Monetary policy should focus on enhancing tax collection

The first six-month monetary policy for the upcoming financial year (2024-2025) is scheduled to be announced in the first fortnight of July. Bangladesh Bank has nearly completed the preliminary work for formulating this policy. However, there is still uncertainty regarding the specific characteristics of the proposed monetary policy.

Economists and related experts believe that the monetary policy for the first six months of the next financial year will likely be contractionary. After several consecutive contractionary monetary policies, Bangladesh Bank is not expected to make any major changes suddenly. Furthermore, the International Monetary Fund (IMF) has recommended that Bangladesh implement a contractionary monetary policy. Consequently, it is anticipated that Bangladesh Bank will ultimately announce a contractionary monetary policy.

It seems unlikely that the announced monetary policy will be sufficient to handle the current state of the country's economy. Most sectors are in distress, and the situation could turn dire at any time. Therefore, the upcoming monetary policy for the first half of the next financial year is highly significant. However, it is widely recognised that monetary policy alone cannot address the economic challenges. A comprehensive approach involving various measures is necessary.

Each monetary policy of Bangladesh Bank aims to support the achievement of the announced budget targets. However, this does not appear to have a significant impact on the future monetary policy. A multifaceted strategy is essential to effectively address the economic issues facing the country.

At present, the country's economy is most concerned about the persistently high inflation that has been prevailing for almost two and a half years. Efforts to bring high inflation down to manageable levels have been unsuccessful. This trend of high inflation began with the onset of the Russo-Ukraine war, which led to abnormal increases in oil prices, pushing global transportation costs to unsustainable levels and causing a supply-side collapse. As a result, global hyperinflation reached unbearable levels. Even the United States, the world's leading economic power, experienced inflation in its domestic markets breaking a 40-year record, reaching 9.1 percent. In response, the US central bank, the Federal Reserve Bank of America (Fed), has raised policy interest rates at least 12 times over the past two years.

Central bank policy aims to control consumer purchasing power by reducing the money supply in the market through raising interest rates. When the policy interest rate increases, the interest rate on bank loans also rises proportionally. As a result, common people are less inclined to take loans as before. Central banks of at least 77 countries have followed the example of the United States by increasing their policy interest rates and taking other measures to bring high inflation down to bearable levels. According to the latest data, inflation in the US domestic market has now decreased to 3.4 percent.

In Bangladesh, the central bank has increased the policy rate several times over the last two years. The policy rate, once at 5 percent, is now at 8.5 percent. However, the interest rate on bank loans has been capped at 9 percent instead of being market-based. Consequently, the initiative to increase the policy interest rate has been counterproductive. This disparity between the policy rate and the fixed bank loan interest rate has undermined the intended effects of the central bank's measures to control inflation.

As the interest rate on bank loans has been lower than the inflation rate, a class of borrowers has exploited this by taking loans from banks through various means. The borrowed money, often not used for its intended purpose, ends up circulating in the market, further fueling inflation rather than reducing it.

Recently, Bangladesh Bank withdrew the maximum cap on bank loan interest rates, allowing them to become market-based. As a result, interest rates on bank loans have exceeded 15 percent in some cases. This move came after an unusually long period during which the central bank maintained a maximum interest rate cap of 9 percent to regulate bank loans. The delay in adjusting the interest rate cap contributed to the exacerbation of inflationary pressures. Consequently, high inflation has been difficult to control. In May, the inflation rate stood at 9.89 percent.

The proposed budget for the next financial year aims to bring down inflation to 6.5 percent. It is anticipated that the new monetary policy of Bangladesh Bank will include measures to achieve this target. However, relying solely on monetary policy to control high inflation is unlikely to be effective.

To effectively combat high inflation, it is essential to integrate fiscal policy and other economic measures alongside monetary policy. Realistic and comprehensive initiatives must be undertaken, involving these three elements to achieve the desired results.

Moreover, the market system in Bangladesh does not adhere to the general economic formulas typically applied in other contexts. Consequently, applying standard economic rules alone will not suffice to control hyperinflation in the country. A tailored approach, taking into account the unique characteristics of the Bangladeshi economy and market system, is required to manage and reduce inflation effectively.

Unless the syndicates operating in the market, which the government rarely acknowledges, are severely suppressed, there is little chance of curbing inflation. The finance minister stated in the post-budget press conference that high inflation will come down within the next six months. It would be helpful to know the basis for this prediction.

Future monetary policy may include further increases in policy rates to reduce the money supply in the market. However, this approach could lead to higher bank loan interest rates, which might significantly reduce the flow of bank credit to the private sector. This reduction in credit availability could hinder private sector growth and economic recovery, exacerbating the existing economic challenges.

A reduction in the flow of bank credit to the private sector will indeed slow down the productive sector. If investment in the private sector does not reach the desired level, employment opportunities will not be created, and poverty alleviation efforts will be hampered. At this moment, there is no alternative to increasing investment in the private sector, as investment has already stagnated.

