The Policy Research Institute (PRI) said that the year will end with a huge deficit of about Tk55,000 crore in revenue collection after analyzing the revenue collection trends in the first nine months of the ongoing FY23.
Although in FY23, the revenue collection target for the National Board of Revenue (NBR) was set at Tk3.70 lakh crore, this collection will be only Tk3.15 lakh crore, according to PRI estimation.
This estimate was presented by PRI's Research Director MA Razzaque at a pre-budget press briefing and discussion held in Dhaka on Sunday.
The experts also said, without massive bank reforms, NBR and other financial institutions and regulators, achieving the International Monetary Fund (IMF) set target in these sectors would be quite impossible.
Attending the pre-budget press briefing, renowned economist and Executive Director of PRI Ahsan H Mansur said: “In the last nine months, Bangladesh Bank spent $12 billion from reserves despite cutting imports by around 33%. This is happening due to controlling the exchange rate. Now, over Tk3 lakh crore of budget expenditure went for loans' interest payment, pension benefits and social safety net program.”
Despite having the potential, the gap between the target revenue and achievement is widened each fiscal year (FY) due to the failure of existing revenue and taxation policies.
“Without massive reform at banks, NBR and other financial institutions and regulators, achieving the IMF set target in these sectors would be quite impossible,” the economist said.
He also stated that the macroeconomic situation of the country may go out of control in the next five to seven months.
MA Razzaque gave a presentation, illustrating the achievements in different sectors and the government spending of the current fiscal year.
In his presentation, Razzaque said that the country's economy is currently under pressure.
“The lack of confidence in the financial sector is not going to go away anytime soon and money laundering is likely to increase instead of dropping,” he added.
The presentation stated that one of the conditions set by the IMF for lending $4.7 billion to Bangladesh was for the country to increase the tax-to-GDP ratio by 0.5% in the next fiscal.
The international lender had estimated that NBR may manage to collect Tk3.36 lakh crore in this fiscal.
As per PRI data, the revenue collection in the current financial year will be Tk21.40 thousand crore less than the estimates made by IMF.
The PRI has blamed NBR's overall lack of capacity and implementation of needed reforms for failing to meet the revenue collection target.
Moreover, the institute has identified declining remittance inflow, export earnings and forex reserves, high inflation and low revenue collection as major setbacks for the country's economy.
PRI Chairman Zaidi Sattar expressed his concerns regarding the lack of confidence in the country's current economic situation.
PRI said, The Bangladesh economy continues to grapple with macroeconomic stress. These challenges began surfacing domestically when imports spiked due to pent-up demand in the wake of economic recovery after the Covid-19 shock.
The rising value of the US dollar across the world exacerbated the situation. The Russia-Ukraine conflict further contributed to the strain by disrupting supply chains and escalating global commodity prices, which in turn made imports even more expensive.
While for Bangladesh and many other developing countries, earnings from exports and remittances didn't rise proportionately, leading to a rapid depletion of foreign reserves. To stem this decline, the Bangladesh Bank was compelled to let the taka depreciate and impose import restrictions. These measures fueled high inflationary pressure within the domestic economy.
As of July 2022, the gross foreign exchange reserve was at a robust US$39.6 billion. However, it experienced a significant reduction over the year, dropping to US$30.34 billion by May 8, 2023.
Inflation also saw a sharp rise, peaking at 9.5% in August 2022 and maintaining an average of 8.9% over the subsequent 10 months, overshooting the annual target by 3.5 percentage points. On the other hand, remittances accumulated from July 2022 to April 2023 amounted to US$17,718.59 million.
Projections from PRI-CDRM suggest that by the close of the current fiscal year, the total remittance earnings will amount to US$21,262.31 million. However, this figure still falls short by US$610.69 million of the revised remittance target outlined in the Monetary Policy Statement.
The export outlook also appears to be rather bleak. From July 2022 to April of FY23, total earnings from exports amounted to US$45.7 billion, falling short of the target by 3.46%. Given the recent downward trend, the PRI-CDRM projects exports at the end of FY23 to stand at about US$54—a shortfall of US$4.2 billion from the budget target. Additionally, due to the dollar crisis, import figures have also seen a significant decrease.
These recent developments have significantly affected the growth trajectory. The global economic growth is anticipated to decelerate to 2.6% in 2023, and in line with this trend, the IMF has projected a 5.5% growth for Bangladesh. Most recently, the provisional estimate by the Bangladesh Bureau of Statistics (BBS) pegged the country's growth rate at 6.08%.
