US embassy cable - 05DHAKA2749

C O N F I D E N T I A L SECTION 01 OF 03 DHAKA 002749 
 
SIPDIS 
 
SENSITIVE 
 
SA/PB, EB/IFD/ODF 
DEPT PASS TO DOE, OPIC, EXIM, TDA 
MANILA FOR USADB 
 
E.O. 12958: DECL: 06/13/2010 
TAGS: EFIN, ECON, ETRD, BG, BGD Elections 
SUBJECT: BANGLADESH UNVEILS ELECTION-FOCUSED FY 2006 BUDGET 
 
Classified By: P/E Counselor D.C. McCullough, reason para 1.4 d. 
 
1.  (SBU) Summary: Finance Minister Saifur Rahman unveiled 
the FY 2006 (July 2005-June 2006) budget on June 10, 
generating controversy over extension of the "whitening of 
black money" provision and general concern that the budget is 
election focused and potentially inflationary with its strong 
emphasis on rural development and education.  Overall 
assessment of the budget is mixed. End Summary. 
 
2. (SBU) In his budget speech to Parliament, Rahman announced 
agricultural subsidies, soft loans for farmers, a large 
education allocation, and other populist measures in the last 
full budget before the next general election expected in 
January 2007.  The budget also includes allowances for the 
mentally disabled, more student grants and help for long-term 
unemployed farmers as well as a series of tax exemptions for 
agro-based, leather and textile industries. 
 
3. (SBU) The USD 10.7 billion budget is based on a revenue 
forecast of USD 7.4 billion and represents a 15.7 percent 
increase on current spending.  Fifty-four percent of the 
revenue and development budget will go to direct and indirect 
poverty reduction programs.  According to the finance 
minister, annual GDP growth is expected to exceed six percent 
in the next fiscal year.  Tax exemptions and tax holidays, 
due to expire in July 2005, have been extended for three more 
years. 
 
4. (SBU) Key points include: 
 
-- Farm subsidies were doubled to USD 200 million (1200 crore 
taka) in an attempt to boost agricultural growth. 
 
-- Education funds were allocated for 3 million female 
students from primary school to college level.  Scholarship 
funds were allocated for 15,000 female college students, up 
from 9000 scholarships last year. 
 
-- Safety net provisions were extended to include monthly 
allowances for the mentally disabled. 
 
-- New allocation for local government to the level of "Gram 
Sharkar" - village government - but with no mechanism or 
accountability set up to handle these funds, a potential 
floodgate for patronage. 
 
-- "Whitening" of black money provision was extended for one 
more year. 
 
-- Provisions for seasonal employment for workers in areas 
hit by yearly monga (partial famine). 
 
 
Controversy 
----------- 
 
5.  (SBU) The extension of the "whitening" provision has 
generated widespread criticism from analysts and business 
leaders, who say it rewards illicite money.  This provision 
was introduced three years ago and was expected to be phased 
out this year.  Rahman had repeatedly indicated that he would 
repeal this provision in the FY 2006 budget. In the past 
three years, Rahman predicted that significant amounts of 
black money would be "whitened" under this provision. 
However, only a small fraction of the predicted amount was 
actually recovered.  Despite previous-year disappointments, 
Rahman remains optimistic that in FY 2006 the provision will 
be better utilized due to a strengthened banking system and 
reforms in the anti-money laundering laws. 
 
6.  (SBU) In a June 12 meeting with Ambassador, Rahman 
expressed satisfaction with the overall budget but 
acknowledged that the extension of the "black money" 
provision is controversial.  He said that he finds the 
provision "morally reprehensible" but had to extend it due to 
concerns over financial stability in the market.  He said 
that black money was being taken to foreign markets, causing 
instability in the rate of taka (local currency) and drying 
up foreign reserves.  Fearing greater losses, he extended the 
provision but imposed a new 7.5 percent tax on the "whitened" 
money. 
Import Duties 
------------- 
 
7. (SBU) The budget forecasts a 12 percent increase (to USD 
1.5 billion) in FY 2006 import duties over FY 2005.  The keys 
areas of increase come from import duties on 40 items 
including iron ore, luxury cars, garment imports, fruit 
juices, mineral water, and various mechanical and electronic 
products.  Supplementary duty has been increased to 35 
percent from 25 percent on processed food imports and on all 
furniture imports.  Notable reductions in import duties were 
made in salt imports, crude petroleum, CNG engines, and 
telephone equipment.  Import duties were eliminated for raw 
materials servicing export-oriented sectors like agriculture 
and textiles. 
 
Direct Taxes 
------------ 
 
8. (SBU) Total revenue from direct taxes is projected to 
increase by 15 percent in FY 2006 compared to FY 2005 (to 
little over USD 1 billion).  The level of tax exempt income 
will be raised from 100,000 taka to 120,000 taka.  Corporate 
income tax rate has been increased to 40 percent from 37.5 
percent.  Given the current year shortfall in income tax 
revenue is estimated at over USD 500 million, the expected 
USD 1 billion revenue from income taxes might be a hard 
target to meet. 
 
Value Added Tax 
--------------- 
 
9. (SBU) The budget forecasts a 16 percent increase (to 
little over USD 2 billion) in FY 2006 Value Added Tax revenue 
over FY 2005 numbers.  This increase is expected, in part, 
due to some new taxed sectors.  The most controversial of the 
new taxes is a 1200 taka (20 dollar) VAT on SIM cards, which 
is offset by a 1200 taka tax reduction for cell phone hand 
sets. 
 
Private and public sector reactions mixed 
----------------------------------------- 
 
10. (SBU) Opposition Leader Sheikh Hasina denounced the 
budget as election focused and pro-corruption.  She cited the 
extension of the black money provision as proof that the 
budget is designed to benefit select groups. 
 
11. (C) Science and Technology Minister Moyeen Khan expressed 
disappointment at the 10 percent import duty applied to 
software and the 1200 VAT applied to SIM cards.  Privately, 
Khan griped to us: "The finance minister does not know how to 
use a computer or a cell phone.  He lives in the nineteenth 
century and does not realize the importance of IT."  Khan 
added that he is tired of fighting for his ministry, which 
once again received no funding for programs. 
 
12. (SBU) Local analysts stated that the development budget - 
increasing outlays by 20 percent to 4.5 billion dollars - is 
aimed at gaining popular support ahead of the elections but 
could fuel inflation above its current 7 percent.  The Center 
for Policy Dialogue (CPD), a social think tank, termed the 
budget as one of "care, compromise and collusion."  With a 
boost of 46. 2 percent, public service received the highest 
increment in expenditure.  The Metropolitan Chamber, the most 
prestigious chamber in Bangladesh, criticized the extension 
of the "whitening" provision, calling it a "great economic 
injustice."  The Foreign Investors Chamber termed the 
increase in corporate tax to 40 percent from 37.5 percent a 
deterrent to investment. 
 
Comment 
------- 
 
13. (C) This budget has increased focus on rural and human 
development and places education as the top priority. 
Although election-oriented, this budget seems to focus on 
long-term development and select export sectors. 
Agricultural subsidies, broadened safety net provisions, 
education grants, and local government funds are all intended 
to generate political support for the ruling BNP in the run 
up to the next election.  However, implementing these 
development programs will remain a major challenge.  In the 
past several budgets, no development program was fully 
completed.  According to some estimates, 70 percent of last 
year's projects have not been implemented. 
THOMAS