Falling revenues, growing worries

While major economies recover from economic challenges, Bangladesh struggles with a concerning trend. The revenue collection has fallen short of target, signalling economic strain ahead, prompting officials to voice apprehensions about bleaker prospects. The National Board of Revenue (NBR) chairman acknowledges the difficulty of achieving revenue targets in an election year compounded by a dollar crisis and declining imports.

While India anticipates a revenue windfall, Bangladesh's revenue authorities trail behind targets, grappling with a challenge for over a decade. The tax-to-GDP ratio, at less than 8%, raises questions about the country's fiscal health.

A declining tax base combined with rising spending pressure point to Bangladesh becoming a revenue-stressed country. The government's austerity measures, including a curb on development spending and caution in borrowing, reflect the urgency to address fiscal challenges.

"This is an election year, there is a dollar crisis, imports are going down and businesses are not doing well. Therefore, achieving the revenue target is a big challenge," said NBR Chairman Abu Hena Md Rahmatul Muneem on 31 October.

Revenue collection by the NBR fell short of the target by more than Tk8,195 crore in the July-September period of the current financial year.

So far, Bangladesh's revenue authorities trail much behind its target for the first quarter. Records show that the NBR failed to achieve the tax targets at least for the last 11 consecutive years.

Now the NBR is under pressure to cut taxes to cushion the consumers hard-pressed by surging prices. "When the prices of daily necessities increase, we have to reduce taxes," the NBR chief told an audience of business leaders and economists on 5 November.

The NBR is now planning to make up the shortfall by a different approach – restricting tax expenditure – given in the form of tax and duty exemptions, which accounted for 3.6% of GDP in FY21.

While a review of such tax breaks became necessary to contain the measure's widespread misuse and to ensure that the measures benefit only those who deserve them, such steps are not going to bring any immediate relief when the government needs more cash to meet its development and welfare expenditures.

What happens when revenues fall

When revenue collection declines, it immediately impacts expenses, leading to a budget deficit. Consequently, governments are compelled to tighten expenditures to manage and control the budget shortfall. This often results in cuts to spending in crucial areas such as human capital, infrastructure, and essential services for citizens and businesses.

According to the World Bank, countries collecting less than 15% of GDP in taxes must augment their revenue collection to fulfil the basic needs of citizens and businesses. This threshold serves as a critical tipping point for a state's viability, paving the way for sustainable growth.

In the context of Bangladesh, the current fiscal challenges stem from various factors, including the devaluation of the taka, high inflation, and a stagnant influx of foreign funds. These issues contribute to a decline in revenue collection and an increase in pressure on government spending.

Being austere

Despite a last-minute flurry of project approvals before the general election in early January next year, the government has opted not to utilise funds from the block allocation earmarked for development initiatives. This decision follows earlier measures, including restrictions on official car purchases, fuel expenses, and land acquisition – a significant element in development projects.

A finance ministry official attributes this recent decision to a combination of revenue shortfalls and a heightened demand for funds for impending development initiatives tied to the general election. In response, the finance ministry is prioritising spending, aiming to conserve funds. While revenue collection for the first three months of FY24 (July-September) exceeded the year-ago period by 14%, it fell short of the target required to meet the IMF's minimum threshold for its loan package.

Towfiqul Islam Khan, a senior research fellow at the Centre for Policy Dialogue (CPD), finds the curb on additional development expenditure right. If the government borrows more to meet expenditure, it will fuel inflation further, he warned.

The government itself is acting cautious about borrowing either from banks or from the public.

It is now repaying more than it is taking from banks. Data compiled till 25 October shows that the government's net borrowing from the banking sector since 1 July stands at Tk105 crore in the negative, meaning that the government is less willing to borrow from banks to meet the budget deficit. Meanwhile, it stopped taking money from the central bank responding to the concerns of economists that printing new money intensifies inflationary pressure.

The government borrowing from savings instruments also fell in the first quarter.

The government's belt-tightening approach is also reflected in the development expenditures. Ministries spent 7.5% of the fiscal year's development outlay in the first quarter, which was 8.6% during the same period last year. Amid tightening financial conditions due to high-interest rates and weakening global growth prospects, most emerging markets and developing economies faced stiffer financial stress last year than any previous such episodes. They had to raise the cost of borrowing and depreciate currencies which put to test the governments' ability to meet financial needs. Economic slowdowns were obvious, which they smoothed with fiscal support measures.  

Bangladesh's economy is now facing the situation that many economies have overcome. Until recently, Bangladesh's policymakers seemed to have put more blame on global factors than lack of local initiatives to handle the economic crisis.

Though late, they are now at least recognising and trying to correct the policy shortfalls.

"Our economy is currently navigating a challenging period. Throughout my 36 years in civil and public service, I have never witnessed an economic crisis of this magnitude," Bangladesh Bank Governor Abdur Rouf Talukder told economic reporters on 6 November.

He stated how managing twin deficits in external balance becomes difficult. The last fiscal year saw both the current account deficit and the financial account deficit, the latter of which had not occurred in 14-15 years, he pointed out, acknowledging that they were "caught off guard".

Most economies across the world have proved their resilience while central banks remain hawkish with higher rates for longer restraining the governments from being much spendthrift. Now it is time to see how it works here in keeping inflation in check and the government's belt-tightening less painful. 

A possible way out

To boost tax compliance and collection, the government can enhance tax administration, intensify efforts against tax evasion, and streamline tax payment processes for the public. Also, broadening the tax base by encompassing more individuals, including the informal sector and agricultural income, can be explored.

Reducing tax exemptions, a potential source of significant revenue loss annually, should be considered. Furthermore, curtailing wasteful government spending by eliminating unnecessary programs and downsizing the bureaucracy is crucial.

Efforts to enhance the efficiency of government spending should focus on refining procurement procedures and minimising corruption within the system. These comprehensive measures aim to alleviate revenue stress and foster a more robust economic environment.