Home ›› 05 Mar 2023 ›› Opinion
Bangladesh has so far performed commendably in many areas of the economy. The country’s socio-economic conditions have rapidly been changing. Following the progressive index, Bangladesh is set to turn its LDC status into a developing nation. Behind the success, the policy concerning various issues played a crucial role, no doubt. The improvement has been made with pragmatic policies and guidelines drafted by the government.
Bangladesh now needs to change its policy frameworks in the wake of recent requirements coming from global lenders. Even though, the expected economic growth rate never be achieved if reform activities are made discontinuation. Previously, the directives issued from global lenders concerning reform activities were seldom implemented.
Bangladesh has one of the worst tax-to-GDP ratios in the world and in South Asia, its position is the lowest. With low revenue earnings volume, the national budget frequently faces fiscal deficit to a great extent. Since FY 2015-2016, the deficit figure started to increase. According to Bangladesh Economic Review 2021, overall budget balance (including foreign grants) as a percentage of GDP was - 4.74 per cent in FY 2015-16, -4.76 per cent in FY 2016-17, -4.78 per cent in FY2017-18, -4.80 per cent in FY 2018-19, -5.37 per cent in FY 2019-20 and -5.60 per cent in FY 2020-21.
Given the already mentioned budget deficit percentage, Bangladesh has to scale up its revenue mobilization pace in addressing budget-related problems. If a significant amount of revenue earnings are not made sure from the state level, the trend of growing fiscal deficit will be continued for the unspecific period.
Revenue earnings in poor volume force the government to look for alternative sources to fulfilling the budget deficit. According to the ‘Public Money and Budget Management Act 2009’, there is a provision for keeping a 5 per cent budget deficit of GDP. The government had been trying to keep the budget deficit within this limit.
Sources of revenue earnings in Bangladesh are tax revenue (NBR), tax revenue (non-NBR) and non-tax revenue. Earnings from VAT, import duty, export duty, income tax, supplementary duty, and excise duty come from the drive by the National Board of Revenue (NBR). Due to the old-aged fiscal policy, the revenue earnings from the above-mentioned sources are hardly up to the standard.
According to a recent news report, tax revenue collection during July-January, FY 23 is not up to the mark considering the current demand in the economy. In a bid to fulfil the budget deficit, loans from global lenders were sought. As a result of the falling trend in foreign exchange reserves, loans from development partners were highly expected. Sri Lanka and Pakistan also moved for loans from Washington-based global lenders given the depletion of the forex reserve. The World Bank (WB) and the International Monetary Fund (IMF) are key external sources of budgetary support in Bangladesh. Upon conditions set by these two lenders, the loan amount is sanctioned.
It is essential to know that budget support from the IMF came three times. Around $ 500 million in 2012, $ 750 million during the coronavirus pandemic was taken from the IMF as budgetary support. The current global situation (Ukraine-Russia war) forced Bangladesh to seek a $ 500 million loan amount from the World Bank in a bid to deal with budgetary problems. Besides, around $ 4.5 billion from the IMF will also help a lot in this connection.
Recently, the IMF management has already sanctioned $ 4.7 billion in loans for Bangladesh which will be disbursed in seven instalments. Bangladesh has so far received one instalment out of seven from the IMF. When the World Bank agreed to Bangladesh’s proposal regarding $ 500 million in budgetary support, a total of 12 conditions were given to Bangladesh then. After releasing $ 250 million last year, the World Bank recently stepped down in regards to disbursing the rest $ 250 million. Bangladesh could not implement all conditions imposed by the WB.
The WB management is on the hard line for not releasing the rest amount if conditions remain unfulfilled. National tariff policy formulation, automated invoicing system for income tax, amending Bank Company Act, formulation and implementation of social protection, creation of public procurement authority, developing of National Household Database, strengthening corporate governance of state-owned banks, adoption of Mujib Climate Prosperity Plan among others are WB’s conditions. IMF conditions included modernization of tax administration and implementation of VAT law among others. IMF conditions suggested that an additional 0.5 per cent tax-to-GDP ratio will have to be increased by FY 2025 and 0.7 per cent by 2026. The IMF will stop loan instalments if conditions remain unfulfilled. There is no alternative to fulfilling WB and IMF conditions in getting the rest instalments.
The two leaders emphasized reforming fiscal frameworks in a bid to expedite economic growth and bring resilience to the economy. Intending to address sudden economic shocks as well as widen social safety net programmes, government earnings have to be made sure first. It is not possible to give a wide range of coverage with external support in times of crisis. The ratio of direct tax is lower compared to indirect tax. Direct tax needs to be scaled up in Bangladesh to get a significant amount of revenue earnings in the days to come. This needs massive reform right now.
The WB in its study said that increasing of tax-to-GDP ratio is required to become an upper-middle-income country by 2031. According to a news report published recently, in the last decade, the direct tax-to-GDP ratio ranged between 2 cents to 3 per cent. During FY 2013-14, the ratio reached 3.22 per cent. It is to be noted here that direct tax was below 10 per cent in FY 1972-73 which now stands above 30 per cent. It should be increased to 65 per cent from the existing 30 per cent.
What is worrying is that the tendency of submitting tax returns by TIN ( Tax Identification Number) holders is totally insignificant. In FY 2022, some 2.8 million taxpayers out of 8.4 million TIN holders submitted tax returns signalling that there is little possibility of increasing the tax-to-GDP ratio soon.
Actually, recently imposed restrictions on imports and low export volume led to a reduction in revenue earnings. The government recently announced for reduction of import duty on sugar for Ramadan month resulting in decreasing revenue. Tax exemption has become a key barrier in raising the tax-to-GDP ratio. Tax exemption practice should be withdrawn in fulfilling IMF conditions.
Among the seven Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) nations, Bangladesh has the second lowest tax-to-GDP ratio of 7 per cent in 2020. According to India-based Observer Research Foundation, the tax-to-GDP ratio is 15.8 per cent in Nepal , 14.5 per cent in Thailand, 13 per cent in Bhutan, 12 per cent in India , 8.1 per cent in Sri Lanka, 6.4 per cent in Myanmar.
Dependency on global lenders is to decrease for budgetary support. Rather, the capacity for revenue mobilization is to be increased by hook or by crook. If the WB and the IMF management take the decision of stopping instalments in what way the government will fill the deficit in the national budget. The government in power is looking for alternative sources to filing up the budget deficit. There are no alternative avenues but to develop fiscal frameworks in respect of raising tax-to-GDP ratio.
The writer is an economic affairs analyst. He can be reached at [email protected]
