by Fahmida Khatun, PhD, Research Director, CPD, the article appeared on post-2015.org, a site managed by Overseas Development Institute (ODI), on 10 December 2014.
Discussions on post-2015 international development agenda are gaining increasing momentum as we are approaching 2015 fast. While debates on setting the goals and targets have more or less narrowed, the focus is now increasingly shifting towards the means of implementation (MoI). Interestingly, in view of the limited success of the goal on global partnership in the Millennium Development Goal (MDG 8), the emphasis on MoI that includes financing as an important component in the post-2015 agenda is noticeable. The MoI takes a distinct position in the agenda of the Open Working Group (OWG) of the United Nations which is working towards shaping the post-2015 agenda. Thus goal 17 of the OWG spells out various MoI including finance in general and sources of finance in particular. Needless to say that domestic resource mobilisation has taken the centre stage of the current discussion. To be more specific, taxation has featured more prominently in the ongoing discussion on efforts towards domestic resource mobilisation.
This is not only due to the declined flow of foreign aid to low income countries, but also for a more stable source of resources. As opposed to an unsustainable development path through reliance on resource from external sources, domestic resource mobilisation can lead towards a self-sustaining development. A number of reasons can be put forward in favour of this logic. First, domestic resources provide a predictability of resource flow to make allocations for the medium term fiscal planning in a country. As poor countries tend to rely on foreign aid they also have to face the impact of volatility and uncertainty in aid flows which creates difficulty in their budget management. Even countries which have graduated themselves from aid dependent to trade dependent countries may also face such volatility and unpredictability. Second, adequate domestic resources create fiscal space for the country to prioritise its spending in line with the policy priorities and political commitments. It thus gives more flexibility as opposed to conditionalities of aid. Third, the need for broadening tax base as a source of domestic resource mobilisation in the country is important also because of the fact that in order to attract foreign investment, countries have to provide generous tax incentives to foreign investors to be competitive in the global market. In order to make up for the reduction in corporate tax, resource generation through the broadening of tax net becomes necessary. Fourth, domestic resource mobilisation through taxation is crucial for creating the sense of participation among people in the development process of the country. This can in turn act as a mechanism to create pressure on the public representatives to be accountable and transparent on the use of resources.
Bangladesh has remarkably reduced its dependency on foreign aid since its independence. In FY2013 the share of overseas development assistance (ODA) in Gross Domestic Product (GDP) has declined to 2.2 percent in FY2013from 5.8 percent in 1981. When compared with the Annual Development Programme (ADP), the share of ODA is 42.9 percent in FY2013 compared to 53.2 percent in FY2000. Notwithstanding a better economic growth compared to other least developed countries, Bangladesh suffers from an imbalance between the public expenditure and revenue. Such imbalance has led the country to rely on borrowing from both internal and external sources to meet up its public expenditure requirements.
This is also because of the fact that tax performance in Bangladesh has not been as good as it should have been given the size of the taxable population. Tax revenue was only 11.3 percent of GDP in FY2013, a rate that has risen from 5 percent in the early eighties and is still much lower compared to any emerging economy. Total revenue is also low at 13.5 percent of GDP. Figure 1 demonstrates trend of revenue in Bangladesh during FY2003- FY2013.
Figure 1: Trend of revenue as percentage of GDP during 2003-2013
Source: Various issues of Bangladesh Economic Review, Ministry of Finance.
