April-June 2010 h agaehAcutn ArlJn 00 Vl 7 No. 38 April-June 2010 Vol. 67 The Bangladesh Accountant

Mobilization of Resources for Sustainable Economic Development CONTENTS

EDITORIAL April-June 2010 Vol. 67 No. 38 Mobilization of Resources for Sustainable Economic Development 01 ACCOUNTANCY Editorial Board Global Branding of Chartered Accountancy Chairman: M Farhad Hussain FCA Profession in Bangladesh 03 Dr. Jamaluddin Ahmed FCA Associate Editor: Harun Mahmud FCA Role of Chartered Accountants in the Mobilization Members of National Resources 06 Md. Abdus Salam FCA Dr Atiur Rahman Md. Shahjahan Majumder FCA Audit Committee, Independent Director, Bangladesh Perspective 08 Md Abdus Salam FCA FCS Showkat Hossain FCA BUDGET & ECONOMICS Masih Malik Chowdhury FCA Value Added Tax in Bangladesh - An Effective Way Anwaruddin Chowdhury FCA of Internal Resource Mobilization 11 ASM Nayeem FCA M. A. Baree FCA Dr. Md. Abu Sayed Khan FCA Marginal Workers’ Benefits: The Lone fat in Company’s Income Statement! 16 Md. Humayun Kabir FCA Mohammad Zahid Hossain FCA Akhter Matin Chaudhury FCA Analysis of the National Budget of Bangladesh 2010-11: Excellences and Constraints 18 Parveen Mahmud FCA • Md. Hafij Ullah Abdur Razzaque Mollah FCA • Monir Ahmmed Md. Abdur Rashid FCA • Abu Hanifa Md. Noman Bin Alam M A Baree FCA FINANCE & BANKING Md. Nurul Haque FCA Macroeconomic Situation 25 An overview of the Ministry of Finance, GOB Kazi Ehsanul Huq FCA A Comparative Analysis of Interest Rate Parity and Md. Akbar Hossain FCA Sticky Price Model of Exchange Rate 36 Md. Sayeed Ahmed FCA Chowdhury Rajkin Mohsin How to Increase Tax Revenue: Improvement of Enabling Md. Jakir Hossain FCA Environment, Application of Strategic Management Approach 42 M. Abu Bakar FCA Moslehuddin Khaled Mohammad Kamrul Hasan FCA Improving Financial Resources Mobilization in Developing Countries and Economies in Transition 48 Md. Kahir Mahmood FCA Suresh N Shende Mizanur Rahman Khan FCA HUMAN RESOURCES Pradip Paul FCA Development Strategies, Governance and Human Mohammed Jashim Uddin ACA Development-Bangladesh Perspective 61 Md. Rokonuzzaman ACA Dr. Shamsul Alam Md. Selim Reza ACA Human Resource Accounting in the Context of External Financial Reporting—An Analytical Study 68 Md. Yasin Miah ACA Dr Dilip Kumar Sen Mohammad Mazharul Haque ACA HR Practices in Industrial Enterprises in Bangladesh: An Approach to Factor Analysis 79 Member Secretary • Dr. Mir Mohammed Nurul Absar N I Chowdhury FCA, Secretary-ICAB • Balasundaram Nimalathasan and • Ratna Dutta ACA

Published by the Editorial Board of the Council, the Institute of Chartered Accountants of Bangladesh (ICAB) 100 Kazi Nazrul Islam Avenue, Dhaka 1215 Tel: 9117521, 9112672, 9115340, 9137847 Fax: 880-2-8119399 E-mail: [email protected] Website: www.icab.org.bd Editorial Mobilization of Resources for Sustainable Economic Development

esource mobilization is the fundamental generate revenues, detecting tax evaders, expanding prerequisite to achieve a balanced the tax net and undertaking procedural and economic growth and just and equitable administrative reforms. R society free of poverty. Resource mobilization and investment have been highlighted The budget for the fiscal 2010-2011 outlined some as the most vital input of the budget strategy in fiscal strategies to gear up resource mobilization as 2010-2011 aiming to achieve a GDP growth rate of follows: 6.7% by the end of the fiscal and reduce poverty to 1. Imposition of Value Added Tax on any purchase at least 50% by the year 2015.Growth, Human of goods or services through tender by development and Governance are the three Government organizations, Semi-Government fundamental factors that influence employment organizations, autonomous bodies, NGOs, generation, nutrition, maternal health, quality of Banks, Insurance companies or any other education, sanitation, safe water, local governance financial institutions, limited companies and and human resource development. But without a educational institutions. successful resource mobilization strategy and its 2. Inclusion of some additional goods and services implementation, growth, human development and under the VAT net. -Increase of Tariff Value of governance are very difficult to achieve. To stimulate some items for charging Value Added Taxes. pro-poor growth, huge investment is required in 3. Imposition and enhancement of supplementary both urban and rural areas. More so investment in duty on some goods at manufacturing stage and the power sector is the number one priority to increase of the minimum VAT rate on small project any development program of the country business. and strike an economic growth averaging 7-8% per Similarly steps are in process to widen the tax net to annum as contemplated, otherwise, the vision 2021 increase the number of tax payers by another at least will be a far cry. five lacs.The entire Income Tax Ordinance 1984 and VAT Act is under revision containing therein more The country needs domestic investment to more effective measures to strengthen the strategies of than 32% of the GDP as projected in the current resource mobilization. The National Board of fiscal to support the target growth rates. This Revenue (NBR) has chalked out programs to hold projection of the government can be supported with symposiums, seminars and workshops and the mobilization of resources through domestic exchange views on widening the tax net and make revenues, reducing losses and subsidies of the state the people aware and more conscious about the owned enterprises and increasing external fund responsibility to pay taxes. A fund titled Bangladesh inflows such as remittances, aids, borrowings, grants Infrastructure Finance Fund (BIFF) has been created etc. The tax-GDP ratio can be made further healthier and a bond would be issued to raise funds from the by expanding tax bases, minimizing exemptions and individuals and organizations on payment of only exclusions of items which have prospects to 10% taxes within the period of 2012.

The Bangladesh Accountant/April-June 2010 1 Editorial

It is thrilling to recollect that the size of the first then the growth rate in the GDP is still logged within national budget of the country presented in 1972- the range between 5% to 6% over a period of about 1973 was Taka 786 Crore (7.86 billion) while the 39 years after independence? As a nation size of the national budget for the fiscal 2010-2011 appreciably advanced in intellect we must read our is 1.32 trillion which is 168.155 times bigger faces on the mirror and try to find out the causes of compared to the size of the first budget of the our failings and locate the causes either in country. This indicates the unimaginable support our corruption or in inefficiency or in leadership crisis. people have been providing to our Government to mobilize resources for the development of the The Honourable Finance Minister of course has country. But this is a hard reality that the country has made a brave target to strike a GDP growth rate of not been able to build the required infrastructure for 6.7% and raise investment to up to 32% of the GDP. sustainable economic growth and per capita income Allocations made for investment in power, energy has not increased in the same proportion. and education sector are all encouraging but alarmingly the record of implementation of the The Power sector of the country is still one of the previous Annual Development Programs are not weakest in the world. Bangladesh’s position is below satisfactory. In spite of that, a bigger ADP around the 180 in the World ranking of Per Capita Electricity size of Taka 390 billion has been announced for the Consumption. Even we are not at par with our fiscal 2010-2011 which is an increase of about 35% neighboring countries. In India the per capita over the ADP of the fiscal 2009-2010. electricity consumption is more than 470 Kwh, in Pakistan more than 440 Kwh and in Sri Lanka more The unofficial rate of inflation is believed to be than 350 Kwh whereas in Bangladesh the per capita around a double digit figure although the electricity consumption is slightly more than 145 Government claims the inflationary rate is Kwh. But power and energy Sector plays the most fluctuating between 6% to 7%.With such a huge vital role in developing the economy of a country. expenditure based budget the Government must The development infrastructure of the country is still mobilize resources as projected ,make a sizable lagging far behind in spite of huge increase in the amount of productive investment and allow the size of the national budgets. private sector to play their role to increase production and create job opportunities for the Bangladesh is still an undeveloped/Least Developed unemployed which may be the appropriate answer country as ranked by the World Bank/United to the economic gaps and lapses since the Nations and other organizations. To enable the independence of the country. Government to mobilize resources the people of this small country have been making huge contributions to the national exchequer since liberation in 1971. Starting with a national budget of Taka 7.86 million the country has gained the strength to finance a M Farhad Hussain FCA budgetary projections of Taka 1.32 trillion. But why Chairman, Editorial Board

The Bangladesh Accountant/April-June 2010 2 Accountancy Global Branding of Chartered Accountancy Profession in Bangladesh* Dr. Jamaluddin Ahmed FCA

Introduction: the Americans with capital to shift to an industrial economy. Accountancy is a critical component of the infrastructure for British auditors accompanied the investors to provide reliable a market economy. Sound economic activities are not financial information, as there was no organized American possible without accountancy. Accountancy provides accounting body. The British auditors started organizing the information on the financial position and profitability of accounting profession and training the Americans. The US operations. It is the foundation of a country’s fiscal system accounting profession gradually grew under the leadership of and it plays a key role in corporate governance. Accountancy British Accountants (Carey, 1970, pp. 53-58). Finally the is relied on when enforcing prudential requirements for American Association of Public Accountants was founded in banks, insurance companies, securities, dealers and other 1887 with its first President being a Briton (Samuels and market participants. As a result, the accountancy sector is Piper, 1985, p.20). Gradually the emergence of such among the most regulated in the world’s advanced economies professional bodies in developing countries representing in terms of its liabilities towards the society. Immediately nationally qualified accountants grew in number and they after independence of Bangladesh, accountancy professionals began competing with those having foreign qualifications. played a key role in establishing accounting system of the Influence over Accounting in Bangladesh: Central Bank and all nationalized and private sector entities. Accountancy Profession in Bangladesh has been transplanted Similarly, soon after the change of national economic through British auditors accompanying investors during philosophy from regimented to open market system, the colonization. Soon afterwards branches of British affiliated accountancy professionals ensured and exerted their highest accounting societies were established in India and Burma in efforts in presenting financial reports in compliance to the 1932, and Bengal in 1933 {Johnson and Caygill (1971)}. requirements of International Financial Reporting Standards Setting up of the East India Company in Surat during 1608 is (IFRS) in addition to the requirements of Securities and considered having significant influence over the development Exchange Commission and Central Bank. The Chartered of British accounting methods throughout the Indian Accountants render their services in the process of collection Subcontinent. Therefore, the East India Company’s rule in of fiscal revenues through certifying taxable profit and Bengal from 1757-1857 and then direct British rule up to reporting on the accuracy of taxable profit and VAT in 1947 has significantly influenced the accounting and compliance to fiscal regulations. reporting of this region. Moreover, the commercial code, The first initiative of developing a Professional Accountancy education, training, along with business education and body came from Scotland. A group of accountants obtained professional training of accountants was highly influenced recognition of the Royal Charter for their body in 1854. with the establishment of UK accounting societies like Following this, the English Institute obtained theirs in 1880. Briston (1978) and Johnson & Caygill (1971). Since World Gradually professional bodies for accountants started forming War II, the Americans have replaced the British as the engine across countries. Kettle (1958) reported that from the late of capitalist development. They have influenced accounting 19th century British accounting firms started establishing and reporting standards worldwide through increased offices in other countries. Deloitte, Deve, Griffiths and Co., activities of multilateral donor agencies such as IMF and the opened offices in 17 foreign cities during 1890-1914. With World Bank. In 1945 the Americans changed Japanese the start of the British industrialization, UK became the accounting code after the War. Similarly, accounting code birthplace of the accounting profession. The British assisted and SEC of South Korea, Philippines and Taiwan were

*Reproduced is the paper authored by Dr. Jamaluddin Ahmed FCA, President, ICAB in published in the Souvenir of the International Conference of Chartered Accountants-2010.

The Bangladesh Accountant/April- June 2010 3 Accountancy modeled following the US Accounting System after US government. Six are serving at the World Bank and Asian investment flowed to these countries post World War II Development Bank, 44 have qualified from foreign Institutes period. Canadian, Hong Kong and Singaporean accounting and a considerable number of CAs is CEOs in different system initially modeled under the British system then shifted business houses. Moreover 150 members of ICAB are now towards the US and IAS methods, after the International working in foreign assignments. Accounting Standards (IAS) Committee formed in 1973. Demand Forecast for Chartered Accountants Since the fall of the command economies of Eastern Europe in Bangladesh: and the former Soviet Union during the 1990s, Anglo- No forecast for Chartered Accountants exists in Bangladesh, American dominated and IFRS/IAS prescribed accounting though the second five-year plan says that financial and reporting policies were implemented there in order to administration should be given a high priority (para 20.44). attract funds from the IMF, WB and ADB for reforming their The two-year plan (1978-80) set a target for the number of economic systems. These countries then designed the Chartered Accountants to be 3,200 (table 11.6, p: 246). In accounting systems of their utilities in line with the US utility India the ratio of Chartered Accountants to overall population companies. This theory illustrates: “Trade follows Flag’ and is 1: 23,333. Applying this as a standard, in Bangladesh with that ‘Accounting follows the Trade’. Moreover (Parry, 1990) the estimated figure would entail an increase of accounting and reporting methods for Banks and Financial more than 4,000 Chartered Accountants, which obviously Institutions in the name of IAS 30 have been modeled under need reassessment. Currently, Bangladesh has more than 800 the G-7 dominated Bank of International Settlement (BIS) hundred CAs, whereas Pakistan has more than 3,000, Sri made unilaterally compulsory for the banks of Developed Lanka has over 2,700 and Nepal has around 270. In terms of Industrialized Countries and for the Least Developed. the current size of Bangladesh economy following the growth Chartered Accountancy Profession in Bangladesh: of banking, insurance, industry and other service sectors, the In Bangladesh the Institute of Chartered Accountants (ICAB) required number of qualified accountants is estimated to be was founded in 1972 with only 80 members. As of 2010 the more than 12,000 in terms of the Bangladeshi economy’s size. number has grown to 1,015, out of which 299 are in practice and the reminder are either serving for the Government, Common Perception on Accountancy Profession: public enterprises, NGOs, donor organizations and different In Bangladesh, in the eye of layman, auditors are believed to corporate houses. Out of the total number only 33 are female be responsible for the accounts. The users of accounts in Chartered Accountants. There were 25 practicing Chartered Bangladesh sometimes confuse this view. The directors of the Accountant firms in 1972 which has grown to 169 in the year entity are statutorily responsible for the accounts. The 2010. Of the total members 238 from them are allowed to auditor’s responsibility begins and ends with their expression train articled students. There are 16 firms with foreign of an opinion on the audit report. Thus the audit report is the qualified partners and who are members of UK Institutes. formal communication about the accounts between the Beyond affiliation with Big Four International firms another 6 auditors of the enterprise and the person to whom they report practicing firms of Bangladesh have formal links with the to either shareholders or the government, as appropriate. This foreign auditor firms. In most cases, the firms having partners concept has yet to work properly in the case of Bangladesh. qualified from foreign institutes and having links with foreign Public enterprises have proved surprisingly disappointing as audit firms become auditors of multinational companies in providers of accounts (Howladar and Parry, 1984). One Bangladesh. It is said that the quality of work also depends on would have normally expected the public sector to set an the size of the firm, qualification and training of the partners example to the private sector, but in Bangladesh this is not so. in practice. Public enterprises generally produce their published accounts Distinguished Chartered Accountants since 1972 served as on request. In some cases the accounts are only produced Cabinet members of the Government of the Peoples’ after much persuasion. Despite the requirements of the Republic of Bangladesh. One served as the Commerce legislation in creating the enterprises, accounts simply do not Minister in the first government of Bangladesh after exist. In other cases, the Annual Reports of the enterprises are independence, one as Deputy Prime Minister and another as prepared which do not contain accounts. Commerce Minister and subsequently for 3 terms (1980, Initiatives of the Institute of Chartered Accountants of 1991 and 2001) as Finance Minister in the earlier Bangladesh (ICAB): The British rule for 190 years and that The Bangladesh Accountant/April- June 2010 4 Accountancy of Pakistani for 24 years without any significant modification program trainers and consultants from the ICAEW educated or change had helped transplantation of British accounting the trainers of the ICAB. In addition, 9 ICAB members over Bangladesh. Bangladesh also is shifting towards US received training on IFRS at the ICAEW. In 2009 the ICAB system following inflow of US led donor funds, FDI, and signed a MoU with the ICAEW under the Twinning Project formation of USA modeled SEC requiring listed securities and developed a new syllabus in line with IFAC follow IAS/IFRS. The IAS/IFRS is taking shape in requirements. The new syllabus has been drawn according to Bangladesh in terms of measurement; recognition, reporting the requirements of ICAEW, abandoning the old syllabus. It and disclosures of accounting information in compliance to is effective from January 2010 with its first examination at US modeled SEC requirements. the Knowledge Level to be held in May 2010. The first exams The Institute of Chartered Accountants of Bangladesh with for the Application Level and Advanced Stage will be held in legacy of pre and post 1961 had been positively responding to November 2010 and May 2011 accordingly. Under the new the development challenges by accepting the improvements syllabus the Knowledge Level (KL) must be completed in the professional field. Since the formation in 1972, the within 4 years. Application Level (AL) and Advanced Stage ICAB had been heading towards internationalization from (AS) need to be completed with a maximum of six colonization by entering into regional and international consecutive attempts each. On completion of one year’s forums like South Asian Federation of Accountants (SAFA), articleship a candidate can appear at the Knowledge Level. Confederation of Accountants in Asia and Pacific (CAPA) On passing of the Knowledge Level (7 papers) students can and International Federation of Accountants (IFAC). The take the Application Level (7 papers). After passing the ICAB is the second most junior professional accounting body Application Level students can appear for the Advance Stage within SAARC region has so far adopted more than 30 lASs which comprises of 3 papers and a case study. Existing and over 27 ISAs. It has also established Quality Assurance ICAB members who are interested to become members of Board to monitor and supervise the implementation of these ICAEW can qualify by fulfilling certain conditions. Standards including those of Companies Act 1994, SEC, Implementation of this syllabus will open the doors for Banking Companies Act, and Financial Institution Act and Bangladesh Accountancy Professionals in the global market. Prudential requirements required by the Central Bank. ICAB The Twinning Project expects that once the current reform allows special exemption of its course for the members of process is fully implemented it would increase the pass rate of ICMAB and graduates from some specific universities. This candidates, meeting the local and international demand for is a significant development of Foreign Loan Syndrome accountancy professionals. Economy of Bangladesh compared to India, Pakistan, Nepal, Furthermore ICAB has agreed upon new organizational and and Myanmar where the index of adopting IAS/IFRS and ISA governance structures and approved its strategy for the period are low. The country rating of adopting IAS/IFRS reveal a of 2008-2010. It has also taken the initiative to recruit new better picture in Bangladesh (67) compared to more organized talent in the post of senior managers. The learning materials economy of Argentina (45), Egypt (24), Turkey (51), for the CA students have been contextualized for the Venezuela (40), EU member country Portugal (31), Peru (38) Bangladeshi environment to support the new syllabus and Austria (54). The ICAB has also adopted the latest curriculum. The ICAB library has been expanded to provide version of IFAC code of ethics, all the 8 IFRS as BFRS and members and students with more books, periodicals and also 28 IAS as BAS then published those standards in the context internet access. Steps are underway to automate the library of Bangladesh. management system. A quality assurance department has The ICAB also opened Chartered Accountancy education for been established to monitor and offer guidance to CA firms in the English stream students with GCSE O-Level & A-Level Bangladesh. Moreover the IFAC SMO Action plan has been backgrounds. The ROSC (Report on Observance of upgraded after undertaking certain projects by the ICAB. The Standards and Codes) sponsored by the World Bank IFAC SMO includes quality assurance, education, recommended under the Economic Management Technical international standards on auditing, code of ethics, accounting Assistance Program (EMTAP) a “Twinning Project” which standards, investigation and discipline. With such plans for brought the ICAB syllabus, examination and corporate development the ICAB is aiming to make CA professionals governance in line with the Institute of Chartered from Bangladesh compete in the global market with Accountants in England and Wales (ICAEW). In this internationally qualified chartered accountants. I The Bangladesh Accountant/April- June 2010 5 Accountancy Role of Chartered Accountants in the Mobilization of National Resources* Dr Atiur Rahman

1. Assalamu Alaikum, good afternoon, and my best regards local standards were once sufficient, but with globalization of and greetings to the chief guest the Honorable President, trade and investments in intricate webs of cross border People’s Republic of Bangladesh, ICAB President, relationships, adherence to uniform international standards is distinguished guests and delegates from home and abroad. now becoming unavoidably necessary. It certainly is a privilege and honor to be asked to present the Where do we Bangladeshis stand in efficiency of national keynote paper in this conference of apex level accounting resource mobilization? Unhappily, down close to bottom of professionals, with exalted personages including the global league table, with tax-GDP ratio at meager 9.2 percent Honorable President of Bangladesh in audience. Myself not in FY 10 after some improvement from 8.6 percent of FY09. being an accounting professional, my presentation on the These levels look dismal against 19.5 percent tax-GDP ratio conference theme, the role of chartered accountants in of neighboring India. The domestic saving rate in Bangladesh mobilization of national resources, will necessarily be an stagnates at around 20 percent of GDP, well below levels in outsider’s view. I would ask the professional accountants in our neighbors and other comparator economies. Only partly the audience to bear with any lack of insider perspectives that are these low levels attributable to low income, the main they may notice in the presentation. reason is poor and dubious accounting and auditing practices. 2. To begin with, why are we concerned about mobilization Affluent households get off paying pittance as income taxes of national resources? We are concerned because we need to with dodgy financial disclosures; thriving businesses evade invest these resources towards faster economic and social taxes understating income, even reporting fictitious losses. growth. These investible national resources include income of The widespread public perception now is that taxpayers, households and businesses tapped by the government as the accountants, auditors and tax collectors are acting in tax base; and the financial savings of households, farms and collective collusion depriving the government of due businesses tapped by investors as their financing sources. The revenues; banks and financial institutions collude by lending government needs true, reliable accounts and financial to tax evading businesses based not on their declared weak statements of households and businesses for correctly balance sheets but on private knowledge about their actual estimating the base of taxation income. The savers feel safe in financial health. placing their savings only with those financial and non- Are these practices of collective collusion in misreporting financial businesses that have reliable accounts and financial accounts and income actually rewarding us? Certainly not. statements with adequate and transparent disclosures. Small Tax evading households and businesses get paid back in investors flocking in the capital market in huge numbers deficient, poor quality services from under-funded public would benefit greatly with credible, properly disclosed establishments, and end up paying additional sums in financial statements of listed companies drawn up and privately arranged services for security, garbage disposal and certified by esteemed members of your professional so forth. Businesses understating income to evade taxes community. These are where the value of well developed cannot access capital markets with their disclosed supposedly professionalism in your trade comes in, as accountants and weak financial statements, and crowd into banks and financial auditors maintaining and certifying accounts and financial institutions for borrowing, pushing up interest costs to the statements according to accepted standards. Adherence with perennially complained about high levels. FDI inflows

*Reproduced is the theme paper presented by Dr. Atiur Rahman, Governor, Bangladesh Bank in the Inaugural Session of the International Conference of Chartered Accountants-2010.

The Bangladesh Accountant/April- June 2010 6 Accountancy languish as foreign investors hesitate about investments in the growth rate to 8.0 percent. Successfully brought about, the non transparent graft-ridden environment, shy of joint desired reforms in accounting and financial disclosure ventures with local businesses having dodgy non-transparent practices will lead to major acceleration in development of financial disclosures. The tax evading well-off are thus paid financial and capital markets channeling higher domestic and back in the same coin, while the less well-off population external investments into the real sectors, leading to faster segments suffer with the most under high burdens of economic growth and poverty reduction. regressive indirect taxes like VAT and tariffs imposed due to I would look forward to audit reports of chartered accountants low collection of direct taxes from the better off. Investment on individual businesses, and to the Journal of the ICAB and economic growth continue to lag below potential, just being informative, effective learning and motivational tools to while the neighboring economies are powering ahead with this end for all of us. On behalf of Bangladesh Bank I better financial disclosures, higher resource mobilization and promise you all cooperation, with open communication and higher rates of economic growth. consultation channel for the ICAB in all aspects of this 3. For the reasons outlined above, I am looking forward to endeavor. this conference today initiating a campaign in breaking out of The government is seriously considering enactment of a new the vicious circle of accounting and financial misreporting law creating an oversight authority for the accounting that is holding down resource mobilization, investment, profession. I am looking forward to ICAB to play role as an economic growth and poverty eradication in Bangladesh. This integral auxiliary in the new regulatory structure, for would clearly be a very major undertaking in reeducating and implementing in letter and spirit the evolving international motivating all of us as individuals, households, businesses best practices of accounting and auditing in Bangladesh; and public authorities in transforming our individual as well towards higher resource mobilization, higher investment, as collective social behavior and practices. Urgency of the poverty eradication and eventual prosperity for Bangladesh. need for this campaign is just as great, with the country’s 4. Let me conclude here, with my thanks and gratitude to you Sixth Five Year Plan (SFYP) 2011-2015 targeting tax-GDP all for your patient attention, and with thanks to ICAB for the ratio of 12.9 percent by year 2015, to raise domestic invitation to address this congregation of accounting I investment to 32.5 percent of GDP and annual real GDP professionals and invited dignitaries.

The Bangladesh Accountant/April- June 2010 7 Accountancy Audit Committee, Independent Director, Bangladesh Perspective

Md Abdus Salam FCA FCS

An Audit Committee charged with oversight responsibility of • Monitoring the internal control process. financial reporting and disclosure. is an important operating • Overseeing the performance of the internal audit function. organ of the Board of Directors of a publicly-traded company • Discussing risk management policies and practices with registered under the laws of the country and enlisted with the management. stock exchanges in Dhaka and Chittagong. Committee The duties of an audit committee are typically members and the Chairman of the Committee are drawn and described in a committee charter. selected from among the members of the company’s board of directors. A qualifying audit committee is required for a Role in oversight of financial reporting and accounting Audit committees typically review financial reports quarterly, Bangladeshi publicly-traded company listed with a stock exchange as per the Notification dated 20 February, 2006, of half yearly and annually in publicly-traded companies. In the Securities and Exchange Commission,. To qualify, the addition, members will often discuss complex accounting committee must be composed of independent directors estimates and judgments made by management and the nominated from outside with at least one qualifying as a implementation of new accounting principles or regulations. financial expert. Audit committees are typically empowered Audit committees interact regularly with senior financial to acquire the consulting resource persons with expertise management such as the CFO and Controller and are in a deemed necessary to perform their responsibilities. The role position to comment on the capabilities of these managers. of audit committees has become predominant as a result of Should significant problems with accounting practices or the passage of the Sarbanes-Oxley Act of 2002. Many audit personnel be identified or alleged, a special investigation may committees also have oversight responsibility of regulatory be directed by the audit committee, using outside consulting compliance and risk management activities. All banks in resources as deemed necessary. Bangladesh must have audit committees, vide Bangladesh External auditors are also required to report to the Banks’ circular No: 12, 23 December 2002. Not for profit management or committee on a variety of matters, such as (NGOs) entities may also have an audit committee. their views on management’s selection of accounting Boards of Directors and their committees rely on principles, accounting adjustments arising from their audits, management to run the daily operations of the business. The any disagreement or difficulties encountered in working with Board’s role is better described as oversight or monitoring, management, and any identified fraud or illegal acts. rather than execution. Responsibilities of the audit committee Role in oversight of the external auditor typically include: Audit committees typically approve selection of the external • Overseeing the financial reporting and disclosure process. auditor. The external auditor (also called a public accounting • Monitoring choice of accounting policies and principles. firm) reviews the entity’s financial statements quarterly and • Overseeing hiring, performance and independence of the issues an opinion on the accuracy of the entity’s annual external auditors. financial statements. Changing an external auditor typically • Oversight of regulatory compliance, ethics, and also requires audit committee approval in line with local whistleblower hotlines. company law such as Companies Act 1994. Audit committees

Md Abdus Salam, FCA, FCS, a Council Member and Vice President of the Institute of Chartered Accountants of Bangladesh (ICAB) and also a Director and Audit Committee Member of the Board of Directors, Islami Bank Bangladesh Limited. He is also a Council Member of Institute of Chartered Secretaries of Bangladesh.

The Bangladesh Accountant/April- June 2010 8 Accountancy also help ensure the external auditor is independent, meaning endorsed the audit committee concept. no conflicts of interest exist that might interfere with the • 1972: The U.S. Securities and Exchange Commission auditor’s ability to issue its opinion on the financial (SEC) first recommends that publicly held companies statements. establish audit committees composed of outside (non- management) directors. Role in oversight of regulatory compliance • 1977: NYSE adopts a listing requirement that audit Audit committees discuss litigation or regulatory compliance committees be composed entirely of independent risks with management, generally via briefings or reports directors. from the top lawyer in the entity. Larger corporations may • 1988: AICPA issues SAS 61 “Communication with Audit also have a Chief Compliance Officer or Ethics Officer that Committees” addressing communications between the report incidents or risks related to the entity’s code of external auditor, audit committee and management of conduct. SEC reporting companies. Role in monitoring the internal control process • 1999: NYSE, NASD, AMEX, SEC and AICPA finalize Internal control includes the policies and practices used to major rule changes based on Blue Ribbon Committee on control the operations, accounting, and regulatory compliance Improving the Effectiveness of the Corporate Audit of the entity. Management and both the internal auditing Committee. function and external auditors provide reporting to the audit • 2002: Sarbanes-Oxley Act is passed in the wake of committee regarding the effectiveness and efficiency of corporate scandals and includes whistleblower and 1 internal control . financial expert disclosure requirements for audit Role in oversight of risk management committees. Entities have a variety of functions that perform activities to Best practices understand and address risks that threaten the achievement of the organization’s objectives. The policies and practices used Managing the audit committee's agenda Audit committees typically use a full year agenda to ensure by the entity to identify, prioritize, and respond to the risks (or opportunities) are typically discussed with the audit coverage of the various topics they are required to address. committee. Many organizations are developing their practices The agenda for each meeting, which is typically quarterly or towards a goal of a risk-based management approach called more often, is then adjusted as necessary. Establishing the Enterprise risk management. Audit committee involvement in agenda is a collaborative effort between the Board, senior non-financial risk topics varies significantly by entity. management, legal counsel, and both the internal and external Experts have argued for risk management early warning auditors. It is important that the committee have its own systems at the corporate board level. perspective on what key issues it should address and these should be reflected in the agenda. Impact of the Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 increased audit committees’ Frequency of interaction with management responsibilities and authority. It raised membership Many audit committee chairpersons conduct interim calls requirements and committee composition to include more with key members of management between quarterly independent directors. Companies were required to disclose meetings. Key contacts may include the CEO, CFO, Chief whether or not a financial expert is on the Committee. Auditor, and external audit partner. Many boards also Further, the Securities and Exchange Commission, USA and schedule dinners prior to formal meetings that allow informal the stock exchanges proposed new regulations and rules to interaction with management. Some companies also require strengthen audit committees. their boards to spend a certain amount of time learning their History operations beyond board meeting attendance. Below are a few key milestones in the evolution of audit Executive sessions committees: These are formally scheduled private meetings between the • 1939: The New York Stock Exchange (NYSE) first audit committee and key members of management or the The Bangladesh Accountant/April- June 2010 9 Accountancy external auditor. These meetings typically are unstructured that they understood management’s processes to identify and provide the opportunity for the committee to obtain the and assess significant business risks. feedback of these managers in private. A key question audit • Only 17% of audit committees had primary responsibility committee members ask in such sessions is: “Is there for oversight of non-financial risk; the full board had this anything you would like to bring to our attention?” responsibility in 56% of companies. Evaluation Independent director Audit committees should complete a self-evaluation annually A non-executive director (NED) or outside director is a to identify improvement opportunities. This involves member of the board of directors of a company who does not comparing the committee’s performance versus its charter, form part of the executive management team. He or she is not any formal guidelines and rules, and against best practices. an employee of the company or affiliated with it in any other Such a review is confidential and may or may not include way. They are different from inside directors and are evaluations of particular members. members of the board either serve or previously served as executive managers of the company. Survey results Non-executive directors have responsibilities in the following Various independent consulting and public accounting firms areas: perform research on audit committees, to provide • Strategy: Non-executive directors should constructively benchmarking data. Some global results are identified below: challenge and contribute to the development of strategy. • 54% of committee members surveyed felt the audit • Performance: Non-executive directors should scrutinize committee was “very effective,” while 38% indicated the performance of management in meeting agreed goals “somewhat effective.” and objectives and monitoring, and where necessary • Risk management, internal control, and accounting removing, senior management and in succession estimates and judgments were the top priority areas for planning. 2007. • Risk: Non-executive directors should satisfy themselves • Most audit committees have 3-4 members and are usually that financial information is accurate and that financial chaired by persons with experience as a CFO, external controls and systems of risk management are robust and auditor, or CEO. defensible. • Audit committees meet 6-10 times per year, either face- • People: Non-executive directors are responsible for to-face or via teleconference, with the former lasting from determining appropriate levels of remuneration of 1-4 hours and the latter 1-2 hours. executive directors and have a prime role in appointing, • Audit committee members devote 50-150 hours to their and where necessary removing, senior management and responsibilities each year. in succession planning. NEDs should also provide independent views on: • The percentage of audit committees with oversight • Resources responsibility for IT compliance (66%), business • Appointments continuity (50%), and information security (45%). • Standards of conduct • 41% were “very satisfied” with the internal audit Non-executive directors are the custodians of the governance function, while 52% were “somewhat satisfied.” process. They are not involved in the day-to-day running of • Two-thirds felt the Chief Internal Audit position was for a business but monitor the executive activity and contribute to professional internal auditor, rather than as a “stepping the development of strategy. stone” to other roles. Recommendations • 93% indicated the audit committee was “somewhat” or In Bangladesh, under the corporate governance framework, it “much more” effective since the Sarbanes-Oxley Act was requires an independent evaluation on the formation and implemented in 2002. performance of the audit committee established in the I • 58% of committee members were “somewhat satisfied” publicly listed companies. The Bangladesh Accountant/April- June 2010 10 Budget & Economics Value Added Tax in Bangladesh - An Effective Way of Internal Resource Mobilization*

