Originally posted in New Age on 23 February 2025
Senior economist and Executive Director of the Centre for Policy Dialogue, Dr. Fahmida Khatun, discusses the economic woes inherited by the interim government as a legacy of 15 years of misrule under the ousted Awami League government and emphasises the urgent need for immediate fixes. In an interview with Special Correspondent Shakhawat Hossain for New Age Business magazine, she elaborates on how the regressive tax system is burdening ordinary citizens. She also talks about the political landscape, the urgent need for reforms, and the necessity of free and fair elections to establish the rule of law, which is essential for economic stability.
Dr Fahmida Khatun expressed her disappointment over the decision to increase the Value Added Tax (VAT) rate and impose additional supplementary duties on more than 100 products by the interim government, just six months after it assumed power following the fall of the Awami League regime, which crumbled like ninepins in the face of a mass uprising in August last year.
Amid criticisms, the increased VAT rate was withdrawn from some of the products. Finance Adviser Salehduddin Ahmed expected that there would be no major impact on overall inflation, but the CPD Executive Director disagreed.
‘These decisions are bound to hurt the majority of consumers,’ she said.
For her, inflation represents a major challenge for the interim government, especially in light of the huge expectations from the public to rise to the occasion after years of long repression and a lack of freedom of speech under the Awami League government led by ousted prime minister Sheikh Hasina.
‘People want comfort,’ she said.
‘Without providing comfort to the people, the interim government will not be able to free them from discrimination,’ she added, highlighting that the call for ending discrimination was at the heart of the spectacular mass uprising that brought an end to the 15-year rule of the Awami League.
Earlier, she described the current state of the economy, which, according to her, had been left behind by the ousted regime.
To evaluate the present economic situation, everyone must look back, she said, pointing out that the Awami League regime had focused on a narrative of development. However, in reality, all the key economic indicators had been deteriorating.
‘Obviously, there were some developments, but they were not sustainable due to the absence of necessary reforms,’ she said.
Questions had been raised about the so-called development narrative promoted by the Awami League due to the decline in private investment, foreign direct investment, employment, and the rising number of youth who are ‘Not in Education, Employment, or Training’ (NEET).
The NEET population increased by more than 10 percentage points in the past five years up to 2022, making them more vulnerable in the labour market. Aged between 15 and 24, the NEET population was recorded at 40.67 per cent in 2022, according to the Bangladesh Bureau of Statistics in its publication, The Bangladesh Sample Vital Statistics 2022.
The NEET population stood at around 30 per cent in 2017, according to the BBS labour force survey conducted in 2016–17.
The growing NEET population has been described as an alarming sign by the CPD Executive Director, as more than two-fifths of the total youth are not participating in any formal training programme for skills development.
According to the CPD Executive Director, this situation stands in stark contrast to the Awami League’s development narrative.
‘Essentially, the development was not balanced; it was cosmetic,’ she said.
Subsequently, inflation, falling foreign currency reserves, inefficiencies in the annual development programme, bank theft, capital flight, and corruption are among the many problems inherited by the interim government, which assumed power on 8 August, three days after Sheikh Hasina fled to India on 5 August.
While lauding some of the steps immediately taken by the interim government in addressing the crisis-hit banking and financial sectors, the CPD Executive Director is critical of the current government’s preference for regressive taxation, particularly the hike in VAT rates.
The CPD Executive Director expressed concern that the decisions were aimed at increasing revenue to overcome financial constraints, which were causing headaches for the finance ministry in managing the current budget deficit and meeting the conditions of the $4.7 billion loan programme with the International Monetary Fund, which has been ongoing since 2023.
However, she emphasised that VAT is a regressive tax that impacts all consumer groups, regardless of their income levels.
‘A millionaire and a beggar are paying the same amount of tax for consuming a product; such a taxation system cannot be considered progressive,’ she said, adding that the CPD has never supported stress on such a tax system.
She lamented the country’s current taxation system, which relies heavily on indirect taxes, thus overburdening the majority of people with this rigorous system over the years.
According to the CPD Executive Director, direct taxes, which are progressive in nature and the opposite of indirect taxes, account for 35 per cent of the total income collected by the National Board of Revenue (NBR).
