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Development Finance


Development Finance a special branch of development economics that encompasses issues like planning and allocation of resources, investment decisions and choice of techniques, management of finance from domestic and external sources, financing internal and external trade, and issues relating to balance of payments and international monetary policies. The pattern of development finance in Bangladesh requires an assessment of weaknesses in generation of domestic resources and the need for external assistance as well as the' extent of flows of foreign aid and its utilisation. Development finance activities in Bangladesh' are implemented basically through a system of two annual budgets - a revenue budget and a development budget.

Until the mid-1990s, the country's development budget remained largely dependent upon external aid. Bangladesh has a long record of failing in generating sufficient financial resources for development from within largely because of weaknesses in its tax system characterised by a number of rigidities. It has a narrow tax base, low tax elasticity, weak tax administration, fairly low tax/GDP ratio and low direct/total tax ratio. The tax system is inequitable due to numerous exemptions that provide a free hand to entrepreneurs wanting to abuse fiscal incentives. Nearly four-fifths of the tax revenues come from indirect taxes on goods and services, where the share of taxes on foreign trade, import duty and sales tax predominates and external aid finances about 50 per cent of the import trade. While imports in Bangladesh have been growing at rates higher than the target, dutiable imports have remained almost at the same level or have even decreased in volume because of the depreciation of the taka against the dollar and a growth of the average effective rate of import duty.

One-fifth of the country's tax revenues is generated in the form of income tax, but according to some estimates, more than fifty percent of eligible income tax payers do not submit income tax returns and thus never pay any tax. Another reason for poor generation of domestic resources is the unsatisfactory financial performance of public sector manufacturing enterprises, a large number of which, instead of contributing to the national exchequer, consume financial subsidy supports to make up their losses and deficits. Net domestic capital, formed through receipts from national savings schemes, post office savings deposits, postal life insurance schemes, government employees' provident fund, deposits of local funds, and departmental and judicial deposits, does not contribute much to finance the economic development of the country because of low household savings rate.

Trends in development finance in Bangladesh show that annual revenue receipts fall short of budgeted targets, while revenue expenditures easily exceed targeted figures. In order that the situation is reversed and the domestic sources contribute more to finance development activities, it is necessary for the economy to achieve an overall high growth rate so that manufacturing, service, construction, housing, trade or other sectors can earn more to pay more taxes. It is also necessary that losses suffered by public sector enterprises are plugged, unproductive revenue expenditures curtailed, and economic activities managed in such a way that income flows of the public remain equitable, and all eligible taxpayers duly pay taxes.

Foreign aid, a major source of development finance in the country, meets its trade and savings gaps, finances procurement of inputs like machinery and capital equipment, industrial raw material, energy and fuel and technical know-how. Foreign aid contributes significantly to making better use of domestic resources. The fairly long history of overwhelming dependence of Bangladesh upon foreign aid in financing development programmes seems to have undergone some change in the recent past as the share of domestic resources in financing annual development programmes (development budget) have started growing. The development budget for 1999-2000 was formulated with the estimate that domestic resources would finance 50.5% of the year's proposed development expenditures. The contribution of internal resources to funding the annual development expenditures of the government was a little less (42%) in the financial year 2009-2010 but in 2008-2009 and 2010-2011, the ratio was 58% and 51% respectively.

In the 1970s, food aid accounted for a large share of foreign aid followed by commodity and project aid. Such a pattern in foreign aid was the reflection of a situation where the country was meeting consumption requirements and where donors had little choice in changing the aid structure. The structure of foreign aid inflows in Bangladesh has changed significantly over time. The share of food, commodity and project aid in total aid flows during 1971-1990 were 21.4%, 31.8% and 43.8% respectively, of the total estimated flow of foreign aid in Bangladesh while in 1999-2000, 84% constituted project aid, 12% commodity aid, and 4% food aid. In the financial year ending 30 June 2009 project aid comprised 97% of the total foreign aid disbursed to Bangladesh. This implies that most of the foreign aid has now been directed to meet development demands. Project aid is utilised almost entirely in development programmes. More than two-thirds of the commodity aid finance imports for production demands of the industrial and agricultural sectors. A significant portion of the foodgrains imported under food aid agreements is used as wages for workers engaged in small-scale infrastructure development activities like food for work, Canal Digging, Rural Maintenance Programmes and Local Initiative Schemes. The counterpart payments received on account of commodity and food aid also provide a major share of the country's development budget.

Development activities in Bangladesh are undertaken in most part in the form of projects and programmes in the frame of Annual Development Programmes in line with goals and objectives set in the five-year plans. Problems in project management, therefore, have direct bearing upon efforts in attaining goals of development finance, including poverty alleviation, improvements in standard of living, and increase in productivity in different sectors of the economy. Some of the major problems are: discontinuation of policy and inconsistencies in national development strategies; weaknesses in project approval and implementation processes; and delays in project designing, approval, implementation, monitoring and evaluation.

Development finance activities are coordinated at the top by the Planning Commission, the Ministry of Finance, and the Economic Relations Division. Development of money market and capital market is regulated by the bangladesh bank and the securities and exchange commission. Operating agencies in the sector are the commercial banks, investment corporation of bangladesh (ICB), stock exchanges, merchant banks and cooperative banks. Development Financial Institutions (DFIs) include the bangladesh house building finance corporation, bangladesh development bank, Bangladesh Small and Cottage Industries Corporation, bangladesh krishi bank and rajshahi krishi unnayan bank, Bangladesh Samabaya Bank, ansar-vdp unnayan bank and trust bank. These DFIs belong to the public sector.

A fairly large number of specialised financial institutions have also emerged in the private sector to contribute to development finance in the country. Some of these are the Delta Brac Housing Finance Corporation, National Housing Finance and Investment Co., sabinco, midas, ipdc, Uae-Bangladesh Investment Co., Prime Finance and Investment Co., Gsp Finance Company, and Vanik Bangladesh. The list of development finance agencies also includes leasing companies such as IDLC, United Leasing Co., Phoenix Leasing Co., Bay Leasing and Investment Co., and International Leasing and Financial Services, as well as Insurance companies such as Bangladesh General Insurance Co., Green Delta Insurance Co., United Insurance Co., People’s Insurance Co., Janata Insurance Co., and Eastland Insurance Co.

non-government organisations (NGOs) in Bangladesh constitute a distinctly separate group of development finance agencies. A vast majority of NGOs operate with microcredit programmes integrated with social development objectives like awareness building, empowerment of the poor and the women, literacy campaigns, health education, provision of elementary healthcare, family planning services and environment protection. Microcredit programmes of NGOs aim at ensuring access of the poor to capital, almost always without any physical collateral, for self-employment and income generating activities. The financing helps the poor to develop sources of income for themselves. At the same time they contribute to the development of off-farm activities in almost all types of small businesses and small and cottage industries.

Development financing by NGOs is characterised by some special features. For example, the NGOs work at the grassroots level, bring financial services to the doorsteps of the poor, and provide capital in a package of services to promote social awareness, business motivation and confidence, and some technical skills. Although NGOs do their best to tap all possible local resources for conducting their microcredit and other development activities, a large number of them act as conduits for delivery of external assistance. NGOs often act as subcontractors of different government agencies in channeling resources for development and implementing development activities. Such activities include health and family planning, basic literacy, non-formal education, self-employment and income generating activities of women and youth, and social forestry and environment protection. [S M Mahfuzur Rahman]