M. A. Baree FCA

Introduction: VAT Conceptual Framework Government needs resources mainly to meet administrative Meaning: VAT is a general consumption tax assessed on the expenses and to undertake growth and poverty reduction value added to goods and services. It is a general tax that programme. Taxation is one way of generating required applies in principle, to all commercial activities involving the revenue, the other way is to borrow from internal or external production and distribution of goods and the provision of sources. Government can not undertake sizeable development services. It is a consumption tax because it is borne ultimately projects without sufficiently large discretionary fund. by the final consumers. It is not a charge on business houses Unlimited public borrowing is of course, risky as has been or service providers, it is charged as a percentage of price, witnessed recently in UK, Spain, Greece etc. Bangladesh which means that the actual tax burden is visible at each stage Government however, has been very cautious in this respect of production and distribution chain. and over the years the budget deficit has been kept within 5% It is collected fractionally, via a system of deductions of GDP. In the last concluded fiscal 2009-10 the deficit was whereby taxable persons can deduct from their VAT liability 4.5% of GDP. Out of this 2% has been financed from external the amount of tax they have paid to other taxable persons on sources and the rest 2.5% from domestic sources. business purchases. This mechanism ensures that the tax is One way of ascertaining whether Government has been able neutral regardless of how many transactions are involved. to mobilize adequate interval resources through basically In other words, it is a multi-stage tax, levied only on value taxation, is to examine its tax- GDP ratio and the trend added at each stage in the chain of production of goods and thereon. The ratio in Bangladesh has been improving but at a services with the provision of a set off for the tax paid at snails pace and with this increase it might take us decades if earlier stages in the chain. The objective is to avoid cascading not years, to reach any reasonable and respectable standard. which can have a snowballing effect on prices. It is further Tax- GDP ratio in Bangladesh assumed that due to inbuilt cross checking in a multi staged 2005-06 8.70 tax, evasion would be checked resulting in more revenues to 2006-07 8.40 the Government. Over the last few decades around 160 2007-08 8.96 countries have introduced VAT. 2008-09 9.03 VAT was invented because very high sales taxes and tariffs 2009-10 9.30 encourage cheating and smuggling. However, critics raise the This compares very badly against our regional standard, let point that it is regressive since it disproportionately taxes the alone other developed or fast developing nations where the middle and low income group. ratio is 15.6%, 10.6%, 18% and 10.9% in the case of Sri Personal and consumer of products and services can not Lanka, Pakistan, India and Nepal respectively. recover VAT on purchases, but businesses are able to recover In the backdrop of this phenomena, the Government does not VAT (input tax) on the products and services they bought in have much of a choice other than improving the ratio quite order to produce further goods and services to be sold to yet substantially. Collection of more VAT is one of the answers another business in the supply chain or directly to a final and this paper is all about discussions, suggestions centering consumer. In this way, total tax levied at each stage in the around various aspects of VAT in Bangladesh. chain is a constant fraction of the value added by a business

*Reproduced is the paper presented by Mr. M. A. Baree FCA, Past President-ICAB in the International Conference of Chartered Accountants-2010

The Bangladesh Accountant/April- June 2010 11 Budget & Economics to its products and most of the cost of collecting the tax borne VAT regime in Bangladesh by the business rather than by the state. VAT was introduced in Bangladesh from 01 July 1991. Classification of goods and services under VAT system Before that it was the regime of sales tax and excise duties. For VAT purpose goods and services are classified into three; The system was introduced rather very quickly at the 1. Taxable, where all goods and services are subject to insistence of the World Bank who thought it appropriate for VAT the rate may be uniform or variation thereof on higher internal resource mobilization by the Government. The different socio-economic considerations. The VAT Act, 1991 along with VAT Rules 1991 was drafted and businessman or service provider has to calculate his passed in the Parliament within a very short space of time. output tax based on sales or turnover. Therefore, he can The Act contains some-73 sections and number of Rules in deduct the input tax paid on the goods or services to Bengali which are too complex and confusing. The structures make his final product or services. often are unnecessarily lengthy, cumbersome and obscured. ii. Exempt, some goods or services may be exempt from The sections are often interlocked and even a particular VAT. It may differ from jurisdictions to jurisdictions but section runs a full page with a single sentence. By any the fundamental remains that suppliers of exempt goods standard the Act and the Rules were not user friendly and the and services are not subject to output tax and as such shadow or spirit of old customs, sale and excise law prevail they can not charge VAT and they can not also offset or allover. To meet the growing demand of time the Act and the claim back input VAT on purchases. Rules have been proved to be basically inadequate and to iii. Zero-rated, this is a variation of taxable goods or cope with even increasingly complex scenario, the NBR services but the rate of VAT has been kept at zero-rate. resorted to issuing of Statutory Regulatory Orders (SRO) and Export is one of such example. On the output side there by this time on various matters where the Act could not is no VAT payable but input taxes paid in the purchase answer, NBR issued innumerable SROs, numbering perhaps of goods and services can be claimed back. 500, some are alive, some are redundant. Origin/destination principle Structure of VAT Act, 1991 Some might wonder why in case imports, when all value has Basically it contained three parts, VAT, Turnover Tax and been added across the border VAT is levied by the receiving Supplementary duty - the rate has been fixed at 15%. country and exports where all value has been added within Turnover Tax the country are not charged VAT. The answer lies in the For small manufacturers or traders with an annual turnover of principle, origin or destination. Under the origin principle certain amount, the present threshold is Tk 50 lakhs, the rate value added domestically on all goods and services whether of output VAT has been fixed at 4%. However, they can not exported or internally consumed is subject to tax. deduct the input taxes paid on their purchases. Consequently, tax can not be levied on value added abroad and this principle confines VAT only to goods originating in Supplementary duty the country of consumption. In short, exports are taxable The rationale stated in the Act for charging supplementary under this principle while imports are exempt. duty is to discourage the use of luxurious or socially Under destination principle value added irrespective of the undesirable goods or services. The duty is indeed quite heavy place of origin is taxable. All goods are taxed if they are ranging from 30% to 500%. It is levied at import stage and at consumed within the country. Under this, exports are exempt local stage. The list is quite lengthy and thousands of items at while imports are taxed. Destination principle is normally import stage attract supplementary duty. used along with consumption VAT. It treats imported goods Local products attracting supplementary duty include at par with domestic products unlike the origin principle cigarettes, sampoo, coconut oil, soft drinks, mineral water, which gives in direct protection even preference to the paint, jorda, ceramic tiles, bath tubs, basins commodes, fruit producers abroad. All EEC and other countries including juice etc. Services attracting VAT are hotel and restaurants of Bangladesh now follow destination principle. certain specifications, supply of SIM cards, cinema halls and

The Bangladesh Accountant/April- June 2010 12 Budget & Economics satellite channel distributors. As a matter of fact, supplementary duty can not be a part of The reason for the levy of supplementary duty at both import VAT Act. It is included there in 1991 by default to fill up the and local stages though appears sound, it has nevertheless revenue gap in 1991 and since then it goes on like this and no used as an additional source of revenue. In essence at import alternative has been evolved within the last 20 years. stage it is a surrogate to custom duty and at local level it is Furthermore, it appears that there lies a tax on tax mischief alike sales tax. Since Bangladesh is a signatory to WTO since to calculate the VAT base at both levels, supplementary agreement to rationalize custom tariff into 4 tier the duty is added. Since the provisions of supplementary duty are Govrnment can not include it with custom duties. But the within the main VAT Act 1991, anything paid under this is in revenue out of supplementary duty both at import and local essence VAT. levels are about 25% of total VAT revenue.

Composition of revenue % VAT at import stage 17 Supplementary duty at import stage 5 Excise 1 VAT - Local stage 23 Supplementary duty - local stage 13 Import duty 17 Other taxes and duties 1 Income tax 23 100

VAT including supplementary duty at various stages account From the above picture the collection scenario appears very for 58% of the tax revenue, the biggest source. Besides a much skewed. 40 multinationals accounting about 25% small amount, around 1% is collected as excise duties from included in LTU contribute more than 60% of LTU revenue two sectors, air ticket and bank deposit/accounts. The reason whereas 165 LTU units contribute more than 60% of total is not however, clear why these two items have been still VAT revenue. Again two cigarette manufacturing and six under excise. mobile phone companies account for 69% of LTU revenue.

The Bangladesh Accountant/April- June 2010 13 Budget & Economics

Registered VAT persons and Large Taxpayers Unit (LTU) At present there are reportedly about 650,000 registered persons (last year 450,000) and about 90,000 retailers in the whole jurisdiction. Out of this 165 are placed under LTU. Perhaps the activities thereon are carried on functional basis. Following figure summarily would provide an idea of LTU; Tk (Figure in Crore)

2006-07 2007-08 2008-09 2009-10 VAT collected from all persons 15560.01 18858.8 21911.95 22795 Collected from LTU 7710.62 10037.44 11028.29 13506.50 As a percentage 49.55% 53.22% 50.33% 59.24% 40 multinationals within 165 (25%) 56.18% 58.31% 52.77% 62% 2 cigarettes and 6 mobile companies within 165 65.49% 66.34% 61.5% 68.79%

The collection from other thousands of registered persons is Bangladesh and further study in required to ascertain the indeed insignificant when compared with LTU units, multi- extent of it. The chartered accountants, when their services nationals and large manufacturers. are obtained by the authorities, can assist in collecting more Import duty VAT. They can- Over the period 2004-05 to 2008-09 import duty collection • educate the taxpayers about VAT • educate and train taxpayers about maintenance of proper which does not need any extra effort rather to apply the fixed books, records and documents relating to VAT rate has been within 0.6% of import value on average. It • assist preparation and submission of VAT returns appears to have been managed as such. • certify the VAT returns of at least LTU if it is made Contribution to GDP mandatory 2006-07 2007-08 2008-09 • audit VAT deduction at source and its timely deposit Manufacturing 17.55% 17.77% 17.90% • assist the authorities to detect large VAT frauds Contribution in VAT 3.8% 3.8% 4.4% • survey the whole range of VAT activities in a circle on Wholesale and retail 14.24% 14.37% 14.41% pilot basis VAT collection .012% .011% .011% • undertake and complete VAT audit if so authorized specially LTU It can be imagined which sectors are paying disproportionately lower amount of VAT. There are of course Recommendations • collection targets must be made considering the tax rebates or exemption. Nevertheless, an exercise analyzing potentiality in each sector rather than 10% last year VAT generated from 15 main sectors of our economy may syndrome provide important policy guidelines. • the target should meet the potentialities not the revenue Collection specially from 80,000 – 90,000 retailers has been requirement and staff performances should be evaluated ludicrously low at Tk 37 crores, Tk 28 crores and Tk 32 accordingly crores in the 2006-07, 2007-08 and 2008-09 fiscals • services of chartered accountants should be outsourced to respectively. The figures on wholesale also are equally bad. meet the skill shortage of NBR. whereas it is an accepted fact that retailers’ turnover has • VAT Act, Rules etc must be rewritten in a more user incurred significantly because of firstly population growth friendly and functional manner (preferably in English and secondly because of increase in purchasing power. There since foreigners are involved in VAT matters) are lot of retailers around who should pay substantial amount • computerize all VAT operations including online of VAT and income tax neither of which they now pay. submission of VAT returns Chartered Accountants’ role • limit the use of SROs, notices and circulars to It seems that VAT has got tremendous potentials in manageable level The Bangladesh Accountant/April- June 2010 14 Budget & Economics

• disproportionably low yield sectors or persons should be • Presumptive tax system which mostly depends on the bought under close and careful monitoring sweet will of the leaders of small traders should be . Their • introduce gradually risk based audit identifying those voices must be heard carefully but the authority should taxpayers who are most likely to be non-compliant not yield to their pressures. Unlike recent bad incidence through the use of risk scoring techniques and taxpayers of 4.5% VAT on private universities, the Government profiling as the concept is applied by banks and financial should make the law on sound legal footing and must institutions. Core principles of risk based audit are: stick to the policy. - trust but verify Conclusion - self assessment of taxes Our long term development goals would not be achieved - compliant taxpayers treated with respect non- without substantial public investments which in turn depends compliant with severity on the ability of the Government to raise adequate internal - promote a culture of voluntary tax payment resources mainly through taxation. Import duty as a source - reduce opportunities for rent seeking behavior has been declining sharply as a result of WTO agreement to - reduce interface between tax staff and taxpayers reduce and rationalize import tariff. Income tax though a • use of electronic cash register (ECR) with fiscal memory earlier made twice mandatory for selected medium and potential source is difficult to collect since it is a direct tax. small traders within all City Corporations from 01 Resistance often grows amongst the taxpayers who may also January 2009 and from 01 July 2009 in all district town. resort to evasion. VAT on the other hand, has wider base and It seems the policy has been shelved. being indirect tax, is not difficult to collect. As a matter of • VAT exemption schedules for goods and services fact, the final consumers of vatable goods and services pay included in the Act and made through SROs, circulars etc VAT at consumption point and it is the duty of the authority to be further rationalized. to collect this efficiently and effectively.

Revenue scenario – NBR administered Tk (Figure in Crore)

2006-07 2007-08 2008-09 2009-10 2010-11 % % % % (budget) % Income tax 8924 23.81 11005 23.93 13538 25.54 16560 27.14 21005 28.93 VAT 13683 36.5 17013 37.0 20116 37.95 22795 37.36 27092 3732 Import duty 8279 22.08 9300 2083 9570 1805 10430 17.09 10885 14.99 Excise 185 .0041 213 .005 237 .006 261 .0061 275 .003 Supplementary duty 6095 16.26 7970 17.33 9121 17.20 10485 17.18 12866 17.72

It is evident from the above that import duty as a source of revenue has been on the decline and VAT though increasing in absolute term, the percentage in relative term has been hovering around 37%. Perhaps, above has been designed as such at the budget preparation stage so that the collecting authorities do not have to bear additional load.

The Bangladesh Accountant/April- June 2010 15 Budget & Economics Marginal Workers’ Benefits: The Lone fat in Company’s Income Statement!

Mohammad Zahid Hossain FCA

Resources are limited while the complexities for business workers without giving any decent, legitimate compensation. houses are getting increased which is leading to the hike in The first one is sometimes difficult if such action creates bad production cost. Despite that, due to the tough competition in impression about the product in the mind of customers or the the market, hiking of product price cannot be a solution to law enforcers take any legal action against it. In that case, cope with the changed cost structure. To manage this critical only the second option remains as last resort! situation, many business houses all over the world conduct Like many other sectors, this is largely happening in RMG “Cost Containment Plan”. Such plans are operated within the sector, the major FOREX earning sector of the country where organization to identify the fats in cost and remove them from an indecent amount of salary or delayed payment thereof is expense statement. This practice has become so popular in the the main reason of frequent unrest. Both owners and Govt. is world that many professional firms are now fully addressing such unrest as “conspiracy” of third party. Yes, concentrated in this area of working wherein they developed conspiracy! This third party is their stomach, landlord, core competencies. They are developing different methods in transporters, families, diseases and so on. a scientific way to cater services to the business houses Companies intended to rationalize the cost-base of the working in various industries. Such professionals have company don’t look into the below areas of expense in industry specific guidelines as well to control the cost and connection with senior executives and owners: bring efficiency therein. 1. Air travel in business class : cost can be reduced by But in developing such methods, these firms always keep the traveling in economy class following issues as constraints in their mind: 2. Membership in expensive club at home and abroad: for 1. Local and international legislations personal amusement. So, it should be paid from the 2. Generally acceptable industry practices beneficiary’s pocket 3. Public interest or social impact 3. Riding expensive cars: one car is enough and BMW is 4. Environmental impact etc. not needed for business In Bangladesh, local companies are not yet very much 4. Frequent pleasure tour outside the country: simply familiar with this sort of strategy to manage cost in an wastage! efficient manner. Some renowned Multinational Companies 5. Premium overseas Medical services including family are running this project taking expert knowledge from their members: they are capable enough to pay from their own overseas offices. This is surely adding value to the business huge income and keeping them very competitive in the market. Like them, This list is not exhaustive and it’s really as big as a laundry local companies specially the export-oriented business houses list! But the misery, the owners only see the small list of should also think to reshape their cost structure to be more expenses (like overtime and evening snacks) in connection cost competitive in international market. with marginal workers. It is found from different It has been experienced from some local companies’ practices organization's income statement that the topmost senior that they control cost either by compromising with the quality executives contribute 33% in total personnel expense though of the product or simply slashing the benefits of marginal they are less than 3% in total number! It cannot be negated

Author is Fellow Member of the Institute of Chartered Accountants of Bangladesh (ICAB).

The Bangladesh Accountant/April- June 2010 16 Budget & Economics that the salary of top executives should be higher than the paying countries must have some other selling factors to the workers as the former is superior to the latter from different buyers which are making them competitive. Bangladesh point of views and their nature of work is more critical also. should also develop their core competency in other areas. The But the workers at least should be given sufficient salary and problem remains elsewhere! A major driving force of Govt. benefits to have a human life! The dispersion between the has been Business Community and they rule the Govt. system executives and workers should not be so big! for their own benefit. Business community always creates a The low-cost laborer has been considered as the main selling panic of shutting down the business leading to the tool of the exporters as well Govt. of Bangladesh to foreign unemployment of the workers. But they should perceive their buyers and potential investors respectively. In creating the own interest attaching to this situation also, if arises. Without market and increasing the FDI for the country, the marginal people, they cannot run their factory too. workers’ back now against the wall. How long they need to They spend huge in maintaining the machine to get seamless fight for their basic requirements? They are not dreaming to output while they are very careless about the people because send their baby in any International school. If they only desire this is the most abundant petty machines available in the to get sufficient payment to send their babies in a Govt. country! primary school, will it be considered as a luxury? We need to If the workers cannot lead a minimum decent life, they will understand the need to arrange shelter, medical support etc lose their interest in their work. Such demoralized people from their wages. cannot give good output to create further demand of the The below table shows the minimum monthly wages of product. Hence, the current situation is highly vulnerable and workers in different countries of Asia which are comparable Govt. should take immediate action considering the long-term with Bangladesh from cost of living point of view: impact on the export as well as work force. Bangladesh USD 23 Govt. should come forward and take stern action especially Vietnam USD 36 on the below issues: Nepal USD 64.60 to 69.51 1. Minimum wages in line with current macro economic Sri Lanka USD 59.41 factors which will be revised time to time taking Pakistan USD 83.22 inflation into account India No national rate, varies according to the state 2. Timely payment of wages and to the sector of industry 3. Spread between the top and marginal workers’ payment If the other competing countries (like, Vietnam) can get 4. Minimum basic facilities business from developed countries even paying higher wages General people don’t want “Business” as a very ruthless book to its workers, why Bangladesh cannot do that? These higher which does not keep the word “humanity” in its pages.

The Bangladesh Accountant/April- June 2010 17 Budget & Economics Analysis of the National Budget of Bangladesh 2010-11: Excellences and Constraints

Md. Hafij Ullah Monir Ahmmed Abu Hanifa Md. Noman Bin Alam

Abstract: and the population. The government has rolled out a National Budget is actually signposts and directions to the prospective budget for 2010-11 which seeks to achieve an vision of the government and therefore, it is necessary to overall 6.7 per cent growth rate for the economy. For this analyze the annual budget along with its figures to manage growth target, the government emphasized on increased implementation and looks at what is being done to deliver revenue collection, enhancing private sector investment and existing obligations. The present study is an endeavor to stabilizing the exchange rate mechanism in order to make the analyze the national budget of Bangladesh highlighting its external sector competitive. The high growth target is also excellences, constraints, future implications, challenges of the relevant to addressing the core concerns of Bangladesh, i.e., governments in implementation. The study mainly finds that poverty alleviation, increased social safety net and robust the allocations are almost justified but roadmap for education for human resources development, strong health implementation is insufficient. This article also provides some services, agriculture, power and energy and rural policy recommendations at the end to help successful development. The development-oriented national budget for implementation and achievement of maximum benefits from the financial year 2010-11 is ‘exceptional to some extent’ for the scares resources. the inclusion of analysis of success and failures of previous year’s budget but it found some lacking as there is Key Words: Budget, Excellences, Constraints, Analysis and insufficient roadmap of its implementation. Therefore, the Implementation. government requires making appropriate policies through Introduction: critical and comparative study for successful implementation The National Budget for the financial year 2010-11 was of the budget to achieve maximum benefits with these scares placed and finally passed in the parliament with a vision of resources. digital and prosperous Bangladesh. The national budget is The focus on budget analysis takes the implied desire of the always more than a mere accounting exercise. National executives and legislature to manage implementation and Budget is actually signposts and directions to the vision of the looks at what is being done to deliver existing obligations (1). government. Therefore, it is necessary to analyze the national Budget analysis are more important in our country because budget along with its figures. The Government passed a budget institutions in low-income countries are much less budget which is 35 percent higher than that of the revised developed than in developed and emerging market countries budget of the financial year 2009-10 but it cannot be said that (2) and weak capacity, ineffective institutions of civil society, the national budget for the next fiscal year (FY 2010-2011) at political economy factors act as a severe constraints on the around Tk. 132.17 billion, which is 16.9 percent of the modernizing budget institutions (3). The present study is a proposed Gross Domestic Product (GDP) worth Tk 780.29 noble endeavor to analyze the budget of the financial year billion, is too ambitious given the overall size of the economy 2010-11 highlighting the potential implications in the macro

Md. Hafij Ullah, Lecturer in Accounting, Department of Business Administration, Faculty of Business Studies, International Islamic University Chittagong, Monir Ahmmed, Assistant Professor in Economics, Department of Business Administration, Faculty of Business Studies, International Islamic University Chittagong and Abu Hanifa Md. Noman Bin Alam, Lecturer in Finance, Department of Business Administration, Faculty of Business Studies, International Islamic University Chittagong.

The Bangladesh Accountant/April- June 2010 18 Budget & Economics economic perspective of the country and to facilitate the (where maximum of the export is made). It is a matter of policy makers for successful implementation of the budget. pleasure that Government has taken some steps to increase Objectives and Methodology of the Study: revenue collections through widening tax-net in case of both The main objective of the study is to analyze the budget Income tax and VAT, reducing tax evasion by revising VAT passed for the financial year 2010-11. To achieve the main Act and Income Tax Ordinance 1984, motivating tax payers objective, the study sets the following specific objectives: by creating client friendly environment in the tax offices, 1. To Analyze the National Budget of Bangladesh passed setting one-stop service centers, increasing efficient for the Financial Year 2010-11. employees in the tax offices, and reorganizing tax appellate 2. To predict the future implications and challenges for the tribunal for reducing tax related cases. But collection of the government in this regard. higher amount of revenue may increase pressure on the 3. To suggest some policy recommendations for successful general people. implementation of the budget to get the maximum benefits from the scares resources. The study was completed based on secondary data only. The methodology followed in this study is mainly of library work basically based on critical analysis and comparative study of the budgets passed and related literatures. Limitations of the Study: This study of analyzing the budget was completed within very short period of time. Therefore, it was not possible to Graph-1: Sources of Total Resource Collections of the highlight all the areas of the budget. Budget 2010-11. Analysis of the Budget: 2. Effects of Budget on Power and Energy Sector: The analysis of budget was performed under different heads The new budget aims to attain a 6.7 percent GDP growth by highlighting the macro-economic perspective of Bangladesh next fiscal, and for that it has focused more on infrastructure as below: development, especially power generation, to facilitate 1. Effects of Budget on Revenue Collections: investment and expansion of business and that is why the Total revenue Collections budgeted for the financial year allocation for power and energy sectors in the new budget has 2010-11 is Tk. 92,847 crore out of which Tk. 72,590 crore been enhanced by (Tk 6,115 crore) about 61.5 percent over from NBR tax revenue, Tk. 3,452 crore from Non-NBR tax what it was in the outgoing fiscal year. But stress on rental revenue and Tk. 16,805 crore from Non-tax revenue power generation means very high cost of power, and there is increasing 19 percent, 16.8 percent and 8.2 percent no clear indication in the budget as to how the electricity thus respectively from revised budget. Whether it would be generated would come within the reach of the common possible to collect these amounts is a question because aiming consumers. at a big increase over a big benchmark may prove difficult The budget gave due importance to these power and energy but the revenue collections position in the last year may make sector describing its real scenario of the present crisis and us optimistic in this regard. If Government can add more ever highest amount were allocated for stimulating from their 5,00,000 people under the tax network as stated in budget present position. A vision is also stated in the budget to speech and can collect VAT appropriately from the widened eliminate difference between supply and demand of areas then it may be expected to collect the budgeted amount. electricity by 2012 and to generate more 9,426 Megawatt But challenge would remain due to taking time for expected electricity by 2015 and ensuring electricity for all by 2021. power generation and instability in RMG sector and also due But the previous experience of implementation of the projects to slow growth continuation in the Euro-zone countries was not so as it was planned. Many projects and proposals are The Bangladesh Accountant/April- June 2010 19 Budget & Economics still in dark or delayed to be implemented. Therefore, the expected improvements in these sectors depend on the successful implementation of the budget. Though allocation was consecutively increasing for electricity for two years, that is, in 2008-09 it was 2.5 percent; in 2009- 10 it was 3.4 percent and in 2020-11 it is 4.6 percent of the total budget but subsidies are not sufficient as per the present crisis and its importance to the economy of the country though the Government emphasized that private investment would increase in this sector. Moreover, gas is getting Graph-2: Sector wise Resource Distribution of the Budget 2010-11. scarcer; the government meanwhile would do well to announce a comprehensive policy on off-shore gas and oil 4. Effects of Budget on Social Security and Welfare: As per the budget statement, poverty reduction through exploration, and especially on extraction of coal and acceleration of economic growth, ensuring social security and establishment of coal-fired power plants to produce cheaper empower people through employment are the prime focusing electricity for the general consumers and the industries. areas of the government and hence the social security and 3. Effects of Budget on Annual Development welfare program was divided into four categories namely: Program (ADP): special allowances to different underprivileged sections, The increase of about 35 percent in ADP (Tk. 42,770 crore) employment generation through micro-credit or different funds/programs, food security programs and finally, support may be taken to eradicate the present economic crisis but it to the new generation in the areas of education, health, was 26 percent (Tk. 31,817 crore) in the last year’s revised training and vocational competence. budget. The allocation in ADP is justified but due to lack of Government again increased the budget allocation for social speediness in activities the budget in maximum cases remains security and welfare to Tk.19,497 crore which is 14.8 percent idle and therefore the activities of the public administration of ADB and Non-ADB budget allocation and for the first should be made speedier to achieve the target of development time a fund of Tk. 5 crore was allocated for the acid-affected, but budget did not mention much about that capacity physically autistic and self-employed activities of the women. enhancement and therefore any variance in these arenas Old-age beneficiaries coverage was 22,50,000 in 2009-10 and would certainly take a toll on the growth figure. proposes to cover 24,75,000 in 2010-11 and allocated Tk. 891 The challenge would expect to face is implementation of the crores to support the program. Allocation of food grain of Annual Development program in 2010-11 (total 910) and 2.65 lakh MT as VGD against the Ministry of Women and therefore, emphasis are to be given on the quality of the Children Affairs, 75 thousand MT as TR against the Ministry projects implemented not on the number of projects of Chittagong Hill Tracts Affairs, 4.10 lakh MT as TR, 80 implemented and on the sectors that have high proportion of thousand MT as GR, 5.50 lakh MT as VGF against the the carried over projects and those to be completed by this Ministry of Food and Disaster Management has been made. financial year. In presenting the earlier budget in 2009-10, the Due to increase in number of beneficiaries additional government emphasized on taking some reforms measures allocation has been made under a number of social security- and using Critical Path Method for monitoring project net programs namely: Allowance for widowed, Divorced and implementation advancement but nothing was observed so far Destitute Women, Old age allowances, Allowance for in this regard. However, the success in achieving the targets Insolvent Persons Disabilities, Honorarium for the Insolvent as stated in the national budget requires that the Freedom Fighters, and Maternity allowance for the Poor administration is transparent and accountable and the Lactating mothers. On the other hand, consistency in the taskforce formed for monitoring the 10 major social security program is really a good step of the Ministries/Divisions working actively. government but increment in allocation has been watered The Bangladesh Accountant/April- June 2010 20 Budget & Economics down by its expansion and the allocation in the social security government namely: determining the priorities of the program for the year 2010-11 in proportion to the total budget industries to be emphasized, site and land development for has actually reduced compared to that of the previous year. leather and pharmaceutical industrial parks, promoting role of Though these programs are helpful for living but the government for private sector development, determining condition of those people would expect to improve if the policy for restructuring or exiting the sick private industries, financing for reviving and exporting of jute products to government could provide them permanent employment. restore the lost pride of the sector, enacting ‘Bangladesh 5. Effects of Budget on Agriculture Sector: Parjatan Board Act 2010’ and The ‘Bangladesh Conservation For achieving the vision of being self sufficient in food by the and Preservation of Tourism Areas and Exclusive Tourist year 2012, various steps were stated in the budget for Zone Ordinance 2010’ for development of tourism industries, improvement of agriculture namely: distribution of agri-input providing training to workers of the nationalized industries to assistance cards to 1.82 crore farmer families and opening enhance their productivity, determining loan target for SMEs account in a bank by Tk. 10 only so that government can & increasing the ceiling for 4 percent turnover tax from Tk 40 provide other subsidies fairly to the doorstep of the farmers lakh to Tk 60 lakh, providing directives to establish a through bank, distribution of organic, green and bio fertilizer ‘Women Entrepreneur Dedicated Desk’ in each bank to to 97 lakh farmer families, producing and distributing variety ensure better opportunity for women entrepreneurs and of high yielding seeds, increasing seed storage capacity, stepping toward formulating ‘Competition Act 2010’ to testing soil quality, ensuring fair prices of agro-products, and ensure fair competition in the free market economy. increasing the target of distribution of agricultural loan, etc. The budget for fiscal year 2010-11 can be called industry- But a total of Tk. 7,492 crore was allocated for (both revenue friendly, and therefore, the businessmen may be happy for and development budget) agriculture which is reduced to 8.6 continuation of the protection for local industries, percent of the total budget consecutively for two years. This continuation of core stimulus subsidies of the existing year figure was 9.7 percent in 2009-10 and it was 11 percent in and expecting that the problem of electricity will be resolved 2008-09. Moreover, a total of Tk. 4,000 crore has been due to taking remarkable steps by the government in this allocated to meet the demand of subsidy for agricultural regard. Government kept Tk. 2,000 crore stimulus package inputs (fertilizer, and other agricultural activities) which was for industry to overcome the consequences of the recession. Tk. 4,950 crore in the previous year. Agricultural subsidies This looks like a sound policy stance in the face of the global are not sufficient as per its importance to the economy of the trend of phasing out stimulus now. country because due to reduced supply of gas the production However, it is hard to understand the logic of taking away the of fertilizer may also reduce and hence the import if urea is to opportunity given to small businesses to pay VAT at a low be increased and it would be difficult for the government to fixed rate. And so is not factoring in the effect of inflation on control the fertilizer prices as stated in the budget. On the income tax slabs. And production costs in the textile sector other hand, irrigation received poor attention, and farm credit would be higher for continuation of duty on the import of for the next fiscal year is very poorly higher. If surface water capital machinery and if present power crisis stays longer. If utilization is high in priority, dredging of rivers was not given the tax on the export of knitwear, woven and other products is due attention. Agriculture insurance for the loss of the raised to 1 percent from the existing 0.25 percent, it will have farmers due to natural calamities and production of salinity a negative impact on overall export growth. Loan and flood tolerant paddy were introduced in the budget but no disbursement in the private sector might be squeezed because specific roadmap was given for implementation of these of the government’s high borrowing from the banking plans. system. 6. Effects of Budget on Business/Industrial Sector: 7. Effects of Budget on Information and As per the vision of the government, the budget 2010-11 Communication Technology: again emphasized on raising the contribution of the industrial The budget allocated only Tk. 112 crore (which is slightly sector to GDP to 40 percent and the level of absorption of the higher than Tk. 100 crore of the last year’s budget) for the labor force in this sector to 25 percent by 2021. To promote ICT sector development and Tk. 200 crore in the existing labor-intensive and environment-friendly industrialization of Equity and Entrepreneurship Fund to promote the country, various significant steps have been taken by the entrepreneurship in the IT sector but according to ICT Policy The Bangladesh Accountant/April- June 2010 21 Budget & Economics

