Originally posted in The Business Standard on 19 January 2024
Addressing the challenges of the economy requires a comprehensive approach, encompassing improved fiscal management, timely project implementation, enhanced accountability, and an environment conducive to private sector growth
The strains on the macroeconomic landscape in 2023 have only intensified over the preceding year, and there is no evidence of any amelioration in the prevailing conditions in the new year 2024.
The economic challenges manifest across multiple indicators, including revenue generation, Annual Development Program (ADP) implementation, foreign exchange reserves, exchange rates and inflation.
Persistent issues such as mismanagement in the banking sector, rising defaulted loans, pressures in external trade, and stagnancy in investment from home and abroad are unlikely to abate shortly.
The Bangladesh Bank has initiated to hike interest rates, albeit belatedly, as a means of curbing inflation. Outlook also indicates a potential decline in global commodity prices, offering a glimmer of hope.
Effective market management could contribute to a moderated inflation rate if the supply of gas, electricity, and other inputs of the industries remain available at reasonable prices.
Any volatility in the exchange rate, particularly the high devaluation of the Taka, would create further pressure on the price level of essential goods and services.
Failure to control inflation in the absence of coordinated fiscal, monetary, and regulatory measures, will result in a huge amount to be spent by the government to provide support through cash, kind, or supplying commodities at a subsidized price, to ease the life and livelihood of the poor.
The stark reality is that the existing revenue generation falls far short of meeting the substantial demands for running the government, financing development, servicing foreign loans, and meeting subsidy demand for various sectors.
The pressure on the fiscal spaces of the government is increasing as the provision of public borrowing from the domestic sector, particularly from banks, is reducing.
In this scenario, the foremost responsibility of the newly appointed finance minister should be to establish an emergency committee comprising economists, private sector representatives, experts, and officials from various departments, under the purview of his ministry.
Transparency and openness in governance become crucial during times of crisis, and the formation of such committees is a practice observed in various countries worldwide, including India.
Following the recommendations of such a committee, the government should formulate a complete reform agenda and initiate the implementation of it, to uplift institutional capacity appropriate for the next level of development.
Our domestic resource mobilisation rate has consistently fallen and now it is lower than the averages of other South Asian countries and even Least Developed Countries (LDCs).
Despite the escalating size of our population and the national budget, the tax collection rate, contrary to expectations, is declining relative to GDP.
The government is facing a continuous failure to allocate sufficient money for some necessary sectors due to lower tax collection, on the one hand. On the other hand, the questions of ensuring accountability, transparency and priority are getting intense, regarding the spending of limited money by the government.
The current challenge in public finance management lies in the institutional capacity of human resources involved in resource acquisition and utilisation.
It is not a novel concern that those who are assigned such duties often face challenges in fulfilling their roles effectively.
To increase revenue collection, we need major reforms, particularly the introduction of information technologies to enhance the institutional capacity of the National Board of Revenue (NBR).
Development organisations like the World Bank and DFID are actively supporting the implementation of technology and automation in revenue boards, but such initiatives have had disappointing outcomes.
Despite sporadic improvements in certain sectors, including large taxpayer units, there is an urgency to expedite these reforms.
Facilitating taxpayers to fulfill their tax file from home through technology not only reduces corruption but also minimises people-to-people contact.
Furthermore, integration of the NBR with the databases of other services like National Identity Cards, Bank Accounts, Savings Departments, Stock market, RJSC, land registry office, and investment registry office would significantly diminish tax evasion and alleviate harassment.
These measures mark essential strides towards a more efficient, transparent, and technology-driven financial system.
It can be asserted that the Board of Revenue might require a significant workforce for these tasks. The reality, however, is that the need for manpower can be substantially reduced through efficient processes.
To enhance efficiency in tax management, a clear demarcation between policy formulation and implementation is imperative. Conflict of interest arises when individuals who are responsible for formulating tax policies, setting collection targets in various sectors, are also handling the collection process.
The oft-repeated call to expand the tax base remains crucial. Emerging sectors of the economy, where incomes are on the rise, including the informal sector in rural areas, represent untapped potential.
The Center for Policy Dialogue (CPD) has been emphasising the importance of broadening tax collection to include various sectors such as inheritance tax, property tax, gift tax, and e-commerce.
Substantial income is generated in sectors like agriculture, fisheries, and livestock. Continuous tax exemptions in these sectors hinder revenue collection.
While those in the formal sector employees diligently pay their taxes, they face harassment through various inquiries, escalating tax rates, and the unnecessary opening of tax files.
High-income people often escape detection and punishment for tax evasion by exercising a high level of influence.
Therefore, there is a pressing need to empower the tax administration, not for harassment, but to effectively enhance revenue.
Striking this balance is crucial for fostering a tax system that is both robust and fair.
In the realm of revenue collection, it is imperative to emphasise non-tax revenue by exploring avenues beyond the tax system.
The government oversees various commercial and service enterprises across sectors, many of which have been incurring losses for decades.
The prevailing issue lies in the prioritisation of the benefit of individuals managing these institutes over national interest.
Regrettably, while government revenue remains stagnant, the allocation and implementation of expenditures according to demand are not on an upward trajectory.
Despite significant cuts, 80-90 percent of the annual development program is executed each year.
This slower implementation in the first and second quarter of the fiscal year often compromises the quality of work, with a noticeable trend of huge money disbursement occurring in the last quarter, undermining the assessment of work quality.
Sluggish implementation of the development program makes infrastructure costly to build through price escalation and also prevents users for a long time from availing the benefit from it.
The COVID-19 crisis has brought to light weaknesses in the health and education sectors, both of which lag in implementing the ADP, despite the growing demand for increased spending.
Moreover, inefficiencies persist in revenue and expenditure, with policymakers seemingly unable to address these issues.
Regular review of audit reports by the Parliamentary Standing Committee is recommended, holding accountable those responsible.
The challenge here is the time lag in issuing audit reports by CAG, often five to six years after the fiscal year ends.
Decades-long problems highlighted by IMED regarding project implementation persist without sufficient action.
Bolstering the logistic and institutional capacity of IMED is crucial for expediting development work.
Government funds have been extensively allocated for infrastructure construction in recent years. Ensuring a return on investment in roads, bridges, and railway lines, is essential.
High user fees resulting from exorbitant infrastructure costs may impede increased user participation.
Despite substantial public investment in infrastructure, private sector investment has stagnated at 22-23% of GDP due to the absence of a proper investment climate.
Achieving targets in tax collection and government spending remains elusive, undermining the accountability of responsible officials who face no repercussions for unmet targets.
Addressing these challenges requires a comprehensive approach, encompassing improved fiscal management, timely project implementation, enhanced accountability, and an environment conducive to private sector growth.