'Bangladesh may also need a fiscal responsibility act'

For the recently approved $4.7 billion loan package to Bangladesh, the International Monetary Fund (IMF) has set 20 reform requirements with the goal of restoring macroeconomic stability, expediting long-overdue macroeconomic reforms, and addressing climate change issues.

The Business Standard spoke to Dr Birupaksha Paul, former Chief Economist of Bangladesh Bank (BB), to discuss how reasonable these requirements are and how the government should proceed to meet them.

The IMF requires the GoB to limit its deficit to 3.3% of GDP, likely resulting in a cutdown on energy subsidies. IMF also wants Bangladesh to adopt a periodic formula-based pricing system for petroleum products. But doing so might increase petroleum prices even further, hurting ordinary citizens. How should the government navigate this issue?

In 2003, the Indian government passed the 'Fiscal Responsibility and Budget Management Act' to ensure that the government does not undertake or continue wasteful public projects. To address the IMF deficit requirements, Bangladesh may also need a fiscal responsibility act which would hold the government responsible for any unnecessary megaprojects.

In terms of energy subsidy and price adjustment, I would go one step further to leave the entire thing to the market, just like exchange rate and interest rates. The Bangladesh Petroleum Corporation (BPC) harbours corruption and inefficiency. The BPC should be dismantled and privatised and the entire process of buying and selling petroleum and other fuels should be left to the market.

In terms of the effect on prices, the BPC or PetroBangla didn't do any better. They kept raising prices when global prices rose but there were no downward adjustments when global prices were low. So oftentimes, prices remained artificially higher than the global market. Despite that, these organisations could not reach or maintain financial stability and subsidising them leaves the GoB fiscally constrained.

There is a saying in Bangla that you cannot use a cat to plough the land. That is, the resource allocation for different wings of the government should be commensurate with the volume of responsibility. But in Bangladesh, the Ministry of Finance alone looks after the monetary policy, fiscal policy, domestic resource mobilisation, investment policy and economic relations.

Among other reform requirements, the IMF wants the BBS to release quarterly GDP figures. It also sets a floor for net reserves and asks the central bank to calculate the reserve figures according to the IMF's balance of payments and investment position manual (BPM6).

Increasing the frequency and ensuring the transparency of macroeconomic data (including reserve figures) is crucial in times of crisis. Without knowing the actual net reserve figures, you cannot undertake prudent measures. But till now, that has been the policy. In most countries they publish the GDP figures quarterly, if there is a recession in one quarter, the government acts accordingly. In our case, we have to rely on intuitions and assumptions instead of data to assess the economic condition of the country at any given point.

In terms of national image, there is no shame in knowing that your reserves are dwindling. It is what it is and there is no point in hiding the actual figures. Rather, the government's efforts should focus on recovering from the existing scenario.

In order to increase revenue mobilisation, the IMF wants Bangladesh to improve its tax-GDP ratio by an additional 0.5% of GDP in the fiscal 2023–24 budget. How feasible is this? And what should be the way forward for Bangladesh when it comes to domestic resource mobilisation?

There is a saying in Bangla that you cannot use a cat to plough the land. That is, the resource allocation for different wings of the government should be commensurate with the volume of responsibility. But in Bangladesh, the Ministry of Finance alone looks after the monetary policy, fiscal policy, domestic resource mobilisation, investment policy and economic relations.

Since it wants to look after everything, it cannot really manage any one of them efficiently. Consequently, something as crucial as tax collection is being left to the NBR Chairman, who is not even an elected official. The NBR is not only responsible for tax collection, but also tax policy. Given its size and scope, it is no surprise that there are so many complaints about NBR's inefficiency.

On the contrary, you still have ministries for jute in Bangladesh, which contributes less than 1% of the GDP. For example, New Zealand introduced the Ministry of Inland Revenue in 2017 to allow breathing space for the Ministry of Finance. Bangladesh should adopt similar policies to improve the efficiency of revenue collection and domestic resource mobilisation. It may also free the NBR from the undue influence of the Ministry of Finance.

Many economists cite the inefficiency of development projects as a contributor to poor domestic resource mobilisation and increasing budget deficit. How can we ensure the efficiency of development projects?

It's very simple. Whenever the government undertakes a development project, it should set a deadline with a reasonable margin of error. If a project is postponed beyond this deadline, the relevant officials must justify the reason for the delay, otherwise, they must be penalised.

The IMF also wants to exclude public servants' pensions and National Saving Certificates (NSC) from social security measures. Moreover, it wants BB to reduce the issuance of NSCs to one-fourth of net domestic financing. How would it affect the middle class who is said to rely heavily on NSCs for saving and investment?

It is a misconception that the national savings certificate helps the poor or the middle class. In reality, it is the rich and powerful, who use different members of the family to purchase obscene amounts of NSCs.

In a recent investigation, it was found that only one household had NSCs worth more than Tk150 crores. A few years back, one study by the Ministry of Finance also found that most of the owners of NSCs belonged to a higher-income strata. That is, the rich, who have more than enough already, are benefitting from the market-distorting interest rates on NSCs. On the one hand, the high volume of NSCs is distorting the market, halting credit growth in the private sector and raising the budget deficit. On the other hand, it is not even benefitting the group it is supposed to serve.

That being said, reducing the issuance of NSCs is a bit trickier. You cannot abruptly stop issuing NSCs. Because as long as the demand for NSCs remains high, mainly because of higher interest rates, people will want to buy them. To address this, the interest rates for NSCs should be brought down to somewhere around the market interest rates or left entirely to the market.

The IMF has asked for actions that establish risk-based banking supervision and support the resolution of non-performing loans. How should the government and the central bank approach the issue of non-performing loans?

Non-performing loans are one of the most severe problems in Bangladesh. Apart from its impact on the country's financial sector, a high volume of non-performing loans is also associated with increased money laundering. In this way, non-performing loans contribute to a low tax-to-GDP ratio as the laundered assets are never accounted for in income tax returns.

Even Agriculture Minister Muhammad Abdur Razzaque recently acknowledged the existence of rampant money laundering in the country. So, it makes sense that the IMF conditionalities address non-performing loans.

In terms of moving forward, the central bank first needs to stop redefining what constitutes a non-performing loan every year in order to accommodate large defaulters. The Ministry of Finance recently released a list of the largest defaulters in the country. Interestingly, many known defaulters managed to remain excluded from the list due to the restructuring of loans. When the first restructuring of default loans was introduced back in 2015, I vehemently opposed it, but nobody listened to me. Now the IMF is making similar suggestions.