2009, (action plan no-100), the government had to allocate 5 due to not starting the PPP in the last year but again a total of percent of the total annual development program and 2 Tk. 3,000 crore (2.2 percent) has been allocated for the public percent of the total revenue budget (it should be about Tk private partnership initiatives for the next year expecting that 3,800 crore). Therefore, the allocation for ICT is insufficient private entrepreneurs would come forward because of as per the plan of the government to build a Digital formulating new PPP guidelines and establishing a separate Bangladesh by 2021. And it is really surprising that the office that would deal with PPP. government plans imposition of VAT on e-commerce However, private entrepreneurs may not respond with much industry when the industry is yet to launch services in enthusiasm to PPP projects of the next fiscal year due to the Bangladesh properly. But the plan and steps taken for lack of profitability guarantee, priority projects, clear development of this sector is appreciable like establishing ‘Hi provision regarding guidelines about private entrepreneurs’ Tech Parks’, ‘ICT Village’, E-Governance, Digital-based involvement in projects and their involvement in the new PPP Filing System, ‘Community E-Centers’ in the rural areas, office. Moreover, high dependability of the government on enhancing research facilities for science & technology, PPP for power and energy projects may prove risky. undertaking ‘South Asian Sub-regional Economic Cooperation (SASEC) information Highway project to 10. Effects of Budget on Income Tax and Value strengthen regional cooperation and establish connectivity Added Tax (VAT): among India, Nepal, Bhutan and Bangladesh. There are very few changes in income tax provisions in the budget and some steps are stated to increase the number of 8. Effects of Budget on Investment and Employment Generation: taxpayers but various steps have been expressed to widen the The investment position in the last two years is not scope of VAT in a massive way. Therefore, the small traders satisfactory for the government and again the target of would now come under VAT net. As an important source of achieving 6.7 percent GDP (Gross Domestic Product) growth government revenue, VAT target again increase by 19.23% in in the fiscal year 2010-11 would be possible if the the current budget as like as last year. To achieve higher government can raise investment, implementation capacity amount of revenue income from VAT, base prices have been and the fate remain in favor of the government, that means, increased in some cases. Truncated VAT rate was increased free from political crisis and natural disaster. Emphasizing on to actual (that is, 15%) in case of the services of dockyard, Foreign Direct Investment and on reducing cost of doing advertising agency, printing press, courier service, business, remarkable steps for power and infrastructure, consultancy and supervisory firm, audit and accounting firm, formulating ‘Bangladesh Economic Zones Act 2010’ and the architect and interior designer, etc. Digitalization of VAT budgeted allocation of Tk. 1,600 crore to the Bangladesh system is a good step, simultaneously the efficiency and Infrastructure Financing Fund would expect to encourage transparency is also to be ensured to achieve the target. investment. The plan for establishment of ‘Bangladesh Government should also take some programs for increasing Institute of Stock Market’ is appreciable but imposing a 3 the morality of the traders to ensure the payment of VAT percent tax on the premium value of shares that are sold at a what they collect from the customers and maintain accurate premium, and the 10 percent tax on the income of listed records of the purchase of raw materials, other ingredients companies earned from trading of shares, may affect stock and sale of products. market negatively. The premium is not an income of the All the proposed hikes, like increasing the tolerable level of company; it is absolutely a capital receipt. If expected VAT at traders’ level to 20 percent from 10 percent and 15 investment in energy and infrastructure is materialized then it percent VAT on rented houses for commercial purposes will is expected that there would be improvement in business and push prices upwards. And the withdrawal of the cottage industries resultantly would increase in employment industrial facilities and imposing a VAT of 15 percent on opportunities. Though overseas employment was reduced for chanachur, juice, energy drinks, bidi, gul and jarda will about two years, government has taken some steps to recover negatively impact the prices. In addition, the tax hike from the job market again and to find new job markets. 4.5 percent to 5.5 percent in the construction sector, and 6 9. Public Private Partnership (PPP): percent tax on furniture at production level and 3 percent at Though the earlier budget of Tk. 500 crore remains unused distribution level will increase prices in the sectors. The Bangladesh Accountant/April- June 2010 22 Budget & Economics 11. Effects of Budget on Inflation and Consumers: industrial pollution, Medical Waste Management and As the budget is comparatively bigger which is rationale for Administration Act 2010 has been enacted and Medical eradication of the poverty from the country but its Waste Management Rules 2010 has been framed to improve implementation and if private sector come forward then there disposal of waste management by medicals and clinics, 16 is a possibility of increasing the rate of inflation highly investment projects have been undertaken for the next fiscal though government want to reduce the rate of inflation. to increase forestation to 20 percent land of the country and The expectation of the people in the middle and lower- modernization process of forecasting and warning system for income brackets from the new national budget is very poor climate change effects are continuing to reduce the loss for because there is really very little good news for them. Only natural calamities. the intention of the government is stated regarding strengthening of TCB and few words are stated for protection 13. Effects of Budget on Education Sector: of the consumer rights. But increase in Compressed Natural The government gave top priority to the sector considering Gas (CNG) price on the grounds that it is one-third of that of education as one of the core strategies to alleviate poverty and petroleum is not really persuasive. The resulting impact will facilitate development and therefore, government has raised be a further increase in the cost of transport, which is already allocation in the education sector by 13.5 percent in the beyond the range of the daily travelers. And higher transport budget for the next fiscal year. It is stated in the budget that cost will go to move up the prices of goods and services as the allocation in the education sector is the highest in the they are hauled from one place to another. VAT (value added country’s history and almost doubles that of any other sector. tax) on small and mid-size businesses has been increased Moreover, government took projects such as school feeding from one and a half percent to three, which may be an extra burden for consumers. Except for some essentials, industrial program, giving stipends at primary level and installation of raw materials, and capital machinery, advance income taxes teaching centres at char, haor, and remote areas to achieve the on others have been increased to five percent from three. As a target of 100 percent enrolment at primary level by 2010. But result, prices of around 3,000 essential items may go up. out of the budgeted allocation, a big portion would expect to Another bad news is that the tariff on power will go up in the be used for the salaries and remuneration of the teachers due next fiscal year. But, except presentation of the wish list of to increasing the MPO listed organization and due to increase steps to ensure economic growth, no instant measures are of the prices of the educational materials. Therefore, the visible to enhance the people’s level of income so that they allocation for the education especially for development may foot the bill of fare inflated by the hike in cost of living. activities is poor. On the other hand, it is more important to Again, middle class buyers might have to pay more for cars ensure quality of education than to increase allocation. But no from 1001cc to 1500cc as import duty on cars in that range significant initiative to improve the quality of education has been upped from 30 to 45 percent in the proposed budget. remain absent in the budget. Import duty on microbus up to 1,800cc has been increased by 10 percent. 14. Effects of Budget on Corruption: One important area is neglected in the budget that is 12. Effects of Budget on Climate Change Fund: corruption. The anti-corruption chapter was probably inserted The most talked and extremely important issue of concern in just for the sake of recognizing its existence; no specific this time is climate change and environment. But Government measure is cited in the budget to eliminate its root. Though it has allocated Tk. 700 crore for climate change fund which is is stated that Anti-Corruption Commission (ACC) is equal to the allocation of the last budget. As per the independent but there is a shaded control of the government on it in the name of Accountability, allocation of funds, importance of the issue, the allocation should be higher than appointment of the manpower. Therefore, all achievements in the allocated amount. According to statements of budget, economic or other affairs may go in vain if the diseases of all Bangladesh Climate Change Resilience Fund of US $110 types of corruption cannot be rooted out. million has been created, Climate Change Trust Fund policy Policy Recommendations: has been approved in the cabinet, refinancing fund of Tk. 300 After placement of the budget in the Parliament, one question crore has been created to facilitate installation of effluent is raised from different corners whether government would be treatment plant in the industries to reduce level of air and able to implement the budget or not. For successful The Bangladesh Accountant/April- June 2010 23 Budget & Economics implementation of the budget and to achieve the targeted of activities very strictly and on-line tendering is to be development, the following policy recommendations may be introduced at all levels. considered worthwhile: 7. Manpower and their efficiency and morality are to be 1. The government should monitor the implementation increased for increasing the collection of Tax and VAT. growths using Critical Path Method, increase manpower Public awareness programs may be undertaken to reduce in the relevant case, providing performance based tax evasion and electronic cash register may be made promotion, taking motivational programs, and increasing compulsory for all business concerns and awareness efficiency and dynamism in the activities of the public among the customers is to be increased for collection of administration. For increasing rate of ADP actual Receipts for purchasing any products because, in implementation, the participation of the local government most cases, shopkeepers are collecting VAT from may be increased and appropriate steps are to be taken customers but hide it from VAT records. from the beginning of the fiscal year. 8. The newly established Public Private Partnership (PPP) 2. The projected 5 percent fiscal deficit, will require bigger office is to be activated, fair and concrete policies are to government borrowings, and could create a critical be formulated, trust of the Private sector is to be situation for the capital requirements for the private increased regarding profitability, risk of investment and sector. The appropriate way to avoid heavy borrowing, participation in the projects, and more lucrative projects particularly from external sources, may be to try to are to be offered to increase private investment. increase remittances from NRBs, increase exports and 9. Government should take necessary steps to strengthen rationalize imports. Trading Corporation of Bangladesh (TCB) in real sense 3. Budget for energy and power sector is sufficient but the by increasing its manpower and funds. TCB should way of implementation should be given more emphasized increase buffer stock of essential goods importing from reducing high dependency on private sector and rental foreign market to reduce price hike. To reduce power station. Government should make Bangladesh transportation cost for goods and for the individuals, Petroleum Corporation (BPC) more strong, transparent, public transports may be made more active by increasing and efficient and should give emphasis on solar energy transparency and accountability of the management of the and hydro-electric projects. respective authorities. 4. Though the target of the budget is high but achievable through ensuring high implementation rate of investment 10. Government should take necessary steps to achieve the programs in key growth areas like energy, roads and target of the social security and welfare programs really railways, bridge, shipping, water resources and benefiting the actual poor hands. Food security programs information & communication technology. may be intensively continued for the whole year. 5. To eliminate or reduce corruption from the country, Conclusion: government should make the Anti-Corruption Though there may have some constraints and challenges in Commission (ACC) independent in real sense; provide implementation of the budget but this budget has shown a sufficient funds, manpower and equipments so that they way forward for the economy of Bangladesh. It may be can play an effective role in this regard. expected that this budget may guide the government as well 6. Exercising political power by different political units creating negative environment regarding project as the nation to the target of its development if it can be I implementation. Government should handle these types implemented effectively.

REFERENCES: 1. Allen, Richard (2009), The challenge of Reforming Budgetary Institutions in Developing Countries, IMF Working Paper-WP/09/96, (Washington: International Monetary Fund). 2. Dabla, E. and et.al. (2010), Budget Institutions and Fiscal Performance in Low-Income Countries, IMF Working Paper-WP/10/80, www.ssrn.com, Date: 21/08/2010. 3. Harvey, C. and Rooney, E. (n.b.), Integrating Hunan Rights? Socio-Economic Rights and Budget Analysis, www.ssrn.com/abstract=1590214, Date: 21/08/2010. 4. Ministry of Finance of GOB: http://www.mof.gov.bd/en/ 5. News Papers: http://www.onlinenewspapers.com/banglade.htm for News Papers published from Bangladesh: (The Daily Star, The Daily New Nation, The Daily Independent, Daily Prothom-Alo, Daily Ittefaq, Daily Noya Diganta).

The Bangladesh Accountant/April- June 2010 24 Finance & Banking Macroeconomic Situation An overview of the Ministry of Finance, GOB

After an impressive growth performance for almost six years, been on high alert and has been monitoring its impact on the the world economy has entered a period of uncertainty due to economy with the help of a Task Force involving the a financial turmoil triggered by the sub prime mortgage crisis concerned stakeholders from both the public and private in the United States of America (USA). During 2002 to 2007, sector. Besides, a Technical Committee has also been formed the world economic growth averaged 4.5 percent per annum by the Ministry of Finance to monitor and analyse the compared to 3 percent in the 1990s. The sudden gloom in macroeconomic impact of the crisis, and to identify necessary world economic prospects has come as a surprise in view of short-term macroeconomic and fiscal management responses. the persistent economic growth and stability. The crisis After detailed examination in line with the recommendations initially affected advanced economies and then its contagion of the Task Force, the Government declared an incentive spread over emerging markets and low-income countries, package together with fiscal, monetary and policy support. albeit, in varying degrees. Advanced economies were first hit Growth, Savings and Investment mainly by the systemic banking crisis in the USA and Amidst the risk of low export earnings and the remittance Europe. Emerging markets with well-developed financial inflows coupled with the lowering of domestic demand, the systems were initially affected, in most cases, by cross-border economic growth demonstrated strong recovery bolstered by financial linkages through capital flows, stock market agriculture along with the contributions by industry and investors, and exchange rates. In less-developed countries, the services sector. The contributions of the agriculture, industry growth and trade experienced major setbacks. The World and services sectors are estimated respectively at 4.6 percent, Economic Outlook of April 2008 projects global growth to 5.9 percent and 6.3 percent, indicating strong performance of slow from 1.5 percent in 2008 to 3.9 percent in 2009 before all the three broad sectors. The share of services in GDP recovering somewhat in 2010. A year later, April 2009 issue amounted to 49.7 percent followed by industry at 29.7 of Outlook forecasts the global growth to contract by 1.3 percent and agriculture by 20.6 percent at constant prices. percent in 2009, lowest ever in last 60 years. The dominance of the services sector in terms of its The economy of Bangladesh continue to demonstrate contribution to economic growth is largely attributable to the considerable resilience during FY2008-09 despite the twin performance of both agriculture and industry sectors. shocks arising from global recessions and the adverse effects The growth in the agriculture sector during FY2008-09 of the consecutive floods and the cyclone-Sidar of the last rebounded strongly in crops and horticulture sub-sector from fiscal year (FY2007-08). The economy is estimated to have 2.9 percent in FY2007-08 to 4.8 percent in FY2008-09. The grown at a rate of 5.9 percent, slightly below the growth rate growth rate of the large and medium scale manufacturing (6.2 percent) of FY2007-08. The key feature of the economic sector, however, moderated to 5.9 percent from 7.2 percent performance during FY2008-09 is the strong recovery in growth rate of previous year, with an uneven performance of agriculture sector coupled with moderate growth in industry its major sub sectors. and service sector. On the expenditure side, total consumption as a share of GDP The impact of the ongoing global financial crisis on increased slightly to 80.0 percent in FY2008-09 from 79.7 Bangladesh economy has not been as severe as it was percent in FY2007-08. The investment climate slightly anticipated, thanks to its well-managed financial sector. affected during FY2008-09, as indicated by a deceleration in However, some adverse impacts were noted in certain areas. the ratio of total investment to GDP to 24.18 percent from Although growth in key areas of potential impact-remittances 24.21 percent in FY2007-08. With an upsurge in remittance and exports remained satisfactory, some weakening in inflows, gross national savings in FY2008-09 grew to 32.4 remittance inflows and export earnings was observed in the percent of GDP. The per capita GDP exceeded US$ 600 for months towards the end of the fiscal year. Since the the first time. The per capita GNI and GDP stood at US$ 690 beginning of the global economic crisis, the Government has and USD 621 respectively during FY2008-09. The Bangladesh Accountant/April- June 2010 25 Finance & Banking Inflation 8.4 percent in FY2008-09 over the last fiscal year. The The rising trend of inflation in FY2007-08 is not only revised target for revenues from NBR source was set at attributable to the higher prices of oil but also to the Tk.530.00 billion as per against which Tk.525.3 billion was unprecedented price increase of some essential imported mobilised implying 99.1 percent achievement of the revised commodities such as rice, lentils, wheat and soybean oil in target. the international market. There had been supply constraint Non-NBR sources of tax revenue increased by 14.7 percent due to decline in production of rice, lentils and wheat all over amounting Tk. 26.5 billion in FY2008-09 compared to 24.2 the world. The crisis was further aggravated due to use of percent growth in FY2007-08. The non-tax revenues grew by some agricultural commodities as raw materials for producing only 0.90 percent to Tk. 111.2 billion from 110.2 billion in fuel by some developed countries in recent times. The FY2006-07. Overall, the tax-to-GDP ratio and revenue-to- inflation rate, therefore, rose to 9.93 percent in FY2007-08 GDP ratio decreased respectively by 0.2 and 0.4 percentage compared to 7.22 percent of the previous year. points from 8.8 percent and 10.8 percent in FY2007-08. To check this upward trend of inflation and also to keep the On expenditure side, the total expenditure fell by 2.1 percent prices of essentials within the reach of the consumers, several to Tk. 851.0 billion in FY2008-09, compared to 37.3 percent steps were taken by the Government which include, among rise in FY2007-08. As a percentage of GDP, total expenditure others, open market sale of the essential commodities, market fell to 13.8 percent from 15.9 percent of GDP in FY2007-08. monitoring, and ban on hoarding. Side by side, the The reason for higher expenditure in FY2007-08 was mainly Government pursued an accommodative monetary policy to on account of assumption of the liabilities of Bangladesh keep the inflation at the tolerable level. Petroleum Corporation (BPC) by the Government to the tune As a result, on a point-to-point basis, inflation declined from of Tk. 75.2 billion. However, Annual Development 10.82 percent in July’08 to 2.25 percent in June’09, with an Programme (ADP) expenditure increased by 7.2 percent annual average of 6.66 percent in 2008-09, slightly lower compared to the 4.4 percent decline in FY2007-08. The than the projection of 7.0 percent in the Medium-Term revised allocation for the ADP was Tk 230.00 billion (3.7 Macroeconomic Framework. percent of GDP) and the expenditure during the fiscal year was Tk 195.9 billion, which is 85.2 percent of revised Fiscal Sector allocation. Fiscal performance was stable in FY2008-09 with a moderate Due to the underutilization of ADP allocation by 0.5 percent rise in revenues receipts accompanied by a substantial rise in of GDP and the 0.2 percent of Non-Development Budget overall expenditure. In the revised budget of FY2008-09, total (Recurrent Budget), budget deficit decreased to 3.4 percent of revenue receipts was projected to rise by 17.3 percent (11.3 GDP from the projected deficit of 4.1 percent. percent of GDP) over the previous year’s revenue earnings. Total public spending was projected to rise by 15.0 percent Monetary and Financial Sector over FY2007-08, implying an expenditure-GDP ratio at 15.3 Money and Credit percent, slightly higher (0.4 percent of GDP) than the ratio of Bangladesh Bank continued to pursue cautious and FY2007-08. The budget deficit was projected at 4.1 percent accommodative monetary policy stance during FY2008-09. of GDP, of which 2.3 percent was to be financed from The, year-on-year growth of broad money during FY2008-09 domestic source and the remining 1.8 percent from external reached 19.2 percent from 17.6 percent in FY2007-08, mainly sources. driven by the increase of net foreign asset of banking system NBR tax revenues increased by 10.7 percent over the (26.7 percent), while the growth in net domestic assets of previous year, with a decline by 2.6 percent in customs duties banking system was 17.8 percent. Year-on-year growth in mainly due to the price fall of imported commodities and the domestic credit was 16.0 percent during FY2008-09 which is moderate growth in Value Added Tax (VAT) at import level well below from 20.9 percent during FY2007-08. Private and income tax. NBR direct tax collection recorded a modest sector credit growth was 14.2 percent in FY2008-09 which is growth of 17.4 while the indirect tax collection increased by significantly lower than the year-on-year growth of 24.9 The Bangladesh Accountant/April- June 2010 26 Finance & Banking percent in previous fiscal year. The reserve money recorded context of the contraction of global trade volume. year-on-year increase of 31.5 percent in FY2008-09, both Among the exported items, woven garments rose by 14.5 driven by the increase of net foreign assets (31.1 percent) and percent and knitwear by 16.2 percent, while raw jute, jute net domestic assets (32.0 percent) of Bangladesh Bank. goods, leather and frozen food showed negative growth Capital Markets during the period, partly due to recession and partly due to During FY2008-09, the general share price index and market non-compliance of required international (mainly frozen capitalization of Dhaka Stock Exchange (DSE) showed some foods) standards. In the face of the global slowdown, the volatility. The general index increased by 9.0 percent, while satisfactory growth in ready-made garments (RMG) is the market capitalization increased by 35.3 percent at the end attributable to the fact that Bangladesh being a low-end of June 2009 over July 2008. There is hardly any presence of producer and rising volumes of readymade garment exports, foreign capital stock as portfolio investment in the capital although the deepening of the global recession indicates markets of Bangladesh and as such the possibility of drain- decline in export earnings in the coming months. out of capital through this channel is less likely. The Imports volatility in the capital market during the period is mainly due During the first half of FY2008-09, imports rose by 23.0 to the investors’ behaviour with higher expectation of percent over the same period of FY2007-08, but declined earnings, market manipulation by some merchant banks and sharply by 11.1percent in the second half of the fiscal year big investors. To overcome the situation, the Securities and posting 4.4 percent growth over the previous fiscal year. The Exchange Commission (SEC) has strengthened its lower growth in imports driven by the sharp decline in food- supervision and issued license to some commercial banks to grains imports and the record fall of oil price after first half of operate merchant banking. 2008. Based on the settlement of Letter of Credits (LCs) in The number of securities listed with the Dhaka Stock FY2008-09, import payments of consumer goods declined by Exchange (DSE) reached 443 as of June 2009 from 412 as of 21.7 percent, mainly due to the lower international food June 2008. By the end of June 2009, the issued capital of prices. Import of intermediate goods and industrial raw listed securities and debenture stood at Tk. 457.9 billion, materials recorded moderate growth of 20.2 percent and 10.5 which is 23.1 percent higher than Tk. 372.2 billion registered percent respectively compared to FY2007-08, while import of at the end of June 2008. capital machinery declined only by 0.8 percent. The number of securities listed with the Chittagong Stock Remittances Exchange (CSE) reached 245 as of June 2009 from 231as of Total remittance receipts during FY2008-09 grew by 22.4 June 2008. The issued capital of listed securities and percent and number of manpower export decreased by 43.4 debenture of this stock exchange stood at Tk. 142.5 billion, percent compared to the preceding fiscal year. However, the which is 39.4 percent higher than Tk. 102.2 billion recorded growth in remittance earnings and manpower exports are at the end of June 2008. As of June 2009, market slowing as the year progresses. It is to be noted that the trends capitalisation of securities reached Tk. 975.0 billion. General on both counts have been showing robust growth for the last share price index of the CSE reached 10,477.7 at the end of couple of years, higher than normal trends. In FY2006-07, the June 2009, which was 9,050.6 at the end of June, 2008. remittances from expatriate Bangladeshi workers stood at External Sector US$ 5,978.5 million reflecting 24.5 percent growth over the Exports previous year. In FY2007-08, remittances stood at US$ Although the performance of export sector was robust (42.4 7,914.9 million registering 32.4 percent increase over the percent growth) in the first quarter of FY2008-09, exports previous year. A total of 564 thousand Bangladeshis went declined by 1.6 percent in the second quarter and increased abroad for employment in FY2006-07, which is 51 percent further by 6.0 percent in third quarter. On a cumulative basis higher than the number registered in the previous year. In however, export growth in FY2008-09 was still satisfactory at FY2007-08, the number of manpower export stood at 981 10.3, as against 15.8 percent in the previous fiscal year in the thousand, which is 73.9 percent higher than that of the The Bangladesh Accountant/April- June 2010 27 Finance & Banking previous year. Exchange Rate The major share of remittances comes from the Gulf region, The nominal exchange rate during FY2008-09 remained where growth prospects have remained largely unchanged in mostly stable against USD, depreciated only by 0.3 percent, 2008 but are projected to be marginally low in 2009. Most of but appreciated against some other currencies like Pound the Bangladeshi workers are unskilled/semi-skilled and are Sterling (23.7 percent), Euro (6.4 percent) and Indian Rupee employed in the construction sector. The current crisis may (15.2). Both the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) indices affect them in the context of fall in oil revenues, prompting a appreciated during FY2008-09. Although REER based slowdown in the construction sector. exchange rate fell in June 2009 compared to July 2008, the Balance of Payments nominal exchange rate is still higher than REER based The trade deficit reduced by 15.0 percent during FY2008-09 exchange rate indicating that Bangladesh enjoys some export compared to the deficit of 60.2 percent in FY2007-08. competitiveness. Despite the deficits in trade and service payments during the Medium Term Macroeconomic Framework (MTMF) period, the robust growth in remittances caused the current Medium Term Macroeconomic Framework is an important account stood surplus to US$ 2,536 million from a surplus of policy instrument for effective linking of the resources of the US$ 680 million in FY2007-08. The deficit in the capital and four macroeconomic sectors, viz. real sector, fiscal sector, financial accounts, mainly due to decrease in portfolio monetary sector and Balance of Payments (BOP) sector. MTMF has been updated by Finance Division in order to investment, other capital, trade credits, the overall balance prepare budgets using a Medium Term Budget Framework showed a larger surplus of US$ 2,058.0 million against a (MTBF). Some important macroeconomic indicators have surplus of US$ 331.0 million in the previous fiscal year. been projected for 3-years taking into account the recent Gross foreign exchange reserves rose to USD 7471.0 million macroeconomic trends, future potentials and uncertainties. at the end of FY2008-09, equivalent to about 3.9 months of The trends and projections of key indicators of import payments. macroeconomic framework have been shown in Table 1.1:

The Bangladesh Accountant/April- June 2010 28 Finance & Banking Stimulus Packages Reforms in Banking, Monetary and Credit Policies To provide support to the private sector in the context of the Legal Reforms global financial crisis, the Government of Bangladesh The financial institutions are now taking steps within the announced a stimulus package on April 19, 2009. The ambit of Artho Rin Adalat Ain, 2003 (the Money Loan Court package includes both fiscal and policy supports. Some of the Act, 2003) to expedite the settlement of disputes regarding supports were meant to be implemented immediately during the loan recovery. Side by side, steps have been taken to the last quarter (April-June) of FY2008-09 while the others implement the recommendations of the committee formed by were to be implemented in FY2009-10 and thereafter. the Government for quick recovery of default loans. The stimulus package for Tk. 34.2 billion covering the period Reforms in the Bangladesh Bank from April-June of FY2008-09 was intended to stimulate To strengthen the role of Bangladesh Bank as the regulatory export and domestic demand. The allocation was provided for authority of the monetary and financial sector of the country (i) export incentives for jute goods, leather goods and frozen and also to enhance its authority, a project ‘Central Bank foods; (ii) recapitalization of three commercial banks working Strengthening Project’ is being with the support from on the agriculture credit; (iii) subsidy for electricity; (iv) International Development Agency (IDA). Starting from late refinancing the agriculture credit and (v) social safety (food 2003, the project is expected to be completed by 2011. The security) programme. Some of the immediate supports to the key focus of the project: exporters include: (i) disbursement of 70 percent of incentives • Restructuring and modernising Bangladesh Bank immediately after primary assessment of the claims and the (structural re-organisation, automation and human rest 30 percent after audit; resource development); (ii) refinancing the commercial banks for export credit; (iii) • Capacity building (strengthening research division; raising the Export Development Fund (EDF) to USD 150 prudential regulation and supervision; accounting and million and credit for a single borrower to USD 1.5 million auditing standards); and from USD 1.0 million; (iv) expansion of export credit at 7 • Strengthening the legal structure. percent for all the exported commodities and the time limit Reforms in State-owned Commercial Banks (SCBs) for repayment to 120 days, up from 90 days at present; (v Following corporatisation of SCBs, the Government, with a withdrawal of fuel surcharge on carrying fruits and vegetable view to create an enabling environment, has taken the on international route; (vi) introducing rationing system for following measures for enhancing their institutional capacity garments workers to provide rice at subsidized rate; (vii) and managerial efficiency as well as bringing capital adequacy of these financial institutions: bringing down the lending rate below percent and allowing • A Memorandum of Understanding (MOU) 2009 for the rescheduling facility without down payment; (viii) helping SCBs (Sonali Bank Ltd., Janata Bank Ltd., Agrani Bank the export oriented industries to get through the economic Ltd. And Rupali Bank Ltd.) has been signed to review the turmoil on a case-case basis. progress of reforms; Reform Programmes • A transition plan of has been put in place for smooth take Fiscal Sector over; • Following the advice from the Finance Division the Within the remit of ongoing financial reforms, 16 Recapitalisation and Progressive Five Year Development ministries/divisions have been brought under the coverage of Plan has been revised to minimise the capital deficit.. Medium-Term Budget Framework (MTBF) in FY2008-09. In Monetary and Financial Sector Reforms the FY2009-10, 4 more ministries/divisions would be • New guidelines has been issued by the Bangladesh Bank included. There is a plan to include all ministries/ divisions in for the appointment of directors to the Board of the fold of MTBF within next three years. As part of this Directors of a bank company from the depositors under plan, MTBF approach in budget setting process will be sub-clause 15(5) of Bank Company Act, 1991. implemented in12 more ministries in FY2009-10. These 12 • Guidelines for recognition of eligible External Credit ministries/divisions will be brought under the full MTBF Assessment Institutions (ECAIs) has been issued by process in FY2010-11. Bangladesh Bank. Now, under the Standardized The Bangladesh Accountant/April- June 2010 29 Finance & Banking

Approach of the Risk Based Capital Adequacy tons and wheat 8.44 lakh metric tons. framework (Basel II), credit rating is to be determined The target of domestic food grains procurement for FY 2008- on the basis of risk profile assessed by the External 09 was 13.35 lakh metric tons (Rice: 13 lakh metric tons and Credit Assessment Institutions (ECAIs) duly recognized Wheat: 0.35 lakh metric tons). The actual quantity of rice by Bangladesh Bank. All scheduled banks will be procured under the domestic procurement programme in this required to nominate recognized ECAI for their own as year was 14.49 lakh metric tons as on June 2009 (Boro rice: 12.87 lakh metric tons and Aman rice: 1.62 lakh metric tons). well as their counterpart credit rating. Price of Aman paddy procurement was fixed at Tk. 16 /Kg • To comply with the international best practices and to while Aman rice at Tk 26 /Kg. Price for Boro paddy make the bank’s capital more risk sensitive as well as to procurement was fixed at Tk.14 /Kg and rice 22 Tk/Kg build the banking industry more resilient and stable, a respectively. The budget provision of food grain imports revised regulatory capital framework titled ‘Risk Based using Government’s own resources for FY 2008-09 was 7.90 Capital Adequacy for Banks’ in line with Basel II has lakh metric tons (Rice: 4.0 lakh metric tons and Wheat: 3.90 been devised and sent to the banks for implementation lakh metric tons). The total quantity of public import of food from January 2009. Along with the existing capital grains for FY 2008-09 was 6.80 lakh metric tons (rice: 3.86 adequacy rules and reporting to Bangladesh Bank, banks lakh metric tons and wheat: 2.94 lakh metric tons). In FY will start quarterly reporting as per reporting format 2008-09 private import reached at 22.16 lakh metric tons enclosed in the Guidelines. A new anti-money (rice: 1.87 lakh metric tons and wheat: 20.29 lakh metric laundering law titled Money Laundering Prevention Act, tons). The target of agriculture credit disbursement has been set at 2009 is in place by amending Money Laundering Tk.9379.23 crore for FY 2008-09. Out of which, Tk.9284.46 Prevention Act, 2002 was enacted on February 24, 2009. crore has been disbursed which is 99 percent of the target. This law was made effective from April 15, 2008, as Different measures such as increase of subsidy on inputs to there was Money Laundering Prevention Ordinance, agriculture, making agriculture inputs more available, more 2008 from the date. availability of irrigation facility, sufficient steps for • The Government, for the first time, promulgated anti- preserving the harvest and ensuring fair price of crops and terrorism law (Anti- Terrorism Act, 2009) which agro-products have been taken with the aim to increase included a stipulation that financing of terrorism is a agriculture productivity. Bangladesh Bank has allocated punishable offence. This law was given effect from June Tk.1183 crore for refinancing agricultural credit with an aim 11, 2008, as there was Anti Terrorism Ordinance, 2008 to widen the scope of agricultural credit and simplify the from the date. disbursement procedure of agricultural credit. An allocation of Tk.1500 crore has been provided in the revised budget for Agriculture the recapitalization of Bangladesh Krishi Bank (BKB), ‘Food for all’ is the prime commitment of the present Rajshahi Krishi Unnoyon Bank (RAKUB) and Government and therefore the Government has given top Karmashanthan Bank in order to revamp the rural economy priority on agriculture sector to achieve self sufficiency in by increasing access to credit, thereby supporting self- food again by 2013 through increased production. The overall employment. contribution of the broad agriculture sector at constant price Industry is projected at 20.60 percent of GDP in FY 2008-09. The According to provisional estimate, the contribution of the contribution of this sector was 20.83 percent in FY 2007-08. manufacturing sector to GDP is 17.78 percent in FY2008-09, Within the broad agriculture sector, the contribution of which is marginally higher than that of the previous year. In agriculture & forestry and fisheries are estimated at 16.03 FY2008-09, the growth rate in the manufacturing sector is percent and 4.57 percent respectively in FY 2008-09. estimated at 5.92 percent, which as a cosequence of the global According to the final estimate released by BBS, the volume economic crisis stands 1.29 percent lower than that of the of food grain production in FY 2008-09 stood at 328.96 lakh previous fiscal year. The government has taken up metric tons of which Aus accounted for 18.95 lakh metric programmes to provide financial assistance to expand SMEs tons, Aman 116.13 lakh metric tons, Boro 178.09 lakh metric through commercial banks. Alongside the disbursement of The Bangladesh Accountant/April- June 2010 30 Finance & Banking loans, Bangladesh Bank has widened its’ refinancing scheme 09. In FY 2007-08, Government provided grant/subsidy of Tk.100 crore with an enhanced allocation of Tk.600 crore. amounting to Tk.494.25 crore to 14 public entities which has Up to June 2009, Tk.716.44 crore has been disbursed among been estimated at Tk 836.83 crore in FY 2008-09.Up to June different scheduled banks and financial institutions for 2008, the total DSL outstanding against 56 SOEs stood at refinancing potential entrepreneurs. In addition, IDA has Tk.72,694.11 crore and the total borrowing of 30 SOEs from provided US$10 million and the Government has provided the state-owned commercial banks amounted Tk.14,172.88 Tk.112.32 crore through ‘Enterprises Growth and Bank crore where classified loan was Tk. 1,425.21 crore. The Modernisation Project (EGBMP)’. ADB has also provided an operating profit on total assets of SOEs was 1.99 percent in additional US$30 million to the Bangladesh Bank. 2004-05 but it reached 3.05 percent in FY 2007-08. The net The disbursement and recovery of the industrial loan was profit on operating revenue was also negative all the years Tk.65001 crore and Tk.52,900 crore respectively in FY2008- since FY 2003-04 but it stood at 13.95 percent in FY 2007- 09 which is 8.13 percent and 24.55 percent higher 08. On the other hand, the rate of dividend on equity respectively than those of the previous fiscal year. This decreased to 0.97 percent in 2007-08 from 1.10 percent in slower growth in disbursement of industrial loan is 2006-07. attributable to the current global economic crisis. Human Resource Development There are eight EPZs in which total investment stood at The cardinal purpose of economic development is human US$1,582.47 million up to June 2009. In FY2008-09, total development. Human well-being is therefore at the heart of investment in the EPZs was US$ 148.03 million. BEPZA’s the UN Millennium Development Goal (MDG). Human export proceeds stood at US$ 2.58 billion, as against the resource development is also gaining prominence in the target of US$2.83 billion set for the fiscal year. EPZs have context of meeting the MDGs. As basic tools for human already employed about 2,34,693 Bangladeshi nationals in development, the importance of education, training, health their attempt to contribute to the national poverty alleviation and social services is immense.The government is allocating efforts. Among them 64per cent are female. It is to be noted substantial resources to social sector to bring about human that by the end of FY2008-09, a total of 33 countries have development. Realizing the importance of education, primary invested in these EPZ’s. In FY2008-09, goods worth of US$ education has been made compulsory since 1990. To promote 2,581.71 million have been exported from the EPZs which female education, a stipend scheme for the girl students has account for 17per cent of total export. In addition to FDI been introduced. An informal education system has been promotion, export development and employment generation, evolved to provide literacy to the aged and illiterate. Bangladeshi EPZs have also been making special Different programmes including teacher’s training, revision contribution to the development of backward linkage and of curricula, building physical infrastructure have been supportive industries of the country. introduced in order to build quality education. Additional State-Owned Enterprises (SOEs) emphasis has been laid on vocational as well as science and State-Owned Enterprises (SOEs) of Bangladesh still make technology based education. It has been outlined in the major contribution towards industry, power, gas, transport “Literacy Assessment Survey-2008”, published by and communication and service sectors of Bangladesh Bangladesh Bureau of Statistics that female literacy rate economy. The contribution of SOEs in GDP, value addition, (49.1) is greater than that of male (48.6). Alongside employment generation and revenue earning is still education, efforts are under way to build an effective and substantial though privatization of public enterprises is well sound health services system to ensure productive health for in progress to develop the private sector. The annual growth the people. Health, Nutrition and Population Sector Program rate of total operating revenue of all existing SOEs during FY (HNPSP) has already been started from July 2003. 2004-05 to FY 2007-08 was 17.96 percent but value addition of production in FY 2004-05 was Tk. 951.00 crore which Government is taking a range of measures through the went up to Tk. 7,612 crore in FY 2007-08. According to Ministry of Women and Children Affairs for the development provisional accounts, the 12 net profit of SOEs is estimated at of women and children. A wide array of programmes has Tk. 2,049.00 crore in FY 2008-09. All the SOEs together been adopted at government level to remove gender disparity contributed Tk.44.38 crore to the public exchequer during FY and to involve women with the mainstream development 2007-08 which is estimated at Tk. 414.45 crore in FY 2008- activities. The Bangladesh Accountant/April- June 2010 31 Finance & Banking

