Policy Exchange hosted a roundtable discussion titled "National Budget 2024-25: Priorities for High-potential Sectors," gathering leaders from a diverse set of sectors to discuss strategic considerations for the upcoming fiscal year. On May 6, 2024, Dr. M Masrur Reaz, Chairman and CEO of Policy Exchange, underscored the need for consistent policymaking to foster sustainable revenue growth. Participants emphasized pragmatic policies for sectors such as agriculture, tobacco, RMG, FMCG, and the digital economy amid prevailing macroeconomic challenges.
The following are excerpts from the roundtable discussion:
Amidst the backdrop of a challenging economic climate locally and globally, Bangladesh deals with persistent hurdles, necessitating careful consideration of sectoral needs in the upcoming budget. The allocation of resources to sectors driving growth, employment and skill development holds paramount importance in navigating these challenges effectively.
To address pressing concerns such as inflation, foreign debt, and unemployment, significant budgetary growth is imperative. This necessitates a robust revenue base, which, in turn, requires prioritizing key revenue generating sectors.For instance, the tobacco sector, which constitutes about 12-13% of the total domestic revenue, has one of the highest tax incidences in the world - above the WHO recommended level. However, the prices of locally manufactured cigarettes are one of the lowest in the world. To deter people from smoking and ensure sustainable revenue growth, prices of cigarettes belonging to all segments must be increased. Additionally, investments in education and healthcare are vital for human resource development, underpinning sustainable economic growth.
It's commendable that the lion's share of our country's demand is met locally, showcasing both our strengths and weaknesses. As we delve into budget discussions, three pivotal aspects warrant attention.
Firstly, the taxation framework for agriculture-based sub-sectors remains largely unchanged despite significant advancements in the field and shifting climatic patterns. Allocating budgetary resources for climate resilience measures can mitigate agricultural risks stemming from climate change.
Secondly, enhancing the agri-food value chain is imperative. While middlemen often shoulder blame for price hikes, the true impediments lie in compliance issues and dysfunctional supply chains.
Lastly, embracing digital agriculture and mechanization is essential for agricultural modernization.
The imperative to safeguard this industry cannot be overstated if we are to realize the ambitious goals set forth. With burgeoning international and domestic demand, the digital sector holds immense potential for growth.
The VAT Act and customs regulations remain riddled with loopholes and anomalies, hindering comprehension for common taxpayers and resulting in unnecessary complications and harassment. Moreover, the approach to increase taxes remains impractical in many instances. For instance, attempting to dissuade the tobacco
industry through increased taxation risks jeopardizing one of the nation's primary revenue streams. Instead, a more judicious approach would be to discourage
consumption by raising cigarette prices of all segments, particularly low segment cigarettes since they
constitute the majority of the market and is accessible to the poor.
Despite the prevailing economic challenges, there has been a notable uptick in revenue collection. In the previous fiscal year, revenue collection amounted to 3.31 trillion taka, compared to the three trillion eight hundred thousand crore taka projected in the 2022-23 budget. This positive trend indicates a commendable 15% growth in revenue over the past nine months, suggesting the potential to surpass the 3.8 trillion taka mark in the upcoming budget.
However, sustainability remains a paramount concern. Streamlining taxation is imperative for fostering economic resilience. Currently, separate laws govern income tax, VAT, and corporate tax, leading to redundant tax payments and increased operational expenses for businesses. Transitioning to a cashless transaction system is also vital for formalizing the informal economy.
With the GDP totaling 450 billion dollars, the current size of our capital market at 70 billion dollars presents a disconcerting dissonance. Addressing this inconsistency is essential for fostering a robust financial environment. A notable disparity exists between the lending and deposit instruments offered by banks and Non-bank Financial Institutions (NBFIs). To cultivate a sustainable economic landscape, the introduction of more corporate bonds and long-term debt instruments is imperative. Long-term financing requirements should be met through the issuance of extended debt securities.
For instance, the NBR has routinely increased tax rates in the tobacco sector in previous fiscal years. However, a more profitable approach would be to raise the prices of tobacco products like cigarettes, benefiting both revenue collection and public health. Given that 80% of cigarettes sold in the market belong to the low segment, discouraging consumption through price increases would be advantageous. Viewing tobacco as an exportable crop due to the high potential of dried tobacco leaves as export goods would further benefit farmers and also contribute in achieving the goal of export portfolio diversification.
Establishing a dedicated research cell within the National Board of Revenue (NBR) is essential. Research-based insights will inform policy formulation, ensuring pragmatic and effective measures to attract foreign investment. By implementing targeted reforms and leveraging data-driven strategies, Bangladesh can enhance its attractiveness to investors and accelerate economic growth.
The agro-processing industry underscores the importance of mechanization for productivity gains, addressing challenges such as land fragmentation. Additionally, while acknowledging the health risks associated with tobacco, policymakers must consider its economic impact, particularly in rural areas where cultivation supports livelihoods and improves socio-economic conditions. As we navigate budgetary decisions, prioritizing infrastructure development and addressing sector-specific challenges are essential for fostering sustainable economic growth and maximizing the potential of key industries.
The forthcoming budget discussions concerning the Ready-Made Garments (RMG) sector are poised to diverge significantly due to Bangladesh's initiation of LDCtransition, signaling the imminent expiration of sector incentives. The sector, pivotal to the nation's export prowess, necessitates tailored policies to navigate this transition effectively, given its substantial private sector investment and intricate governance and social issues.
Post-graduation challenges herald a need for comprehensive structural adjustments, particularly in taxation, to avert potential crises. While Bangladesh remains open to Foreign Direct Investment (FDI), stringent regulations are imperative to safeguard sector integrity.