Bangladesh Budget 2010-2011 & Its Impact on Capital Market

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Introduction

   Budget is a numerical expression of a plan. It is essential to every financial or nonfinancial institution. A govt. can not run without its budget. The govt. publishes its budget for every financial year. This budget directly or indirectly affects the capital market of that country. In this report We  have analyzed the budget 2010-11 with a view to finding out the impact of budget on capital market.

 Description

Budget-Definition   A budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. It has to take account the institutional setting, national aspiration, economic environment within which it operate to attain the cherished objectives.

In summary, the purpose of budgeting is to:

  1. Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out.
  2. Enable the actual financial operation of the business to be measured against the forecast.

Government Budge

A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis for municipal and county revenues, while sales tax and/or income tax are the basis for state revenues, and income tax and corporate tax are the basis for national revenues.

The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits.

Budgets have an economic, political and technical basis. Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use. They also have a political basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens. The technical element is the forecast of the likely levels of revenues and expenses.

Therefore govt. budget should involve:

· A plan, setting out proposal and decisions of running out the finances of the govt.

· An authorization to raise the revenue and to incur expenditure.

· A forecast of the results expected on which to base future policy.

· An efficiency yardstick of what expenditure or revenue ought to attain successfully.

Bangladesh Govt. budgeting procedure

The annual budget is prepared by the Ministry of Finance and presented to Parliament for approval each year, except during periods of martial law, when the budget has been announced by the martial law administration.

The Constitution of Bangladesh, however, does not use the term budget. Instead, it uses an equivalent term ‘Annual Financial Statement’, which is to show the estimated receipts and expenditures of the government for a particular financial year.

Government budget in the country has two parts:

· Revenue and

· Development.

The tax on premium value would discourage the companies, which are planning to be listed on the exchanges.

The government could easily reduce its budget deficit to three per cent – instead of five per cent forecast in the budget by off-loading shares of state-owned enterprises. This will reduce the public deficit to a great extent, replenish the bourses with quality shares and stabilize the market. In 2008, the government raised more than Tk 20 billion from the capital market by off-loading SoEs’ shares.

Govt. must be appreciated for not making mentioning TIN mandatory while opening BO accounts and for not imposing tax on individuals’ capitals gain.

Recommendations

With regard to budget FY11, the apprehension is that realization of revenue targets and resource mobilization may be more within reach than the full implementation of the expenditure plan, in terms of quantity and quality However, some of the reform measures articulated earlier such as strengthening of regulatory reforms, BBBF, public expenditure reform, and civil service reform should receive due attention. These are critical to raising efficacy of public service delivery. Implementation of the budget proposals will hinge on significant improvement in the delivery capacity of the entire government machinery including various implementing ministries, institutions and agencies

Some recommendations related to capital market reforms:

  • The government might impose three per cent tax on capital gains of the institutional investors if they do not sell their shares within one year to encourage long-term investment and five per cent might be imposed on their income if they make profit by selling their shares before the one-year period.
  • Govt. should fix the tax on brokerage commissions at 0.035 percent instead of 0.1 percent.
  • 5% tax on income of sponsor shareholders or directors of a company listed with any stock exchange should be reduced as they give income tax on their total income.
  • The government may reconsider the tax on premium value since this is not an income of the company but part of the equity.

Appendix Table 1.1

References

Ø  The Monthly Economic Trend, June, 2010, Bangladesh bank.

Ø  The Budget for FY-2010-11, Ministry of Finance.

The Economic Review of Bangladesh, Ministry of Finance, Bangladesh.

The Daily Financial Express, The daily star – English newspaper;

Prothom Alo- Bangla newspaper;

State of the Bangladesh Economy and Budget Responses 2010-11, CPD;

Finance Minister’s Budget speech- (2010);

Ministry of Finance, Bangladesh;

www.banglapedia.com

www.cpd.bd.com

www.dse.com

www.stockbangladesh.com

www.bdstockprice.info

www.biasl.net

www.bd.stock.com

Bibliography

Bodie, Z; Kane, A; Marcus, J. Alan; Investments, (Tata McGraw-Hill)

Dragota, V. Minority shareholders’ protection in Romanian capital markets: evidence on dividends, Euro-Mediterranean Economics and Finance Review,

Khan, M. Y; Jain, P. K; Financial Management, (Tata McGraw-Hill)

Reily, K. Frank; Brown, C. Keith; Investment Analysis and Portfolio Management.