Published on The Daily Star
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Photo: A.M.Ahad / Drik news
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The context
Domestic resource mobilization has taken centre stage during the 1990s in view of the declined flow of foreign aid to the developing countries. As opposed to an unsustainable development path through reliance on resource from external sources domestic resource mobilization can lead towards a self-sustaining development. Several reasons have been 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 also gives flexibility as opposed to conditionalities of aid. Third, the need for broadening the tax base as a source of domestic resource mobilization 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. The reduction in corporate tax necessitates resource generation through the broadening of tax net. 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.
The above arguments in favour of domestic resource mobilization are also applicable for Bangladesh to a large extent. Bangladesh has been enjoying a steady economic growth and notable improvements in social indicators. With a relatively sound macroeconomic management the country has been able achieve the growth of Gross Domestic Product (GDP) at an average rate of 5.8 percent during the past decade. In the past three years GDP growth rate averaged at 5.9 per annum percent. The per capita income has risen to USD 684 in 2010 from USD 334 in 2000. Other major economic indicators such as inflation, export earnings, foreign exchange reserve and domestic debt have been more or less within a reasonable grip. A robust GDP growth and positive macroeconomic fundamentals have contributed to poverty reduction during the past decade. According to the Household Income and Expenditure Survey (HIES) of the Bangladesh Bureau of Statistics (BBS) poverty rate fell from 56.6 percent in 1991-92 to 40.0 percent in 2005. Though growing inequality has emerged as a major concern since income accruing to top 5 percent of the households was 20.85 times higher compared to that of bottom 5 percent households in the HIES of 2005 the pace of poverty reduction has been faster during the recent past. If poverty reduced by 1 percent per annum in the 1990s, the rate of poverty reduction accelerated between 2000 and 2005.
Bangladesh has also reduced its dependency on foreign aid by a remarkable rate since its independence. In 2010 the share of overseas development assistance (ODA) in GDP has declined to 2.2 per cent from 5.8 percent in 1981. When compared with the Annual Development Programme (ADP) the share of ODA is set to be around 41 in FY11 compared to 53.2 percent in FY2000. Albeit an impressive economic growth the country suffers from an imbalance between the public expenditure and revenue, among many other shortcomings of the economy. Over the years fiscal deficits have increased, from an average of 3 percent of GDP per annum in the 1980s to about 5 percent in the 1990s and 2000s. The imbalance has led the country to reply on borrowing from both internal and external sources to meet up its public expenditure requirements.
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Photo: Wahid Adnan / drik News
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Fiscal deficits
In the FY11 the revenue collections and total expenditures are estimated to be taka 92,847 crores and taka 132,170 crores respectively leaving a deficit of taka 39,323 crores. Two percent of this deficit will be met by external resources (in the form of loans and grant) and 3 percent by the domestic resources through bank and non-bank borrowing. In doing so the government has to pay high interests. For example, in FY11 interest payments amount to 18.8 percent of total budget. Increased cost on interest payment is a matter of concern for the country since it squeezes the scope for making development expenditures. In this context efforts towards increasing domestic resource mobilisation have to be invigorated. Recent measures undertaken and proposed by the government towards revenue generation are praiseworthy. This has already started to reap some results which have been manifested through higher revenue collection by the National Board of Revenue (NBR) in the recent months. However, in order to contribute sustainably to the revenue mobilisation efforts, an integrated approach has to be adopted in terms of meeting the public and private sector requirements in the country through exploring all avenues for higher growth.
Resource mobilisation effort by the government
Taxation is a major instrument for mobilising domestic resource for all economies. However, 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 9.3 percent of GDP in FY10, a rate that has risen from 5 percent in the early eighties and is still much lower compared to the neighbouring countries. The tax structure of Bangladesh is also weak with a narrow base and dependent on indirect tax for revenue generation which is discriminatory in nature. A gradual move towards expanding the income tax base is being observed recently. Revenue mobilisation has been a success story in the FY10 when the NBR tax registered a growth rate of 18.05 percent which is much higher than the targeted growth of 16.13 percent for the FY10. The major sources of such high growth are the increase in income tax and value added tax (VAT) which grew by 23.3 percent and 25.0 percent respectively. Backed by a number of reforms and various motivational activities for awareness building the NBR has already surpassed its target in collecting income tax and VAT for the FY11.
The growth in income tax during July-October of the FY11 has been 29.2 percent against the target of 22.4 percent for the whole fiscal year. The growth in total tax collection during the first four months of the FY11 is 25.7 percent as opposed to the annual target of 16.8 percent. However, even with such spectacular growth in tax collection, the tax-GDP ratio is well below the requirement for a dynamic move towards the next trajectory of development.
Financial markets and intermediation for the private sector
In order to mobilize 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 (SMEs), agriculture and infrastructure. Moreover, interest rate spread (IRS) 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. In Bangladesh capital market is not a matured one though market capitalization has increased significantly over a short period of time. Market capitalization as a percentage of GDP has increased from just 1.4 percent in FY91 to 39 percent in FY10 and total number of companies increased to 243 in FY10 from 149 in FY91.
Though the capital market experienced buoyancy in the recent period it also experiences volatility due to both economic and non-economic factors. The depth of the market is also 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 still limited.
Public private partnership
Given the resource constraint of the government private sector can play an important role to bridge the gap between resource requirement and availability. The public private partnership (PPP) initiative introduced by the present government can be a useful mode of resource mobilization for undertaking large investment in power, port and infrastructure projects. Foreign direct investment (FDI) can also participate in such projects. However, the success of PPP will depend on a supportive institutional and regulatory framework. Ironically, even after several months since the announcement in the budget of FY10 the PPP initiative is yet to take off.
Policy issues
There is a conscious effort to expand the tax net and realisation of taxes which is evident from various reform measures and policies undertaken and proposed by the government. However, 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 a dual challenge 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 which is more than 5 percent at present. The shares of national savings and investment as a percentage of GDP were 29.7 percent and 24.3 percent respectively in FY10 suggesting that there was investible surplus in the economy. This surplus is manifested through perennial under implementation of the ADP. During the last 10 years the share of ADP expenditure has been below 7 percent of GDP and during the last 5 years it has been between 3.7 to 5.2 percent of GDP. This is rather low in view of the desired goal to achieve a 10 percent GDP growth by 2017.
While addressing the issue of domestic resource mobilization both policy and institutional aspects have to be considered. Measures such as reorganization of tax slabs, reduction of tax holidays and imposition of tax at source from the real estate developers at the time of registration are positive measures for higher tax revenue. A number of other measures have been proposed in the national budget of FY11 to increase the tax collection. Some of these include: e-filing of income tax returns on a limited basis; installment of tax calculator software on the website of NBR; restructuring of manpower and other facilities of income tax department; motivational programme for taxpayers of income tax and VAT; introduction of a two page income tax return form; introduction of tax card for highest taxpayers; initiation of e-VAT software; reforms in judicial process for easy settlement of VAT related cases; massive reforms in VAT administration including setting up more VAT offices and recruit officials, setting up VAT offices in each upazilla consisting of one inspector, one data entry operator and two sepoys. These are praiseworthy initiatives. However, implementation of these will require a transparent and accountable tax administration which should not only be supported by efficient human resources with integrity but should also work independently and impartially without any political influence.
Finally, enhancement of resource mobilization also depends on the utilization of resources. If the taxpayers are not convinced and confident of the proper utilization 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 in case of failure to meet the stated purpose the responsible authority can be made accountable. This is also required for ensuring the quality of expenditures so that resources spent by the public representatives can contribute to employment generation and poverty reduction in a sustainable manner.