FINANCE MINISTER DELIVERS FY 2007 BUDGET

C O N F I D E N T I A L SECTION 01 OF 02 DHAKA 003449 SIPDIS SIPDIS E.O. 12958: DECL: 06/12/2016 TAGS: EFIN EAID PGOV PREL BG SUBJECT: FINANCE MINISTER DELIVERS FY 2007 BUDGET REF: A. DHAKA 3330 ¶B. DHAKA 2741 Classified By: Acting Political Counselor David Renz; Reason 1.4(d) ¶1. (U) Summary: Finance Minister Saifur Rahman presented an ambitious budget to Parliament on June 8 designed, he said, to balance stakeholder interests and address the needs of the three governments - current, caretaker, and next elected -- that will be responsible for its implementations. Political critics quickly attacked the budget as election-year gimmickry, while major donor institutions remain skeptical of the projections underlying the budget. End summary. ¶2. (U) The budget presented June 8 by Finance Minister Saifur Rahman proposes sizable increases for education and the annual development program funded by equally sizable increases in revenue collection. The FY2007 budget (July 1-June 30) assumes GDP growth of 6.71 percent, up from the 6.5 percent widely expected for FY 2006. The budget lowers rates on import duties and income taxes, but nonetheless projects an overall 17 percent increase in revenue collections. Overall expenditure growth is estimated at 14 percent. Funding for the Annual Development Program (ADP) received a 21 percent increase. Fully 15 percent of the development budget is allocated for education and technology, a 20 percent increase over the FY2006 budget. Rahman made no mention of defense spending in his budget speech; however, budget documents show an 11 percent increase. The FY2007 budget deficit is projected at 3.7 percent of GDP, exclusive of foreign grants. Adding in foreign grants would reduce the deficit to 3.2 percent of GD ¶P. ¶3. (U) The budget assumes fuel price increases to reduce the reduce the strain of fuel subsidies on the budget; however, the 10 percent price increase of diesel is well below the 40 percent increase the IMF estimates (ref b) would be needed to reduce pressures on the budget . The government did move swiftly however, implementing the price increase within hours of the budget speech. ¶4. (U) In a move to appease popular concern over rising prices, the budget significantly reduces tariff and supplementary duties on over 3000 items, bringing the top combined rate down to 20 percent from its current 35 percent ceiling. (Note: Luxury items remain subject to significantly higher tariffs and supplementary duties.) Tariffs on agricultural commodities, especially such staples as sugar, were also reduced substantially to provide price relief in the market. Other tax incentives are sprinkled throughout the budget to appeal to a wide range of special interests with an eye on this election year budget. ¶5. (U) The budget seeks to improve revenue collections by imposing a minimum tax, adding incentives for taxpayers who report significant gains in their income (over 10%),and by reducing the top tax rates. To make it harder to hide income, salaries and benefits for mid-level and senior employees must be paid by bank check or direct deposit to be deductible from a firm's revenues. Rahman announced that the tax ombudsman authorized by a 2005 law would begin operations on July 1. ¶6. (U) The Awami League lead opposition was quick to attack the budget, calling it a fraud and claiming it is "designed to loot public money." They specifically objected to local government block grants, claiming these were an invitation for corruption. Other opposition challenges ranged from specific objections to lack of funding for pet projects to more general criticisms that the budget lacked vision, failed to address people's concerns about price increases and power shortages, and was long on promises but provided little guidance on how the targets would be achieved. ¶7. (U) Business groups and economic think-tanks praised the tax and tariff reductions but complained that allocations to address power sector infrastructure were woefully inadequate. Businesses also objected to the structure of "money whitening" provisions, which gave tax favored treatment to previously undeclared income if invested in certain non-productive sectors. Policy groups decried what they saw as the budget's lack of focus on clear priorities and its failure to address governance and corruption issues DHAKA 00003449 002 OF 002 affecting both revenues and expenditures. ¶8. (C) Even before the budget was officially released, major donors were highly skeptical of the revenue and expenditure projections (ref A). Donors noted institutional inefficiencies and capacity constraints already undermined the government's utilization of development funds. These will be compounded by the transitions from the current government to the caretaker government and then to the next elected government, all during the 2007 fiscal year. Donors also doubt the government has the capacity to absorb the sizable increase in ADP spending proposed for the FY 2007 budget. Finally, donors are skeptical of the government's ability to meet its revenue targets, especially in an election year. ¶9. (U) The text of Finance Minister Rahman's budget address is available at: http://www.mof.gov.bd/budget/Bdg Combin-Speach-06-English.htm (note: speech is misspelled in the URL). Additional information on the budget is available at www.mof.gov.bd. ¶10. (C) Comment: There is little doubt the assumptions underlying the FY2007 budget are flawed. The combination of election year political turmoil and the cumulative effects of years of underinvestment in infrastructure, especially power, are likely to constrain GDP growth, while pressures build for election year spending. Moreover, fuel subsidies continue to undermine the government's fiscal position, while the government's politically cautious decision to impose only a token increase in fuel prices will likely jeopardize access to some foreign grants and loans. Ironically, bureaucratic inefficiencies, inevitable inertia during the transition through the caretaker government to the next government, and the general lack of absorptive capacity may keep expenditures sufficiently in check to minimize the risk of significant fiscal disruptions in FY 2007. End comment. BUTENIS