A comprehensive programme is being implemented in order the Bangabandhu Bridge during FY 1997-98 was Tk.0.99 to turn the youth into an efficient and productive work force crore which stood at Tk. 212.45 crore during FY 2008-09. In by organizing skilled development training; providing inputs order to establish direct transport link between Dhaka and together with loans and grants. A number of programmes Munshigonj, construction of Mukterpur (6th Bangladesh- have been undertaken for the welfare and socio-economic China Friendship) Bridge over the river Dhaleswari has been development of the groups of people who 13 are landless, completed in February 2008. The total project cost stands at distressed, vagabond, orphans, disabled and also other Tk. 197.36 crore which includes Tk. 121.87 crore (US$ disadvantaged group of people. In both sports and cultural 18.19) as technical and financial assistance from the People’s arena development activities at government level are Republic of China.Chittagong Port is the major sea port of continuing. Bangladesh. As the dominant seaport of Bangladesh, it Transport and Communication handles about 92 percent of country’s maritime trade. The In the current context of globalisation and market economy, growth rate of import-export through Chittagong port is about there is a critical need for evolving a developed and well-knit 10 percent of imports and 80 percent of exports are handled transport and communication system that should be able to by this port. Mongla is the second largest seaport of integrate Bangladesh with the international transport and Bangladesh. About 13 percent of total export and 8 percent of communication network. The transport and communication the imports are handled by this port. In FY 2008-09, 9.30 lakh network in Bangladesh has evolved around road, rail and air metric tons of goods have been imported and 2.08 lakh metric transport system including post, telecommunication and tons of goods have been exported through this port. information technology. In FY2008-09, the total allocation in Bangladesh Inland Water Transport Corporation (BIWTC) is non-development and development budget together was Tk. a service-oriented government-owned organisation. It is also 4,278.83 crore for the Ministry of Communication. The the largest inland water transport organisation. Currently, contribution of this sector to GDP at constant price in FY there are 189 vessels in this organisation. To meet up the 2008-09 is 10.61 percent. A total of 113 increasing trend of traffic demand, BIWTC has rehabilitated development/investment projects including 2 technical 4 Ro-Ro ferries and 3 Ro-Ro Pontoons at a cost of Tk. 22.48 assistance projects have been included in the RADP of Roads crore by using its own resources. The Civil Aviation and Highways Department for FY 2008-09. Tk.1,399.28 Authority of Bangladesh (CAAB) as part of its responsibility crore has been allocated for a total of 115 investment is putting in place necessary infrastructural facilities for projects, of which GoB component recorded at Tk. 855.63 movement of domestic and international aircrafts. Biman is crore and project aid recorded at Tk. 543.65 crore. There is a operating flights to 3 domestic and 18 international network of 20,948 km. roads under the jurisdiction of Roads destinations. Out of the International destinations, Biman now and Highways Department. RHD has under its control a total is operating to cover 4 destinations in the SAARC countries, number of 4,507 bridges and 13,751 culverts. RHD are 3 in South-East-Asia, 1 in Far-East, 8 in Gulf and the Middle currently operating about 153 ferry boats in 60 ferry ghats on East and 2 in Europe. its road network throughout the country. The Bangladesh Telecommunications Company Limited For infrastructure development of urban and rural areas, (BTCL) has taken a series of measures to promote the ICT LGED is implementing a series of programmes with foreign sector for the overall development of the country. It and local funding. During FY 1991-92 to FY 2008-09 a total contributes a considerable amount of revenue to the national of 1,31,290 km. (64,691 km dirt road and 66,599 km paved exchequer, facilitates rapid flow of information for other roads), upazila road and union road as well as 9,53,295 meter sectors of economy. The BTCL has been implementing two bridge/culverts have been constructed. development projects under ADP during FY2008-09 having The Bangabandhu Bridge is playing a vital role in road an allocation of TK.140 crore. Besides BTCL is transport system. The Bridge has been constructed to implementing a ILDTS (International Long Distance establish direct road and rail link between the north-west and Telecommunication Services) project from its own fund with eastern zone of the country, which was separated by the an allocation of Tk180.00 crore. In order to ensure mighty river Jamuna. Besides, the road and railway development of telecommunication services in Bangladesh communication facilities, electricity and gas pipelines have and to regulate it, all relevant powers, responsibilities and also been laid on the Bridge. Revenue from toll collection at pertinent matters related to telecommunication regulation has The Bangladesh Accountant/April- June 2010 32 Finance & Banking been vested with the Bangladesh Telecommunication 21.055 tcf is recoverable. As of June 2009, a total of 8.37 tcf Regulatory Commission (BTRC). According to BTRC has been produced. With a view to explore and expand gas forecast, telephone subscribers will rise to 5 crore by 2010. resources at a faster pace, the country has been divided into The tele- density now stands around 34 percent, which is 23 blocks. So far production sharing contracts have been more than three times than that of predicted density. concluded for 12 gas fields. The private sector is also coming The Government within its limited resources has already up alongside the public sector to meet the increasing demand taken initiatives to introduce e-governance in the country. of gas resources. Major Ministries, Divisions and Departments have already In order to minimize environmental pollution, there is an launched their websites. Currently, software & IT service ongoing process of converting transports into CNG. This is companies in Bangladesh are exporting software and their playing a positive role in the economy and is also saving services to different countries. foreign exchange worth Tk.7,500 crore per year required for Power and Energy fuel import. Bangladesh Petroleum Corporation has been Power is the key to development. The demand for power as a working to develop and expand energy system to put at par source of energy is rising in many spheres starting from with the international level. industries to day-to-day demand of the general public, Poverty Alleviation agriculture and service sector. Despite there have been remarkable attempts to reduce Government has given the highest priority to the development endemic poverty since independence, people living below the of power sector and has committed to make electricity poverty line is still significant and according to the Human available to all by 2021. For this purpose, the government has Development Report 2009 of UNDP, Bangladesh ranked initiated reforms in power sector along with various 112th in respect of human poverty. expansion programmes. In FY 2008-09, the total installed However, according to the Household Income and generation capacity of electricity was 5719 MW including Expenditure Survey (HIES) 2005, the incidence of poverty at 3812 MW in public sector and 1907 MW in private sector of the national level declined from 48.9 percent in 2000 to 40.0 which dependable generation capacity is 4162 MW. In order percent in 2005 in the Cost of Basic Needs (CBN) method. to complement the government efforts, an enabling According to DCI (Direct Calorie Intake) method, the environment has been created to attract private investment in incidence of absolute poverty was 44.3 percent in 2000 at the this sector. Currently, the public sector accounts for 66.66 national level which went down to 40.4 percent in 2005. percent of the total installed capacity of power generation. During this period, incidence of absolute poverty also showed The remaining 33.34 percent of power generation is handled the downward trend. In the case of Division wise poverty by the private sector. On the other hand, 58.49 percent of the situation, Barisal Division has the highest incidence of net power generation is carried out by the public sector and poverty scoring 35.6 percent while the Chittagong Division the private sector accounts for the remaining 41.51 percent. has the lowest incidence of poverty of 16.1 percent followed Of the net power generation 88.79 percent is gas based, 1.57 by Dhaka and Sylhet Divisions using Head Count Ratio percent is hydraulic and 5.74 percent is oil based. At present (HCR) in the lower poverty line. Using the upper poverty power generation per capita is 182 kwh and the number of line, the incidence of poverty has also significantly gone beneficiaries is about 47 percent. down at the national level in head count ratio. The incidence Bangladesh Power Development Board (PDB) is the main of poverty in rural areas of Dhaka Division declined from source of electricity generation. At present, PGCB owned by 55.9 percent in 2000 to 39.0 percent in 2005. The reduction of PDB is responsible for entire transmission and maintenance HCR is also significant in the urban area. It came down to including future expansion. Besides this, REB, DPDC and 20.2 percent in 2005 from 28.2 percent in 2000 in the urban DESCO have been working for management of distribution area. The incidence of poverty slightly went up in Khulna system. Division in FY 2005 from FY 2000. In 2005, the estimates of Natural gas is an important source of energy that accounts for incidence of poverty by ownership of land using the upper 75 Percent of the commercial energy of the country. Till date poverty line were found to be 46.3 percent for landless 23 gas fields have been discovered in the country which households, 56.4 percent for owners of less than 0.05 acre. contains 29.234 trillion cubic foot (tcf) of gas, of which The Bangladesh Accountant/April- June 2010 33 Finance & Banking

Examining the monthly household nominal income, welfare services and other facilities including employment. expenditure and consumption, it is seen that it had an In rural micro-credit sector, PKSF usually provides loan increasing trend in the previous years. The monthly facility such as rural and urban microcredit, micro-credit for household nominal income was estimated at Tk.7,203 at the the poorest of the poor, micro-enterprise-credit, agriculture national level, whereas it was estimated at Tk. 6,096 in the sector microfinance, programme initiatives for ‘Monga’ rural area and Tk. 10,463 in the urban area. The average Eradication (PRIME) to manage micro-credit in greater monthly household expenditure was estimated at Tk. 6,134 at Rangpur district. Till June 2009 PKSF disbursed micro-credit the national level, whereas it was Tk. 5,319 in the rural area to the tune of Tk. 7,484.46 crore to its 257 partner and Tk. 8,533 in the urban area. Per capita nominal organisations, while Bangladesh Rural Development Board expenditure in 2005 at the national level was Tk.5,964 which (BRDB) disbursed Tk.7,530.26 crore among 5,360,408 was Tk. 5,165 in the rural area and Tk. 8,315 in the urban members. Through Two-Tier Cooperative model (TCCA- area. KSS), BRDB is working for agricultural development by To achieve fully the goals of Millennium Development Goals organizing and providing credit and other agricultural (MDGs) by 2017, the present government has given top instruments to the small and marginal farmers. During the priority to eradicate poverty and disparity (disparity in same period, the scheduled banks disbursed Tk.19,761.51 income and within region). To meet these targets, Poverty crore whereas other specialised commercial banks disbursed Reduction Strategy Paper (PRSP) titled ‘Unlocking the Tk. 4,520.1 crore. The administrative departments of the Potential: National Strategy for Accelerated Poverty Government disbursed credits amounting Tk. 61,139.92 crore Reduction’ (for the period of 2004/2005-2006/2007) was up to June 2009. adopted and extended up to June/2008. As a sequel of the first Private Sector Development PRSP the second PRSP titled ‘Moving Ahead: National Private sector’s contribution to the total investment in Strategy for Accelerated Poverty Reduction’ for 2008/09- Bangladesh economy is remarkable. Of the total 24.2 percent 2010/2011 (NSAPR-II) was approved and at present, revision investment in the provisionally estimated GDP of FY 2008- of this document is under process to align this national 09, the share of private investment has been computed to be document with the development agenda of the present 19.6 percent which was recorded at 13.58 percent of GDP in government. Moreover, preparation of Sixth Five Year Plan FY1995-96. Government has brought reforms in the (SFYP) for 2011-2015 is under way where poverty is an issue privatisation scheme to strengthen, galvanise and modernise of importance. the privatisation process. Government has put in place To attain the annual target as specified in the Poverty necessary institutions and infrastructure to create a private Reduction Strategy Paper (PRSP), directly and indirectly sector investment-friendly environment. The government about 58 percent of development and non-development plans to earmark a significant allocation in the next year’s budget resources were allocated for poverty reduction budget to facilitate Public Private Partnership (PPP) to in an activities in FY2008-09. Both the government and attempt to take the country to higher trajectory of growth. The nongovernment organisations have been implementing a government has taken a number of programmes to attract number of programmes for employment and income private local-foreign investors to facilitate infrastructure generation for the upliftment of the poor segment such as development. In this respect, government intends to go social safety net programme, cash transfers programme, food beyond the traditional public-private interrelationships and security programme, micro-credit programmes. Under old- establish strategic, target-oriented functional relationships age allowance programme there are17 lakh beneficiaries, 9 which are evident in the recent policy initiatives. The Election lakh beneficiaries under the widowed and women deserted by Manifesto of the government envisages that GDP growth rate their husbands allowance programme and 1.25 lakh will accelerate to 8 percent in 2013 and to 10 percent by 2017 beneficiaries under insolvent freedom fighters’ honorarium. which will then be maintained till 2021. Preliminary These beneficiaries are receiving financial assistance directly. assessment of the required investment to boost growth rate Moreover, under the Abashan Project being implemented at a has been prepared. cost of Tk. 715.98 crore 65 thousand landless, homeless and The number of subscribers of the 6 cellular mobile companies rootless families are receiving benefits of health and family in the country was about 4.7 crore as of June 2009. In 2001, The Bangladesh Accountant/April- June 2010 34 Finance & Banking the mobile teledensity recorded 0.58 percent which rose to environmental policy, national environment law and rules, 34.00 in June 2009. Currently, a total of 43 privately owned national forest policy and national agriculture policy have general insurance companies and 17 life insurance companies been formulated. Side by side with these, the Government is are operating in the country. Premia realised by the state- implementing the conventions and protocols signed at owned Sadharan Bima and 43 private general insurance international and regional levels in order to protect and companies together stood at Tk.1,404.33 crore in 2007 develop environment. compared to Tk. 907.17 crore in 2006. As of December 2008, The Government has been implementing a range of 376 cotton and synthetic spinning mills were in the country of programmes, which are playing a critical role in protecting which 352 units belonged to private sector. Moreover, 1,098 and developing environment. Included among them are: weaving units (large, medium & small), 1,48,342 handlooms, making compulsory the use of catalytic converter, oxidation 1,200 knitting and knit-dyeing units, 310 18 woven dyeing- catalyst and diesel particulate filter in the petrol, diesel and finishing units and about 2000 local hosiery units exist in the gas driven vehicles; encouraging introduction of country. Majority of the textile industries of the country environment-friendly block bricks; taking action against mainly belongs to the private sector. Only 24 old textile mills illegal cutting of hills; issuing certificates in favour of the are now under public sector (BTMC), some of which have industrial enterprises giving assurance that the level of been put into operation by the private entrepreneurs under pollution from these industries remains within the reasonable Service Charge System. At present, there are 88 Jute mills limit; issuing certificates in favour of the industrial under BJMA (Bangladesh Jute Mills Association) including enterprises that install effluent treatment plants. Besides 38 denationalized and 50 mills established by the members of these, creating reserved area for protecting bio-diversity, BJMA. In the private sector, the production and export taking actions leading to drawing up national strategy to face activities of jute mills are being run by Bangladesh Jute Mills the climatic change, taking initiative to frame laws to manage Association (BJMA), at present there 80 mills under BJMA biomedical waste, introducing training for managing clinical including 38 decentralized and there are 50 mills under waste, inclusion of environment 19 education in the course Bangladesh Jute Spinners Association (BJSA). Out of 38 curriculum of primary and secondary level to create denationalized mills, 12 mills are in operation, 15 mills are in awareness about the environmental and ecological balance. partia operation and 11 mills have been closed. Out of 50 Along with the government, a good number of NGOs have mills, 3 mills are closed and the remaining is in operation. been working to face environmental problems and to improve Presently, there are 40 registered private Medical Colleges, environmental system of the country since 1980s. The NGOs 11 private Dental Colleges, 11 private Medical Assistant play an important role in motivating people at grass root level Training School and 15 private Institute of Health to protect environment and to take coordinated efforts in Technology in the country. Moreover, a total of 239 pharmaceutical product manufacturing units are producing solving environmental problems. Ministry of Agriculture is 17,433 brands of medicines and raw materials of worth Tk. inspiring farmers a new technique to uses of super/mega 5,334.00 crore annually. More than 96 percent of the total granules (guti urea) instead of urea, which have positive domestic’s requirements is fulfilled by local production. At impact to protect pollution and misuse of urea fertiliser. present, Bangladesh is exporting 182 brands of medicines to The activities of the forest department and the department of 71 countries manufactured by 27 companies. environment that deal with environment pollution, forest Environment and Development management, aforestation, preservation of wildlife, In order to protect environment and also to ensure management of reserved areas, establishment of eco-parks development, the Government is taking steps having legal etc. are contributing towards preservation of biodiversity and compulsions including sensitising people of all strata. The enrichment of depleted forest resources, to ensure supply of global environment is also facing many threats due to various raw materials to wood based industries, to expand eco- human activities. With this end in view, a number of policies tourism for the recreational facilities of the people and to I like national land use policy, national water policy, national develop environment. The Bangladesh Accountant/April- June 2010 35 Finance & Banking A Comparative Analysis of Interest Rate Parity and Sticky Price Model of Exchange Rate

Chowdhury Rajkin Mohsin

Abstract 1944 till 1971. Rather than create a smooth flow of trading This study is a comparative test to determine how accurately and ease of capital transfer, the fixed system created more the Sticky Price equation and Interest Rate Parity model can problems than solutions. Currencies were basically pegged to forecast the value of the currency of Bangladesh. It is both a the gold standard. Thus nations heavy on gold reserves had a test as well as investigation to find out the best fit model competitive advantage. The fixed system that lasted over two between the two in predicting the value of the local currency. decades became obsolete only to be replaced by a new system This study can also be viewed as a comparison of a which would value the goods and services by the invisible regression model with a non-linear model. To derive at the forces of demand and supply. The end of the Bretton Woods empirical results, common macro-variables of Bangladesh era also marked the beginning of the birth of Bangladesh. A and United States has been utilized including the value of country poised with famine, over population and corruption. Taka in terms of a foreign currency which, in this study is the The currency of Bangladesh gave birth in the year 1972. Over U.S Dollar. The nature of this study is exploratory and it is the past thirty years, the only direction the currency has divided into five sections. The opening paragraph explores moved is towards the south with slow economic growth and the historical significance and performance of BDT GDP per capita significantly less than its neighboring (Bangladesh Taka) in terms of United States Dollar over the countries India and Pakistan. past twenty years followed by the discussion of the most well known exchange rate models which covers the literature review. The third and fourth corners of this paper analyses the study design and empirical findings from the equations. The paper concludes with the winner of the two models with a thorough critical analysis of existing models and sheds light over the areas that need exploration.

Keywords: International Finance, Exchange rate, Regression Analysis, Forecasting and Macro-Economics. Introduction In the field of Economics and Finance, exchange rate can be defined as the price of a currency in terms of another. In other The above chart highlights BDT in terms of Dollar for past words, how much is a country’s currency worth. The value of twenty years. The chart displays an upward trend which a Currency cannot be determined by itself except via a technically is an appreciation of the dollar denoting currency from another country. Since the inception of the devaluation of the home currency. Economists argue this fall Bretton Woods agreement, the gold standard of measuring the in price is due to the deficit in the domestic country’s balance value of exchange rate had been the sole commodity to of payments and unstable economic growth. As to its determine the exchange rate of a country. According to this continued devaluation, it must be noted that the local system, exchange rates were fixed and this system lasted from currency has not yet set its foot in international territory as

The author is lecturer, Independent University, Bangladesh.

The Bangladesh Accountant/April- June 2010 36 Finance & Banking there is simply is no demand for the local currency by foreign contribute to exchange rate determination and its investors. Its economy has been subject to severe criticism by predictability. Studies performed have mostly covered outside agencies for lack of infrastructure development, developed nations. In this section, five of the most common frequent political turmoil, power shortages and policy theories have been discussed. The Sticky-Price monetary misgivings. All the above factors among others could model of Dornbusch (1976) and Frankel (1979) can be possibly play a role in the continuous devaluation for the expressed as: currency. Asia’s emerging tigers, Malaysia, China, India and Thailand, all lagged behind Bangladesh in the early 1980’s in economic growth. Where e is the exchange rate, m is log of money, g is real Within less than twenty years, all four nations emerged as GDP, i represents the interest rate and f denotes the inflation pioneers in Asian economies with impressive strengthening rate denotes the inter-country difference; ‚ is the measure of of their respective currencies. The Taka has continued to lose volatility for the respective variable and is the error term. In its value since its inception whereas Indian Rupees, Thailand this model market prices of goods are sticky in the short run Baht and Malaysian Ringgit have shown impressive and adjust accordingly. Financial markets are assumed to appreciation in recent years. adjust instantly in the market. Purchasing power parity is also This study however is not about exchange rate comparison assumed to hold in the long run. If the supply of money between neighboring countries. It is geared towards justifying increases, interest rate will decrease, causing capital outflow what ought to be the price of BDT in early 2010 based on two of the country and thus depreciation of the exchange rate. On well known models. It is financial forecasting in simplest the opposite end, if the money supply decreases, interest rate terms using regression analysis and interest rate parity model. rises resulting in capital inflow and appreciation of the Financial forecasting takes in many forms. Estimating exchange rate. Empirical studies have given various results. currency price and foreign exchange trading is over a trillion Some supporting the theory and others having no relevant. dollar business. Corporations of developed nations tend to Countries geographically close tended to have shown utilize currency forecasting for the sole purpose of significance. minimizing losses as both payments and revenue received by Behavioral Equilibrium Exchange Rate (BEER) of Clark and the parent company can fall short due to exchange rate Macdonald (1999) hypothesis is based upon uncovered variation. To offset such losses, respective analysts forecast interest rate parity and can be expressed as: currency price by various models and utilize derivative instruments to hedge prospective future losses. ExxonMobil, American Express, Wal-Mart and IBM are among several In this equation, e the exchange rate, v is a unitary coefficient, major corporations that cater a foreign exchange division c represents the consumer price index, n corresponds to the simply to estimate future currency price as a slight change in price on non-tradables, r is the real interest rate, y denotes exchange rate can either cost millions or benefit the firm by ratio of government debt to GDP, t is the log of terms of trade additional revenue. What determines the rates at which and a is the foreign asset ratio. This equation indicates that currencies exchange with another? To put in more simple an increase in real interest rate differential coincides with a words, what determines the price of one currency in terms of real appreciation of corresponding size for a given expected another currency? The issues, underlying this debate has been exchange rate. The expected real exchange rate is assumed to subject to severe criticisms and controversies, some of which be equal to the equilibrium exchange rate in the long run. The has been discussed in the following literature. concept of un-covered interest rate parity has been rejected in Literature Review exchange rate movements. In the universe of exchange rate forecasting, numerous The above two theories are based upon certain assumptions literature and empirical studies have been carried out only to and limited variables. The concept of interest rate parity is arrive at a puzzling end. It has puzzled academics and yet still less complicated and contains one variable that solely remains unresolved as to what factor or factors actually determines exchange rate movements. The underlying The Bangladesh Accountant/April- June 2010 37 Finance & Banking assumption behind the theory is the ideology of covered interest arbitrage. Investors take advantage of the discrepancy In the above equation, money is expressed by m, GDP by g, of interest rates between countries and hedge their position interest rate by i and productivity by p.A rise in factor via a forward contract. Under this theory, it will not be productivity in the tradable sector raises wages both in the possible to engage in arbitrage transaction as the forward rate tradable sector as well as non-tradable sector. This is will offset the interest rate advantage. accompanied by economic growth which is accompanied by high interest rate causing real exchange rate appreciation due to the differential productivity growth between the two sectors. A fall in factor productivity will decrease wages and economic growth accompanied by low interest rate and fall in exchange rate. A well known implication of this model is The theory determines the forward rate of the foreign demand cannot affect real exchange rate. However, there is currency by either a premium or discount that is equal to the evidence that demand does influence real exchange rates difference in interest rates between the two countries. If based on tests performed. Empirical evidence has provided interest rate is less than a foreign country, home investors will support for the hypothesis; however the results were strongly take the advantage of investing in the foreign country. As a influenced by the nature of the tests. The Balassa Samuelson result, the foreign exchange rate will increase which will hypothesis proved true for industrialized nations with high offset the interest rate advantage. On the reverse situation, if growth. Under developed countries remains a good interest rate is greater in home nation than foreign nation, the investigation ground for this model. foreign rate will decrease as foreign investors would try The theory of Purchasing power parity originated in 1918 by capitalizing from the higher interest rate offered in the home Gustav Cassel that exchange rates were primarily based upon nation, which will be offset due to the increase in home the price levels of two countries. In the absolute form, the exchange rate. In both the situation, covered interest rate purchasing power of different currencies is equal for a given arbitrage will provide a return that will be no less, no more basket of goods. than the domestic return. Empirical tests conducted between the actual relationship between interest rate and forward rate supported the theory in certain studies. The tests were The equation for the relative version is displayed above. The focused on arbitrage feasibility more than the determination spot rate of one currency to another will change to the of actual forward rates. If the forward rate does indeed reflect differential in inflation rates between the two countries. the actual difference in interest rate, arbitrage is not feasible. According to the theory, if a good in a particular country is The potential flaw in this theory is that actual forward rate is costly due to inflation, consumers will try purchasing the not determined by the difference in interest rate but by the same good from another country with lower inflation. As a forces of demand and supply. There are deviations from the result, the exchange rate for the foreign country will shoot theory and not large enough to make covered interest upwards as investors will require foreign currency to buy the arbitrage worth while if transaction costs, tax laws and foreign good. Hence, the price paid for the good in the government regulations are accounted for. The minimal domestic market as well as foreign good should be equal due difference in interest rate causes arbitrage to be negligible. to the appreciation of the foreign currency. The Purchasing However, in today’s globalised financial markets, investors Power Parity theory assumes inflation rate between two are venturing in various markets and capitalizing form countries is the sole driver for exchange rates. Empirical tests interest rate advantages due to the leveraged trading and have shown this parity does not hold due to lack of substitutes forward contracts. for traded goods. Due to lack of substitute goods, consumers Similar to the BEER and sticky price model, Balassa necessarily resort to foreign goods due to high domestic Samuelson hypothesis incorporates productivity in the inflation. Based on the confounding effects, exchange rate is model: influenced by the inter country difference of several factors The Bangladesh Accountant/April- June 2010 38 Finance & Banking including inflation, interest rates, national income, Simultaneously a decrease in the independent variables will government control and future expectations as a result result in an increase in the dependent variable. However, exchange rates do not solely move due to inflation GDP and money variables have been found to be positively differences. related to the dependent variable. A one percent change in Methodology GDP and money supply results in an increase of 1.578% and To derive at the price of the currency of Bangladesh for 2010, 0.028% increase in the exchange rate. Thus both the GDP and regression analysis for the sticky price monetary exchange money supply are positive correlated to the exchange rate. rate model and the equation for interest rate parity have been Using the beta coefficients and solving for the equation gives utilized. Regression analysis can be used for both correlation a net change of -0.25% for the foreign currency. analyses as well as forecasting. This study focuses on the Incorporating this change, actual price for one dollar should latter. Regression analysis contains four steps which includes be 68.0295 taka base on the sticky price model. Interest rate specifying the model, data compilation, estimating the parity model provides a result of revaluation of 7.98% for the regression coefficients and data interpretation. Data has been home currency which gives a price of 73.64 taka for the collected for GDP, inflation, interest rate and money for past dollar. Both findings are for the beginning of 2010. Actual ten years for U.S and Bangladesh. The inter-difference rate for beginning of January 2010 has been 69.35 taka per between the variables of the two countries was calculated to dollar. It can be concluded that none of the models have been derive the values of the equation. Primary sources were used accurate in predicting the accurate price of the currency of which include both the Central Bank of Bangladesh and Bangladesh in terms of U.S dollar. Several theories can be Federal Reserve of U.S. Regression analysis have been used drawn from here. Both linear and interest rate parity does not to derive at the respective coefficients of the macro-economic hold for BDT although the sticky price relatively came close variables listed in the sticky price model. The coefficients to the actual. show the relationship between the dependent and independent Actual (01/2010) Interest Rate Parity Sticky Price Model variables. The coefficients were then inserted in the equation 69.35 BDT Per $ 73.64 BDT per $ 68.0295 BDT per $ along with latest data of the variables to arrive at the percentage change of the local currency. To derive the values According to the parity theory, when home (Bangladesh) of the second model used in this study, one year lending rate interest rate is greater than foreign (USA), foreign investors of both Bangladesh and U.S banks have been inserted in the would take the initiative to invest in home nation and this equation. Solving for both the equations, the empirical would cause upward pressure on the value of the home findings have been compared to the actual exchange rate currency or devaluation of the foreign currency. On the flip beginning of the year to arrive at the purpose of the study. side, when foreign interest rate is greater than home, investors Empirical Findings would tend to invest in the foreign nation to take advantage of Listed in the appendix section are the post regression data the high interest rate which would put upward pressure on the extracted from the sticky price model. Data posted contains value of the foreign currency and downward pressure on the both correlation data and coefficients of the four variables value of home currency. The change in the currency will be used in the linear model. The coefficient of determination equal to the difference between the two countries interest rate. also known as R square, measures the variation in the In this case, taka would pose to get stronger due to higher dependent variable that can be explained by regression interest rate as outside investors would have to buy the model. In this case 60.9% of the variation in the dependent currency to invest. However, in this study the opposite has variable can be explained by the independent variable. taken place. Although Bangladesh banks offer higher Interpreting the coefficients, both the inflation and interest investment rates than USA banks, the local currency has rate are negatively correlated to the exchange rate. A one devalued, which in this case should appreciate. The strictest percent increase in the inflation and interest rate results in - conclusion that can be drawn is interest rate parity theory 1.905% and -2.136% decrease in the exchange rate. does not hold in Bangladesh. Several factors can be attributed

The Bangladesh Accountant/April- June 2010 39 Finance & Banking as to why the theory does not hold. The most common being interest parity model has been able to justify exchange rate interest rate cannot be the sole determinant for pricing movement for the currency of Bangladesh. Not only the exchange rates. Although interest rates are far more attractive empirical data failed to match the actual, but the underlying in Bangladesh than U.S banks, most out side investors would hypothesis of the models as well could not be incorporated not take the initiative to invest in local banks due to the into the context of Bangladesh which could possibly explain transaction cost, inflation, limitation in currency flows and the failure of the models' empirical findings. The rationale the hassle of currency conversion among others. Most for capital outflow and inflow due to changes in interest rate investors residing out side of the country are probably not cannot be infused in least developing nations. Both the aware of the high interest offered by banks in Bangladesh and models' predictability had no scope in this study. It can be given the barriers, there is every possibility of not taking the wisely concluded that the two existing models used in this initiative to invest. paper for exchange rate determination are more appropriate Much closer to the actual value has been the sticky price for developed countries, as both money supply and interest model, although inaccurate to the actual rate. Sticky price rate tend to have a profound impact for capital flows which proposes a negative relation between exchange rates and can affect the price of the developed nation’s currency. As money supply. In this study, it has been found to be positive. much impact the variables are posed to have, tests performed The theory proposes that as money supply increases, interest using the models in countries in the western hemisphere have rate will move in the opposite direction, causing capital not provided the best of results. Other variables require outflow from the country and thus devaluing exchange rate. If serious attention as well as investigation. Very little work has the supply of money decreases, interest rate will increase as a been done incorporating leading, lagging, coincidental result capital inflow injection will take place strengthening indicators and shadow economy in exchange rate forecasting. I the local currency. Capital outflow will result due to lack of investment opportunities in home nation as investors seek financial products that offer higher return. The empirical findings promote a reverse relation. As money supply increases, interest rate decreases which should cause capital outflow which in turn should cause exchange rate to increases. The empirical findings are contradictory to the theory, which states as capital outflow occurs due to fall in interest rates causing currency depreciation whereas in this study capital outflow causes currency appreciation and vice versa. The rationale for this theory can be rejected in the context Bangladesh; capital outflow would not occur if interest rates decrease as the country. As one of the least developed countries in the world, stricken with poverty and corruption, investors in Bangladesh do not engage in arbitrage transactions and even if it were possible, it would not be possible to transfer more than three thousand dollars through legal means according to government regulations. Concluding Remarks The sole purpose of this paper was to investigate how accurately the Interest Rate Parity Model and Sticky Price Exchange Rate can predict the price of a particular currency over a particular time. Neither the sticky price model nor the

The Bangladesh Accountant/April- June 2010 40 Finance & Banking

The Bangladesh Accountant/April- June 2010 41 Finance & Banking How to Increase Tax Revenue: Improvement of Enabling Environment, Application of Strategic Management Approach

Moslehuddin Khaled

Abstract finance their operations more and more through their internal Tax is one of the main sources of internal revenue for any revenue, thus reducing their dependence on external aid and government. Most of the time, we see the finance minister is grants. pressing tax administration (NBR) for increasing the tax From the latest data of 2008, World Bank development collection for more government revenue. Personal indicators show that tax revenue as a % of GDP is only 8.8. experiences of the citizen with the tax offices and tax related (World Bank, 2009). If we look at the previous 5 to 10 years, formalities show that environment is not enabling for the tax we will see that it was always less than 10%. Though there officials and for the tax payers. If government is compared are other developing countries which have similar low with a good business organization and tax officials as percentage, it will be better indicative of our backwardness if managers, and increasing tax revenue is a business target, we compare with the OECD and EU countries which are then applying business like strategic management approach mostly developed countries. EU average is 39.8% and OECD would entail two major tasks: Create enabling environment - average is 35.9% of GDP. So it is easily understandable, that streamline the TIN application and tax filing procedure, we have enough room for improving our tax revenue. reward tax officials for innovative and customer orientation Articles about different aspects, problem, evasion, and approach and Improve management capability of the tax reforms are found with a simple internet search. For example, department - train the tax officials in basic marketing, service Sarkar, Basher (2002). There are many studies and reports marketing, ICT, statistical packages etc. The strategic action and ongoing seminar about the importance of increasing tax plan should be declared by the prime minister, not the finance revenue. But how to increase the tax collection in reality has minister or NBR chairman. If government takes a strategic always remained a great challenge. approach – consistent, integrated, enabling, the tax revenue Personal experiences of the citizen with the tax offices and can be increased at an increasing rate with active citizen tax related formalities and matters reveal the state of taxation participation. in our country. Added to it, perusal of the newspapers or Introduction browsing their online versions and other internet sources will Why the states need tax anyway? Tax is one of the main reveal that both government and citizens are aware of the sources of internal revenue for any government. Taxation is problem. But there is a lack of integrated and cohesive one medium of participation in government by the citizen – approach from the government. whatever the form of government is. But collecting tax In line with the above, this article will suggest a business like money has never been an easy job? strategic management approach of increasing the tax revenue. A finance minister headache? Most of the time, we see the We call it business like in the sense that this approach does finance minister is clamoring tax administration (national not depend only on the NBR officials or the finance minister. board of revenue - NBR) for increasing the tax collection for In a corporate business, the management would take it as a more government revenue. The logic is simple. Bangladesh, central organization concern and would try an integrated like many other so called developing countries need to strategic approach.

