Prioritising development of physical infrastructure, power and energy

A stark example is the burgeoning ready-made garment (RMG) sector, which does not pay any income tax despite making huge profits. The RMG industry recorded a phenomenal growth, primarily based on an elaborate incentive structure. The continued duty and tax exemption benefits provided by the government to factory owners enabled them to earn profits at high rates, and accumulate huge capital and assets. There is, therefore, no justification to keep the sector out of the tax net any longer. The recent government decision to lower the nominal 0.8 per cent export tax to 0.3 per cent for this sector has failed to get popular support.
Even as they pay no taxes to the government, the apparel exporters are coming up with fresh demands for concessions at every opportunity. The industry has asked the government to compensate for the loss of Tk 140 billion (14000 crore) (!) they say they have suffered due to the political turmoil and the increase in workers' wages. The industry people say they have increased workers' wages by 300 per cent over the past years. Would the industry leaders tell people where in the world wages of garment workers are as low as Tk 5300? Shouldn't they be asked about how many hundreds of millions of Taka of business profits they have made in the past years, from which not even a penny has gone to the national exchequer?
There is no economic rationale or moral justification for continuing the tax exemption benefit long enjoyed by the RMG industry. The sector should be brought under the regular tax net and made to pay income and any other taxes as required by the prevalent income tax laws. However, the RMG industry should be given adequate fiscal policy support in the next budget by withdrawing high duties on the import of fire and building safety equipment in order to encourage factories to make necessary investments for improving worker safety.
NON-NBR REVENUES: Duties and taxes on narcotics and liquor, vehicles, land revenue, and non-judicial stamp duty are the principal sources of non-NBR revenues. The revenue generated from these sources is low mainly because no serious efforts were made in the past to increase the rates of these duties and taxes. There are also significant leakages in the collection of these revenues, because of corruption on the part of the concerned administration. Hence, opportunities are there to enhance non-NBR revenues by an upward revision of the rates of these duties, and streamlining the administration to ensure full realisation of these revenues.
NON-TAX REVENUES AND STATE-OWNED ENTERPRISES (SOES): Government's non-tax revenue comes mainly from income surpluses of SoEs (state-owned enterprises). However, since most of the SoEs have been perennially in losses, they have become a burden to government instead of sources for generating revenues.
While the presence of SoEs may often appear useful and necessary in some sectors of production, even in a market-oriented economy, these SoEs should be required to compete with private sector enterprises. But in Bangladesh, the SoEs are allowed to operate freely under public patronage, obtaining huge amounts of subsidy to sustain their losses every year, thus becoming a chronic burden on the national exchequer. Yet, budgetary and extra-budgetary support given to SoEs has become a formality for the government and the issue did not even appear in the Finance Minister's budget speech in the past years.
There were mounting criticisms in the past, as they are now, of government's financing SoE losses with taxpayers' money, but these went unheeded by successive governments. Years ago, critics used to say that public savings generated by withdrawing subsidies given to the loss-making SoEs would enable the authorities to construct a new Jamuna bridge every two years. The government in the next budget should sharply cut down subsidies to SoEs, formulate credible measures to make them profitable within a definite time-frame, and ask them to cut down their losses and raise income for the government.
It is rumoured that the government is providing Tk 40 billion (4000 crore) to state-owned banks to meet their capital shortfalls. Capital shortfalls in banks may be due to many reasons, not the least of which is the loan scams resulting from the lax management of banks and dishonesty of bankers. In order to prevent moral hazards, banks may be given medium-term loans to meet their capital shortfalls and such loans may be repaid to government out of profits over a given period of time.
REVIVING BLACK MONEY: According to press reports, NBR might recommend the whitening of black money in order to prevent capital flight. Stories are often heard of massive capital flights that make newspaper headlines, but there is hardly any concrete information about such occurrences. Capital flights may occur for unrealistic exchange rates maintained for a long period, but this possibility can be ruled out in Bangladesh because the central bank has been maintaining a flexible exchange rate since 2003, and the exchange rate has been close to the market exchange rate.  
