All the IMF's questions

The International Monetary Fund (IMF) team, since its arrival in Dhaka to discuss $4.5 billion loans sought by Bangladesh, has extensively visited government offices and held a series of meetings to take stock of the country's macroeconomic situation, its internal and external finance and fiscal policies. It inquired about Bangladesh's preparation for LDC graduation, measures to check wastage in government expenditure, and plans to phase out subsidies in energy.

Apart from hundreds of questions put forward to nearly a dozen government offices and regulatory bodies, there was a common query: Why is Bangladesh asking for loans despite its impressive economic performance over the years?

As the IMF team is ending its two-week visit with a final meeting with Finance Minister AHM Mustafa Kamal today, officials of the Ministry of Finance are hopeful of getting the loan – even if it comes with strict conditions.

They said the loan would be made available at the same rate for three fiscal years, including this one and the next two.

Of all the queries from the IMF, the most were reserved for the National Board of Revenue (NBR), who got 38 questions. The global lender asked the board a range of questions, from the VAT (value-added tax) system, VAT exemptions, how tax holidays are given and how capital losses are treated.

In an earlier meeting, the IMF asked the Bangladesh Energy Regulatory Commission (BERC) about its model of determining bulk and retail tariff gas and electricity prices in the country, how often it revised or adjusted tariff in a certain year and whether the commission has the freedom to set prices independently, said a source at the BERC. It also inquired about the energy regulator's role in expediting gas exploration in the country.

In a discussion with the Bangladesh Bureau of Statistics (BBS), the multilateral lender also wanted to know the reason behind the delay in publishing recent inflation data. It further sought estimates of Bangladesh's debt servicing over the next few years. While meeting the Economic Relations Divisions, the IMF wanted to know how the increases in the secured overnight financing rate (SOFR) and the London Inter-bank Offered Rate have affected loan repayments. Besides, it asked about Bangladesh's possible signing of free trade agreements with some countries and regions, and its future plans on utilising foreign loans in the pipeline. The global money lender also wanted to know what reforms were planned to attract more foreign direct investment. 

When it sat with the central bank, the delegation asked about the default loan ratio. In another meeting, the IMF delegation asked the Bangladesh Investment Development Authority (Bida) about the investment environment, situation of investment sectors and future plans of Bangladesh.

After holding a wrap-up meeting with the Bangladesh Bank on Tuesday afternoon to finalise the terms and conditions of the loan, the IMF also held another meeting.

The various conditions given by the global financial agency were already informed to the prime minister on Sunday and the secretaries of the ministries concerned and the central bank governor have taken her consent.

The officials of the ministry are expecting to receive the first instalment of the loan by next January after the approval in the next board meeting of the organisation.

An official of the Finance Division said the IMF team suggested reducing the huge wastage in government expenditure, which was identified as a major failure in budget management.

It also criticised the subsidies given to institutions like the Bangladesh Road Transport Corporation and the Bangladesh Sugar and Food Industries Corporation.

It also asked for increasing the use of fintech to prevent corruption in the distribution of allocations under the social safety net and reduction of subsidies by increasing the prices of fertilisers, electricity and gas.

It further suggested cancelling tax holidays and exemptions to increase revenue.

The delegation, led by Rahul Anand, head of IMF's Asia and Pacific region, also recommended reserve calculation in accordance with international rules, leaving the dollar rate to the market, withdrawing the interest rate cap, marking as a defaulter if instalments are not paid in three months instead of six, and reducing the defaulted loans of the banks.

In order to make appropriate decisions on the basis of updated information on the country's economy, the IMF advised the Bangladesh Bureau of Statistics to publish quarterly GDP data, announce monetary policy every three months and ensure transparency in information management. 

Besides, it discussed diversification of products by reducing reliance on ready-made garments to mitigate export risk.

IMF reserves most questions for NBR

In a meeting with the NBR last week, the IMF delegation suggested increasing the revenue contribution to Bangladesh's GDP (tax to GDP ratio) to 9%.

As of the last fiscal year 2021-22, the tax to GDP ratio was 7.6%.

NBR officials said the average revenue growth in the last five years is around 15%. At this rate of growth, the tax to GDP ratio could be 8.5% in the next four years. Achieving a 9% ratio would require 17-18% annual growth in tax revenue.

NBR officials said the NBR has already started the work of reducing tax exemption. 

In the last financial year, VAT exemptions have been cancelled or reduced in some cases in the manufacturing stage of ready-made infrastructure, meditation services, railway services, mobile phone trading stage and refrigerators. This will continue next year as well.

A month before the visit to Bangladesh, the IMF had sent hundreds of questions to various organisations. 

Bangladesh had prepared answers to these questions in advance and provided them during the tour. 

Of the questions, the IMF had sent 38 questions to the NBR alone.

In the four-page written questionnaire given to NBR, the IMF said, "We understand that there is a reduced VAT rate [5%] on electricity distribution. Is this correct?

"We understand that effective July 1, 2019, Bangladesh requires non-resident vendors of digital services to consumers in Bangladesh to register for and collect VAT if the annual taxable sales exceed Tk30 million. Was this rule implemented? If yes, could you please provide the annual revenue for 2021?"

Regarding corporate income tax, the IMF mission asked the NBR to clarify whether companies that benefit from a tax holiday are still required to file an income tax return and sought information on the procedures for approving tax incentives and tax holidays as well as related laws.

It asked if there was close collaboration between pertinent agencies that serve to promote tax incentives and whether this collaboration was structured and mandated, or informal.

The IMF sought data on corporate income tax incentives, exemptions, special regimes granted for at least the last three years, income taxed under the corporate income tax and income exempted from the corporate income tax, regime etc.

"Are capital gains realised by corporations taxed at 15%? How are capital losses treated?" it asked.

The questionnaire was prepared by the IMF based on the international Bureau of Fiscal Documentation.

The IMF also sought data compiled on total personal income tax reliefs and tax deductions by categories for the last three years. 

It held several separate meetings with various wings of the Finance Divisions and important departments of the Bangladesh Bank. 

Besides, the global lender met the government's power and energy agencies including PDB, Petrobangla and BPC. 

For electricity-fuel price fixing, it held a separate meeting with the Bangladesh Energy Regulatory Commission.

The IMF also had separate discussions with the Economic Relations Division, the Ministry of Planning, the Ministry of Commerce, the Bangladesh Securities and Exchange Commission and many others.

It discussed 54 agendas in talks with the Bangladesh Bank. In five meetings with the Ministry of Commerce and the Banking and Financial Institutions Divisions, dozens of issues, including changes in bank provisioning methods and the government's capital support given to state-owned banks gained importance.

Bangladesh sent a formal loan proposal to the IMF after a decade seeking a loan of $4.5 billion to overcome the ongoing foreign exchange reserve crisis. 

The two parties held informal discussions in this regard four months prior. 

Before coming to Dhaka on October 26 to hold formal talks, the organisation said they would discuss reforms and policies in Bangladesh's economy and financial sector.

When Bangladesh last received budget support from the IMF in 2012, it enacted a new VAT law to comply with the terms. 

The law had a provision of 15% VAT in all cases, later under pressure, the government reduced the rate in various sectors. 

Due to pressure from traders, the government implemented the law from the financial year 2019-20.