Author is Faculty member, School of Business, Independent University Bangladesh and teaches Management, HRM, and marketing courses in BBA and MBA program and is enrolled in MPhil/PhD program in management of University of Chittagong. His research area is improving management environment and capability in public sector.

The Bangladesh Accountant/April- June 2010 42 Finance & Banking Current State and Future Strategy of Taxation: These steps seem natural for setting a strategic approach to As told by NBR managing the taxation system. It shows us the good intention In this section we will get a snapshot of the current state of (strategic intent) of the government. It provides a road map or taxation and strategic intent of the concerned government a broad action plan to achieve organizational objectives (i.e., authority. The concept of strategic intent means going increasing tax revenue). beyond solving current problems and realizing future General Perception of Customers opportunities for increasing tax revenue. Strategies formulated with only the present in mind, argue Prahalad and (citizens) about tax paying Hamel (1994), tend to be more concerned with today’s Though the NBR strategic plans and actions are desired and problem than with tomorrow’s opportunities. give us hope for a well managed taxation system, our Now, is there a strategic intent in NBR? Quoting the NBR experience and observation shows a contradictory picture of Chairman, a Daily Star newspaper report presented the the realities which undermine the good intention of the strategic intent of the NBR. If we summarize the facts we get government. the following: General perception about the system • The government in the current fiscal year (2009) has set a The media reports (print, television, web) about anomaly and target of collecting higher revenue than the previous year inconsistencies in the overall tax system are widespread and — 38 percent growth in revenue from import, 33 percent they form a general perception. In addition to it, there are in VAT and 27 percent growth in income tax. personal experiences of the individual citizens and small • NBR is trying to improve the tax collection system by business persons. The overall perception can be summarized introducing simpler methods and technology. as follows: • The number of taxpayers has increased to around 7.53 • Our tax rules and regulations need to be updated with the lakh until November (2009) from 6.56 lakh last year. However the number of the taxpayer identification need of the time. That they have to be customer (citizen) number (TIN) holders is around 2.4 million. friendly. •A tax survey is ongoing to increase the number of • There are many TIN holders but not many tax payers. (TIN taxpayers by 4 lakh within the current fiscal year. is needed for different kind of business, e.g. submitting • It is trying to enhance the board’s strength, and bring tender etc.) more transparency and accountability. • There are not any centralized computerized systems that • A move is under way to set up ‘dedicated benches’ in the can identify the tax payer and/ or TIN holders as unique Supreme Court to handle NBR-related cases and reference. (Many people hold more than one TIN, promptly collect the revenues in due (around taka 8000 whenever they need they get one.) crore). Also, there is a plan to introduce Alternative • The environment is not enabling for the tax official that Dispute Resolution for out-of-court settlement of cases. means, they cannot apply innovative ways of motivating • The tax administrator is working to introduce an online tax payers or, on the other hand, there are many rooms for tax payment system by next month to upgrade the concerned tax official to misuse their discretion. existing tax returns submission procedure. In this process, trained the taxpayers will be able to pay tax online from January. • Our tax officials are not well in dealing with • The board now works to rationalize the tariff structure people, even if they are non-corrupted and honest. In and remove anomalies in the taxation to encourage more most cases they are not well behaved. taxpayers to submit VAT, customs duties and income • Sometimes the tax rules are found to be too rigid to be taxes. accepted as just and fair. Along those rigid rules, tax • The NBR chief said they will set up a national data officials also are rude. So sometimes it happens that an centre to provide adequate information to help taxpayers honest tax payer is caught in the net of rules, on the other avoid hassles. hand, smart evasive tax payer manage to escape anyway. (Source: NBR chairman, found in a daily start report, All of the above may be confirmed with measuring the December, 2009). The Bangladesh Accountant/April- June 2010 43 Finance & Banking frequency or magnitude of the incidence or occurrences. We want to pay - abiding by all the existing tax rules and leave it here for further researches. regulations? General perception about the Tax office Interactions Currently we see finance minister and/ or NBR chairman What is the problem with current scenario? Do citizens feel having frequent meeting with tax collecting officers. One free to walk in to tax offices any time for consultation about major objective is to pressurize them in these meetings? But the rules and procedures? The perception is ‘NO’. Personal how would they increase the tax the tax official - should they experiences of the citizens show that be aggressive? Should they be merciless on the citizens for • Before being a tax payer the sake of increasing revenue for the government? Isn’t it a • Tax officials are not easily reachable or accessible to duty of the citizens themselves to pay the tax – duly? On the other hand, why citizens would bother to pay the tax the citizens. in the right amount? Should they pay for a government which • No call center or customer help line works in reality. is consistently corrupt and inefficient? A government misuses • Applying for the TIN is not a hassle free one stop public funds with projects like roads without the bridges or solution. That means wanting to be a tax payer is bridges without the roads? A government which governs hassle some. without a strategic approach to managing or orientation about • After being a tax payer governance? This is the psyche of the citizen’s not being • Filing return is even more hassle some for the responsible citizen by paying tax duly. individual tax payer. Enabling environment is the expression that encompasses • No authorized list of personal income tax government policies that focus on creating and maintaining practitioners or tax consultants available publicly. an overall macroeconomic environment that brings together • Rather than catching the real gross evaders, suppliers and consumers in an inter-firm co-operation manner sometimes genuine tax payers are caught for (UNCTAD, 1998a. TD/B/COM.2/33). trivial discrepancies and documentations. When International Finance Corporation (IFC) works to • Very little mechanism to ensure a user friendly tax improve enabling environment, it means to promote reforms return system. that support private sector development (IFC, 2010). A • In general UNIDO report (2008) sees the enabling environment • Going to the office and talking to the officials is a encompassing from the narrow scope of regulatory business matter of fear and hesitation. environment to broader scope of investment climate. • Behavior of the tax office staffs is intimidating and Another typical general definition is as follows: “An enabling confusing. environment is a set of interrelated conditions—such as legal, • Very little guidelines available to the public about bureaucratic, fiscal, informational, political, and cultural— how to fill the tax return and submit the relevant that impact on the capacity of …development actors to documents. engage in development processes in a sustained and effective manner” (Thindwa 2001: 3). In many cases, it is not the fault of the individual tax officials Brinkerhoff (2004) presented commonly agreed-upon that they cannot improve the above mentioned scenario. It is features of the enabling environment, divided into five true that they need more training in leadership, change, and categories of factors: economic, political, administrative, organizational development (business management socio-cultural, and resources. For example, in the principles). But more importantly they need strategic support Administrative category the features of enabling environment (enabling environment) from the government just like, in a are – business, middle or business unit mangers need strategic • Efficient service delivery capacity support from the top management or corporate management. • Low levels of corruption. Enabling Environment: What it is • Institutional checks & balances. Our fundamental concern is: is there an enabling • Decentralization. environment where people can smoothly pay the tax, if they • Civil service meritocracy. The Bangladesh Accountant/April- June 2010 44 Finance & Banking

The associated illustrative enabling Actions by Government Now government needs to create an enabling environment by may be: reforming the rules and regulations and provide the tax • Curbing abuse & corruption. officials management training, particularly behavioral • Creating incentives for performance training. Then many people will be interested to pay the tax • Separating service provision from financing and gratuitously be in the tax net. The key to success in this • Building cross-sectoral partnerships model depends on the facilitating skill of the government. • Establishing monitoring & evaluation systems Government has to play a strong facilitating role and should • Improving coordination across agencies & sectors do it systematically with strategic management process. Now, like many other government units and agencies, our tax Figure 1 shows the process in schematic diagram. offices do not have this kind of enabling environment 1. Prime minister should inaugurate the process: The framework. However, enabling environment for increasing strategic process of generating more revenue should start tax revenue should ensure that - from the head of the state as s/he is the Chief Executive • There is a healthy environment for both the tax officials Officer (CEO). Prime minister (CEO) should publicly and tax payers – be it businesses or individuals. announce the strategy clearly that country cannot ignore • Tax payers get the respect and dignity from the importance of increasing revenue through taxation. Then government and tax officials. come Finance minister and the NBR chairman as they are • Tax officials are clarified the scope and limit of the power the Strategic Business Unit and divisional managers. Tax of their administrative discretion. officials are the last persons to be responsible for • Tax officials and NBR are capable enough of practicing operational implementation. If the strategic planning and good managerialism. marketing for increasing the tax revenue is done • All the ambiguous rules are wiped out and clarified in professionally and carefully, jobs of the tax collectors details. will be easier. • All the procedural formalities are streamlined. • For example, taxation is an unpopular idea. But if PM So due to lack of this kind of enabling environment, our tax takes the responsibility of positioning to the customer revenue do not increase. (citizen), it will be supportive for the officers at the Can we apply Business Management Approach implementation levels to sell it (tax collecting) to the Prahalad and Hamel (1989) stress that strategic intent customers. encompasses an active management process, which included 2. Review existing policy and practices: The next step is focusing the organization’s attention on the essence of to sit in meetings with different focus groups consisting winning, motivating people by communicating the value of of different tax payers who have been paying taxes for the target, leaving room for individual and team long time and some who are not paying regularly because contributions, sustaining enthusiasm by providing new of rule difficulties. The objective of this step will be to operational definitions as circumstances change and using critically review the existing scenario, policies and strategic intent consistently to guide resource allocations practices and find the gaps that are encouraging (Prahalad, 1989) malpractices, discouraging compliance, and hindering Bangladesh needs more tax revenue. It is true that there has good citizen behavior. been a general tendency to evade tax in all countries at all 3. Open suggestion from citizens: In this step, ministry times, and, in a country like Bangladesh where regulatory and NBR should ask for open suggestions from citizens framework is weak and poor managed, this is easy to non- of all corners of the society. Multiple communication comply and difficult to comply. But equally true is that many channels – post, email, telephone, mobile sms – should be citizens avoid tax paying because of the official and there for taking in communications from the people. The documentation hassles. objective is to broaden the opinion base. The outcome of The Bangladesh Accountant/April- June 2010 45 Finance & Banking

this step is to find out various views and suggestions should be given some cultural change training centrally about – what will make people be enlisted as tax payer by the ministry and their performance should be (increasing the tax payer net) and what will make them somehow tied with increasing the number of tax payers pay regularly. Special attention to be given to those who and the amount of tax collection. want to pay the tax but do not do so because of regulatory 6. Media management: Media should be convinced by the unfriendliness and procedural mismanagement (lack of office of the Prime Minister and ministry of finance that enabling environment). their positive reporting about the tax collection drive is 4. Modify the standard operating procedure of the tax essential. They should be given orientation on the rules and collection mechanism and sent to review importance of uniform media support for successful committee: at this stage a modified and improved version implementation of the government strategy. But as of the policies and guideline will have completed. But Bangladesh is a popular democracy, it will be very before sending it to the tax offices for tactical level difficult to manage the media. So the first thing first is to implementation, the policy may be sent to a review ensure that the government’s strategy is very clear and committee consisting of economists, businessmen, enabling for the tax payers and tax officials. Then media service holders and so on who will critically review it for may be encouraged to report the cases of malpractice inconsistency and gaps for field level. done by the tax officials and bad tax payers. 5. Implementation of the policy by the NBR and tax In any cases, there should be a direct and multi channel offices: these offices will act as the executing agency of government’s strategy of increasing tax revenue. feedback system which connects the tax payers (specially Employees of the tax offices headed by commissioners of individual and SME) with the government, say PMO, Finance taxes, are characterized by typical government employee ministry etc. Then the tax payers who are sincere and regular attitude – they lack the customer (citizen) service attitude can contact the ministry if they face specific hassle in clearing basic managerial principles and also motivation. They their tax smoothly.

The Bangladesh Accountant/April- June 2010 46 Finance & Banking Summary and Conclusion research and analysis about the tax payer profile and In summary, if government is compared with a good business trend analysis) organization and tax officials as managers, and increasing tax • Improve management capability of the tax department revenue is a business target, then applying business like • Train the tax officials in basic marketing, service strategic management approach would entail two major tasks: marketing, ICT, statistical packages etc. • Create enabling environment • Create help desk, open house day, customer service • Simplify the rules executive position • Streamline the TIN application and tax filing • Establish multi channel help line for the citizen to get procedure access • Reward tax officials for innovative and customer If government takes a strategic approach – consistent, orientation approach integrated, enabling, the tax revenue can be increased at an • Outsource some activities (for example, some of the increasing rate with active citizen participation.

REFERENCES:

Basher T. A. M. Nurul, Review of the Tax System in Bangladesh: A Prerequisite for Industrial Growth found in http://www.worldnewsbank.com/TaxArticle.pdf

Brinkerhoff, Derick W. (2004), The Enabling Environment for Implementing the Millennium Development Goals: Government Actions to Support NGOs, Paper presented at George Washington University Conference.

G. Hamel and C. K. Prahalad, Competing for the Future (New York: Free Press, 1994), quoted in Hill and Jones, Strategic Management, 7th Ed, 2007, p. 27.

G. Hamel and C. K. Prahalad, Strategic Intent, Harvard Business Review, May-June, 1989, p. 64, quoted in Hill and Jones, Strategic Management, 7th Ed, 2007, p. 27.

Niccolo Machiavelli, The Prince, St Martins Press, 1964.

Sarker, T. K. Incidence of income taxation in Bangladesh, found in http://unpan1.un.org/intradoc/ groups/public/documents/ UNPAN/UNPAN014405.pdf

World Bank Databank 2009, http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=307&Topic2id=95

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United Nations International Development Organization, 2008, Creating an enabling environment for private sector development in sub-Saharan Africa.

The Bangladesh Accountant/April- June 2010 47 Finance & Banking Improving Financial Resources Mobilization in Developing Countries and Economies in Transition Suresh N Shende

Introduction building and institutional development are an absolutely The United Nations Millennium Declaration resolved to essential complement to finance in the effort to improve create an environment –at the national and global levels alike living standards of the poor. Most developing countries, – which is conducive to development and to the elimination usually the poorest ones, still lack institutions capable of of poverty. Success in meeting these objectives depends, inter implementing the necessary actions, and will need to focus alia, on good governance within each country and at the major national efforts on capacity building. For this purpose, international level and on transparency in the financial, more and better assistance from the international community monetary and trading systems, as also in removing the is needed; indeed, experience shows that imposing tough obstacles that developing countries and economies in policy conditionality on poor countries without assisting them transition face in mobilizing the resources needed to finance to build their domestic capacity would certainly lead to their sustained development. frustration and unsatisfactory results. The generation of In the Road Map towards the implementation of the UN domestic resources to save and invest productively is the Millennium Declaration, it is clearly pointed out that the essential foundation of sustained development. A very low mobilization of domestic resources, is the foundation for self- domestic savings rate is the major structural weakness to be sustaining development. Domestic resources finance domestic overcome in most developing countries and economies in investment and social programmes which are essential for transition. But there will not be enough domestic savings, nor economic growth and for eradicating poverty. In this context, enough high quality national investment, without a sound fiscal policy, responsible social spending and a well macroeconomic discipline. Economic policy must be functioning and competitive financial system are the elements designed to make inflation and the current account balance of good governance that are crucial to economic and social consistent with sustained growth. For countries with high development. Strategies for moving forward include, inter inflation, this implies that monetary policy should aim to alia, disciplined macro-economic policies and fiscal policy, reduce inflation over time, and once it has reached a low including clear goals for the mobilization of tax and non-tax level, to hold it there. Monetary policy also needs to be revenues and responsible public spending on basic education consistent with the chosen exchange rate regime, which must and health, the rural sector and women. The primary give reasonable assurance that the country will avoid an responsibility for achieving stable growth and equitable unsustainably large current account deficit. development lies with the developing countries themselves. Fiscal discipline, too, is required at all times, so as to keep This responsibility includes creating the conditions that make deficit financing small enough to avoid causing inflation, to it possible to secure the needed financial resources for avoid excessive accumulation of public debt, and to ensure investment. It is the actions of domestic policymakers that that government borrowing does not crowd out the private largely determine the state of governance, macroeconomic sector investment. Almost everywhere the most potent way to and microeconomic policies, the public finances, the empower the poor to integrate themselves into the market condition of the financial system, and other basic elements of economy, and hence to contribute to and benefit from a country’s economic environment. Achieving such a positive economic growth, is to make public investments in broadly environment is not simply a matter of political will. Capacity accessible education, health, and nutrition, in other basic

Author is Interregional Adviser in Resource Mobilization Public Policy, Analysis and Development Branch, Division for Public Economics and Public Administration, Department of Economic and Social Affairs, United Nations, July, 2002.

The Bangladesh Accountant/April- June 2010 48 Finance & Banking social programs, and in the rural sector, where large towards creating a market-friendly policy regime. The proportions of the poor typically inhabit. These programs reduction of income, corporate and trade-related taxes and a need to have the first call on government resources—they greater reliance on domestic value-added taxes were the should not be treated as marginal programmes whose budgets major elements of this strategy. Another major element was can be slashed as economy measures when times are difficult. the liberalization of the domestic financial sector involving, inter alia, the deregulation of interest rates, the elimination of Domestic resource mobilization directed credit and freedom of entry into the financial sector Developing countries and countries with economies in for both domestic and foreign private investors. To meet transition are currently confronting unsustainable fiscal import-financing needs, developing countries were to rely on deficits, unabated debt service charges, and declining external exports and access to foreign private capital as the primary assistance seriously affecting their development process. It instruments. The above approach to development financing would be in their interest to overhaul the strategies of has been seriously questioned. Many developing countries domestic and external financial resources mobilization were not adequately prepared in terms of institutional and through tax and non-tax instruments that are fair, equitable human resources capacity to deal with the inevitable and create minimal disincentives for economic efficiency, and challenges associated with its implementation, especially initiate tax reforms to simplify and rationalize the tax against the backdrop of the globalization of financial markets structure. The non-tax revenues include social security which was occurring with phenomenal speed. The reliance on contributions, grants from foreign governments and exports to generate resources also did not evolve in the way international organizations, property income, interest, anticipated. Concomitantly, aid flows declined and the list of dividends from state enterprises, rents from government developing countries classified by the United Nations as property, fines, penalties and forfeits and sale of goods and “least developed” became longer. In the light of these factors, services. There should be greater emphasis on improving the it is necessary to re-examine the issue of resources efficiency and effectiveness of the revenue administration, mobilization for financing for development, using a more strengthening the institutional framework, selection of taxes holistic approach and reaching agreement on different options and duties which are administratively feasible and lend to appropriate for today’s global economic environment. realistic collections, widen the tax base and progressively The agenda of the International Conference on Financing for integrate the “informal” sector into the mainstream of the Development held in March 2002 at Monterrey, Mexico national economy. In the context of international economic emphasized the importance of mobilizing domestic financial relationships, there should be increased stimulus to finalize resources for development; mobilizing international resources bilateral tax treaties, protect the interests of national revenue from the adverse effects of operation of electronic commerce, for development: FDI and other private flows; trade; transfer pricing mechanisms, non-cooperative tax increasing international financial cooperation for jurisdictions and other tax shelters and secure legitimately development through, inter alia, ODA; debt; and addressing due tax revenues from income attributable to the new and systemic issues: enhancing the coherence and consistency of innovative financial instruments, but avoid harmful tax the international monetary, financial and trading systems in competition. support of development. . The Monterrey Consensus adopted The subject of financing for development has engaged the at the International Conference on Financing for attention of policy makers and development economists since Development has recommended, inter alia, that developing several decades. However, the importance of this topic has countries and economies in transition should set up an acquired new urgency. For most of the 1980s and early effective, efficient, transparent and accountable system for 1990s, the approach of the international community to mobilizing public resources and managing their use by development was dominated by the Washington Consensus, Governments as also emphasized the need to secure fiscal the elements of which incorporated an emphasis on domestic sustainability, along with equitable and efficient tax systems resource mobilization through fiscal restraint and tax reform. and administration, as well as improvements in public The concept of tax reform was to be influenced by the move spending that do not crowd out productive private investment. The Bangladesh Accountant/April- June 2010 49 Finance & Banking

It also recognizes the contribution that medium-term fiscal government, such as the provision of infrastructure, are being frameworks can make in that respect and has also encouraged increasingly provided or financed by the private sector. When strengthened international tax cooperation, through enhanced investment is made by the public sector, as often done and dialogue among national tax authorities and greater needed for, inter alia, providing public goods and alleviating coordination of the work of the concerned multilateral bodies poverty, many issues arise with respect to how the requisite and relevant regional organizations, giving special attention resources are raised and used. These include transparency of to the needs of developing countries and countries with government budgets, impact of tax subsidy policies, criteria economies in transition. applied for inter-sectoral allocation within the public sector Economic development being basically measured by progress and efficiency in the use of resources. The emphasis is thus in economic growth remains largely valid although over the on policy measures to generate the funds required for last decade, the concept of development has been increasingly investments in the variety of sectors crucial to development, accepted as a broader concept incorporating social and both economic and social. According to the framework environmental dimensions as integral parts. While these advocated by Musgrave (1959), the three main fiscal policy aspects are crucial and there needs to be a policy focus on the goals are: macroeconomic stability, efficiency in resource implied concerns, without economic progress the financial allocation, and an appropriate distribution of income. All and other resources needed to deal with them would not be three objectives should contribute to the ultimate goal of available. Thus, the inevitable conclusion is that economic reducing poverty, whether by increasing disposable income, growth is a necessary but not sufficient condition for promoting access to job opportunities and productive assets, development. In fact, the development of a country is ensuring certainty and a stable economic policy environment, determined by a multitude of factors, including its natural or providing protection to the poor. Although the “function” resource base, its human resources, the state of its physical side of the government budget constraint has a more direct infrastructure, the technology available, the development impact on the poor, the budget, considered as a whole, strategy of the government, and its openness to the outside remains one of the most pervasive instruments of public world. It can be considered that development, or economic policy. In this context, the trade-off among the alternative growth, is a direct function of the various investments made means of financing public spending must be taken into in a country. In particular, there are important management account when formulating poverty reduction strategies. There and governance issues involved in investment activities are three main ways in which the public sector can obtain within each sector to avoid or minimize wastage and leakage resources to finance its actions: levying taxes, contracting as also questions relating to the inter-sectoral allocation of debt and creating money. When tax revenues are insufficient investment. It can be claimed that when investment decisions to finance government spending, the transfer may occur are made on the basis of market competition, the relative rates through issuing high-powered money or/and borrowing. of return over time should determine its allocation and hence Broadly speaking, investible resources can be divided into intersectoral allocation should not be a matter of policy two broad sources: domestic and foreign. Domestic resources concern. However, there are always market imperfections in comprise household, corporate and government savings. many different forms: inadequate information flows; Some of the factors that influence domestic resource complications due to the structure of industry (monopoly, mobilization include the level and growth of per capita oligopoly, imperfect competition); and a variety of positive or incomes, savings preferences of individuals in the society, the negative externalities. These make the reliance on relative degree of development of and confidence in financial rates of return of investment as the main determinant of inter- intermediation, demographic structure, and fiscal/ monetary sectoral allocation, and thereby economic growth and policies. Transforming these resources into investment in development, more than problematic. productive activities depends on the quality of the There are, in addition, questions relating to the role of the macroeconomic fundamentals, including fiscal/monetary government visà vis the private sector, since some of the prudence, the structure of the financial market, including the development functions traditionally performed by the regulatory and supervisory framework of the banking sector The Bangladesh Accountant/April- June 2010 50 Finance & Banking and the size and quality of the securities and bond markets, economic factors in the rest of the world, particularly the and the continuity of a consistent investment policy. Other country of origin of the funds, such as relative growth factors, such as the law and order situation, the availability of prospects, interest rates, and tax regimes, also become an appropriately skilled workforce, the state of development relevant. Foreign official inflows are more related to political of physical infrastructure, and property rights, also weigh on and strategic interests, the relative level of development and decisions to convert intermediate savings into investment. the amount of funds allocated to aid budgets by donor The promotion of exports allows countries to generate foreign countries. In addition, it should be noted that national efforts exchange to pay for import needs, many of which are to mobilize resources are interrelated with the external investment-related. Exports are often crucial to pay for the economic and financial environment: adverse developments import of new technologies, capital goods and raw materials in prices of exports, sharp fluctuations in key exchange rates not produced at home to improve the productivity and or instability in the international financial system can efficiency of investment as well as to take advantage of constrain such efforts severely. In general, the degree of economies of scale. economic security in a country is crucial to its success in The discussion on fiscal architecture is crucial in identifying raising resources to finance its development. The political and the revenue capacity of different types of taxes based on the economic environment variables affecting savings and characteristics of a specific country. No one tax system fits investment decisions include government leadership, the risk all. The fiscal architecture presents a range of alternatives for of external conflict, corruption, the rule of law, racial and policymakers to consider in seeking raising revenue to fund ethnic tension, political terrorism, civil war, the quality of the government operations. The degree of tax compliance also bureaucracy, the risk of repudiation of contracts, the risk of helps policymakers in designing tax policy. In many expropriation by government, political rights and civil countries, tax administration concerns strongly influence tax liberties. policy. The structure of the economy of developing countries An analysis of 53 developing countries over the period 1984- makes it difficult to collect certain taxes. The module on tax 1995 shows that the countries with better economic security compliance helps identify the limitations of various types of had significantly high levels of investment and economic taxes and offers guidance on the design of different tax growth. Reforms to improve economic security can raise instruments. Finally, countries no longer can effectively private investment by a half to one percentage point of GDP design their tax systems in isolation. The increased mobility in the short to medium term, and a half to one and a quarter of capital and labor requires policymakers to consider the tax per cent over the longer term. It is also true that the increasing systems of other countries. Globalization and reduced trade globalization of the world economy has brought with it barriers threaten two major sources of tax revenue for serious implications for the economic security of countries. developing countries: trade taxes and corporate income taxes. The increasing mobility of factors of production coupled with The challenge many countries face is replacing those lost the lowering of the degrees of freedom for national revenue sources with taxes that do not disproportionately macroeconomic policy independence has led to the necessity burden the poor. of developing and implementing universal codes of conduct Foreign financial resources for business and financial markets. Countries which partake Foreign investible resources comprise funds from the in these exercises will certainly be viewed as preferred international banking system (commercial short- and recipients of investment flows. It is generally agreed that medium-term loans), from international capital markets benefits of globalization, being faster and more sustained (foreign private portfolio investments), from corporations growth, higher living standards, more employment and large (FDI) and ODA from bilateral donor governments and from dividends from advances in technology required concerted multilateral financial institutions, such as, the World Bank action, at both national and international levels, and cannot be and ADB. The factors which influence the size and left to the operation of market forces alone. In fact, composition of private external inflows are broadly similar to globalization and its accompanying market forces should be those for domestic private savings, with the addition that properly guided and harnessed to become inclusive forces for The Bangladesh Accountant/April- June 2010 51 Finance & Banking sustainable and people-oriented development. emergency food aid or with the help of export subsidies, has It was considered that while the evidence of the quantitative damaged farm production in a number of developing impact of globalization on public revenues is still limited, countries, some of which had been carefully nurtured under there are indications that it may reduce tax revenues due to assistance programs. In other cases, tariff peaks and increased tax competition among jurisdictions to attract escalation frustrate efforts by developing countries to foreign direct investment, exponential growth in electronic diversify their exports. Greater coherence between aid and commerce, increased mobility of factors of production, and trade policies is therefore essential. In particular, reducing or growing importance of off-shores and non-cooperative tax eliminating biases against developing country products in jurisdictions. The fall in revenues might further aggravate the industrial country import and agricultural regimes would problem of budgetary deficits of fiscally-stretched economies. make both aid including debt relief and trade more effective It was observed that globalization may also create pressures in promoting development. for increased spending for education, training, research and Foreign aid has dwindled in the budgets of many donor development, environment, economic and social countries during the past several years, but it continues to infrastructures, and for institutional changes primarily to loom very large for many of the recipients. In many improve efficiency. While these items of expenditure are developing countries, foreign aid receipts are an important consistent with the traditional and basic role of the state in its source of revenue and thus constitute a key element in fiscal allocative function, globalization may create additional policy. Aid may be an indispensable source of financing, in financial requirements for social protection by way of particular, for expenditures in areas, such as, health, unemployment benefits to unskilled labour facing education, and public investment that are essential to raise the retrenchment due to closing down of noncompetitive living standards of poor people in developing countries. domestic industries. To the extent that globalization is Given that aid is limited, it is particularly important to use it perceived to be a factor in the worsening of the income wisely. This requires not only establishing appropriate distribution of countries, it appeared that globalization systems to manage aid funds with a view to avoiding increased the need for governmental intervention, while, at corruption and mismanagement. Important though this aspect the same time, it reduced its capacity to intervene due to is but also designing aggregate fiscal policy to take proper reduced availability of financial resources. account of the macroeconomic implications of aid financed ODA spending. Both aspects are essential to maximize the benefits Official development assistance (ODA) in recent years has for the recipients and thereby convince donors that aid is totaled US $50-60 billion a year. Debt relief under the HIPC money well spent. Initiative was US$1.4 billion in 2001. At the same time, In discussing the fiscal implications of aid, a basic question is trade-distorting policies have prevented the creation of whether aid receipts are any different from any other source incomes far in excess of these amounts. Estimates of the of revenue. The literature has focused on two elements. First, welfare gains from eliminating all barriers to merchandise in the long run, aid. unlike, for instance, tax revenues tends to trade are substantial, ranging from US$250 billion to US$680 taper off as the economy develops (and in some cases, much billion annually, of which one-third would accrue to sooner); this should be taken into consideration in developing countries. These benefits would derive in part determining the appropriate inter-temporal fiscal policy. from the elimination of access barriers to industrial country Second, while all revenues are subject to uncertainty, the markets, but also in good part from reform of the trade nature of the uncertainty is somewhat different for aid than regimes of developing countries themselves. Determined domestic tax revenues, as it stems from the spending opening of markets is a win-win proposition—both industrial processes of donor countries and the design of conditionality. and developing countries gain. An important empirical question is then how the overall In some cases, the current trade policies of industrial degree of uncertainty of aid compares with that of tax countries directly neutralize the effectiveness of aid. The revenues. To the extent that aid receipts are relatively dumping of agricultural surpluses, in the form of non- uncertain, the issue from the donors’ stand-point is how to The Bangladesh Accountant/April- June 2010 52 Finance & Banking reduce this uncertainty and, from the recipients, how to take it consideration. To the extent that the discount rate utilized into account in designing fiscal policy. reflects the creditor’s opportunity cost, i.e., the return it could The positive impact of aid has been undermined in some make on alternative investments of the same capital, this cases by the volatility and unpredictability of aid. Aid is present value measures the economic value of debt service significantly more volatile than domestic fiscal revenue and repayments and, on this account, the financial value of the the level of volatility increases with aid dependency. In loan. The grant element of the loan is the portion of the loan addition, aid is procyclical vis-à-vis domestic fiscal revenue; that, at a given time, is not expected to be repaid, i.e. the rather than smoothing out cyclical shocks, it tends to shortfall of the abovementioned present value relative to the exacerbate them. Moreover, aid is not well predicted even in amount disbursed. For the purposes of ODA, loans are countries with on-track programmes and the prediction error classified as concessional if their grant element exceeds 25 is asymmetric: aid commitments are more likely to percent, and as non-concessional (and hence ignored) overestimate disbursements than vice versa. otherwise. The grant elements are computed using some Many poor aid-recipient countries view foreign aid as a special assumptions; however, most importantly, loan interest critical ingredient in their development strategy, even though rates (used to compute interest charges) are assumed to its development effectiveness remains in question among remain constant throughout the life of the loan, and a fixed 10 many economists. At the same time, the level and trends of percent discount rate is utilized in all present value foreign aid are increasingly becoming sensitive issues in calculations. This methodology for computing grant elements donor countries’ budgetary discussions, with analysts contains a number of shortcomings, which may lead to loan observing increasing signs of “donor fatigue”. In particular, misclassification and distortion of ODA figures across time, International Financial Institutions have expressed concerns donors, and recipients. regarding the level of overall development aid and the Despite the declining share of aid in budget of donor possible crowding out of poor traditional recipients by former countries, aid continues to play an important role in many socialist economies. developing countries. While the impact of aid is typically Whatever the merits of these views, the key issue arises of divided between supplementing domestic saving and whether the aid aggregates commonly used by policymakers contributing to consumption, there is less agreement on the and researchers in their assessments of development aid potential effects of aid on growth. The impact of large aid provide an accurate measure of true aid flows. inflows on the relative price of traded and nontraded goods is Foreign aid is conventionally measured on the basis of the well known, and several recent papers confirmed the OECD’s ODA, a concept introduced in the early 1970s. ODA importance of real exchange rate appreciation for the decline comprises official financial flows with a development of the traded goods sector in developing countries. But in a purpose in the form of grants (inclusive of those tied to dynamic context, the effects of aid depend on how aid- technical assistance) and highly concessional loans. Loans are financed spending affects the productive capacity of the defined as highly concessional when their grant element— economy. While several empirical studies suggest that aid i.e., the subsidy implicitly included in the loan, relative to the tends to enhance growth, they also suggest that the linkage is loans’ face value—is at least 25 percent. The leading measure neither direct nor automatic, but depends very much on the of foreign aid flows is the so-called Net ODA, which is the environment that influences the use of aid. net disbursement amount, i.e., disbursements minus Mobilization of Government Funds amortization, of those flows classified as ODA. Governments in developing countries and economies in ODA is based on a sharp distinction between concessional transition have been, and still are, an important agent of and nonconcessional loans, drawing from their respective development. While in most of these countries their role in grant elements. Conceptually, the calculation of the grant owning and operating productive enterprises has been element, i.e., the degree of concessionality, involves the declining, mainly through the privatization of state-owned computation of the expected present value of the stream of enterprises, they remain suppliers of crucial public goods of debt service obligations associated with the loan under various sorts, of physical and social infrastructure and The Bangladesh Accountant/April- June 2010 53 Finance & Banking maintenance of law and order. The mobilization of sufficient well. While no useful tax performance comparison can be resources for use by the government for these varied made between developed and developing countries, this functions has always been rather problematic and many have proves that in developing countries the tax efforts are low in run up sizeable fiscal deficits over several years. While these relation to the amount of tax revenue that could be collected countries have not generally suffered prolonged bouts of on the basis of voluntary taxpayer compliance hyperinflation or fiscal profligacy through the rampant Moreover, these percentages, as illustrated in table below are printing of monies, they have not yet reached a stage where relatively low by comparison with developed countries. There regular payment of taxes through voluntary compliance is is clearly room for enhanced revenue collection in almost all seen as a social responsibility. This tends to complicate the developing countries and economies in transition. However, task of raising resources for the government. Basically, it should be noted that the capacity of a country to raise mobilizing funds for use by governments is undertaken in tax revenue depends not only on tangible economic factors three ways: through the levying of taxes, through the but also on a variety of non-economic factors, such as, generation of non-tax revenues and through government political will, administrative efficiency, and a culture of borrowing from local or international capital markets. tax compliance, and as such it is almost impossible to Most of the off-market resources are raised through taxes, prescribe a priori what proportion of GDP should be with non-tax revenue being less than 5 per cent of GDP in most countries. For the period 1985-87, the average total tax raised as taxes in any particular country. There are several level in the developing countries was about 17.5% of GDP, different techniques and measures to evaluate a country’s tax and for 1995-97, it was 18.2% while the average tax level in system. Tanzi and Zee note that one can estimate a the OECD countries in 1985-87 was more than twice as high “hypothetical tax to GDP ratio” by isolating several at 36.6% of GDP and in 1995-97 at 37.7%. The overall independent variables (such as, per capita income, share of average tax effort level in developing countries is around agricultural output, openness of the economy, and ratio of 20% as against over 35% in the developed countries, although money supply to GDP) and comparing tax performance to in developing countries, it varies between 10% to 30% as that of similar countries.

