In the wake of dwindling forex reserves and dipping remittance income, the government’s austerity measures such as upping letter of credit (LC) margins for luxurious products, imposing higher duty on those items and releasing less funds in government projects to insulate the local economy from the global economic headwinds are likely to hold back the country’s revenue in FY24.
The World Bank in its latest “Bangladesh Development Update” for October this year said, “In the near-term or in FY24, the country’s overall revenue growth is likely to remain tepid as a result of muted imports.”
“The fiscal deficit is expected to remain within the government's target of 5.5 per cent of GDP, with a moderate increase in revenues,” according to the update published by the World Bank Dhaka office at a press conference on Tuesday as part of a broader report covering the South Asian region.
“Current expenditure growth in the near term may be subdued if austerity measures are effective. These include pause in the purchase of new vehicles and foreign travels of government officials, and stricter rules on expenditures related to land acquisition. Without major structural changes, the revenue-to-GDP ratio for Bangladesh is likely to remain one of the lowest in the world at below 10 per cent of GDP,” it added.
It said that as trade-related taxes–which accounted for almost one-third of total taxes–declined due to a sharp fall in imports, the country’s revenue-to-GDP saw a reduction to an estimated 7.9 per cent in FY23 compared to 8.5 per cent in FY22. Besides, income tax collection also slowed as a result of muted profits by firms and slowing private consumption was also reflected in an 8.6 per cent decline in consumer goods imports and weak domestic VAT collection.
“A surge in inflation eroded consumer purchasing power, contributing to a deceleration in estimated private consumption from 7.5 per cent to 3.5 per cent in FY23.”
The update stated that over the medium term or more precisely during LDC graduation, revenues will rise with increasing trade, improving domestic economic activity, higher incomes, and ongoing efforts to strengthen tax administration. Because, over the medium term, the government is likely to exit austerity and the growth in subsidy expenditures would be contained by pricing reforms. Capital expenditure on infrastructure megaprojects is expected to remain robust.
“Over the longer term, rising public expenditure requirements to meet infrastructure needs, mitigation of climate vulnerabilities, and enhancement of human capital will require additional domestic revenues. Declining reliance on National Savings Certificates (NSCs) for deficit financing would need to continue in the medium term. The resulting increase in government’s bank borrowing could increase deposits in the commercial banks due to reduced investment in NSCs,” it said.
“However, close monitoring of the liquidity of the banking system will be required to minimize crowding out of private credit by government borrowing. As a result of declining fiscal deficit, the debt-to-GDP ratio is expected to remain at a sustainable level,” it recommended.
Adequate foreign exchange liquidity will be critical to meeting debt service and other external payment obligations.
Though the country witnessed stagnation in revenue collection in FY23, this paper highlighted the new Income Tax Act approved by Parliament in June 2023, which replaced the Income Tax Ordinance of 1984 as the new Act aims to increase revenue and simplify the tax submission process.
“It consolidates tax exemptions on salary, introduces environmental surcharges for owning multiple vehicles, reduces the documentation needed to file a corporate tax return, imposes taxes on interest paid by mobile financial services providers, and abolishes the provision for mandatory submission of wealth statements for travelling abroad,” the WB said.
The National Board of Revenue collected Tk 46,233 crore in revenue during the July-August period of FY24, up by around 15 per cent year-on-year. The shortfall in revenue collection increased to Tk 4,087 crore as the actual target was Tk 50,321 crore for the first two months of the current fiscal year.
The global lender has also lowered Bangladesh’s GDP growth projection for FY24 to 5.6 per cent in October, a slip from April forecast of 6.2 per cent.
This latest World Bank forecast for Bangladesh is now similar to the average GDP growth figures posted by this region. It should be noted that the projection places Bangladesh second only to India in terms of economic growth.
Other global agencies such as the Asian Development Bank and the International Monetary Fund (IMF) had projected 6.5 per cent GDP growth for Bangladesh in FY24. The government had set a 7.5 per cent growth target in the budget for FY24.
When asked whether Bangladesh will turn into another Sri Lanka if it fails to tackle the economic challenges, World Bank Country Director Abdoulaye Seck said, “Bangladesh has a strong track record of economic performance, and the country has a bright future ahead.”
“Bangladesh has strong economic fundamentals, with a demographic dividend, growing market share in readymade garments, and a large overseas workforce. With the right and timely policy adjustments, there is no reason why Bangladesh cannot reach its development objectives.”