VZCZCXRO4570
RR RUEHCI
DE RUEHKA #0957/01 1650000
ZNR UUUUU ZZH
R 140000Z JUN 07
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC 4289
INFO RUEHLM/AMEMBASSY COLOMBO 7964
RUEHIL/AMEMBASSY ISLAMABAD 1693
RUEHKT/AMEMBASSY KATHMANDU 9131
RUEHNE/AMEMBASSY NEW DELHI 9954
RUEHCI/AMCONSUL KOLKATA 0789

UNCLAS SECTION 01 OF 02 DHAKA 000957 
 
SIPDIS 
 
SIPDIS 
 
EB/IFD/OMA; EB/IFD/ODA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV BG
SUBJECT: GOVERNMENT PROPOSES DEVELOPMENT FOCUSED BUDGET FOR 
FY 08 
 
¶1.    Summary:  The Bangladesh government released a draft 
fiscal year 2008 (starting July 1, 2007) budget on June 7. 
In his budget message, Finance Advisor Mirza Islam identified 
seven key development and economic growth challenges and the 
government's plan for meeting those challenges.  Agriculture, 
education, health, power and transportation infrastructure, 
and information and communications technology were key 
beneficiaries.  The budget proposes a more focused approach 
to the annual development program, with fewer projects 
implemented more quickly.  Adjustments to tax policy are 
intended to reduce dependence on import tariffs while 
increasing the share of revenue from income and VAT taxes. 
In an important structural change, the budget will finance 
the outstanding debt of several state-owned enterprises, in 
particular over $1 billion of debt owed by the Bangladesh 
Petroleum Corporation to the government owned banks. 
Conspicuously absent was discussion of the defense budget, 
which received modest increases over FY 07 expenditures. 
Business and civil society reaction was generally positive. 
The final budget will be issued by ordinance following a 
brief public comment period. End Summary. 
 
¶2.    Budget Facts:  The government is proposing a $12.44 
billion budget for FY08, 30% larger than the revised FY 07 
(ending June 30) budget, funded by a near doubling of both 
domestic borrowing ($2.75 billion) and foreign assistance 
($1.7 billion).  Revenues are projected to rise 15.8 % 
through broadening of the tax base, enhanced enforcement, 
introduction of an improved self-assessment system and 
limitations on the discretionary authority of tax 
administrators.  While more realistic than the previous 
budget's 20% projected revenue growth, the FY 08 projections 
are still 4.5 percentage points higher than the 11.3% growth 
achieved in the first eight months of FY 07.  The projected 
deficit, including the allowance for the BPC debt, is $4.26 
billion, or 5.6% of GDP.  The budget assumes 7% real GDP 
growth, slightly higher than the 6.8% achieved in FY 06. 
(Political turmoil is expected to limit growth for FY 07 to 
between 6% and 6.3%.) 
 
¶3.    Budget Reflects Interim Government's Priorities: 
Elections are a key priority.  The budget provides a 350% 
increase in funding for the Election Commission from $17.1 
million to $76.6 million, over 50% more than the Commission 
requested.  Funding for the Annual Development Program is up 
slightly over the original FY07 budget but reflects a 23% 
increase over the FY 07 revised figure (based on actual 
expenditures).  Historically, actual ADP expenditures are 
significantly lower than the budget targets, which help 
offset revenue shortfalls.  This year, the government 
proposes to concentrate on fewer ADP projects and introduce 
administrative changes to ensure earlier and more complete 
implementation.  Power and infrastructure (34.4%) and social 
safety net (34.3%) receive the lion's share of the ADP 
budget.  The government promises to eliminate power shortages 
by 2010 with nearly 2300 MW of new power generation and 
increased attention to maintenance and operational efficiency 
of the installed base.  Likewise, the budget includes 
significant allocations to both add new road and rail 
infrastructure and address long-neglected maintenance of 
existing roads and rail lines. 
 
