Bangladesh needs an additional 65,000C in tax revenue to meet IMF conditions

Major structural reforms are needed to meet IMF conditions, which would help collect 20% more revenue in the upcoming fiscal years, as per IMF estimates

The International Monetary Fund (IMF) set a target of increasing Bangladesh's tax GDP ratio from 7.8% to 8.3% by the end of FY24 and to 9.5% by the end of FY26. 

According to the condition of the IMF's $4.7 billion loan package, to meet this target, the Bangladeshi government needs to raise the revenue by at least an additional Tk65,000 crore by the end of FY24, a whopping 20% increase from the ongoing fiscal year's collection.

As per multilateral lender organization conditions, if the revenue can be mobilized in proportion to GDP after FY26, at least Tk234,000 crore more will be added than the revenue that will be accumulated in the state coffer at the end of FY23. 

At the end of FY25, the amount of this additional revenue collection has to generate Tk138,300 crore more than FY23, according to a calculation by the Policy Research Institute of Bangladesh (PRI).

Asked about the amount of revenue PRI took as basis for revenue calculation in FY23, the think-tank said that it was on the basis of the IMF's FY23 revenue estimation, which was Tk345,600 crore.

However, the NBR collected Tk301,634 crore as revenue in the last fiscal year (FY22) with a healthy growth of 16.09%.

To achieve this target and fulfill IMFs conditions, economists are saying that major structural reforms are needed as early as possible. 

PRI's research on Domestic Resource Mobilization was done following the recent announcement of the IMF's conditions regarding increasing the Tax-GDP Ratio on Monday. 

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh said: “To meet IMF conditions, major structural reforms are needed as early as possible. But this reform is not just because the IMF says so. This reform is necessary for us. So we would like to implement it as our homegrown agenda.”

Regarding IMF's tax exemption, he said: “Although it is not possible to stop tax exemptions in all cases as per the terms of the IMF, a comprehensive study is needed on tax incentives or exemptions about the required area, its percentage and an explanation of why it's given”

“Not only that. But every year in the budget announcement, the government should also give the correct calculation of this tax exemption. It should be mentioned how much the country's revenue is being lost due to this exemption,” he added. 

Mohammad Abdur Razzaque, chairman of the Research and Policy Integration for Development (Rapid) and research director of the Policy Research Institute (PRI) presented the keynote paper. 

In his presentation, he said: “The IMF just announced a set of conditions in connection to a $4.5 billion loan package for the Government of Bangladesh. One of the key conditions is an increase in revenue mobilization efforts of an additional 0.5% of GDP annually in FY24 and FY25 and 0.7% of GDP in FY26. That is, the IMF stipulates that Bangladesh's tax-GDP ratio should rise from the current 7.8% of GDP to 8.3% in FY24, to 8.8% in FY25 and finally to 9.5% by FY26.”

When asked what the plan should be to achieve this target, he said that the IMF loan condition on domestic revenue mobilization should be considered as part of a home-grown agenda and the tax-GDP ratio needs to go much higher than what has been suggested. 

According to the keynote paper, it may be tempting to see this as an external demand from the IMF. But it is a reform which matters for ordinary Bangladeshis and for the future health of our economy. 

“We have one of the lowest tax-GDP ratios in the world and this has significant costs. Our current health spending of less than 1% of GDP stands poorly against the global standards of at least 3-5% of GDP. Bangladesh's education spending of close to 2% of GDP is just half of the target stipulated in Unesco's Education 2030 Framework for Action,” he added.

The IMF conditions of 1.7 percentage point rise in the tax-GDP ratio over the next three years is actually a soft target, and thus its materialization must not cause any complacency. 

Rather, this should be considered as part of achieving our home-grown policy target, as set out in the 8th Five-Year Plan, of raising the tax-GDP ratio to 12.3% in FY25. 

PRI analysis shows that increasing the tax-GDP ratio by 5 percentage points (i.e., to fulfill the 8th FYP target) could increase economic growth by up to 3.3 percentage points and reduce the poverty headcount rate by up to 2.2 percentage points.

Achieving this increase in the tax-GDP ratio is possible. PRI sets out practical policy options for how the government can achieve this. These options will affect sectors and groups within Bangladesh differently. 

The choice of which to pursue is one for the government to take, balancing competing policy goals of revenue increases while ensuring fairness in the system. 

1. Reduce tax exemptions, which are estimated to be 2.3% of GDP. 2. Increasing compliance with the personal income tax system can generate additional revenue to raise the tax-GDP ratio by 2.1 percentage points. 3. Reform VAT – short-term VAT reforms could increase the tax-GDP ratio by up to 0.6 percentage points. Additional reforms could increase this further in the medium to long term. 4. Increasing compliance with corporate tax could increase the tax-GDP ratio significantly.

In his concluding remark, Abdur Razzaque said: “Tax exemptions are currently provided to a range of sectors. Its current indiscriminate use must be carefully evaluated and should immediately be brought down to a much lower level. Any tax exemptions should be allowed only for a short period of time.”

Asked about the amount of revenue PRI took as basis for revenue calculation in FY23, the think-tank said that it was on the basis of the IMF's FY23 revenue estimation, which was Tk345,600 crore.

However, the NBR collected Tk301,634 crore as revenue in the last fiscal year (FY22) with a healthy growth of 16.09%.

And at the end of FY25, the amount of this additional revenue collection has to generate Tk138,300 crore more than FY23, according to a calculation by the PRI.