Politics have been shrouded in uncertainty. There has been unrest as various groups are taking to the streets to press their demands. The uncertainties and instability are hurting the economy and obstructing reform initiatives. At the same time, investors are lacking confidence in committing to new investments. As a result, employment is not increasing.
Although there has been some sort of stability in various indices of the economy over the last nine months, there has been no significant progress in investment or creation of jobs. While some indicators in the macroeconomy have improved, others have not met expectations. Though the upward trend of inflation is somewhat controlled, it remains at an intolerably high level.
Remittance inflow remains strong, which has improved the foreign exchange situation. Exporters, anticipating an increase in prices in the future, are no longer keeping their earnings abroad as before; instead they are bringing their export income back to the country. This has helped balance external transactions.
However, despite some improvements in the banking sector, the crisis is not over. The sense of panic regarding the banking system is not like before. A new ordinance has been issued for the banking sector, and initiatives have been taken to protect depositors. Steps are being taken to implement international-standard audits. These steps are expected to restore confidence of the investors.
Overall, the crisis the macroeconomy was passing through is no longer there. The economy has been brought back to a relatively safer place from the precipice it was. But this does not mean that everything has been all right. Reform initiatives are on the right track.
Politics, however, has been marked with uncertainty. There has been unrest on the streets too. There was not a day when a vital intersection like Shahbagh, Kakrail or Mohakhali was not blocked. People from different walks of life took to the streets to press home their demands - reasonable and unreasonable. If the roads remain closed, this stops the sources of income of daily wage earners. There has been no indication that the unrest on the streets would declinein the near future; rather, there are symptoms that this will intensify.
Such uncertainties and unrest obstruct the reform initiatives. This was seen in the case of reforming the National Board of Revenue (NBR). Various such demonstrations have been hampering the reform attempts. The question, how can economic reforms be achieved in such a situation? How will new investments come? There will be no jobs if there is no new investment. But there can be no new investment in such an uncertain situation.
In such a context, focus should be on the economic challenges of the budget for the next fiscal year. There has to be balanced steps so that inflation does not put pressure on the budget, focus does not shift from the importance of creating jobs. There has to be steps to mitigate structural weakness. Apart from this, there should be stability in foreign trade.
Another expectation is, the next budget should not be overly ambitious. Previous finance ministers had a tendency to show an inflated size of the budget.
A budget has two sides, how the revenue will be generated and how the money will be spent. NBR and non-NBR sources generate revenue for the budget. It would be tough to generate a revenue of over Tk 5 trillion (500,000 crore) from those two sources in the next fiscal year. It was not possible to collect that much revenue in the past.
There should be a focus so that the budget deficit does not cross Tk 2 trillion (200,000 crore). This deficit could be met. Overall, the revenue could be around Tk 7.2 trillion (720,000 crore). If the plan is made to spend more than this, that would be highly ambitious. Then it will go beyond the capacity.
The main issue is, how the taxes will be collected. Dependency on direct tax will have to be increased and dependency on indirect taxes will have to be brought down. But the rate of income tax must not be increased.
It is easier to speak about widening the tax net but achieving that is a tougher task. In such a context, it is tough to boost revenue from income tax. That is why steps have to be taken to stop tax evasion. The finance adviser in an interview said they have identified an incident of tax evasion of Tk 1 billion (100 crore) of one tax payer. The taxpayer paid only Tk 100 million (10 crore) by bribing a tax commissioner Tk 600 million (60 crore) and in the process saved Tk 300 million (30 crore). Corruption has to be curbed to stop such incidents of tax evasion. Loopholes in the tax policy have to be amended as the tax officials and employees seize the opportunity of those loopholes.
It could be said that more tax could be collected without increasing the tax rate and widening the tax net. The tax policy has to be made simpler. For this, paying tax online has to be facilitated.
Meanwhile, the government is set to withdraw tax exemption. The traders did not take to the streets as of now. But we have to wait and see what happens after the announcement of the budget.
Let’s take a look at the expenditure now. There is no way to avoid a huge amount of expenditure, achieved due to the steps of the previous governments. For example, the interest and salaries and allowances of government employees. Around Tk 70 billion (7,000 crore) will be earmarked in the next budget for dearness allowance.
Such steps are irrelevant when the government should have been more austere. There is no scope to slash 80 per cent of the expenses of the budget; the remaining 20 per cent could be restructured. Especially, there is a scope to revise the annual development projects (ADPs) and subsidies.
Maybe it would not be possible to slash the total expenses in those sectors but the sector-wise allocation could be changed. For example, the subsidy in agricultural equipment is a grand gesture but it does not have any efficacy; the middlemen simply gobble it up. There are many small unnecessary projects in the ADP. Overall, the quality of expenditure will have to be enhanced.
The government is taking a loan of Tk 1.4 trillion (140,000 crore) from banks to meet the budget deficit. Will the private sector get enough loans if the government borrows so much money from banks? Besides, the interest rate for treasury bills is 11 to 12 per cent. Why would the banks take the risk and lend money to private companies if they could earn so much money in the form of interest rate from government sectors?
* Zahid Hussain, former lead economist, World Bank Dhaka Office
** This analysis, originally published in the print and online edition of Prothom Alo, has been rewritten in English by Shameem Reza