Financial Express (FE): Country's economy has been going through a difficult time because of the pandemic. In such a situation, what should be the main features of the national budget for the next fiscal year? How can this year's budget guide the people involved in budget preparation?
Zahid Hussain (ZH): The central features-expenditures, financing and structural reforms--must be consonant with the state of the economy currently and going forward next fiscal year. It must build on and reorient the existing fiscal policy to steer the economy through the crisis created by the virus globally and locally.
The economy was on a recovery path until the recent rampage beginning from the current month. Growing consumer confidence, perhaps overconfidence, underpinned rise in private consumption expenditures on tourism, entertainment, and durables. Data on collection of Value Added Taxes (VAT) during the first eight months of the current fiscal year suggest private consumption expenditures were nearly back to the same level they were in the corresponding period of the previous fiscal year. The same happened to exports which at the aggregate level was tending to approach pre-pandemic levels. However, both public and private investments have remained well below pre-pandemic levels.
The economy was by no means out of the woods. A successful start in vaccination bolstered optimism. Bangladesh looked like an outlier on Google Mobility Indicators with rapid rise in the first quarter of 2021 on all fronts-shopping, recreation, transport, and workplaces. Mobility and assembly increased too fast too soon. Open borders and rapidly waning adherence to public health protocols conspired to trigger the invasion and transmission of more transmissible and deadly variants of the virus. The fear and chaos, the latter in large part resulting from a thoughtless "lockdown", has caused a major setback to economic recovery.
Firefighting and recovery efforts on both the health and economic fronts ought to be the central features of the FY22 budget. On the health front, this means focusing on the procurement and distribution of vaccines and strengthening public health service delivery. Education needs special attention. On the economic front, the budget must weigh more interventions supporting the families and enterprises vulnerable to the disruptions caused by the virus. While the pandemic continues, the budget should focus on crisis management, prioritizing spending on health, providing well-targeted fiscal support, and maintaining accommodative monetary policy while keeping an eye on financial stability risks.
We saw a business-as-usual budget last year. It will be best not to use it as a guide in designing the budget this year. This does not mean there is nothing to learn. We did not have the benefit last year of knowing what we know now about how the policy response to the pandemic works and where the fault lines are.
FE: What are the policies followed in the budget for the FY'21, you think, have paid dividend? What should be policy changes in the next budget?
ZH: We are short on policy dividends. The budget outlined policy reforms in the financial, infrastructure, ease of doing business, human capital, and innovation sectors at a very general level. The specific reform initiatives in each of these areas have been lethargic and, in many cases, exhibit the "so near yet so far syndrome." A good example is one stop shops for regulatory services.
Both revenues and expenditures are far behind the overambitious targets set last year. The new VAT law in its second year of implementation has turned out to be no better than what it replaced. Subsidies for financial stimulus packages have worked better for the formal sector large enterprises than the informal and formal sector cottage, micro, and small enterprises. Cash and food based social protection programmes have suffered from the usual bureaucratic red tape and corruption.
The $100 million emergency healthcare programme launched after the coronavirus outbreak had a provision to get a 20-bed isolation centre and a five-bed critical care unit in each district hospital. Moreover, there was a plan to set up a 50-bed isolation centre and a 10-bed intensive care unit at each of the 17 medical college hospitals. Implementation progress has been close to dismal, Corruption allegations stalled progress because of enquiry and audit of government agencies involved. Consequently, the virus has caught our health system unprepared once again!
The legacy projects-ones inherited from the past-made some progress. This is particularly true for Padma Bridge and the Dhaka Metro Rail Transit project. Yet they appear to be running behind their respective finish lines.
The government has done a good job in lining up funds for vaccines. The World Bank has approved $500 million. The Asian Development Bank is close to committing $940 million. Negotiations are ongoing for $500 million from the AIIB, $295 million from the European Investment Bank, and $176 million from the French AFD. The billion-dollar question is whether we will be able to use the money when needed.
The government last year opted to administer cash transfers based on a list prepared by the Union Parishad Chairmen and members. The program had to be abandoned because of anomalies in the list. The amount of cash transfer at Tk 2500 was also too small. Countries worldwide expanded efforts to give their citizens money to cope with the pandemic.
Successful programmes have a solid financing base, a system to identify beneficiaries, an outreach programme, and a delivery platform. Missing data on employment status and blurry lines between corporations and individuals in the informal sector hinder the effectiveness of labor market policies. Therefore, governments have bet on cash transfers when trying to expand the coverage of their social protection systems.
Mobile money gas proven to be an effective and physical-distancing-friendly option to deliver cash transfers in large scale. Many countries have sought to boost mobile payment platforms to reduce corruption, improve efficiency and budget transparency, and broaden financial inclusion, especially for the informal sector and women. Given that ownership and use of mobile phones in emerging and developing economies is widespread, it is difficult to fathom why our administration preferred archaic systems to reach out to families suffering from livelihood distress.
FE: The main sources of domestic tax revenue are tobacco, telecom, gas, real estate and cement. What should be the policies to generate more revenues from these sectors?
ZH: These sectors were recovering. It is not a good idea to target sectors that are contributing most for even greater revenues. You risk killing the goose laying the golden eggs. Trying to squeeze out more from those who are already paying sends absolutely the wrong signals.
Reforms in tax policy and administration must be guided by efficiency and equity considerations. Their application has been debated ad infinitum. The consensus is to move towards greater reliance on direct taxes for revenue mobilisation. The outcomes so far have defied intentions. The reason is simple. The intentions have not been backed by reforms.