Despite various initiatives in the area of tax policy and administration, tax mobilisation remained low. Tax performance in Bangladesh is constrained by a number of structural factors. These include low per capita income and narrow tax base. A gradual move towards expanding the income tax base is being observed recently. Albeit slow, the growth of revenue collection during the last few years can be attributed to a number of factors. Measures such as simplification of value added tax (VAT) system, increased coverage of VAT and imposition of supplementary tax have contributed to revenue growth. With a view to improve collection of VAT, a new VAT act has been approved in the national parliament. This will be in place from July 2015. The National Board of Revenue (NBR) is also undertaking a modernisation plan that started in 2011 and be completed in 2016. It is expected that proper implementation of these initiatives will bring some fruition in terms of higher revenue generation. Another concern is the increased capital flight from the country which has been quite significant, according to the report on ‘Illicit Financial Flows from the Least Developed Countries’ by UNDP (2011). Given the importance of the issue the newly set up Transfer Pricing Cell within the NBR needs to be more vigilant on such outflow of domestic resources. Such effort has to be backed by human resources and infrastructure.
In order to mobilise resources effectively and allocate them to the most productive investment opportunities a well functioning financial system is an important requirement. Though Bangladesh has a relatively sound and profitable financial system, its financial intermediation is low. The financial system in Bangladesh is dominated by the banking sector with a small non-bank financial sector. In terms of outreach and access to financial services to its population Bangladesh has made good progress. However, there are still gaps between the demand and provision of financial services to rural areas and in financing small and medium enterprises, agriculture and infrastructure. Moreover, interest rate spread which is the difference between the weighted average lending rate and the weighted average deposit rates is high in the banking sector by international standards. This is because of high overhead costs, credit risk, and weak competition within the sector and can be discouraging for savers.
In addition to banks and other financial institutions, the development of capital market is necessary to achieve efficiency of capital allocation. In contrast to banks which finance only well-established and safe borrowers, stock markets can finance risky and innovative investment projects. Unfortunately, capital market in Bangladesh could not take off due to various regulatory and policy failures. The capital market is not a matured one and market capitalisation is low. Moreover, the capital market experiences volatility due to both economic and non-economic factors. The depth of the market is shallow as it lacks sectoral diversification and has a concentration of the financial sector which again is represented mainly by the banking sector. Hence the opportunity to finance large infrastructural projects through raising funds from foreign portfolio investment, off-loading of shares of the state owned enterprises and various equity and bonds from the capital market is very limited.
Given the resource constraint of the government the private sector can play an important role to bridge the gap between resource requirement and availability. The public private partnership (PPP) could be a useful mode of domestic resource mobilisation for undertaking large investment in power, port and infrastructure projects. An amount of Tk. 2,500 crore was allocated by the government in the budget of FY2010. However, there is very little enthusiasm on PPP projects. Thus the achievement in the area PPP has been frustrating till today.
In addition to reform measures and policies, the improvement in the revenue scenario is contingent upon several factors including sound public spending management. Domestic resource can become the driver of economic development only if public spending is managed efficiently and prudently. Ironically, domestic resource mobilisation effort in Bangladesh is constrained also by low level of public expenditure and investment, among many other factors. Thus the country is posed with dual challenges of generating domestic resources and utilizing that resource efficiently for increased productivity and economic development. The lack of capacity to spend by the government is also reflected through the gaps between national savings and domestic investment rates. The shares of gross national savings and gross investment as a percentage of GDP were 29.5 percent and 26.8 percent respectively in FY2013 suggesting that there was investible surplus in the economy. This surplus is also manifested through under implementation of the ADP.
While addressing the issue of domestic resource mobilisation both policy and institutional aspects have to be considered. The implementation of new measures requires a transparent and accountable tax administration which should be supported by efficient and honest human resources. They should also be able to work independently and impartially without any external influence.
Finally, enhancement of resource mobilisation also depends on the utilisation of resources. If taxpayers are not convinced and confident of the proper utilisation of their hard earned money, the generation of resources becomes difficult. Therefore, there has to be clarity and transparency on the purpose of resource allocation for investment so that the responsible authority can be made accountable in case they fail to perform. This is also required for improving the quality of expenditures so that resources spent by the public representatives can contribute to employment generation and poverty reduction which are part of the post-2015 development agenda. The achievement of post-2015 agenda is thus, to a large extent, contingent upon domestic resource mobilistion.