Government debts may reach extreme levels

Foreign reserveProthom Alo illustration

The headlines of Banik Barta on 10 April read, 'Revenue not increasing in ratio to GDP, government debt rises.' This detailed report stated that in the 2013-14 financial year, government revenue earnings were 9.1 per cent in ratio to the GDP, but in 2021-22, this fell to 8.7 per cent. If just tax-GDP ratio is taken into consideration, then this falls further to 7.7 per cent, which is shameful. For over two decades, Bangladesh's official revenue-GDP ratio and tax-GDP ratio has been the lowest among Asian countries, but since the present finance minister took over in January 2019, this ration has steadily been decreasing even further.

At this juncture of Bangladesh's economic development, income tax should be the main source of government revenue. But at present, income tax stands third among sectors for revenue collection. The revenue earned through income tax lags far behind value added tax (VAT) and import tariff, including supplementary duty. If the revenue-GDP and tax-GDP ratio remains so low, it is inevitable that there will be no alternative but to gradually increase government debt.

In Bangladesh too, after the present government came to power in 2009, it has been necessary to increase the government domestic and foreign debts every year in relation to the GDP. As a result, where the government's debt-GDP ratio was 28.7 per cent in 2014 according to IMF figures, in 2023 that has shot up to 42.1 per cent.

The failure to sternly bring a halt to hundi, the informal channel of money transfer, will continue to put a big dent in remittance through formal channels. Additionally, the country's export revenue hasn't been increasing significantly either in recent times

It is undeniable that Bangladesh's recent government debt growth has been abnormally high. Experts have expressed apprehension that the repayment of the domestic and foreign loans will very rapidly be a burden on the economy. In the budget of the current financial year, after the cost allocation for the government administration sector, the next highest allocation, that is, Tk 803.75 billion (Tk 80,375 crore) had to be made for payment of interest on government loans. At the end of the financial year, actual expenditure in this sector may rise further. In the coming year, the cost allocation for payment of interest on government loans will cross one trillion taka (one lakh crore taka). Just to pay the installments of interest and principal on foreign debt alone, the approximate USD 2 billion of the present budget will increase to over USD 4 billion in the 2024-25 budget. It is estimated that this high rate of debt repayment will continue until 2029.

It is very important to share some perceptions about the government's total debt burden at present. At present Bangladesh government's total debt burden stands at USD 169 billion. If the value of one dollar is taken as Tk 108 in accordance to Bangladesh Bank rates, then the total debt in local currency stands at Tk 18,360 trillion (Tk 18,36,000 crore). Of this, Tk 10,270 trillion (Tk 10,27,000 crore), that is, USD 95.07 billion, is government loans from various domestic sources and Tk 8.690 trillion (Tk 8,69,000 crore), that is, USD 71.93 billion, is the government's foreign debt.

In the 2022-23 fiscal budget, the deficit has been shown as Tk 2,45,064 crore, that is, 36 per cent of the total budget. It was announced in the present budget that the government would take a loan of Tk 1,60,334 crore from the country's banking sector. But it does not look like the banks will be able to meet this target. That is why the government has been taking an abnormal volume of loans from Bangladesh Bank this year.

There has been a significant shortfall in the government's revenue collection this year too. In the first nine months of this financial year, the revenue deficit stood at Tk 290.32 billion (Tk 29,032 crore). This revenue deficit is the major reason behind the abnormal increase in government debt this  year. The first installment of the USD 4.7 billion loan which we took recently from IMF, has been paid. But IMF's conditionality before releasing the second tranche of the loan is that the government must bring the tax-GDP ratio up to 8.3 per cent within the 2022-23 fiscal. And IMF has also set the target to increase the tax-GDP ratio to 9.5 per cent by the 2025-26 fiscal. But from the current trend it is evident that we will not be able to meet either of these conditionalities.

Overseas remittance through formal channels in April 2023 has been 16 per cent lower than in April of the previous year. This is certainly a danger signal to the government. The failure to sternly bring a halt to hundi, the informal channel of money transfer, will continue to put a big dent in remittance through formal channels. Additionally, the country's export revenue hasn't been increasing significantly either in recent times. Meanwhile, though Bangladesh's foreign debt ratio with the GDP has not yet reached alarming levels, the government's continuing spree of whimsical investments in various mega projects is pushing up the foreign debt rapidly. The government simply cannot be deterred from its tendency to take up mega projects of little importance.

Added to this is the ardent enthusiasm of the country's private sector businessmen to avail foreign loans, pushing even the private sector foreign debt up to over USD 25 billion. The Bangladesh government has to be guarantor for these loans. Simply for this reason alone, over the past one year a large gap deficit emerged in the financial account of the country's balance of payment. As a result, it may not be possible to stem the nose-diving trend in our foreign exchange reserves in the near future.

For a developing country like Bangladesh, the present 7.7 tax-GDP ratio is absolutely unwarranted. The present finance minister has several times decreased the rate of corporate taxes, the main source of revenue income. If corporate income tax is slashed in this manner, isn't this wrongfully providing the businessmen and industrialists with perks? The late finance minister Abul Mal Abdul Muhit would organise all sorts of income tax fairs and introduce incentive policies to increase personal income tax collection. All those efforts have now dwindled. There had been initiatives to expand the income tax department down to the upazila level. Why have those slackened now?

According to the media, around 200,000 persons in the country have deposits of over Tk 10 million (Tk 1 crore). Why has the process to being them under the tax net not been started? If needed, the income tax department's workforce can be increased and the officials and employees of the department can be given financial incentives if they can collect income tax from new taxpayers.

According to the income tax department, around 7.5 million (75  lakh) people have e-TIN. Whose failure is it that it has not been possible to being even one third of them under the income tax net? In order to stimulate the revenue sector, it should be announced in the next budget that within two or three years the income tax will be established as the government's main revenue sector.

* Dr Mainul Islam is an economist and former professor at Chittagong University's department of economics.

* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir