Budget must be fully committed to financial sector reform

Even if the financial sector is not directly included in budget revenue and expenditure, the banking sector becomes involved through the financing of the budget deficit. The security market has not yet become supportive in that sense. In this time of financial sector reform, how essential is the budget’s commitment to restoring good governance in the banking sector and advancing other sectors? Dr. Toufic Ahmad Choudhury, director general of the Bangladesh Academy for Securities Markets, recently spoke with Views Bangladesh's Special Correspondent Saleya Sultana on these issues.

Views Bangladesh: Many policies are being adopted for financial sector reform. Non-performing loans (NPLs), which were previously understated, are much higher in reality. However, there has been some improvement. The exchange rate has been left to the market. Considering all this, how supportive will the budget be to the financial sector? Because even if not directly, the government relies on the financial sector to meet the budget deficit, and financial supply is also related to private investment.

Toufic Ahmad Choudhury: The budget is an income-expenditure statement. Since the government borrows from the financial sector, income and expenditure aren’t directly related to it. The connection comes from the fact that the government takes money from the financial sector to cover its deficit. The issue is, we don’t want the government to operate this way. If it stops doing so, it would benefit both the financial sector and the government. This can happen in two ways. As you mentioned, the government takes the majority from the banking sector. If the government takes all the money from banks, then there’s nothing left for the private sector. That’s the crowding-out effect.

Views Bangladesh: Then where should the government borrow from? Are the other sectors ready for that?

Toufic Ahmad Choudhury: The government should take it from the securities market. That would help grow our securities market. The bond market would expand. Until the government’s bond market improves in the securities market, the corporate bond market won’t develop. So, there would be progress on both fronts.

Views Bangladesh:  It is assumed that this would increase the government’s expenses.

Toufic Ahmad Choudhury: Let it increase—doing so will develop and energise a massive market. That benefit needs to be recognised. This is the global norm. In the United States, not a single dollar is borrowed from banks. The Bank of England, the Bank of Tokyo—they do not borrow a single dollar from banks. This is how it’s practiced around the world. I think government willingness is essential. I don’t want things to continue this way—just one step from the government would be enough.

Views Bangladesh:  Besides the securities market, those directly involved with the government's income and expenditure include the NBR or revenue department. Due to the overall domestic and international situation, everyone is requesting tax exemptions.

Toufic Ahmad Choudhury: No, no—there can’t be tax exemptions for everyone. As it is, our tax-to-GDP ratio is very low compared to the rest of the world. Then what’s the point of more exemptions? It’s only the corporate sector that uses these exemptions and benefits—often unjustifiably. Instead, the tax net must be expanded. Only 8 percent to 9 percent pay taxes. Is that acceptable? This rate should be at least 10–12 percent.

Views Bangladesh: Is tax exemption necessary to boost investment? Because SMEs and startups don’t have the same capacity as those operating in competitive markets.

Toufic Ahmad Choudhury: Those who have been receiving unjustified tax exemptions should no longer be given such opportunities. However, tax exemptions and fiscal incentives must be provided for startups and SMEs. Entrepreneurs in this sector don’t evade taxes—in fact, they want to pay. Right now, the loopholes for tax evasion need to be closed. I’m not saying tax collection should decrease, but it must increase according to capacity. Look, in the settlement with the IMF, revenue collection is a major issue.

Views Bangladesh:  Although the budget size is shrinking, foreign loans or aid from donor agencies remains a significant factor in the budget.

Toufic Ahmad Choudhury: We will take IMF funds, because the way they evaluate our economy serves as a benchmark for other donor agencies. In many cases, the confidence of foreign investors also depends on the confidence of these donor organisations. They believe Bangladesh is a viable place to invest. For that purpose, we will take loans from the IMF and World Bank. Otherwise, we could manage without it. Additionally, creating a business-friendly environment is essential. But we also need to consider that local credit within the country isn’t growing. If domestic investors improve, foreign investment will grow too. For that, the cost of doing business must be reduced and a business-conducive environment must be created.

Views Bangladesh:  How important is the budget’s commitment to financial sector reform?

Toufic Ahmad Choudhury: The budget must have full commitment to financial sector reform. If the government sends a message through the budget that it wants to see improvements in the financial sector, that would have a significant impact. I want the government to express this hope through the budget. We want good governance to return to the banks. We want the rule of law to be established in the banking sector—because banking is the largest financial sector in our country. Without support, loan defaulters couldn’t have grown this much. Let the government declare in the budget: “We will not allow NPLs to rise this year.” That intention from the government alone would be enough.

Now we see that NPLs are decreasing in the banking sector, good governance is returning—isn’t that so? The government hasn’t said anything directly, but the environment is such that everyone is repaying their loans. If the government is fully committed, the financial sector will improve. Depositors will also respond with a positive mindset.

Views Bangladesh:  Thank you very much for your time.

Toufic Ahmad Choudhury: Thank you as well.