase the tax the tax official - should theybe aggressive? Should they be merciless on the citizens forthe sake of increasing revenue for the government? Isn’t it aduty of the citizens themselves to pay the tax – duly?On the other hand, why citizens would bother to pay the taxin the right amount? Should they pay for a government whichis consistently corrupt and inefficient? A government misusespublic funds with projects like roads without the bridges orbridges without the roads? A government which governswithout a strategic approach to managing or orientation aboutgovernance? This is the psyche of the citizen’s not beingresponsible citizen by paying tax duly.Enabling environment is the expression that encompassesgovernment policies that focus on creating and maintainingan overall macroeconomic environment that brings togethersuppliers and consumers in an inter-firm co-operation manner(UNCTAD, 1998a. TD/B/COM.2/33).When International Finance Corporation (IFC) works toimprove enabling environment, it means to promote reformsthat support private sector development (IFC, 2010). AUNIDO report (2008) sees the enabling environmentencompassing from the narrow scope of regulatory businessenvironment to broader scope of investment climate. Another typical general definition is as follows: “An enablingenvironment is a set of interrelated conditions—such as legal,bureaucratic, fiscal, informational, political, and cultural—that impact on the capacity of …development actors toengage in development processes in a sustained and effectivemanner” (Thindwa 2001: 3).Brinkerhoff (2004) presented commonly agreed-uponfeatures of the enabling environment, divided into fivecategories of factors: economic, political, administrative,socio-cultural, and resources. For example, in theAdministrative category the features of enabling environmentare –• Efficient service delivery capacity• Low levels of corruption.• Institutional checks & balances.• Decentralization.• Civil service meritocracy.


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The associated illustrative enabling Actions by Governmentmay be:• Curbing abuse & corruption. • Creating incentives for performance • Separating service provision from financing • Building cross-sectoral partnerships• Establishing monitoring & evaluation systems• Improving coordination across agencies & sectorsNow, like many other government units and agencies, our taxoffices do not have this kind of enabling environmentframework. However, enabling environment for increasingtax revenue should ensure that - • There is a healthy environment for both the tax officials

and tax payers – be it businesses or individuals.• Tax payers get the respect and dignity from the

government and tax officials. • Tax officials are clarified the scope and limit of the power

of their administrative discretion.• Tax officials and NBR are capable enough of practicing

good managerialism.• All the ambiguous rules are wiped out and clarified in

details.• All the procedural formalities are streamlined.So due to lack of this kind of enabling environment, our taxrevenue do not increase.Can we apply Business Management ApproachPrahalad and Hamel (1989) stress that strategic intentencompasses an active management process, which includedfocusing the organization’s attention on the essence ofwinning, motivating people by communicating the value ofthe target, leaving room for individual and teamcontributions, sustaining enthusiasm by providing newoperational definitions as circumstances change and usingstrategic intent consistently to guide resource allocations(Prahalad, 1989) Bangladesh needs more tax revenue. It is true that there hasbeen a general tendency to evade tax in all countries at alltimes, and, in a country like Bangladesh where regulatoryframework is weak and poor managed, this is easy to non-comply and difficult to comply. But equally true is that manycitizens avoid tax paying because of the official anddocumentation hassles.

Now government needs to create an enabling environment byreforming the rules and regulations and provide the taxofficials management training, particularly behavioraltraining. Then many people will be interested to pay the taxand gratuitously be in the tax net. The key to success in thismodel depends on the facilitating skill of the government.Government has to play a strong facilitating role and shoulddo it systematically with strategic management process.Figure 1 shows the process in schematic diagram.1. Prime minister should inaugurate the process: The

strategic process of generating more revenue should startfrom the head of the state as s/he is the Chief ExecutiveOfficer (CEO). Prime minister (CEO) should publiclyannounce the strategy clearly that country cannot ignoreimportance of increasing revenue through taxation. Thencome Finance minister and the NBR chairman as they arethe Strategic Business Unit and divisional managers. Taxofficials are the last persons to be responsible foroperational implementation. If the strategic planning andmarketing for increasing the tax revenue is doneprofessionally and carefully, jobs of the tax collectorswill be easier. • For example, taxation is an unpopular idea. But if PM

takes the responsibility of positioning to the customer(citizen), it will be supportive for the officers at theimplementation levels to sell it (tax collecting) to thecustomers.

2. Review existing policy and practices: The next step isto sit in meetings with different focus groups consistingof different tax payers who have been paying taxes forlong time and some who are not paying regularly becauseof rule difficulties. The objective of this step will be tocritically review the existing scenario, policies andpractices and find the gaps that are encouragingmalpractices, discouraging compliance, and hinderinggood citizen behavior.

3. Open suggestion from citizens: In this step, ministryand NBR should ask for open suggestions from citizensof all corners of the society. Multiple communicationchannels – post, email, telephone, mobile sms – should bethere for taking in communications from the people. Theobjective is to broaden the opinion base. The outcome of


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this step is to find out various views and suggestionsabout – what will make people be enlisted as tax payer(increasing the tax payer net) and what will make thempay regularly. Special attention to be given to those whowant to pay the tax but do not do so because of regulatoryunfriendliness and procedural mismanagement (lack ofenabling environment).

4. Modify the standard operating procedure of the taxrules and collection mechanism and sent to reviewcommittee: at this stage a modified and improved versionof the policies and guideline will have completed. Butbefore sending it to the tax offices for tactical levelimplementation, the policy may be sent to a reviewcommittee consisting of economists, businessmen,service holders and so on who will critically review it forinconsistency and gaps for field level.

5. Implementation of the policy by the NBR and taxoffices: these offices will act as the executing agency ofgovernment’s strategy of increasing tax revenue.Employees of the tax offices headed by commissioners oftaxes, are characterized by typical government employeeattitude – they lack the customer (citizen) service attitudebasic managerial principles and also motivation. They

should be given some cultural change training centrallyby the ministry and their performance should besomehow tied with increasing the number of tax payersand the amount of tax collection.

6. Media management: Media should be convinced by theoffice of the Prime Minister and ministry of finance thattheir positive reporting about the tax collection drive isessential. They should be given orientation on theimportance of uniform media support for successfulimplementation of the government strategy. But asBangladesh is a popular democracy, it will be verydifficult to manage the media. So the first thing first is toensure that the government’s strategy is very clear andenabling for the tax payers and tax officials. Then mediamay be encouraged to report the cases of malpracticedone by the tax officials and bad tax payers.

In any cases, there should be a direct and multi channelfeedback system which connects the tax payers (speciallyindividual and SME) with the government, say PMO, Financeministry etc. Then the tax payers who are sincere and regularcan contact the ministry if they face specific hassle in clearingtheir tax smoothly.


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Summary and ConclusionIn summary, if government is compared with a good businessorganization and tax officials as managers, and increasing taxrevenue is a business target, then applying business likestrategic management approach would entail two major tasks:• Create enabling environment

• Simplify the rules• Streamline the TIN application and tax filing

procedure• Reward tax officials for innovative and customer

orientation approach• Outsource some activities (for example, some of the

research and analysis about the tax payer profile andtrend analysis)

• Improve management capability of the tax department• Train the tax officials in basic marketing, service

marketing, ICT, statistical packages etc.• Create help desk, open house day, customer service

executive position• Establish multi channel help line for the citizen to get

accessIf government takes a strategic approach – consistent,integrated, enabling, the tax revenue can be increased at anincreasing rate with active citizen participation.


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REFERENCES:Basher T. A. M. Nurul, Review of the Tax System in Bangladesh: A Prerequisite for Industrial Growth found inhttp://www.worldnewsbank.com/TaxArticle.pdfBrinkerhoff, Derick W. (2004), The Enabling Environment for Implementing the Millennium Development Goals: GovernmentActions to Support NGOs, Paper presented at George Washington University Conference.G. Hamel and C. K. Prahalad, Competing for the Future (New York: Free Press, 1994), quoted in Hill and Jones, StrategicManagement, 7th Ed, 2007, p. 27.G. Hamel and C. K. Prahalad, Strategic Intent, Harvard Business Review, May-June, 1989, p. 64, quoted in Hill and Jones,Strategic Management, 7th Ed, 2007, p. 27. Niccolo Machiavelli, The Prince, St Martins Press, 1964. Sarker, T. K. Incidence of income taxation in Bangladesh, found in http://unpan1.un.org/intradoc/ groups/public/documents/UNPAN/UNPAN014405.pdfWorld Bank Databank 2009, http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZShttp://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=307&Topic2id=95Daily Star. 22 Dec, 2009. http://www.thedailystar.net/pf_story.php?nid=118729UNCTAD, 1998a. TD/B/COM.2/33) found in unfccc.int/ttclear/jsp/EEnvironment.jspIFC, 2010 http://www.ifc.org/ifcext/sme.nsf/Content/BEEUnited Nations International Development Organization, 2008, Creating an enabling environment for private sector developmentin sub-Saharan Africa.


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IntroductionThe United Nations Millennium Declaration resolved tocreate an environment –at the national and global levels alike– which is conducive to development and to the eliminationof poverty. Success in meeting these objectives depends, interalia, on good governance within each country and at theinternational level and on transparency in the financial,monetary and trading systems, as also in removing theobstacles that developing countries and economies intransition face in mobilizing the resources needed to financetheir sustained development.In the Road Map towards the implementation of the UNMillennium Declaration, it is clearly pointed out that themobilization of domestic resources, is the foundation for self-sustaining development. Domestic resources finance domesticinvestment and social programmes which are essential foreconomic growth and for eradicating poverty. In this context,a sound fiscal policy, responsible social spending and a wellfunctioning and competitive financial system are the elementsof good governance that are crucial to economic and socialdevelopment. Strategies for moving forward include, interalia, disciplined macro-economic policies and fiscal policy,including clear goals for the mobilization of tax and non-taxrevenues and responsible public spending on basic educationand health, the rural sector and women. The primaryresponsibility for achieving stable growth and equitabledevelopment lies with the developing countries themselves.This responsibility includes creating the conditions that makeit possible to secure the needed financial resources forinvestment. It is the actions of domestic policymakers thatlargely determine the state of governance, macroeconomicand microeconomic policies, the public finances, thecondition of the financial system, and other basic elements ofa country’s economic environment. Achieving such a positiveenvironment is not simply a matter of political will. Capacity

building and institutional development are an absolutelyessential complement to finance in the effort to improveliving standards of the poor. Most developing countries,usually the poorest ones, still lack institutions capable ofimplementing the necessary actions, and will need to focusmajor national efforts on capacity building. For this purpose,more and better assistance from the international communityis needed; indeed, experience shows that imposing toughpolicy conditionality on poor countries without assisting themto build their domestic capacity would certainly lead tofrustration and unsatisfactory results. The generation ofdomestic resources to save and invest productively is theessential foundation of sustained development. A very lowdomestic savings rate is the major structural weakness to beovercome in most developing countries and economies intransition. But there will not be enough domestic savings, norenough high quality national investment, withoutmacroeconomic discipline. Economic policy must bedesigned to make inflation and the current account balanceconsistent with sustained growth. For countries with highinflation, this implies that monetary policy should aim toreduce inflation over time, and once it has reached a lowlevel, to hold it there. Monetary policy also needs to beconsistent with the chosen exchange rate regime, which mustgive reasonable assurance that the country will avoid anunsustainably large current account deficit.Fiscal discipline, too, is required at all times, so as to keepdeficit financing small enough to avoid causing inflation, toavoid excessive accumulation of public debt, and to ensurethat government borrowing does not crowd out the privatesector investment. Almost everywhere the most potent way toempower the poor to integrate themselves into the marketeconomy, and hence to contribute to and benefit fromeconomic growth, is to make public investments in broadlyaccessible education, health, and nutrition, in other basic

Improving Financial Resources Mobilization in Developing Countries and Economies in Transition

Suresh N Shende

Author is Interregional Adviser in Resource Mobilization Public Policy, Analysis and Development Branch, Division for PublicEconomics and Public Administration, Department of Economic and Social Affairs, United Nations, July, 2002.

social programs, and in the rural sector, where largeproportions of the poor typically inhabit. These programsneed to have the first call on government resources—theyshould not be treated as marginal programmes whose budgetscan be slashed as economy measures when times are difficult.Domestic resource mobilizationDeveloping countries and countries with economies intransition are currently confronting unsustainable fiscaldeficits, unabated debt service charges, and declining externalassistance seriously affecting their development process. Itwould be in their interest to overhaul the strategies ofdomestic and external financial resources mobilizationthrough tax and non-tax instruments that are fair, equitableand create minimal disincentives for economic efficiency, andinitiate tax reforms to simplify and rationalize the taxstructure. The non-tax revenues include social securitycontributions, grants from foreign governments andinternational organizations, property income, interest,dividends from state enterprises, rents from governmentproperty, fines, penalties and forfeits and sale of goods andservices. There should be greater emphasis on improving theefficiency and effectiveness of the revenue administration,strengthening the institutional framework, selection of taxesand duties which are administratively feasible and lend torealistic collections, widen the tax base and progressivelyintegrate the “informal” sector into the mainstream of thenational economy. In the context of international economicrelationships, there should be increased stimulus to finalizebilateral tax treaties, protect the interests of national revenuefrom the adverse effects of operation of electronic commerce,transfer pricing mechanisms, non-cooperative taxjurisdictions and other tax shelters and secure legitimatelydue tax revenues from income attributable to the new andinnovative financial instruments, but avoid harmful taxcompetition. The subject of financing for development has engaged theattention of policy makers and development economists sinceseveral decades. However, the importance of this topic hasacquired new urgency. For most of the 1980s and early1990s, the approach of the international community todevelopment was dominated by the Washington Consensus,the elements of which incorporated an emphasis on domesticresource mobilization through fiscal restraint and tax reform.The concept of tax reform was to be influenced by the move

towards creating a market-friendly policy regime. Thereduction of income, corporate and trade-related taxes and agreater reliance on domestic value-added taxes were themajor elements of this strategy. Another major element wasthe liberalization of the domestic financial sector involving,inter alia, the deregulation of interest rates, the elimination ofdirected credit and freedom of entry into the financial sectorfor both domestic and foreign private investors. To meetimport-financing needs, developing countries were to rely onexports and access to foreign private capital as the primaryinstruments. The above approach to development financinghas been seriously questioned. Many developing countrieswere not adequately prepared in terms of institutional andhuman resources capacity to deal with the inevitablechallenges associated with its implementation, especiallyagainst the backdrop of the globalization of financial marketswhich was occurring with phenomenal speed. The reliance onexports to generate resources also did not evolve in the wayanticipated. Concomitantly, aid flows declined and the list ofdeveloping countries classified by the United Nations as“least developed” became longer. In the light of these factors,it is necessary to re-examine the issue of resourcesmobilization for financing for development, using a moreholistic approach and reaching agreement on different optionsappropriate for today’s global economic environment.The agenda of the International Conference on Financing forDevelopment held in March 2002 at Monterrey, Mexicoemphasized the importance of mobilizing domestic financialresources for development; mobilizing international resourcesfor development: FDI and other private flows; trade;increasing international financial cooperation fordevelopment through, inter alia, ODA; debt; and addressingsystemic issues: enhancing the coherence and consistency ofthe international monetary, financial and trading systems insupport of development. . The Monterrey Consensus adoptedat the International Conference on Financing forDevelopment has recommended, inter alia, that developingcountries and economies in transition should set up aneffective, efficient, transparent and accountable system formobilizing public resources and managing their use byGovernments as also emphasized the need to secure fiscalsustainability, along with equitable and efficient tax systemsand administration, as well as improvements in publicspending that do not crowd out productive private investment.


