Officials say they are on track to meet the deadlines necessary to receive the 2nd tranche of the loan package
Finance and revenue authorities will brief an International Monetary Fund (IMF) team next week, after the Eid holidays, on their specific action plans to raise reserves to $24.4 billion by June and the tax-GDP ratio by 0.5% in the next fiscal year.
In the first review from 25 April, they will elaborate on how much of the time-bound reform pledges have so far been covered since the IMF released its first instalment of its $4.7 billion loan package and what remains to be done to get the second tranche due in November.
The budget for the fiscal 2023-24 beginning in July will reflect, to a large extent, the detailed work plan already prepared by the National Board of Revenue (NBR) to reach the agreed level of tax-GDP ratio.PauseUnmute
It has explained how an additional Tk16,000 crore revenue can be earned from income tax, value added tax and customs duty in the next fiscal year, according to documents prepared for the IMF’s review mission.
On the other hand, the central bank will detail on how reducing the export development fund and $2 billion expected by June from development partners like World Bank, the Asian Development Bank, the Asian Infrastructure Investment Bank, and the Japan International Cooperation Agency will help rebuild the net reserves.
To keep the overall subsidy at the IMF prescribed limit, the price of fertiliser has already been increased, the price of electricity will also be increased twice. Adjusting the price of fuel oil matching the international market every three months will begin from next September. The finance ministry will reduce the amount of net subsidy in the next fiscal year compared to the current fiscal year.
Of the time-bound action plans for the first review in the MoU signed by the Ministry of Finance and the Bangladesh Bank with the IMF, a Sustainable Public Procurement Policy Paper and an Associate Action Plan to Integrate Climate and Green Dimensions are to be formulated by September 2023. The government has started its formulation.
Meanwhile, relevant authorities of the government have prepared the groundwork to make an inflation forecast for coming months and balance of payment outlook for 2023-2025. Much has been done to cut subsidies by raising fertiliser and electricity prices and adjusting fuel oil prices to the global market – as per the guidelines agreed with the IMF to facilitate more public spending in social safety, education and health sectors.
An official from the Finance Division, seeking anonymity, told The Business Standard that they hoped the IMF team would be satisfied with the overall progress in implementing the loan conditions.
“Some conditions including adapting the interest rate corridor, establishing the market-based exchange rate needs to be implemented from July. The finance ministry and the Bangladesh Bank have taken all the preparations to implement them,” said the official.
“The finance ministry will keep sector-wise allocation in the next budget as per the IMF conditions,” added the official.
Analysts, however, have pointed out the steps taken so far were paperwork and more of low-hanging fruits while tough steps are ahead, requiring strong commitment to carry forward.
The IMF will disbursed the loans in seven instalments until 2026, with the first tranche of $476.2 million released on 30 January. The next instalment is due in November.
If the IMF is satisfied with the NBR’s plan to increase revenue collection and if the net foreign exchange reserves stands at $24.46 billion by next June, Bangladesh can easily pass the first IMF review.
Before leaving on 2 May, the IMF mission will hold a series of meetings with the Finance Division, Internal Resources Division, NBR and other relevant authorities. Getting the second instalment disbursed will depend on the report of this team.
Analysts want stronger steps
Zahid Hussain, former chief economist of the World Bank in Dhaka, said, if the Bangladesh Bank can show the amount of net foreign reserves expected by the IMF by June and the NBR presents a fitting action plan aimed at increasing the revenue collection by 0.5% in proportion to the GDP, Bangladesh will easily pass the first review.
“I think the net foreign exchange reserves is $19-20 billion dollars now. In that case, an additional $4 billion must be added by June. The IMF would be satisfied if we can meet this. If not, the IMF will ask the authorities to revise the issues it considers in formulating the outlook of Bangladesh’s foreign exchange reserves,” he said.
“The IMF will scrutinise the NBR’s plans to reform tax policy and tax administration in the next budget. The lender will focus on increasing revenue by reducing tax expenditure, automation etc,” said Zahid Hussain.
“If the reserve and revenue targets can be met, there will be no issue in getting the second tranche of the loan disbursed. Because, the IMF ignored many issues before approving the loan. It is rare for a country to receive IMF budget support after having multiple exchange rates. But the IMF did not take it seriously in the case of sanctioning the loan to Bangladesh,” he added.
