The global recession following Covid-19 and the soaring costs of fuel imports due to the Russia-Ukraine conflict considerably strained Bangladesh's foreign currency reserves. With limited alternatives, the government of Bangladesh sought financial aid from the International Monetary Fund (IMF) for the first time since 2012.
Bangladesh government's decision to ask for IMF’s aid through loan can be attributed to the ongoing economic crisis. The average inflation rate during FY23 was 9.02%, a stark rise compared to the 6.15% inflation rate in FY22. In October 2023, the general inflation rose to an all-time high of 9.93%, with food inflation of 12.56%.
In January 2023, IMF agreed to loan Bangladesh $4.7 billion, subject to stringent conditions aimed at restoring macroeconomic stability. When the IMF agrees on financial aid, along with it come harsh “austerity measures” to rectify fiscal balance sheets and to stabilize the economy, to achieve solvency and to meet repayment obligations. According to the IMF, these conditions preserve the country's “macroeconomic stability and support strong, inclusive, and green growth.”
Despite the country’s failure to meet the minimum Net International Reserves (NIR) and tax revenue collection targets, the second and third installments of the loan were approved, with conditions including: Reducing tax rebates, adjusting fuel prices, boosting foreign currency reserves, adopting a strategy to rationalize subsidies, and reducing the amount of defaulted loans.
One of the primary reform areas of IMF’s suggestions was related to tax reform, since it is evident that tax exemptions slowed down the country’s economic growth in the past years.
Going forward, as fiscal austerity measures the IMF has urged Bangladesh to increase tax revenues by 0.5% of GDP in both 2024 and 2025, and by 0.7% in 2026. Hence, the specific tax revenue target for FY23 was set at Tk 3,45,600 crore, which was below the government’s original target of Tk 4,33,000cr. Against this target, the government collected Tk3,39,000cr, falling short by Tk6,600cr. To meet the IMF-prescribed tax revenue target for FY24, a 20.40% growth in tax revenue is required.
Moreover, if the revenue target set in the national budget is to be achieved, an even higher growth rate of nearly 33% must be reached. In contrast, the revenue collection trend of recent years indicates that, on average, revenue collection has grown by approximately 12% year-on-year since 2018.
What do these conditions and set targets mean for the aggregate fiscal scenario and the individual income tax practices of Bangladesh? To achieve these targets, the government has taken initiatives to implement extensive tax reforms, affecting the income and tax liabilities of the citizens. Tax collection by the National Board of Revenue (NBR) rose 15% in the first nine months of the current fiscal year, a step taken to promptly meet the IMF conditions.
Other tax reforms include increasing the number of taxpayers to 1 crore by 2026 by enhancing IT administration and simplifying the tax code. By facilitating the ability for tax returns to be submitted online, more than 3 lakh people have submitted their tax returns online in 2023.
As a result of these cumulative reform efforts, there was a 16% increase in holders of digital taxpayer identification numbers (e-TIN) in FY23. Currently, there are 90.3 lakh TIN holders, among which 33 lakh people have successfully submitted tax returns.
This shift highlights the government's move from trade-related taxes to income taxes and value added taxes, meeting the IMF's demands for trade liberalization.
To sustain the momentum of proper tax collection, the government must prioritize initiatives such as enhancing TIN registrations and compliance by linking TINs to the NID system, similar to the UK's national insurance number system. National campaigns can promote TIN registration, especially in rural areas.
The NBR should consider establishing a central electronic database for all taxpayer information to fully automate tax administration, and to reduce human intervention to curb corruption. Continuing efforts like requiring proof of tax return submission for government services and enabling online tax submissions will further boost compliance, with tax certificates issued automatically and without fees.
In the revenue sector, authorities are working on eliminating the longstanding exemptions in income tax, VAT, and tariffs. According to the NBR, tax exemptions are expected to amount to Tk 1,78,200cr, which is 3.5% of GDP, based on the projected GDP size in the FY24 budget. Tax exemptions totaled Tk1,25,800cr in FY21, with corporate tax exemptions accounting for Tk85,300cr and individual tax exemptions amounting to Tk40,000cr. Additionally, efforts to eliminate long-standing tax exemptions and accelerate revenue mobilization are imperative, which are priorities for the upcoming national budget and have been further emphasized by both the IMF and domestic authorities such as the Policy Research Institute (PRI).
According to a recent study by the PRI, Bangladesh could generate an additional Tk65,000cr in tax revenue by increasing tax collection by 2% through expansion of the tax net and improving compliance with personal income tax. If the government invests this additional revenue from tax in development sectors, GDP growth will increase by 0.2%, the PRI said.
As a result, the country's tax-GDP ratio will stand at 10.4%. Increased tax collection by 2% would additionally boost real GDP by 0.51% and reduce the poverty rate among households in the lowest quintile by 4%. Utilizing this tax revenue, government expenditure on essential civic services like health, education, and quality infrastructure is crucial for economic growth.
Whether IMF loans are a cure or a curse, a catalyst or a constraint, is a heavily debated notion of nations across the globe. However, there is no doubt that every IMF loan bears severe standards, and more often than not it is the regular people who struggle in the process of satisfying them in the short term.
As Bangladesh navigates the conditions attached to IMF loans and undertakes ambitious tax reforms, the path to economic stability and growth is fraught with challenges and opportunities.
Adeeba Rukaiya Hasan is a freelance contributor.