Indirect taxes contribute 65 per cent of the NBR’s overall income.
‘Emphasis should be placed on increasing direct tax,’ she said.
Highlighting the fund shortages faced by the interim government, the noted economist pointed out that successive governments have struggled to shift the country’s regressive taxation system towards a more progressive one due to corruption and tax exemptions.
She argued that tax exemptions for certain industries should not be sustained for long.
Calling such exemptions a barrier to sustainable industrialisation in the country, the CPD Executive Director suggested that new industries should be granted tax exemptions instead of those that are already established.
She also stated that the interim government should address revenue leakages to recalibrate overall revenue generation, ensuring that the government’s development activities under the annual development programme (ADP) can continue.
While welcoming the step to identify politically motivated and unviable projects from the Awami League regime, she emphasised that the implementation of ADP projects must be accelerated, as failing to do so would prevent the creation of employment opportunities.
‘The current unemployment rate is unacceptable,’ she said, questioning how economic progress could advance without the implementation of development projects and job creation.
She further noted that the number of NEET individuals was already alarmingly high.
The NEET population accounted for 19.11 per cent of the country’s total population of 16.98 crore in 2022, with the proportion of females significantly higher at 61.71 per cent, compared to 18.59 per cent for males.
To address the growing NEET population, which risks becoming a burden on the nation, the CPD Executive Director suggested major changes in the education system and skills development for young people.
When asked which of the two challenges—the repatriation of stolen money or the increasing tax-to-GDP ratio—was more difficult for the current government, the CPD Executive Director replied that both were equally challenging.
‘Increasing the tax-to-GDP ratio is a significant challenge, for which automation is crucial,’ she added.
Referring to the overall status of automation in revenue collection, despite past efforts, she noted that the National Board of Revenue (NBR) could not avoid responsibility for its half-hearted approach to this highly important issue.
The CPD Executive Director also pointed out that factors such as bank theft, rewarding dishonest and errant taxpayers, and administrative hassles were discouraging the general public from paying taxes.
‘Honest taxpayers want to see better service delivery from government officials,’ she said, adding that service delivery had hardly improved, despite increased parks and packages for government employees.
She expressed concern over the proposed pay hike for government officials.
On 12 December, the finance ministry appointed a seven-member committee, headed by the principal secretary to the chief adviser, Professor Muhammad Yunus, to explore ways of providing a dearness allowance to public employees. Three days later, senior secretary Mokhlesur Rahman of the Ministry of Public Administration, also a member of the committee, informed reporters that the interim government would soon announce a dearness allowance for all its employees.
However, on 28 January, the finance adviser stated that no decision had been made regarding the dearness allowance, despite widespread criticism.
Recalling the previous pay scale implemented for government employees in 2015, the CPD Executive Director noted that the government had almost doubled salaries at that time.
‘Compared to the regular pay hikes for public officials and employees, wages in other sectors have not been updated on time,’ she lamented.
In January 2025, the CPD, at an event titled ‘Reform in Workers’ Livelihood, Workplace Safety, and Rights: An Agenda for the Interim Government’, recommended implementing new wage rates within a year for sectors where wages have not been updated in the past five years.
There are 42 sectors covered by minimum wage regulations, but 19 of these have not had their wages updated in five years, according to data from the Minimum Wage Board. The informal sector, which covers 85 per cent of the total labour force, includes industries not covered by the 42 sectors. The think tank reported that there are approximately 140 sectors and sub-sectors in the country, both formal and informal.
The CPD Executive Director noted that public employees also received a 5 per cent annual increment in their basic salary.
The recently released ‘White Paper on the State of the Bangladesh Economy’ described the pay hike in 2015 as an attempt to appease the bureaucracy, which had supported the government in rigging the 2014 election.
The growing public debt, due to low revenue, has resulted in surging interest payments on loans since 2017–18. The interest payments have even surpassed the amount spent on salaries and allowances for government employees, the paper stated in ‘Chapter VII on Public Investment: The Roots of Corruption.’
Asked to comment on the questionable performance of Bangladesh Bank (BB) over the years as a regulator and what actions are necessary to revive it, the CPD Executive Director stated that BB had already been granted sufficient power.
