The Sixth Five Year Plan, as outlined in Bangladesh's Poverty Reduction Strategy Paper, targets strategic growth and employment. The medium-term macroeconomic framework plan entails the involvement of both the private and public sectors. Human resources development strategy programs reaching out to the poor and the vulnerable population, as well as environment, climate change, and disaster risk management, have been included in the plan. Managing regional disparities for shared growth and strategy for raising farm productivity and agricultural growth have been outlined. Diversifying exports and developing a dynamic manufacturing sector are all inclusive in the proposed plan.


The Sixth Five Year Plan, as outlined in Bangladesh's Poverty Reduction Strategy Paper, targets strategic growth and employment. The medium-term macroeconomic framework plan entails the involvement of both the private and public sectors. Human resources development strategy programs reaching out to the poor and the vulnerable population, as well as environment, climate change, and disaster risk management, have been included in the plan. Managing regional disparities for shared growth and strategy for raising farm productivity and agricultural growth have been outlined. Diversifying exports and developing a dynamic manufacturing sector are all inclusive in the proposed plan.

Chapter 4: Financing The Plan

Realization of the Plan objectives would entail involvement of both the private sector and the public sector. Although private sector will continue to play its dominant role in the economy, public sector will be mobilized to foster an economic environment more conducive for higher private sector production, investment, consumption and savings. Public sector will also play the crucial role of making the growth more inclusive through fiscal interventions by making the tax system more equitable and undertaking expenditure programs to improve quality of living for the under privileged segments of the society. Public sector will play its vital roles through annual budgets which would be consistent with the Plan. Financing of the Plan would thus require both private sector savings as well as public sector resource mobilization through buoyancy of the tax revenue, prudent utilization of public resources for public consumption and subsidy/transfer programs, and improved efficiency of public sector enterprises.

The Overall Resource Envelope for the Investment Program

Total investment under the Plan would amount to Tk 13.47 trillion in constant FY2011 prices. Much of the investment will be undertaken by the private sector, although public sector investment will play a bigger role in catalyzing much greater private sector investment under the Plan. Private sector investment (including through PPP programs) will account for 77.2% of the total investment under the Plan, much of that from domestic sources. External financing for private investment, primarily in the form of foreign direct investment (FDI) is expected to grow, but will still remain modest in relative term at about 4.0 %.

Public sector investment, much of it through the Annual Development Plan (ADP), will amount to Tk 3.1 trillion in constant FY2011 prices, accounting for about 22.8% of the total investment in the economy. Of the total public sector investment, Tk 2.2 trillion (72.8%) will be financed from domestic sources comprising savings of the government sector, capital receipts, self financing by the public enterprises, and borrowing from the domestic banking and nonbank sources. Use of external financing for project and budget support will be done flexibly within the context of prudent management of the external debt. This will mostly entail loans from the official bilateral and multilateral sources on best possible terms. The scope for a limited borrowing from the international capital market may also be possible.

Financing of Total Public Sector Outlays During The SFYP: Role of Fiscal Policy

Total public sector spending under the SFYP, including spending on account of provision of public services and transfer payments and subsidies, is projected to be Tk. 9.6 trillion or 19.6% of GDP. The Plan envisages a significant increase in the size of the government spending in relation to GDP in order to broaden the basic economic and social services across the country and improve the quality of public service delivery. The size of the public sector in Bangladesh is relatively small and the task of improving the quality and coverage of public service delivery will require a larger and more proactive role with a bigger domestic resource base to finance it in a sustainable and noninflationary manner.

While expanding the size of recurrent public spending will be needed for achieving wider coverage and better public service delivery, efforts will also be made to increase significantly public sector savings to finance a growing public investment. Accordingly, even after allowing for 2 percentage points increase in recurrent expenditure, public sector savings is projected to increase by about 2 percentage points to 2.5% of GDP by the end of the Plan. Public sector savings is projected to finance one-third of the projected public sector investment by the end of the Plan period, compared with only one-eighth of the development spending funded by public sector savings in FY10. This significant turnaround will happen only if the strategy for revenue mobilization is realized under the Plan.

