Assessing the Budget FY2020-21 implications for capital market
GDP and inflation paradox
– COVID-19 effects slashed the 2019-20 Real GDP Growth to 5.20% from 8.15% in FY2018-19;
– The target 8.20% Real GDP (RGDP) growth is ambitious as there is uncertainty about the timing and nature of economic recovery;
– Taking COVID into account, the World Bank predicts RGDP growth at merely 1% for FY2020-21;
– Inflation rates may significantly deviate (possibly to be lower) from 5.4%, as production and demand fall in the economy, and money supply likely to become constrained.
Sluggish private investment
– As a reflection of lockdown-driven economic slowdown, investment to GDP ratio for FY2019-20 during March-June 2020 has dropped significantly compared to previous years;
– Private investment figures for FY2020-21 seem overestimated, since economic activities may not recover soon, private credit demand could go negative, and large government borrowing could slash the lending capacity of banks.
Proposed budget structure
– The estimated total government expenditure for FY2020-21 is set to be 13.24% more than that of FY2018-19.
– Larger expenditure increases (by Tk. 1763 billion) is relative to revenue increases (by Tk. 1261 billion) a major reason why the budget deficit is set to be increased by 35% or Tk. 502 billion between the respective years.
– There is Tk. 12,224 crore additional ADP in FY2020-21 compared to the previous year, which may be challenging to implement due to the unlikely economic revival soon.
– Financing from the banking channel is set to rise by 3% is FY2020-21, which will deter consumer spending and hamper private sector credit supply;
– External financing, mainly from development agencies/governments set to grow by 42%, mainly to fund.
Annual Development Programme (ADP)- Sector Allocation
– Bangladesh’s ADP is growing faster. Tk. 2051 billion of ADP proposed for FY2020-21, which is 2.5 times larger than what it was six years before (from Tk. 816 billion in FY2014-15 to). ADP expansion supports progresses in critical projects nationwide, mainly in the form of construction of roads, bridges, highways, flyovers, and government mega-projects such as Padma Bridge, Payra Deep-Seaport, Metro Rail, Ruppur Nuclear Power Plant, etc.
– Among the broad sectors, communication infrastructure got the top priority, which is reflected by the highest figure of ADP between FY217-20.
– The proposed ADP 2020-21 reaffirms the highest priority in the communication sector.
– ADP under Food & social safety got greater importance especially to combat the COVID-19 pandemic. In this context, the total stimulus package for the COVID-19 pandemic is proposed at Tk. 1,031 billion for FY2020-21 to combat against the adverse economic impacts.
Financing the Budget
Tax revenue for FY2020-21
– The total tax revenue target for FY2020-21 is Tk. 3,780 billion which is 9% higher than the revised budget of 2019-21; the figure looks ambitious due to the COVID-19 driven socio-economic crisis.
– About 58% of the budget 2020-21 will be financed by NBR tax revenue, which is challenging given the economic slowdown.
– Of the NBR tax revenue targets, Income Tax and Value Added Tax (VAT) are set to earn 31% and 38% revenue respectively.
– Excise duty target is lowered by Tk. 16.6 billion compared to the revised budget of 2019-20. This will favor the local manufacturers to some extent.
– The non-tax revenue target for FY2020-21 is estimated to reduce by Tk. 20 billion compared to the revised budget of 2019-20.
– Non-NBR tax accounts for 4% of the total tax plan, of which 79% Non-NBR tax revenue is set to arise from the selling of Non-Judicial Stamps.
Domestic borrowing FY2020-21
– About 69% (Tk. 2419 billion) of the domestic debt will be sourced from the banking sector, which is 7% or Tk. 168 billion higher than the revised budget 2019-20 figure. Increased government borrowing may slowdown private sector credit growth; this could lead to fewer private investment and deceive tax revenue targets.
– Borrowings from non-banking sources are proposed to be Tk. 1,080 billion for FY2020-21, which is 3% higher than the revised budget of 2019-20.
– The government also shows increased reliance on direct public borrowing, as 83% non-banking are set to arise through National Savings Schemes compared to 76% in the previous year.
– Compared to the previous year, an increased National Savings Certificates (NSC) of additional Tk. 97 billion is planned; this may further deepen the liquidity crisis in the banking sector and capital markets, as NSCs generally offer double-digit interest rates.
– Overall domestic debt to rise by Tk. 204 billion or 6% in comparison to the revised budget of 2019-20
Tax changes (FY2020-21)
Proposed income tax for FY2020-21
– The proposed tax-free income limit for the individual taxpayers is raised to Tk. 3 lac from existing Tk. 2.5 lac to give relief to people in the lower-income bracket, in an effort to allow low-income people to mitigate the pandemic better.
– The minimum and maximum income tax rates are reduced to 5% and 25% respectively, from the current 10% and 30% to facilitate economic relief from COVID-19 effects.
– The proposed rise in the tax-free income threshold for women and senior citizens physically challenged people and gazetted war-wounded freedom fighters to Tk. 3.50 lac, 4.50 lac, and Tk. 4.75 lac respectively from the current levels of Tk. 3 lac, Tk. 4 lac, and Tk. 4.25 lac.
– The proposed income tax rates for the non-listed companies to change from 35% to 32.5%. The other sectors’ tax rates would remain unchanged.
Capital market incentives
– The budget proposes an investment of undisclosed money to the capital markets by paying a 10% tax, which is subject to a lock-in period of 3 years from the date of securities purchase. The undisclosed funds will be allowed for investment only in Real estate, Banks as deposits, Savings certificate, and Capital market.
– No authority including the NBR will raise any question on investing the undisclosed money to the capital markets if the 10% tax is paid.
– The tax-fee limit of dividend income has been proposed at Tk. 50,000 instead of existing Tk. 20,000.
– Double taxation on dividends from listed companies is set to be removed.
– The budget proposes to make the mandatory provision of a declaration of the cash dividend on at least 50% of the total dividend payment made by any listed company.
– Introducing withholding tax deduction on the trading commission (transaction cost) fixed by the Securities and Exchange Commission, instead of the current provision of deducting the tax being charged on the value of bond transactions.
– Provision of Tax Deduction at Source (TDS) on interest payment and discount on bonds has been proposed instead of existing provision of deduction at source tax upfront on interest payment and discount.
Possible implications of the stock market measures
Budgetary measures for different sectors and stock market implications
– The 8.2% growth target is over-optimistic as COVID-19 recovery remains highly uncertain.
– 5.68 trillion budget size is 13% higher than the previous year; implementation remains a big challenge.
– 3.78 trillion revenue targets are challenging considering the ongoing economic slowdown.
– 2,419 billion borrowings from banking sources are likely to drive away private sector credit supply, which could contradict with the tax revenue targets outlined.
– Increases in personal tax-free income limit will help COVID-19 driven economic woos by increasing consumer spending and demand for goods and services, particularly for low-income households.
– Most of the proposed tax, VAT, and duty rescheduling may benefit local industries; many listed companies in different sectors in the stock market will be able to boost financial and business performance.
– Whitening the black money to the capital markets, real estate, bank deposits, and savings certificates may increase liquidity in the financial markets.
– The black money option however may not benefit the stock market much since potential investors might choose to opt for risk-free alternatives such as bank deposits and savings certificates.
You can download the full report here: RCL Bangladesh National Budget Analysis 2020-21