We want to know the government's economic plan

There are easy and difficult paths to increasing revenue. The easy path is to raise import duties or value-added tax (VAT). The difficult path is income tax collection. The interim government chose the easy path. However, the question arises: why did the government need to raise VAT and supplementary duties on more than a hundred products halfway through the fiscal year? Why did the government opt for the easy path? Were there alternatives?

Before answering these two questions, let’s recall some key events in Bangladesh’s economic history. For instance, on 16 April 1975, the then Awami League government declared the 100-taka note obsolete. A month later, on 17 May, the exchange rate of the taka against the British pound was drastically changed. The value of one pound, which was Tk 18.16, was increased to Tk 30, a devaluation of 58 per cent.

In 1975, Ziaur Rahman came to power, and as the acting economic adviser to the finance ministry, he increased the prices of fertilizer in the budget of 1976-77 fiscal year as part of reducing subsidies in agriculture, and also imposed tax in the agriculture.

In the 2005-06 fiscal year, the then finance minister M Saifur Rahman made significant changes to the tax structure just over a month and a half after the budget was passed. He reduced the import duty on 3,352 products by 1.5 to 2 per cent. Such changes without the budget were a rare incident.

Between 2012 and 2015, the then Awami League government raised fuel prices five times, electricity prices eight times, and water prices five times.
In recent years, a major economic crisis began in 2022 with the onset of the Ukraine war. The dollar price surged, and inflation pressures increased. In this context, on 5 August 2022, the government raised fuel prices by up to 51 per cent. That was the first government step inviting the high inflation. The pressure from inflation has persisted since then.

The latest development occurred on 9 January, when the government issued an ordinance raising VAT and supplementary duties on over a hundred products.

Now, the question arises: Is there a connection between these events? Let’s explore. After Tajuddin Ahmad’s resignation in 1974, Dr. Azizur Rahman Mallik became the finance minister of the Awami League government. His two main decisions were related to fulfilling the conditions of the International Monetary Fund (IMF) loan.

Bangladesh first received an IMF loan on 14 June 1974, and the second loan on 28 July 1975. According to a World Bank report published on 22 March 1976, titled "Bangladesh: Current Economic Performance and Short-Term Prospects," the 58 per cent devaluation of the taka in May 1975 was part of the economic reforms under the IMF’s loan programme.

In 1975, Ziaur Rahman took power, and the World Bank's report stated that the new government continued the IMF programme, committing to reduce subsidies, impose taxes on agriculture, and liberalise imports. It turned out that these conditions were consistently fulfilled.

In 2005, the massive reduction in import duties was a condition for obtaining a $300 million development support credit (DSC) loan from the World Bank. The Vice President of the World Bank’s South Asia region, Prof. Praful C. Patel, met with finance minister Saifur Rahman on 21 July of that year to discuss reducing duties in exchange for the loan.

After the Awami League came to power in 2009, finance minister Abul Maal Abdul Muhith sought a loan from the IMF, which was granted in 11 April 2012. As part of this loan agreement, fuel, water, and gas prices were regularly raised.

Even though global oil prices dropped from $110 per barrel in 2013 to $27 per barrel within two years, the government did not lower fuel prices, as it did not prioritize easing the burden on ordinary people.

Overall, Bangladesh has taken 12 loans from the IMF, fulfilling numerous conditions, yet no finance minister or government has ever publicly acknowledged this. Even budget speeches make no mention of it.

After the Russia-Ukraine war began, then finance minister AHM Mustafa Kamal wrote to the IMF on 24 July 2022, requesting a loan. Subsequently, fuel prices were increased by up to 51 per cent on 5 August of that year, followed by a 5 per cent increase in water prices. In November 2022, the IMF gave its initial approval for the loan, and the final decision was made on 30 June the following year. One of the conditions of this loan was to pass and implement new VAT and supplementary duty laws.

As part of fulfilling this condition, the new VAT law was passed in parliament on 27 November 2012, but it was delayed due to pressure from businesspeople. When the IMF delayed releasing funds, the government promised to implement the law on 1 July 2015, after the 2014 elections. After this promise, the final two installments of the IMF loan were released.

The law came into effect in 2019, after the 2018 national elections.
Although the new VAT law was implemented, many provisions of the original law were dropped to appease various stakeholders. The original VAT rate was set at 15 per cent, but the new law broke this into eight rates. Bangladesh Bank's current governor, Ahsan H Mansur, at the time, described the new law as "old wine in a new bottle." The law did not significantly contribute to increasing the country’s revenue.

To secure IMF loans, the interim government revised the VAT law once again. On 9 January, the government raised duties and taxes on more than a hundred products. During this time, the single VAT rate for various goods and services was also reinstated according to the price law.

It is true that the interim government inherited the IMF loans and their conditions. Moreover, the government has sought an additional $1 billion or 100 crore from the IMF. In December, an IMF team visited Bangladesh and recommended increasing revenue by 0.6 per cent of GDP. As part of this, taxes and duties on over a hundred products were raised.

However, the government has not yet acknowledged the IMF’s conditions. Even policymakers claim that these changes will not negatively impact the market, although the reality may be different.

For 54 years, Bangladesh has had one of the lowest tax-to-GDP ratios in the world. Therefore, increasing revenue is crucial. At one time, import duties were a major source of revenue; now VAT has taken that place. VAT is an indirect tax, and the burden falls on consumers.

The ideal way to increase revenue would be through direct taxes or income tax. This is where Bangladesh faces a challenge. The government cannot collect income taxes from the powerful and wealthy, so it chooses the easy path of collecting indirect taxes. The interim government followed the same path.

The government inherited a fragile economy, and fixing it overnight is not easy. However, it is essential to understand what the government is doing to steer the economy in the right direction and what its priorities are.
It is true that in the past five months, the government has made several positive decisions regarding the economy. However, if people and investors do not trust the government’s actions, inflation will never decrease, and investment will not increase. It is clear that, with high inflation on one side and VAT increases on the other, it will be difficult to regain people’s trust through this path.

The interim government took office on 8 August, just one month and seven days after the current fiscal year began. So, the government has nearly the entire fiscal year to implement the budget. However, given the state of the economy the government inherited, implementing this budget will be a difficult task. Therefore, many expected the finance ministry to provide an economic review at least by the end of December, updating the public on the budget implementation.

Economist Debapriya Bhattacharya, head of the White Paper Drafting Committee, also recommended a mid-term review of the economy. This would have allowed the public to understand the current economic situation, the measures taken, their impact, and what needs to be done in the remaining months of the fiscal year.

The main allegation of the previous authoritarian government was its poor economic management and ad-hoc handling of the economy. There was no structured consultation or discussion with economists and experts. It was hoped that the current government would at least form a consultation group with experts and investors to address economic issues, especially since those who criticized these matters during the previous government are now in charge.

Therefore, whether raising VAT is the right way to increase revenue or there are other ways, where the funds for high allowances will come from, whether VAT increases can be delayed through negotiation with the IMF, what the interest rate policy should be, and how the government plans to rehabilitate those losing employment—discussions on these matters would have increased the transparency of the government’s work. People would also have understood the government’s goals. We all know that transparency has a deep relationship with trust.

Discussions are underway regarding the outlines of elections or reforms. In the current situation, it is equally important to know the economic roadmap. At least the government’s economic plan until June should be known. Because if the economic situation does not improve, inflation pressure does not decrease, and employment and income do not increase, then people will have little interest in reforms.

*Shawkat Hossain, Head of Online, Prothom Alo

**This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Rabiul Islam