Revenue Mobilization under the Plan

Bangladesh has one of the lowest tax-to-GDP ratios in the world and the ratio has not improved much over the last several decades despite the pickup in real GDP growth rate. While Bangladesh’s legal tax rates are not low by the regional and international standards, because of inefficiencies in tax administration and inadequate coverage, the tax-to-GDP ratio has remained virtually stuck at below 10% level over many years. The introduction of the Value Added Tax (VAT) in 1991 boosted revenue performance for several years, but the momentum could not be sustained due to lack of modernization of tax administration and ad hoc arrangements put in place for political and administrative expediency. Bangladesh and India inherited similar tax structure and administration from the British rulers, and both countries suffered from low tax ratios for many decades. But while India has made substantial progress in reforming its tax system and raising the tax yield, Bangladesh’s tax effort has stagnated. Thus, in the mid-1970s, Bangladesh’s tax-to-GDP ratio was only slightly below that of India at about 8% level. Currently Bangladesh’s tax-to-GDP ratio is about half of that in India.

Certainly this revenue situation must change for Bangladesh in order to realize its ambitious objectives under the SFYP and beyond as envisaged under the Perspective Plan. In the FY10 budget, the government made its first attempt to break away from this stagnant revenue performance even though this was clouded by the global economic meltdown.

In the event, despite a collapse in imports, NBR revenues exceeded the target, the growth rate being 18.12% for FY 2009-10 and the tax-to-GDP ratio reached 9% level for the first time, with revenue-GDP ratio at 10.9%. During the first nine months of FY 2010-11, the growth rate of revenue collection was 27.4%. This turnaround provides credibility to the Plan’s projected revenue mobilization.

Building on this gain, the Plan projects an increase in the revenue to GDP ratio by 3.7 percentage points to 14.6% of GDP by FY15 (Table 4.2). Much of the revenue gain will come from NBR taxes which are projected to increase by 3.4 percentage points in relation to GDP over the Plan period. Consistent with this Plan strategy, the Government has announced wide-ranging revenue measures in the areas of VAT and income tax in the first budget announced under the SFYP. The reform measures undertaken in the areas of income tax, VAT and customs contributed to a positive turnaround at the NBR (Box 4.1).

Table 4.1:

Financing of Sixth Five Year Plan Investment

(FY2011 prices)

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Source: Sixth Five Year Plan Projection
Table 4.2:

Revenue Projections for the Sixth Plan

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Source: National Board of Revenue and SFYP Projections

Achieving the dual objectives of a rapid increase in tax revenue and simultaneously reducing dependence on trade taxes will entail fundamental reforms in the tax laws and modernization of tax administration. The major initiatives announced in the context of FY11 budget constitute important first steps which would need to be built on during the Plan period in a comprehensive manner. In addition to the introduction of a modern VAT law as announced in the FY11 budget, the income tax law will also be replaced by a new one. Modernization of the VAT and income tax administration, including computerization of tax administration and much greater reliance on accounts based audit will play central roles in this regard. Modernization of tax administration generally pays high dividends, as visible in the case of India with the modernization initiatives undertaken in recent years (see Figure 4.2 above). Enhancing voluntary compliance, combating tax evasion, raising the share of direct taxes, phasing out of tax exemptions and incentives and building Digital NBR are some of the major issues that deserve special attention for increasing tax-GDP ratio in Bangladesh. Encompassing all these major elements, the NBR has prepared a Five-year Modernization Plan (Tax Policy and Tax Administrative), an outline of which has been presented with the FY12 budget announcement.

