CPD for protecting poor’s buying capacity in next budget

The Centre for Policy Dialogue (CPD) has urged the government to prioritise the protection of purchasing capacity of the poor and middle-income people in the budget for the fiscal 2022-23, ignoring the budget deficit, to help them cope with the sharp rise in prices of daily essentials.

The think-tank recommended a set of fiscal and monetary measures, including reducing tax and VAT on production and imports of essentials, rearranging subsidies for the poor, expanding the coverage and per capita allocation of the social safety net programmes and increasing the tax-free income threshold.

Dr Fahmida Khatun, executive director at the CPD, presented the recommendations made by the think-tank ahead of the budget for the next fiscal year in a press briefing on Tuesday.

She said the current price situation in the market has become onerous for the middle-income people apart from putting an adverse impact on low- and lower-income populations. Reining in the prices of essentials should be the most urgent and critically important macroeconomic policy objective.

The level of the price hike in the commodity market is even 5-6 times higher than inflation data provided by the BBS. People receiving higher salaries who adjusted to the BBS inflation are also now unable to bear the expenses of their families, Fahmida noted.

She proposed increasing the tax-free income threshold for individuals to Tk3,50,000 for the next fiscal year, which is Tk3,00,000 currently in view of the added pressure of the rising food inflation and income erosion induced by the pandemic.

She also said, "The proposed measures would create some pressure on the budget deficit due to some additional cost and losing some revenue earnings. But a certain level of budget deficit to protect the livelihood of the poor would not create any pressure on macroeconomic stability."

Fahmida said the government has a tendency of formulating a larger budget based on some unrealistic assumptions, which remains underutilised in terms of expenditure and revenue generation.

She urged the government to formulate a realistic budget and increase the institutional capacity to implement it.

The government is formulating a budget at a time when the country is facing an unprecedented crisis as the economy has yet to recover from the impact of Covid-19 despite reduced health impact.

The external sector, which was the strength of the economy, is now facing pressure in terms of foreign trade, current account and reserve of the foreign currency. The foreign public debt is rising and the continuation of the tendency would create pressure on external debt servicing.

Fahmida said Bangladesh aspires to graduate from LDC to a developing nation, become an upper middle income country by 2031 and achieve a high-income country status in 2041, and also attain Sustainable Development Goals (SDGs).

Once Bangladesh comes out of the LDC status, it will no longer enjoy preferential trade benefits, low-cost loans and other facilities in the global area.

To prepare for dealing with challenges after the country archives such statuses, she recommended boosting internal revenue collection, increasing allocations for health and education to develop human resources.

Fahmida also suggested imposing tariffs on single-use plastic products and introducing eco-tariff at a rate of $1 per tonne of carbon emissions to ensure environmentally-friendly sustainable development.

The economist further said prices of medicines may go up after the country's LDC graduation as the special exemption of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) will go. Keeping it in mind, he recommended that preparations be made to reduce VAT on medicines.

Prof Mustafizur Rahman, distinguished fellow at the CPD, said, "Since we are going to graduate to a developing country, the amount of our grant element in foreign debts will be lowered. Our concessional loans will decline too. We will have to bring in foreign loans at a regular market rate, which will be higher than our previous loan rates."

"All our previous foreign loans had a maturity period of 30-40 years, with a grace period of 5-10 years," he noted. 

Commenting that there is not much benefit in the current loans, he said interests and principal amounts of these loans have to be paid in comparatively short time, which will increase the pressure on the external sector of the economy.

This economist also said, "Our import bills are increasing. The trade deficit exceeded $22 billion in eight months, which will reach $30 billion by the end of this year. In this situation, there is a need to keep the exchange rate stable."

CPD Research Director Dr Khondaker Golam Moazzem said a new economic and social order is needed in the budget of the next fiscal year. Preparations for the LDC graduation must be completed. 

Special attention needs to be paid to government debts and liabilities, good governance, institutional reforms and overhauling revenue collection structure, he also said.

He further said in the forthcoming election manifesto, political parties need to have commitment on inclusive and sustainable economic growth and social welfare.

CPD Senior Research Fellow Towfiqul Islam Khan said some projects were taken up under the annual development programme before elections for political reasons. We need to be careful about taking up such projects now."

Minimum social safety allowance should be set at Tk1,000

The CPD has recommended that all types of social safety allowances be fixed at a minimum of Tk1,000. 

Talking about it in a keynote, the CPD said although the allocation for social protection schemes has steadily increased, it is still far below in proportion to GDP. Besides, at least 25% of social safety allocation goes to paying pensions of retired government employees. 

The CPD demanded that allocations for social safety programmes meant for the poor be earmarked separately.

For several years, the old-age allowance has been only Tk500. Commenting that this allowance is of no use due to rising commodity prices, Towfiqul Islam Khan suggested increasing the per capita allocation in this sector.

Apart from that, he recommended streamlining the social safety net by dividing the 143 ongoing programmes into three sectors.

Proposal for hiking tax on tobacco

The CPD has recommended imposing a specific excise tax of Tk10 on a cigarette, considering it a harmful product. At present, supplementary duty is levied at the rate of 57% to 65% on cigarettes. Abolishing the tiers system will reduce tobacco use and increase tax collection.

Besides, it suggested increasing the tax rate on soft drinks and energy drinks, considering the health risks.  The think-tank also wants a cut in tariff rates on imports and production of sanitary napkins.

Zero tolerance for loan defaulters

Mustafizur Rahman advised the government to declare zero-tolerance against loan defaulters in the pre-election budget. 

He said if this is done, on the one hand the government's popularity will increase and on the other hand, default loans will be realised.

He also recommended not continuing the scope to whiten black money in the next budget.