Chapter 5 Budget System (Final Word File)
Chapter 5 Budget System (Final Word File)
ON
“Chapter 5: Budget System”
COURSE: Public Finance
COURSE CODE: 306
Submitted To:
Dr. Jannat Ara Parveen
Professor
Department of Finance
University of Chittagong.
Submitted By:
Team Rainbow &Team Arbitrators
(Details enclosed in file)
BBA 6th Semester
Session: 2018-2019
Department of Finance
University of Chittagong.
Date of Submission: ,February,2023
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Table of Contents
5.1 Understanding Budget ............................................................................................... 3
5.1.1 Defination of Budget and Budget system ............................................................ 3
5.2 Nature of Budget: ...................................................................................................... 4
5.2.1 Some noteworthy features of a budget: .............................................................. 4
4.Budgeting Cycle ............................................................................................................ 9
4.1 Budget Preparation............................................................................................... 10
4.2 Getting the Budget Approved: .............................................................................. 11
4.3 Implementation and Execution: ............................................................................ 12
4.4 Audit and Review .................................................................................................. 13
5. Budget Principles .................................................................................................... 14
6. Performance Budget ............................................................................................... 18
6.1 Definition .............................................................................................................. 18
6.2 Purpose: ............................................................................................................... 18
6.3 Characteristics of Performance Budgets: .............................................................. 18
6.4 Performance Budget Process ................................................................................ 19
6.5 Advantages ........................................................................................................... 21
6.6 Disadvantages ................................................................................................... 21
7. National Budget FY 2022-2023 At a Glance ............................................................ 22
8. Sources of resources and Use of resources in Budget FY 2022-23: ......................... 23
9. 1Limitations of Budget:........................................................................................... 24
9.2 How to overcome from these limitations; ............................................................ 25
10. Reference ............................................................................................................ 26
11. GROUP DETAILS: ................................................................................................. 27
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5.1 Understanding Budget
A budget is an estimation of revenue and expenses over a specified future period of time and is
usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person,a
group of people ,a business, a government ,or just about anything else that makes and spends
money. The budget of a government is a summary or plan of the intended revenues and
expentidures of that government .There are three types of government budget=the operating or
current budget,the capital or investment budget, and the cash or cash flow budget.A budget
helps create financial stability .By tracking expenses and following a plan,a budget makes it
easier to pay bills on time, build an emergency fund, and save for major expenses such as a car
or home. Overall, a budget puts a person on stronger financial footing for both the day to day
and the long term.
A budget is financial plan for the coming period,setting out goals with the allocation of
resources needed for the achievement of those goals. A budget is an estimation of revenue
and expenses for a specified period of time, typically used by individuals, households, and
organizations to plan and manage their financial resources.
The government budget refers to the budget of the central or federal government, which
outlines its estimated revenue and expenses for the next fiscal year. The government budget
encompasses a wide range of spending and revenue sources, including taxes, grants, subsidies,
and borrowing.
A budget system refers to the set of processes and procedures used by the government to
prepare and execute its budget. This includes the formulation of budget proposals, the
allocation of resources, and the monitoring and control of expenditures. The budget system
aims to ensure that the government's financial resources are being used in a transparent and
accountable manner to achieve its objectives and priorities.
The Budget Act,2001 defines the budget as “the process by which Government sets levels to
efficiently collect revenue and allocate the spending of resources among all sectors to meet
national objectives.”
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5.2 Nature of Budget:
The budget should necessarily be integrated with the corporate plan. The budget defines targets
in concrete and quantitative terms for the firm as a whole as well as for each functional area. It
provides guidelines on how to achieve these targets. It is more administrative and persuasive in
nature as compared to the corporate plan and its preparation is the responsibility of line
managers.
The budget usually covers a one-year period with a monthly or quarterly break-up. Preparation
of such a budget requires analysis of the present capacity (assets and people) and financial
position of the firm and formulation of assumptions about the external environment, such as the
state of the economy, the behavior of the competitors, and the current and prospective demand
in the market.
