Country’s economy in yellow zone: Experts at ICAB pre-budget discussion

Suggestions  

• Implementing a contractionary monetary policy
• Merging ministries 
• Budgetary focus on reforming the revenue structure
• Mandatory tax returns for anyone with NID 

Economists and experts said the country's economy is currently in the yellow zone due to four macroeconomic challenges: high inflation, depleting foreign currency reserves, development budget dependency on deposit financing, and increasing default loans in the banking sector.

Considering the situation, the next budget should focus on reforming the revenue structure to increase direct taxes, they said at a pre-budget discussion, organised by the Institute of Chartered Accountants of Bangladesh (ICAB) at its office, today (28 April).

Additionally, it could withhold government employment for a certain period and merge some ministries to reduce government expenditure, they further said. 

Ashikur Rahman, senior economist at the Policy Research Institute (PRI), said the economy has been facing some microeconomic tension factors for the last two years, which pushed the country's economy into the yellow zone. It will require another 3 years to overcome the situation. The next budget should consider these tension factors.

He said inflation has been in the double digits for the last 20 months. Sri Lanka and India have successfully curbed inflation to 5 to 6% through strong monetary policy, but Bangladesh failed to do that.

"Our foreign currency reserves are depleting. Over the last 22 months, they have depleted by about $24 billion," he added. 

"We have also failed to balance the financial account, despite efforts by the Bangladesh Bank to improve the situation through currency depreciation and imposing caps on interest rates at fixed rates of 6% and 9%. But there is still much more to be done."

In FY2023, the development budget allocation totaled Tk2 lakh crore, financed through deposit financing.

"It was rational when the Treasury bill interest rate was 3% to 4%, but now such financing would not be sustainable."

The banking sector is experiencing a liquidity shortage, with default loans totaling Tk84,000 crore across only 10 banks, which have already been named for the merger. How the government will finance them after a merger is not possible through printing money or allocating from the development budget. 

Ministry merger to minimise expenditure

Economists also advised implementing a contractionary monetary policy to reduce the rate of monetary expansion to combat inflation.
Ashikur Rahman suggested merging ministries like Environment and Water, as well as Religious and Social Welfare. 

Speaking with TBS, he questioned why Bangladesh needed two ministries in the same area of work when the US government can function with only 11 ministries.

He also raised concerns about the investment return of state-owned companies, which currently stands at only 0.7%, emphasising that it should be at least 5%.  

Echoing Ashikur, former State Minister for Planning Shamsul Alam said, "If the government borrows more from banks, the private sector does not."

"We need political commitment for that, and it also requires good governance to tax GDP ratio," he added.

Shamsul Alam advised that intelligence agencies can oversee and investigate businesses' harassment allegations against VAT and Customs officials.

Tax returns mandatory for NID holders

To increase direct tax, Shamsul Alam suggested that tax returns should be made mandatory for anyone with a National Identification Number, which may help reduce tax evasion.

Tax procedures should be automated and simplified so that taxes can be paid from anywhere, with officers facing fewer challenges. This approach may help curb unethical practices, he added.

He also raised a voice to form a commission to investigate the reasons why NBR backtracked from the installation of Electronic Fiscal Deposit Machines.

Corporate tax for listed companies to 20%

Former State Minister for Planning Shamsul Alam also advised reducing corporate tax for listed companies to 20%, with the condition to allocate 25% of profits for CSR.

"Those who have dual citizenship should not be allowed to sell their land if they have not been in the country for the last five years. This measure may help prevent capital flight."

He mentioned that more than a quarter of homeowners do not pay rent tax, referring to his experience in the Basila and Mirpur areas. If house owners do not pay taxes in the city, then what happens in the marginal areas or outside the city? The amount of tax evasion in this regard is significant.

PRI Executive Director Ahsan H Mansur said the economy is facing adverse conditions such as high inflation, high exchange rates, and climate change. Relief may not be forthcoming until global inflation subsides, which could take another 5-6 months.

For the stabilisation of the exchange rate, he added that interest rates should be increased in line with the global market.

The size of the next budget will not be large due to these reasons, which means the government may struggle to meet its needs in many sectors, particularly in gas and agriculture. As a result, this fiscal burden will likely persist into the next year as well, he added.

Bring property under tax net

"We have not been able to bring wealth and properties under the tax net. Most of our wealth is land-based," said Ahsan H Mansur. 

Referring to the landlords of Dhaka city, he noted that they rely solely on collecting house rent to cover their expenses. If the government could bring this group under the tax net, a significant income tax could be generated.

He also mentioned the need to amend the VAT Act 2012 and implement the original act.

He suggested that reverting to the previous law could have yielded significant benefits by now. Additionally, he proposed levying VAT tax on re-priced assets.

"Moreover, our administration is not efficient. Reforming the administration is now a matter of utmost importance. And tax automation should be done. A strong database should be created without having tax officers all over the country."

"The government expenditure subsidy should be reduced and pay attention to interest payments".

Government borrowing from domestic sources should be reduced. The private sector is not getting loans due to excess government borrowing, he added.

He said Bangladesh Bank has supplied liquidity to banks without giving direct loans to the government, and banks are lending a large portion of their profits to the government. 

Ahsan H Mansur also said the government should increase the expenditure on health, poverty alleviation, and education.

Former NBR chairman Muhammad Abdul Mazid advised that the budget presentation should be simplified to engage with the people effectively. Additionally, he suggested that the NBR should refrain from involvement in tariff fixing, as it falls under the jurisdiction of the Tariff Commission.