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It also recognizes the contribution that medium-term fiscalframeworks can make in that respect and has also encouragedstrengthened international tax cooperation, through enhanceddialogue among national tax authorities and greatercoordination of the work of the concerned multilateral bodiesand relevant regional organizations, giving special attentionto the needs of developing countries and countries witheconomies in transition.Economic development being basically measured by progressin economic growth remains largely valid although over thelast decade, the concept of development has been increasinglyaccepted as a broader concept incorporating social andenvironmental dimensions as integral parts. While theseaspects are crucial and there needs to be a policy focus on theimplied concerns, without economic progress the financialand other resources needed to deal with them would not beavailable. Thus, the inevitable conclusion is that economicgrowth is a necessary but not sufficient condition fordevelopment. In fact, the development of a country isdetermined by a multitude of factors, including its naturalresource base, its human resources, the state of its physicalinfrastructure, the technology available, the developmentstrategy of the government, and its openness to the outsideworld. It can be considered that development, or economicgrowth, is a direct function of the various investments madein a country. In particular, there are important managementand governance issues involved in investment activitieswithin each sector to avoid or minimize wastage and leakageas also questions relating to the inter-sectoral allocation ofinvestment. It can be claimed that when investment decisionsare made on the basis of market competition, the relative ratesof return over time should determine its allocation and henceintersectoral allocation should not be a matter of policyconcern. However, there are always market imperfections inmany different forms: inadequate information flows;complications due to the structure of industry (monopoly,oligopoly, imperfect competition); and a variety of positive ornegative externalities. These make the reliance on relativerates of return of investment as the main determinant of inter-sectoral allocation, and thereby economic growth anddevelopment, more than problematic. There are, in addition, questions relating to the role of thegovernment visà vis the private sector, since some of thedevelopment functions traditionally performed by the

government, such as the provision of infrastructure, are beingincreasingly provided or financed by the private sector. Wheninvestment is made by the public sector, as often done andneeded for, inter alia, providing public goods and alleviatingpoverty, many issues arise with respect to how the requisiteresources are raised and used. These include transparency ofgovernment budgets, impact of tax subsidy policies, criteriaapplied for inter-sectoral allocation within the public sectorand efficiency in the use of resources. The emphasis is thuson policy measures to generate the funds required forinvestments in the variety of sectors crucial to development,both economic and social. According to the frameworkadvocated by Musgrave (1959), the three main fiscal policygoals are: macroeconomic stability, efficiency in resourceallocation, and an appropriate distribution of income. Allthree objectives should contribute to the ultimate goal ofreducing poverty, whether by increasing disposable income,promoting access to job opportunities and productive assets,ensuring certainty and a stable economic policy environment,or providing protection to the poor. Although the “function”side of the government budget constraint has a more directimpact on the poor, the budget, considered as a whole,remains one of the most pervasive instruments of publicpolicy. In this context, the trade-off among the alternativemeans of financing public spending must be taken intoaccount when formulating poverty reduction strategies. Thereare three main ways in which the public sector can obtainresources to finance its actions: levying taxes, contractingdebt and creating money. When tax revenues are insufficientto finance government spending, the transfer may occurthrough issuing high-powered money or/and borrowing.Broadly speaking, investible resources can be divided intotwo broad sources: domestic and foreign. Domestic resourcescomprise household, corporate and government savings.Some of the factors that influence domestic resourcemobilization include the level and growth of per capitaincomes, savings preferences of individuals in the society, thedegree of development of and confidence in financialintermediation, demographic structure, and fiscal/ monetarypolicies. Transforming these resources into investment inproductive activities depends on the quality of themacroeconomic fundamentals, including fiscal/monetaryprudence, the structure of the financial market, including theregulatory and supervisory framework of the banking sector


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and the size and quality of the securities and bond markets,and the continuity of a consistent investment policy. Otherfactors, such as the law and order situation, the availability ofan appropriately skilled workforce, the state of developmentof physical infrastructure, and property rights, also weigh ondecisions to convert intermediate savings into investment.The promotion of exports allows countries to generate foreignexchange to pay for import needs, many of which areinvestment-related. Exports are often crucial to pay for theimport of new technologies, capital goods and raw materialsnot produced at home to improve the productivity andefficiency of investment as well as to take advantage ofeconomies of scale.The discussion on fiscal architecture is crucial in identifyingthe revenue capacity of different types of taxes based on thecharacteristics of a specific country. No one tax system fitsall. The fiscal architecture presents a range of alternatives forpolicymakers to consider in seeking raising revenue to fundgovernment operations. The degree of tax compliance alsohelps policymakers in designing tax policy. In manycountries, tax administration concerns strongly influence taxpolicy. The structure of the economy of developing countriesmakes it difficult to collect certain taxes. The module on taxcompliance helps identify the limitations of various types oftaxes and offers guidance on the design of different taxinstruments. Finally, countries no longer can effectivelydesign their tax systems in isolation. The increased mobilityof capital and labor requires policymakers to consider the taxsystems of other countries. Globalization and reduced tradebarriers threaten two major sources of tax revenue fordeveloping countries: trade taxes and corporate income taxes.The challenge many countries face is replacing those lostrevenue sources with taxes that do not disproportionatelyburden the poor.Foreign financial resourcesForeign investible resources comprise funds from theinternational banking system (commercial short- andmedium-term loans), from international capital markets(foreign private portfolio investments), from corporations(FDI) and ODA from bilateral donor governments and frommultilateral financial institutions, such as, the World Bankand ADB. The factors which influence the size andcomposition of private external inflows are broadly similar tothose for domestic private savings, with the addition that

economic factors in the rest of the world, particularly thecountry of origin of the funds, such as relative growthprospects, interest rates, and tax regimes, also becomerelevant. Foreign official inflows are more related to politicaland strategic interests, the relative level of development andthe amount of funds allocated to aid budgets by donorcountries. In addition, it should be noted that national effortsto mobilize resources are interrelated with the externaleconomic and financial environment: adverse developmentsin prices of exports, sharp fluctuations in key exchange ratesor instability in the international financial system canconstrain such efforts severely. In general, the degree ofeconomic security in a country is crucial to its success inraising resources to finance its development. The political andeconomic environment variables affecting savings andinvestment decisions include government leadership, the riskof external conflict, corruption, the rule of law, racial andethnic tension, political terrorism, civil war, the quality of thebureaucracy, the risk of repudiation of contracts, the risk ofexpropriation by government, political rights and civilliberties.An analysis of 53 developing countries over the period 1984-1995 shows that the countries with better economic securityhad significantly high levels of investment and economicgrowth. Reforms to improve economic security can raiseprivate investment by a half to one percentage point of GDPin the short to medium term, and a half to one and a quarterper cent over the longer term. It is also true that the increasingglobalization of the world economy has brought with itserious implications for the economic security of countries.The increasing mobility of factors of production coupled withthe lowering of the degrees of freedom for nationalmacroeconomic policy independence has led to the necessityof developing and implementing universal codes of conductfor business and financial markets. Countries which partakein these exercises will certainly be viewed as preferredrecipients of investment flows. It is generally agreed thatbenefits of globalization, being faster and more sustainedgrowth, higher living standards, more employment and largedividends from advances in technology required concertedaction, at both national and international levels, and cannot beleft to the operation of market forces alone. In fact,globalization and its accompanying market forces should beproperly guided and harnessed to become inclusive forces for


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sustainable and people-oriented development.It was considered that while the evidence of the quantitativeimpact of globalization on public revenues is still limited,there are indications that it may reduce tax revenues due toincreased tax competition among jurisdictions to attractforeign direct investment, exponential growth in electroniccommerce, increased mobility of factors of production, andgrowing importance of off-shores and non-cooperative taxjurisdictions. The fall in revenues might further aggravate theproblem of budgetary deficits of fiscally-stretched economies.It was observed that globalization may also create pressuresfor increased spending for education, training, research anddevelopment, environment, economic and socialinfrastructures, and for institutional changes primarily toimprove efficiency. While these items of expenditure areconsistent with the traditional and basic role of the state in itsallocative function, globalization may create additionalfinancial requirements for social protection by way ofunemployment benefits to unskilled labour facingretrenchment due to closing down of noncompetitivedomestic industries. To the extent that globalization isperceived to be a factor in the worsening of the incomedistribution of countries, it appeared that globalizationincreased the need for governmental intervention, while, atthe same time, it reduced its capacity to intervene due toreduced availability of financial resources.ODAOfficial development assistance (ODA) in recent years hastotaled US $50-60 billion a year. Debt relief under the HIPCInitiative was US$1.4 billion in 2001. At the same time,trade-distorting policies have prevented the creation ofincomes far in excess of these amounts. Estimates of thewelfare gains from eliminating all barriers to merchandisetrade are substantial, ranging from US$250 billion to US$680billion annually, of which one-third would accrue todeveloping countries. These benefits would derive in partfrom the elimination of access barriers to industrial countrymarkets, but also in good part from reform of the traderegimes of developing countries themselves. Determinedopening of markets is a win-win proposition—both industrialand developing countries gain. In some cases, the current trade policies of industrialcountries directly neutralize the effectiveness of aid. Thedumping of agricultural surpluses, in the form of non-

emergency food aid or with the help of export subsidies, hasdamaged farm production in a number of developingcountries, some of which had been carefully nurtured underassistance programs. In other cases, tariff peaks andescalation frustrate efforts by developing countries todiversify their exports. Greater coherence between aid andtrade policies is therefore essential. In particular, reducing oreliminating biases against developing country products inindustrial country import and agricultural regimes wouldmake both aid including debt relief and trade more effectivein promoting development. Foreign aid has dwindled in the budgets of many donorcountries during the past several years, but it continues toloom very large for many of the recipients. In manydeveloping countries, foreign aid receipts are an importantsource of revenue and thus constitute a key element in fiscalpolicy. Aid may be an indispensable source of financing, inparticular, for expenditures in areas, such as, health,education, and public investment that are essential to raise theliving standards of poor people in developing countries.Given that aid is limited, it is particularly important to use itwisely. This requires not only establishing appropriatesystems to manage aid funds with a view to avoidingcorruption and mismanagement. Important though this aspectis but also designing aggregate fiscal policy to take properaccount of the macroeconomic implications of aid financedspending. Both aspects are essential to maximize the benefitsfor the recipients and thereby convince donors that aid ismoney well spent. In discussing the fiscal implications of aid, a basic question iswhether aid receipts are any different from any other sourceof revenue. The literature has focused on two elements. First,in the long run, aid. unlike, for instance, tax revenues tends totaper off as the economy develops (and in some cases, muchsooner); this should be taken into consideration indetermining the appropriate inter-temporal fiscal policy.Second, while all revenues are subject to uncertainty, thenature of the uncertainty is somewhat different for aid thandomestic tax revenues, as it stems from the spendingprocesses of donor countries and the design of conditionality.An important empirical question is then how the overalldegree of uncertainty of aid compares with that of taxrevenues. To the extent that aid receipts are relativelyuncertain, the issue from the donors’ stand-point is how to


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reduce this uncertainty and, from the recipients, how to take itinto account in designing fiscal policy.The positive impact of aid has been undermined in somecases by the volatility and unpredictability of aid. Aid issignificantly more volatile than domestic fiscal revenue andthe level of volatility increases with aid dependency. Inaddition, aid is procyclical vis-à-vis domestic fiscal revenue;rather than smoothing out cyclical shocks, it tends toexacerbate them. Moreover, aid is not well predicted even incountries with on-track programmes and the prediction erroris asymmetric: aid commitments are more likely tooverestimate disbursements than vice versa.Many poor aid-recipient countries view foreign aid as acritical ingredient in their development strategy, even thoughits development effectiveness remains in question amongmany economists. At the same time, the level and trends offoreign aid are increasingly becoming sensitive issues indonor countries’ budgetary discussions, with analystsobserving increasing signs of “donor fatigue”. In particular,International Financial Institutions have expressed concernsregarding the level of overall development aid and thepossible crowding out of poor traditional recipients by formersocialist economies. Whatever the merits of these views, the key issue arises ofwhether the aid aggregates commonly used by policymakersand researchers in their assessments of development aidprovide an accurate measure of true aid flows. Foreign aid is conventionally measured on the basis of theOECD’s ODA, a concept introduced in the early 1970s. ODAcomprises official financial flows with a developmentpurpose in the form of grants (inclusive of those tied totechnical assistance) and highly concessional loans. Loans aredefined as highly concessional when their grant element—i.e., the subsidy implicitly included in the loan, relative to theloans’ face value—is at least 25 percent. The leading measureof foreign aid flows is the so-called Net ODA, which is thenet disbursement amount, i.e., disbursements minusamortization, of those flows classified as ODA.ODA is based on a sharp distinction between concessionaland nonconcessional loans, drawing from their respectivegrant elements. Conceptually, the calculation of the grantelement, i.e., the degree of concessionality, involves thecomputation of the expected present value of the stream ofdebt service obligations associated with the loan under

consideration. To the extent that the discount rate utilizedreflects the creditor’s opportunity cost, i.e., the return it couldmake on alternative investments of the same capital, thispresent value measures the economic value of debt servicerepayments and, on this account, the financial value of theloan. The grant element of the loan is the portion of the loanthat, at a given time, is not expected to be repaid, i.e. theshortfall of the abovementioned present value relative to theamount disbursed. For the purposes of ODA, loans areclassified as concessional if their grant element exceeds 25percent, and as non-concessional (and hence ignored)otherwise. The grant elements are computed using somespecial assumptions; however, most importantly, loan interestrates (used to compute interest charges) are assumed toremain constant throughout the life of the loan, and a fixed 10percent discount rate is utilized in all present valuecalculations. This methodology for computing grant elementscontains a number of shortcomings, which may lead to loanmisclassification and distortion of ODA figures across time,donors, and recipients.Despite the declining share of aid in budget of donorcountries, aid continues to play an important role in manydeveloping countries. While the impact of aid is typicallydivided between supplementing domestic saving andcontributing to consumption, there is less agreement on thepotential effects of aid on growth. The impact of large aidinflows on the relative price of traded and nontraded goods iswell known, and several recent papers confirmed theimportance of real exchange rate appreciation for the declineof the traded goods sector in developing countries. But in adynamic context, the effects of aid depend on how aid-financed spending affects the productive capacity of theeconomy. While several empirical studies suggest that aidtends to enhance growth, they also suggest that the linkage isneither direct nor automatic, but depends very much on theenvironment that influences the use of aid.Mobilization of Government FundsGovernments in developing countries and economies intransition have been, and still are, an important agent ofdevelopment. While in most of these countries their role inowning and operating productive enterprises has beendeclining, mainly through the privatization of state-ownedenterprises, they remain suppliers of crucial public goods ofvarious sorts, of physical and social infrastructure and


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maintenance of law and order. The mobilization of sufficientresources for use by the government for these variedfunctions has always been rather problematic and many haverun up sizeable fiscal deficits over several years. While thesecountries have not generally suffered prolonged bouts ofhyperinflation or fiscal profligacy through the rampantprinting of monies, they have not yet reached a stage whereregular payment of taxes through voluntary compliance isseen as a social responsibility. This tends to complicate thetask of raising resources for the government. Basically,mobilizing funds for use by governments is undertaken inthree ways: through the levying of taxes, through thegeneration of non-tax revenues and through governmentborrowing from local or international capital markets.Most of the off-market resources are raised through taxes,with non-tax revenue being less than 5 per cent of GDP inmost countries. For the period 1985-87, the average total taxlevel in the developing countries was about 17.5% of GDP,and for 1995-97, it was 18.2% while the average tax level inthe OECD countries in 1985-87 was more than twice as highat 36.6% of GDP and in 1995-97 at 37.7%. The overallaverage tax effort level in developing countries is around20% as against over 35% in the developed countries, althoughin developing countries, it varies between 10% to 30% as

well. While no useful tax performance comparison can bemade between developed and developing countries, thisproves that in developing countries the tax efforts are low inrelation to the amount of tax revenue that could be collectedon the basis of voluntary taxpayer compliance Moreover, these percentages, as illustrated in table below arerelatively low by comparison with developed countries. Thereis clearly room for enhanced revenue collection in almost alldeveloping countries and economies in transition. However,it should be noted that the capacity of a country to raisetax revenue depends not only on tangible economic factorsbut also on a variety of non-economic factors, such as,political will, administrative efficiency, and a culture oftax compliance, and as such it is almost impossible toprescribe a priori what proportion of GDP should beraised as taxes in any particular country. There are severaldifferent techniques and measures to evaluate a country’s taxsystem. Tanzi and Zee note that one can estimate a“hypothetical tax to GDP ratio” by isolating severalindependent variables (such as, per capita income, share ofagricultural output, openness of the economy, and ratio ofmoney supply to GDP) and comparing tax performance tothat of similar countries.


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1985-87 1995-97

OECD countries 1/ 36.6 37.9America 30.6 32.6Pacific 30.7 31.6Europe 38.2 39.4Developing countries 2/ 17.5 18.2Africa 19.6 19.8Asia 16.1 17.4Middle East 16.5 18.1Western Hemisphere 17.6 18.0

Sources: Revenue Statistics (OECD); and Government Finance Statistics (IMF).1/ Excludes the Czech Republic, Hungary, Korea, Mexico, and Poland.2/ A sample of 8 African countries; 9 Asian countries; 7 Middle Eastern countries; and 14 Western Hemisphere countries.

Table 1. Comparative Levels of Tax Revenue, 1985-97 (In percent of GDP)

Resource mobilization through taxationTaxation is used as the main policy instrument fortransferring resources to the public sector. It can also assist increating an atmosphere within which the private sectoroperates in conformity with national objectives. It has beenargued by multilateral institutions, among others, that the taxsystem should be used only to raise finances that aresufficient for meeting the minimum necessary level of publicexpenditure, such as, to preserve territorial integrity, tomaintain law and order, to provide various public goods andto regulate undesirable activities. From the efficiencyviewpoint, it can be said that taxes provide the best means offinancing the bulk of public expenditures. However, taxesimpose on society three types of cost:a) a direct cost or revenue foregone, as taxes, as taxpayers

reduce their disposable income by paying the amountdue;

b) an indirect allocative effect, or excess burden, which isthe welfare cost associated with the economic distortionsinduced by taxes as they alter relative prices of goods,services and assets; and

c) an administrative/compliance cost, since tax forms, taxcontrol, payment procedures and tax inspection arecostly. Not all tax systems have the same distortionaryeffect. For a given amount of tax revenue, the finalburden of taxation depends on a number of features ofthe tax system, namely, the composition of tax revenues(income versus consumption), the size of the tax base(affected by tax evasion and tax fraud), the tax rates andother factors of administrative nature. Availableevidence for developing countries indicates thatcorporate and personal income taxes have a negativeimpact on economic activity, whereas taxes on importsand exports do have a significant, negative effect oninvestment. On the other hand, nonneutralities in thetaxation of savings and investment severely distortcapital markets. These distortions become even worsewhen tax evasion is widespread and the informal sectoris large.

