Increasing tax collection essential to meet higher interest costs: Economists

Even if the country's debt does not increase, the cost of paying interest will increase in the future due to various reasons, including attaining the status of a middle-income country.

In this situation, there are no options other than increasing tax collection to meet expenditure for priority sectors like education, health, and security after meeting the interest costs, said economists at a seminar, "Debt and Development: Where is Bangladesh Headed?" organised by the Bangladesh Institute of Development Studies (BIDS) in the capital yesterday.

At the seminar, Dr Syed Mainul Ahsan, professor emeritus at Canada's Concordia University and visiting professorial fellow, said a safe level of government debt cannot be determined by calculating what percent of the GDP it is. Like Sri Lanka, Italy also has a debt to GDP ratio of around 100.

He said, "The rate is even higher in the Organisation for Economic Co-operation and Development (OECD) countries. In Japan, government debt is more than twice the GDP. In this case, it should be considered whether the government's income is increasing in line with the demand for debt repayment or not.

"Currently, about 18% of the collected revenue is spent on domestic and foreign debt interest payments. Our debt to GDP ratio has been increasing slightly, but not our revenue collection; it has rather declined in recent years. If it does not increase, it will become a cause of concern in the future."

He called for reforms in tax administration, increasing the use of technology to ensure automation, and decentralisation to increase the scope of taxes to increase revenue collection.

The economist also urged the Bangladesh Bank to take quick initiatives to determine the size of the underground economy in order to increase revenue collection.

He said, "Many accounts of Bangladesh are not in appropriate condition. Although there is talk of an underground economy, there is no understanding of its size. Apart from that, all economic activities are not included in any accounting system."

Mentioning that black economy or underground economy exists in all countries, he said, "People conceal transactions in different countries to evade taxes. However, the underground economy is measured in most countries. The Bangladesh Bank should take initiatives to determine the dimensions of the black economy, the range of their activities, how to value it, and how to bring it into the white economy."

He also said according to the World Bank and IMF, the cost of interest on domestic debt is increasing. A lot of effort has been made to ensure reforms to reduce the interest on internal debt, but that was not very fruitful. However, the country has been getting the benefit of reducing the interest rate of savings bonds in recent times.

Mozammel Huq, professor of economics at the University of Strathclyde, Glasgow, said Bangladesh does not have any serious concern in terms of public debt. However, in the context of South Asia, there is a little crisis. After Sri Lanka, Pakistan is also facing a crisis. In this situation, Bangladesh is also in a state of worry over some issues.

Regarding mismanagement in the banking sector, Dr Ahsan said the number of banks in Bangladesh is much more than is required, which is not good at all for the financial system.

He said no bank is ever allowed to fail in Bangladesh, which is a bad culture. If a bank cannot do business, it should be allowed to fail. Before that happens, though, their deposits should be insured.

He also said the government should stop arranging capital for the banks. Referring to it as an issue of good governance, he said ensuring good governance will not be possible without reducing the number of banks.

BIDS Director General Dr Binayak Sen, who presided over the meeting, said so far the government's debt management has been within sustainability. However, the Russia-Ukraine war has caused more damage in this regard than the Covid-19 pandemic. If the war is prolonged, Bangladesh will be in a fragile state.

He said, "There is no room for complacency in thinking that the government's debt to GDP ratio is only at 40%. How much of our income is spent on debt and interest payments should also be considered.

"Around 18% of our revenue is spent on interest payments. As it increases, finances in other sectors decrease. This amount is still not unusual, but it has become a matter of concern"

Binayak Sen said the government began discussions on the IMF loan at the right time. It will be good for the country if the reform measures are implemented as per the advice of the organisation.