Identifier
Created
Classification
Origin
09DHAKA686
2009-07-13 10:37:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Dhaka
Cable title:  

GOB BUDGET: THE GOOD, THE BAD AND THE UGLY

Tags:  BG EAGR EAID ECON EFIN ETRD KCRM KTNF PGOV PTER 
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PP RUEHAST RUEHBC RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDE RUEHDH RUEHGI
RUEHJS RUEHKUK RUEHLH RUEHNEH RUEHPW RUEHROV RUEHTRO
DE RUEHKA #0686/01 1941037
ZNR UUUUU ZZH
P 131037Z JUL 09
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC PRIORITY 9147
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RHHMUNA/CDR USPACOM HONOLULU HI
RHHJJPI/PACOM IDHS HONOLULU HI
RUCNISL/ISLAMIC COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/WHITE HOUSE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAWJB/DEPT OF JUSTICE WASHDC
UNCLAS SECTION 01 OF 03 DHAKA 000686 

SENSITIVE
SIPDIS

DEPT FOR SCA/INSB
WHITE HOUSE FOR USTR VKADER
COMMERCE FOR SLEWIS-KHANNA, DFONOVICH
NEW DELHI FOR FAS
DOJ FOR OPDAT, LSAMUEL

E.O. 12958: N/A
TAGS: ECONEFINETRDPGOVEAGRPTERKTFNKCRMEAID BG
SUBJECT: GOB BUDGET: THE GOOD, THE BAD AND THE UGLY

SUMMARY
-------

UNCLAS SECTION 01 OF 03 DHAKA 000686

SENSITIVE
SIPDIS

DEPT FOR SCA/INSB
WHITE HOUSE FOR USTR VKADER
COMMERCE FOR SLEWIS-KHANNA, DFONOVICH
NEW DELHI FOR FAS
DOJ FOR OPDAT, LSAMUEL

E.O. 12958: N/A
TAGS: ECONEFINETRDPGOVEAGRPTERKTFNKCRMEAID BG
SUBJECT: GOB BUDGET: THE GOOD, THE BAD AND THE UGLY

SUMMARY
--------------


1. (SBU) The recently-passed Government of Bangladesh (GOB) budget
is expansionary and flexible. The $16.6 billion budget includes a
progressive initiative for encouraging public-private partnerships
to develop energy and transport infrastructure. More troubling is a
tax amnesty that would allow Bangladeshis to "whiten" so-called
"black money." Local economists also voiced concern about increased
duties on a range of imports, which they characterized as unduly
protectionist.

EMPHASIS ON FISCAL STIMULUS
--------------


2. (SBU) Bangladesh's FY10 budget reflects many of the priorities
the Awami League outlined in its election manifesto, including
increased spending on employment, education and health programs;
expanding the social safety net, especially food subsidies; and
investing in infrastructure. The Government of Bangladesh (GOB)
traditionally allocates many of these expenditures under its "Annual
Development Program," or ADP. The GOB almost always fails to fully
implement the ADP during the fiscal year, which runs from July 1 to
June 30.


3. (SBU) This year's ADP totals $4.4 billion, which, according to a
local think tank, is 19 percent higher than the proposed ADP for
FY09 and 33 percent higher than the amount of last year's ADP the
GOB actually implemented. As the think tank reported, the new ADP
was "not oversized in the context of the country's needs, but
ambitious in the context of current implementation capacity."


4. (SBU) A World Bank economist characterized the budget as
"expansionary," which was not necessarily bad given the current
global economic situation. The fiscal stimulus, social safety net
programs and large ADP allocation in the budget would give the GOB
flexibility to offset potential slowdowns in Bangladeshi exports and
remittances, key drivers of Bangladesh's economy and the areas most
likely to be affected by the global economic crisis. (NOTE:
Bangladesh's exports and remittances both grew during FY09, which
ended on June 30. Exports grew 13 percent, and remittances grew 23
percent. END NOTE.)


5. (SBU) This expansion was good, the economist added, only so long
as it funded real investment in infrastructure, education, health,
etc. An expansionary budget was worthless if politicians and
middlemen siphoned funds from investment and development projects.


PUBLIC-PRIVATE PARTNERSHIPS
--------------


6. (SBU) One of the most promising new initiatives of the budget is
one that promotes public-private partnerships to develop transport
and energy infrastructure in Bangladesh. The GOB allocated more
than $300 million to get this initiative off the ground, including
funds for technical assistance to ensure proper implementation of
the program. The PPP initiative, as it is known, was apparently the
brainchild of a small group of young businessmen and respected
economists, who wrote a position paper for the GOB that formed the
core of the proposal.


