No outcome without reforms

Zahid Hossain | Update:

Zahid HossainThis budget is achievable, but cannot be implemented unless prioritised reforms are brought about. And even if implemented, the desired outcome will not be achieved. The reform priorities include lessening default loans in the banking sector, deficit finance management, tax administration, and public investment management.

The budget this time does not have over-ambitious plans for revenue collection, expenditure and the deficit sector, but it is ambitious and achievable, something that is a bit different from past budgets. This is a positive difference and can inspire those involved in implementing it.

Deficit financing for the budget has been estimated as 5 per cent of the GDP. The economy is strong enough to bear this deficit as the loan-GDP ratio is not too high. The challenge lies in finance management. The government is in a dilemma about this. It is being said that the deficit will be met from domestic sources. This is mostly dependent on savings certificates.

This time the budget has reduced the target for financing from savings certificates and increased that from the bank loans. If this step was taken two years ago, it could have been hailed, but the banks are facing a liquidity crisis at present. If the government reaches for loans from the banking sector, the liquidity crisis will deepen further. This will impact on the private sector. And if there is a crisis in financing for private sector investment, this will create problems for overall investment and production.

There are three main reasons behind the liquidity crisis in the banking sector. These are excessive default loans, weak growth in deposits, and excessive dollar sales by the central bank.

The culture of default loans must be stopped. This will not be possible without reforms in the banking sector. But the budget has no significant mention of reforms in this sector. Loopholes in the law must also be addressed in order to halt the default culture. The financial loan courts must be modernised. The budget has only mentioned the formation of a bank commission. But this is inadequate to address the problem which has gone out of control. The solution remains unclear in the budget.

The target given to the National Board of Revenue (NBR) is 17 per cent higher than that in the revised budget of this fiscal. This is achievable. The VAT act of 2012 was prepared but not implemented. VAT exemption has been provided in many cases and several VAT categories have been drawn up. This VAT collection is not likely to create much of an impact. In the original VAT act of 2012, the scope for VAT evasion was closed. But the multi-tier VAT rates this time and the provision for VAT exemption, has created the opportunity to evade VAT payment.

Corporate tax should have been reduced, but that has not been done. If investments are to be increased, corporate tax has to be decreased. The high rate of corporate tax that exists at present is unjustified.

The budget has given opportunity to whiten black money. This is a disincentive for honest taxpayers to pay their taxes. If anyone earns Tk 10 million, he has to pay Tk 3 million in taxes. But if the Tk 10 million is black money, then he just has to pay Tk 1 million in taxes to whiten it. The sooner such facilities are shunned, the better it will be for the economy.

Supplementary duty on mobile phone services has been doubled. At a juncture when this growing technological sector needs supportive reforms, quite the opposite is being done.

The reforms mentioned by the finance minister in the revenue sector entail bringing the number of taxpayers up to 10 million. He plans on setting up more tax offices in the upazilas. This will not be possible in a matter of one year.

Automation of the tax administration is proceeding at a snail’s pace. VAT e-filing is only carried out for large taxpayers. Unless the efficiency of the tax department is enhanced and significant legal reforms are taken, it will not be easy to meet the revenue target.

If the revenue target is not met, pressure will increase on the government’s expenditure. Presently the infrastructure and human resources have the highest allocations.
There are certain new expenditures in the budget this time. It is doubtful whether this additional expenditure is being made on a priority basis.

Cash incentives have been announced for remittance and export sectors. Incentive of Tk 30 billion (Tk 3000 crore) has been allocated for remittances from expatriates. But there is no economic justification for incentives in these two sectors. Instead, there can be reforms in the currency exchange rate. This will benefit both sectors.

There are sectors with higher priority than these two sectors. The farmers are in dire straits. They are not receiving fair prices for their bumper crops. It is imperative to provide them with support at this time. But that is not the priority.

Unless implementation of the annual Development Programme (ADP) is increased, there will be no employment. Inequity will not decrease. So there is need for reforms in the public investment management.

The expenditure capacity of project directors has been increased in this budget. But that is not the only problem in project implementation. Complications in land acquisition, frequent changing of project directors, flaws in project planning, falling hostage to contractors, are among the many problems that afflict the sector. The budget has nothing to say about these matters. These problems push up project costs and time.

* Zahid Hossain is chief economist of the World Bank Dhaka office. This piece appeared in the print edition of Prothom Alo and has been translated in English by Ayesha Kabir

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