Given the disincentive effects of taxes, as showed byempirical evidence, efficiency-oriented tax reforms should befeatured by:a) reliance on a dominantly consumption-oriented set of

broadlybased taxes;

b) moderate tax rates on labor and capital incomes; andc) simple taxation of profits and returns to financial capital,

with little incentive schemes, and as neutral as possible.Regarding the equity aspect, there are very many aspectsin the design of a tax system that may affect inequalityand poverty. Traditionally, it has been thought thattaxing income is inherently more progressive than taxingconsumption, since the personal income tax usuallyimplements graduated tax rates and a standard personalexemption, while rate differentiation in consumptiontaxes according to income or wealth of individualsproves more difficult or even unfeasible.

Countries with different economic and demographiccharacteristics will have different appetites for different taxinstruments. A major purpose of Fiscal Architecture is toprovide estimates of the revenue capacity of different taxesgiven the characteristics of the country. Economic factorsinclude the structure of the economy, the composition ofearnings, and resource endowments. Demographic factorsinclude the size of the population, the education level, the agedistribution, the relative size between urban and ruralpopulation, and family size. In determining the relative taxmix, it is useful to have estimates of revenue potential foreach tax instrument. Because the design considerations foreach instrument greatly affects revenue estimates,calculations are required for different assumptions as to thedesign and scope of a particular tax instrument (for example,assumptions as to rates, base, and coverage of a particulartax). For example, revenue estimates for an individual incometax will depend on the percentage of population subject to tax(the choice of the tax threshold or zerorate band), the incomesubject to tax and the allowable deductions, and the ratestructure.It is also necessary to have estimates of compliance andenforcement costs for each tax instrument based on differentscenarios (as to rates, base, and coverage). Substantialvariations in these costs may influence the roles a particulartax instrument plays in the tax system. For example, thecollection costs and auditing costs for an individual incometax per unit of tax revenue collected may be much higher thanthe collection cost and auditing costs for a VAT. In addition,it is important to estimate the level of tax evasion for differenttax instruments and the cost and probability of reducing thelevel to acceptable levels. Tax incidence studies of


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developing countries tend to reaffirm this impression: almostall income tax systems are found to be progressive, whileonly a minor part of overall tax systems share this feature.This finding comes to no surprise, since developing countrieshave a tax structure dominated by indirect taxes, with alimited number of capital and wealth taxes. Progressivity isfurther limited by payroll taxes where they are in place.Besides, when only wage earners pay taxes while there iswidespread informality and large taxpayers do not complywith the income tax, payroll taxes become a “tax on honesty”paid by the low and middle income class. Broadly based taxsystems, with fewer deductions and exemptions (apart from apersonal exemption not larger than per capita income),relatively low tax rates (albeit moderately progressive in thecase of the personal income tax), and compatible withadministrative capabilities, are likely to provide a stable,reasonably efficient and more pro-poor alternative offinancing public expenditures.However, governments have traditionally used tax resourcesto finance some of its other development or political agenda.The tax system favoured by multilateral organizationstypically is composed of a broad-based sales tax, such asvalue-added tax (VAT), a relatively low level of import dutiesfor protective purposes only, and simplified personal incomeand corporate profit taxes. A sales tax, being a tax onconsumption of domestic and/or imported products, helps inreducing consumption and, if combined with an excise dutyon luxury goods, can also help in reducing conspicuousconsumption. While direct taxes are both equitable andelastic, they can reduce incentives to work and, possibly, tosave and/or invest. However, empirical evidence is notconclusive regarding their impact on either labour supply orsavings. The net effect of a tax change on total savingsdepends on the relative marginal propensities to save ofdifferent groups on the one hand and an increase in publicinvestment or reduction in fiscal deficit on the other.Obviously if the reduction in private savings exceeds theincrease in public savings, aggregate savings will fall. TheVAT has been introduced in most of the developing countriesand economies in transition and usually the tax rate has beenuniform, with unprocessed food and exports generally beingexempt. The tax does not usually distinguish betweendomestic production and imports. VAT is considered neutralas the tax burden falls equally heavily on different products

and as such avoids the cascading effects of conventional salesor turnover tax. While it is often argued that VAT is subjectto less evasion compared with income tax, various studies donot show a better compliance. Experience with VAT taxeshas demonstrated that a destination- and consumption-basedtax has been the easiest to administer. Import tariffs andexport duties have been a major source of governmentrevenue for many developing countries. However, high ratesof trade taxes and dispersion in the implied effectiveprotection rates lead to production inefficiencies and cancreate an anti-export bias. Many of these countries have beenable to reduce significantly their dependence on trade taxes,imposing VAT instead. Some other countries have alsostarted rationalizing their tariff structure. Similarly, the effectiveness of the VAT system can bedetermined by computing the “VAT productivity,” a measurethat focuses on VAT revenue as a percent of GDP divided bythe VAT rate. It is also possible to estimate the amount ofvarious types of income from national income accounts andother data sources. This information allows policymakers toestimate the potential tax revenue from different taxinstruments assuming different tax compliance rates. In allthese instances, the usefulness and reliability of theseestimates are, of course, dependent on the quality of theunderlying data. Part of the variation in aggregate taxrevenues among countries can be explained by differentdemands and tastes for government services. The demand forgovernment services tends to increase with per capita income.Countries, and presumably the residents of countries, mayalso have different views on such important questions as thepublic versus private provision of education, health, andretirement benefits, and the size and quality of governmentprovisions of defense, transportation and other services.These are primarily political questions to which economicadvisors may have little to contribute. As taxes are theprimary vehicle to fund government services, higher taxes arerequired to fund higher level of government services. It is generally believed that high income and corporate taxrates result in an adverse incentive for work effort, saving andinvestment. Accordingly, it is often suggested that income taxrates be reduced to improve compliance and lessen the burdenof tax administration. In the case of most of the developingcountries, average income and corporate tax rates haveprogressively fallen, taxable income slabs have been


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narrowed and the minimum threshold of income to be taxed,increased. Obviously if the maximum marginal tax rates haveto be reduced and the total tax revenue has to be defended,then the middle rates will have to be increased. Alternatively,the loss of revenue may be compensated by imposing indirecttaxes.While investors, indigenous or foreign, rely on their judgmentof the fundamentals of an economy rather than on theincentives offered, most developing countries have beenproviding fiscal incentives, including reduction in thecorporate income tax rates, tax holidays, accelerateddepreciation allowances, deduction from social securitycontributions, specific deduction on gross earnings forincome tax purposes, etc. While these may be redundant, acountry that does not offer fiscal incentives may lose FDI tothe countries that do. Clearly, these tax incentives should beharmonized rather than left to compete with each other. Landand/or property taxes are levied in many countries withprivate ownership of land. While land taxes often include agricultural land, propertytaxes are mainly an urban phenomenon. In addition, theauthority to set the rate and collect these taxes is sometimesdelegated to local government units in order to provide themwith their own revenue collection mechanism. Two recent studies on tax reforms and their effects in somedeveloping countries in South-East Asia illustrate theenormous difficulties with implementing tax reform. Theyshow the incentives for the government to continue to addtaxes rather than rationalize when they face a resourceshortage, the administrative complexities of tax collection,the problems of vested interest groups and the difficulty ofbalancing equity and revenue generation considerations.However, it is interesting that in one country tax collectionhas never been more than 15 per cent of GDP, that incomeand profit taxes have always been less than a quarter of taxrevenues and that after reform only 2 per cent of thepopulation actually file tax returns. In the other country, taxrevenues have grown to around 20 per cent of GDP andincome and corporate taxes account for just over one third ofthe amount raised. In the first country, trade related taxes stillaccount for almost 40 per cent of revenues; in the othercountry, the figure is less than 5 per cent. Both have madeefforts to widen VAT-type taxes to include the service sector.The taxing of the informal or unregistered sector has proved

to be a daunting task, particularly in the first country, wherethe sector is quite large. The division of tax collection mattersbetween the national government and state and localgovernments in both countries is a bone of contention; as inmost countries, taxes on property are the main source ofrevenue generation at the sub-national level.Governments in developing countries and economies intransition which wish to undertake fiscal reforms should alsotake into account the concomitant tax administration reform,since weak tax administration will make it difficult to achievethe objectives of overall fiscal reform. Tax administrationreform should encompass the re-definition of fiscalrelationships, and the adaptation, as appropriate, of theorganizational structure of tax methods and administrationprocedures. The organizational structure should be such as toenable the tax administration to achieve the highest possibledegree of voluntary taxpayer compliance, and to administerthe tax laws efficiently, effectively and fairly, with thehighest degree of integrity.. It is commonly held that tax policy and tax administrationare intrinsically linked. In this interrelationship, however,formulation of tax policy is generally seen to precede taxadministration. This is because only when a tax structure islegislated does tax administration come to play its role in theimplementation of the tax law. In developing countries andeconomies in transition, however, the direction of the linkmay not be quite so apparent. Indeed, it has been observedthat in developing countries tax administration is tax policy.This would imply that, however fine the design of the taxstructure might be in a representative developing country, it isthe manner of interpretation and implementation of the lawthat counts. These elements reflect the need for adequatecapacity of the tax administration in place to implement thelaw.In many developing countries, tax laws themselves may beextremely well designed and detailed. But unless theaccompanying tax administration is able to handle those lawsin terms of having the appropriate staff to interpret andimplement them, the field level reality of the actual incidenceof the tax system may be quite different from the originalobjectives. The taxes may be passed on to those on whomthey are not meant to fall, and the distribution of the burdenmay turn out to be indiscriminate. Economists will have afield day carrying out exercises regarding the “true incidence”


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and “efficiency costs” of various taxes, lawyers will find iteasy to litigate tax matters because of the difficulties ininterpreting complex tax laws and, accountants, ploughingthrough a myriad pages of the tax code, will successfullyadvise clients in careful tax planning such that their taxburden is minimized.While dealing with the question of the impact of tax policy ontax administration in developing countries and economies intransition, it is not as though the design of tax policy indeveloped countries does not affect its administration. Thecomplexity in their tax structures has necessitated increasinginternational cooperation on exchange of taxpayerinformation, transfer pricing and arm’s length rules, andattempts at the development of harmonized rates, accountingrules and executive statutes and action. Thus, the design oftax policy is of paramount importance for tax administration.If efficient and feasible administration is an objective, thestructure of all taxes should comprise common elements: lowrates, few nominal rates, a broad base, few exemptions, fewincentives, few surcharges, few temporary measures; andwhere there are exceptions, clear guidelines. This is because asimple tax structure induces better tax administration.Increasing public revenues are key in achieving non-inflationary growth and ensuring enough resources to financeessential public expenditures, including poverty-eradicationprogrammes. Within the constraints imposed by the structureof the economy, the domestic tax system and non-taxrevenues should be designed to raise enough revenue tofinance public expenditures resulting in sustainable fiscalbalances and reduce the need to rely on increasing publicborrowing or money creation.On-going transformations and evolving national developmentstrategies in the context of globalization of the internationaleconomy suggest that many developing countries andeconomies in transition may have to adapt their tax policy,administration and legislation, including the internationaldimension of national tax systems to the changing domesticand external economic, fiscal and financial environment.Globalization, liberalization, international trade agreementsand efforts to attract foreign capital have persuaded countriesto lower rates and tariffs, often privileging the mobile factor -financial capital - at the expense of labour and underlining theneed to establish or strengthen a progressive tax system.Past experiences also point to the need to strengthen or put inplace a tax system that is fair and equitable, that minimizesdisincentives for economic efficiency, that is simple (easy tounderstand and administer) that eliminates evasion andavoidance, that is flexible enough so as to secure equitabletax revenue from income attributable to the new andinnovative financial instruments, that allows for gradually

widening the tax base and integration of the informal sector inthe mainstream of the economy. The selection of taxes andduties need to ensure that they are administratively feasibleand result in realistic collection of revenue. The systemshould protect national revenues from tax havens and othershelters, and prevent vocational competition from becoming arace to the bottom. A transparent budget process and linking revenues to deliveryenhance accountability and legitimize revenue collection.Successful outcomes of public programmes in education andhealth are a point in case. An efficient and transparent taxadministration system, free of corruption, can expand revenuecollection. While mobilization of domestic resources is in thelong-run a sine qua non for sustained development, for a largenumber of developing countries and economies in transition,in particular least developed countries and other countries thathave difficulties attracting financial resources, there will be aneed for substantial external resources in order to make majorstrides in poverty eradication.Taxes play an important role in any poverty reductionstrategy. The most important function is to raise revenue tofund government expenditure programs. Whether taxes canaid in the redistribution of income or providing targeted reliefis a difficult question, the answer to which depends oncountry-specific factors. However, until personal incometaxes play a greater role in developing countries,redistribution via taxation will be very difficult. Even then,income tax competition from other countries and limitationsof tax administration will limit the ability of using the taxsystem to redistribute income and wealth. Addressing povertyconcerns through the design of specific tax instruments maybe more promising. Although any specific proposal needs tobe considered in the context of the entire tax system, reducingthe number of individuals subject to income taxation and thelower rating of certain basic foodstuffs and fuel merits seriousconsideration.Public debtIf public debt is properly utilized, it can contribute toeconomic growth and poverty reduction and smooth outconsumption in response to shocks. However, if inefficientlyallocated, the cost of borrowed external resources cancontribute to macro-economic management problems in theform of high and unsustainable levels of external debtservicing obligations. External debt management has closelinks with the management of fiscal budget, foreign exchangereserves and the overall balance of payments. The externaldebt burden of many low income developing countriesincreased substantially since the 1970s, due to, firstly,exogenous factors, such as, adverse terms of trade, shocksand weather; secondly, a lack of sustained macro-economic


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Finance & Bankingadjustment and structural reforms; thirdly, non-concessionallending and refinancing policies of creditors; fourthly,inadequate debt management; and lastly, political factors,such as, civil wars and social strife. The institutionalarrangements for debt management necessarily differ fromcountry to country but their activities should revolve around:formulation of debt management policies and strategies;providing macro-economic projections and analysis tosupport policy making; and undertaking operations toimplement terms of loan agreements and maintaining loanrecords (i.e. monitoring and maintaining information ondisbursements and debt service payments).For many countries, even full use of traditional mechanismsof rescheduling and debt reduction - together with continuedprovision of concessional financing and pursuit of soundeconomic policies - may not be sufficient to attain sustainableexternal debt levels within a reasonable period of time andwithout additional external support. In September 1996, theIMF and World Bank have addressed this problem through aHeavily Indebted Poor Countries (HIPC) Initiative designedto provide exceptional assistance to eligible countriesfollowing sound economic policies to help them reduce theirexternal debt burden to sustainable levels, that is, to levelsthat will comfortably enable them to service their debtthrough export earnings, aid and capital inflows. Thisassistance will entail a reduction in the net present value(NPV) of the future claims on the indebted country. Suchassistance will help to provide the incentive for investmentand broaden domestic support for policy reforms. The HIPCInitiative is a comprehensive, integrated and coordinatedapproach to debt reduction that requires the participation ofall creditors - bilateral, multilateral and commercial. Centralto the Initiative is the country’s continued effort towardmacro-economic adjustment and structural and social policyreforms. In addition, the Initiative focuses on ensuringadditional finance for social sector programmes - primarilybasic health and education.Issuing Government bonds to the private sector either directlyor through the banking system constitutes a second alternativeto money printing, which is available to many developingcountries. While avoiding the immediate inflationary impactof money financing, this type of financing of the fiscal deficitputs pressure on real interest rates and/or reduces the creditthat would be otherwise available for private sector activities.The final impact on private sector activity and real output willdepend on the response of both private saving and privateinvestment to higher real interest rates. A growing body ofevidence supports the notion that the relationship betweenprivate saving and real interest rates is ambiguous. Althoughreal interest rates affect the way economic agents spread theirconsumption and saving over time, this effect may be offset

due to substitution, income and wealth effects, and tofinancial market constraints preventing consumers fromresponding to interest rate fluctuations across time. Mostcase studies provide little evidence that real interest ratesfavorably affect private saving. The effect of higher interestrates on private investment depends to a large extent on theexisting degree of financial liberalization. When there isfinancial deepening and interest rates are market determined,a rise in domestic public debt increases the risk of default andreduces public sector confidence on the sustainability of thefiscal stance, putting pressure on real interest rates. The costof capital for private users increases, thus contributing toreduce the profitability of private investment. On the otherhand, higher interest rates contribute to further deterioratingthe fiscal balance, in some cases creating explosive debtdynamics. The Government has to face the directconsequence of serving the domestic debt by makingpayments of both interest and amortization. For anunchanged level of the primary balance, a rise in interestpayments associated with higher domestic debt or a raise ininterest rates will increase the size of the fiscal deficit,creating additional constraints to the potential growth ofeconomic activities.In countries where interest rates are being controlled,excessive internal borrowing to finance the fiscal deficitentails a reduction of the credit available at the bankingsystem, often leading to higher interest rates in the informalmarket. When interest rates are regulated and the publicsector is being given preferential access to credit, thecrowding out effect of private investment is exacerbated.RecommendationsThe following recommendations are suggested formobilization of financial resources through taxation:(1) that developing countries and countries with economies

in transition will strive to develop progressive andequitable national taxation systems that are consistentwith the country’s social and economic framework andgenerating adequate revenues while minimizingdisincentives.