Ahsan H Mansoor, executive director of the Policy Research Institute, told TBS that most of the issues of the first review are paper-based preparations. The government has already done them.
“However, no such steps are visible in bringing back order in the financial sectors including NBR reforms and reducing bad loans. If you don’t take action now, it will be difficult to successfully pass the next review,” he warned.
“Most of the work of the first review is document-based. They are also easy to complete. But without appropriate reforms, it will be difficult for the government to work at the field level to increase revenue and reduce bad debt. No steps in these regards are visible yet,” added Ahsan H Mansoor.
NBR’s plan
After reviewing the revenue growth data from Value Added Tax (VAT), Income Tax and Customs for the last few years, the agency found that even with the existing rate of growth, an additional revenue of around Tk16,000 crore is required to meet the IMF conditions.
According to the NBR’s calculations, to achieve the tax-GDP ratio as agreed with the IMF, the revenue authority will have to collect additional Tk4,828 crore in the customs sector, additional Tk 5,547 crore in the income tax sector, and additional Tk4,800 crore from VAT.
NBR plans to reduce duty exemptions to collect additional revenue, reorganise duty rates, strengthen duty recovery process, take initiative for speedy disposal of cases, enact new customs laws, automation of duty collection process and fully operationalise Customs Risk Management Unit within three years, which the NBR will present to the IMF team.
Similarly, the NBR will emphasise reducing tax exemptions, increasing tax rates, introducing Document Verification System (DVS), transfer pricing, and digital taxation to increase revenue in the income tax sector.
VAT collection will be increased by strengthening VAT audit for additional VAT collection, speeding up activities of VAT intelligence to prevent VAT evasion, and exchange of information of the organisation with the income tax department.
The NBR will reduce tax exemptions in the next budget to meet the conditions of increasing revenue. Preparations are also underway to form a VAT risk management unit before the second review. A few officers of the NBR are currently working on VAT risk management. The announcement of formation of a unit including these officials will be made during the budget.
NBR Chairman Abu Hena Md Rahmatul Muneem indicated that it was ready to reduce the tax-exemption in a consultative meeting with traders on 13 April.
“Tax support will decrease slowly. Local industries that have developed capacity will now bear the burden of VAT-tax as many are now able to pay taxes,” he said.
A senior NBR official told TBS that till last March, revenue collection had been achieved as per the target set by the IMF.
“It is hard to say what will happen in the remaining three months,” said the official.
Pledges for IMF loan
There are about 38 conditions in the IMF loan agreement. Among these, the organisation will check the status of those to be implemented between June and September. The lender will also review what initiatives are there in the upcoming budget to implement the conditions that the government has promised to implement by June 2024.
The review mission will check the current status, challenges and timing in implementation of interest rate corridor system, status of the recommendation of the 2022 IMF’s safeguard assessment to strengthen Bangladesh Bank’s institutional autonomy and governance, exchange rate movements, kerb market, exchange rate policy, trade credit, cross-border interbank loans, external loan disbursement data, recent trade performance, Balance of Payment in 2022 and outlook for FY23-25, FDI projection, National Savings Certificates reforms and prospects.
Bangladesh has to be ready to deliver the status of performance of state-owned commercial banks and plans to address non-performing loans and recapitalisation, liquidity and forex shortages as well as lending activities.
In the Annual Financial Stability Report published by the Bangladesh Bank, the IMF has stipulated that the information of rescheduled loans and non-performing loans of the banks should be presented separately. The IMF will verify what Bangladesh Bank is doing to fulfil this condition during the visit.
The IMF has a condition to raise the draft of the Bank Company Act in the form of a bill in the Parliament before next June. The Cabinet has already given final approval to the draft. The finance ministry is set to raise it in the form of a bill in the coming budget session.
During its week-long stay in Dhaka, the IMF team will review the impacts on the second phase of energy price hikes on the economy and how much decline has been reported in energy import as a result of the government’s demand management measures.
The IMF will conduct two more reviews in September and April-May 2024 before the third and fourth instalments of the loan are disbursed.
Source: tbsnews.net