Figure 4.1:
Figure 4.1:

Bangladesh and Indian Tax-GDP Ratio

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Figure 4.2:
Figure 4.2:

Bangladesh: Trend in Tax GDP Ratio

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Source: National Board of Revenue

Factors contributing to a positive turnaround at the National Board of Revenue

Reform Initiatives in Income Tax

  • Submission of TIN has been made mandatory for receiving certain public services.

  • For expanding tax base, tax exemptions are being phased out.

  • Institutional investors in the capital market have been brought under the tax net through imposition of tax at a reduced rate.

  • Scope of deduction at source has been enhanced and the rates have been rationalized.

  • Spot assessment program has been introduced for relatively small businessmen and professionals.

  • For the first time in the country, National Income Tax Day was observed at all divisional headquarters on 15 September 2010.

  • In order to create awareness among taxpayers, income tax fair was organized at Dhaka and Chittagong for the first time in the country during 26-30 September 2010.

  • The highest and the longest time taxpayers at the district level have been awarded honorary certificates on the National Income Tax Day.

  • As recognition to the highest taxpayers at the national level, the government has decided to issue tax cards to 10 highest taxpaying individuals and 10 highest taxpaying companies. A policy has been formulated to provide state honor and accord privileges to the card holders through offering the status of commercially important persons (CIPs).

  • A new direct tax code has already been drafted to keep pace with the changing needs and to simplify procedures. It has been posted on the NBR website to elicit public opinion.

  • Ten percent rebate on income tax has been introduced to encourage activities under corporate social responsibility (CSR) in the areas of assistance for natural calamities, education for homeless children, women’s rights and campaign against dowry, offering benefits to freedom fighters for a dignified living etc.

  • E-filing of income tax return has been commissioned on a pilot basis as part of fulfillment of the government’s commitment of building Digital Bangladesh.

  • Tax calculator has been installed on the NBR website to facilitate taxpayers to calculate their incomes and payable taxes.

  • Draft law on Alternative Dispute Resolution (ADR) in income tax, VAT and customs has been placed in the parliament..

Reform Initiatives in VAT

  • To expand the contour of deduction at source, provision has been made to deduct VAT at source for any procurement of goods and services through tender by the government and some other organizations.

  • Truncated bases have been reviewed and withdrawn from certain services while tax exemptions on few products have

  • been withdrawn Tariff values for payment of VAT have been rationalized and upward revision has been made for certain products.

  • To provide incentives for small and medium sized enterprises (SMEs), the threshold limit for turnover tax has been raised to Tk. 6 million from Tk. 4 million and turn over tax has been reduced from 4% to 3%

  • A new VAT code has been drafted and posted on the NBR website to seek public opinion.

  • Provisions to protect confidentiality of the information taxpayers’ have been included in the VAT Act.

  • The value declaration process for manufacturers has been simplified.

  • Import of services through e-commerce has been brought under the purview of VAT.

  • Online VAT registration and return submission have been introduced on a trial basis.

Reforms in Customs

  • The First Schedule of the Customs Act, 1969 has been revised by deleting 328 redundant HS Codes and amending 677 HS Codes to affect more balance in the Schedule.

  • As part of the capacity building measures of the customs officers, coverage of mandatory PSI system has been withdrawn from less risky items.

  • Dhaka Custom House has been brought under the automation program.

  • All important Land Customs stations (LCs) are now being brought under the ASYCUDA++ system for online processing of declarations.

Source: National Board of Revenue

In order to make the revenue system more balanced and less dependent on customs duty on imports, reliance on customs duty at the import stage is projected to come down significantly. This strategy will also create a more competitive environment for export production and import competing sectors in the domestic economy contributing to greater efficiency gains. In order to offset the potential revenue loss from the rebalancing of the tax structure, greater emphasis will be placed on the VAT and income tax systems under the Plan.

Accordingly, the share of domestic based taxes (income tax and domestic VAT) is projected to increase by 2.5 percentage points to 32.5% of the total tax, while the share of customs duty is projected to decline by almost 5.7 percentage points to 11.1% of the total tax revenue by FY15.

