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Macroeconomic framework for the economy of Bangladesh

Khondker, Bazlul Haque and Raihan, Selim (2008): Macroeconomic framework for the economy of Bangladesh.

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Abstract

The Asian Development Bank (ADB) provided support to the MOF to formulate a user-friendly and easily transferable computable general equilibrium (CGE) model to reflect the effect of changes in various public policies and forecast changes of fiscal policy on different sectors of the economy. However, given the difficulties posed by institutionalization of the CGE model and the priorities of the Finance Division, it was agreed that the modeling exercise should be compatible with the financial programming framework. Furthermore, it was agreed that the consultant team would improve the existing macro-economic framework maintained by the Finance Division. In accordance to their recommendation, the following features are added to the existing framework.

• Introduce behavioral specifications for some key variables — namely production behavior, revenue functions, capital formation, private investment functions, private consumption etc. • Improve the interdependence between variables of different blocks namely between real side and government budget; government budget, money and BOP; money and real side. • Introduce policy instruments to expand the simulation possibility. The range of instruments may include direct and indirect tax rates, tax base, subsidy, exchange rates etc. • It is argued that the transfer of technology to run the proposed model partly depends on the simplicity and user’s friendly feature. Although, the simplification limits the simulation capability of the model, considering the important objective of technology internalization the model will be constructed in an ‘Excel’ spread sheet. • The following provides specifications of the macro-economic framework. In accordance to the existing practice, the macro-economic framework contains blocks: Real side; Government Budget; Money; and Balance of Payment. In addition to these blocks, a debt block is appended to capture debt dynamics.

Data period considered in this framework is 2002 to 2007. Almost all data used in the macro-economic framework has been provided by the Finance Division and the FMRP project. Breakdown of value added (i.e. GDP) by labor value added and capital value added was obtained from the updated social accounting for Bangladesh for 2005. World Economic Outlook forecasts were reviewed to get parameters for external sector (e.g. world price of imports and exports, world inflation rate etc.).

It is important to note from the objective and purpose of the ‘financing programming’ that, it is essentially a framework to assess the financing options in accordance to a targeted economic growth and inflation rate. In contrast to the simulation feature of a CGE model, it is primarily an accounting framework limiting the scope to conduct policy simulations. Moreover, it is specified at the macro level restricting the scope of sectoral impacts analysis and output generation. Despite its’ limitation as a simulation framework, a number of scenario generation capabilities are incorporated. A possible list of policy simulations available in the framework is given below:

• Altering indirect tax bases (both domestic and external) various types of indirect tax bases. For instance, these may include bases of VAT, excise duty, import duties, supplementary duty, and all other taxes. • Altering indirect tax rates. For instance, these may include VAT rates, excise rates, import duties, supplementary duty and other rates. • Expanding direct tax bases by raising the threshold, reducing the exemption and deduction levels. • Changing the direct tax rates. For instance, these may include personal income tax rates, and corporate tax rates. • Expanding non-tax revenue sources. • Expanding the coverage of the government expenditure program both re-current and capital. For instance, full or partial indexing of pay-allowance item to CPI. • Re-setting world price of imports. • Re-setting the growth rates of various components of money and credit. They include private credit growth; net other asset growth etc. Variations in them affect net domestic assets leading to changes in money supply. • Re-setting the growth rates of various balance of payment. For example, they include current transfer; loan disbursement, grant disbursement. Variations in them affect current account balance and resources for deficit-financing implicating the requirement for bank borrowing.

The projection outcomes cover period 2008 to 2015. Outcomes coverage include: (i) incomes and prices; (ii) government income, expenditures, budget deficit and their financing sources; (iii) money supply and usage by components; and (iv) receipts from and payments to the external sectors and balances of current and capital accounts. An indicator table is always available for each simulation.

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