The revenue sector is lagging the most in fulfilling the conditions of the International Monetary Fund (IMF) as the extent of reforms expected in this sector has not materialised.
Although it was suggested to separate revenue collection and policy into different divisions, this has not been implemented.
There has also been minimal progress in reducing tax exemptions. Overall, the condition to increase customs and tax collections has not been met either.
In addition, several major conditions for reforming the banking sector have not been fulfilled.
The Banking Companies Act has not been amended. The Bangladesh Bank Order has not been presented in parliament either.
Considering these factors, meeting the various IMF conditions poses a significant challenge for the new government.
Against this backdrop, the visiting IMF delegation began discussions with the new government yesterday, Tuesday.
On the first day, the IMF delegation met with Prime Minister Tarique Rahman and Finance Minister Amir Khasru Mahmud Chowdhury. The delegation is led by Krishna Srinivasan, Director of the Asia and Pacific Department.
Fulfilling the various IMF conditions is now a major challenge for the new government.
The loan program with the IMF, amounting to 4.7 billion US dollars, began on 30 January 2023.
During the transitional government led by Professor Muhammad Yunus, the amount was increased by 800 million dollars last June, raising the loan programme to 5.5 billion dollars.
So far, Bangladesh has received 3.64 billion dollars in loan assistance from the IMF in five installments. The remaining amount is 1.86 billion dollars.
Although there was a plan to receive the sixth installment last December, it was not acquired. There is a possibility of receiving the sixth installment by next June.
Revenue sector conditions
To create a dynamic revenue system, the IMF has given several conditions. One key condition is to abolish the National Board of Revenue (NBR) and create two separate divisions named Revenue Policy and Revenue Administration.
Although an ordinance was issued last year, it could not be implemented due to protests from NBR officials and employees.
The two divisions were supposed to start operations by last December, which did not happen. As of now, the separation of the two divisions and the recruitment of personnel, along with other activities, have not commenced.
Another IMF condition to increase revenue collection is to eliminate all types of tax exemptions.
The exemptions are to be withdrawn in three phases by 1 July 2027.
The process of withdrawing these exemptions has already started. For instance, the nominal tax for garment exporters has been removed and reverted to the previous state.
Moreover, tariff-tax benefits on several products have been withdrawn. There is also a condition from the IMF to repeal the arbitrary authority of granting tax exemptions by abolishing Section 76(1) of the Income Tax Act, but this has not been done.
In the past five decades, over 200 notices have been issued granting tax exemptions to various sectors. Although a committee was formed by the NBR to meet IMF conditions, the recommendations of that committee have not been fully implemented.
Relevant individuals believe that in a developing country like Bangladesh, entirely removing tax exemptions is difficult for the development of the industrial and service sectors.
Currently, there are mainly 10 VAT rates in Bangladesh: 15 per cent, 10 per cent, 7.5 per cent, 5 per cent, 4.5 per cent, 4 per cent, 2.4 per cent, 2 per cent, 1.5 per cent, and 0 per cent.
Although the VAT Act specifies a 15 per cent VAT rate, multiple VAT rates are in place to benefit various sectors. During discussions with NBR officials before the last budget, the IMF delegation pressured for a single VAT rate. The NBR has now started working on how to implement a single VAT rate.
A plan to manage regulations in the VAT and income tax sectors was supposed to be finalised by June 2024. This has not yet been done. There was a plan to create a medium and long-term strategy to increase customs-tax collection by December 2024; this has not been achieved yet. However, it is reported to be an ongoing process.
Under IMF conditions, NBR has enacted new Customs and Income Tax laws.
One of the major IMF conditions is to collect additional revenue equivalent to 0.5 per cent of GDP annually. This condition has not been fulfilled in any year; rather, the revenue collection situation has worsened.
According to NBR sources, in the first 7 months (July-January) of the current fiscal year, there is a revenue collection shortfall of over Tk 600 billion.
The banking sector is also lagging
The IMF gave conditions to amend the definition of non-performing loans, the definition of directors, and the Banking Companies Act; however, none have been accomplished in the past three years. Although there is a condition to reduce the overall non-performing loan ratio of state-owned banks to below 10 per cent, it has not been possible.
To ensure the governance and autonomy of the Bangladesh Bank, an amendment to the Bangladesh Bank Order was supposed to be completed by September 2025. It was drafted with the assistance of the IMF. Since there has been no national assembly, it has not yet been passed.
According to the conditions, an exchange rate system was initiated using the IMF's own accounting method called crawling peg.
This is currently being expanded and continued. Additionally, foreign currency reserves are also being calculated using the IMF's own accounting method. Alongside, reserve calculations are also being conducted using traditional methods.