Economic troubles won’t clear without reforms
Without any fundamental reforms in policies, the precarious state of the economy will get worse, said the Policy Research Institute of Bangladesh yesterday.
The performance in different economic arenas -- such as exports, imports, remittance and revenue mobilisation -- is not satisfactory, said Ahsan H Mansur, executive director of the think-tank.
"That will badly impact the growth in the days ahead," he said at an event styled "Pre-Budget Press Briefing and Discussion" organised by the PRI at its office in Dhaka.
Given the current state of affairs, a GDP growth target of 7.5 percent for the next fiscal year is unrealistic, he said.
If the expected GDP growth is not achieved, the revenue collection target will not be fulfilled, which in turn will widen the budget deficit.
Expansion of the tax net is important to increase revenue collection, said Mohammad A Razzaque, director of the PRI Study Centre on Domestic Resource Mobilisation.
The NBR should give extra efforts to ramp up tax collection from the affluent class, he said.
If all households in the top 10 percentile of income were subjected to a 10 percent tax, the tax-GDP ratio could be increased by 1.6 percentage points.
Reducing tax exemptions, which are estimated to be 2.3 percent of GDP, should be considered as well, he said.
As the government plans to increase the size of the upcoming budget, it is vital to acknowledge the expected substantial shortfall in overall revenue receipts for the current fiscal year, he said.
Short-term VAT reforms could increase the tax-GDP ratio by up to 0.6 percentage points, he said, adding that additional reforms could increase this further in the medium to long term, Razzaque added.
The economy has been in crisis for the last 15 months, but the government has not addressed the issue with exigency, said Mansur, also a former economist of the International Monetary Fund.
For instance, the central bank has not withdrawn the interest rate ceiling of 9 percent on loans.
At the IMF's urging, it would be rolling out an interest rate corridor, which will be set by the average yields of treasury bills.
This will increase the interest rate by 1-2 percentage points.
"But the hike is not enough to tackle the current instability in the financial sector," said Mansur, also the chairman of Brac Bank.
In addition, the central bank has not allowed the market to truly determine the floating exchange rate.
"This is why the existing instability in the foreign exchange market is persisting," he said.
The central bank is injecting dollars into the market regularly to prop up the exchange rate and in the process, draining the foreign currency reserves.
Between July 1 last year and May 10, the central bank supplied a record 12 billion to banks in contrast. In fiscal 2021-22, it provided $7.62 billion.
As of May 10, reserves stood at $30.34 billion, down 28.1 percent year-on-year.
The central bank should implement the floating exchange rate in the market, said PRI Chairman Zaidi Sattar.
"If the exchange rate is controlled, the reserves will fall further," he said.
The central bank has already taken several measures to bring down import payments to safeguard the dollar stockpile, Mansur said.
"But there is no scope to cut it further, or else it will take a heavy toll on the economy."
In the first nine months of the fiscal year, import bills dropped 12.33 percent year-on-year to $53.93 billion.
Bringing back the confidence of both the local and foreign investors is highly important to give a boost to the economy.
"Otherwise, the existing deficit in the financial account can't be narrowed," Mansur added.
The financial account includes foreign direct investment, portfolio investment and the Bangladesh Bank's reserve assets such as gold, currency, derivatives, special drawing rights, equity and bonds.
In the first nine months of the fiscal year, the financial account registered a deficit of $2.21 billion in contrast to a surplus of $11.92 billion a year ago.
The deficit was $1.97 billion in the first eight months of the fiscal year.
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