FE presentation
Bangladesh has an impressive track record of growth. It has tackled the covid-19 pandemic well and maintained a stable macroeconomic situation. The July-Dec 2021 export grew 28.4 per cent while the July-Nov-21 import surged by nearly 54 per cent. Such growth in the external trade means that the recovery is in the fastest pace in the country after almost two years of onslaught by the pandemic.
It is now expected that the export recovery and rise in consumption will help the GDP growth rate to reach 6.4 per cent at the end of 2022 and 6.9 per cent in 2023 (WB projections). Bangladesh is also on track to graduate UN's Least Developed Country list.
But there are also downsides. They are: higher inflation, poor remittance growth and widening current account deficit. During Jul-Dec-21 the remittance inflow dropped by 21 per cent against the expansion of the same by 38 per cent during the corresponding period a year earlier. The current account deficit has widened by $6.19 billion during the Jul-November-2021 period mainly due to higher imports and poor remittance inflow. The current account was at $3.5 billion surplus during the same period a year earlier.
According to the United Nations Conference on Trade and Development (UNCTAD), the cost of freight has risen by 34 per cent since the Russian invasion of Ukraine on February 24 last. This, on top of the rising global fuel, food and fertiliser prices poses a great challenge for Bangladesh. The rate of inflation has soared by 6.2 per cent [point-to-point basis] in February last. It was 5.6 per cent in the previous month.
The fiscal situation is also not that comfortable due to poor revenue growth and widening budget deficit. In FY 2020: the deficit was 6.14 per cent over the thumb-rule of 5.0 per cent of the GDP. It was however tamed to 5.31 per cent in FY 2021. But the deficit might go up slightly further when the final data are available.
External debt has gone up to $90.8 billion (according to Bangladesh Bank data). It was $75 billion in March, 2021.
There are more worries in the fiscal front. One is concerning the lower Tax-GDP ratio. The ratio has declined to 8.77 or 1.0 percentage point down in FY-21 than that of the previous fiscal year (FY-2020). This is as a result of rebasing of the economy, although many tend to believe that the ratio should have remained unchanged.
The total tax collection during Jul-Dec, 2021 was Tk 1.58 trillion (t). The NBR part of the same was Tk 1.43t, while the non-tax revenue consisting of earnings from the state-owned enterprises during Jul-Dec 2021 was Tk 158.02b. The main component of revenues were VAT: Tk 577.7b. Income tax: Tk 403.1b, Import duty: Tk 207.9 billion, Supplementary: Tk 205.3b. The direct tax should be the number one contributor to the domestic resource mobilisation. VAT should be number two.
The global inflation is now up due to surges in the prices of fuels and food. It has intensified by the war in Ukraine at the fag end of February last. A threat to global food security now looms. Ukraine is a major source of wheat, sunflower and iron ore for Bangladesh. In such uncertainties, the NBR may waive or cut duty to stabilise local market. The NBR has already cut VAT on edible oil to stabilise the market during the holy month of Ramadan.
Once the fiscal and macro economic indicators start showing signs of instability, central bank might intervene through its monetary instruments.
In the matter of revenue mobilisation, the NBR exploits the goods and services the demand for which is inelastic, e.g., cigarette, mobile phone services. The board concentrates more on people and entities that are in the tax net. This strategy of the NBR contradicts or opposed to the 'ability to pay principle' or progressive taxation.
Cigarette is now the biggest source of domestic resource mobilisation, its contribution is around 10 per cent of total revenue receipt. The NBR collected revenue around Tk. 285 billion from the sector in FY 21. This fiscal year may not see revenue growth from this sector. This is going to be unusual as this sector sees revenue growth of around 10-15 per cent every year.
Cigarette taxes in Bangladesh are very high, average weighted tax rate is 77 per cent. It is 70 per cent in Singapore, 64 per cent in Japan and Indonesia, 61 per cent in Pakistan and 58 per cent in India.
Current state of no revenue growth from cigarette sector is due to NBR's concentration on increasing price of top tier cigarettes only without increasing price of medium and low tiers. Medium and low tiers account for around 85 per cent of total cigarette sector volume. Naturally, if price of two biggest tiers do not increase then revenue growth will also be hampered. This is exactly what has happened this year.
The low segment cigarettes occupy 75 per cent of the industry, but in the past 2 years fiscal years, the price has remained unchanged at TK 39 (per 10s stick pack). Medium tier on the other hand comprises of around 10 per cent volume. The price has remained same for almost 3 years now. Hence prices of both these tiers need to increase in the upcoming fiscal year if government wants to bring back revenue earning from cigarette sector in growth momentum.
