Originally posted in The Financial Express on 5 May 2021
Almost after a year since the first wave of the Covid-19 pandemic in Bangladesh, the country is passing through a second wave of the pandemic. The second wave seems to be stronger than the first one both in the number of affected people and the deaths. Therefore, just when the government was hoping to recover from the fallouts of the pandemic, it had to go for lockdown once again to contain the spread of the deadly virus. While strong restrictions on the mobility of people is the only way to flatten the curve, it has brought back the miseries for the people and uncertainty for the economy. The policymakers, once again, are posed with the challenge of maintaining a balance between the lives and livelihoods.
In the midst of the pandemic, the FY20 was completed with lower than projected growth of the Gross Domestic Product (GDP). However, the official GDP growth of 5.2 per cent in a pandemic year was not so unsatisfactory, particularly because almost all other countries have experienced much lower, if not negative growth. In anticipation of the pandemic slowing down and economic activities reviving, the government had projected a growth rate of 7.4 per cent for FY21. This was a highly optimistic projection.
However, with almost 10 months on, the key economic indicators appear to be far less promising than projected earlier. The fiscal framework continues to be weak in view of poor achievements, more specifically, both in terms of revenue mobilisation and public expenditure.
Available data for the first six months of FY21 reveal subdued performance as regards several key economic indicators. For example, during the first six months (July- December) of FY21, both revenue mobilisation and public expenditure have shown lower uptake compared to the same period of the previous fiscal year. As Section 3 of this report shows, as of December 2021, the growth in revenue collection is significantly lower. Given the track record, it is unlikely that the target will be fulfilled during the next six months of FY21. Clearly, a major reason for the large gap in revenue collection is because of the Covid-19 pandemic, but more importantly, this also points to the need to address some of the underlying weaknesses in institutional structure, which needs to be strengthened through urgent reforms.
In the case of public expenditure — a much-needed measure during the pandemic to boost the economy — there was hardly any effort to go for a strong expansionary fiscal policy. Instead, public expenditure during July-December of FY21 exhibited a downward trend. This is true for both the ADP and non-ADP expenditures. Lower public expenditure, in the backdrop of the revenue mobilisation during this period, has led to a lower budget deficit as of December 2021 compared to that of December 2020. Such a tepid expenditure pattern fails to meet the need to boost demand and supply in view of the ongoing pandemic.
It is good that the agriculture sector has remained resilient during the pandemic. However, the external sector has shown a mixed performance in the first three quarters of FY21. Following the outbreak of the pandemic in March 2020, exports had experienced a drastic fall due to demand collapse and, more particularly, the cancellation of readymade garments (RMG) orders by the global brands and buyers. The situation has, however, improved slightly towards the later part of 2020 and the beginning of FY21. However, the level of export earnings is still flat. Also, import continues to be sluggish for both intermediate imports and capital goods imports. This is worrisome since it indicates lower domestic demand and lack of new investment. Remittance flow, on the other hand, has shown robust growth. Due to higher remittance flow, the balance of payment situation improved significantly during July-December of FY21 compared to the same period of FY20.
In the above context, there is a need for sustained efforts to stimulate the economy through appropriate policy measures. The national budget for the upcoming FY22 will have to be designed in such a way that budgetary measures should not only address the immediate needs but also help a sustainable recovery of the economy from the pandemic.
MACROECONOMIC STANCE FOR THE BUDGET:
The unexpected outbreak of the pandemic led to the initiation of a number of stimulus packages by the government in FY20 and also in FY21 to help people address the immediate shocks and mitigate the economic losses. The stimulus packages, which are equivalent to about 4.4 per cent of Bangladesh’s annual GDP, were no doubt helpful, but these only had limited impact in terms of addressing the enormous challenges faced by the poor and the small businesses. For the poor, the amount of direct cash and food support that were distributed proved to be highly inadequate. Moreover, the distribution mechanism is also fraught with multiple problems. And for the micro and small businesses, the liquidity support from the commercial banks at a subsidised interest rate proved to be cumbersome and could not be accessed by a large part of deserving entrepreneurs.
Hence, the Ministry of Finance (MoF) will have to plan for higher public expenditures for addressing the affected people and sectors of the economy on the one hand and mobilise adequate resources to undertake such expenditures on the other. Though the government had planned for an expansionary fiscal and monetary policy in FY21, the fiscal framework as of December 2021 does not vindicate this, as mentioned above and discussed in more detail in another part of the article.
In view of the ongoing situation, Centre for Policy Dialogue (CPD) reiterates the need for an expansionary macroeconomic stance in the budget for FY22 which accommodates the needed additional public spending. While this will imply pursuing a higher fiscal deficit in the FY22 budget, this is the appropriate policy stance in the current circumstances. Of course, the MoF will have to design deficit financing in a prudent way so that any likely inflationary pressure is contained. There is a likelihood that such deficit financing could crowd out loanable funds for the private sector. However, private sector credit has been low during the ongoing fiscal, and this crowding out should not be a major concern. Also, the government should put more efforts into higher foreign aid to underwrite the fiscal deficit. Increased budget deficit should be justified by prudent reallocation and reprioritisation of public expenditure needs in FY22.