(2) that developing countries and economies in transitionwill endeavour to ‘ ensure that:i) the incidence of taxation falls equitably on labour

and owners of financial capital and other assets;ii) the tax base will be extended to cover electronic

commerce and innovative financial instruments, butexclude the subsistence sector;

iii) indirect taxes will be expanded and made moreequitable by targeting the growing service sector,socially undesirable activities as well as focusingon luxury consumption.

(3) that developing countries and economies in transitionwill undertake appropriate administrative and legislativemeasures to combat tax evasion, prevent tax avoidanceand reduce the efficacy of tax shelters and tax havensthat undermine national tax revenues.

(4) developing countries and economies in transition willdevise innovative measures, such as, presumptivetaxation, to target hard-to-tax groups and will aim toeffect progressive transition of the “informal” sectorwithin the mainstream of the economy through reform oflabour legislation, the legal and regulatory framework,rationalization of allowances, incentives and exemptionsto reasonable levels.

(5) that countries will strive to simplify tax laws and toimprove the efficiency and effectiveness of taxadministration and enhance enforcement through thestrengthening of institutional, technical andtechnological capacities, including the development of a

transparent and accountable system free from corruption,and to provide better taxpayer services to facilitatecompliance.

(6) enhance multilateral cooperation among national taxauthorities to promote conclusion of tax treaties with aview to eliminating double taxation and promotingequitable distribution of taxation among competingjurisdictions and improving international incomeallocation.

(7) that countries will strive to supplement tax revenues byexploring sources of non-tax revenues, with dueconsideration given to equity concerns, includinginstitution users fees or improving the targeting ofsubsidies for publicly financed goods and services.

(8) that the developed countries and international financialinstitutions will provide increasing support, especially interms of resources for technical assistance in capacitybuilding, to developing countries and countries witheconomies in transition. n


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REFERENCES:1. K. Chu, H. Davoodi, S. Gupta, Income distribution and tax and government social spending policies in developing countries. IMF

WP/00/62.2. G. Mackenzie, Estimating the base of the value-added tax (VAT) in developing countries: the problem of exemptions. IMF WP/91/21.3. Musgrave, Public finance in theory and practice. McGraw-Hill, 1989.4. J. Stiglitz, Economics of the public sector. New York: Norton, 2000.5. P. Shome, Taxation in Latin America: structural trends and impact of administration. IMF WP/99/19.6. P. Shome (Ed.), Tax policy handbook. Washington: IMF, WDC, 1995.

Chapter II. General Concept and Issues. Chapter III. Domestic Consumption and Production Taxes. A. Comparison between the sales taxesand the VAT.Chapter IV. Taxation and the Open Economy. Chapter XX. Theory of Optimal Commodity Taxation. Chapter XX. Taxationand Equity. Chapter XX. Summary of IMF Tax Policy Advice.

7. J. Slemrod, J. Bakija, Does growing inequality reduce tax progressivity?Should it? Cambridge: National Bureau of Economic Research, Working Paper 7576, 2000.

8. J. Slemrod, Optimal taxation and optimal tax system. Cambridge: National Bureau of Economic Research, Working Paper 3038, 1989.9. J. Slemrod (Ed.) Tax policy in the real world. Cambridge University Press, 1998. J. Alm, What is An “Optimal” Tax System?10. Tait Alan A. Value-added tax: administrative and policy issues. Occasional paper, No. 88. IMF, WDC, 1991.11. V. Tanzi, Tax policy for emerging markets: developing countries.

IMF,WP/00/35 Section III. Policy Issues in Selected Major Taxes. C. Value added Tax, Excises, and Import Tariffs.12. V. Thuronyi, Tax law design and drafting. The Hague; Boston: Kluwer Law International, 2000.13. V. Thuronyi, Tax reform for 1989 and beyond. Tax Notes (U.S.); 42:981-96 February 20, 1989.14. Helene Poirson, “Economic security, private investment, and growth in developing countries” IMF Working Paper No. WP/98/4 (January

1998), pp. 17-19.15. M. Govinda Rao, “Tax reform in India: achievements and challenges” and Ilho Yoo, “Experience with tax reform in the Republic of

Korea”, Asia-Pacific Development Journal, vol. 7, No. 2, December 2000.


Human Resources

1. The Development Vision of the PresentGovernmentThe present government has placed elimination of povertyand inequity at the forefront of its development strategy. Thethrust has now shifted to putting Bangladesh into a trajectoryof high performing growth, stabilizing commodity prices,minimizing income and human poverty, securing health andeducation for all, enhancing creativity and human capacity,establishing social justice and social inclusion, reducingsocial disparity, achieving capacity to tackle the adverseeffects of climate change, and firmly rooting democracy inthe political arena.The above vision for the development of the country wouldbe translated into reality through a Perspective Plan 2010 -2021, which is under final stage of preparation. ThePerspective Plan envisages strong enough link in order toenhance the overall strength of the economy to achieve someof the following objectives:• Eliminate illiteracy by 2014• Attain cent percent enrolment in the 12th class by 2021

with gender parity• Reduce poverty to 15% by 2021• Strengthen information technology to establish a digital

Bangladesh• Emphasise energy availability to provide per capita

energy consumption of about 600 kWh by 2021• Generate per capita income of about $1100 by 2015 and

$1800 by 2021The Perspective Plan 2010 – 2021 has placed strong emphasisto make productive use of Bangladesh’s human and physicalcapital as strategies for accomplishing the targets. The thrustsof the plan are:• Accelerated growth rate• Building an equitable and pro-poor, inclusive, secular,

progressive, participatory, tolerant, democratic welfarestate

• Stable macroeconomic framework• Ensuring good governance, social justice and curbing

corruption• Ensuring adequate supply of electricity and fuel• Ensuring food and nutrition security• Sustaining Human development• Building infrastructure for sustainable economic growth• Pursuing environmentally sustainable development• Building Digital BangladeshThe long term vision of the government would be realizedinitially through the NSAPR II ending in June 2011, andthrough the implementation of the Sixth Five Year Plan (FY2011-2015) and Seventh Five Year Plan (FY 2016 – 2020).The main thrusts of the medium term plans would be toachieve higher growth in excess of 10 percent and to ensureits distributional justice so that the poorer sections get aproportionately greater share of the benefits of growth thatcan lead them out of poverty. A level playing ground for theprivate sector would be created to harness their full potentialto supplement public sector efforts in economic development.In the Sixth Five Year Plan (SFYP), the role of the publicsector in generating growth would be important for severalreasons. First, public investment in infrastructure liketransport and communication, power and energy, ports, andhuman capital would be critical to enhancing the efficiency ofprivate investment. Second, the government needs to supportthe private sector through facilitating development-friendlyinstitutions– well defined property rights, rule of law, market-oriented incentives, sound monetary policy, sustainablepublic finances, and governance. Finally, public investmentwill determine the structure of growth by allocating resourcesto the social sectors like education, health, and ruralinfrastructure.

Development Strategies, Governance and HumanDevelopment-Bangladesh Perspective

Dr. Shamsul Alam

Dr. Shamsul Alam, Member, General Economics Division (GED), Planning Commission.The paper was presented by the author in the Bangladesh Development Forum held between February 15-16 2010.

Basic characteristics of the Sixth Five Year Plan would be:• Inclusive Economic Growth• Accelerated Economic Growth• Employment Creation• Universal Social Protection for the Hardcore Poor• Emphasize role of Market, State and Community in

Economic Growth• Public Private Partnership• Regional and Sub-Regional Planning• Gender Responsive Plan and action• Technology Base for ‘Digital Bangladesh’• Human Resource Development• Environment and Climate Change• Good Governance, Human Rights and Maintaining

Democratic Polity• Establishing operational linkage between Planning and

Budgeting• Stronger Regional/Sub-Regional Economic Integration• Least-cost National Security• Implementation and Effective MonitoringNSAPR-II (Revised)The Government has approved the document titled “Stepstowards Change: National Strategy for Accelerated PovertyReduction (2009-11) (revised)” that has been recast in linewith the election manifesto, development vision and people’saspiration. However, the NSAPR II shall remain in force untilJune 2011.2. Progresses in achieving development strategies,governance and Human Development2.1 Macroeconomic resilience: The economy of

Bangladesh continues to demonstrate considerableresilience during 2008-09 despite the twin shocks arisingfrom global recessions and the adverse effects of theconsecutive floods and the cyclone-Sidr of the fiscalyear 2007-08. The economy is expected to grow at a rateof 6.0 percent, slightly below the growth rate 6.2 percentof 2007-08. The key feature of the economicperformance during 2008-09 is the strong recovery inagriculture sector supported by moderate growth inindustry and service sector. The contributions of theagriculture, industry and services sectors are estimatedrespectively at 4.6 percent, 5.9 percent and 6.3 percentgrowth, indicating strong move of all the three broadsectors. The share of services in GDP amounted to 49.7

percent followed by industry at 29.7 percent andagriculture by 20.6 percent at constant prices. Theimpact of the ongoing global financial crisis onBangladesh would be minimal in the short run given thather financial sector is not fully integrated with the worldsystem. In the long run the country’s export, remittanceand investment flows are likely to be affected unless theworld recovery process is accelerated. The investmentclimate slightly affected during 2008-09, as indicated bya deceleration in the ratio of total investment to GDP to24.18 percent from 24.21 percent in 2007-08. Showingan upsurge in remittance inflows, gross national savingsin 2008-09 increased to 32.4 percent of GDP. The percapita GNI and GDP are USD 690 and USD 621respectively during 2008-09. On a cumulative basis,however, export growth in 2008-09 was 10.3,decelerated from 15.8 percent in the previous fiscal yearin the context of the contraction of global trade volume.At this difficult time, the developed countries shouldallow uninterrupted entry of Bangladeshi exportsduty and quota free access to their markets. Thelower growth in imports driven by the sharp decline infood-grains imports and fall in of oil price in therecorded level after first half of 2008. Import ofintermediate goods and industrial raw materials recordedmoderate growth of 20.2 percent and 10.5 percentrespectively compare to 2007-08, while import of capitalmachinery declined only by 0.8 percent. Totalremittance receipts during 2008-09 rose by 22.4 percentand number of manpower export decreased by 43.4percent over the preceding fiscal year.

2.2 Progress in poverty reduction: The incidence of povertyhas been declining in Bangladesh. The national headcount index of poverty measured by the upper povertyline declined from 56.6 percent in 1991-92 to 40.0percent in 2005. However, the poverty has beenestimated at 38.0 percent in 2008. During 1991 to 2005,urban poverty reduced at a faster rate than rural poverty.Social safety net programme for alleviating poverty andproviding livelihood support for the hard core poordirectly and programmes for income generation in therural area are continuing. Cash transfers programme,Food security programme Vulnerable GroupDevelopment Programme, Routine MaintenanceProgramme, special programmes for poverty alleviation


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and micro-credit programmes for selfemployment areworth mentioning. These programmes covers 22.50 lakhbeneficiaries under old-age allowance programme, 7.50lakh beneficiaries under the widowed and womendeserted by their husbands, 1.0 lakh insolvent freedomfighters and disadvantaged persons who are receivingfinancial assistance directly. Under the Abashan Project,65 thousand landless, homeless and rootless families arereceiving the benefits of health and family welfareservices and other facilities including income-generatingactivities. At the same time, all indicators of humanpoverty like life expectancy at birth, infant mortalityrate, population having access to drinking water, andadult literacy rate have shown improvements.

2.3 Progress in achieving MDGs particularly in health andeducation: Bangladesh has successfully achieved genderparity in primary and secondary education. The countryis on track to achieve the targets of halving theproportion of people living below the poverty line. TheHead Count Rate (HCR) of the incidence of poverty,using the upper poverty line, has been declining inBangladesh since the 1990s. If this trend continues, theestimated poverty level in 2015 would be less than 30percent, equal to the MDG target. The prevalence ofunderweight children was 48 percent at the national levelin 2005. The best fitted trend (exponential) shows thatthe prevalence of underweight children at the nationallevel will be 36.5 percent in 2015, which is relativelyclose to the target of 33 percent. The net enrolment ratioin primary education in 2007 was 91 percent and if thistrend continues, complete coverage in primaryenrolment will be achieved within 2010. In 2007, theunder-five mortality rate was 60 and if this trendcontinues, the under-five mortality rate will reach anumber even below the target (48 on thousand livebirths) within 2010. By 2013, every household will bebrought under hygienic sanitary facilities.However, there are some lagging areas like primaryschool completion rate, adult literacy rate, access to safedrinking water by the rural people, and maternalmortality ratio, gender based discriminatory socialpractices linked to health and education which indicatethe need for sustained government efforts and generousdonor support.

2.4 Return to democracy: The Awami League (AL)-ledgrand alliance’s sweeping victory in the 9thparliamentary elections witnessed the return ofdemocratic rule in Bangladesh with a remarkableparticipation of women and young voters after nearlytwo years of an army-backed caretaker government.With the return to democracy, the people’s hopes andaspirations have also been substantially raised certainlyin areas such as good governance, strong stance againstcorruption and clear vision for economic development.The election manifesto of the Awami League, called ‘ACharter for Change’, promised to address five priorityissues. These are maintaining economic stability andcontrolling commodity price hikes in the face of globalfinancial crisis; taking effective action againstcorruption; addressing the power and energy crisis;eliminating poverty and inequality; and establishinggood governance.

2.5 Promoting good governance: The promotion of goodgovernance will focus primarily on makingparliamentary process effective, ensuring participatorygovernance, restructuring and strengthening the publicservice system, reforming the legal and judicial systemto ensure judicial help for the disadvantaged groupsparticularly poor, women and children and other sociallyexcluded groups, changing roles of law enforcingagencies, strengthening financial management,established merit based competitive civil service,strengthening of local government, promoting e-governance, combating corruption, ensuring humanrights, accessing information, raising citizens’ voice,improving project implementation capacity; andimproving sectoral governance, which all will bechallenging tasks.

2.6 Reforms in the governance: In the country Judiciary hasbeen separated from the executive branch of thegovernment. The Anti Corruption Commission has beenreconstituted and given independent status to wagecombat against corruption. The Anti CorruptionCommission Law suffers from some flaws that is beingamended to ensure the independence of the Commissionin consistent with its public accountability. The ElectionCommission has been functioning independently andeffectively. The Right to Information Act-2009 has been


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passed in the parliament so that the citizens can enjoythe access to information easily and as part of it anindependent information commission has beenconstituted. Citizen’s charter has been developed in allthe government entities to apprise the people about theirrights and services. Government is also in the process offinalizing National Integrity Strategy (NIS) to set moraland ethical standards for all government functionariesand for the society as a whole. A process of establishingOffice of the Ombudsman is under consideration.With a view to maintaining fiscal discipline and toensure accountability, the government has expanded theMedium Term Budgetary Framework (MTBF) to 32ministries. All ministries would eventually be broughtunder this framework. Duration of the MTBF would beof five years to match with the five year plan document.Government has also promulgated a new law titled“Public Money & Budget Management Act-2009” thatwill ensure accountability of the public resources to theparliament. Under this law, Hon’ble Finance Ministerwould keep the parliament informed about the utilizationof public money on a quarterly basis.In a bid to strengthening the local government system,Upazila Parishad Election was held in the last year andother local body elections will be held during 2010 and2011.

2.7 Ensuring efficient delivery of public services: Effortswill be made to develop public-private partnership andGO-NGO cooperation to improve efficiency in themanagement of delivery in some essential utilityservices. However, Building capacity and an improvedhuman resources framework for delivering publicservices and ensuring sustained and inclusive growthand strengthening accountability mechanisms in order toimprove public sector performance would remain aschallenge.

2.8 Promoting Gender Equality: Since independenceGovernment emphasized women’s advancement issue asone of its priority areas for its national development. Theequal rights of men and women and the equity measureto bring advancement of backwards groups in the societyhave been included in the Constitution of Bangladesh.Gains have been made in advancing gender equality inBangladesh through policy, legal and institutional

measures. As part of the continuing effort, Governmentintroduced quota system in the Parliament and in thegovernment services for women. A number of laws havebeen enacted to protect women’s interests. The numberof reserved seats of women in the parliament has beenincreased to 45 from 30 and will be increased to 100 infuture. Bangladesh has already achieved gender parity inprimary and secondary education at the national level.This positive development has occurred due to somepublic sector interventions focusing on girl students,such as stipends and exemption of tuition fees for girls inrural areas, the stipend scheme for girls at the secondarylevel, etc. There was a sharp increase in the number ofwomen parliamentarians elected in the most recentgeneral elections. The total number of womenparliamentarians in the present national assembly is 64(19+45), or 19 percent of the total seats. However, inorder to attain gender equality, there is a need tomainstream women in politics. Gender ResponsiveBudget preparation system has already been introducedthrough MTBF to specifically monitor womenpoverty reduction and their development. To copewith the gender challenges, NSAPR II (revised) hasfollowed a twopronged approach for women’sadvancement to create a society where men and womenwill have equal opportunities in all spheres of life.

2.9 Planned development emphasised: No country,particularly a developing country, can prosper without along term vision for development. The democraticallyelected Government of Prime Minister Sheikh Hasinahas, therefore, decided to launch a long term OutlinePerspective Plan for the period 2010-2021. The longterm vision will be implemented by NSAPR II and twosuccessive five year plans.