The GDP growth target for the next financial year has been set at 6.75 percent, but achieving this target seems unlikely. Economists believe that an economy like Bangladesh requires a 4 percent investment in the private sector for every 1 percent of GDP growth. Accordingly, to achieve a growth rate of 7.5 percent, more than 27 percent investment will be required.

Investment target of 27 percent of GDP in the private sector has been set for the next financial year. Is it achievable? In the financial year 2017-18, the rate of investment in the private sector was 24.94 percent of GDP. The following year it rose to 25.25 percent. In the financial year 2019-20, it decreased slightly to 24.02 percent. In FY 2020-21, the private sector investment rate was 23.70 percent of GDP. It was 24.52 percent in FY 2021-22. In FY 2022-23, private sector investment rate was 23.64 percent of GDP. The account of investment in the private sector for the current financial year (2023-24) is not yet finalised. However, economists think that there may be 23 percent investment in the private sector in the current financial year. In this situation, will it be possible to increase investment in the private sector by 4 percent in just one year?

Similarly, foreign direct investment (FDI) is also declining. In 2021, foreign direct investment (capital investment) was collected at 114 crore US dollars. In 2022 it was 102 crore USD. In 2023 foreign investment is only 71 crore US dollars. If the private sector does not invest as much as expected, production will suffer and growth will be hampered. So it remains to be seen what steps are taken in Bangladesh Bank's monetary policy to achieve growth and control high inflation. 1 lakh 13 thousand 500 crore rupees have been allocated for the payment of interest on loans taken by the government (local and foreign) in the next financial year, which is 14.24 percent of the total budget allocation. In the next financial year, the government will take a loan of Tk 1 lakh 37 thousand 500 crore from the banking sector of the country. Apart from this, it will take a loan of 90 thousand 700 crores from foreign sources. Taking a loan of Tk 1 lakh 37 thousand 500 crore from the local bank will face obstacles in lending to the private sector. And at the moment most of the country's banks are in acute liquidity crisis. So they cannot lend to the private sector if they want to meet the government's loan demand. Alternatively, the government can manage the situation by printing new money through Bangladesh Bank; But there is a danger that the price inflation in the market will increase greatly. That is, in this case, Bangladesh Bank will fall into both crises.

The easiest way out of this situation is to drastically increase revenue collection. The proposed budget for the next financial year has shown the amount of income of 5 lakh 41 thousand crores. Out of this, Value Added Tax (Musak) is Tk 1 lakh 82 thousand 783 crores. 1 lakh 75 thousand 620 crores of tax from income and profit. Supplementary duty is 64 thousand 278 crore taka. Import duty is 49 thousand 464 crore taka. The National Board of Revenue (NBR) will have the greatest responsibility for tax collection; But can NBR fulfill that responsibility with transparency and accountability? Recently, a high-ranking official of NBR. Allegations have been raised against Matiur Rahman and several members of his family for misappropriation of money and wealth through corruption and abuse of power.

In particular, the son of a relevant revenue officer, has faced criticism for purchasing a sacrificial goat for 12 lakh taka and posting pictures of the goat on social media. This has drawn public ire as news of massive corruption involving Matiur Rahman continues to emerge. As of June 24, reports have surfaced detailing the extent of Matiur Rahman and his family’s wealth, including ownership of 65 bighas of land in 6 districts, 8 flats, two resorts, factories, and a profit of Tk 36 crores from the stock market.

The National Board of Revenue (NBR), responsible for revenue collection on behalf of the government, has been under scrutiny due to these allegations. Md. Matiur Rahman, who was performing that duty, is accused of diverting a significant portion of the collected revenue into personal funds rather than depositing it into the state treasury.

They even have assets abroad. The number of such corrupt individuals like Matiur Rahman in the NBR is significant. Mainly because of these dishonest officials, the government is unable to collect the expected revenue. A few days ago, a female officer of the NBR was accused of unethically waiving off Rs 150 crore owed to mobile companies for personal gain, which is now under investigation. With such officers working in the NBR, how will the expected level of revenue be collected? A common complaint is that a large section of Tax Identification Number (TIN) holders do not file their returns regularly.

There is a problem in providing TIN number. The TIN number should be held by the person or organisation who regularly pays the tax; But here we have people who have never paid tax in the past also get TIN. TIN is mandatory for several transactions including purchase of land. As a result, a person obtains TIN in his name through an Income Tax Advisor or any other means before purchasing land. Once the work is completed, the person no longer needs to file a return. This is the main reason for TIN holders not filing returns. Hence purchase of land or in such cases prior possession of TIN may be made conditional. And TIN should be given to those who have been paying tax for at least one year.

The government is not able to collect taxes as expected due to a class of corrupt NBR officials. And due to not being able to collect taxes, the government has to borrow to finance the development. A country like Nepal has a GDP-tax ratio of 23 percent. And the GDP-tax ratio of Bangladesh is less than 8 percent. How can this be accepted? In the next monetary policy, clear initiatives should be taken to increase tax collection. Existing complications in tax collection should be reduced. At the same time the tax rate can be reduced rather than increased. At the same time initiatives should be taken to increase the tax network.

MA Khaleq: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economic Affairs.