As was the case in FY21, the upcoming budget will also have to allocate resources in a way that would address needs of both the immediate and the recovery phase. In the immediate term, it will need to focus on health risk mitigation and ensuring food security through expanded safety nets. In the recovery phase, which should be pursued simultaneously, the budget will have to make allocations and undertake measures in view of the demands of enterprises, businesses and commerce. The experience of FY21 should be a guide for the MoF in formulating the second budget during the Covid-19 pandemic.
Unfortunately, despite being hit hard by the pandemic, the health sector received only a marginally higher allocation in the FY21, with the share remaining less than one per cent of the GDP. The spending so far has been much lower, even in this backdrop, primarily because of the weak spending capacity of the health ministry. The urgency of improving the implementation capacity of the relevant ministries and departments cannot be overemphasised. The ongoing pandemic has created a significant number of new poor and is apprehended to accentuate inequality, as have been borne out by many studies, including studies carried out by CPD. Consequently, a higher allocation for social protection in the FY22 budget is critically important. Covid-19 has particularly impacted the education sector most adversely, and the risk of deteriorating future human capital is very high. Unless the government addresses the situation by providing online education facilities for all students, the recovery of the anticipated losses will take a long time. The medium to long term costs to the economy and society will be significant if these concerns are not addressed adequately and the urgency they deserve. The budget for FY22 should allocate adequate resources for digital support and technologies for continuing education at educational institutions across the country. Finally, the implementation of ongoing fiscal and administrative reforms should be continued alongside the efforts towards addressing the fallouts of the pandemic.
REVENUE MOBILISATION:
Despite reeling from the shocks of the Covid-19 pandemic, total revenue collection posted a respectable growth of 8.6 per cent during the July-December period of FY21, thanks to a whopping 40.2 per cent growth in non-tax revenue earnings (Table-1). The total revenue growth for the corresponding period of FY20 (pre-Covid-19 months) was only 6.2 per cent. Although some improvement is visible in terms of growth of revenue mobilisation, it is still inadequate to attain the highly ambitious targets set in the budget for FY21. Indeed, a staggering 74.2 per cent growth is required for the remaining period of FY21 in order to achieve the total revenue mobilisation target. Collection of tax revenue will need to grow by 105.3 per cent during the remainder of FY21, an impossible task.
In view of the recent spike in Covid-19 cases, both in Bangladesh and overseas, the fiscal framework for FY22 will need to take cognisance of the pandemic’s short-term impacts as also the medium-term repercussions. Growth of export earnings is in the negative terrain while the growth of import payments is rather subdued. Indeed, further slowdown of economic activities is apprehended due to the recently imposed nationwide ‘strict lockdown’. All these will likely put under risk even the current slow pace of recovery. Consequently, any significant uptake in revenue mobilisation is also highly unlikely.
The Ministry of Finance needs to be prudent and take into account the medium-term impacts and outcomes of policy measures while introducing or adjusting fiscal measures and allocating budgets to specific sectors. In view of the above, the revenue mobilisation strategy for the FY22 budget should be designed considering the following four approaches:
- Instead of setting ambitious targets which may miss the annual target by a significant margin by the end of the fiscal year, the targets for revenue mobilisation should be set in a realistic manner taking cognisance of the potential shortfall in FY21.
- Immediate term readjustments in tax provisions should be made considering the urgency of both addressing the risks and mitigation of the vulnerabilities. In order to extend support to economic recovery over the medium term, persuasion of fiscal policy should be made in a judicious manner. There must be a clear demarcation between short-term and medium-term measures.
- As introducing new taxes or raising tax rates may be difficult, more emphasis should be given to the enforcement of tax measures and curbing tax evasion.
- Implementation of medium-term reform plans should receive high priority on the part of policymakers.
In light of the aforementioned strategies, the following recommendations may be considered while formulating the budget for FY22:
- In the budget for FY21 personal income tax (PIT) rates were reduced. Providing benefits to monthly income earners of Tk. 4 lakh and above clearly went against the cause of promoting tax justice at a time when the resource was scarce. The budget for FY22 should correct this by reinstating the highest tax rate to 30 per cent.
- Reduction of the corporate income tax rate from 35 per cent to 32.5 per cent for non-publicly traded companies and reduction of withholding tax from 1.0 per cent to 0.5 per cent on all types of export proceeds, including those of the RMG enterprises, introduced in the budget for FY21, are two provisions which may be continued in FY22. Also, given the crisis inflicted by the Covid-19 pandemic, tax holiday facilities for the seven newly emerging manufacturing sectors earmarked in the FY21 budget, alongside the existing 26 sectors, should not be discontinued in the upcoming budget.