3. Challenges Ahead3.1 Enabling macroeconomic environment for pro-poor

growth: The projections of the Medium TermMacroeconomic Framework (MTMF) reflect acautiously optimistic scenario that is consistent withrecent trends and takes into account the commitment ofthe government to reduce poverty and inequity andmaintain macroeconomic stability and steer the economyto recovery and move to higher growth path. AnnualGDP growth is projected to be 6.0 percent in FY10, 6.7


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percent in FY11, and 7.2 percent in FY12. Constraintshave to be overcome to achieve sustainable, equitableand inclusive eight percent annual growth at the end ofthe Sixth Five Year Plan. Inflation rate is projected todecline during the NSAPR II period, investment/GDP isprojected to improve, revenue/GDP and governmentexpenditure/GDP are projected to improve in FY10 butthe budget deficit will be contained to 5% of GDP. In theexternal sector, both import and export growth wouldlikely be higher in FY10 and FY11 and in thesubsequent years.However, the challenge would be overcoming bindingconstraints to achieving sustainable and inclusive eightpercent annual growths. Restoring private sectorconfidence and attracting FDI, shaken by the globaleconomic downturn, would be some tasks ahead.Deepening financial sector reforms is called for restoringprivate sector confidence and participation. Quality ofpublic investment must be ensured and implementationcapacity of public sector agencies ought to be raised tosatisfactory level. Adopting prudent fiscal measuresincluding expanding the tax net and value added taxsystem is another area that deserves immediate attentionto generate domestic resources and to reducedependence on foreign borrowing.

3.2 Creating infrastructure for pro-poor growth: Thestrategy will be sustained by defining appropriate rolesof the public and private sectors and encouraging publicprivate partnerships (PPP); focusing on the key sourcesof growth; ensuring regional balance in development;reducing population growth and reaping the benefit ofdemographic dividend (more people in active age);focusing on women’s advancement and rights;strengthening safety nets programmes; and ensuringenvironmental protection and protection from theadverse effects of global warming and climate change.The vision of the power sector is to provide access toaffordable and reliable source of energy to all citizens ofBangladesh including the poor and vulnerable of in-gridand off-grid areas by 2021. However, enhancing publicand private investment to overcome increasingly severeinfrastructure gap would be a critical challenge.

3.3 Social protection for the vulnerable: The governmenthas taken steps to balance its policies to meet short term

exigencies and long term development needs. A strongand expanded social safety net programme (SSNP) hasbeen envisioned in the perspective plan (2010-2021) toprotect the poor and disadvantaged group from socialevils, economic hardship and natural shocks. The FY 09-10 budget has adopted special measures and supportpackage for minimizing the adverse impact of the globaleconomic slowdown. The NSAPR II has put socialprotection of the vulnerable at one of the top of itsagenda and allocated 319.39 billion Taka or US$ 4.56billions (11.35% of total allocation). To reduce women’spoverty and vulnerability, the design of social safety netprogrammes will be objectively targeted and monitored.However, the burden of the social safety net program asa percentage of GDP is increasing, which may bedifficult to sustain in the long run without generoussupport from the development partners.

3.4 Development of Human resource: The country’seducation system comprising primary, secondary,tertiary, and non-formal education will be developed tobuild a knowledge-based society. The focus will be onensuring quality education and labour market orientedskills considering domestic and international needs. Inthe revised NSAPR II, 582.30 billion taka or US $ 8.44billion (20.69% of total) is estimated for Education,training and research, which ranks 1st according toNSAPR II (revised) priority. Health, nutrition andpopulation (HNP) are intimately related andcomplementary to other sectors of the economy. Thegovernment is committed to ensure quality health,nutrition and family welfare services, which areaffordable, attainable and acceptable to its citizens. Thegovernment focuses on increasing health status, reducinghealth inequalities, expanding access to social safetynetwork and encouraging affordable service deliverysystems for everybody. The government plans toestablish 18,000 Community Clinics (CCs) in phases todeliver maternal and child health care including familyplanning services to the door steps and limited curativecare. In the revised NSAPR II, 207.94 billion taka or US$3.0 billion (7.4%) is estimated for Health, Nutrition andPopulation Planning, which ranks 5th according topriority.


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3.5 Caring for environment and tackling climate change:The environmental challenges including pollution willbe met by undertaking measures in the areas of policies,planning, regulations and capacity building. Climateadaptation will be strengthened by undertaking sectoral,multi-sectoral and cross-sectoral measures. The climatechange adaptation initiatives will integrate holistic,gender sensitive and inclusive approach to sustainabledevelopment offering clear opportunities to anticipate,survive, cope with and recover from the effects ofdisasters. However, adapting climate change measureson agriculture productivity, livelihoods and rural incomewill be a big challenge given that the overwhelmingmajority of the poor are financially insolvent andtechnologically backward.

3.6 Enhancing productivity and efficiency through scienceand technology: The quality of life of people of thedisadvantaged group will be improved throughenhancing quality of education and health care systemby innovative application of ICT, enhancing productivityin agriculture through the application of biotechnology.Ensuring access to ICT and technology for the poor,women and disadvantaged children remains a challenge.

4. Thoughts on Way forward1. Proper and full implementation of the NSAPR-II and

Five Year Plans with ongoing review and monitoring toaccelerate growth and reduce poverty;

2. Increasing revenues and ensuring quality of publicinvestments through the annual development budget;

3. Partnering with the private sector, and encouragingprivate investments to realize full potential of theeconomy;

4. Making public expenditure more effective by raising theefficiency of and by introducing cost effective measuresin budgeting, budget-planning linkages and aideffectiveness;

5. Increasing Regional Co-operation especially in cross-border trade, transport and energy;

6. Building a better governed Bangladesh through animproved accountability framework and reforms of civilservice by introducing performance merit based careerplanning, and promoting e-governance;

7. Bringing ‘services to people’s doorsteps’ bydecentralizing services, strengthening local government

and enhancing local accountability mechanisms;8. Increasing focus on results in order to improve access to

and utilization of quality education, health, nutrition andsocial protection services;

9. Providing skills training and enhancing employmentopportunities, particularly for the youth and women;

10. Implementing Bangladesh’s Climate Changes Strategyand Implement Action Plan.

11. Strengthening planning and implementation monitoringby the planners.

5. Expected role from the Development Partners toachieve the goal of the Government5.1 Increasing support from development results, aligned

with NSAPR II and five year plan: Developed countrieshave so far failed to perform their responsibility toaddress the problem of unfair trade and global financialsystem; providing 0.7 per cent ODA of their GDPs; andtransferring new technologies for productive youthemployment in developing countries to achieve MDG 8.Developed countries should come forward and assist theleast developed countries in exploiting potentials ofinternational trade and should fulfill their obligation assignatories to the MDGs.

5.2 Implement the Joint Cooperation Strategy forImproved Aid Effectiveness: The Government ofBangladesh and fifteen donors signed a Statement ofIntent to Develop a Joint Cooperation Strategy (JCS) insupport of the national poverty strategy (RevisedNSAPR II) in August 2008. The overall goal of a JCS isto make aid in Bangladesh more effective by creatingcommon platforms for national and sector dialogues anda national owned change process for improving deliveryof aid. In order to make aided projects/programmeeffectively implemented, Bangladesh would take thelead to make real structural and behavioural changes onaid policies and implementation. The GOB led JCSWorking Group has started various JCS relatedconsultations and recently drafted a JCS outline and adetailed JCS Action Plan. There would be regulardialogues with development partners based on mutuallyagreed JCS with clear aid effectiveness outcomes andaccountability mechanism in support of a prioritised andoperational national poverty strategy.


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5.3 Help Meet Global Financial Crisis: As a consequenceof global financial crisis, Bangladesh is going to beaffected due to recent decline in export earning fromReadymade garments and frozen foods as the demandfor these declined in the US and Europe. At the sametime migrant workers are returning back to the countrydue to shrinkage of employment opportunities in therespective countries. To fill the resource gap arisingfrom unemployment and loss of export, domesticeffective demand has to be increased through investmentin agriculture, in SMEs and manufacturing sectors andfinding new avenues in the external markets.

5.4 Globalization: Bangladesh and other developingcountries have been unable to reap any significantbenefit from globalization despite increase in globaloutput, trade and investment; the benefits ofglobalization have been unequally distributed. In orderto address these challenges we need a strong supportfrom our development partners in the form of directinvestment, labour migration, market access for ourexports, simplification and relaxation of rules of origin,capacity building in trade and investment for creatingdomestic demand.

6. Indicative Costs of National Strategy forAccelerated Poverty Reduction (NSAPR II revised)and domestic resource gap- another challengeThe estimated cost of achieving the strategic goals and targetsset out in NSAPR II is Taka 2,814.81 billion. Non-discretionary expenditure comprising interest paymentobligations (both domestic and foreign interest payments) ofthe public sector and national defence expenditure needsamounted to Tk. 642.59 billion at FY08 prices. The totalpublic expenditure in the NSAPR II period thus comes to Tk.3,457.40 billion. The total domestic resource that can bemobilized is in the amount of Tk. 2,582.56 billion at FY08prices. The estimated total resources gap is Tk. 874.84 billionor USD 12.50 billion for three years. Although the resourcerequirement (US$ 4. 166 billion/year) exceeds the normallevel of foreign assistance (US$ 2.00 – 2.5 billion) that wereceive from our Development Partners, the additional fundscan be mobilized through mutual efforts and innovativemeasures like Public Private Partnership (PPP) and FDI.Also, attempt must be made to increase tax-GDP ratio byexpanding the tax net. The resource gap can be met up ifrevenue share could be raised to 13.60 % of GDP from thepresent share of roughly 11.0 %. For this to happen, therevenue administration system ought to be overhauled andrestructured, corruption free and broadened. n


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Abstract:This article, which is entirely based upon literature survey, isan endeavor of assessing the utility value of HRA in theperspective of external financial reporting. Here the purposeis to examine whether HRA can be a useful part of externalfinancial reporting. The study is entirely based on the surveyof litrature. The findings of the study do not seem to stand inthe way of incorporating HRA information in externalfinancial reports, rather several accounting scientists arefound to welcome the idea of integrating HRA with theconventional external financial reports.

Keywords: HRA, External Financial reporting, Asset Status,External Users,

Introduction and Methodology The intent of this study is to review literature in order to seekout whether or not Human Resource Accounting (HRA)could be an integral part of external financial reporting. Butbefore launching this inquiry, it is probably worthwhile tosurvey the literature related to (1) what HRA is about? and(2) do human resources really possess asset status? Thereason is that answers to these questions maybe of someassistance in assessing whether HRA could be a part ofexternal financial reports. Presumably, the issue of reportinghuman resources value side by side with physical andfinancial asset values in external financial reports dependslargely upon the real meaning of HRA and whether humanresources can really be classified as assets.This paper is the result of an exploratory research study basedupon survey of literature exclusively. Here literature has beenreviewed issue-wise keeping in view the objective of thestudy.

What HRA is about?Human Resource Accounting (HRA), as defined by RensisLikert and David G. Bowers (March 1973:15), is an activitydevoted to attaching dollar estimates to the value of a firm’shuman organization. These dollar estimates, according tothem, (a) enable the management of an enterprise to knowwhether its managers are increasing or decreasing theproductive capability of the human organization and (b)permit an almost accurate appraisal of the organizationalperformance. The American Accounting Association (AAA)Committee on HRA looked upon the concept of HRA as “theprocess of identifying and measuring data about humanresources and communicating this information to interestedparties” (1973: 169). Here immediately a question arises:who are the interested parties? Mainly, two sets of people,namely, “investors” and “managers” are the interested partiesbecause they could benefit much from HRA in makingdecisions (the former being external users and the latter beinginternal users of financial statements). HRA could providemore adequate information to “investors” about the presentstate of an organization. Rhode, Lawler and Sundem(February, 1976: 13-25) state in this regard that investorswould change their decisions about investments when HRAinformation is available. Managers are the second set of interested people who canpotentially use HRA information. However, the above 1973definition (given by the AAA’s Committee on HRA)emphasizes the need for proper measurement of the costsincurred by the organization in acquiring, developing andreplacing human assets. The Committee later modified theabove definition as “the process of managing people in theorganization” (1974: 115). This modification gaveimportance to HRA as a managerial tool for manpowerplanning and control. Eric G. Flamholtz takes the above idea

Human Resource Accounting in the Context of ExternalFinancial Reporting—An Analytical Study

Dr Dilip Kumar Sen

Dr. Dilip Kumar Sen, Professor of Accounting and Finance, School of Business, Independent University, Bangladesh.

to a broader plane and observes that HRA connotes:Accounting for people as an organizationalresource. It involves measuring the cost incurred bybusiness firms and other organizations to recruit,select, hire, train and develop human assets. It alsoinvolves measuring the economic value of people toorganizations. The primary purpose of a humanresource accounting system is to help managementplan and control the use of human resourceseffectively and efficiently. In addition, some humanresource accounting information may also bereported in financial statements for use by investorsand others outside the organization (1974:3).

To turn to the view of another set of experts (R.G. BarryCorporation’s HRA experts, November (1971:75; Amiss andWilliams, Jr., August, 1981: 113):HRA implies identification of the costs incurred in recruiting,hiring, training and developing human resources for thebenefit of more than one period like any other asset ofmaterial value and charging of those costs to the periods inwhich their benefit is felt.Another set of Scholars like Sherman R. Roser (September-October 1983: 35), Richard B. Frantzrab, Linda L.T. Landauand Donald P. Lundberg (June 1974: 73) and Marvin Weiss(The Magazine of Bank Administration, December 1972:12)are of the view that HRA requires capitalization of humanresources for presentation as an asset on the balance sheet.They feel that the fundamental idea of HRA is that peoplehave a quantifiable value to an organization which shouldsomehow be considered for internal decision-making, i.e.,personnel management decision-making and reportedperiodically for external users as well. Meyers and Shane (January 1984: 29) subscribe to the aboveviews by regarding humans as organizational assets as well asby recognizing the importance of accounting for human assetsby way of capitalization of human resource recruitment,training and development costs. It emerges from the above definitions that HRA should, inreal sense of the term, mean capitalization of investment inhuman resources, falling into two major categories—acquisition and learning costs, of which the former includescosts for recruitment, selection, hiring and placement, and thelatter includes cost for formal training and orientation on thejob training, supervisory salaries during training period, low

productivity during training involving the cost of lostperformance of employees other than the trainee anddevelopment by enhancing an employee’s capabilities beyondthe immediate technical skills required (Ameiss andWilliams, August, 1981:115). In the same tune, S.Balasubramanian views that the concept of HRA, in its purestform, calls for the recognition of human resources as capitalassets, the amortization of human resource costs and finally,presentation of them on the balance sheet like other physicaland financial assets (May 1984:251). But it is very importantto note that HRA is not merely a method of putting people onthe balance sheet, it is something more. HRA is primarily aninformation system designed to aid the management inefficiently and effectively evaluating the performance of itspersonnel functions. It is not just a measurement system, it isalso a paradigm or way of thinking about people and theirmanagement in organizations (Flamholtz, 1974:337). Chastain is not far from the above viewpoints. He believesthat HRA should conceptually refer to capitalization of thosecosts (value in some cases) incurred for organizationalemployees whose related benefits are reasonably expected tobe realized in future accounting periods. In later periods, thecapitalized costs need to be amortized against revenues toagree to the matching convention that has general acceptancein accounting practice (Jan. 1979: 16). Underlying the concept of HRA, there are some theoreticallysound assumptions (Caplan & Landekich, 1974:2; andFlamholtz & Lacey, 1981: 58-59):i. The usual accounting definition of an asset involves the

right to receive economic benefits in the future. And inthis sense, human resources may appropriately beclassified as accounting assets.

ii. People (like conventional assets) are valuable resourcesof an organization and are capable of providing bothpresent and future services.

iii. The benefits from both conventional assets and humanresources have value to an organization since thesebenefits contribute to the accomplishment of theorganizational goals.

iv. The benefits from human resources are essentiallyeconomic in nature and, therefore, are subject tomeasurement, with acceptable accuracy.

v. It is not the owning of people but their service potentialthat makes them organizational resources, after


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providing for necessary allowance for the expectedturnover (as they are not owned by any organization).

vi. It is theoretically possible to identify and measurehuman resources costs and benefits within anorganization. It follows, therefore, that at the macrolevel also, manpower costs and benefits can beidentified and measured.

vii. Information in regard to manpower costs and benefitscan be useful to manpower planning, utilization, andcontrol decisions.

viii. The presentation of human resource costs informationin financial statements will depict a much more realisticpicture of the financial position of an organization ascompared to that shown by conventional financialstatements.

