This Selected Issues paper on Bangladesh underlies the export performance of readymade garment industry and inflation dynamics. Bangladesh has demonstrated that it is highly competitive in the world’s major garment markets. Inflation inertia, monetary factors, and exchange rate fluctuations are the main determinants of inflation in Bangladesh. Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.

Abstract

This Selected Issues paper on Bangladesh underlies the export performance of readymade garment industry and inflation dynamics. Bangladesh has demonstrated that it is highly competitive in the world’s major garment markets. Inflation inertia, monetary factors, and exchange rate fluctuations are the main determinants of inflation in Bangladesh. Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.

V. Assessing Performance of Nonfinancial Public Corporations 1

A. Introduction

1. In Bangladesh, nonfinancial public corporations (NFPCs) engage in an extensive range of commercial and quasi-fiscal activities. Currently, there are 47 nonfinancial corporations operating in seven broad industrial sectors: manufacturing, utility, energy, transportation, communication, commerce, agriculture, fisheries, construction, and services (Table 1).

Table 1.

Bangladesh: Nonfinancial Public Corporations

(as of July 2006)

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Source: Ministory of Finance, Monitoring Cell.

2. Most of these enterprises operate under government regulations and are subject to interventions in pricing and other areas. In turn, some of these enterprises receive significant support from the government budget, thus directly affecting the government’s fiscal position. Even when there is no direct budgetary support, foregone revenues due to the underpricing of products and services and other noncommercial operations based on government’s administrative decisions are not recorded in the budget. Therefore, appropriate fiscal management would require monitoring of the NFPCs’ operations and transparent treatment of all quasi-fiscal activities.

3. This paper aims to assess performance of NFPCs by using various financial performance indicators. The paper also discusses the need for improved monitoring and reporting of NFPC operations to assess the combined financial position of the nonfinancial public sector (i.e., the central government and NFPCs).

B. A Framework for Performance Assessment

Existing approach

4. Annual financial data are available for 47 nonfinancial public corporations. The Ministry of Finance’s monitoring cell collects the data including both flow and stock variables and estimates expenditure requirements for these corporations as part of the budget formulation process: these estimates provide the basis for budget allocations to NFPCs through subsidy, loans, and equity with the bulk of the allocation being made through the ADP. The data are annual frequency and updated several times a year. The focus of monitoring has been on profitability (net profit after tax) and the cash flows of each corporation. Detailed analyses of various stock indicators have not yet been conducted.

5. Several limitations constrain the application of the statistical framework described in the Government Finance Statistics Manual 2001. The limitations of the available financial information include: data based on cash and accrual accounting are mixed; depreciation and other noncash items (including foreign exchange gains and losses) are not separated; stock and flow variables are not treated consistently; and the valuation of assets is not up-to-date.2 Importantly, transactions and cross-holdings of assets and liabilities between the central government and the NFPCs are not recorded separately, precluding a proper consolidation of the government and the NFPCs to derive fiscal accounts for the nonfinancial public sector. Implementing the GFSM2001 framework in Bangladesh will likely take many years.

Proposed interim framework

6. An interim framework for assessing the NFPC sector is proposed (Table 2). The framework recognizes the data limitations and focuses mostly on cash-based accounting data. The table summarizes the NFPCs’ financial data to enable a consistent assessment together with the central government operations. Balance sheet information is also presented although, as mentioned above, it is known that asset valuations are not up-to-date.

Table 2.

Bangladesh: Nonfinancial Public Corporation Operations, FY2000–06

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Sources: Ministry of Finance, Monitoring Cell; Bangladesh Bank; and Fund staff estimates.

Includes capital transfers from the central government budget.

Includes net amount of payables less receivables.

Capital expenditure less depreciation; includes investment financed by capital transfers from the central government that are provided under the Annual Development Program.

7. Current and overall balances are the main summary indicators to analyze NFPC performance. Current balance is the difference between revenue and operating and interest expenditure and reflects NFPCs’ profitability before taking into account depreciation costs. The overall balance is measured on a cash basis and includes all revenue and expenditure items; it indicates the NFPCs’ ability to generate enough resources internally to finance their own capital expenditure and determines the financing need to cover current losses and capital investment.

8. Total financing is broken down into long-term and short-term financing. Longterm financing is further broken down into equity financing and net lending. Equity financing is entirely from the government budget, and net lending includes funds from the government, international financial institutions, and commercial banks.

9. The table also includes several balance sheet indicators. On the asset side, the size of fixed assets could be examined to assess the adequacy of the level of capital stocks. On the liability side, the size of NFPC debt could affect the assessment of public debt sustainability: it should be noted here that the total public sector debt would be considerably less than the sum of the government debt and the NFPC debt because a large part of the NFPC debt is owed to the government. Properly consolidated public sector debt data are available only for outstanding borrowings from the banking sector.

