Bangladesh budget for FY17: Highlighting some issues

The proposed Bangladesh budget for fiscal year (FY) 2016-17 will be presented to parliament on this Thursday. Like in other countries, in Bangladesh also various interest groups have been trying to advance their sectional interests through budgetary provisions.  
The state-owned banks (SoBs) are keen do recapitalise through budgetary grants and canvassing their case to enable them to meet the Basel III requirements. Basel III stipulates a set of reform measures to improve banking supervision, regulation, risk management and governance - above all, strengthening banks' transparency and disclosures.
It appears that SoBs are in general found wanting on most the Basel III requirements, in particular the levels of non-performing loans they have accumulated. This is where the crux of the problem lies and they want the government to throw a lifeline at them by providing publicly funded what has been described as "recapitalisation". In reality they are asking an ongoing bailout package by the government. This ensures not any the survival of these banks but also provides a guarantee of deposits, thereby protecting the depositors in these banks. So in one stroke it saves the banks and their depositors — a kind of insurance but without paying any premium for it to the guarantor, i.e. the government.
There are eight SoBs in Bangladesh. They now collectively account for almost half of the non-performing loans (NPL). The NPL gross loan ratio for all commercial banks has been exhibiting an increasing trend rising from 5.8 per cent in 2011 to 9.4 per cent in 2014. There is no evidence available now that this trend has reversed.
However, the draft budget appears to have allocated Tk 20 billion to recapitalise the SoBs. This allocation is at a much reduced level than before. As these banks argue that they need publicly funded recapitalisation to shore up their financial position to enable them do meet the Basel III Accords requirement as most of them have capital shortfalls to fulfil the requirement under the Accord.
The SoBs appear to have an ongoing problem with their financial position largely due to a very high volume of NPLs. The question now arises why SoBs relative to private sector banks (PSBs) have always saddled with much higher levels of NPLs? Obviously the management failures at these banks are responsible for this situation. The simple answer to remedy management failures is to let the SoBs face the full forces of the market discipline.
This can only be done by privatising these banks to expose them to the market discipline. If for some reasons or others that is not possible or feasible, then they should be fully corporatised delinking them from government protection and fully exposed to the market forces while government retaining the ownership. The whole banking sector will thus face the market forces where both banks and depositors will be fully responsible for their decisions without any state bailouts or resource packages. More importantly, it will create a level playing field for all banks whether SoBs or PSBs.
REAL ESTATE SECTOR: Another group of people are also out and about and they are represented by an industry organisation — the Real Estate and Housing Association of Bangladesh (REHAB). They are canvassing for a continuation of a policy which allows undisclosed income to be invested in real estate for the next five years. REHAB even provides its own unique logic for the continuation of such a policy that it would stop money laundering and contribute to increased tax revenue.
There are a number issues that ought to be addressed here. They include (1) what are the source of this undisclosed income and (2) why they remain undisclosed? I think this ought to be thoroughly investigated by the National Board of Revenue (NBR) as well as the Anti-Corruption Commission. There is no doubt that tax evasion has taken place on a monumental scale. Therefore, a criminal offence has been committed. And the sources of undisclosed income also need to be investigated.
This money has been moving around in the underground economy (definitely this money was not sitting idle) leading to the formation of organised crime groups. The problem with organised crime groups is that they have great potential to corrupt all branches of the government; one may just look at Italy for an example.
In effect what REHAB is asking the government to allow money laundering to take place completely legally. Furthermore, the Panama Papers have revealed that a substantial amount of money has flowed out of the country. It is understood that sources of this money are tax evasion, graft, drug dealings and corrupt dealings in public contracts. To allow this type of money to be laundered legally within to country will further encourage more tax evasions and other illegal financial dealings.
I think the finance minister is absolutely right to decline to support such a proposal.
The writer is an independent economic and political analyst.
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Source: The Financial Express


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