However, she argued that BB would not be able to fulfil its responsibilities as long as it remained under political influence.
‘BB will remain inactive as long as political influence prevails,’ she said, describing how the BB had been influenced by the Awami League regime to grant licences to new and inexperienced bank operators, extend the tenure of bank directors, and turn banking into a family business for many AL-connected oligarchs.
She noted that current law did not allow bureaucrats to be appointed as the governor or deputy governors of the Bangladesh Bank.
‘But this rule is not always maintained,’ she said, referring to the appointment of retired bureaucrat Fazle Kabir as BB governor after development economist Atiur Rahman was asked to resign following the reserve heist, in which hackers stole around $80 million from BB in one of the largest robberies in banking history.
The CPD Executive Director is also critical of the role of the Financial Institutions Division (FID) under the Ministry of Finance, stating that the creation of the division by the AL undermined the autonomy of the Bangladesh Bank (BB).
‘The FID plays a dual role to the BB,’ she said, adding that it has been turned into a lobbying centre for acquiring loans on political grounds from the government-owned commercial banks.
‘There is no justification for maintaining it, merely to protect a few positions, including that of a secretary,’ she commented.
In her view, the BB is more than capable of overseeing the banking sector, especially considering that its governor possesses strong personal attributes.
The CPD Executive Director remarked that while political pressure on the central bank is inevitable in a country like ours, the central bank governor could easily overcome such pressure if he had the necessary character.
‘It is imperative for the central bank governor to avoid conflicting actions, based on moral judgement,’ she added, lamenting that the country has yet to witness an example of someone resigning due to a commitment to principles, instead of holding onto their post.
According to the CPD Executive Director, the new BB management under the interim government has faced numerous challenges on the economic front, including the recovery of stolen funds sent abroad by AL oligarchs who plundered banks, as well as the management of growing distressed assets in the banking sector.
Distressed assets in Bangladesh’s banking sector exceeded Tk 6.75 lakh crore at the end of FY24, an amount equivalent to the cost of 13.5 Dhaka Metro systems or 22.5 Padma Bridges, according to a draft White Paper.
The report highlights that the banking sector’s problems are not isolated incidents, but rather result from systemic failures and regulatory loopholes that have enabled widespread malpractice.
The CPD Executive Director argued that an Asset Management Company should be appointed to deal with non-performing loans, which reached Tk 2,84,977 crore in September 2024. This figure represents nearly 17 per cent of the total outstanding loans in the country and is 2.7 times higher than the combined allocation for the education and health budgets in the 2023-24 financial year.
The CPD Executive Director stated that the long-awaited reforms concerning the constitution, judiciary, election commission, bureaucracy, human rights, and the media—initiated under the current government—should be completed to ensure the sustainability of the economic front.
She added that reforms in other areas would become irrelevant without comprehensive economic reform, which has long been overlooked by the AL regime.
She reiterated that much of the country’s future prospects and the success of reform depend largely on the politicians and the next elected government.
Expecting the next general election to be free and fair, and for it to be participated in by all, particularly young people and first-time voters who have been deprived of their voting rights since 2014 due to the lack of a fair election process, she emphasised that the newly elected government should be motivated by a strong understanding of the general electorate.
‘After all, political parties will have to earn the confidence of voters by committing to the implementation of current reform proposals put forward by various commissions and task forces,’ she said, hoping that the newly elected government would continue reforms across most sectors, as the interim government is unable to complete such a large task due to time constraints.
The CPD Executive Director stressed that it is the prime responsibility of the interim government to bring about changes to the election commission, ensuring that credible elections, conducted freely and fairly, can take place after more than a decade.
She expressed hope that the newly elected political party would not repeat the mistakes made by the AL in 2009 by discontinuing the reforms.
It has been reported that when the AL assumed power, it recognised only 54 out of the 122 ordinances promulgated by the military-backed caretaker government in 2007-08.
The CPD Executive Director warned that the July uprising, led by students, should serve as a lesson for all political parties to allow the people to exercise their voting rights freely and fairly.
‘Otherwise, the people will join the uprising again,’ the senior economist concluded.