A visiting IMF mission expressed concern over the delays in giving effect of the new VAT law – a key reform to boost revenue earnings.
“… the introduction of a new value added tax (VAT), a key government reform to boost fiscal space for development spending, is facing delays,” mission leader Rodrigo Cubero said in a statement on the conclusion of a two-week review on Bangladesh economy yesterday.
The mission held discussion on the fifth review under a three-year Extended Credit Facility (ECF) arrangement approved in April 2012 for a total amount of about USD954 million.
The mission met with the ministers of Finance and Commerce, Economic Adviser to the Prime Minister, Finance Secretary, Bangladesh Bank Governor, and other senior officials, development partners, and the private sector.
The mission concluded that preliminary understandings have been reached at the technical level on policy measures that, once endorsed by the government and subject to approval by the IMF’s executive board, would permit concluding the fifth review under the ECF.
The mission expected further decisive steps to improve the financial position of the state-owned commercial banks (SOCBs) through enhanced supervision and corporate governance, complemented with gradual recapitalisation as required.
“The authorities have made good progress in improving working and safety conditions in the garment industry. Further strengthening the targeting and efficiency of social safety net programmes is, however, needed,” it said.
To ensure sustained rapid growth and poverty reduction in the medium term, the mission emphasised that it is necessary to preserve macroeconomic stability and create fiscal space for critical infrastructure investment and well-targeted social spending.
With a calmer political environment, it said the economic activity is gaining momentum, and real GDP growth is expected at about 6.25% in fiscal year 2015 (July 2014-June 2015), supported by strong domestic demand. “There has also been progress on structural reforms.”
Cubero said the persistent revenue shortfalls relative to budget expectations reinforce the importance of pressing ahead with tax reforms. Implementing the new VAT remains the foremost priority, as it has the potential to mobilise considerable additional resources, reduce compliance costs, and boost growth.
“This should be complemented by reforms to strengthen revenue administration and automate data management and reporting procedures.”
The mission said the Bangladesh authorities have made significant progress in consolidating macroeconomic stability under the ECF-supported programme. Despite a moderation in exports, foreign exchange reserves have continued to increase and have reached adequate levels, inflation has declined, the fiscal deficit is contained and public debt is on a downward path.
It welcomed the authorities’ efforts to strengthen public debt management by focusing external borrowing on projects with high social returns; to improve public financial management, including by formalising monthly treasury cash flow forecasts; and to strengthen financial reporting by state-owned enterprises.
It said steps have also been taken to gradually liberalise foreign exchange regulations, helping to boost the investment climate. Continued progress on these fronts should contribute to promoting sustained high and inclusive growth.