Debt Management Strategy of the SFYP

External Debt Management

Bangladesh has received very favorable ratings from the international rating agencies like Moodys and Standard and Poors (S&P). The positive ratings are reflections of Bangladesh’s good track record in macroeconomic management, prudent debt management and its positive external outlook (Figures 4.3 and 4.4). The favorable rating has also opened up a new channel for potential borrowing from the international capital market at reasonable terms by issuing sovereign debt instruments. Although Bangladesh may not need to issue sovereign debt for budgetary or balance of payments needs, such an issue would establish a benchmark for private sector corporate borrowers in financing their domestic investment plans.

Figure 4.3:
Figure 4.3:

Bangladesh: Debt Dynamics during FY01-FY10

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Source: Ministry of Finance
Figure 4.4:
Figure 4.4:

Bangladesh: Debt Services Ratio during FY01-FY10

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Source: Ministry of Finance

The external financing strategy under the Plan will essentially maintain the current strategy of prudent external borrowing on best possible terms. Donor supports for various major infrastructure projects (like first and second Padma bridges, deep sea port in Chittagong etc) should increase as the pace of project initiation and implementation gains momentum under the Plan. Bangladesh will also be implementing numerous projects for mitigating the adverse impacts of climate change during the Plan period and much of them should be financed in the form of grants and soft loans from the international community under multilateral initiatives.

In general, the external financing of the Plan would rely on broadening of the sources of external financing, creating greater scope for private investors to secure external financing on better terms through reduced country/sovereign risk, and continued reliance on multilateral institutions for financing large public sector projects/programs. Projections based on this broad strategy would entail continued reduction of government and government guaranteed external debt in relation to GDP and reduction of external debt service payments in relation to exports of goods and services (Figure 4.5). Sustaining this strategy will help broaden access to international capital markets by domestic private borrowers and also help reduce financing cost for domestic borrowers.

Figure 4.5:
Figure 4.5:

Bangladesh: External Debt Dynamics for SFYP

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Source: Ministry of Finance and SFYP Projections

Domestic Debt Management

Maintaining the past momentum, the reliance on external financing is projected to go down and reliance on domestic financing will continue to increase. Since domestic financing is relatively costly and excessive borrowing by the public sector may potentially crowd out the financing of the private sector, the domestic financing of the Plan would need to be consistent with the borrowing needs of the rapidly growing private sector. By limiting the overall fiscal deficit (including grants) within the targets set under the Plan (4-4.5 percent of GDP) and by securing a sizable part of that from the external sources, the Plan expects to alleviate this concern. The fact that the projected levels of domestic borrowing is in line with the levels of domestic financing incurred in recent past years also provides assurance that the domestic financing plan under the Plan is consistent with continued macroeconomic stability and will help support private sector growth.

The domestic financing of the Plan takes into account the sustainability of the public debt burden (Annex Table 3.5). At present domestic debt accounts for about one third of the total public debt, but interest payments on account of domestic debt accounts for about two third of the total debt servicing payments. Although high costs of domestic debt servicing is not likely to pose any debt sustainability issue over the medium term, still it limits the size of budgetary discretionary spending and the fiscal space for undertaking priority programs in the public sector. Thus debt management reforms will be undertaken to make public borrowing cheaper and also to help debt market development. The government has already taken some important steps to rationalize the interest rate structure of national savings instruments and made most interest income from such instruments subject to income tax withholding.

Figure 4.6:
Figure 4.6:

Debt Amounts and Cost of Financing

Citation: IMF Staff Country Reports 2013, 063; 10.5089/9781475521344.002.A004

Source: Ministry of Finance

Public Investment Priorities

The Government is aware that even with a strong public resource mobilization effort, total resources available will be limited in relationship to demand. Accordingly priorities will need to be set. The Government also recognizes that ensuring proper use of these scarce resources is very important. This requires paying attention to implementation capacity, governance and results-based monitoring and evaluation (M&E). Issues of plan implementation are discussed in Chapter 9.