7. (SBU) Critics have warned that the PPP initiative could just
become another avenue for graft if the government did not implement
it properly. The GOB's announcement that the first PPP project
would be a light rail system for Dhaka drew criticism from some
experts who said this project was overly ambitious and the GOB
should focus on smaller projects at first, including independent
power plants. Others have praised the proposal. At a follow-up
seminar with GOB officials and businessmen, officials from India who
implemented a similar program briefed the Bangladeshis on
public-private partnership best practices from the Indian
experience.

"MONEY WHITENING"
--------------


8. (SBU) The most controversial component of the budget is a tax
amnesty that will allow Bangladeshi citizens and companies to

DHAKA 00000686 002.2 OF 003


legitimize previously undisclosed income. As originally proposed,
the amnesty, or "whitening of black money," would allow taxpayers to
pay only 10 percent in taxes on previously undisclosed income
declared sometime before 2012, as long as taxpayers invested the
money in a variety of sectors, including real estate. The original
proposal also stated taxpayers would not have to disclose the
sources of their income, which left the door open for the legalized
laundering of the proceeds of crime and terrorism.


9. (SBU) Critics attacked almost every aspect of the proposed
amnesty. The Ambassador, joined by the chiefs of the European
Union, British, Australian, Canadian, German, Dutch and Danish
missions, wrote the Finance Minister to express serious concern that
the failure to disclose sources of income violated not only
Bangladesh's own Anti-Money Laundering (AML) and Anti-Terrorism
laws, but also international standards laid down by the Financial
Action Task Force (FATF).


10. (SBU) Economists said the proposal could destroy the GOB's
ability to collect taxes, which was not very strong in the first
place. Who would pay the normal 25-45 percent tax rates when they
could get away with paying only 10 percent at the end of three
years? GOB officials weakly responded that the amnesty was a
political necessity, which would increase investment in Bangladesh.
Local businessmen said the amnesty was simply a ploy for politicians
to legalize the proceeds of graft and extortion. The World Bank
noted that various Bangladesh governments had implemented tax
amnesties nine times since the 1980s. All these amnesties combined
recovered less than $3 billion in previously undisclosed income and
taxes.


11. (SBU) In the face of this criticism, the GOB amended the
amnesty to cover only one year. The GOB adjusted the wording of the
final legislation with the intention of insuring the legislation did
not over-ride AML and anti-terrorist finance laws. The central bank
also pledged to issue regulations confirming this and directing
banks to continue exercising due diligence and verifying sources of
funds.

PROTECTION FOR LOCAL INDUSTRY
--------------


12. (SBU) Local economists also criticized the range of customs,
supplementary and regulatory duties the budget placed on a variety
of imports, including cars, mobile phones, powdered milk, snack
foods, newsprint, air-conditioners and other consumer goods. An
economist and banker said these duties punished consumers. An
international economist noted these duties protected local
industries that already received high rates of protection. These
criticisms prompted the GOB to adjust some of the tariffs in its
final legislation, including on some cars, newsprint and mobile
phones.

PAYING FOR THE BUDGET
--------------


13. (SBU) The GOB projected a budget deficit of about $5 billion,
or roughly 5 percent of GDP. Some local experts questioned the
GOB's revenue estimates for the coming year and expressed doubt
about the government's abilities to increase tax collection,
particularly as a result of the tax amnesty provisions. Assuming
the deficit projection remains on target, the GOB planned to finance
60 percent of the deficit from domestic sources, mostly through
local bank borrowing. Some experts cautioned this could crowd out
private sector borrowing, while others claimed local banks had
excess liquidity that could absorb government borrowing. In terms
of foreign financing of the deficit, an economist at one
multi-lateral lending institution was pessimistic about the
prospects for budgetary support from his organization. He said some
of the budget's protectionist measures and the GOB's stated
intentions to slow divestment of state-owned enterprises and revamp
its public procurement rules could harm prospects for foreign budget
support.

COMMENT
--------------


14. (SBU) With the exception of the tax amnesty and some of the

DHAKA 00000686 003 OF 003


tariff increases, the GOB budget is largely sound. It contains some
buffers that could allow the government to compensate for unexpected
shocks. It seeks to fulfill some of the Awami League's promises to
aid the poor and promote growth in the face of a global economic
slowdown. The GOB has projected its economy will grow 5.5 percent
in the coming year, which some say is too modest a projection.
Modest it may be, but it is also politically savvy. It dampens
expectations for a year where Bangladesh might finally feel the
effects of the global economic crisis. And if growth exceeds the
projection, the government can claim the credit.


15. (SBU) The devil, as always, is in the details. In its first
six months, the Awami League government has not demonstrated an
ability to move quickly on key economic goals, particularly energy
and power development. Bureaucratic inertia is partly to blame, but
dividing the spoils after eight years out of power has distracted
many in the Awami League from pursuing national economic priorities.
It remains to be seen whether the Awami League can and will direct
its energies to achieving its numerous budget goals.

Moriarty