A paradox: Smoking is dangerous for health and, for this reason, the government discourages its consumption through policy intervention. But the poorer section of the population consume lower segment cigarettes much as they are cheap. The poor do not have enough income to spend on health. The rich can afford health related expenses and insurance converge for many critical illness. On the other hand, the poor mostly live in rural areas lacking even basic healthcare facilities.
Telecom sector: It contributes around 5.0 per cent of total tax collection. It may fall FY22 as VAT rebate for equipment that are being purchased by telecom operators. Reduction in the VAT on internet usages (5.0 per cent from previously 15 per cent).
The telecom sector is in deep pains as they need to pay 0.5 per cent to 2.9 per cent regardless of company's income. Such taxation is contrary to the spirit of the income tax law which says tax must be paid on income not on sales or receipts.
Corporate tax rate compared to other neighbouring countries remains high (45 per cent). Many of the telephone operators including Robi cannot enjoy lower slab of corporate tax for having higher turnover despite the fact that the operator is listed on the bourses.
Real estate: It has a contribution to GDP around 15 per cent. Prices of building materials have surged since March 2021 by around 50 per cent. War in Ukraine has made MS rods, cement and tiles costlier. The housing sector was witnessing a turnaround after two-year covid time. But the hike in prices of building materials is pushing it again to a slump.
Agri sector: The agriculture sector's performance is also promising. Agri sector vital for the country's economy, in terms of stabilising the food market. It plays key role in ensuring food supply during crisis, e.g., coronavirus pandemic.
NBR has a plan to introduce eTIN for farmers. If introduced, the food prices may go up further, leading to an additional inflationary pressure. Supply chain disruption had emerged a serious problem. The problem still exists.
The rise in global inflation and Ukraine war have added a new dimension. Some developing economies including Bangladesh have started to bear the brunt, in terms of commodity prices in particular. Such situation poses a risk to mobilisation of resources by the government.
How to raise revenue: Research/study-based and technology-based taxation policy are required. NBR should bring new people particularly the buyers of land and flats in urban areas under the tax net.
NBR should focus more on the lower segments of cigarettes that account for more than 75 per cent of total consumption.
NBR should reduce the excising VAT on construction materials before prices going out of control and for the interest of booming real estate sector and raise the farmers' non-taxable income limit to Tk 2.5 million from the exiting Tk 500,000. The tax authority should also reduce the corporate tax for mobile phone operator to 25 per cent for listed and 32 per cent for non-listed ones.
Revise the current rebate schedule for equipment which would increase the NBR tax. NBR should continue reforms, including digitalization of its all wings. Human resource development in the NBR should be strengthened. Appointment of tax ombudsman is necessary as it will widen grievance-redress system for the taxpayers.
The provisions of depositing 20 per cent of demanded tax or fine for lodging appeals under section 122 of the present VAT Act, should be maximum 5.0 per cent to allow aggrieved taxpayers to lodge appeals for getting justice.
Linking banking transaction with the NBR will help raise the direct tax collection.
The expenditure pattern of the budget is not favourable to many sectors like education and health where the volume of allocation does not cross 2.0 per cent and 1.0 per cent respectively. Seeing the budget trend, I am confident that there will be a shortfall between Tk 300 billion (Tk 30,000 crore) and Tk 500 billion (Tk 50,000 crore) despite the 54 per cent growth in customs duty. It shows there is a growth but the revenue is not growing with the speed of the country's economic growth and this mismatch has certainly given rise to worries. If the revenue does not increase, it will not be possible to execute many project and programmes. We can think of carrying out big projects but the country might fall into high risk if it implements such projects with the lower than expected collection of revenue. On the other hand, the tendency of taking loans keeps rising fast. The net foreign borrowing rose to over Tk 970 billion at the end of FY'21 from around Tk 50 billion recorded in FY'15. The trend is not good. The country calculates its debt on the basis of GDP (gross domestic product), which is not the proper way as the capacity of the government to pay and the capacity of the economy to pay are two different issues. There is a possibility of becoming bankrupt if the government does not have money. The money will not save the country from being bankrupt. The government of Bangladesh does not have the money. The tax-GDP ratio in the United States (US) is 35 per cent whereas it is around 11 per cent here. Our capacity to service the debt is one-third of the US. This is one factor. Another factor is the interest payments are high here compared to that of the developed nations. It has further impacted our capacity to pay. The fiscal space keeps squeezing gradually because of growing interest and subsidy bills. The subsidy for agriculture was estimated at Tk 70 billion which was revised to Tk 280 billion but the price of fertiliser is on the rise in the wake of the Russia-Ukraine war. So, the volume of agriculture subsidy might go up to Tk 320 billion. If we add other forms of subsidies, the accumulated figure of subsidy would reach Tk 1.0 trillion. If the national budget is Tk 6.0 trillion and leave the deficit due to the shortfall of revenue is Tk 1.0 trillion, it means one-fifth of the budget will be going for subsidies. Then how will we get fiscal space? At the same time, the government expenditure keeps increasing to meet the growing wages and pension benefits. We cannot tackle it and the government is relentlessly increasing its expenses without thinking about its consequences. At least, we should rationalise the subsidies. The prices and taxes of low-segment cigarettes that account for 75 per cent of the consumption is low and the area remained untouched for the last couple of years. That should go up and the rates in the case of upper end need to be raised slowly so that overall the price of cigarettes can go up and we can discourage smoking.