Table 1. Comparative Levels of Tax Revenue, 1985-97 (In percent of GDP)

1985-87 1995-97

OECD countries 1/ 36.6 37.9 America 30.6 32.6 Pacific 30.7 31.6 Europe 38.2 39.4 Developing countries 2/ 17.5 18.2 Africa 19.6 19.8 Asia 16.1 17.4 Middle East 16.5 18.1 Western Hemisphere 17.6 18.0

Sources: Revenue Statistics (OECD); and Government Finance Statistics (IMF). 1/ Excludes the Czech Republic, Hungary, Korea, Mexico, and Poland. 2/ A sample of 8 African countries; 9 Asian countries; 7 Middle Eastern countries; and 14 Western Hemisphere countries.

The Bangladesh Accountant/April- June 2010 54 Finance & Banking Resource mobilization through taxation b) moderate tax rates on labor and capital incomes; and Taxation is used as the main policy instrument for c) simple taxation of profits and returns to financial capital, transferring resources to the public sector. It can also assist in with little incentive schemes, and as neutral as possible. creating an atmosphere within which the private sector Regarding the equity aspect, there are very many aspects operates in conformity with national objectives. It has been in the design of a tax system that may affect inequality argued by multilateral institutions, among others, that the tax and poverty. Traditionally, it has been thought that system should be used only to raise finances that are taxing income is inherently more progressive than taxing sufficient for meeting the minimum necessary level of public consumption, since the personal income tax usually expenditure, such as, to preserve territorial integrity, to implements graduated tax rates and a standard personal maintain law and order, to provide various public goods and exemption, while rate differentiation in consumption to regulate undesirable activities. From the efficiency taxes according to income or wealth of individuals viewpoint, it can be said that taxes provide the best means of proves more difficult or even unfeasible. financing the bulk of public expenditures. However, taxes Countries with different economic and demographic impose on society three types of cost: characteristics will have different appetites for different tax a) a direct cost or revenue foregone, as taxes, as taxpayers instruments. A major purpose of Fiscal Architecture is to reduce their disposable income by paying the amount provide estimates of the revenue capacity of different taxes due; given the characteristics of the country. Economic factors b) an indirect allocative effect, or excess burden, which is include the structure of the economy, the composition of the welfare cost associated with the economic distortions earnings, and resource endowments. Demographic factors induced by taxes as they alter relative prices of goods, include the size of the population, the education level, the age services and assets; and distribution, the relative size between urban and rural c) an administrative/compliance cost, since tax forms, tax population, and family size. In determining the relative tax control, payment procedures and tax inspection are mix, it is useful to have estimates of revenue potential for costly. Not all tax systems have the same distortionary each tax instrument. Because the design considerations for effect. For a given amount of tax revenue, the final each instrument greatly affects revenue estimates, burden of taxation depends on a number of features of calculations are required for different assumptions as to the the tax system, namely, the composition of tax revenues design and scope of a particular tax instrument (for example, (income versus consumption), the size of the tax base assumptions as to rates, base, and coverage of a particular (affected by tax evasion and tax fraud), the tax rates and tax). For example, revenue estimates for an individual income other factors of administrative nature. Available tax will depend on the percentage of population subject to tax evidence for developing countries indicates that (the choice of the tax threshold or zerorate band), the income corporate and personal income taxes have a negative subject to tax and the allowable deductions, and the rate impact on economic activity, whereas taxes on imports structure. and exports do have a significant, negative effect on It is also necessary to have estimates of compliance and investment. On the other hand, nonneutralities in the enforcement costs for each tax instrument based on different taxation of savings and investment severely distort scenarios (as to rates, base, and coverage). Substantial capital markets. These distortions become even worse variations in these costs may influence the roles a particular when tax evasion is widespread and the informal sector tax instrument plays in the tax system. For example, the is large. collection costs and auditing costs for an individual income Given the disincentive effects of taxes, as showed by tax per unit of tax revenue collected may be much higher than empirical evidence, efficiency-oriented tax reforms should be the collection cost and auditing costs for a VAT. In addition, featured by: it is important to estimate the level of tax evasion for different a) reliance on a dominantly consumption-oriented set of tax instruments and the cost and probability of reducing the broadlybased taxes; level to acceptable levels. Tax incidence studies of The Bangladesh Accountant/April- June 2010 55 Finance & Banking developing countries tend to reaffirm this impression: almost and as such avoids the cascading effects of conventional sales all income tax systems are found to be progressive, while or turnover tax. While it is often argued that VAT is subject only a minor part of overall tax systems share this feature. to less evasion compared with income tax, various studies do This finding comes to no surprise, since developing countries not show a better compliance. Experience with VAT taxes have a tax structure dominated by indirect taxes, with a has demonstrated that a destination- and consumption-based limited number of capital and wealth taxes. Progressivity is tax has been the easiest to administer. Import tariffs and further limited by payroll taxes where they are in place. export duties have been a major source of government Besides, when only wage earners pay taxes while there is revenue for many developing countries. However, high rates widespread informality and large taxpayers do not comply of trade taxes and dispersion in the implied effective with the income tax, payroll taxes become a “tax on honesty” protection rates lead to production inefficiencies and can paid by the low and middle income class. Broadly based tax create an anti-export bias. Many of these countries have been systems, with fewer deductions and exemptions (apart from a able to reduce significantly their dependence on trade taxes, personal exemption not larger than per capita income), imposing VAT instead. Some other countries have also relatively low tax rates (albeit moderately progressive in the started rationalizing their tariff structure. case of the personal income tax), and compatible with Similarly, the effectiveness of the VAT system can be administrative capabilities, are likely to provide a stable, determined by computing the “VAT productivity,” a measure reasonably efficient and more pro-poor alternative of that focuses on VAT revenue as a percent of GDP divided by financing public expenditures. the VAT rate. It is also possible to estimate the amount of However, governments have traditionally used tax resources various types of income from national income accounts and to finance some of its other development or political agenda. other data sources. This information allows policymakers to The tax system favoured by multilateral organizations estimate the potential tax revenue from different tax typically is composed of a broad-based sales tax, such as instruments assuming different tax compliance rates. In all value-added tax (VAT), a relatively low level of import duties these instances, the usefulness and reliability of these for protective purposes only, and simplified personal income estimates are, of course, dependent on the quality of the and corporate profit taxes. A sales tax, being a tax on underlying data. Part of the variation in aggregate tax consumption of domestic and/or imported products, helps in revenues among countries can be explained by different reducing consumption and, if combined with an excise duty demands and tastes for government services. The demand for on luxury goods, can also help in reducing conspicuous government services tends to increase with per capita income. consumption. While direct taxes are both equitable and Countries, and presumably the residents of countries, may elastic, they can reduce incentives to work and, possibly, to also have different views on such important questions as the save and/or invest. However, empirical evidence is not public versus private provision of education, health, and conclusive regarding their impact on either labour supply or retirement benefits, and the size and quality of government savings. The net effect of a tax change on total savings provisions of defense, transportation and other services. depends on the relative marginal propensities to save of These are primarily political questions to which economic different groups on the one hand and an increase in public advisors may have little to contribute. As taxes are the investment or reduction in fiscal deficit on the other. primary vehicle to fund government services, higher taxes are Obviously if the reduction in private savings exceeds the required to fund higher level of government services. increase in public savings, aggregate savings will fall. The It is generally believed that high income and corporate tax VAT has been introduced in most of the developing countries rates result in an adverse incentive for work effort, saving and and economies in transition and usually the tax rate has been investment. Accordingly, it is often suggested that income tax uniform, with unprocessed food and exports generally being rates be reduced to improve compliance and lessen the burden exempt. The tax does not usually distinguish between of tax administration. In the case of most of the developing domestic production and imports. VAT is considered neutral countries, average income and corporate tax rates have as the tax burden falls equally heavily on different products progressively fallen, taxable income slabs have been The Bangladesh Accountant/April- June 2010 56 Finance & Banking narrowed and the minimum threshold of income to be taxed, to be a daunting task, particularly in the first country, where increased. Obviously if the maximum marginal tax rates have the sector is quite large. The division of tax collection matters to be reduced and the total tax revenue has to be defended, between the national government and state and local then the middle rates will have to be increased. Alternatively, governments in both countries is a bone of contention; as in the loss of revenue may be compensated by imposing indirect most countries, taxes on property are the main source of taxes. revenue generation at the sub-national level. While investors, indigenous or foreign, rely on their judgment Governments in developing countries and economies in of the fundamentals of an economy rather than on the transition which wish to undertake fiscal reforms should also incentives offered, most developing countries have been take into account the concomitant tax administration reform, providing fiscal incentives, including reduction in the since weak tax administration will make it difficult to achieve corporate income tax rates, tax holidays, accelerated the objectives of overall fiscal reform. Tax administration depreciation allowances, deduction from social security reform should encompass the re-definition of fiscal contributions, specific deduction on gross earnings for relationships, and the adaptation, as appropriate, of the income tax purposes, etc. While these may be redundant, a organizational structure of tax methods and administration country that does not offer fiscal incentives may lose FDI to procedures. The organizational structure should be such as to the countries that do. Clearly, these tax incentives should be enable the tax administration to achieve the highest possible harmonized rather than left to compete with each other. Land degree of voluntary taxpayer compliance, and to administer and/or property taxes are levied in many countries with the tax laws efficiently, effectively and fairly, with the private ownership of land. highest degree of integrity. While land taxes often include agricultural land, property . It is commonly held that tax policy and tax administration taxes are mainly an urban phenomenon. In addition, the are intrinsically linked. In this interrelationship, however, authority to set the rate and collect these taxes is sometimes formulation of tax policy is generally seen to precede tax delegated to local government units in order to provide them administration. This is because only when a tax structure is with their own revenue collection mechanism. legislated does tax administration come to play its role in the Two recent studies on tax reforms and their effects in some implementation of the tax law. In developing countries and developing countries in South-East Asia illustrate the economies in transition, however, the direction of the link enormous difficulties with implementing tax reform. They may not be quite so apparent. Indeed, it has been observed show the incentives for the government to continue to add that in developing countries tax administration is tax policy. taxes rather than rationalize when they face a resource This would imply that, however fine the design of the tax shortage, the administrative complexities of tax collection, structure might be in a representative developing country, it is the problems of vested interest groups and the difficulty of the manner of interpretation and implementation of the law balancing equity and revenue generation considerations. that counts. These elements reflect the need for adequate However, it is interesting that in one country tax collection capacity of the tax administration in place to implement the has never been more than 15 per cent of GDP, that income law. and profit taxes have always been less than a quarter of tax In many developing countries, tax laws themselves may be revenues and that after reform only 2 per cent of the extremely well designed and detailed. But unless the population actually file tax returns. In the other country, tax accompanying tax administration is able to handle those laws revenues have grown to around 20 per cent of GDP and in terms of having the appropriate staff to interpret and income and corporate taxes account for just over one third of implement them, the field level reality of the actual incidence the amount raised. In the first country, trade related taxes still of the tax system may be quite different from the original account for almost 40 per cent of revenues; in the other objectives. The taxes may be passed on to those on whom country, the figure is less than 5 per cent. Both have made they are not meant to fall, and the distribution of the burden efforts to widen VAT-type taxes to include the service sector. may turn out to be indiscriminate. Economists will have a The taxing of the informal or unregistered sector has proved field day carrying out exercises regarding the “true incidence” The Bangladesh Accountant/April- June 2010 57 Finance & Banking and “efficiency costs” of various taxes, lawyers will find it widening the tax base and integration of the informal sector in easy to litigate tax matters because of the difficulties in the mainstream of the economy. The selection of taxes and interpreting complex tax laws and, accountants, ploughing duties need to ensure that they are administratively feasible and result in realistic collection of revenue. The system through a myriad pages of the tax code, will successfully should protect national revenues from tax havens and other advise clients in careful tax planning such that their tax shelters, and prevent vocational competition from becoming a burden is minimized. race to the bottom. While dealing with the question of the impact of tax policy on A transparent budget process and linking revenues to delivery tax administration in developing countries and economies in enhance accountability and legitimize revenue collection. transition, it is not as though the design of tax policy in Successful outcomes of public programmes in education and developed countries does not affect its administration. The health are a point in case. An efficient and transparent tax complexity in their tax structures has necessitated increasing administration system, free of corruption, can expand revenue international cooperation on exchange of taxpayer collection. While mobilization of domestic resources is in the information, transfer pricing and arm’s length rules, and long-run a sine qua non for sustained development, for a large attempts at the development of harmonized rates, accounting number of developing countries and economies in transition, rules and executive statutes and action. Thus, the design of in particular least developed countries and other countries that tax policy is of paramount importance for tax administration. have difficulties attracting financial resources, there will be a If efficient and feasible administration is an objective, the need for substantial external resources in order to make major structure of all taxes should comprise common elements: low strides in poverty eradication. rates, few nominal rates, a broad base, few exemptions, few Taxes play an important role in any poverty reduction incentives, few surcharges, few temporary measures; and strategy. The most important function is to raise revenue to where there are exceptions, clear guidelines. This is because a fund government expenditure programs. Whether taxes can simple tax structure induces better tax administration. aid in the redistribution of income or providing targeted relief Increasing public revenues are key in achieving non- is a difficult question, the answer to which depends on inflationary growth and ensuring enough resources to finance country-specific factors. However, until personal income essential public expenditures, including poverty-eradication taxes play a greater role in developing countries, programmes. Within the constraints imposed by the structure redistribution via taxation will be very difficult. Even then, of the economy, the domestic tax system and non-tax income tax competition from other countries and limitations revenues should be designed to raise enough revenue to of tax administration will limit the ability of using the tax finance public expenditures resulting in sustainable fiscal system to redistribute income and wealth. Addressing poverty balances and reduce the need to rely on increasing public concerns through the design of specific tax instruments may borrowing or money creation. be more promising. Although any specific proposal needs to On-going transformations and evolving national development be considered in the context of the entire tax system, reducing strategies in the context of globalization of the international the number of individuals subject to income taxation and the economy suggest that many developing countries and lower rating of certain basic foodstuffs and fuel merits serious economies in transition may have to adapt their tax policy, consideration. administration and legislation, including the international dimension of national tax systems to the changing domestic Public debt and external economic, fiscal and financial environment. If public debt is properly utilized, it can contribute to Globalization, liberalization, international trade agreements economic growth and poverty reduction and smooth out and efforts to attract foreign capital have persuaded countries consumption in response to shocks. However, if inefficiently to lower rates and tariffs, often privileging the mobile factor - allocated, the cost of borrowed external resources can financial capital - at the expense of labour and underlining the contribute to macro-economic management problems in the need to establish or strengthen a progressive tax system. form of high and unsustainable levels of external debt Past experiences also point to the need to strengthen or put in servicing obligations. External debt management has close place a tax system that is fair and equitable, that minimizes links with the management of fiscal budget, foreign exchange disincentives for economic efficiency, that is simple (easy to reserves and the overall balance of payments. The external understand and administer) that eliminates evasion and debt burden of many low income developing countries avoidance, that is flexible enough so as to secure equitable increased substantially since the 1970s, due to, firstly, tax revenue from income attributable to the new and exogenous factors, such as, adverse terms of trade, shocks innovative financial instruments, that allows for gradually and weather; secondly, a lack of sustained macro-economic The Bangladesh Accountant/April- June 2010 58 Finance & Banking adjustment and structural reforms; thirdly, non-concessional due to substitution, income and wealth effects, and to lending and refinancing policies of creditors; fourthly, financial market constraints preventing consumers from inadequate debt management; and lastly, political factors, responding to interest rate fluctuations across time. Most such as, civil wars and social strife. The institutional case studies provide little evidence that real interest rates arrangements for debt management necessarily differ from favorably affect private saving. The effect of higher interest country to country but their activities should revolve around: rates on private investment depends to a large extent on the formulation of debt management policies and strategies; existing degree of financial liberalization. When there is providing macro-economic projections and analysis to financial deepening and interest rates are market determined, support policy making; and undertaking operations to a rise in domestic public debt increases the risk of default and implement terms of loan agreements and maintaining loan reduces public sector confidence on the sustainability of the records (i.e. monitoring and maintaining information on fiscal stance, putting pressure on real interest rates. The cost disbursements and debt service payments). of capital for private users increases, thus contributing to For many countries, even full use of traditional mechanisms reduce the profitability of private investment. On the other of rescheduling and debt reduction - together with continued hand, higher interest rates contribute to further deteriorating provision of concessional financing and pursuit of sound the fiscal balance, in some cases creating explosive debt economic policies - may not be sufficient to attain sustainable dynamics. The Government has to face the direct external debt levels within a reasonable period of time and consequence of serving the domestic debt by making without additional external support. In September 1996, the payments of both interest and amortization. For an IMF and World Bank have addressed this problem through a unchanged level of the primary balance, a rise in interest Heavily Indebted Poor Countries (HIPC) Initiative designed payments associated with higher domestic debt or a raise in to provide exceptional assistance to eligible countries interest rates will increase the size of the fiscal deficit, following sound economic policies to help them reduce their creating additional constraints to the potential growth of external debt burden to sustainable levels, that is, to levels economic activities. that will comfortably enable them to service their debt In countries where interest rates are being controlled, through export earnings, aid and capital inflows. This excessive internal borrowing to finance the fiscal deficit assistance will entail a reduction in the net present value entails a reduction of the credit available at the banking (NPV) of the future claims on the indebted country. Such system, often leading to higher interest rates in the informal assistance will help to provide the incentive for investment market. When interest rates are regulated and the public and broaden domestic support for policy reforms. The HIPC sector is being given preferential access to credit, the Initiative is a comprehensive, integrated and coordinated crowding out effect of private investment is exacerbated. approach to debt reduction that requires the participation of all creditors - bilateral, multilateral and commercial. Central Recommendations to the Initiative is the country’s continued effort toward The following recommendations are suggested for macro-economic adjustment and structural and social policy mobilization of financial resources through taxation: reforms. In addition, the Initiative focuses on ensuring (1) that developing countries and countries with economies additional finance for social sector programmes - primarily in transition will strive to develop progressive and basic health and education. equitable national taxation systems that are consistent Issuing Government bonds to the private sector either directly with the country’s social and economic framework and or through the banking system constitutes a second alternative generating adequate revenues while minimizing to money printing, which is available to many developing disincentives. countries. While avoiding the immediate inflationary impact (2) that developing countries and economies in transition of money financing, this type of financing of the fiscal deficit will endeavour to ‘ ensure that: puts pressure on real interest rates and/or reduces the credit i) the incidence of taxation falls equitably on labour that would be otherwise available for private sector activities. and owners of financial capital and other assets; The final impact on private sector activity and real output will ii) the tax base will be extended to cover electronic depend on the response of both private saving and private commerce and innovative financial instruments, but investment to higher real interest rates. A growing body of exclude the subsistence sector; evidence supports the notion that the relationship between iii) indirect taxes will be expanded and made more private saving and real interest rates is ambiguous. Although equitable by targeting the growing service sector, real interest rates affect the way economic agents spread their socially undesirable activities as well as focusing consumption and saving over time, this effect may be offset on luxury consumption. The Bangladesh Accountant/April- June 2010 59 Finance & Banking

(3) that developing countries and economies in transition transparent and accountable system free from corruption, will undertake appropriate administrative and legislative and to provide better taxpayer services to facilitate measures to combat tax evasion, prevent tax avoidance compliance. and reduce the efficacy of tax shelters and tax havens (6) enhance multilateral cooperation among national tax that undermine national tax revenues. authorities to promote conclusion of tax treaties with a (4) developing countries and economies in transition will view to eliminating double taxation and promoting devise innovative measures, such as, presumptive equitable distribution of taxation among competing taxation, to target hard-to-tax groups and will aim to jurisdictions and improving international income effect progressive transition of the “informal” sector allocation. within the mainstream of the economy through reform of (7) that countries will strive to supplement tax revenues by exploring sources of non-tax revenues, with due labour legislation, the legal and regulatory framework, consideration given to equity concerns, including rationalization of allowances, incentives and exemptions institution users fees or improving the targeting of to reasonable levels. subsidies for publicly financed goods and services. (5) that countries will strive to simplify tax laws and to (8) that the developed countries and international financial improve the efficiency and effectiveness of tax institutions will provide increasing support, especially in administration and enhance enforcement through the terms of resources for technical assistance in capacity strengthening of institutional, technical and building, to developing countries and countries with I technological capacities, including the development of a economies in transition.

REFERENCES: 1. K. Chu, H. Davoodi, S. Gupta, Income distribution and tax and government social spending policies in developing countries. IMF WP/00/62. 2. G. Mackenzie, Estimating the base of the value-added tax (VAT) in developing countries: the problem of exemptions. IMF WP/91/21. 3. Musgrave, Public finance in theory and practice. McGraw-Hill, 1989. 4. J. Stiglitz, Economics of the public sector. New York: Norton, 2000. 5. P. Shome, Taxation in Latin America: structural trends and impact of administration. IMF WP/99/19. 6. P. Shome (Ed.), Tax policy handbook. Washington: IMF, WDC, 1995. Chapter II. General Concept and Issues. Chapter III. Domestic Consumption and Production Taxes. A. Comparison between the sales taxes and the VAT.Chapter IV. Taxation and the Open Economy. Chapter XX. Theory of Optimal Commodity Taxation. Chapter XX. Taxation and Equity. Chapter XX. Summary of IMF Tax Policy Advice. 7. J. Slemrod, J. Bakija, Does growing inequality reduce tax progressivity? Should it? Cambridge: National Bureau of Economic Research, Working Paper 7576, 2000. 8. J. Slemrod, Optimal taxation and optimal tax system. Cambridge: National Bureau of Economic Research, Working Paper 3038, 1989. 9. J. Slemrod (Ed.) Tax policy in the real world. Cambridge University Press, 1998. J. Alm, What is An “Optimal” Tax System? 10. Tait Alan A. Value-added tax: administrative and policy issues. Occasional paper, No. 88. IMF, WDC, 1991. 11. V. Tanzi, Tax policy for emerging markets: developing countries. IMF,WP/00/35 Section III. Policy Issues in Selected Major Taxes. C. Value added Tax, Excises, and Import Tariffs. 12. V. Thuronyi, Tax law design and drafting. The Hague; Boston: Kluwer Law International, 2000. 13. V. Thuronyi, Tax reform for 1989 and beyond. Tax Notes (U.S.); 42:981-96 February 20, 1989. 14. Helene Poirson, “Economic security, private investment, and growth in developing countries” IMF Working Paper No. WP/98/4 (January 1998), pp. 17-19. 15. M. Govinda Rao, “Tax reform in India: achievements and challenges” and Ilho Yoo, “Experience with tax reform in the Republic of Korea”, Asia-Pacific Development Journal, vol. 7, No. 2, December 2000.

The Bangladesh Accountant/April- June 2010 60 Human Resources Development Strategies, Governance and Human Development-Bangladesh Perspective

Dr. Shamsul Alam

1. The Development Vision of the Present progressive, participatory, tolerant, democratic welfare Government state The present government has placed elimination of poverty • Stable macroeconomic framework and inequity at the forefront of its development strategy. The • Ensuring good governance, social justice and curbing thrust has now shifted to putting Bangladesh into a trajectory corruption of high performing growth, stabilizing commodity prices, • Ensuring adequate supply of electricity and fuel minimizing income and human poverty, securing health and • Ensuring food and nutrition security education for all, enhancing creativity and human capacity, • Sustaining Human development establishing social justice and social inclusion, reducing • Building infrastructure for sustainable economic growth social disparity, achieving capacity to tackle the adverse • Pursuing environmentally sustainable development effects of climate change, and firmly rooting democracy in • Building Digital Bangladesh the political arena. The long term vision of the government would be realized initially through the NSAPR II ending in June 2011, and The above vision for the development of the country would through the implementation of the Sixth Five Year Plan (FY be translated into reality through a Perspective Plan 2010 - 2011-2015) and Seventh Five Year Plan (FY 2016 – 2020). 2021, which is under final stage of preparation. The The main thrusts of the medium term plans would be to Perspective Plan envisages strong enough link in order to achieve higher growth in excess of 10 percent and to ensure enhance the overall strength of the economy to achieve some its distributional justice so that the poorer sections get a of the following objectives: proportionately greater share of the benefits of growth that • Eliminate illiteracy by 2014 can lead them out of poverty. A level playing ground for the • Attain cent percent enrolment in the 12th class by 2021 private sector would be created to harness their full potential with gender parity to supplement public sector efforts in economic development. • Reduce poverty to 15% by 2021 In the Sixth Five Year Plan (SFYP), the role of the public • Strengthen information technology to establish a digital sector in generating growth would be important for several Bangladesh reasons. First, public investment in infrastructure like • Emphasise energy availability to provide per capita transport and communication, power and energy, ports, and energy consumption of about 600 kWh by 2021 human capital would be critical to enhancing the efficiency of • Generate per capita income of about $1100 by 2015 and private investment. Second, the government needs to support $1800 by 2021 the private sector through facilitating development-friendly The Perspective Plan 2010 – 2021 has placed strong emphasis institutions– well defined property rights, rule of law, market- to make productive use of Bangladesh’s human and physical oriented incentives, sound monetary policy, sustainable capital as strategies for accomplishing the targets. The thrusts public finances, and governance. Finally, public investment of the plan are: will determine the structure of growth by allocating resources • Accelerated growth rate to the social sectors like education, health, and rural • Building an equitable and pro-poor, inclusive, secular, infrastructure.

Dr. Shamsul Alam, Member, General Economics Division (GED), Planning Commission. The paper was presented by the author in the Bangladesh Development Forum held between February 15-16 2010.