In the current state of the economy, there is hardly any scope of increasing tax rates to boost revenue. Tax revenue mobilisation will depend on rate rationalisation and administrative improvements through digitization. In step, we need to move towards simpler rate structures in customs, VAT, and corporate tax regimes. Efforts should continue to focus on limiting capital flight, tax avoidance, and tax evasion. Excise taxes on tobacco sales have a clear social benefit to reduce tobacco use.
Progress on automation to reduce the cost of tax compliance has faltered despite many donor supported initiatives. Even the pandemic could not speed up implementation. Take the case of VAT. The NBR on April 8 urged businesses to submit VAT returns by the 15th of every month when the country is supposedly under lockdown. "All the customs, excise and VAT Commissionerate offices across the country remain open in the lockdown period to help the businesses submit the VAT returns on time." This is pathetic. Businesses will have to submit returns in their respective VAT offices. What happened to the online submission of VAT returns? This has been in the works for over half a decade now!
FE: Agriculture makes a sizeable contribution to the economy and employment generation. What should be the policies to spur growth of the sector? Is the peasantry getting fair price for their produce during the Covid time?
ZH: Agriculture still constitutes the source of livelihood of about 45 per cent of our population. More than 84 per cent of the 15 million farm holdings are small scale farmers owning less than 2.5 acres of land. These farm households face tough competition on the selling against buyers with market power. Consequently, good harvest often turns into growers' misery.
Bumper harvests, if not stored by the farmers themselves, are sold at slumping prices in the local market. Public procurement directly from the farmers in harvest times is one solution in theory. However, its application has not lived up to the expectation of increasing the grower share in the surplus generated in production and trading of farm output. Paddy and rice procurement drive during Aman season got tangled on pricing issues. Increasing storage capacity is apparently another solution. Making it work requires incentivising storage.
Fiscal policy support is needed to improve the capacity to store at the local level, increase productivity, agricultural diversity, and food security. Taxation and expenditure policy need to incentivize diversification of sources of income, including broadening the varieties of plant, fish, and animals raised on the farm, adopting post-harvest practices and intermediate level processing, and promoting off-farm income.
The FY21 budget provided Tk 95 billion for subsidies on inputs and an additional Tk 20 billion for farm mechanisation .Since the introduction of the card system, the subsidies on inputs appear to be reaching the farmers better. The subsidy for mechanisation increased demand for combined harvesters. As a result, the sellers of the harvesters have benefited as well.
Two refinancing schemes for Tk 50 billion agricultural credit to farmers and another Tk 30 billion for small farmers and traders were introduced as well. Disbursement rate was 70 per cent in the former and probably even less in the latter because most small farmers do not meet the conditions for receiving subsidised credits from the banks.
During the lockdown last year, the farmers suffered from lack of access to markets to sell their produce leading to income losses from their crops. The same situation is arising now. We have probably missed out on creating alternative marketing opportunities and labour-movement facilities during pandemic. Restricted inter-district transport movement without any effective alternative to bring the agricultural produce to markets will once again have deleterious effects on farm households. Food prices have already increased significantly without benefiting the farmers and this may happen even in harvest times in food deficit areas.
Public expenditure programme in agriculture should focus on upgrading technology and processes to improve the flow of market information and ultimately raise overall food and non-food value chain competitiveness that allows the growers to capture a fair share of the value added. This requires working with the production systems, end markets, support services such as financial and business development services and mechanization.
FE: Businesses have been demanding a sizeable cut in corporate tax rate. What should be the best tax rates in Bangladesh conditions?
ZH: There are many suggestions. The standard refrain is if corporate taxes are reduced, returns to investment will be higher, raising investment and growth. It may also lead to higher wages. But lower taxes could also mean less government revenues, although the converse could be true at current rates. What is important is to get the basics right first.
Corporate tax rate should be activity neutral. Taxation is far too high in some sectors such as telecommunication and financial and not so in others. The tax rate should not be used to favour one sector over another. Sectors that earn high returns should in fact be encouraged to expand. The telecom companies can be encouraged to invest in speeding up the internet. The result of differentiated high rates is underinvestment in those relative to the lower rate sectors. This is a fact.
One lower rate sector is exports. The garment industry claims its profits are too thin to be taxed at regular rates. Application of the standard corporate tax for non-listed companies would force many of the small garments out of business. There are continuing difficulties with customs and disbursement of subsidies. Yet this cannot be a persuasive argument for concessional corporate tax because it applies to other sectors as well.
The corporate tax rate on average is too high. It discourages foreign and domestic investors. They all seek tax holidays. Tax holidays are hard to reverse. All investment projects have gestation periods during which they do not make money. The length varies depending on the technology and market conditions. The tax authority and the regulators do not know what these are to be able to correctly distinguish between winners and losers. Why bother? Let the market select the efficient investments. Early tax burden can be uniformly reduced by allowing accelerated depreciation.
Both the average rate and the rate differentials need to be reduced. Decision on the average rate should be based on the rate needed to be internationally competitive in attracting investments. This is likely to be in the 15 to 25 per cent range. In the Google age, it does not require too much effort to figure what our competitors are doing in this area.
There is no good reason to maintain the difference in tax rates between listed and non-listed companies. It discriminates against small companies that the government is trying to promote. There is no evidence it has made a difference in getting the companies listed. A lower tax rate for listed companies benefits the rich because high-income individuals own most of the shares. The gap should be reduced to zero, perhaps not in one go.