Local Self-Government Finance and Financial Management in Bangladesh: Issues and Challenges

Abstract

Local governments in developing countries are failing to cope with the increasing demand for developmental activities and local services. Insufficient functional assignment, financial weakness and inequitable distribution of the resources and poor managerial performance are responsible for this failure. The purpose of this study is to investigate the current state of the local government finance and financial management at union level in Bangladesh. Within the financial perspective the analysis concentrates on the scope and structure of the expenditure and revenue and the intergovernmental transfers of UPs. This thesis also describes the components of financial management - revenue generation, planning, budget, financial information and control at UP level in Bangladesh. Finally, it stipulates and demonstrates a strategy for reform to provide a sound financial base for UPs. The study is based on data and information of the different ministries of Bangladesh and six selected UPs. The study was conducted for the period from July 2009 to September 2011. Against this background, the research study seeks to provide an explanation of how the local government financial system works at Union level in Bangladesh. To investigate these questions, I employ both qualitative and quantitative research within a framework of public finance. It is evident from the present study that the structure, composition and tenure of the elected bodies are not specified in the constitution. It hampers to perform the functional responsibilities of the elected representatives smoothly. The constitution is also silent about the fiscal transfers/grants. UP finance and financial management are guided by a set of legislations. The primary law, rules, regulations, guidelines, circulars, and policies for UP finance and financial management have been developed over the last fifty years. The sources of the statutes are different. So it creates difficulty to know about the statutes. As a result it is very common that the UP functionaries and the stakeholders are ignorant about the statutes that hamper the proper implementation of laws. The legal framework on the assignment of expenditure responsibilities to UPs is very weak. The laws are vague about the exact expenditure responsibilities of UPs. Practically the principle of subsidiarity is not followed for the assignment of the functions to UPs. Resources as well as staffs working at union level also remain under the control of the Government. The study reveals that the share of local government in GDP is very low. Only in the year of 2007-08 it was just over 1 % of GDP. Though 77 percent of people in the country live in the area of UPs, their expenditure share as percentage of GDP is less than 0.2 percent. The largest portion of expenditure has been spent for the development purposes. The major heads of development expenditures include agriculture, road construction and maintenance, and health and sanitation. These categories account for 70-90 percent of total expenditures of the UPs. The total and per capita expenditures of the study UPs shows that there is significant variation among them. So the present trends are not favorable for an equitable system. It is found that equitable allocation of the resource is not followed not only among the UPs but also within UP. The resource allocation is not determined based on statistical or economical perspectives but on socio-political factors. The dependence of UPs on transfers on the government was very high. In the year of 2007-08 and 2008-09, the own contribution in expenditure at the UP level was 10.52 and 4.84 percent respectively. The per capita expenditure of UPs is very low. In Bangladesh, tax policy and tax administration are basically under the grip of the central government. The most important sources of revenues in Bangladesh are collected by the central government. Local governments have no choice over the tax base and very little discretion on the rates of the assigned tax. The UPs are empowered to collect revenues: from local sources and the tax base is very small. The revenue collected by the local government institutions in Bangladesh is very insignificant. The revenue yield of UPs is also very low. Average annual growth is very trivial. The data show that there is variability in per capita revenues of the study UPs. Coefficient of variation of the collected revenue sources even exceeded 100 percent. The variability showed for all the major revenue sources of the sampled UPs. The holding tax is the principal tax item for UPs. Fees are the second largest own sources of revenue for UPs. The full revenue potential of UPs is not exploited. Poor administrative capacity and other socio-political factors are responsible for low revenues generation. Central government transfers are the major source of revenue for the local government in Bangladesh. It is the source of more than 80 percent of local government expenditure. Nevertheless in terms of GDP, the share of intergovernmental transfers to the UPs is a relatively low in comparison with other developing countries. Transfers in Bangladesh are determined by ad-hoc decisions. There are formulas in allocation of the transfers but they are not strictly followed for absence of reliable data. Population and area are the two weight age to determine Union level allocation. The population data are used from the census 2001. There is no backwardness data at Union level, for this reason backwardness criterion is totally ignored. So it is difficult to develop an equitable grant system. There is uncertainty in receiving grants timely. UPs do not know when the national government will transfer the money. For those allocations received in May and June there is substantial time stress to select, plan and implement the works before the arid of the financial year. For this reason poor infrastructural development and services are inevitable. It is evident from the regression analysis that the need factors are not considered in the allocation of the FFW (Special) and TR (Special) grants at UP level. These types of grants could be used to balance specific problems not accounted for by the general grants. Yet, political intervention and pressure appear to be vital determinants of the allocation of these types of grants. So, these types of grants are a barrier in developing as a horizontally equitable grant system at union level in Bangladesh. Fiscal equalization system based on the fiscal needs of the UPs should be implemented for reducing the inequalities of unions in revenues and facilitate the UPs to provide a national minimum standard of local public goods. In Bangladesh, participatory planning and budget has been introduced at UP level that is essential for a transparent allocation system at local level. Absence of the pre-requisites of this type of budget hampers in full implementation of the practice. For a successful progression of the process, it is needed full support and joint action of government, UP functionaries, civil society and NGOs. Accounting is the basic financial record-keeping and expenditure control tool of local government and potentially the most valuable information system available to local functionaries. In this provision UPs are very weak due to absence of professional accountant. Access to financial information of the local people is very rare. The prov1s1on of the proactive publicly disclose of the financial statement is never happened at this level of local government in Bangladesh. However, transparent accounts are not possible at without government intervention in this area. An effective system of audit is crucial to the integrity and efficiency of local government. Ideally, civil society should also have access to them since auditor and UP functionaries may join together in mismanagement of public money. In practice, public access to external audit reports is more restricted in UPs. Even the members of the Parishad are also not involved in the process. Most of the stakeholders and functionaries believe that the existing audit system is not favorable for reducing corruption.