Some organizations follow the ‘continuous (rolling) budget system’. Under this system, at the
end of each month or quarter, the month or quarter just ended is dropped and the subsequent
month or quarter is added. The greatest advantage of this budget over the periodic budget is that
it constantly forces management to think concretely about the forthcoming twelve months.
Under this system, at any point in time, a plan for the next twelve months is available.
However, a better system is to prepare the budget for a year, broken down into monthly
budgets, and to complement the budget with the rolling forecast. Actual results should be
compared with both budget targets and the forecast. Investigation into the causes of variances
as compared to the budget provides better learning because managers get an insight into where
they erred in formulating budget premises.
8. Reduction of debt: A budget can be used to create a plan for reducing debt, such as paying
off credit card balances or student loans.
9. Saving and investing: A budget can help individuals and organizations allocate funds
towards saving and investing, allowing them to grow their wealth over time.
10. Improved cash flow: A budget can help improve cash flow by identifying areas where
expenses can be reduced and by ensuring that income is being used efficiently.
11. Enhanced decision-making: A budget provides individuals and organizations with the
information they need to make informed financial decisions, such as choosing between
different investment options or determining the affordability of a major purchase.
12. Transparency: A budget provides transparency into an individual's or organization's
financial activities, enabling them to identify and address any areas of concern or
inefficiency.
13. Responsibility and accountability: A budget fosters responsibility and accountability by
encouraging individuals and organizations to take control of their finances and be mindful
of their spending habits.
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-
Balanced
budget
1.According to
the Surplus budget
5.3 Types of government
1. Long term
Budget
2. Based on
Time
2. Short-term
Budget
1.Basic budget
Budgets 3. Based on
Condition
2.Current
budget
1.Master
budget
4. Based on
Function
2.Functional
budget.
1. Fixed budget
(Static Budget)
5. Based on
Flexibility.
2. Flexible
budget
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1. According to the government, the budget is 3 types: Balanced budget, Surplus budget,
Deficit budget.
Surplus Budget: when estimated govt. receipts are more than the estimated expenditure it is
termed a surplus budget. When the govt. spends less than the receipts the budget is used either
to reduce govt. public debt or increases its savings.
Deficit Budget: when estimated expenditure exceeds the govt. receipts are termed as a
deficit budget. In modern economies, most of the budgets are of this nature. A deficit budget
increases the liability of the govt. or decreases its reserves. A deficit budget may prove useful
during a period of depression, economic activities are at a low level. It results in
unemployment, business loss, and even bankruptcy and inflation, etc.
2. Short-term Budget.
Short-term budget: This budget is drawn usually for one year. Sometimes a budget may
be prepared for a shorter period (like monthly, quarterly, etc.) Example- A material
consumption budget, Labor utilization budget. Cash budget etc.
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3. Based on condition budget is classified into 2 types:
1. Basic budget and
2. Current budget.
Basic budget: A budget that is established for use as unaltered over a long period is called
basic budget. This budget is useful for top-level management for formulating policies.
Current budget: A budget that is established for use over a short period and is related to
the current condition is called the current budget. This budget is adjusted to the current
condition prevailing in the business.
Master budget: The master budget shows the operating profits of a business for the
business period and the budgeted balance sheet at its close. The budget portrays the overall
plan for the budget period.
Functional budget: Functional budget relates to the function of the business. In other
words, functional budgets are prepared in respect of various functions performed in a business.
Example – Sales budget, Production budget, Material budget, cash budget etc.
2. Flexible budget.
Fixed budget: Fixed budget is a budget which is designed to remain unchanged irrespective
of the level of activity attained. Fixed budget is ineffective as a tool of cost control.
Flexible budget: This budget designed to change by the level of activity attained. The
flexible budget amount for a specific level of activities determined differently depending on
whether a cost is variable or fixed.
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4.Budgeting Cycle
Meaning: A budget cycle is the life of a budget from creation or preparation, to evaluation. Most small
businesses don't use the term “budget cycle” but they use the process and go through each of its four phases
— preparation, approval, execution and evaluation.