The upcoming national budget will be challenging one in the context of post-coronavirus recovery, ongoing supply chain disruption and Ukraine war. To control inflation caused by external factors, the government has to take some remedial measures. So, the government needs to continue subsidies in areas like energy, edible oils, rice and onion. If we stop releasing subsidies to these areas, it might badly impact our economy. So the subsidy will increase and the government would require cutting SD (supplementary duty) in the coming days. It means the pressure on the overall budget deficit will mount further. For people who became jobless because of the pandemic, the government should increase the volume of investment in areas like public works and rural development for creating employment for a temporary period. I have a suggestion in the context of allocations for executing projects. We have been taking long-term projects with disbursing limited allocation of fund. The number of projects keeps increasing but the allocation continues squeezing. It takes too much time to complete a project. Under such circumstances, we should not go for expansionary budgetary option, we should take a balanced approach while attaching utmost priority to the ongoing projects and we should not take unnecessary projects right at the moment. At the same time, special attention needs to be paid to property tax with innovative thinking as people often dodge taxes by not showing the actual price of the land.
There are a total of 0.65 million people earning through freelancing. We can think of bringing them into the tax net. The budget-GDP ratio is around 17 per cent, which is too little and very funny. We did not take the benefits of demographic dividend, as the level of unemployed youth keeps rising. Twenty nine per cent of the youth remains unemployed and female youths are lagging behind. We failed to create decent work for them. We need to give more attention to this area. Half of the population are women. If we want inclusive growth, we need to engage them by making the necessary budgetary allocations, but we don't have such expenditure policy. A proper gender-sensitive budget is required. The major problem for social protection is we target the bottom 20 per cent of the beneficiaries but we don't have products for the middle 60 per cent of the beneficiaries. The government started working with a new product which is pension fund but we need more innovative products like insurance fund.
The name of the customs officials has officially been changed to customs commissioner in place of collectors in the Customs Act. But customs officials are still behaving as collectors, not commissioner. That is a big problem. Taxation has both revenue and policy perspective. Customs and revenue officials always pay greater attention to revenue when they formulate policies. When I ask people in the customs that what is your main task, they say revenue collection although their main responsibility is to facilitate trade with proper application of customs rules and regulations. But they do not do that. They only concentrate on revenue. So, they are concerned more about under-invoicing through. They are not much concerned about over-invoicing through which the country annually loses a huge amount of resources in the form of capital flight. Now the time has come to think how we can separate policy from revenue part. Otherwise, the reform will not come in the income tax. I don't understand why we set up a revenue target for customs officials. Revenue will not come if there is no import. So, we need to fix import target, not the revenue.
People now started comparing Bangladesh with Sri Lanka. I think it is not right. Bangladesh is much stronger economically than Sri Lanka. But we need to be careful in managing macroeconomic factors, as some prosperous economies like Sri Lanka are facing economic crisis. Foreigners keep saying good words about Bangladesh economy but they are not coming here to invest. As a result, Bangladesh becomes one of the poorest recipients of FDI (foreign direct investment). This is very bad. Now we're getting some government to government investment from countries like China and Russia. In terms of macroeconomic fundamentals, we have a very good track record in South Asia, but we do see it declining during the last five years. We also need transparent review of the public projects to ensure quality of investment as there are projects that did not get the adequate allocation. Interest payments for agriculture and energy have doubled that are putting pressure on the fiscal space. A reform of NBR is required. We need investment on education as we have to train up our labours enabling them to cope with the future challenges.
Our main focus has been on domestic resource mobilisation but the situation is not that comfortable for people who will prepare the next budget because of hurdles like supply chain disruptions, hike in freight charges, inflation and the Ukraine war. The interest bill is growing while the volume of subsidy is skyrocketing. Under such challenges, the government should not go for expansionary budgetary option, as Mr. Monzur mentioned, but to adopt a balanced approach. Our main focus should be on export-led growth but our export largely concentrates on one product. So we need to explore other potential sectors. While exploring other sectors, we also need to ensure that current major revenue contributing sectors, including tobacco, keep on providing substantial resources to the national exchequer.
Transcript prepared by
Mr Jasim Uddin Haroon, Special Correspondent, FE and Mr Jubair Hasan, Senior Reporter, FE