Rice, sugar, soybean oil and beef are more expensive in Bangladesh than in other developing or developed countries, according to the Centre for Policy Dialogue (CPD).
The think tank also found that at least 28 imported basic food items presently suffer a high incidence of tax.
Whilst inflationary pressures had been growing in Bangladesh prior to the Russia-Ukraine war, the international crisis provided an excuse, where commodity prices that had previously climbed in the international market have now reduced, but this has had little effect on the local market.
Furthermore, the recent sharp swings in energy costs have increased the cost of living in Bangladesh, so CPD recommended that a "special increment" be given to all officers and employees in the public and private sectors to relieve some of the pressure on people with limited incomes in the face of high inflation.
CPD made these recommendations during their annual "CPD's Recommendations for the National Budget FY2023-24."
The keynote paper was presented by Fahmida Khatun, executive director of CDP.
In her presentation she said: “Inflationary pressures have been building in Bangladesh even before the situation in Ukraine began. Recent sharp swings in energy costs have made matters worse in Bangladesh. Commodity prices have been rising steadily since the Ukraine war. Although we have seen the prices of many products falling in the international market, there is no impact on our country's market. That price hike is not even in imported products, but our internally produced products as well. All have some sort of upswing trend. Many of the essential goods that we import have high taxes, and a reduction in tax can provide some relief to the people.”
CPD's report said that there are at least 28 imported essential food items that are subject to high taxes.
“There are a number of essentials such as rice, sugar and soybean oil that are more expensive in Bangladesh than in other developing or industrialized countries. Besides, the beef which we do not import is also much higher than the international market. Taking advantage of any crisis, the prices of products are increased,” she added.
Fahmida said: “We have calculated how the expenditure of a family of four in Dhaka city is increasing only on food. The compromise diet and regular diet were analyzed in two ways. In a compromised diet, there will be only vegetables and pulses, no fish and meat. Consequently, a family's monthly expenditure is Tk7,131, and if fish and meat are included, the cost in February 2023 is Tk22,664.”
The think tank recommended giving a 5% increment in the wages of workers in various industries, as well as forming a new wage structure.
Given the increased pressure of the commodity price hike, particularly those of food items, the tax free income threshold for personal income should be increased to Tk3.5 lakh.
As an alternative, in order to give the low-income earners some respite, the second PIT slab, which is 5% for an additional Tk1 lakh, should be raised to Tk3 lakh.
Fahmida Khatun said this has affected the macroeconomic situation of the country and has drawn attention away from the accumulated and embedded weaknesses within the Bangladesh economy.
She also highlighted several disquieting developments, including negative growth in revenue mobilization, slow implementation of the development projects, increased reliance on bank borrowing for deficit financing, skyrocketing prices of essentials, declining liquidity situation of banks, deteriorating external sector balance, and the state foreign exchange reserves.
“Given the current macroeconomic situation, policymakers' scope of maneuvering policy measures has become rather limited due to the declining fiscal space,” the CPD said in its analysis.
Findings and recommendation
Despite increased commodity prices and a significant depreciation of the Bangladeshi taka, revenue and VAT collection were lower in FY23.
According to MoF data, income mobilization declined by 3.1% between July and December of FY23.
During the July-December period of FY23, revenue mobilized by the NBR, which accounts for approximately 85% of the entire targeted resource envelope, declined by 4.0%.
CPD estimates that the revenue gap at the end of FY23 will be around Tk75,000 crore, with total revenue collection being around Tk358,000 crore.
It is more likely that the IMF's condition to generate Tk3,456.5 billion in FY23 as tax revenue would remain unmet.
However, CPD's earlier projection on December 22 was a revenue shortfall of Tk64,000 crore.
The government borrowed about Tk51,266 crore from the central bank and repaid about Tk20,735 crore in net terms to the scheduled banks.
The central bank also retracted a substantial amount of BDT as it sold $10.5 billion, which kept M2 and reserve money within the programmed limits.
Overall liquidity in the banking system had declined sharply by Tk66,581 crore.
The think-tank also noted that to give more priority to non-RMG sectors for providing export cash incentives and also finds out strategies to gradually withdraw traditional cash incentives for export because after Bangladesh graduates from the LDC category in 2026, it cannot provide cash incentives for export in its current form as per WTO rule.
The government may consider introducing market-based exchange rates between USD and BDT.
At present, the exchange rate against USD is Tk113, while the remittance exchange rate is Tk107. Such a measure would reduce the demand for cash incentives for inward remittance as the exchange rate would be considerably higher – above the 2.5% cash incentives provided at present.
This would reduce the demand for using the informal channel to remit forex abroad.
The think tank recommended that the government should eliminate the tiers of cigarette taxation and replace them with a single universal system. Additionally, a specific excise duty, which is fixed per stick and per pack, should be implemented instead of an ad valorem tax.
CPD recommends that the VAT on medicines should be exempted starting from FY26 to ensure that medicines continue to be affordable to all even after the loss of the TRIPS waiver in 2026.
They also said TTI on imported raw materials required to produce sanitary napkins should be zero by exempting all forms of VAT, CD, SD AIT, RD, AT and AIT.
CPD also stated that in order to meet these GHG emission reduction targets, Bangladesh must implement a number of tax and regulatory measures.
They also propose raising the health development surcharge on cigarettes and other tobacco products from 1% to 5%, increasing the VAT on cigarettes and other tobacco products from 15% to 20% in FY24, and considering taxing single-use plastic products in FY24.