In other word, the budget cycle is the process by which a government, business, or other organization
prepares, approves, implements, and reviews its budget. The budget cycle typically involves several stages,
including budget preparation, budget approval, budget implementation, and budget review and evaluation.
The budget cycle is an ongoing process that is repeated each year or as needed, with the goal of ensuring
that the organization's financial resources are used effectively and efficiently.
The budget cycle is an important tool for ensuring the efficient and effective use of financial resources and
for providing transparency and accountability in decision-making. The specifics of the budget cycle may
vary depending on the type of organization and its budgeting process, but the general principles remain the
same.
The budgeting cycle primarily involves four phases: preparing and submitting, approving, executing,
and monitoring.
Budget
Preparation
Audit
and
Budget Legislative
Approval
Review Cycle
Implementation
and Execution
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4.1 Budget Preparation
The first phase in the budgeting cycle is to create the budget. A business must use its leadership vision to
decide on what to include and exclude from the budget. Also, the management should take the suggestions
and recommendations of the ground-level employees. A budget must include targeted revenue and the
estimates of expenses that a business needs to incur to meet the revenue targets. Also, the budget should
consist of any improvements that a company expects to go for in the near term.
Once the budget is ready, it needs to be approved by the department heads and the top management. The
preparation of the Budget involves the Ministry of Finance, along with multiple bureaucrats. Before the
Budget is prepared, expert advice is also taken from economists and other stakeholders
The cycle includes the following steps;
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4.2 Getting the Budget Approved:
Typically, the legislature has the power to approve or reject a proposed budget. They review it and vote. If
approved, it moves into the implementation phase.
Approving the budget is not just a simple yes or no. Instead, it may involve extensive debates before a
budget gets final approval. A budget may move back and forth for edits and corrections until all parties
approve the document. The budget should get approval only after the review, discussion, edit, and
corrections (if any).
The government budget approval process;
In Bangladesh, the government budget approval process typically involves the following steps:
1 .Preparation: The Ministry of Finance prepares the budget proposal, taking into account the needs
of various government departments and considering the country's economic situation.
2. Presentation to the Cabinet: The budget proposal is presented to the Cabinet, which reviews and
approves it.
3. Submission to Parliament: After Cabinet approval, the budget proposal is submitted to Parliament
for discussion and approval.
4. Parliamentary debate: The budget proposal is debated in Parliament, with members of the ruling
party and the opposition discussing and making changes to the proposal as needed.
5. Approval by Parliament: Once the budget proposal has been debated and any necessary changes
have been made, it is approved by a majority vote in Parliament.
6. Implementation: Once the budget has been approved, it is implemented and the government
carries out the projects and initiatives outlined in the budget.
This process is subject to change, but these are the general steps involved in the government budget
approval process in Bangladesh.
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4.3 Implementation and Execution:
Once you get the approval for the budget, the next step is to start executing it.
The execution of the budget usually starts with the beginning of the accounting
period. It is the duty of the executive branch - primarily involves distributing the
budgeted resources to their designated recipients within the government and
spending it as planned.
1.Allocation of
resources
2.Implementation of
projects and programs
3.Monitoring and
evaluation
4 .Adjustments and
revisions:
5. Reporting and
accountability
6. Financial control and
auditing
In Bangladesh, the budget implementation and execution process typically involves the following steps:
1. Allocation of resources: The approved budget is divided among various government departments
and agencies for implementation.
2. Implementation of projects and programs: The government departments and agencies carry out the
projects and programs outlined in the budget.
3. Monitoring and evaluation: The government regularly monitors and evaluates the progress of the
budget implementation to ensure that the projects and programs are being carried out effectively and
efficiently.
4. Adjustments and revisions: Based on the monitoring and evaluation results, the government may
make adjustments and revisions to the budget implementation as needed.
5. Reporting and accountability: The government provides regular reports to the public on the progress
of the budget implementation and is held accountable for its use of resources.
6. Financial control and auditing: The government's financial control and auditing agencies ensure that
the budget is being implemented and executed in accordance with the approved plan and the
financial regulations of the country.