The Bangladesh Accountant/April- June 2010 61 Human Resources

Basic characteristics of the Sixth Five Year Plan would be: percent followed by industry at 29.7 percent and • Inclusive Economic Growth agriculture by 20.6 percent at constant prices. The • Accelerated Economic Growth impact of the ongoing global financial crisis on • Employment Creation Bangladesh would be minimal in the short run given that • Universal Social Protection for the Hardcore Poor her financial sector is not fully integrated with the world • Emphasize role of Market, State and Community in system. In the long run the country’s export, remittance Economic Growth and investment flows are likely to be affected unless the • Public Private Partnership world recovery process is accelerated. The investment • Regional and Sub-Regional Planning climate slightly affected during 2008-09, as indicated by • Gender Responsive Plan and action a deceleration in the ratio of total investment to GDP to • Technology Base for ‘Digital Bangladesh’ 24.18 percent from 24.21 percent in 2007-08. Showing • Human Resource Development an upsurge in remittance inflows, gross national savings in 2008-09 increased to 32.4 percent of GDP. The per • Environment and Climate Change capita GNI and GDP are USD 690 and USD 621 • Good Governance, Human Rights and Maintaining respectively during 2008-09. On a cumulative basis, Democratic Polity however, export growth in 2008-09 was 10.3, • Establishing operational linkage between Planning and decelerated from 15.8 percent in the previous fiscal year Budgeting in the context of the contraction of global trade volume. • Stronger Regional/Sub-Regional Economic Integration At this difficult time, the developed countries should • Least-cost National Security allow uninterrupted entry of Bangladeshi exports • Implementation and Effective Monitoring duty and quota free access to their markets. The NSAPR-II (Revised) lower growth in imports driven by the sharp decline in The Government has approved the document titled “Steps food-grains imports and fall in of oil price in the towards Change: National Strategy for Accelerated Poverty recorded level after first half of 2008. Import of Reduction (2009-11) (revised)” that has been recast in line intermediate goods and industrial raw materials recorded with the election manifesto, development vision and people’s moderate growth of 20.2 percent and 10.5 percent aspiration. However, the NSAPR II shall remain in force until respectively compare to 2007-08, while import of capital June 2011. machinery declined only by 0.8 percent. Total 2. Progresses in achieving development strategies, remittance receipts during 2008-09 rose by 22.4 percent governance and Human Development and number of manpower export decreased by 43.4 2.1 Macroeconomic resilience: The economy of percent over the preceding fiscal year. Bangladesh continues to demonstrate considerable 2.2 Progress in poverty reduction: The incidence of poverty resilience during 2008-09 despite the twin shocks arising has been declining in Bangladesh. The national head from global recessions and the adverse effects of the count index of poverty measured by the upper poverty consecutive floods and the cyclone-Sidr of the fiscal line declined from 56.6 percent in 1991-92 to 40.0 year 2007-08. The economy is expected to grow at a rate percent in 2005. However, the poverty has been of 6.0 percent, slightly below the growth rate 6.2 percent estimated at 38.0 percent in 2008. During 1991 to 2005, of 2007-08. The key feature of the economic urban poverty reduced at a faster rate than rural poverty. performance during 2008-09 is the strong recovery in Social safety net programme for alleviating poverty and agriculture sector supported by moderate growth in providing livelihood support for the hard core poor industry and service sector. The contributions of the directly and programmes for income generation in the agriculture, industry and services sectors are estimated rural area are continuing. Cash transfers programme, respectively at 4.6 percent, 5.9 percent and 6.3 percent Food security programme Vulnerable Group growth, indicating strong move of all the three broad Development Programme, Routine Maintenance sectors. The share of services in GDP amounted to 49.7 Programme, special programmes for poverty alleviation The Bangladesh Accountant/April- June 2010 62 Human Resources

and micro-credit programmes for selfemployment are 2.4 Return to democracy: The Awami League (AL)-led worth mentioning. These programmes covers 22.50 lakh grand alliance’s sweeping victory in the 9th beneficiaries under old-age allowance programme, 7.50 parliamentary elections witnessed the return of lakh beneficiaries under the widowed and women democratic rule in Bangladesh with a remarkable deserted by their husbands, 1.0 lakh insolvent freedom participation of women and young voters after nearly fighters and disadvantaged persons who are receiving two years of an army-backed caretaker government. financial assistance directly. Under the Abashan Project, With the return to democracy, the people’s hopes and 65 thousand landless, homeless and rootless families are aspirations have also been substantially raised certainly receiving the benefits of health and family welfare in areas such as good governance, strong stance against services and other facilities including income-generating corruption and clear vision for economic development. activities. At the same time, all indicators of human The election manifesto of the Awami League, called ‘A poverty like life expectancy at birth, infant mortality Charter for Change’, promised to address five priority rate, population having access to drinking water, and issues. These are maintaining economic stability and adult literacy rate have shown improvements. controlling commodity price hikes in the face of global 2.3 Progress in achieving MDGs particularly in health and financial crisis; taking effective action against education: Bangladesh has successfully achieved gender corruption; addressing the power and energy crisis; parity in primary and secondary education. The country eliminating poverty and inequality; and establishing is on track to achieve the targets of halving the good governance. proportion of people living below the poverty line. The 2.5 Promoting good governance: The promotion of good Head Count Rate (HCR) of the incidence of poverty, governance will focus primarily on making using the upper poverty line, has been declining in parliamentary process effective, ensuring participatory Bangladesh since the 1990s. If this trend continues, the governance, restructuring and strengthening the public estimated poverty level in 2015 would be less than 30 service system, reforming the legal and judicial system percent, equal to the MDG target. The prevalence of to ensure judicial help for the disadvantaged groups underweight children was 48 percent at the national level particularly poor, women and children and other socially in 2005. The best fitted trend (exponential) shows that excluded groups, changing roles of law enforcing the prevalence of underweight children at the national agencies, strengthening financial management, level will be 36.5 percent in 2015, which is relatively established merit based competitive civil service, close to the target of 33 percent. The net enrolment ratio strengthening of local government, promoting e- in primary education in 2007 was 91 percent and if this governance, combating corruption, ensuring human trend continues, complete coverage in primary rights, accessing information, raising citizens’ voice, enrolment will be achieved within 2010. In 2007, the improving project implementation capacity; and under-five mortality rate was 60 and if this trend improving sectoral governance, which all will be continues, the under-five mortality rate will reach a challenging tasks. number even below the target (48 on thousand live 2.6 Reforms in the governance: In the country Judiciary has births) within 2010. By 2013, every household will be been separated from the executive branch of the brought under hygienic sanitary facilities. government. The Anti Corruption Commission has been However, there are some lagging areas like primary reconstituted and given independent status to wage school completion rate, adult literacy rate, access to safe combat against corruption. The Anti Corruption drinking water by the rural people, and maternal Commission Law suffers from some flaws that is being mortality ratio, gender based discriminatory social amended to ensure the independence of the Commission practices linked to health and education which indicate in consistent with its public accountability. The Election the need for sustained government efforts and generous Commission has been functioning independently and donor support. effectively. The Right to Information Act-2009 has been The Bangladesh Accountant/April- June 2010 63 Human Resources

passed in the parliament so that the citizens can enjoy measures. As part of the continuing effort, Government the access to information easily and as part of it an introduced quota system in the Parliament and in the independent information commission has been government services for women. A number of laws have constituted. Citizen’s charter has been developed in all been enacted to protect women’s interests. The number the government entities to apprise the people about their of reserved seats of women in the parliament has been rights and services. Government is also in the process of increased to 45 from 30 and will be increased to 100 in finalizing National Integrity Strategy (NIS) to set moral future. Bangladesh has already achieved gender parity in and ethical standards for all government functionaries primary and secondary education at the national level. and for the society as a whole. A process of establishing This positive development has occurred due to some Office of the Ombudsman is under consideration. public sector interventions focusing on girl students, With a view to maintaining fiscal discipline and to such as stipends and exemption of tuition fees for girls in ensure accountability, the government has expanded the rural areas, the stipend scheme for girls at the secondary Medium Term Budgetary Framework (MTBF) to 32 level, etc. There was a sharp increase in the number of ministries. All ministries would eventually be brought women parliamentarians elected in the most recent under this framework. Duration of the MTBF would be general elections. The total number of women of five years to match with the five year plan document. parliamentarians in the present national assembly is 64 Government has also promulgated a new law titled (19+45), or 19 percent of the total seats. However, in “Public Money & Budget Management Act-2009” that order to attain gender equality, there is a need to will ensure accountability of the public resources to the mainstream women in politics. Gender Responsive parliament. Under this law, Hon’ble Finance Minister Budget preparation system has already been introduced would keep the parliament informed about the utilization through MTBF to specifically monitor women of public money on a quarterly basis. poverty reduction and their development. To cope In a bid to strengthening the local government system, with the gender challenges, NSAPR II (revised) has Upazila Parishad Election was held in the last year and followed a twopronged approach for women’s other local body elections will be held during 2010 and advancement to create a society where men and women 2011. will have equal opportunities in all spheres of life. 2.9 2.7 Ensuring efficient delivery of public services: Efforts Planned development emphasised: No country, will be made to develop public-private partnership and particularly a developing country, can prosper without a long term vision for development. The democratically GO-NGO cooperation to improve efficiency in the elected Government of Prime Minister Sheikh Hasina management of delivery in some essential utility has, therefore, decided to launch a long term Outline services. However, Building capacity and an improved Perspective Plan for the period 2010-2021. The long human resources framework for delivering public term vision will be implemented by NSAPR II and two services and ensuring sustained and inclusive growth successive five year plans. and strengthening accountability mechanisms in order to improve public sector performance would remain as 3. Challenges Ahead challenge. 3.1 Enabling macroeconomic environment for pro-poor 2.8 Promoting Gender Equality: Since independence growth: The projections of the Medium Term Government emphasized women’s advancement issue as Macroeconomic Framework (MTMF) reflect a one of its priority areas for its national development. The cautiously optimistic scenario that is consistent with equal rights of men and women and the equity measure recent trends and takes into account the commitment of to bring advancement of backwards groups in the society the government to reduce poverty and inequity and have been included in the Constitution of Bangladesh. maintain macroeconomic stability and steer the economy Gains have been made in advancing gender equality in to recovery and move to higher growth path. Annual Bangladesh through policy, legal and institutional GDP growth is projected to be 6.0 percent in FY10, 6.7 The Bangladesh Accountant/April- June 2010 64 Human Resources

percent in FY11, and 7.2 percent in FY12. Constraints exigencies and long term development needs. A strong have to be overcome to achieve sustainable, equitable and expanded social safety net programme (SSNP) has and inclusive eight percent annual growth at the end of been envisioned in the perspective plan (2010-2021) to the Sixth Five Year Plan. Inflation rate is projected to protect the poor and disadvantaged group from social decline during the NSAPR II period, investment/GDP is evils, economic hardship and natural shocks. The FY 09- projected to improve, revenue/GDP and government 10 budget has adopted special measures and support expenditure/GDP are projected to improve in FY10 but package for minimizing the adverse impact of the global the budget deficit will be contained to 5% of GDP. In the economic slowdown. The NSAPR II has put social external sector, both import and export growth would protection of the vulnerable at one of the top of its likely be higher in FY10 and FY11 and in the agenda and allocated 319.39 billion Taka or US$ 4.56 subsequent years. billions (11.35% of total allocation). To reduce women’s However, the challenge would be overcoming binding poverty and vulnerability, the design of social safety net constraints to achieving sustainable and inclusive eight programmes will be objectively targeted and monitored. percent annual growths. Restoring private sector However, the burden of the social safety net program as confidence and attracting FDI, shaken by the global a percentage of GDP is increasing, which may be economic downturn, would be some tasks ahead. difficult to sustain in the long run without generous Deepening financial sector reforms is called for restoring support from the development partners. private sector confidence and participation. Quality of 3.4 Development of Human resource: The country’s public investment must be ensured and implementation education system comprising primary, secondary, capacity of public sector agencies ought to be raised to tertiary, and non-formal education will be developed to satisfactory level. Adopting prudent fiscal measures build a knowledge-based society. The focus will be on including expanding the tax net and value added tax ensuring quality education and labour market oriented system is another area that deserves immediate attention skills considering domestic and international needs. In to generate domestic resources and to reduce the revised NSAPR II, 582.30 billion taka or US $ 8.44 dependence on foreign borrowing. billion (20.69% of total) is estimated for Education, 3.2 Creating infrastructure for pro-poor growth: The training and research, which ranks 1st according to strategy will be sustained by defining appropriate roles NSAPR II (revised) priority. Health, nutrition and of the public and private sectors and encouraging public population (HNP) are intimately related and private partnerships (PPP); focusing on the key sources complementary to other sectors of the economy. The of growth; ensuring regional balance in development; government is committed to ensure quality health, reducing population growth and reaping the benefit of nutrition and family welfare services, which are demographic dividend (more people in active age); affordable, attainable and acceptable to its citizens. The focusing on women’s advancement and rights; government focuses on increasing health status, reducing strengthening safety nets programmes; and ensuring environmental protection and protection from the health inequalities, expanding access to social safety adverse effects of global warming and climate change. network and encouraging affordable service delivery The vision of the power sector is to provide access to systems for everybody. The government plans to affordable and reliable source of energy to all citizens of establish 18,000 Community Clinics (CCs) in phases to Bangladesh including the poor and vulnerable of in-grid deliver maternal and child health care including family and off-grid areas by 2021. However, enhancing public planning services to the door steps and limited curative and private investment to overcome increasingly severe care. In the revised NSAPR II, 207.94 billion taka or US infrastructure gap would be a critical challenge. $3.0 billion (7.4%) is estimated for Health, Nutrition and th 3.3 Social protection for the vulnerable: The government Population Planning, which ranks 5 according to has taken steps to balance its policies to meet short term priority. The Bangladesh Accountant/April- June 2010 65 Human Resources

3.5 Caring for environment and tackling climate change: and enhancing local accountability mechanisms; The environmental challenges including pollution will 8. Increasing focus on results in order to improve access to be met by undertaking measures in the areas of policies, and utilization of quality education, health, nutrition and planning, regulations and capacity building. Climate social protection services; adaptation will be strengthened by undertaking sectoral, 9. Providing skills training and enhancing employment multi-sectoral and cross-sectoral measures. The climate opportunities, particularly for the youth and women; change adaptation initiatives will integrate holistic, 10. Implementing Bangladesh’s Climate Changes Strategy gender sensitive and inclusive approach to sustainable and Implement Action Plan. development offering clear opportunities to anticipate, 11. Strengthening planning and implementation monitoring survive, cope with and recover from the effects of by the planners. disasters. However, adapting climate change measures 5. Expected role from the Development Partners to on agriculture productivity, livelihoods and rural income achieve the goal of the Government will be a big challenge given that the overwhelming majority of the poor are financially insolvent and 5.1 Increasing support from development results, aligned technologically backward. with NSAPR II and five year plan: Developed countries have so far failed to perform their responsibility to 3.6 Enhancing productivity and efficiency through science address the problem of unfair trade and global financial and technology: The quality of life of people of the system; providing 0.7 per cent ODA of their GDPs; and disadvantaged group will be improved through enhancing quality of education and health care system transferring new technologies for productive youth by innovative application of ICT, enhancing productivity employment in developing countries to achieve MDG 8. in agriculture through the application of biotechnology. Developed countries should come forward and assist the Ensuring access to ICT and technology for the poor, least developed countries in exploiting potentials of women and disadvantaged children remains a challenge. international trade and should fulfill their obligation as signatories to the MDGs. 4. Thoughts on Way forward 5.2 Implement the Joint Cooperation Strategy for 1. Proper and full implementation of the NSAPR-II and Improved Aid Effectiveness: The Government of Five Year Plans with ongoing review and monitoring to Bangladesh and fifteen donors signed a Statement of accelerate growth and reduce poverty; Intent to Develop a Joint Cooperation Strategy (JCS) in 2. Increasing revenues and ensuring quality of public support of the national poverty strategy (Revised investments through the annual development budget; NSAPR II) in August 2008. The overall goal of a JCS is 3. Partnering with the private sector, and encouraging to make aid in Bangladesh more effective by creating private investments to realize full potential of the common platforms for national and sector dialogues and economy; 4. Making public expenditure more effective by raising the a national owned change process for improving delivery efficiency of and by introducing cost effective measures of aid. In order to make aided projects/programme in budgeting, budget-planning linkages and aid effectively implemented, Bangladesh would take the effectiveness; lead to make real structural and behavioural changes on 5. Increasing Regional Co-operation especially in cross- aid policies and implementation. The GOB led JCS border trade, transport and energy; Working Group has started various JCS related 6. Building a better governed Bangladesh through an consultations and recently drafted a JCS outline and a improved accountability framework and reforms of civil detailed JCS Action Plan. There would be regular service by introducing performance merit based career dialogues with development partners based on mutually planning, and promoting e-governance; agreed JCS with clear aid effectiveness outcomes and 7. Bringing ‘services to people’s doorsteps’ by accountability mechanism in support of a prioritised and decentralizing services, strengthening local government operational national poverty strategy. The Bangladesh Accountant/April- June 2010 66 Human Resources 5.3 Help Meet Global Financial Crisis: As a consequence 6. Indicative Costs of National Strategy for of global financial crisis, Bangladesh is going to be Accelerated Poverty Reduction (NSAPR II revised) affected due to recent decline in export earning from and domestic resource gap- another challenge Readymade garments and frozen foods as the demand The estimated cost of achieving the strategic goals and targets for these declined in the US and Europe. At the same set out in NSAPR II is Taka 2,814.81 billion. Non- time migrant workers are returning back to the country discretionary expenditure comprising interest payment due to shrinkage of employment opportunities in the obligations (both domestic and foreign interest payments) of the public sector and national defence expenditure needs respective countries. To fill the resource gap arising amounted to Tk. 642.59 billion at FY08 prices. The total from unemployment and loss of export, domestic public expenditure in the NSAPR II period thus comes to Tk. effective demand has to be increased through investment 3,457.40 billion. The total domestic resource that can be in agriculture, in SMEs and manufacturing sectors and mobilized is in the amount of Tk. 2,582.56 billion at FY08 finding new avenues in the external markets. prices. The estimated total resources gap is Tk. 874.84 billion 5.4 Globalization: Bangladesh and other developing or USD 12.50 billion for three years. Although the resource countries have been unable to reap any significant requirement (US$ 4. 166 billion/year) exceeds the normal benefit from globalization despite increase in global level of foreign assistance (US$ 2.00 – 2.5 billion) that we output, trade and investment; the benefits of receive from our Development Partners, the additional funds can be mobilized through mutual efforts and innovative globalization have been unequally distributed. In order measures like Public Private Partnership (PPP) and FDI. to address these challenges we need a strong support Also, attempt must be made to increase tax-GDP ratio by from our development partners in the form of direct expanding the tax net. The resource gap can be met up if investment, labour migration, market access for our revenue share could be raised to 13.60 % of GDP from the exports, simplification and relaxation of rules of origin, present share of roughly 11.0 %. For this to happen, the capacity building in trade and investment for creating revenue administration system ought to be overhauled and I domestic demand. restructured, corruption free and broadened.

The Bangladesh Accountant/April- June 2010 67 Human Resources Human Resource Accounting in the Context of External Financial Reporting—An Analytical Study

Dr Dilip Kumar Sen

Abstract: What HRA is about? This article, which is entirely based upon literature survey, is Human Resource Accounting (HRA), as defined by Rensis an endeavor of assessing the utility value of HRA in the Likert and David G. Bowers (March 1973:15), is an activity perspective of external financial reporting. Here the purpose devoted to attaching dollar estimates to the value of a firm’s is to examine whether HRA can be a useful part of external human organization. These dollar estimates, according to financial reporting. The study is entirely based on the survey them, (a) enable the management of an enterprise to know of litrature. The findings of the study do not seem to stand in whether its managers are increasing or decreasing the the way of incorporating HRA information in external productive capability of the human organization and (b) financial reports, rather several accounting scientists are permit an almost accurate appraisal of the organizational found to welcome the idea of integrating HRA with the performance. The American Accounting Association (AAA) conventional external financial reports. Committee on HRA looked upon the concept of HRA as “the process of identifying and measuring data about human

Keywords: HRA, External Financial reporting, Asset Status, resources and communicating this information to interested : : External Users, parties” (1973 169). Here immediately a question arises who are the interested parties? Mainly, two sets of people, namely, “investors” and “managers” are the interested parties Introduction and Methodology because they could benefit much from HRA in making The intent of this study is to review literature in order to seek decisions (the former being external users and the latter being out whether or not Human Resource Accounting (HRA) internal users of financial statements). HRA could provide could be an integral part of external financial reporting. But more adequate information to “investors” about the present before launching this inquiry, it is probably worthwhile to state of an organization. Rhode, Lawler and Sundem survey the literature related to (1) what HRA is about? and (February, 1976: 13-25) state in this regard that investors (2) do human resources really possess asset status? The would change their decisions about investments when HRA reason is that answers to these questions maybe of some information is available. assistance in assessing whether HRA could be a part of Managers are the second set of interested people who can external financial reports. Presumably, the issue of reporting potentially use HRA information. However, the above 1973 human resources value side by side with physical and definition (given by the AAA’s Committee on HRA) financial asset values in external financial reports depends emphasizes the need for proper measurement of the costs largely upon the real meaning of HRA and whether human incurred by the organization in acquiring, developing and resources can really be classified as assets. replacing human assets. The Committee later modified the This paper is the result of an exploratory research study based above definition as “the process of managing people in the upon survey of literature exclusively. Here literature has been organization” (1974: 115). This modification gave reviewed issue-wise keeping in view the objective of the importance to HRA as a managerial tool for manpower study. planning and control. Eric G. Flamholtz takes the above idea

Dr. Dilip Kumar Sen, Professor of Accounting and Finance, School of Business, Independent University, Bangladesh.

The Bangladesh Accountant/April- June 2010 68 Human Resources to a broader plane and observes that HRA connotes: productivity during training involving the cost of lost Accounting for people as an organizational performance of employees other than the trainee and resource. It involves measuring the cost incurred by development by enhancing an employee’s capabilities beyond business firms and other organizations to recruit, the immediate technical skills required (Ameiss and select, hire, train and develop human assets. It also Williams, August, 1981:115). In the same tune, S. involves measuring the economic value of people to Balasubramanian views that the concept of HRA, in its purest organizations. The primary purpose of a human form, calls for the recognition of human resources as capital resource accounting system is to help management assets, the amortization of human resource costs and finally, plan and control the use of human resources presentation of them on the balance sheet like other physical effectively and efficiently. In addition, some human and financial assets (May 1984:251). But it is very important resource accounting information may also be to note that HRA is not merely a method of putting people on reported in financial statements for use by investors the balance sheet, it is something more. HRA is primarily an and others outside the organization (1974:3). information system designed to aid the management in To turn to the view of another set of experts (R.G. Barry efficiently and effectively evaluating the performance of its Corporation’s HRA experts, November (1971:75; Amiss and personnel functions. It is not just a measurement system, it is Williams, Jr., August, 1981: 113): also a paradigm or way of thinking about people and their HRA implies identification of the costs incurred in recruiting, management in organizations (Flamholtz, 1974:337). hiring, training and developing human resources for the Chastain is not far from the above viewpoints. He believes benefit of more than one period like any other asset of that HRA should conceptually refer to capitalization of those material value and charging of those costs to the periods in costs (value in some cases) incurred for organizational which their benefit is felt. employees whose related benefits are reasonably expected to Another set of Scholars like Sherman R. Roser (September- be realized in future accounting periods. In later periods, the October 1983: 35), Richard B. Frantzrab, Linda L.T. Landau capitalized costs need to be amortized against revenues to and Donald P. Lundberg (June 1974: 73) and Marvin Weiss agree to the matching convention that has general acceptance (The Magazine of Bank Administration, December 1972:12) in accounting practice (Jan. 1979: 16). are of the view that HRA requires capitalization of human Underlying the concept of HRA, there are some theoretically resources for presentation as an asset on the balance sheet. sound assumptions (Caplan & Landekich, 1974:2; and They feel that the fundamental idea of HRA is that people Flamholtz & Lacey, 1981: 58-59): have a quantifiable value to an organization which should i. The usual accounting definition of an asset involves the somehow be considered for internal decision-making, i.e., right to receive economic benefits in the future. And in personnel management decision-making and reported this sense, human resources may appropriately be periodically for external users as well. classified as accounting assets. Meyers and Shane (January 1984: 29) subscribe to the above ii. People (like conventional assets) are valuable resources views by regarding humans as organizational assets as well as of an organization and are capable of providing both by recognizing the importance of accounting for human assets present and future services. by way of capitalization of human resource recruitment, iii. The benefits from both conventional assets and human training and development costs. resources have value to an organization since these It emerges from the above definitions that HRA should, in benefits contribute to the accomplishment of the real sense of the term, mean capitalization of investment in organizational goals. human resources, falling into two major categories— iv. The benefits from human resources are essentially acquisition and learning costs, of which the former includes economic in nature and, therefore, are subject to costs for recruitment, selection, hiring and placement, and the measurement, with acceptable accuracy. latter includes cost for formal training and orientation on the v. It is not the owning of people but their service potential job training, supervisory salaries during training period, low that makes them organizational resources, after The Bangladesh Accountant/April- June 2010 69 Human Resources

providing for necessary allowance for the expected professor who throughout his paper titled “Human Resource turnover (as they are not owned by any organization). Accounting—A Myth or Reality?” (September-October vi. It is theoretically possible to identify and measure 1985:5-7) has opposed the concept of HRA for financial human resources costs and benefits within an statement presentation: organization. It follows, therefore, that at the macro Both assets and expenses represent ‘cost’ to the level also, manpower costs and benefits can be organization. The distinction between these two identified and measured. items of ‘cost’ under the conventional accounting vii. Information in regard to manpower costs and benefits systems is that ‘expense’ is an ‘expired cost’ can be useful to manpower planning, utilization, and whereas ‘asset’ is an ‘unexpired cost’, which has a control decisions. service potential available to future operations. It is viii. The presentation of human resource costs information important to distinguish between ‘assets’ and in financial statements will depict a much more realistic ‘expenses’ because if an item of ‘cost’ is classified picture of the financial position of an organization as as an ‘expired cost’ when in reality it is an compared to that shown by conventional financial ‘unexpired cost’ the income for that organization statements. will be understated. The treatment of all ‘human In summary, one may remark that HRA is a distinct branch of resource costs’ by the management accounting accounting or a tenet of managerial accounting. It enables the system as an ‘expired cost’ has not properly organization to evaluate human resources by following an classified the ‘cost of human resource’ and hereby acceptable set of concepts and techniques of measurement. understates income in some years and overstates This underlies the desirability and importance of being able to income in other years. Therefore, the charging of identify clearly how much the human organization is worth to ‘all costs of human assets’ to expenses as incurred a company and also how to retain and enhance this worth. tends to create short-term pressure on the size of Precisely, HRA is a socio-managerial accounting technique of the existing work-force and its productivity and estimating the value of manpower in the same way as a these, in turn, have long-term adverse effects on physical asset’s value is determined in an organization. It is revenues and expense (Sept.-October 1985:6-7). also an accounting technique of transmitting the information A word of comment on the above quotation. It is interesting on manpower to the management who can rightly use that in to note that Aminul Islam, in spite of his standing on the its working process for optimizing performance results. It can platform opposite to that supporting “external financial very well be a part of an annual financial disclosure statement reporting of human resources value”, has clearly admitted from which its external users can immensely benefit by using that the treatment of “unexpired costs on human resources” as realistic information regarding an organization’s earnings and “expenses” instead of “assets” has long-term adverse effects financial position. on the income stream. Does a Human resource really possess asset status ? In the words of J.B. Canning (1929:22): “an asset is any The question that might now pertinently come to mind: is future service.” A few years later, Paton and Littleton (vide manpower in the banking industry a capital asset, in an Black, July-August 1981:79) stressed “service potentialities” accounting sense ? This very question seems to relegate HRA as the basic component of an asset. Accounting Terminology to non-existence. This question might also be put in a slightly Bulletin No. 1, issued by the American Institute of Certified different form: is the future benefit from the costs on Public Accountants, proposed that an asset may be defined as acquisition, recruitment, training, orientation and “a property right of value received or an expenditure which development of bank manpower certain enough to warrant has created a property right or is properly applicable to the asset status? Now one can review the literature on this issue. future” (vide Black, July -August 1981:79). The Committee First of all, one may have an insightful look into the on Accounting Concepts and Standards of the American comments of Aminul Islam, a South African University Accounting Association concurs with the above authorities The Bangladesh Accountant/April- June 2010 70 Human Resources fully and describes an asset succinctly as an aggregate of McGwen (Summer 1968: 86) supports the view of service potential available for or beneficial to the success of recognizing humans as assets by stating: “Explicit recognition operations (AAA, 1957:4). Vatter (1947 P.17) agrees with of the asset value of human resources would enable managers them and states clearly that an asset owes its value to the to consider their employees within a conceptual framework of embodiment of “future want satisfaction in the form of asset management”. service potentials”. Dahl (January 1979: 44) looks at the issue from the same G.D. Roy’s comment in this context is very relevant. He angle and comments: “human resources constitute an considers the labour force to be an offspring of capital and investment for a firm, rather than an expense; that is, states that: employee costs should be capitalized rather than expensed”. The two types of capital, human and physical, have Nadler (1979: 265) takes this idea one step further in to be worked together in co-partnership for asserting that the costs of educating and developing productive activities. It has been found that there is employees are investments or assets. no ambiguity in this contention because,the human Relevantly, Caplan and Landekich (1974: 79) refer to assets are the results of past accumulated labour Hermanson, who argues that realistically it is not the legal and material in the same way as material assets are ownership of resources that is important to an economic (1977:187). entity but rather the right to control such resources and There is, however, one problem in the proposed recognition receive benefits from them. Here Hermanson ignores the of the human asset according to C.S. Samuel (1975: 148- importance of legal ownership of resources and instead, 151), who views that every firm has a band of lower grade stresses the importance of the right to control such resources workers whose employment is casual or temporary and not and the future expected benefits therefrom. permanent. Evidently, “the claims to services” to be available According to Hermanson (1964: 4), human resources from them fail to acquire the durability that could entitle them constitute the largest element of operational assets. to be included in human assets. That is probably the reason Ebersberger (August, 1981: 37) seems to agree with this view why, in certain cases, only the upper grade permanent fully and to strengthen his own similar view quotes employees are considered in the enumeration of the human Hermanson who again contends that it is logical to consider a asset. Nevertheless, it is important to note that if “debtors”, human an asset at least from the point of view of the which are only “claims to money” against specific persons, operational right to receive benefits. can be treated as assets, why not “claims to services” against Hermanson (1964: 4) defines assets as: them also? Though human assets would in that case rightly be Scarce resources …operating within the entity, “rights in personam” instead of “right in rem” like physical capable of being transferred by forces in the assets, the continued “claims to services of human assets” economy, and expressible in terms of money; which over a number of consecutive accounting periods would very have been acquired as a result of some current or well maintain the nature of their being capital assets. past transaction, and which have the apparent Flamholtz’s viewpoint (1979: 213-214) is worth ability to render future economic benefits. noting here. He asserts: This definition deserves a word of comment. It implies that: The HRA paradigm is conceptual (i) the valuation of assets—regardless of whether they are framework or way of thinking about legally owned by the entity or they are operational items— management based on the notion that should be a function of the future economic benefits expected people should be viewed as “resources” to be derived from the assets; (ii) both owned and operational rather than “expenses”…The view of assets ought to be included in financial statements. All that in people as organizational resources the foregoing discourse suggests that the amount of implies that they are capable of providing investment in acquisition, training and development with long current and future services which have term benefit on human resources should be capitalized. economic value to the organization. But accountants, in most cases, do not view and regard The Bangladesh Accountant/April- June 2010 71 Human Resources humans as assets because they feel that the “legal ownership” of providing future service potential, clearly a case can be of employees cannot be gained except under conditions of made for treating him as an asset. Human resource costs are slavery (Caplan and Landekich, 1974: 3). To some critics, the sacrifices incurred by the firm in obtaining services, which notion of HRA is repugnant, as it does “ownership of may yield benefits. Such costs, which yield current benefits, employees” and smacking of outmoded perceptions of the should be treated as expense; those, which yield future “master servant” relationship (Fanning 1981: 31) of the slave benefits, may be regarded as an asset. However, we do not days. These days employees cannot be owned in the same live in a slave society, and the concept of owning human sense as inanimate objects, such as machines. As Jauch and beings is alien to us. At the same time, a firm does employ an Skigen put it : where there is no exclusive right, there is no ever-present labour force (albeit changing in composition), assurance of future benefit” (May 1974: 33). This lack of and so human can, in a sense, be owned. Exactly similar view conventional employer control over employees may naturally is held by Tsaklanganos who views: prompt many, as one can think, to argue that even An asset entails a cost that is planned to provide employment contracts or bonds would not qualify for asset benefits in future periods. An expense, on the hand, classification. In the same tune many economists also assert is an outlay providing benefits in the current that people should not be viewed as assets, because assets are period. A basic tenet of HRA is that, since income at the service of people and people cannot be owned by any generated by Human investment will be largely organization. In reply to this, another economist Von Thunen realized in future periods, human resources should has remarked: to treat human resources as resources does not be treated as assets (May 1980:45). rob them of liberty or value. Indeed, to fail to see people as Here Sinha’s arguments (1986: 260-261) for regarding capital assets may be especially harmful in times of war human resources as assets deserve quoting: “because then … a hundred men may be sacrificed during a It is true that employees cannot be owned as slaves; battle to save one canon” (vide Grojer and Johanson, 1991: they are not marketable like other assets and they 19). “The reason for this is that ... the purchase of canons are not totally under the control of an entity, since costs the public money, while people may be obtained free of some of them will not stay in the entity for long. But charge …” (Schultz, 1961: 2). it is true that most of them will stay and the entity Marvin Weiss (Administrative Management, December will always have under its control a force of 1972: 47-48; The Magazine of Bank Administration, employees. Besides, uncertainty of deriving benefits December 1972: 47-48; The Magazine of Bank is not peculiar to only this sort of asset; this is Administration, December 1972: 18) does not agree with the applicable to other assets as well. For instance, above views of disregarding humans as assets and argues benefits will not be derived from existing fixed emphatically that certain types of assets need not be ‘owned’ assets in future if they become obsolete because of in the conventional sense, to be treated as assets; in an recent innovations. The argument that in the Tax economic sense, the rights due from human resources are laws there is no provision for amortization of similar to the rights due from capitalized long-term leases. capitalized human assets is also not tenable, since Speaking more clearly, the capitalization of rental payment all sorts of expenses which are chargeable to under long-term leases is an example of asset treatment where revenue according to accounting principles are not the item is not owned in the legal sense. Thomas McRae considered deductible expenses in the laws. Human (December 1975: 1-8) holds the similar view and contends: components are considered assets mainly with a human resources fit the usual definitions of accounting assets view to providing an idea about how much has been because they represent rights to receive economic benefits in invested in recruiting and developing personnel in the future. Here one may quote David Watson (March 1978: an organization and how much services it expects 42) very relevantly: to derive from them in future. An organization with An asset can be defined as the future service potential of a an efficient and skilled working force expects factor of production. Therefore, if a human being is capable naturally greater service potentials than those with The Bangladesh Accountant/April- June 2010 72 Human Resources