The realistic exchange rates apart, there are capital controls in the country and the interest rates are also very high compared to any country in the world. Besides, the main mechanisms of capital flight are under-invoicing of exports and over-invoicing of imports, but these are being strictly monitored by the central bank.
While evidence is so scanty about capital flights, there is hardly any reason to reintroduce the provision of whitening the undisclosed incomes in the coming budget. The provision is not just unethical, it also frustrates the honest taxpayers and undermines efforts by the ACC (Anti-Corruption Commission) and the Anti-Money Laundering Department of the Bangladesh Bank to detect and punish the tax evaders.
BUDGET DEFICIT: The Finance Minister has indicated that the budget deficit in the next fiscal will not be more than 5.0 per cent of GDP. However, he should not be very rigid but remain a little flexible on the size of the deficit in the next fiscal year because there is no alternative to increasing the deficit if available internal resources fall short of the targeted expenditures.
Deficit financing is a universally recognised method employed to stimulate demand, and, if expenditures are well-targeted, deficit financing can contribute to the expansion of employment and income-generating activities. The all-important consideration is how the government would raise the required funds (domestic or foreign) for financing the deficit and how the funds would be spent. Domestic financing of the deficit out of bank or non-bank borrowing is convenient, but it raises the interest burden in the recurrent budget. Between the two, non-bank borrowing is costlier because of its higher interest costs.
FOREIGN FINANCING: Foreign financing is less costly but the availability of foreign loans and grants is uncertain for two reasons. First, the disbursement of aid funds has remained low because of slow implementation of projects. Government should, therefore, improve the implementation capability of the agencies concerned in order to get quick access to external resources.
Second, the availability of aid is often subject to harsh conditions. Because of the government's unwillingness to accept some of these conditions in the past, donors were reluctant to release aid, and as a result a large volume, about $8.0 billion, of foreign aid is now lying in the pipeline.
Not all the donor conditions are bad for the country, however. Some of them, such as the upward adjustment of energy prices, strengthening public sector institutions, ensuring good governance, and reforming tariff structures are in fact distinctly beneficial. Government should accept these conditions and quickly start negotiations with donors in order to get access to the aid funds lying in the pipeline as well as to get new aid commitments for the upcoming fiscal year.
DOMESTIC FINANCING: In case foreign resources are still difficult to obtain, the government will have to go for borrowing from banks. Because of slow ADP (Annual Development Programme) spending in the present fiscal year, the government is currently burdened with idle funds worth more than Tk 55 billion (5500 crore).
There are also opportunities for increasing government's borrowing from the banking sector, because of the large excess liquidity of Tk 370 billion (37000 crore) of commercial banks. Although about 73 per cent of this excess liquidity is held by banks in virtually non-negotiable government bills and bonds, the other 27 per cent or an additional Tk 100 billion (10000 crore) is available for lending to the government. Financing the deficit should not, therefore, be any problem.
Criticisms that government borrowing from the banking system crowds out private investment do not have strong empirical support. On the contrary, there is a long-held belief that increased public expenditure on infrastructure facilities with government's borrowing from banks increases the cash flow to the economy, stimulates aggregate demand, and, at the same time, removes the physical impediments to growth. A recent research done by the BIDS (Bangladesh Institute of Development Studies) lends credence to that belief. Concerns over budget deficit should not, therefore, deter the government from raising its expenditures on infrastructure development as well as on social sectors, such as education, health and social protection programmes.
CONCLUDING REMARKS: An expansionary budget will be needed for FY '15. Sectors that long remained outside the tax net should now be made to pay taxes.
The implementation capability of the relevant government ministries and divisions should be improved significantly. No new project should be included in the ADP until the backlogged projects are completed.
Priority should be given to the development of physical infrastructure, power and energy, agriculture, human resources and social protection.
While the power sector should be given a high priority, the amount of subsidy given to this sector should be gradually reduced so that funds thus released can be used in financing other more important social sector expenditures.   
The existing agricultural subsidies should be continued, and tax holiday facilities extended to manufacturing industries on a selective basis.
Finally, science and technology should receive much larger allocation than in the past years in order to enable the country to remain globally competitive.
The writer is a former Professor of Economics at the University of Dhaka.
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