Given the recent macroeconomic developments and the upcoming national election—widely expected at the end of the calendar year—the forthcoming budget for FY24 takes on increased significance. The fiscal framework of the upcoming budget is of particular interest in assessing how the IMF program conditions will be met in the backdrop of macroeconomic stress, uncertain global economic and financial climate, and unfolding electoral dynamics.
The budget
A national budget for FY24, of Tk7.5 lakh crore was approved in a cabinet meeting held on 11th May and will now be placed before the Parliament. It represents a 12% increase in national spending from the previous year.
The revenue collection target for the upcoming fiscal year has been set at Tk5,000 billion, marking a 15% rise from the current fiscal year. The National Board of Revenue (NBR) is tasked with collecting Tk4,300 billion, a target 16.2% higher than that of the previous year. Furthermore, the non-NBR revenue and non-tax revenue collection targets are set at Tk20,000 crore and Tk50,000 crore, respectively.
As the government plans to increase the size of the upcoming budget, it is vital to acknowledge the expected substantial shortfall in overall revenue receipts for the current fiscal year. As of March, the NBR has collected Tk2,255 billion (5.1% of GDP). That is, it will need to mobilize further an amount which is about 40% of the overall budget target for the year (i.e Tk1,445 billion) in the last quarter of April-June.
Given the preset revenue milestones, the NBR is supposed to gather Tk816.7 billion from VAT and SD of Tk498.5 billion from income and other profits, and Tk129.7 billion from customs and excise duty.
However, according to PRI-CDRM estimates, if the NBR's revenue growth trend of the past quarter persists, the projected revenue shortfall could be around Tk546 billion.
To meet the NBR revenue target for FY23, an average monthly collection of Tk482 billion (representing a monthly average growth of 60%) would be required in the last quarter. The revenue target set by the IMF, Tk3368 billion, is significantly lower, as it opted for a more realistic one considering the weak record of revenue collection over the past several years.
To meet the IMF's target, the NBR will need to mobilize Tk1113 billion in the final quarter of this fiscal year. This demands an average monthly generation of Tk371 billion during April—June, which corresponds to a growth rate of 24% compared to the preceding nine months' 8% growth.
According to PRI-CDRM estimates, the NBR could face a revenue shortfall of Tk214 billion when measured against the IMF target. There remains a slim chance for the NBR to meet the IMF target, although this would likely necessitate aggressive collection efforts.
Conditions of IMF loan package
The drive to enhance revenue collection and optimize existing tax systems could facilitate the generation of necessary resources. These could then support the allocation of additional funds towards social protection programs and other pressing expenditure needs. The IMF has also attached several conditions to its loan package to reinforce the fiscal framework of the country.
Notably, one of the key IMF requirements involves bolstering revenue mobilization efforts by an additional 0.5% of GDP annually in both FY24 and FY25, followed by a further 0.7% increase in FY26. This implies elevating the tax-GDP ratio from the current 7.8% of GDP to 8.3% in FY24, to 8.8% in FY25, and finally to 9.5% by FY26. The IMF has also recommended the establishment of Compliance Risk Management Units within the customs and VAT wings of the NBR by December of this year.
Furthermore, the IMF has provided a comprehensive set of conditions, which includes reducing tax expenditures across major sectors, developing and adopting a Medium-Term Revenue Strategy (MTRS), a Tax Compliance Improvement Plan, and a modernized Customs Act. These measures aim to bolster the government's revenue generation in the quest for fiscal stability and sustainability.
Recently, an IMF team visited Bangladesh to review the progress made since the country received the first installment of US$476 million as part of the IMF loan package. The NBR has reported the following major measures, amongst others, as part of its efforts to boost revenue:
- The NBR is collaborating with the World Bank to develop a medium-term revenue strategy to meet loan conditions.
- The NBR is implementing extra measures for enhanced revenue growth, such as plans to reduce duty exemptions for additional revenue collection, reorganize duty rates, strengthen the duty recovery process, initiate speedy disposal of cases, enact new customs laws, automate the duty collection process, and fully operationalize the Customs Risk Management Unit within three years.
- The NBR will adopt case-by-case tax benefits and review existing exemptions (which, according to NBR estimates, currently account for 2.8% of GDP).
- The NBR plans to install 60,000 Electronic Fiscal Devices (EFDs) in retail shops in Dhaka and Chittagong and aims to install 0.3 million devices over the next six years. As of January 2023, around 9097 EFDs have been installed in various shops.
- The NBR is developing specialized software, known as the "Risk Management Engine", which will bring transparency to the tax audit process, check the discretionary power of tax officials, detect tax evasion, and alleviate audit fears among taxpayers. The piloting of this automated computer program will commence soon in one or more circle offices of Tax Zone 6 in Dhaka.