In summary, one may remark that HRA is a distinct branch ofaccounting or a tenet of managerial accounting. It enables theorganization to evaluate human resources by following anacceptable set of concepts and techniques of measurement.This underlies the desirability and importance of being able toidentify clearly how much the human organization is worth toa company and also how to retain and enhance this worth.Precisely, HRA is a socio-managerial accounting technique ofestimating the value of manpower in the same way as aphysical asset’s value is determined in an organization. It isalso an accounting technique of transmitting the informationon manpower to the management who can rightly use that inits working process for optimizing performance results. It canvery well be a part of an annual financial disclosure statementfrom which its external users can immensely benefit by usingrealistic information regarding an organization’s earnings andfinancial position. Does a Human resource really possess asset status ?The question that might now pertinently come to mind: ismanpower in the banking industry a capital asset, in anaccounting sense ? This very question seems to relegate HRAto non-existence. This question might also be put in a slightlydifferent form: is the future benefit from the costs onacquisition, recruitment, training, orientation anddevelopment of bank manpower certain enough to warrantasset status? Now one can review the literature on this issue. First of all, one may have an insightful look into thecomments of Aminul Islam, a South African University

professor who throughout his paper titled “Human ResourceAccounting—A Myth or Reality?” (September-October1985:5-7) has opposed the concept of HRA for financialstatement presentation:

Both assets and expenses represent ‘cost’ to theorganization. The distinction between these twoitems of ‘cost’ under the conventional accountingsystems is that ‘expense’ is an ‘expired cost’whereas ‘asset’ is an ‘unexpired cost’, which has aservice potential available to future operations. It isimportant to distinguish between ‘assets’ and‘expenses’ because if an item of ‘cost’ is classifiedas an ‘expired cost’ when in reality it is an‘unexpired cost’ the income for that organizationwill be understated. The treatment of all ‘humanresource costs’ by the management accountingsystem as an ‘expired cost’ has not properlyclassified the ‘cost of human resource’ and herebyunderstates income in some years and overstatesincome in other years. Therefore, the charging of‘all costs of human assets’ to expenses as incurredtends to create short-term pressure on the size ofthe existing work-force and its productivity andthese, in turn, have long-term adverse effects onrevenues and expense (Sept.-October 1985:6-7).

A word of comment on the above quotation. It is interestingto note that Aminul Islam, in spite of his standing on theplatform opposite to that supporting “external financialreporting of human resources value”, has clearly admittedthat the treatment of “unexpired costs on human resources” as“expenses” instead of “assets” has long-term adverse effectson the income stream. In the words of J.B. Canning (1929:22): “an asset is anyfuture service.” A few years later, Paton and Littleton (videBlack, July-August 1981:79) stressed “service potentialities”as the basic component of an asset. Accounting TerminologyBulletin No. 1, issued by the American Institute of CertifiedPublic Accountants, proposed that an asset may be defined as“a property right of value received or an expenditure whichhas created a property right or is properly applicable to thefuture” (vide Black, July -August 1981:79). The Committeeon Accounting Concepts and Standards of the AmericanAccounting Association concurs with the above authorities


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fully and describes an asset succinctly as an aggregate ofservice potential available for or beneficial to the success ofoperations (AAA, 1957:4). Vatter (1947 P.17) agrees withthem and states clearly that an asset owes its value to theembodiment of “future want satisfaction in the form ofservice potentials”.G.D. Roy’s comment in this context is very relevant. Heconsiders the labour force to be an offspring of capital andstates that:

The two types of capital, human and physical, haveto be worked together in co-partnership forproductive activities. It has been found that there isno ambiguity in this contention because,the humanassets are the results of past accumulated labourand material in the same way as material assets are(1977:187).

There is, however, one problem in the proposed recognitionof the human asset according to C.S. Samuel (1975: 148-151), who views that every firm has a band of lower gradeworkers whose employment is casual or temporary and notpermanent. Evidently, “the claims to services” to be availablefrom them fail to acquire the durability that could entitle themto be included in human assets. That is probably the reasonwhy, in certain cases, only the upper grade permanentemployees are considered in the enumeration of the humanasset. Nevertheless, it is important to note that if “debtors”,which are only “claims to money” against specific persons,can be treated as assets, why not “claims to services” againstthem also? Though human assets would in that case rightly be“rights in personam” instead of “right in rem” like physicalassets, the continued “claims to services of human assets”over a number of consecutive accounting periods would verywell maintain the nature of their being capital assets. Flamholtz’s viewpoint (1979: 213-214) is worthnoting here. He asserts:

The HRA paradigm is conceptualframework or way of thinking aboutmanagement based on the notion thatpeople should be viewed as “resources”rather than “expenses”…The view ofpeople as organizational resourcesimplies that they are capable of providingcurrent and future services which haveeconomic value to the organization.

McGwen (Summer 1968: 86) supports the view ofrecognizing humans as assets by stating: “Explicit recognitionof the asset value of human resources would enable managersto consider their employees within a conceptual framework ofasset management”.Dahl (January 1979: 44) looks at the issue from the sameangle and comments: “human resources constitute aninvestment for a firm, rather than an expense; that is,employee costs should be capitalized rather than expensed”.Nadler (1979: 265) takes this idea one step further inasserting that the costs of educating and developingemployees are investments or assets. Relevantly, Caplan and Landekich (1974: 79) refer toHermanson, who argues that realistically it is not the legalownership of resources that is important to an economicentity but rather the right to control such resources andreceive benefits from them. Here Hermanson ignores theimportance of legal ownership of resources and instead,stresses the importance of the right to control such resourcesand the future expected benefits therefrom. According to Hermanson (1964: 4), human resourcesconstitute the largest element of operational assets.Ebersberger (August, 1981: 37) seems to agree with this viewfully and to strengthen his own similar view quotesHermanson who again contends that it is logical to consider ahuman an asset at least from the point of view of theoperational right to receive benefits. Hermanson (1964: 4) defines assets as:

Scarce resources …operating within the entity,capable of being transferred by forces in theeconomy, and expressible in terms of money; whichhave been acquired as a result of some current orpast transaction, and which have the apparentability to render future economic benefits.

This definition deserves a word of comment. It implies that:(i) the valuation of assets—regardless of whether they arelegally owned by the entity or they are operational items—should be a function of the future economic benefits expectedto be derived from the assets; (ii) both owned and operationalassets ought to be included in financial statements. All that inthe foregoing discourse suggests that the amount ofinvestment in acquisition, training and development with longterm benefit on human resources should be capitalized.But accountants, in most cases, do not view and regard


Human Resources

humans as assets because they feel that the “legal ownership”of employees cannot be gained except under conditions ofslavery (Caplan and Landekich, 1974: 3). To some critics, thenotion of HRA is repugnant, as it does “ownership ofemployees” and smacking of outmoded perceptions of the“master servant” relationship (Fanning 1981: 31) of the slavedays. These days employees cannot be owned in the samesense as inanimate objects, such as machines. As Jauch andSkigen put it : where there is no exclusive right, there is noassurance of future benefit” (May 1974: 33). This lack ofconventional employer control over employees may naturallyprompt many, as one can think, to argue that evenemployment contracts or bonds would not qualify for assetclassification. In the same tune many economists also assertthat people should not be viewed as assets, because assets areat the service of people and people cannot be owned by anyorganization. In reply to this, another economist Von Thunenhas remarked: to treat human resources as resources does notrob them of liberty or value. Indeed, to fail to see people ascapital assets may be especially harmful in times of war“because then … a hundred men may be sacrificed during abattle to save one canon” (vide Grojer and Johanson, 1991:19). “The reason for this is that . . . the purchase of canonscosts the public money, while people may be obtained free ofcharge …” (Schultz, 1961: 2).Marvin Weiss (Administrative Management, December1972: 47-48; The Magazine of Bank Administration,December 1972: 47-48; The Magazine of BankAdministration, December 1972: 18) does not agree with theabove views of disregarding humans as assets and arguesemphatically that certain types of assets need not be ‘owned’in the conventional sense, to be treated as assets; in aneconomic sense, the rights due from human resources aresimilar to the rights due from capitalized long-term leases.Speaking more clearly, the capitalization of rental paymentunder long-term leases is an example of asset treatment wherethe item is not owned in the legal sense. Thomas McRae(December 1975: 1-8) holds the similar view and contends:human resources fit the usual definitions of accounting assetsbecause they represent rights to receive economic benefits inthe future. Here one may quote David Watson (March 1978:42) very relevantly:An asset can be defined as the future service potential of afactor of production. Therefore, if a human being is capable

of providing future service potential, clearly a case can bemade for treating him as an asset. Human resource costs aresacrifices incurred by the firm in obtaining services, whichmay yield benefits. Such costs, which yield current benefits,should be treated as expense; those, which yield futurebenefits, may be regarded as an asset. However, we do notlive in a slave society, and the concept of owning humanbeings is alien to us. At the same time, a firm does employ anever-present labour force (albeit changing in composition),and so human can, in a sense, be owned. Exactly similar viewis held by Tsaklanganos who views:

An asset entails a cost that is planned to providebenefits in future periods. An expense, on the hand,is an outlay providing benefits in the currentperiod. A basic tenet of HRA is that, since incomegenerated by Human investment will be largelyrealized in future periods, human resources shouldbe treated as assets (May 1980:45).

Here Sinha’s arguments (1986: 260-261) for regardinghuman resources as assets deserve quoting:

It is true that employees cannot be owned as slaves;they are not marketable like other assets and theyare not totally under the control of an entity, sincesome of them will not stay in the entity for long. Butit is true that most of them will stay and the entitywill always have under its control a force ofemployees. Besides, uncertainty of deriving benefitsis not peculiar to only this sort of asset; this isapplicable to other assets as well. For instance,benefits will not be derived from existing fixedassets in future if they become obsolete because ofrecent innovations. The argument that in the Taxlaws there is no provision for amortization ofcapitalized human assets is also not tenable, sinceall sorts of expenses which are chargeable torevenue according to accounting principles are notconsidered deductible expenses in the laws. Humancomponents are considered assets mainly with aview to providing an idea about how much has beeninvested in recruiting and developing personnel inan organization and how much services it expectsto derive from them in future. An organization withan efficient and skilled working force expectsnaturally greater service potentials than those with


Human Resources

inefficient working force. In this sense, humancomponents are assets to an entity. The legal assetsare not so important here.

To now summarize the above discussion regarding atheoretical inquiry into whether humans really qualify asassets, the views of various authors and accounting institutesimply some fundamental characteristics that every asset mustpossess: (1) future economic benefits must be expected froman asset; (2) the organization reporting an asset must have theright to the benefits therefrom; (3) the benefits from the assetmust be capable of measurement. To comment further: themanpower of any organization, whether it is a bank or anyother service / manufacturing concern, is endowed with thesecharacteristics. Therefore, one may cogently argue that ahuman in an organization is an asset. To now again add aword of comment on the manpower status in the bankingindustry for example: one can very well observe that theacquisition, training and development of bank manpowertypically involve an economic cost and the benefits frombank manpower can be expected to contribute economiceffectiveness. Every banking organization has an operationalright to derive economic benefits. It is a well-known fact thatevery bank rents the services of human capital i.e., bankmanpower for the purpose of economic benefits or servicepotentials, which constitute the basic component of an asset.The manpower working in a bank is quite capable ofrendering current and future services to a bank and theseexpected future services have economic value for the bank.Hence, manpower need not be ‘owned’ in conventional senseby banks to be accounted for as assets. The reasons, therefore,may be pointed out in Flamholtz and Laciy’s vein (1981: 58-59): first, if the need for HRA information is perceived bymanagement, HRA information can be reported at least as anadjunct to the financial accounting statement; secondly,although employees are not ‘owned’ in a conventional senseby banks and they may potentially leave a bank, one can stillaccount for investment in them, their replacement cost andtheir economic value because the probability of gettingservice from them cannot be ruled out; thirdly, a bankingorganization’s decision to account for its employees as assetstallies with the economist’s view point of treating people ashuman capital in explaining economic growth; and fourthly, abank’s manpower maybe brought under control throughexplicit or implicit employment bonds or contracts.

HRA in the Context of External Financial ReportingIn the realm of HRA, a vital question is: is HRA informationreally needed in external financial statement? In regard toincorporation of HRA information in external financialreporting: whilst some authors, such as, Jauch and Skigen(1974:33), Newell (1972:16) and Dittman, Juris, and Revsine(Spring 1976:65) have rejected the rationale of integratingHRA with conventional external financial reporting on thegrounds of inability of the accounting profession to develop ameaningful system of manpower value measurement,inability to determine the period of future benefit, lack of anorganization’s exclusive legal ownership right to humans andinability to amortize asset, some other authors haverecommended the inclusion of HRA information in financialaccounting reports for external users. A number of thinkersincluding Brummet, et al (April 1968:217-24),Flamholtz(1979: 44-61), Sinclair (March 1975: 48-54), andMirvis and Macy (April 1976:153-154), Likert and Pyle (Jan-Feb. 1971:82-83), Lev and Schwartz (Jan: 292-293), andEdward S. Schwan (1976:219-237) believed that HRA couldgive benefits to external users of financial statements. Hence,unexpired human resource costs should necessarily bereported as an asset presumably as a separately identifiedasset in the balance sheet (Schwan, 1976:219). According tothem: “External decision-makers must know the changes inhuman assets in order to evaluate properly assets and income.If the condition of human assets changes during the period,conventional accounting income may be misstated and theasset base distorted” (James A. Hendricks, April 1976: 292).The Committee on Human Resource Accounting of AmericanAccounting Association (1973:169) summarized the aboveposition thus: “External users, particularly investors, couldbenefit from HRA through the provision of information onthe extent to which the human assets of the organization havebeen increased or have diminished during the period”.James A. Hendricks (April 1976:292) again stresses theimportance of HRA for external reporting: “Statement userswill invest more funds in a firm whose financial statementsshow an increasing investment in human asset as opposed to afirm showing a decreasing investment in human assets”.Marc Levine (August 1980: 19-21) seriously disputes theviewpoints that deny human asset recognition. She believesthat strict inflexible definition of asset with particularemphasis on exclusive legal ownership right can only be


Human Resources

detrimental to the cause of greater reporting disclosure. Thatrigidity in the definition of human asset should go and thedefinition of human asset much needs a modification. Sheargues that managerial planning and control process as wellas external reporting becomes erroneous if human resourcefactor is not considered. She asserts that a breakthrough forHRA in the area of external financial reporting is needed.In this respect, the point of view of Marvin Weiss (September1972: 735-741) merits particular attention. He states that theHRA treatment is well within the purview of existingGenerally Accepted Accounting Principles (GAAP). He is ofthe view that ‘to capitalize’ rather than ‘to expense’ the costsof recruiting, training and hiring personnel, which is theessence of HRA, is a more appropriate method of financialreporting than the conventional treatment of expensing suchcosts in the period incurred. He warns that expensing of thosecosts as incurred would not only cause distortion of netincome during the period of training, but would also concealthe cost of employee turnover to the organization, as nobalance (unamortized deferred charge) remains to be writtenoff as a turnover loss when a valuable employee leaves theorganization. He asserts that the balances resulting fromcapitalizing those costs can be amortized as expenses in theperiod(s) when an employee is a productive member of theorganization, and the unamortized balances can be recognizedas losses if the employee leaves the organization. Consideringthe cost of acquisition, training and development, heidentified cost of turnover as a significant loss of assets andrecommends measuring of such loss. He further emphasizesthe need for including HRA information in external financialreporting by stating that: “the capitalization of actual outlaywould be a good start and would certainly contribute to thegeneration of financial statements that provide greaterinformation as to the true worth of the company” (MarvinWeiss, September 1972:741). Rensis Likert and David G. Bowers strongly recommendestimating the change in dollar value of the humanorganization for improving the accuracy of P/L (Profit/Loss)reports (Michigan Business Review, March 1973: 15-24).They are of the opinion that ignoring information in terms ofestimates in dollars regarding human organization has givenrise to widespread concern about inaccurate financial positiondisclosure, poor decisions, poor productivity, poor quality andlack of will to work. They are found to emphasize the need

for disclosure of human organization information in terms ofestimates in dollars in their following comment:

Excellent managers, investing their efforts inbuilding a more productive human organization,frequently go unrecognized and unrewarded. Solong as changes in the dollar value of the potentialfuture productive capability of the humanorganization are ignored, managerialcompensation plans that are linked to currentreports often will motivate behavior contrary to afirm’s true financial well being (Likert andBowers:16).

David Watson’s view (March 1978:42) is, indeed, significantin this respect. According to him, uses of HRA can also beexternal to an organization. Conventional external financialreports integrating HRA can provide adequate informationabout an organization’s employees to the employers. Thisinformation includes present, past (pensioners) andprospective employees. This integrated accounting systemcan provide information to other external users primarily,shareholders who can use the information for evaluatingstewardship by the director of this human asset. Otherexternal users, namely integrated accounting system byknowing a lot about the employees of the organization. Hermanson (see Caplan and Landikich, July 1974:79), animportant proponent and adherent of HRA observed that theincorporation of human resource measurements in financialstatements would result in improved comparability andcompleteness of external reporting; such improvementswould greatly assist management and investors for analysis ofstatements and would thus provide for a more efficientallocation and utilization of resources within the organization. Khandelwal fully concurs with Hermanson and commentsthat accountants do try to fully record and disclose physicalassets but they largely ignore human assets in their bothinternal and external reports. This results in faulty evaluation(July 1979: 11-14).David Fanning’s comment (November 1981: 31-32) whichaccords with Hermanson’s and Khandelwal’s comment isvery relevant and merits particular attention in this context:

Even in its simplest form human resourcesaccounting involves the isolation and identificationof the costs of recruitment, training, development,maintenance and support of the human assets


Human Resources

employed in the organization. Such figures andinformation are not generally available to outsideanalysts and evaluators, but a useful picture of abanking company’s usage of human resources canbe built up from employee-related statistics. Byexamining growth and performance in terms ofproductivity, complementary comparisons can bederived from the banks alongside conventionalfinancial figures.