inefficient working force. In this sense, human HRA in the Context of External Financial Reporting components are assets to an entity. The legal assets In the realm of HRA, a vital question is: is HRA information are not so important here. really needed in external financial statement? In regard to To now summarize the above discussion regarding a incorporation of HRA information in external financial theoretical inquiry into whether humans really qualify as reporting: whilst some authors, such as, Jauch and Skigen assets, the views of various authors and accounting institutes (1974:33), Newell (1972:16) and Dittman, Juris, and Revsine imply some fundamental characteristics that every asset must (Spring 1976:65) have rejected the rationale of integrating possess: (1) future economic benefits must be expected from HRA with conventional external financial reporting on the an asset; (2) the organization reporting an asset must have the grounds of inability of the accounting profession to develop a right to the benefits therefrom; (3) the benefits from the asset meaningful system of manpower value measurement, must be capable of measurement. To comment further: the inability to determine the period of future benefit, lack of an manpower of any organization, whether it is a bank or any organization’s exclusive legal ownership right to humans and other service / manufacturing concern, is endowed with these inability to amortize asset, some other authors have characteristics. Therefore, one may cogently argue that a recommended the inclusion of HRA information in financial human in an organization is an asset. To now again add a accounting reports for external users. A number of thinkers word of comment on the manpower status in the banking including Brummet, et al (April 1968:217-24), industry for example: one can very well observe that the Flamholtz(1979: 44-61), Sinclair (March 1975: 48-54), and acquisition, training and development of bank manpower Mirvis and Macy (April 1976:153-154), Likert and Pyle (Jan- typically involve an economic cost and the benefits from Feb. 1971:82-83), Lev and Schwartz (Jan: 292-293), and bank manpower can be expected to contribute economic Edward S. Schwan (1976:219-237) believed that HRA could effectiveness. Every banking organization has an operational give benefits to external users of financial statements. Hence, right to derive economic benefits. It is a well-known fact that unexpired human resource costs should necessarily be every bank rents the services of human capital i.e., bank reported as an asset presumably as a separately identified manpower for the purpose of economic benefits or service asset in the balance sheet (Schwan, 1976:219). According to potentials, which constitute the basic component of an asset. them: “External decision-makers must know the changes in The manpower working in a bank is quite capable of human assets in order to evaluate properly assets and income. rendering current and future services to a bank and these If the condition of human assets changes during the period, expected future services have economic value for the bank. conventional accounting income may be misstated and the Hence, manpower need not be ‘owned’ in conventional sense asset base distorted” (James A. Hendricks, April 1976: 292). by banks to be accounted for as assets. The reasons, therefore, The Committee on Human Resource Accounting of American may be pointed out in Flamholtz and Laciy’s vein (1981: 58- Accounting Association (1973:169) summarized the above 59): first, if the need for HRA information is perceived by position thus: “External users, particularly investors, could management, HRA information can be reported at least as an benefit from HRA through the provision of information on adjunct to the financial accounting statement; secondly, the extent to which the human assets of the organization have although employees are not ‘owned’ in a conventional sense been increased or have diminished during the period”. by banks and they may potentially leave a bank, one can still James A. Hendricks (April 1976:292) again stresses the account for investment in them, their replacement cost and importance of HRA for external reporting: “Statement users their economic value because the probability of getting will invest more funds in a firm whose financial statements service from them cannot be ruled out; thirdly, a banking show an increasing investment in human asset as opposed to a organization’s decision to account for its employees as assets firm showing a decreasing investment in human assets”. tallies with the economist’s view point of treating people as Marc Levine (August 1980: 19-21) seriously disputes the human capital in explaining economic growth; and fourthly, a viewpoints that deny human asset recognition. She believes bank’s manpower maybe brought under control through that strict inflexible definition of asset with particular explicit or implicit employment bonds or contracts. emphasis on exclusive legal ownership right can only be The Bangladesh Accountant/April- June 2010 73 Human Resources detrimental to the cause of greater reporting disclosure. That for disclosure of human organization information in terms of rigidity in the definition of human asset should go and the estimates in dollars in their following comment: definition of human asset much needs a modification. She Excellent managers, investing their efforts in argues that managerial planning and control process as well building a more productive human organization, as external reporting becomes erroneous if human resource frequently go unrecognized and unrewarded. So factor is not considered. She asserts that a breakthrough for long as changes in the dollar value of the potential HRA in the area of external financial reporting is needed. future productive capability of the human In this respect, the point of view of Marvin Weiss (September organization are ignored, managerial 1972: 735-741) merits particular attention. He states that the compensation plans that are linked to current HRA treatment is well within the purview of existing reports often will motivate behavior contrary to a Generally Accepted Accounting Principles (GAAP). He is of firm’s true financial well being (Likert and the view that ‘to capitalize’ rather than ‘to expense’ the costs Bowers:16). of recruiting, training and hiring personnel, which is the David Watson’s view (March 1978:42) is, indeed, significant essence of HRA, is a more appropriate method of financial in this respect. According to him, uses of HRA can also be reporting than the conventional treatment of expensing such external to an organization. Conventional external financial costs in the period incurred. He warns that expensing of those reports integrating HRA can provide adequate information costs as incurred would not only cause distortion of net about an organization’s employees to the employers. This income during the period of training, but would also conceal information includes present, past (pensioners) and the cost of employee turnover to the organization, as no prospective employees. This integrated accounting system balance (unamortized deferred charge) remains to be written can provide information to other external users primarily, off as a turnover loss when a valuable employee leaves the shareholders who can use the information for evaluating organization. He asserts that the balances resulting from stewardship by the director of this human asset. Other capitalizing those costs can be amortized as expenses in the external users, namely integrated accounting system by period(s) when an employee is a productive member of the knowing a lot about the employees of the organization. organization, and the unamortized balances can be recognized Hermanson (see Caplan and Landikich, July 1974:79), an as losses if the employee leaves the organization. Considering important proponent and adherent of HRA observed that the the cost of acquisition, training and development, he incorporation of human resource measurements in financial identified cost of turnover as a significant loss of assets and statements would result in improved comparability and recommends measuring of such loss. He further emphasizes completeness of external reporting; such improvements the need for including HRA information in external financial would greatly assist management and investors for analysis of reporting by stating that: “the capitalization of actual outlay statements and would thus provide for a more efficient would be a good start and would certainly contribute to the allocation and utilization of resources within the organization. generation of financial statements that provide greater Khandelwal fully concurs with Hermanson and comments information as to the true worth of the company” (Marvin that accountants do try to fully record and disclose physical Weiss, September 1972:741). assets but they largely ignore human assets in their both Rensis Likert and David G. Bowers strongly recommend internal and external reports. This results in faulty evaluation estimating the change in dollar value of the human (July 1979: 11-14). organization for improving the accuracy of P/L (Profit/Loss) David Fanning’s comment (November 1981: 31-32) which reports (Michigan Business Review, March 1973: 15-24). accords with Hermanson’s and Khandelwal’s comment is They are of the opinion that ignoring information in terms of very relevant and merits particular attention in this context: estimates in dollars regarding human organization has given Even in its simplest form human resources rise to widespread concern about inaccurate financial position accounting involves the isolation and identification disclosure, poor decisions, poor productivity, poor quality and of the costs of recruitment, training, development, lack of will to work. They are found to emphasize the need maintenance and support of the human assets The Bangladesh Accountant/April- June 2010 74 Human Resources

employed in the organization. Such figures and of “shareholders” and “investors”, HRA provides a information are not generally available to outside framework of information and an analysis of the ways and analysts and evaluators, but a useful picture of a means by which management may be able to decide whether banking company’s usage of human resources can to buildup or deplete human assets. HRA data are expected to be built up from employee-related statistics. By be of much use to the external users in different professions: examining growth and performance in terms of the financial analysts making investment recommendations, productivity, complementary comparisons can be the investors deciding between alternative investment derived from the banks alongside conventional opportunities and the appraisers making business valuation financial figures. decisions (Edonds and Rogow, February 1986:15). V.S. Verma’s point of view that agrees with that of David An intelligent investor can predict the future financial Fanning also deserves mention: conditions of an organization including rate of capital The current accounting practice leads to notable appreciation based upon the analysis of the trend of human consequence of under-assessing or over-assessing assets growth. Likewise, the trade union may also be able to the real value of organizational resources. The understand the management’s keen desire for building up accountants are understating profits or over-stating human resources in the organization. HRA-incorporated losses by charging expenses of recruitment, financial statements may focus on a new dimension in the training and development of human resources to employer-employee relationship by providing an added profit and loss account of current period. This perspective to both “Management” and “Trade Union”. practice leads to the concealment of asset and net “Government”, the another external user may be able to know worth to that extent. It results in the violation of ‘ whether there is any scope for getting more people employed the cardinal principle of true and fair disclosure’ in in an organization when it uses HRA. “Government” may the published accounts (Summer 1983:58). also be able to see the reasonably accurate picture of earnings Sayers and Rogow are at one with them and state very clearly and financial position of an organization if it uses HRA. that from accounting standpoint, the investment in human Other external users like “employees” may be motivated to resources should be shown as an asset on the firm’s balance perform their jobs in a better manner since HRA-incorporated sheet and periodic increases/decreases in the investment external financial reports will disclose their worth and the balance should be reflected in the income statement (April results of their performance. Through financial statements 1988:45). incorporating HRA information, external users may be able to Paperman looks at the issue a little differently. According to know whether the “employees” are giving an adequate return him (Autumn 1976:95 and 97), if HRA information is to be commensurate with the payment made to them and whether externally reported, it should be done by using either a they over paid or underpaid. As external users of financial narrative special statement called “Statement of Financial statements, the “investors” are expected to be immensely condition” (in the form of a supplementary statement) or benefited. The rate of return on investment (ROI) is an detailed footnote disclosure. Sangeladji (December 1977: 50- important factor to be considered in making investment 51) also suggests supplementary financial statements for decisions. The conventional accounting practice of treating all human resource investments dimension in order to facilitate expenditures on acquisition, training and development of comparative analysis of realistic earnings and financial human resources as “expenses” during the period of position of different organizations. incurrence presents distorted figures of ROI (Katiyar, October In the preceding paragraphs, obviously, many accounting 1991: 754). From HRA information incorporated in external scholars have supported inclusion of HRA information in financial statements, the “investors” may easily compare the external financial reports this or that way. In their opinion, true performance-results and the real financial position of presumably, external financial statements incorporating HRA different organizations. That may help them direct their information may be really useful to the external users of resources to reasonably profitable channels of investment financial statements. It is believed that from the point of view (Katiyar, October 1991:754). The Bangladesh Accountant/April- June 2010 75 Human Resources

Summing-up and Conclusions future benefits. Hence, the basic tenet of HRA that has To sum up, one may make the following observations: become prominent is that since income generated by human 1. Generically, HRA has three basic components: (i) investment will be largely realized in future years, humans identification of human resources as assets; (ii) should be treated as assets. measurement of asset data about human resources and 1. It is further evident from the discussion that (iii) communication of this information to interested conventional external financial reports integrating HRA parties. can give a clearer and more realistic picture of an 2. HRA is an accounting for people, requiring the organization. External users like shareholders, trade recognition of human resources as capital, involving unions, Government and financial analysts can have a capitalization of an organization’s cost of recruiting, better picture about personnel costs. The problems of hiring, training and developing employees. It is also an personnel turnover and replacement, and excessive information system designed to provide relevant, timely, recruitment and development costs have a magnificent quantifiable and verifiable information about manpower impact on current and future profits. The primary benefit resources to management to make informed judgement from HRA may not accrue to shareholders only on the and decisions. decision of capitalizing employee costs but rather when 3. In spite of conflicting views regarding asset status of costs are written off. When amortization exceeds humans, they (humans) may be given asset status by deferral of current expenditures, the human organization relaxing the rigidity of the definition of asset with is dissipated; and this may adversely affect future earning potential. respect to “exclusive legal ownership”. Giving 2. HRA proponents argue that a firm’s value is understated recognition of “asset status to manpower” is probably when financial statements fail to recognize the value of the basic philosophy underlying the concept of HRA. human assets. While analyzed from a broader point of view, humans 3. Assessment of managerial talents is an important factor can be recognized as assets. The term ‘assets’ can have to analysts at the time of their evaluating an different meanings. In this context, the point of view of organization’s merit for investment recommendations. If Edmonds and Rogow (Feburary 1986: 12-13) may be this is so, why should the quantification of that factor be much pertinent: lacking in the balance sheet. When applied in a particular chain of reasoning, it 4. The real challenge for the accounting profession is how has a known and constant meaning that is not to measure the value of humans when it thinks to accept bound by tradition, but based upon use. If assets HRA as a part of external financial reports. Human value are considered tangibles or intangibles that possess is too subjective to measure. But time demands that the certain properties, and if accounting statements are point of subjectivity in measurement of human resource to provide a realistic reflection of usefulness or value may be viewed less seriously. To underscore the value of these properties, humans can be assets. If need for relaxing the subjectivity of manpower value one property is that an asset should be subject to measurement, one can gain support from the statement control by the firm, that control need not be of Edmonds and Rogow (February 1986:14): absolute. For instance, goodwill is currently The accuracy of such human resource considered an asset, but it is subject to many forces measurements has been overly debated to the outside the firm. Thus, assets are something that detriment of financial statement users who need possess utility or value. They are acquired not for human resource information to make informed their own sake, but for what they can contribute to investment and business decisions. If accuracy were a firm’s cash flow. This definition avoids the main issue, a strong case could be made for controversies over ownership, control and deleting from financial statements depreciation and exchangeability. inventory valuation, which are based on arbitrary This removes the ownership stigma and concentrates on historical assumptions. The Bangladesh Accountant/April- June 2010 76 Human Resources

In fine, it may be stated that the literature reviewed in the reporting becomes faulty in the absence of human resource foregoing paragraphs does not seem to stand in the way of factor. Hence these days they start with the belief that a incorporating HRA information in external financial reports, breakthrough for HRA in respect of external financial rather several accounting scientists are found to welcome the reporting is needed. idea of integrating HRA with conventional external financial Some of the scholars are also of the view that even if the reports. Their traditional belief has changed. They now accounting world is most uncompromisingly opposed to believe, as is evident from the earlier discussions, that strict reporting human resource value in the balance sheet, at least a inflexible definition of asset with particular emphasis on narrative special statement of HRA in the form of a exclusive legal ownership right can only be detrimental to the supplementary statement to conventional annual financial cause of greater reporting disclosure. The rigidity in the definition of human asset should go and the definition of reports or a detailed footnote disclosure may be introduced I human asset greatly needs a modification. External financial for external financial reporting of HRA information.

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The Bangladesh Accountant/April- June 2010 78 Human Resources HR Practices in Industrial Enterprises in Bangladesh: An Approach to Factor Analysis

Dr. Mir Mohammed Nurul Absar Balasundaram Nimalathasan and Ratna Dutta ACA

Abstract study selected the HR practices such as HR planning, The present study attempted to rank Human Resource (HR) recruitment and selection, training and development, practices with respect to their importance in the context of performance appraisal, compensation, and industrial relations industrial enterprises of Bangladesh through using which were incorporated by the Guest Model. ‘Exploratory Factor Analysis’ (EFA). The results show that 2. Objectives five factors extracted from the analysis explain 83.667% of The following two objectives were taken for the study: the total variance. These five factors such as ‘extensive To rank the HR practices of the industrial enterprises in training’, ‘selection’, ‘management attitude’, ‘performance Bangladesh with respect to their importance. appraisal’ and ‘pay survey’ have been ranked as first, To offer some policy implications to enhance the HR second, third, fourth, and fifth respectively with respect to practices of the industrial enterprises in Bangladesh. their importance. Outcomes of the study would benefit the 3. Literature Review academicians, researchers, policy-makers, and practitioners HR practices have been researched form various perspectives of Bangladesh and other similar countries. in Bangladesh. Taher (1992) conducted a case study on the Keywords: HR Practices; Industrial Enterprises, Exploratory overall HR practices of Khulna Hard Board Mills Ltd. of Factor Analysis (EFA) Bangladesh. He discussed about the organizational structure, 1. Introduction recruitment, selection, training and development, Human resource management (HRM) refers to the policies compensation, labor relations, and safety and health. The and practices involved in carrying out the ‘Human Resource’ researcher unearthed different problems related to personnel aspects of a management position including human resource management practices of the mill such as conflicts in planning, job analysis, recruitment, selection, orientation, personnel department, disproportionate span of supervision, compensation, performance appraisal, training and inappropriate grade, high rate of absenteeism, antagonistic development, and labour relations (Dessler, 2007, p. 4). HRM feeling of local workers, inadequate training programs, lack is composed of the policies, practices, and systems that of skill audit, nepotism and favoritism in promotion and influence employees’ behaviour, attitude, and performance selection of employees, poor industrial relations, inadequate (Noe, Hollenbeck, Gerhart, and Wright, 2007, p. 5). There are compensation, and poor safety and health services. Moyeen four top models of HRM such as the Fombrun, Tichy, and and Huq (2001) studied HRM practices of 92 medium and Devana Model of HRM, the Harvard Model of HRM, the large business enterprises (public and private sector) located Guest Model of HRM, and the Warwick Model of HRM in Dhaka, Bangladesh. They found that only 62% of surveyed (Bratton and Gold, 1999, pp. 17-24). Out of these models, organizations had an HR/IR department. The highest (about Guest Model of HRM is considered to be much better than 96%) number of organizations had training programs. 91% other models (Aswathappa, 2008, p.19). Thus, the present of organizations had performance appraisal system and

The authors are Dr. Mir Mohammed Nurul Absar, Assistant Professor, East Delta University, Agrabad, Chittagong, Balasundaram Nimalathasan, Lecturer, Department of Commerce, University of Jaffna, Sri Lanka and Ratna Dutta ACA, Director-Finance and Accounts, Siam’s Superior Ltd, Export Processing Zone, Chittagong.

The Bangladesh Accountant/April- June 2010 79 Human Resources similar percent of organizations had a system of rewarding apprenticeship training, and class room training to employees. the good employees. The least prevalent practice among the They also found that the surveyed companies filled up surveyed organizations was employee pension plan. The vacancies through internal movement. The companies had researchers tested two hypotheses and inferred that union formal performance appraisal system. Again, the companies status (presence of unions) was associated with some HRM were found to have no standing policy regarding transfer. An practices and firms’ size was found as an important predictor in-depth study (Mahmood, 2004) assessed the institutional of some of the HRM practices. They also unearthed that context of HR practices in Bangladesh. The author mentioned HRM was being practiced, either formally or informally, to a that research on HRM did not receive its due attention in greater or lesser extent, in business enterprises regardless of Bangladesh. The researcher observed that other than the size. Nonetheless, the study did not include some of the organizational contingencies, the institutional context such as major HRM practices such as HR planning, job analysis, national education and training system, national industrial recruitment, selection, and compensation. A research study relations system, regulatory frameworks, and overall societal (Mamun & Islam, 2001) examined the HRM practices of the context had significant influence on the development of HR ready made garments (RMGs) enterprises. The study practices in Bangladesh. emphasized on improving productivity of garments workers Hossain, Khan, and Yasmin (2004) analyzed the nature of through proper HRM practices to face challenges of voluntary disclosures about human resource in the annual globalization. They identified that wage rate and labor reports of 40 Bangladeshi companies. They found that productivity of workers in Bangladesh were very low in contemporary Bangladeshi companies, though not mandatory, comparison to competing nations. Furthermore, they were willingly giving various information regarding their discovered that the reasons for the low productivity of human resources in the annual reports. Akand (2006), in a laborers were unsystematic recruitment and selection of case study, investigated the personnel management practices workers, unavailability of training facilities, inadequate of Janata Bank. Ernst and Young, and Metropolitan Chamber financial facilities, and low motivation level of workers. of Commerce and Industry (2007) conducted a survey on HR HRM practices of ten local private manufacturing enterprises practices of more than 50 organizations selected from listed under Dhaka Stock Exchange (DSE) were examined by industries (mainly from the private sector) such as Pharma Akhter (2002). She covered different aspects of HRM and Healthcare, FMCG, IT, Telecom, Manufacturing, practices of the surveyed manufacturing enterprises such as Finance, Non-Government Organizations(NGOs), job description, HR planning, recruitment and selection, Textile/Garments, and Conglomerates. They thoroughly orientation, training, promotion, performance appraisal, examined talent acquisition, performance management, transfer, salary and wage administration, incentives, and people development, compensation and benefits, HR strategy fringe benefits. She also measured correlation between and processes, organizational culture, and HR practices for employees’ opinions regarding HRM practices in their Workmen, staff and other non-managerial employees of the enterprises and their age, education, and experience. Islam surveyed organization. Uddin, Habib, and Hassan (2007) (2003) in a study on the HRM practices of small businesses depicted a comparative scenario of HR practices with respect of Bangladesh found that small businesses did not offer to the public and the private sector companies of Bangladesh. reasonable salaries and benefits, training and development The study encompassed the HR practices of Wartsila, one of opportunities. The author mentioned that due to outdated HR the private sector power generation companies, and practices, the productivity and motivation level of the Bangladesh Power Development Board (BPBD), the public employees of small businesses of Bangladesh were very low. sector power generation company. They examined Haque and Prince (2003) assessed the HR practices such as recruitment, selection, training, performance appraisal, and training, promotion policy, performance appraisal method, compensation practices of both the firms. The authors and transfer policies of some private manufacturing industries concluded that the overall HR practices of Wartsila very based in Chittagong. They found that the surveyed companies much satisfactory. In contrast, the HRM practices of BPDB imparted on-the-job training, vestibule training, were quite inefficient. Huda, Karim, and Ahmed (2007) made The Bangladesh Accountant/April- June 2010 80 Human Resources a study on the HR practices of 20 NGOs of Bangladesh. It 4.3 Reliability and Validity of the scale was identified from the study that the HR challenges faced by Cronbach’s alpha is most widely used method. It may be the NGOs were shortage of qualified candidates, mentioned that its value varies from 0 to 1, but satisfactory insufficiency of qualified female candidate, poor academic value is required to be more than 0.6 for the scale to be background of applicants in the suburban and rural areas, and reliable (Malhotra, 2002; Cronbach, 1951). In the present the lack of training infrastructure and training need analysis. study, we, therefore, used Cronbach’s alpha as a measure of The first three challenges were related to recruitment. reliability of the scale. The above literature survey reveals that like other developing Table 1: Reliability value of the Scale countries, HR practices as an area of research have not Scale No. of Items Cronbach’s Alpha (·) received proper attention in Bangladesh. Though, both review Overall HR practices 31 .911 type and empirical type of studies were carried out, empirical Source: Filed Study studies primarily used descriptive statistics such as mean, percentage. Only few studies used inferential statistics. So far From the table-1, it is seen that reliability value was estimated knowledge goes, no study on HR practices in Bangladesh to be · =.911, if we compare reliability value of the scale used sophisticated statistical model such as EFA. This study used in the present study with the standard value alpha of 0.6 is, therefore, conducted to fill up the existing research gap. advocated by Cronbach (1951), Nunnally and Bernstein (1994), and Bagozzi and Yi’s (1988); it is observed that the 4. Research Methodology Research methodologies of the present study are outlined scale of the present study was highly reliable for data below. analysis. Validation procedures involved initial consultation of the questionnaires. The experts also judged the face and 4.1 Sample content validity of the questionnaires as adequate. Hence, A sampling frame of 91 industrial enterprises was prepared researchers satisfied reliability and validity of the scale. on the basis of listed industrial enterprises under Chittagong Stock Exchange (Chittagong Stock Exchange, Annual Report, 4.4 Analysis 2007). The structured questionnaire was sent to the HR To analyse the data, this study used only inferential statistics managers of all the 91 industrial enterprises. (EFA). All statistical calculations were carried out by SPSS 4.2 Data Collection and Questionnaire Development version 13.0. The study was complied with the help of primary data and 5. Research Findings secondary data. Questionnaire survey method was used to An exploratory factor analysis with an orthogonal varimax gather primary data in the present study. A 31-item Likert rotation and a Kaizer- Guttman criterion of eigen value type questionnaire (where1=strongly disagree to 5 = strongly greater than 1.00 was conducted for the 31-item of HR agree) was developed through extensive literature review to practices. For 31-item of HR practices, five components (or identify the HR practices of industrial enterprises in factors) with eigen value greater than 1.00 were extracted Bangladesh. The questionnaire covered all the major HR with the total variance 83.677%. However, the general practices such as HR planning, recruitment and selection, criterion of eigen value greater than 1.00 may misjudge the training and development, performance appraisal, most appropriate number of factors (Gorsuch, 1983).To compensation, and industrial relations. As HR managers are the most reliable persons to provide data related to HR facilitate easy interpretation, these factors were then rotated practices (Huselid & Becker, 1996), the structured using the varimax criterion for orthogonal rotation. Only questionnaire was sent to the HR managers of the surveyed statements or items with factor loadings of 0.50 (Pallant, industrial enterprises. Moreover; the desk study covered 2005) and above in the rotated factor matrix was considered various published and unpublished materials on the subject. as significant in interpreting the factors. Table-2 shows the Finally, 34 useable questionnaires were obtained for the factor matrix indicating the factor loadings and communality study. estimates (h2) of every variable on these five factors. The Bangladesh Accountant/April- June 2010 81 Human Resources

Table 2: Scale Items, Component loading and Communality Estimates for five- Factors of HR Practices

Item Factor loadings h2 F1 F2 F3 F4 F5 COM4 .925 .882 COM2 .923 .938 COM1 .918 .931 COM3 .916 .946 HRP5 .839 .840 RNS3 883 .861 HRP3 .764 .906 HRP4 .754 .739 PA3 .713 .831 PA2 708 .517 .869 COM5 .688 . 574 .835 RNS8 .608 .763 RNS2 -.531 .794 PA1 .975 .955 RNS1 .956 .920 HRP1 .937 .898 TND1 .884 .781 RNS4 .782 .853 RNS6 .733 .628 IR1 .772 .871 IR4 .754 .657 IR3 .704 .753 TND4 .565 .591 .727 IR2 .548 .561 .684 TND2 .878 .936 HRP2 .812 .849 TND3 .745 .867 TND5 .625 .905 RNI5 .885 .908 IR5 .706 .825 RNS6 .659 .783 Eigen value 13.414 5.697 3.302 2.140 1.383 Percent of Variance 31.477 18.209 13.825 10.575 9.581 Cumulative Percentage 31.477 49.686 63.511 74.086 83.667 Source: Field Study h2 = Communality Estimates

The Bangladesh Accountant/April- June 2010 82 Human Resources

Table-2 illustrates the factor matrix indicating the factor collective bargaining; trade union free from outsiders; further loadings and communality estimates (h2) of every variable on training and development, and labour management relation. these five factors. Factor-1(F1) to Factor-2(F2) comprised of Factor loadings of these variables ranged from .759 to .619. thirteen; six; five; four and three items respectively (For Further training and development and labour management details please see appendix table-1). The practice getting relation loaded fairly high on Factor 1 as well; because of its highest loading becomes the title factor e.g. pay survey -title higher loading and greater relevance it is also included in this of practices of factor 1 and the like. group [Hema, et al. (2000)]. A variance of 13.825% was Factor1: PAY SURVEY-This practice was represented by explained by this factor. thirteen practices with factor loadings ranging from .925 to - Factor 4: EXTENSIVE TRAINING-Four variables with .531. They were pay survey; competence of the employee; loadings ranging from .878 to .625, which included extensive salary & benefits are competitive, Human resource planning training; manpower requirement data; training need analysis change with business; job analysis guides recruitment; human resource information system; succession planning; and budget for training. This practice explained 10.575% of performance appraisal effective; performance feedback; non- the rated variance. Training need analysis loaded fairly high financial benefits; psychological attributes, and large number on Factor 1 as well; because of its higher loading and greater of applicants for vacancy. Performance feedback, and non- relevance it is also included in this group [Hema, et al. financial benefits loaded fairly high on Factor 3 as well; (2000)]. because of its higher loading and greater relevance it is also Factor 5: SELECTION- This practice encompasses three included in this group [Hema, W., Anura, D.Z., Tilak, F. & variables representing selection is fair; management accepts Basil, P, (2000)]. This practice accounted for 31.477% of the suggestions; and spend considerable time. Factor loadings of rated variance. these variables ranged from .885 to .659. A variance of Factor2: PERFORMANCE APPRAISAL-Six variables 9.581% was explained by this factor. Spend considerable time were included in this practice. They were formal performance loaded fairly high on Factor 2 as well; because of its higher appraisal; recruitment policy; formal human resource loading and greater relevance it is also included in this group policies; orientation programme; rigorious selection, and line [Hema, et al. (2000)]. and HR - participate in selection. Their factor loadings Ranking of the above practices in order of their importance ranged from .975 to .733. The factor explained 18.209%. along with factor score is shown in Table 3. The importance Factor3: MANAGEMENT ATTITUDE-This practice of these practices as perceived by the respondents has been comprises five variables representing management attitude; ranked on the basis of factor score. Table 3: Ranking of HR practices according to their importance

Key HR practices Factor Score1 Rank Factor 1 : PAY SURVEY .107 5 Factor 2 : PERFORMANCE APPRAISAL .142 4 Factor 3 : MANAGEMENT ATTITUDE .144 3 Factor 4: EXTENSIVE TRAINING .205 1 Factor 5: SELECTION .193 2 Source: Field Study As depicted in table 3, the HR Practices: ‘EXTENSIVE TRAINING’; ‘SELECTION’; ‘MANAGMENT ATTITUDE’; ‘PERFORMANCE APPRAISAL’ and ‘PAY SURVEY’ have been ranked as first, second, third, fourth, and fifth respectively with respect to their importance.

1 Factor score = Composite scores estimated for each respondents on the derived factors. The Factor scores for the ith factor th may be estimated as follows: Fi = Wi1X1+Wi2 X2+Wi3X3+———-+WikXk; WhereFi= estimate of i factor; Wi = Weight or factor score coefficient; K = number of variables. *Factor Score = Factor loadings X Component Score Coefficient The Bangladesh Accountant/April- June 2010 83 Human Resources 6. Policy Implications right jobs. The following policy implications may be useful for overall • Management of industrial enterprises should have positive improvement of HR practices in the industrial enterprises of attitudes towards the trade unions. Bangladesh and other similar countries: • Industrial enterprises should have formal employee • Industrial enterprises should offer extensive training and performance appraisal system. development programs to the employees • Industrial enterprises should conduct pay survey regularly I • Industrial enterprises should select right persons for the to offer competitive compensation to the employees.

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Appendix-1 Table-1: Code Sheet Sl# Code Item 01 HRP1 Formal HR policies are maintained in our organization. 02 HRP2 Our organization maintains manpower requirement data for next one to three years. 03 HRP3 Our organization maintains computerized human resource information system (HRIS). 04 HRP4 Our organization maintains succession planning. 05 HRP5 Our HR policies change with our business strategies. 06 RNS1 Our organization maintains formal recruitment policies. 07 RNS2 Our organization encourages large number of applicants for any vacant position. 08 RNS3 Job analysis guides the recruitment process of our organization. 09 RNS4 Our organization follows rigorous selection process. 10 RNS5 I think, in general, our organization’s selection process is fair. 11 RNS6 In our organization line managers and HR manager participate in selection. 12 RNS7 We spend considerable time in our employee selection process to find out the right person. 13 RNS8 We focus considerably on applicants’ psychological attributes in the selection process. 14 TND1 Our organization offers formal orientation program to all new employees. 15 TND2 Our organization conducts extensive training and development programs for its employees in all aspects. 16 TND3 In our organization, training needs analysis (TNA) is conducted systematically. 17 TND4 Further training and education are encouraged in our organization. 18 TND5 Annually, our organization maintains adequate budget for training and development of the employees. 19 PA1 Formal performance appraisal system is used in our organization. 20 PA2 Employees are provided performance based feedback and counselling in our organization. 21 PA3 I find our organization’s performance appraisal system highly effective. 22 COM1 Our organization offers competitive salaries and benefits to the employees. 23 COM2 In our organization, salary and benefits are offered on the basis of competencies or abilities of the employees. 24 COM3 The compensation of employees is directly linked to their performance in our organization. 25 COM4 Our organization conducts pay survey to review the salaries and benefits of the employees regularly. 26 COM5 Our organization emphasizes on non-financial benefits like interesting job, recognition, empowerment and so forth as tools of employee motivation 27 IR1 Management has positive attitudes towards trade unions in our organization. 28 IR2 Labour-management relationship is very cooperative and friendly in our organization. 29 IR3 Workers are free from outsiders’ influence in our organization. 30 IR4 Collective bargaining process is encouraged in our organization. 31 IR5 Management accepts workers’ suggestions to improve the working environment in our organization. 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