Policy coordination to yield better budgetary outcomes – Debapriya Bhattacharya

Originally posted in The Daily Star on 31 May 2023

Sharper, flexible and timely coordination among fiscal, monetary and trade policies of Bangladesh will yield improved stabilisation outcomes, said Debapriya Bhattacharya, a distinguished fellow of the Centre for Policy Dialogue.

With a view to tackling high inflation and stopping the fall of the foreign currency reserves, the country needs to get the numbers right first, he said, while speaking to The Daily Star in an interview.

“As we know, there is a difference between the forex reserve estimation methodology practised by the central bank and the International Monetary Fund. So, it will be definitely challenging to hold on to net $30 billion as per the IMF’s method.”

“This will be particularly so because of the dim short-term outlook for exports, the erratic flow of remittances, minuscule foreign direct investment and growing debt servicing liabilities.”

Under the circumstances, aligning multiple exchange rates of the taka is a must to stabilise the foreign currency flow and provide practicality to the market, according to Bhattacharya.

“The foreign exchange rationing, which is currently being practised, has to be eased up to bolster investment and create employment. Quick disbursement of the contracted budget support and other forms of concessional finance from external sources may help significantly.”

To a great extent, Bhattacharya said, the current inflationary trend is spurred by a cost-push brought about by rising commodity and service prices in the global market, falling value of the taka, import control of consumer goods and distortions in market management.

“Thus, without stabilisation of the external balances, it will be difficult to tame the price spiral.”

However, a number of tariff rationalisation measures may alleviate the situation a bit.

For example, as the government tries to rationalise the subsidisation of energy prices, it may also reduce the taxes at source for liquid fuels. This may moderate the price pressure coming from the cost of energy inputs.

A former ambassador and permanent representative of Bangladesh to the World Trade Organisation and the United Nations, Bhattacharya said the revenue collection target for the elapsing fiscal year will be missed by a large margin.

About two-thirds of the collection by the National Board of Revenue (NBR) comes from indirect taxes, which took a hit due to control of public expenditure and imports. Further, collections from direct taxes were weaker than the indirect taxes uptake.

On the other hand, the implementation of the annual development programme witnessed the lowest delivery rate of the last 10 years in the July-March period of 2022-23, partly due to the imposition of expenditure restraint predicated by, among others, both local and foreign currency shortages.

Given the below-average revenue collection and public expenditure performance, the fiscal deficit is going to increase by about 1 per cent of the GDP in FY23.

“One may recall that the fiscal targets for FY23 had been less ambitious than those of the pre-Covid years. Yet these restrained fiscal targets would remain far from the designated finishing line. In fact, the revenue performance remains much lower than the potential for mobilisation as projected by the provisional GDP growth estimate,” said Bhattacharya.

Nonetheless, he thinks, it must be recognised that the fiscal situation could have been worse if the expenditure and import controls were not introduced.

Arguably, this was driven by the serious deterioration of the balance of payments, current account and even the financial account. Otherwise, the fast-depleting foreign exchange reserve would have been in a worse situation.

He pointed out inadequate policies when it comes to addressing inequality and making economic development inclusive.

The latest Household Income and Expenditure Survey indicated that Bangladesh is increasingly becoming a deeply unequal society. This is true in terms of assets, income and consumption inequalities. Unfortunately, the fiscal policy played little role in preventing such a situation.

The tax-GDP ratio in Bangladesh remains one of the lowest in the world. The incremental revenue collection comes from indirect sources such as VAT, which is not mean-tested.

While the effort to broaden the tax net through improved income tax collections is in the right direction, such efforts essentially overlook taxing land and other assets, the economist said.

“Bangladesh needs to strengthen its collections from property taxes. It has to think of introducing a reasonable inheritance tax and rationalise gift tax.”

However, increasing tax uptake can’t be considered in isolation from improving the quality of government expenditures.

“To motivate taxpayers, we need to demonstrate that public services such as health, education, social welfare, and public safety are addressing the citizens’ concerns. Making the tax system fair, just and transparent would also require radical reform of the tax administration.”

Bhattacharya says he was not sure to what extent the upcoming budget can deal with the policy challenges, particularly in the wake of an electoral transition.

“Anyway, accumulated problems emanating from unattended reforms can be hardly addressed in a single annual budget framework.”