V.S. Verma’s point of view that agrees with that of DavidFanning also deserves mention:

The current accounting practice leads to notableconsequence of under-assessing or over-assessingthe real value of organizational resources. Theaccountants are understating profits or over-statinglosses by charging expenses of recruitment,training and development of human resources toprofit and loss account of current period. Thispractice leads to the concealment of asset and networth to that extent. It results in the violation of ‘the cardinal principle of true and fair disclosure’ inthe published accounts (Summer 1983:58).

Sayers and Rogow are at one with them and state very clearlythat from accounting standpoint, the investment in humanresources should be shown as an asset on the firm’s balancesheet and periodic increases/decreases in the investmentbalance should be reflected in the income statement (April1988:45).Paperman looks at the issue a little differently. According tohim (Autumn 1976:95 and 97), if HRA information is to beexternally reported, it should be done by using either anarrative special statement called “Statement of Financialcondition” (in the form of a supplementary statement) ordetailed footnote disclosure. Sangeladji (December 1977: 50-51) also suggests supplementary financial statements forhuman resource investments dimension in order to facilitatecomparative analysis of realistic earnings and financialposition of different organizations. In the preceding paragraphs, obviously, many accountingscholars have supported inclusion of HRA information inexternal financial reports this or that way. In their opinion,presumably, external financial statements incorporating HRAinformation may be really useful to the external users offinancial statements. It is believed that from the point of view

of “shareholders” and “investors”, HRA provides aframework of information and an analysis of the ways andmeans by which management may be able to decide whetherto buildup or deplete human assets. HRA data are expected tobe of much use to the external users in different professions:the financial analysts making investment recommendations,the investors deciding between alternative investmentopportunities and the appraisers making business valuationdecisions (Edonds and Rogow, February 1986:15). An intelligent investor can predict the future financialconditions of an organization including rate of capitalappreciation based upon the analysis of the trend of humanassets growth. Likewise, the trade union may also be able tounderstand the management’s keen desire for building uphuman resources in the organization. HRA-incorporatedfinancial statements may focus on a new dimension in theemployer-employee relationship by providing an addedperspective to both “Management” and “Trade Union”.“Government”, the another external user may be able to knowwhether there is any scope for getting more people employedin an organization when it uses HRA. “Government” mayalso be able to see the reasonably accurate picture of earningsand financial position of an organization if it uses HRA.Other external users like “employees” may be motivated toperform their jobs in a better manner since HRA-incorporatedexternal financial reports will disclose their worth and theresults of their performance. Through financial statementsincorporating HRA information, external users may be able toknow whether the “employees” are giving an adequate returncommensurate with the payment made to them and whetherthey over paid or underpaid. As external users of financialstatements, the “investors” are expected to be immenselybenefited. The rate of return on investment (ROI) is animportant factor to be considered in making investmentdecisions. The conventional accounting practice of treating allexpenditures on acquisition, training and development ofhuman resources as “expenses” during the period ofincurrence presents distorted figures of ROI (Katiyar, October1991: 754). From HRA information incorporated in externalfinancial statements, the “investors” may easily compare thetrue performance-results and the real financial position ofdifferent organizations. That may help them direct theirresources to reasonably profitable channels of investment(Katiyar, October 1991:754).


Human Resources

Summing-up and Conclusions To sum up, one may make the following observations:1. Generically, HRA has three basic components: (i)

identification of human resources as assets; (ii)measurement of asset data about human resources and(iii) communication of this information to interestedparties.

2. HRA is an accounting for people, requiring therecognition of human resources as capital, involvingcapitalization of an organization’s cost of recruiting,hiring, training and developing employees. It is also aninformation system designed to provide relevant, timely,quantifiable and verifiable information about manpowerresources to management to make informed judgementand decisions.

3. In spite of conflicting views regarding asset status ofhumans, they (humans) may be given asset status byrelaxing the rigidity of the definition of asset withrespect to “exclusive legal ownership”. Givingrecognition of “asset status to manpower” is probablythe basic philosophy underlying the concept of HRA.While analyzed from a broader point of view, humanscan be recognized as assets. The term ‘assets’ can havedifferent meanings. In this context, the point of view ofEdmonds and Rogow (Feburary 1986: 12-13) may bemuch pertinent:When applied in a particular chain of reasoning, ithas a known and constant meaning that is notbound by tradition, but based upon use. If assetsare considered tangibles or intangibles that possesscertain properties, and if accounting statements areto provide a realistic reflection of usefulness orvalue of these properties, humans can be assets. Ifone property is that an asset should be subject tocontrol by the firm, that control need not beabsolute. For instance, goodwill is currentlyconsidered an asset, but it is subject to many forcesoutside the firm. Thus, assets are something thatpossess utility or value. They are acquired not fortheir own sake, but for what they can contribute toa firm’s cash flow. This definition avoidscontroversies over ownership, control andexchangeability.

This removes the ownership stigma and concentrates on

future benefits. Hence, the basic tenet of HRA that hasbecome prominent is that since income generated by humaninvestment will be largely realized in future years, humansshould be treated as assets. 1. It is further evident from the discussion that

conventional external financial reports integrating HRAcan give a clearer and more realistic picture of anorganization. External users like shareholders, tradeunions, Government and financial analysts can have abetter picture about personnel costs. The problems ofpersonnel turnover and replacement, and excessiverecruitment and development costs have a magnificentimpact on current and future profits. The primary benefitfrom HRA may not accrue to shareholders only on thedecision of capitalizing employee costs but rather whencosts are written off. When amortization exceedsdeferral of current expenditures, the human organizationis dissipated; and this may adversely affect futureearning potential.

2. HRA proponents argue that a firm’s value is understatedwhen financial statements fail to recognize the value ofhuman assets.

3. Assessment of managerial talents is an important factorto analysts at the time of their evaluating anorganization’s merit for investment recommendations. Ifthis is so, why should the quantification of that factor belacking in the balance sheet.

4. The real challenge for the accounting profession is howto measure the value of humans when it thinks to acceptHRA as a part of external financial reports. Human valueis too subjective to measure. But time demands that thepoint of subjectivity in measurement of human resourcevalue may be viewed less seriously. To underscore theneed for relaxing the subjectivity of manpower valuemeasurement, one can gain support from the statementof Edmonds and Rogow (February 1986:14):The accuracy of such human resourcemeasurements has been overly debated to thedetriment of financial statement users who needhuman resource information to make informedinvestment and business decisions. If accuracy werethe main issue, a strong case could be made fordeleting from financial statements depreciation andinventory valuation, which are based on arbitraryhistorical assumptions.


Human Resources

In fine, it may be stated that the literature reviewed in theforegoing paragraphs does not seem to stand in the way ofincorporating HRA information in external financial reports,rather several accounting scientists are found to welcome theidea of integrating HRA with conventional external financialreports. Their traditional belief has changed. They nowbelieve, as is evident from the earlier discussions, that strictinflexible definition of asset with particular emphasis onexclusive legal ownership right can only be detrimental to thecause of greater reporting disclosure. The rigidity in thedefinition of human asset should go and the definition ofhuman asset greatly needs a modification. External financial

reporting becomes faulty in the absence of human resourcefactor. Hence these days they start with the belief that abreakthrough for HRA in respect of external financialreporting is needed. Some of the scholars are also of the view that even if theaccounting world is most uncompromisingly opposed toreporting human resource value in the balance sheet, at least anarrative special statement of HRA in the form of asupplementary statement to conventional annual financialreports or a detailed footnote disclosure may be introducedfor external financial reporting of HRA information. n


Human Resources

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and 115-118American Accounting Association. (1957). “Accounting and Report Standards for Corporate Financial Statements and

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Review, Supplement to Vol. XLIV : 114-124Balasubramanian, S. (1984). “Human Resource Accounting,” The Management Accountant, India (May) : 251-255Caplan, Edwin H. and Stepen Landekich.(1974). Human Resource Accounting: Past, Present and Future. New York: National

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31,(January): 16-23Dahl, H.L. (1979). “Measuring the Human ROI,” Management Review (January), : 44-50Dittman, David A., Hervey A. Juris and Lawrence Revsine. (1976). “On the Existence of Unrecorded Human Assets: An

Economic Perspective,”Journal of Accounting Research (Spring):49-65Ebersberger, Sue A. (1981). “Human Resource Accounting: Can We Afford It?” Training and Development Journal (August):

37-40Edmonds, Charles P. and Robert Rogow. (1986). “Should Human Resources be Reflected on the Balance Sheet?,” Financial

Executives (February): 13-15Flamholtz, Eric G. (1974). “Human Resource Accounting: A Review of Theory and Research,” Journal of Management Studies

(February): 44-61Flamholtz, Eric G. (1979). Human resource Accounting: State of the Art and Future Prospects. Los Angeles: Institute of

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Horizons (June): 73-79Grojer, Jan-Erik/UIf johanson.(1991). Human Resource Costing and Accounting, Stockholm, Sweden: Joint Industrial SafetyCouncil.Hendricks, James, A. (1976). “The Impact of Human Resource Accounting Information on Stock Investment decisions: An

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Islam, Aminul. (1985). “Human Asset Accounting –A Myth or Reality?” The Cost and Management, Bangladesh (September-October): 5-7

Jauch, Roger and Michael skigen. (1974). “Human Resource Accounting: A Critical Evaluation,” Management Accounting(May): 33-36

Katiyar, Rakesh Chandra. (1991). “Human Resource Accounting-Professional Stance in India,” The Management Accountant.India (October): 752-755

Khandelwal, N.M. (1979). “The Rationale of Human Resource Accounting,” The Chartered Accountant, India (July): 11-14Levine, Mare. (1980). “Perspectives in Accounting for the Human Resource,” The Chartered Accountant in Australia

(August): 19-22Likert, Rensis and William C. Pyle. (1971). “Human Resource Accounting: A Human Organizational Measurement Approach,”

Financial Analysts Journal (January/February): 75-84Likert, Rensis and D.G. Bowers. (1973). “Improving the accountancy of P/L reports by estimating the change in dollar value of

the human organization,” Michigan Business Review (March): 15-25McGowen, Peter. (1968). “Human Asset Accounting,” Management Decisions (Summer): 86-89McRae, T. W. (1975). “Human Resource Accounts: Nature and Prospects,” The Accounting Forum (December): 1-8Meyers, Bruce G. and Hugh M. Shane. (1984). “Human Resource Accounting for Managerial Decisions: A Capital Budgeting

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Human Resources

HR Practices in Industrial Enterprises in Bangladesh: AnApproach to Factor Analysis

Dr. Mir Mohammed Nurul AbsarBalasundaram Nimalathasan and

Ratna Dutta ACA

Abstract The present study attempted to rank Human Resource (HR)practices with respect to their importance in the context ofindustrial enterprises of Bangladesh through using‘Exploratory Factor Analysis’ (EFA). The results show thatfive factors extracted from the analysis explain 83.667% ofthe total variance. These five factors such as ‘extensivetraining’, ‘selection’, ‘management attitude’, ‘performanceappraisal’ and ‘pay survey’ have been ranked as first,second, third, fourth, and fifth respectively with respect totheir importance. Outcomes of the study would benefit theacademicians, researchers, policy-makers, and practitionersof Bangladesh and other similar countries. Keywords: HR Practices; Industrial Enterprises, ExploratoryFactor Analysis (EFA)1. Introduction Human resource management (HRM) refers to the policiesand practices involved in carrying out the ‘Human Resource’aspects of a management position including human resourceplanning, job analysis, recruitment, selection, orientation,compensation, performance appraisal, training anddevelopment, and labour relations (Dessler, 2007, p. 4). HRMis composed of the policies, practices, and systems thatinfluence employees’ behaviour, attitude, and performance(Noe, Hollenbeck, Gerhart, and Wright, 2007, p. 5). There arefour top models of HRM such as the Fombrun, Tichy, andDevana Model of HRM, the Harvard Model of HRM, theGuest Model of HRM, and the Warwick Model of HRM(Bratton and Gold, 1999, pp. 17-24). Out of these models,Guest Model of HRM is considered to be much better thanother models (Aswathappa, 2008, p.19). Thus, the present

study selected the HR practices such as HR planning,recruitment and selection, training and development,performance appraisal, compensation, and industrial relationswhich were incorporated by the Guest Model.2. ObjectivesThe following two objectives were taken for the study:To rank the HR practices of the industrial enterprises inBangladesh with respect to their importance. To offer some policy implications to enhance the HRpractices of the industrial enterprises in Bangladesh. 3. Literature Review HR practices have been researched form various perspectivesin Bangladesh. Taher (1992) conducted a case study on theoverall HR practices of Khulna Hard Board Mills Ltd. ofBangladesh. He discussed about the organizational structure,recruitment, selection, training and development,compensation, labor relations, and safety and health. Theresearcher unearthed different problems related to personnelmanagement practices of the mill such as conflicts inpersonnel department, disproportionate span of supervision,inappropriate grade, high rate of absenteeism, antagonisticfeeling of local workers, inadequate training programs, lackof skill audit, nepotism and favoritism in promotion andselection of employees, poor industrial relations, inadequatecompensation, and poor safety and health services. Moyeenand Huq (2001) studied HRM practices of 92 medium andlarge business enterprises (public and private sector) locatedin Dhaka, Bangladesh. They found that only 62% of surveyedorganizations had an HR/IR department. The highest (about96%) number of organizations had training programs. 91%of organizations had performance appraisal system and

The authors are Dr. Mir Mohammed Nurul Absar, Assistant Professor, East Delta University, Agrabad, Chittagong, BalasundaramNimalathasan, Lecturer, Department of Commerce, University of Jaffna, Sri Lanka and Ratna Dutta ACA, Director-Finance andAccounts, Siam’s Superior Ltd, Export Processing Zone, Chittagong.

similar percent of organizations had a system of rewardingthe good employees. The least prevalent practice among thesurveyed organizations was employee pension plan. Theresearchers tested two hypotheses and inferred that unionstatus (presence of unions) was associated with some HRMpractices and firms’ size was found as an important predictorof some of the HRM practices. They also unearthed thatHRM was being practiced, either formally or informally, to agreater or lesser extent, in business enterprises regardless ofthe size. Nonetheless, the study did not include some of themajor HRM practices such as HR planning, job analysis,recruitment, selection, and compensation. A research study(Mamun & Islam, 2001) examined the HRM practices of theready made garments (RMGs) enterprises. The studyemphasized on improving productivity of garments workersthrough proper HRM practices to face challenges ofglobalization. They identified that wage rate and laborproductivity of workers in Bangladesh were very low incomparison to competing nations. Furthermore, theydiscovered that the reasons for the low productivity oflaborers were unsystematic recruitment and selection ofworkers, unavailability of training facilities, inadequatefinancial facilities, and low motivation level of workers. HRM practices of ten local private manufacturing enterpriseslisted under Dhaka Stock Exchange (DSE) were examined byAkhter (2002). She covered different aspects of HRMpractices of the surveyed manufacturing enterprises such asjob description, HR planning, recruitment and selection,orientation, training, promotion, performance appraisal,transfer, salary and wage administration, incentives, andfringe benefits. She also measured correlation betweenemployees’ opinions regarding HRM practices in theirenterprises and their age, education, and experience. Islam(2003) in a study on the HRM practices of small businessesof Bangladesh found that small businesses did not offerreasonable salaries and benefits, training and developmentopportunities. The author mentioned that due to outdated HRpractices, the productivity and motivation level of theemployees of small businesses of Bangladesh were very low.Haque and Prince (2003) assessed the HR practices such astraining, promotion policy, performance appraisal method,and transfer policies of some private manufacturing industriesbased in Chittagong. They found that the surveyed companiesimparted on-the-job training, vestibule training,

apprenticeship training, and class room training to employees.They also found that the surveyed companies filled upvacancies through internal movement. The companies hadformal performance appraisal system. Again, the companieswere found to have no standing policy regarding transfer. Anin-depth study (Mahmood, 2004) assessed the institutionalcontext of HR practices in Bangladesh. The author mentionedthat research on HRM did not receive its due attention inBangladesh. The researcher observed that other thanorganizational contingencies, the institutional context such asnational education and training system, national industrialrelations system, regulatory frameworks, and overall societalcontext had significant influence on the development of HRpractices in Bangladesh. Hossain, Khan, and Yasmin (2004) analyzed the nature ofvoluntary disclosures about human resource in the annualreports of 40 Bangladeshi companies. They found thatcontemporary Bangladeshi companies, though not mandatory,were willingly giving various information regarding theirhuman resources in the annual reports. Akand (2006), in acase study, investigated the personnel management practicesof Janata Bank. Ernst and Young, and Metropolitan Chamberof Commerce and Industry (2007) conducted a survey on HRpractices of more than 50 organizations selected fromindustries (mainly from the private sector) such as Pharmaand Healthcare, FMCG, IT, Telecom, Manufacturing,Finance, Non-Government Organizations(NGOs),Textile/Garments, and Conglomerates. They thoroughlyexamined talent acquisition, performance management,people development, compensation and benefits, HR strategyand processes, organizational culture, and HR practices forWorkmen, staff and other non-managerial employees of thesurveyed organization. Uddin, Habib, and Hassan (2007)depicted a comparative scenario of HR practices with respectto the public and the private sector companies of Bangladesh.The study encompassed the HR practices of Wartsila, one ofthe private sector power generation companies, andBangladesh Power Development Board (BPBD), the publicsector power generation company. They examinedrecruitment, selection, training, performance appraisal, andcompensation practices of both the firms. The authorsconcluded that the overall HR practices of Wartsila verymuch satisfactory. In contrast, the HRM practices of BPDBwere quite inefficient. Huda, Karim, and Ahmed (2007) made


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a study on the HR practices of 20 NGOs of Bangladesh. Itwas identified from the study that the HR challenges faced bythe NGOs were shortage of qualified candidates,insufficiency of qualified female candidate, poor academicbackground of applicants in the suburban and rural areas, andthe lack of training infrastructure and training need analysis.The first three challenges were related to recruitment. The above literature survey reveals that like other developingcountries, HR practices as an area of research have notreceived proper attention in Bangladesh. Though, both reviewtype and empirical type of studies were carried out, empiricalstudies primarily used descriptive statistics such as mean,percentage. Only few studies used inferential statistics. So farknowledge goes, no study on HR practices in Bangladeshused sophisticated statistical model such as EFA. This studyis, therefore, conducted to fill up the existing research gap. 4. Research MethodologyResearch methodologies of the present study are outlinedbelow. 4.1 SampleA sampling frame of 91 industrial enterprises was preparedon the basis of listed industrial enterprises under ChittagongStock Exchange (Chittagong Stock Exchange, Annual Report,2007). The structured questionnaire was sent to the HRmanagers of all the 91 industrial enterprises. 4.2 Data Collection and Questionnaire Development The study was complied with the help of primary data andsecondary data. Questionnaire survey method was used togather primary data in the present study. A 31-item Likerttype questionnaire (where1=strongly disagree to 5 = stronglyagree) was developed through extensive literature review toidentify the HR practices of industrial enterprises inBangladesh. The questionnaire covered all the major HRpractices such as HR planning, recruitment and selection,training and development, performance appraisal,compensation, and industrial relations. As HR managers arethe most reliable persons to provide data related to HRpractices (Huselid & Becker, 1996), the structuredquestionnaire was sent to the HR managers of the surveyedindustrial enterprises. Moreover; the desk study coveredvarious published and unpublished materials on the subject.Finally, 34 useable questionnaires were obtained for thestudy.