- In view of the ongoing second wave of the pandemic, exemption of import duties and taxes related to health services which were introduced in the FY21 budget should be continued in FY22. Medicines for Covid-19 treatments which have to be imported should also be tax-free, considering these as life-saving drugs.
- With the food grain stock being the lowest in recent years, the government needs to put particular focus on ensuring food security for the low-income people. The government has already taken the decision to distribute cash support, instead of food, under the various existing safety net programmes. For the FY22 budget, reduction of import-related tariffs (such as advance income tax and VAT) on essential food items (such as onion, lentil, garlic, ginger and soybean oil etc.) should be considered.
- For education and business purposes the necessity and usage of mobile internet-based services have increased substantially in the backdrop of the pandemic for students and those undertaking various business activities using digital platforms. In view of this, the government should withdraw the existing 15 per cent supplementary duty, and the 1 per cent surcharge levied on mobile internet while keeping the prevailing rate of VAT at 5 per cent unchanged. This will provide some respite to the low-income consumers and make mobile internet more accessible and affordable for education and business purposes.
- Nevertheless, a medium-term plan should be formulated as regards phasing out the various tax exemptions provided during the pandemic. Stakeholder consultations should be an integral part of formulating this plan. Such a plan will provide the business community as well as the revenue mobilisation entities some predictability amidst uncertain times.
- A viable completion timeline should be introduced, or at the least chalked out, for reforms that are under consideration, such as the Customs Act and Direct Tax Act, in the budget for FY22. Doing so will enable the implementation process to start early.
- In view of Bangladesh’s LDC graduation in 2026, obligations and compliance requirements as a developing country should be identified, and gradually reforms in the taxation system should be put in place.
- Digitalisation of the revenue mobilisation process can be improved through an e-TDS system for which CPD has been advocating for a number of years. The introduction of the e-TDS system will enable NBR to issue tax certificates against an e-TIN linked to the ‘tax-deducted-at-source (TDS)’ collection system, thus making the evasion of TDS difficult.
- The present system of mere submission of TIN number for license/registration etc., should be replaced (at least in selective cases) by the requirement of submission of tax token for the most recent years.
- CPD would like to reiterate its earlier proposals urging the NBR to initiate wealth and property tax in Bangladesh. Introduction of an inheritance tax, informed by global best practices, may also be taken into account as such initiatives do not only mobilise additional revenue but also pave the way towards building a more equitable society.
- CPD would like to recommend that NBR introduce taxes for proxies for pollution, by tax region, in alignment with what was mentioned in the “Public Financial Management (PFM) Action Plan 2018-2023 to implement The PFM Reform Strategy 2016-2021”. This may be viewed as a new and desirable source of tax revenue.
- The provision of whitening of black/undisclosed money facility through voluntary disclosure of undisclosed income should be discontinued in the budget for FY22. Despite the fact that this has led to infusion of some additional revenue to the national coffer, such practices discourage honest taxpayers and incentivise tax evasion in the medium to long run. Instead, a Benami Property Bill may be introduced as was suggested earlier by CPD.
- A mechanism should be put in place to contact relevant entities who are registered in the system but do not submit tax returns and also those who are registered and submit returns but do not actually pay any taxes. Phone calls, SMSs and emails may be helpful in this regard for the NBR to increase the number of effective taxpayers. Such a mechanism can be set up easily using the e-TIN database.
- As envisaged in the PFM Action Plan 2018-2023, NBR should launch a comprehensive on-line payment system for VAT, income tax and customs together with an interface with iBAS++. Also, harmonisation and taxpayer data sharing across various wings of the NBR should be ensured at the earliest.
- As per data from international sources, the major part of Bangladesh’s illicit financial outflows is on account of trade mispricing. Transfer Pricing Cell (TPC) of NBR, Bangladesh Financial Intelligence Unit (BFIU) and Customs Intelligence and Investigation Directorate (CIID) should work closely to deal with trade-based money laundering. For effective implementation of the responsibility of the TPC, the national budget for FY22 should ensure adequate allocation for technical and human resources and forensic investigation capacities.
Dr Fahmida Khatun is Executive Director, CPD; Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD. towfiq@cpd.org.bd; avra.bhattacharjee@gmail.com
The article is based on ‘CPD’s Recommendations for the National Budget FY2021-22.’ Research support was received from Mr Muntaseer Kamal, Mr Md. Al-Hasan, and Mr Syed Yusuf Saadat, Senior Research Associates of CPD; Mr Abu Saleh Md. Shamim Alam Shibly and Ms Nawshin Nawar, Research Associates of CPD; Ms Helen Mashiyat Preoty, Programme Associate of CPD; and, Mr Md Salay Mostafa, Research Intern of CPD.