Like the body politic, Bangladesh economy is in transition at present. Both macroeconomic management by the government and microeconomic performance by the market are facing headwinds. While policy making in the first instance is within the bailiwick of the government, the latter is embodied by decisions of millions of producers, suppliers and consumers mediated by regulatory framework of the government. The disconnect between the two yawned wide during the past autocratic regime as crony capitalism and kleptocracy-dominated policy making at macro level. As a result fiscal gap ( the difference between public expenditures and public revenue) has widened, making bank borrowing chronic while fast depletion of foreign exchange reserves has hung like Damocles' sword, threatening default in repayment of foreign loans. Remittance by wage earners and steady export earnings, particularly by the readymade garment sector, kept the foreign exchange crisis at bay, albeit precariously. But the pressure on foreign exchange has led to depreciation in the value of taka, which in turn has fed into inflationary pressure already made stubborn by supply chain problems and high global prices of export items.
The interim government has inherited both the problems of fiscal deficit and dwindling foreign exchange reserves spawned in the reckless and self-serving policy regime of the ousted government. While the problem of inadequate resource mobilisation in the fiscal arena has been sustained by an inefficient and venal tax collecting machinery, burgeoning volume of 'sick' loan of commercial banks has been the handiwork of predators patronised by political mentors, making both fiscal and monetary policy anaemic and lacklustre. To have an idea of the macroeconomic problem facing the interim government in concrete terms, certain figures can be mentioned. To finance the budget for fiscal 2025, a target of Tk 4,700 billion was estimated to be collected as tax and VAT by the National Board of Revenue (NBR). During the first five months of the present fiscal, a total of Tk 1,207 billion was collected by NBR, which is less than Tk 423 billion less than the target for the period. Foreign aid as loan for budgetary support (revenue) was estimated to be Tk 1.70 billion against which T 0.60 billion have been received so far. During last fiscal, repayment of loan (Tk 1.71 billion) amounted to more than the foreign exchange received ( Tk 1.54 billion) as loan from donors and lenders. The prospect does not seem to be brighter during this fiscal. For the development component of the budget (ADP), commitments for Tk 0.52 billion have been received from donors and lending agencies so far, which is one-tenth of the amount committed for the same period last year. The 'foreign exchange gap' has been manageable until now because of uptick in both remittances sent by wage earners and export earnings in recent months. The present reserve of US$20 billion (according to BPM of IMF) is just enough to pay for four month's import bill to ACU ( Asian Clearing Union). While the economy ( the country) has managed to scrape together to defray foreign expenditures, the fiscal deficit has been not only persistent , but has panned out. The only recourse open to the government is to fall back on bank borrowing. But the double digit inflation stubbornly prevailing for nearly a year has precluded that option.
The diagnosis of the malaise with which the economy is afflicted is the easy part. What is difficult is to formulate the prescription that will restore workable health to the ailing economy. It is one of the irony of macroeconomics that proper diagnosis may indicate what medicines should be prescribed and administered, but the side effects may be such that course of treatment becomes unpalatable for both the producers and consumers. The interim government, in its wisdom, has opted for biting the bullet i.e. austerity in the form of increase in indirect taxes which makes it possible to collect revenue immediately. But being indirect it is regressive in nature, increasing the tax burden of middle and lower income earners. The brunt of Tk 120 billion is expected to be earned through recent increase (January 9, 2025) of VAT and supplementary duties is to borne by the income groups mentioned above. On the supply side, the increases in VAT are likely to impact production of goods and services, as can be concluded from reactions of private sectors.
It is obvious that government has plumped for increase in indirect taxes to reduce fiscal deficit in the near term to qualify for the disbursement of the fourth tranche of $4.7 billion of IMF loan. But the government could be more discerning in selecting the items for increase in the rates of taxes, keeping their incidence on the lower income groups and producers in view. For instance, additional tax on LP gas, lubricant and transformer oil is likely to have adverse impact on producers in the first place and increase prices at retail level as secondary effect. Increasing VAT and supplementary tax on these and other intermediate goods from the present 5 per cent to 15 per cent may be counterproductive from the perspective of equity and productivity. On either count, the impact on price level cannot but be adverse. NBR could be little more circumspect in selecting the items for increase in tax rates.
If the announcement of increase in VAT and supplementary tax has been done surreptitiously and all on a sudden, the finance advisor has given advance notice about reduction of subsidy on water, gas and electricity soon. There is no surprise in this as subsidy is a favourite whipping horse of IMF and World Bank, notwithstanding the fact that it is in practice in America and Europe for many years. But the present government has to be aware of the fact that being an unelected one, it does not have the mandate to dismantle the entire structure of subsidy that has been put in place by successive elected governments. At the most, some tinkering can be made in the volume of subsidy targeted for specific groups on the basis of their income levels.
An area where ample scope exists for curtailing allocation of funds under the budget is the ADP. The overall implementation of projects under ADP during the first half of the present fiscal is only 12 per cent, the lowest during the last five years. Given this abysmally low rate of utilisation about 50 per cent of fund allocated for ADP can be hived off in keeping with the trend rate of utilisation.
There is no denying the fact that in times of fiscal crisis some degree of austerity is inevitable. But the burden of austerity measures should be borne equally by both the private and public sectors. In times of fiscal crisis like the present one, any increase in salary and allowances of public sector personnel should be kept on hold. The granting of dearness allowance to government officials, proposed across the board, does not satisfy this condition. There are many other items of public expenditures that can be curtailed in an economy drive. The scope of this curtailment is given by the size of public expenditures which is Tk 5,060 billion out of the total of Tk 7,970 billion in the present budget. Though many commissions on reforms have been formed by the present government, reform and rationalisation of public expenditures is conspicuous by its absence.
During the present transition it is the monetary policy that has been on the right track. Keeping the paramount importance of containing inflation, a tight money policy has been put in place. The policy rate was raised immediately after the new governor of Bangladesh Bank took over charge. There is indication that it is going to be raised again as both headline and core inflation has increased recently. But the anti-inflationary measure of monetary policy can work only if fiscal policy does not undermine it, either through profligate spending or increasing taxes regressively. As seen in the latest decision to increase tax on as many as one hundred items, the two policies are on collision course. The government has to decide which is of greater importance, bringing down price level or austerity measures that exacerbate inflationary pressure?
© 2025 - All Rights with The Financial Express