This process may vary slightly depending on the specific government and its budget implementation
process, but the core steps generally remain the same in Bangladesh.
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4.4 Audit and Review
A company or an individual should regularly evaluate the budget. Regular evaluation helps make timely
revisions to the budget based on internal and external factors. These changes could be revising revenue
targets, adjusting costs, or making an adjustment to the budget with any newly available information.
Regular evaluation is also necessary to identify variance if any. Variation is the deviation of the actual
spending from budget spending. Even when evaluating the budget, the focus should be on boosting profits.
A final evaluation of the budget is done after the end of the accounting period. This evaluation provides the
overall feedback on the budget, including how accurate it was, cash flow management, and more. Such
feedback helps in the preparation of the next budget and assists management in making better financial
decisions.
The government budget audit and review process;
3.Review of
1.Internal audit 2.External audit financial
statements
In Bangladesh, the government budget audit and review process typically involves the following
steps:
1. Internal audit: The government's internal audit agencies, such as the Controller General of
Accounts and the Internal Audit Wing of the Ministry of Finance, conduct regular audits of the
budget implementation to assess the use of resources and ensure compliance with financial
regulations.
2. External audit: The government may also conduct external audits, such as by the National Board of
Revenue or the Office of the Comptroller and Auditor General, to assess the effectiveness of the
budget implementation.
3. Review of financial statements: The government reviews the financial statements of government
departments and agencies to ensure that they are in compliance with financial regulations and that
the budget implementation is being carried out effectively.
4. Feedback and adjustment: Based on the results of the internal and external audits, the government
may make adjustments to the budget implementation to improve its effectiveness.
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Reporting and accountability: The government provides regular reports to the public and
relevant stakeholders on the results of the budget audit and review process, and is held
accountable for its use of resources.This process is subject to change, but these are the general
steps involved in the government budget audit and review process in Bangladesh. The goal of
the audit and review process is to ensure that the budget is being implemented effectively and
efficiently, and to make any necessary adjustments to improve its impact.
5. Budget Principles
The budget is a central government policy document, showing how it will prioritize and achieve
its annual and multi-annual objectives. Apart from financing new and existing programs, the
budget is the primary instrument for implementing fiscal policy, and thereby influencing the
economy as a whole. Budget principles deal with the various phases of the budget process, the
attributes of the budget document, as well as the wider context within which budgets are
formed. Budget principles are the recommendations or guidance on specific elements of the
overall budgeting framework.
1. Budgets should be managed within clear, credible and predictable limits for fiscal
policy:
• A sound fiscal policy is one that avoids the build-up of large, unsustainable debts,
and which uses favorable economic times to build up resilience and buffers against
more difficult times.
• At a minimum, governments should have a stated commitment to pursue a sound
and sustainable fiscal policy.
• Overall budget targets for each year should ensure that all elements of revenue,
expenditure and broader economic policy are consistent and are managed in line
with available resources.
2. Budgets should be closely aligned with the medium-term strategic priorities of the
government:
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structure the budget allocations in a way that corresponds readily with national
objectives.
• The CBA should have a close working relationship with the other institutions at the
Centre of government, given the inter-dependencies between the budget process and
the achievement of government-wide policies.
• From time to time, governments may need to revisit or realign their fundamental
priorities to take account of developments in the economy or in society.
Capital investment plans, which by their nature have an impact beyond the annual budget,
should be grounded in objective appraisal of economic capacity gaps, infrastructural
development needs and sectorial/social priorities. The budgeting process should require a
prudent assessment of the costs and benefits of such investments; affordability for users over
the long term, including in light of recurrent costs; relative priority among various projects; and
of overall value for money. Investment decisions should be evaluated independently of the
specific financing mechanism
• Clear, factual budget reports should be available to inform the key stages of policy
formulation, consideration and debate, as well as implementation and review. The
annual budget document itself, which shows the allocations for each public service
area and revenue policy measures under each tax heading, is of central importance.
• All budget reports should be published fully, promptly and routinely, and in a way
that is accessible to citizens.