¶4.    Social Priorities Also Addressed:  Education and 
religion received the highest share (16.3%) of the total ADP 
allocation, with funding for 15,000 additional primary 
teachers, expansion of stipends for poor female and (for the 
first time) male students, additional classrooms, and pilot 
jobs-training programs.  The budget introduces performance 
evaluation for non-government schools receiving government 
teacher salary support and introduces a competitive grant 
program to promote international standard research at the 
university level. The budget also increases spending on 
social welfare, women and youth development, including a 
pilot stipend program for poor lactating mothers. 
 
¶5.    Tackling Inflation:  Mirza boldly predicted inflation 
would moderate to 6.5%.  The budget contains modest 
provisions to reduce the price of essentials, including 
elimination of tariffs on edible oils, wheat and other 
essential consumables, subsidies to farmers to offset rising 
costs for fertilizer and diesel fuel, increased government 
imports for market stabilization and to support the 
vulnerable group feeding program, and development of 
additional wholesale markets to increase efficiency in the 
distribution chain.  Mirza stressed, however, that many of 
the factors contributing to higher inflation were beyond the 
 
DHAKA 00000957  002 OF 002 
 
 
scope of the budget. 
 
¶6.    Down Payment on Structural Imbalances:  Responding to 
longstanding IMF recommendations, the budget proposes to 
gradually eliminate below-market energy pricing by the 
state-owned energy companies and transfer their liabilities 
to the national budget.  The budget includes various income 
support mechanisms to cushion the impact of rising energy 
prices on the poor. The most significant impact is the 
recognition of the $1.08 billion debt of the Bangladesh 
Petroleum Corporation to the national commercial banks 
(NCBs).  The financing of this debt is the principal cause of 
the projected increase in domestic financing.  The immediate 
monetary impact should be minimal (this is the recognition of 
a pre-existing debt, not new spending) and is a positive 
change in the government's fiscal transparency.  Addressing 
the BPC debt to the NCBs should also facilitate ongoing IMF 
supported efforts to privatize the NCBs.  The budget also 
proposes public trading of the shares of the state-owned 
enterprises both to bolster the capitalizations of the 
country's two stock exchanges and to introduce greater 
accountability into the organizations.  The budget addresses 
regional development imbalances by directing a larger share 
of development funds to the three less developed western 
divisions. 
 
¶7.    Business Gets Few Perks:  The budget was largely 
neutral for business, with most of the impact coming from tax 
changes.  The top tariff slab remained 25% but the other two 
slabs increased from 5% to 10% and from 12% to 15%.  The 4% 
infrastructure surcharge was eliminated, in many cases 
offsetting the tariff increases.  Some business deductions 
were liberalized while withholding provisions were 
strengthened.  Taxes based on gross revenues were halved. 
The list of goods and services subject to VAT was expanded 
while procedures for calculating and assessing VAT were 
streamlined.  Funding to support development of the 
information and communications technology sector increased 
21%.  Funding for SMEs, worker training and support in the 
ready-made garment sector, agricultural research, and other 
business incentive funds saw modest increases.  For most 
businesses, the real impact lies elsewhere in the budget's 
emphasis on infrastructure and human capital development. 
 
¶8.    Military Slice Modest:  The FY 08 budget includes $768 
million (5.6%) for defense spending, up 11.5% from the 
original FY07 budget but a mere $11 million (1.4%) above 
projected FY 07 expenditures.  The government did not provide 
a breakdown of military spending. 
 
¶9.    Public Reaction Positive:  Business leaders generally 
welcomed the budget proposal, while cautioning that 
implementation would be challenging.  Although winners and 
losers quibbled over specific tax changes, no one challenged 
the overall approach.  Civil society analysts also reacted 
favorably to the budget while expressing similar concerns 
over implementation. 
 
¶10.   Comment:  The FY 08 budget is a serious attempt to 
address longstanding economic and social development needs. 
It is reasonable to think the government will achieve its 
goal of earlier and more complete implementation of its 
planned annual development program expenditures, as these are 
largely within the government's control.  The risk is that 
the corresponding revenue and donor assistance growth needed 
to fund those expenditures, over which the government has 
significantly less control, will as in the past fall well 
short of budget projections.  The additional budget shortfall 
could significantly expand an already large budget deficit, 
undermining macroeconomic stability and the government's 
efforts to combat inflation while fostering stable economic 
growth.  End Comment. 
BUTENIS