While the ongoing political unrest poses substantial risk to businesses and the economy of Bangladesh, Policy Research Institute (PRI) thinks it will be better if the government promises changes to economic policy after the elections.
The scale and depth of current challenges mean more significant actions are required to avoid further worsening of macroeconomic conditions, they also observed.
Experts from the think tank also said that Bangladesh's economy was at a crossroad, as cost of living challenges put pressure on ordinary people while the government faced slower revenue growth, increasing debt costs and low foreign exchange reserves.
Speaking at a press conference on “Domestic Resource Mobilization from the perspective of IMF and Bangladesh” organized by PRI’s Study Center on Domestic Resource Mobilisation (PRI-CDRM), Executive Director of the PRI Ahsan H Mansur said that dollar trading was done at unofficial rates in the official interbank market, while the unofficial rate is close to the rate in the kerb, or open market.
His presentation also stated that although there was an official unified exchange rate, these rates are only on paper.
Due to the dollar crisis in the market, people are forced to pay at rates much higher than the official rate as many banks are refusing to open LCs. Many banks are selling dollars at higher rates, he observed.
However, as the ongoing macroeconomic instability keeps on throwing challenges to the economy on multiple fronts, meeting the conditions set by the IMF has become increasingly important, especially meeting the revenue target, not only to ensure the disbursement of upcoming instalments but also to tackle these looming challenges.
It is also important to consider the required reforms as a homegrown agenda, Mansur further said.
In his presentation he also said: “There was no obstacle to releasing the $681 million of the second instalment of the IMF's loan program next December. The situation, however, may change if a 'powerful country' intervenes.”
“The chairman of the National Board of Revenue may be changed. But most others in the institution will remain. They don't want any reforms or automation. They only want to maintain the status quo. The next government would have a difficult time tackling fiscal issues such as those related to revenue collection, government expenditure, monetary and exchange rate policies,” he also said.
He also highlighted the economic pressures due to high inflation, revenue collection shortfall, dwindling reserves and the exchange rate hikes.
Downslide in indicators
Mansur's presentation also stated that currently the nation was grappling with a growing dollar crisis, a notable decline in import activities, and a downturn in business performance.
Consequently, the attainment of the revenue target presented a formidable challenge.
In the context of the ongoing election year, the political unrest poses a substantial risk to business and economic activities, with the attendant possibility of diminished revenue collection. In light of these circumstances, it is imperative for the NBR to strategically plan revenue initiatives, accounting for the potential impact of these issues.
Regarding political unrest, PRI's Research Director MA Razzaque said: “This was the first time that political instability and economic uncertainty were both seen ahead of the elections.”
The IMF's second loan instalment is expected to be released soon if the country fulfills the international lender's reform conditions. The authorities have made substantial progress on structural reforms under the IMF-supported program, but challenges remain. Continued global financial tightening, coupled with existing vulnerabilities, is making macroeconomic management challenging, putting pressures on taka and foreign exchange reserves, he further said.
There is a negative impact on the economy because imports that would drive the economy have fallen. Revenue is also negatively impacted due to lower imports. This will result in reduced revenue with a negative impact. So besides finding new taxpayers or enhancing tax net corruption in revenue collection should be removed, automation and tax collection systems should be speeded up, he explained.
However, the IMF's board is expected to rule on the disbursement of the tranche at its board meeting on December 9.
PRI-CDRM’s policy recommendations
Reduce indiscriminate tax exemptions: NBR estimated that direct tax expenditure cost 3.56% of GDP revenue. They need to review the exemption periodically and provide the exemption based on a priority basis.
Focus on state-owned enterprise (SOE): The government needs to reform SOEs to improve their financial performance. In FY21, non-financial SOE assets amounted to 17% of GDP, a 10-12% rate of return on these assets can potentially generate a revenue equivalent to 2% of GDP for the government.
Revert to original VAT Act 2012 and EFD compliance: The VAT Act of 2012 represented a globally recognized standard, and should implement the original 2012 VAT Act since the current amended VAT Act introduced numerous distortions in the VAT system. The installation of EFD machines needs to be faster and try to bring more business under the VAT and EFDs compliance.