4.3 Reliability and Validity of the scaleCronbach’s alpha is most widely used method. It may bementioned that its value varies from 0 to 1, but satisfactoryvalue is required to be more than 0.6 for the scale to bereliable (Malhotra, 2002; Cronbach, 1951). In the presentstudy, we, therefore, used Cronbach’s alpha as a measure ofreliability of the scale.

Table 1: Reliability value of the ScaleScale No. of Items Cronbach’s Alpha (·)Overall HR practices 31 .911Source: Filed StudyFrom the table-1, it is seen that reliability value was estimatedto be · =.911, if we compare reliability value of the scaleused in the present study with the standard value alpha of 0.6advocated by Cronbach (1951), Nunnally and Bernstein(1994), and Bagozzi and Yi’s (1988); it is observed that thescale of the present study was highly reliable for dataanalysis. Validation procedures involved initial consultationof the questionnaires. The experts also judged the face andcontent validity of the questionnaires as adequate. Hence,researchers satisfied reliability and validity of the scale.

4.4 AnalysisTo analyse the data, this study used only inferential statistics(EFA). All statistical calculations were carried out by SPSSversion 13.0.5. Research Findings An exploratory factor analysis with an orthogonal varimaxrotation and a Kaizer- Guttman criterion of eigen valuegreater than 1.00 was conducted for the 31-item of HRpractices. For 31-item of HR practices, five components (orfactors) with eigen value greater than 1.00 were extractedwith the total variance 83.677%. However, the generalcriterion of eigen value greater than 1.00 may misjudge themost appropriate number of factors (Gorsuch, 1983).Tofacilitate easy interpretation, these factors were then rotatedusing the varimax criterion for orthogonal rotation. Onlystatements or items with factor loadings of 0.50 (Pallant,2005) and above in the rotated factor matrix was consideredas significant in interpreting the factors. Table-2 shows thefactor matrix indicating the factor loadings and communalityestimates (h2) of every variable on these five factors.


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Human ResourcesTable 2: Scale Items, Component loading and Communality Estimates for five- Factors of HR Practices

Item Factor loadings h2F1 F2 F3 F4 F5

COM4 .925 .882COM2 .923 .938COM1 .918 .931COM3 .916 .946 HRP5 .839 .840RNS3 883 .861HRP3 .764 .906HRP4 .754

.739PA3 .713 .831PA2 708 .517 .869COM5 .688 . 574 .835RNS8 .608 .763RNS2 -.531 .794PA1 .975 .955RNS1 .956 .920HRP1 .937 .898TND1 .884 .781RNS4 .782 .853RNS6 .733 .628IR1 .772 .871IR4 .754 .657IR3 .704 .753 TND4 .565 .591 .727IR2 .548 .561 .684TND2 .878 .936HRP2 .812 .849TND3 .745 .867TND5 .625 .905RNI5 .885 .908 IR5 .706 .825RNS6 .659 .783Eigen value 13.414 5.697 3.302 2.140 1.383 Percent of Variance 31.477 18.209 13.825 10.575 9.581 Cumulative Percentage 31.477 49.686 63.511 74.086 83.667 Source: Field Study h2 = Communality Estimates

Table-2 illustrates the factor matrix indicating the factorloadings and communality estimates (h2) of every variable onthese five factors. Factor-1(F1) to Factor-2(F2) comprised ofthirteen; six; five; four and three items respectively (Fordetails please see appendix table-1). The practice gettinghighest loading becomes the title factor e.g. pay survey -titleof practices of factor 1 and the like.Factor1: PAY SURVEY-This practice was represented bythirteen practices with factor loadings ranging from .925 to -.531. They were pay survey; competence of the employee;salary & benefits are competitive, Human resource planningchange with business; job analysis guides recruitment; humanresource information system; succession planning;performance appraisal effective; performance feedback; non-financial benefits; psychological attributes, and large numberof applicants for vacancy. Performance feedback, and non-financial benefits loaded fairly high on Factor 3 as well;because of its higher loading and greater relevance it is alsoincluded in this group [Hema, W., Anura, D.Z., Tilak, F. &Basil, P, (2000)]. This practice accounted for 31.477% of therated variance. Factor2: PERFORMANCE APPRAISAL-Six variableswere included in this practice. They were formal performanceappraisal; recruitment policy; formal human resourcepolicies; orientation programme; rigorious selection, and lineand HR - participate in selection. Their factor loadingsranged from .975 to .733. The factor explained 18.209%.Factor3: MANAGEMENT ATTITUDE-This practicecomprises five variables representing management attitude;

collective bargaining; trade union free from outsiders; furthertraining and development, and labour management relation.Factor loadings of these variables ranged from .759 to .619.Further training and development and labour managementrelation loaded fairly high on Factor 1 as well; because of itshigher loading and greater relevance it is also included in thisgroup [Hema, et al. (2000)]. A variance of 13.825% wasexplained by this factor.Factor 4: EXTENSIVE TRAINING-Four variables withloadings ranging from .878 to .625, which included extensivetraining; manpower requirement data; training need analysisand budget for training. This practice explained 10.575% ofthe rated variance. Training need analysis loaded fairly highon Factor 1 as well; because of its higher loading and greaterrelevance it is also included in this group [Hema, et al.(2000)].Factor 5: SELECTION- This practice encompasses threevariables representing selection is fair; management acceptssuggestions; and spend considerable time. Factor loadings ofthese variables ranged from .885 to .659. A variance of9.581% was explained by this factor. Spend considerable timeloaded fairly high on Factor 2 as well; because of its higherloading and greater relevance it is also included in this group[Hema, et al. (2000)].Ranking of the above practices in order of their importancealong with factor score is shown in Table 3. The importanceof these practices as perceived by the respondents has beenranked on the basis of factor score.


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Key HR practices Factor Score1 RankFactor 1 : PAY SURVEY .107 5Factor 2 : PERFORMANCE APPRAISAL .142 4Factor 3 : MANAGEMENT ATTITUDE .144 3Factor 4: EXTENSIVE TRAINING .205 1Factor 5: SELECTION .193 2

Table 3: Ranking of HR practices according to their importance

Source: Field StudyAs depicted in table 3, the HR Practices: ‘EXTENSIVE TRAINING’; ‘SELECTION’; ‘MANAGMENT ATTITUDE’;‘PERFORMANCE APPRAISAL’ and ‘PAY SURVEY’ have been ranked as first, second, third, fourth, and fifth respectivelywith respect to their importance.

1 Factor score = Composite scores estimated for each respondents on the derived factors. The Factor scores for the ith factormay be estimated as follows: Fi = Wi1X1+Wi2 X2+Wi3X3+———-+WikXk; WhereFi= estimate of ith factor; Wi = Weightor factor score coefficient; K = number of variables.*Factor Score = Factor loadings X Component Score Coefficient

6. Policy Implications The following policy implications may be useful for overallimprovement of HR practices in the industrial enterprises ofBangladesh and other similar countries:• Industrial enterprises should offer extensive training and

development programs to the employees• Industrial enterprises should select right persons for the

right jobs. • Management of industrial enterprises should have positive

attitudes towards the trade unions.• Industrial enterprises should have formal employee

performance appraisal system.• Industrial enterprises should conduct pay survey regularly

to offer competitive compensation to the employees. n


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REFERENCES: Akhter, N. (2002). Human resource management in Bangladesh: A study of some local private manufacturing industries. Unpublished doctoraldissertation, University of Dhaka, Bangladesh.Akand, J. F. (2006). Personnel management in banks: A case study of personnel management of Janata Bank. Unpublished MPhil thesis,University of Dhaka, Bangladesh.Aswathappa, K.(2008). Human resource management: Text and cases. Delhi: Tata McGraw-Hill Publishing Company Limited.Bagozzi Richard P., & Yi Y., (1988). On the evaluation of structural equation models. Journal of the Academy of Marketing Science, 16(1),74-95.Bratton, J., & Gold, J. (1999). Human resource management: Theory and practice. London: Macmillan Press Ltd.Chittagong Stock Exchange (CSE) (2007). Annual Report. Chittagong, Bangladesh: Cronbach,L.J.,(1951). Coefficient alpha and the internal structure of tests, Psychometrika, 6(3),297-334.Dessler, G.(2007). Human resource management. New Delhi: Prentice Hall of India Private Limited.Ernst & Young, & Metropolitan Chamber of Commerce and Industry (2007). HR practices survey - Bangladesh. Dhaka: Author.Gorsuch, R.L. (1983). Factor Analysis, Hillsdale, New Jersey: Erlbaum. Haque, A. K. M. T., & Prince, S. A. (2003). Some aspects of human resource management in Bangladesh: A study on some privatemanufacturing industries. The Chittagong University Journal of Business Administration, 18, 81-96.Hair,J.F., Anderson, R.E. Jr., Tatham, R.L. & Black, W.C.(1995). Multivariate Data Analysis, 4th ed. New York: Macmillan. Hema, W., Anura, D.Z., Tilak, F. & Basil, P. (2000). Factors contributing to the success of manufacturing enterprises in Sri Lanka: An empiricalinvestigation. Sri Lankan Journal of Management, 5(1&2), 110-130.Hossain, D. M., Khan, A. R., & Yasmin, I. (2004). The nature of voluntary disclosures on human resource in the annual reports of Bangladeshicompanies. Journal of Business Studies, XXV(1), 221-231.Huda, K. N., Karim, M. R., & Ahmed, F. (2007). HRM practices & challenges of non-government development organizations: An empiricalstudy on Bangladesh. Journal of Management, 9(1), 35-49.Huselid, M. A., & Becker, B. E. (1996). Methodological issues in cross-sectional and panel estimates of the HR-firm performance link.Industrial Relations, 35, 400-422.Huselid, M. A.(1995). The Impact of human resource management practices on turnover, productivity, and corporate financial performance. TheAcademy of Management Journal, 38(3),635-672.. Islam, M. S. (2003). HRM Practices in the small business in Bangladesh: Some guidelines to follow. Dhaka Commerce College Journal, 1(2),113-123.Pallant,J.(2005). SPSS Survival Manual, Sydney: Allen & Unwin. Malhotra, N. K. (2002). Marketing Research: An Applied Orientation (3rd ed.). New Delhi, India: Pearson Education Asia.Mamun, M. A., & Islam, M. A. (2001). Managing women work force: A case study of ready made garments (RMGs) in Bangladesh. TheChittagong University Journal of Commerce, 16, 81-90.Mahmood, M. H. (2004). The institutional context of human resource management: Case studies of multinational subsidiaries in Bangladesh.Unpublished doctoral dissertation, University of Manchester, UK.Moyeen, A. F. M. A., & Huq, A. (2001). Human resource management practices in business enterprises in Bangladesh. Journal of BusinessStudies, xxii (2), 263-270.Nunnally, J.C., Bernstein I.H. Psychometric Theory, New York: McGraw-Hill, 1994.Noe, R. A., Hollenbeck, J. R., Gerhart, B., Wright, P. M.(2007). Human resource management: Gaining a competitive advantage. USA:McGraw-Hill.Taher, A. (1992). Personnel management practices in Bangladesh (A case study of Khulna Hard Board Mills Ltd.). Management Development,21(1), 69-82.Uddin, M. A., Habib, M. A., & Hassan, M. R. (2007). Human resource management practices in power generation organizations of Bangladesh:A comparative study of public and private Sector. Journal of Business Studies, III (2), 129-144.


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Appendix-1Table-1: Code Sheet

Sl# Code Item01 HRP1 Formal HR policies are maintained in our organization. 02 HRP2 Our organization maintains manpower requirement data for next one to three years.03 HRP3 Our organization maintains computerized human resource information system (HRIS).04 HRP4 Our organization maintains succession planning.05 HRP5 Our HR policies change with our business strategies.06 RNS1 Our organization maintains formal recruitment policies.07 RNS2 Our organization encourages large number of applicants for any vacant position.08 RNS3 Job analysis guides the recruitment process of our organization.09 RNS4 Our organization follows rigorous selection process.10 RNS5 I think, in general, our organization’s selection process is fair.11 RNS6 In our organization line managers and HR manager participate in selection.12 RNS7 We spend considerable time in our employee selection process to find out the right person.13 RNS8 We focus considerably on applicants’ psychological attributes in the selection process. 14 TND1 Our organization offers formal orientation program to all new employees. 15 TND2 Our organization conducts extensive training and development programs for its employees in all aspects.16 TND3 In our organization, training needs analysis (TNA) is conducted systematically.17 TND4 Further training and education are encouraged in our organization.18 TND5 Annually, our organization maintains adequate budget for training and development of the employees.19 PA1 Formal performance appraisal system is used in our organization.20 PA2 Employees are provided performance based feedback and counselling in our organization.21 PA3 I find our organization’s performance appraisal system highly effective.22 COM1 Our organization offers competitive salaries and benefits to the employees.23 COM2 In our organization, salary and benefits are offered on the basis of competencies or abilities of the employees.24 COM3 The compensation of employees is directly linked to their performance in our organization.25 COM4 Our organization conducts pay survey to review the salaries and benefits of the employees regularly.26 COM5 Our organization emphasizes on non-financial benefits like interesting job, recognition, empowerment and so

forth as tools of employee motivation 27 IR1 Management has positive attitudes towards trade unions in our organization. 28 IR2 Labour-management relationship is very cooperative and friendly in our organization.29 IR3 Workers are free from outsiders’ influence in our organization.30 IR4 Collective bargaining process is encouraged in our organization.31 IR5 Management accepts workers’ suggestions to improve the working environment in our organization.

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Ohlson, J. A. 1991. Earnings, book values, and dividends in security

valuation. Working paper. Columbia University.

Footnotes: Footnotes are not to be used for documentation. Textual

footnotes should be used only for extensions and useful excursions of

information that if included in the body of the text might disrupt its

continuity. Footnotes should be consecutively numbered throughout the

manuscript with superscript Arabic numerals. Footnote text should be

double-spaced and placed at the end of the article.

Policy on Reproduction

An objective of The Bangladesh Accountant is to promote the wide

dissemination of the results of systematic scholarly inquires into the broad

field of accounting.

Permission is hereby granted to reproduce any of the contents of The

Bangladesh Accountant for use in courses of instruction, as long as the

source and ICAB copyright are indicated in any such reproductions.

Written application must be made to the Editor for permission to

reproduce any of the contents of The Bangladesh Accountant for use in

other than courses of instruction—e.g., inclusion in books of readings or

in any other publications intended for general distribution. In

consideration for the grant of permission by The Bangladesh Accountant

in such instances, the applicant must notify the author(s) in writing of the

intended use to be made of each reproduction. Normally, The Bangladesh

Accountant will not assess a charge for the waiver of copyright.

Except where otherwise noted in articles, the copyright interest has been

transferred to the ICAB. Where the authro(s) has (have) not transferred the

copyright to the Association, applicants must seek permission to

reproduce (for all purposes) directly from the author(s).

Policy on Data Availability

The following policy has been adopted by the Executive Committee in its

April 1989 meeting. “An objective of (The Bangladesh Accountant) is to

provide the widest possible dissemination of knowledge based on

systematic scholarly inquiries into accounting as a field of professional,

research and educational activity. As part of this process, authors are

encouraged to make their data available for use by others in extending or

replicating results reported in their articles. Authors of articles which

report data dependent results should footnote the status of data

availability and, when pertinent, this should be accompanied by

information on how the data may be obtained.” n

The Bangladesh Accountant/April-June 2010 87

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