• As well as having access to budget documents and data, parliament and citizens should
be able to engage with and influence the discussion about budgetary policy options,
according to their democratic mandate, competencies and perspectives.
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6. Budgets should present a comprehensive, accurate and reliable account of the public
finances:
• As a contract of trust between citizens and the state, it is expected that the budget
document should account comprehensively and correctly for all expenditures and
revenues of the national government, and that no figures should be omitted or hidden
(although limited restrictions may apply for certain national security or other legitimate
purposes).
• Budget accounting should show the full financial costs and benefits of budget
decisions, including the impact upon financial assets and liabilities. Accruals budgeting
and reporting, which correspond broadly with private sector accounting norms,
routinely show these costs and benefits; where traditional cash budgeting is used,
supplementary information is needed. Where accruals methodology is used, the cash
statement should also be used to monitor and manage the funding of government
operations from year to year.
• Once authorized by parliament, the budget allocations should be implemented fully and
faithfully by the agencies of government, with oversight throughout the year by the
CBA and line ministries as appropriate.
• Budget execution reports, including in-year and audited year-end reports, are
fundamental to accountability. Such reports, if well-planned and -designed, can yield
useful messages on performance and value-for-money to inform future budget
allocations.
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8. Performance, evaluation and value for money should be integral to the budget process:
• Parliament and citizens need to understand not just what is being spent, but what is
being bought on behalf of citizens – i.e. what public services are actually being
delivered, to what standards of quality and with what levels of efficiency.
• In particular, all substantive new policy proposals should be routinely and openly
evaluated ex ante to assess coherence with national priorities, clarity of objectives, and
anticipated costs and benefits.
• Periodically, governments should take stock of overall expenditure and reassess its
alignment with fiscal objectives and national priorities, taking account of the results of
evaluations. For such a comprehensive review to be effective, it must be responsive to
the practical needs of government as a whole.
9. Longer-term sustainability and other fiscal risks should be identified, assessed and
managed prudently:
10. The integrity and quality of budgetary forecasts, fiscal plans and budgetary
implementation should be promoted through rigorous quality assurance including
independent audit:.
• The CBA needs to command the confidence of a broad range of stakeholders – across
government, within parliament and the public, and internationally – in the quality and
integrity of its budgetary forecasts and fiscal plans and in its ability to manage
budgetary implementation and delivery.
• Independent internal audit is an essential safeguard for the quality of integrity of budget
processes and financial management within all ministries and public agencies.
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6. Performance Budget
6.1 Definition; A performance budget is a budget that refers to programs, functions,
and performance that reflects the estimated expenses and revenues of the companies,
Government, or Statutory bodies. It is a budget that provides the objective and purpose for
raising funds and proposed activities and programs to be accomplished.
It is aimed to improve the efficiency of the people involved in performing the budgeted task as
per the budget.
6.2 Purpose: A performance budget is mainly aimed at evaluating whether the budgeted
task is being carried out as planned and measuring the performance involved in the budget
procedure. The purpose is to ensure the performance is as per the budgets and workings are
being done smoothly and the persons performing their task with utmost responsibility along
with efficient utilization of the funds raised and achieving the objectives.
Enhanced Communications
It helps enhance the communications as there are personal responsibilities in performing their
work, which will result in clear and improved communication to avoid any delay in achieving
the program’s objective and helps in the individual performances of the management.
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Better Decision Making
It helps in deciding with the help of a better understanding of the processes. Then, with the help
of proper information, the management can implement techniques for improvement and take
appropriate actions to resolve the issues involved.
• Formulation of Objectives
Step-1
• Financial Planning
Step-5
It is the initial step to formulate the objective as to what to achieve. It is essential to set the
objectives, and then only the designated tasks can be allocated to the teams based on their
abilities.
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The second stage is to identify the process and plan, which will help achieve the objectives—
various processes and strategies that can be introduced to the program to achieve the objective.
After identifying various processes and plans, the most profitable and easy to communicate and
implement plans and processes should be evaluated and selected to achieve the objectives.
It is another step to developing the criteria on which the processes and plans will be rolled out.