C. NFPC Performance and Fiscal Implications

An overview of recent developments

10. NFPCs’ contribution to the economy in terms of value added is small: their contribution to total value added was 0.8 percent on average during 1999/00 through 2005/06. However, a number of NFPCs operate in key infrastructure areas, as well as provide essential inputs for agricultural and industrial production. Therefore, their efficiency could significantly affect the productivity of the rest of the economy.

11. The NFPCs’ contribution to government revenue is also limited while a number of NFPCs receive modest current transfers and substantial investment financing from the budget. Only a limited number of NFPCs currently pay taxes or dividends. Subsidies are recorded only for two corporations and these current transfers between the government and NFPCs are modest—less than 0.1 percent of GDP for most of the years. In contrast, equity financing and net lending—mostly through the ADP—account for the main part of the resource transfers from the government to the NFPCs. It is estimated that about one-fifth of ADP spending (which ranges between 4–5 percent of GDP over the last several years) goes to utility companies to cover their infrastructure investment.

12. Quasi-fiscal activities by several large NFPCs and the associated losses have become a significant source of fiscal risk. Net losses after tax (after depreciation costs) averaged 0.6 percent of GDP during 1999/00 through 2005/06. Large losses were recently recorded by the petroleum company (BPC), a power company (PDB), a chemical company (BCIC), and the national airline company (BIMAN). Most of the losses stem from administratively determined underpricing of products (fuel, electricity, and fertilizer). In addition, domestically produced natural gas is sold substantially below international prices, implying significant foregone revenue for the company (BOGMC) and the government. 3

Trends of key indicators

13. The overall balance (after operations with the budget) of the NFPC sector has ranged from a deficit of 1–2½ percent of GDP (Figure 1 and Table 2). The deficit reflects the lack of funds generated from current operations to cover capital expenditure. More recently, the deterioration of the current balance contributed to the increase in the overall deficit. The current balance-to-GDP ratio shifted from a surplus of ½ percent in 2002/03 to a deficit of ¾ percent in 2005/06.

Figure 1.
Figure 1.

Bangladesh: Nonfinancial Public Corporations

In percent of GDP

Citation: IMF Staff Country Reports 2007, 230; 10.5089/9781451804232.002.A005

14. Short-term financing accounts for a larger part of the deficit financing in recent years. While long-term financing as a share of GDP remained around the same level during the period from 2003/04 to 2005/06, short-term financing as a share of GDP increased sharply, reflecting more than doubling of net bank financing as a share of GDP.

15. Turning to the sectoral performance (Table 3), the current balance for the electricity, gas, and water sector (which includes electricity producers, but not distributors) and the service sector (which includes water and electricity distributors) deteriorated in recent years, but remained in the positive territory. However, the overall balance of these sectors recorded large deficits due to the need for capital expenditure. In contrast, for the commerce sector (which includes the petroleum company), the main source of large overall deficits are current deficits due to the underpricing of products.

Table 3.

Bangladesh: Current and Overall Balance of Nonfinancial Public Corporations by Sector, FY2000–06

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Sources: Ministry of Finance, Monitoring Cell; and Fund staff estimates.

16. On the balance sheets, both liabilities and assets declined relative to GDP in recent years, particularly for the manufacturing and utility (electricity, gas, and water) sectors (Table 4). The recent decline in liabilities-to-GDP ratio mainly reflects the trend in long-term liabilities while there is no noticeable trend for current liabilities. The commerce sector records a negative equity position because of accumulated losses and building up of liabilities by BPC, indicating the need for financial restructuring. Although lower liabilities may be desirable for public debt sustainability, the declining trends in assets could be indicating the need for higher levels of investment, especially for the utility sector. Among the different types of assets, the ratio of net fixed assets to GDP has been declining steadily, likely reflecting inadequate capital spending (Table 5).

Table 4.

Bangladesh: Balance Sheets of Nonfinancial Public Corporations by Sector, FY2000–06

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Sources: Ministry of Finance, Monitoring Cell; and Fund staff estimates.
Table 5.

Bangladesh: Gross and Net Fixed Investment of Nonfinancial Public Corporations by Sector, FY2000–06

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Sources: Ministry of Finance, Monitoring Cell; and Fund staff estimates.