The public investment priorities will be determined on the basis of realization of the key plan targets in relation to growth, poverty reduction, human development, equity and sustained development. Many of the priorities are reflected in the FY2011 Budget. The SFYP builds on this and looks at the broad consistency of proposed allocations to plan objectives, targets and the projected resource envelope. A summary of proposed broad sectoral allocation of planned investment resources in constant (FY 2011) prices and in current prices are shown in Tables 4.3. and Table 4.4 respectively. The mapping of these allocations by Ministries in current and constant prices is shown in Annex Tables 4.1-4.2. These are indicative allocations and will be reviewed on an annual cycle in light of actual resources, program implementation and changing priorities. Detailed sectoral objectives, targets, strategies and policies are discussed in sectoral chapters in Part 2 of the Plan document.

Table 4.3:

Sixth Plan Sectoral Public Investment Allocation

(Crore Taka; FY2011 price)

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Source: Sixth Five Year Plan Projections
Table 4.4:

Sixth Plan Sectoral Public Investment Allocation

(Crore Taka; Current Price)

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Source: SFYP Projections

Public Investment Breakdown

Total public investment has traditionally consisted of two components: ADP and non-ADP. In recent years, another component in the form of public-private partnership (PPP) has been added to public investment.

The allocation of public investment by sectors (Tables 4.3-4.4) and by ministries (Annex Tables 4.1-4.2) comprise of ADP and non-ADP components. Government’s contribution to PPP (GPPP) during the Sixth Plan, which is confined mainly to transport and energy sectors, is not included in these sectoral or ministry wise allocations. The GPPP allocation is additional. However, GPPP allocations are included in defining total public investment (Table 3.1 in Chapter 3).

Thus the addition of sectoral investments in current prices (Table 4.4) gives public investment excluding GPPP (line 3 in Table below). The GPPP component is shown in line 2. The addition of line 3 and 2 gives total public investment (as defined in Table 3.1 of Chapter 3).

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Risks and Challenges

The major challenge lies in reforming the domestic tax administration and in its modernization. Although there is no question about the potential for the revenue department to realize the tax revenue targets projected under the Plan, the major challenge will be in changing the culture and practices associated with current revenue administration and steadily moving toward a modern technology and accounts based administration of the tax system. Moving from the current tax administration system, based on physical controls, to an accounts based system with greater reliance on automation will be a precondition for the success of the domestic revenue mobilization strategy. Successful implementation of NBR’s Five-Year Tax Administration Modernization Plan will constitute a beginning of this process.

The projections for external resource inflows are reasonable and broadly in line with the current lending strategies of the major multilateral donors. In relative terms there will be a significant reduction in the reliance on external financing during the Plan period, maintaining the general trend of recent years. The SFYP also shows the least reliance on external financing compared with previous Plans. Additionally, there are significant upside possibilities of getting more external financing if some of the major multilateral and bilateral initiatives (like mitigation of climate changes and food security) become operational. There should not be any major problem with the financing of the Plan from the domestic bank and nonbank sources. The planned borrowing needs from these two sources are sizable but manageable and with the envisaged reduction in future costs of funds such borrowings would not create any debt sustainability issue. The projected domestic borrowing path is consistent with credit needs of the private sector and inflation targets.

Chapter 4 Annex Tables

Annex Table 4.1:

Ministry- Wise Public Investment Allocation in the Sixth Plan

(Crore Taka; Current price)

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Source: SFYP Projections
Annex Table 4.2:

Ministry-Wise Public Investment Allocation in the Sixth Plan

(Crore Taka; 2011 Price)

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Source: SFYP Projections
Bangladesh: Poverty Reduction Strategy Paper
Author: International Monetary Fund. Asia and Pacific Dept