It is also essential to develop a basis to measure the performances of the persons involved in the
processes.
After developing the processes and identifying the steps involved, it is required to plan for the
financial requirement and prepare a financial budget for the processes planned.
After rolling out the processes, it is vital to measure the performance given by the persons
involved in the process to initiate the actions accordingly. In addition, it is crucial to see whose
performance was up to the mark and what changes are required to be made.
It is the final step that corrects the deviations in the process and performance. Also,to make the
required changes in both the process and performance to remove all those deviations.
1. 80% reduction in the patients suffering from Malaria & Dengue by 2020.
2. 20% decrease in manufacturing waste by introducing staff training in the manufacturing
process;
3. 50% reduction in the infant mortality rate through the successful implementation of
vaccination centers in different parts of the country by 2021;
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6.5 Advantages
There are the following advantages:
· Clear Purpose: It provides a clear purpose for budgeting and provides a clear understanding
of the performance of the persons involved. It becomes easier to access the deviations and the
performances and correct them.
Sets Accountability: Since this budget provides a clear understanding of the roles to be
performed and tasks to be completed by the persons, it provides accountability to every person
for their roles and tasks, and they will be held accountable for their part of the work.
6.6 Disadvantages
Following are the disadvantages:
It is difficult for the long-term processes as there is a continuous update in the
processes;
There can be the possibility of manipulation of data;
There is a requirement for a robust system of
accounting;
These budgets are subjective.
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7. National Budget FY 2022-2023 At a Glance
Income
Financing
Expenditure
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9. 1Limitations of Budget:
1. Political Constraints: The government budget is often subject to political
pressure and compromise, leading to compromises on priority spending.
2. Limited Resources: Governments have limited resources, and the budget must reflect
this constraint. It must balance the need for essential spending with the need for
revenue generation.
3. Inflexibility: Government budgets are often set for a specific period, usually one year,
and can be difficult to change once they have been established.
7. Lack of Transparency: The government budget process can be opaque, and it may be
difficult for citizens to understand how their tax dollars are being spent.
8. Interest Payments: The government may have to allocate a significant portion of its
budget towards interest payments on debt, leaving less room for other priorities.
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11.Inadequate Investment in Public Goods: The government budget may not always
provide adequate investment in public goods such as infrastructure, education, and
research and development.
12.Regional Disparities: The allocation of resources in the government budget may not
always reflect regional disparities and the needs of different regions.
13.Limited Room for Experimentation: The government budget is often set for a
specific period and may not provide adequate room for experimentation and
innovation in public policy.
3. Flexible Budgeting: Implementing more flexible budgeting processes that allow for
adjustments during the fiscal year can help governments respond to unexpected events
and changes in circumstances.
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5. Improved Resource Allocation: Governments can implement more efficient resource
allocation processes that prioritize spending on public goods and allocate resources
based on need rather than political considerations.
6. Reduction of Debt: Reducing government debt can free up resources for spending on
other priorities and reduce the amount of the budget allocated to interest payments.
7. Investment in Technology: Investing in technology and digital tools can improve the
efficiency and transparency of the budget process and provide better information for
decision-making.
10. Reference
1. Garrison, Managerial Accounting
2. V.Rajasakaran and R. Lalitha, Cost Accounting
3. https://www.oecd.org/
4. http://www.bb.org.bd/
5. http://www.investopedia.com/
6. Ministry of Finance, Government of the People's Republic of Bangladesh
7. International Monetary Fund - IMF
The end
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11. GROUP DETAILS:
Team Rainbow
No. ID Name
1. 19303114 Julekha Akhter (L)
2. 19303119 Tamanna Tabassum Tonni
3. 18303112 Sadia Noor
4. 19303065 Nipa Rani Das
5. 19303122 Nishat Tara Nur
6. 19303108 Meher Afroz
7. 19303035 Abdur Rahim
8. 19303121 Asikul Hossen
9. 18303095 Md Shakib
10. 18303129 Neori Rakhain
11. 19303127 Abdul Wazed Chowdhury
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