Fiscal implications of NFPC operations

17. When assessing the implications of NFPC operations for fiscal policy in general and public debt sustainability in particular, it would be important to take into account the scope for policy adjustments and the need for scaling up public investment:

  • There is clearly scope for significantly improving the current balance of NFPCs through price and tariff adjustments—particularly for electricity, gas, and petroleum sectors. As mentioned earlier, petroleum and domestically produced natural gas are significantly underpriced. An upward adjustment in natural gas would have a second round effect through prices for electricity and fertilizers. Although the government would be required to undertake fiscal measures to mitigate the social impact if such broad price adjustments had to be implemented, there would be significant net gains to the overall public sector. The additional fiscal resources thus generated could be used for increasing poverty-related expenditure as well as infrastructure spending.

  • The current level of public investment is likely insufficient to maintain adequate infrastructure. Additional resources should be generated through strengthening the current balance of NFPCs in the energy sectors, as well as scaling up government revenues. Addressing underpricing of key inputs such as natural gas and petroleum products (and perhaps the use of public assets as well) is also important in this respect.

D. Need for Improved Monitoring and Reporting

18. As mentioned earlier, a number of data limitations constrain the analysis of the nonfinancial public sector on a consolidated basis. However, even in the absence of complete data, the analysis could be further extended by including reasonable projections for the NFPC sector and by providing direct estimates of the quasi-fiscal activities. The following steps would be useful to include as part of regular budget reporting.

  • Current and capital transfers between the government and the NFPCs (flow data) are essential to assess the fiscal indicators for the consolidated public sector. In addition, the outstanding stock of lending and borrowing between the government and the NFPCs would be necessary to capture the true indebtedness of the nonfinancial public sector.

  • Summary information on NFPC operations (including balance sheets) for both actual data and projections should be prepared more frequently. Table 2 offers a prototype for such reporting. Individual NFPC reporting should be more frequent and provide projections.

  • A direct estimate of quasi-fiscal activities could be added. Currently, net losses after tax or the level of the current balance are used as a broad indicator to measure the size of quasi-fiscal operations. These are only indicative and more direct measures of quasi-fiscal activities using both price and quantity data should be considered (Chivakul and York, 2006, and Mackenzie and Stella, 1996).

  • Contingent liabilities could be added to the monitoring framework. Starting from the FY2006/07 budget, the government includes all explicit and counter guarantees in the budget documents. Although this could be the basis for estimating contingent liabilities, a large amount of borrowing from state banks by the NFPCs should be counted as a potential quasi-fiscal liability even if they are not explicitly guaranteed.

  • Improved monitoring of NFPCs’ financial position would allow more specific scenarios to be incorporated in the DSA. Currently the DSA includes a possible case where contingent liabilities (10 percent of GDP) arise in one of the standard bound tests. In the case of Bangladesh, this is consistent with the estimated amount of contingent liabilities, including BPC’s accumulated losses (about 2½ percent of GDP), public financial institutions’ undercapitalization and nonperforming loans (about 4½ percent of GDP), and an allowance for various other potential liabilities that the government may need to assume from the NFPCs (about 3 percent of GDP).

E. Conclusion

19. The paper proposes an interim framework—in line with the existing framework used for the central government, and based on readily available data—to assess performance of NFPCs on an aggregated basis as well as to analyze sectoral developments. Given the significant fiscal risks involved in operations of nonfinancial public corporations in Bangladesh, there is a case for expanding the coverage of fiscal indicators to include NFPCs, particularly the large and vulnerable ones. However, due to data limitations, deriving a fully consolidated position of the nonfinancial public sector (i.e., the central government and NFPCs) based on an internationally accepted statistical framework would unlikely be a feasible option for many years. To further enhance the monitoring of NFPCs and transparency of fiscal decision making, the budget documents and fiscal reporting should include: budget provisions for NFPCs (a large part of which is through the ADP); the outstanding balance of lending and borrowings between the government and the NFPCs; summary information on NFPC operations (including balance sheets) for both actual data and projections; and explicit and direct estimates of the size of the quasi-fiscal activities and contingent liabilities.

References

  • Chivakul, Mali, and Robert York, 2006, “Implications of Quasi-Fiscal Activities in Ghana,” IMF Working Paper 06/24 (Washington: International Monetary Fund).

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  • Mackenzie, G.A., and Peter Stella, 1996, “Quasi-Fiscal Operations of Public Financial Institutions,” IMF Occasional Paper No. 142 (Washington: International Monetary Fund).

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1

Prepared by Noriaki Kinoshita (FAD).

2

Assets are recorded at book values except for cases where an entity undergoes capital restructuring and revaluation. An important recent example of the latter cases includes the two companies in the electricity sector (PDB and DESA).

3

The average domestic sales price is less than a half of the international price, and the foregone revenue is estimated to be 2–3 percent of GDP.