Dr. Zahid Hussain served as a Lead Economist in the Macro, Trade and Investment Global Practice of the World Bank. He joined the World Bank in 1995 and prior to that, he was a member of academia, with 14 years of teaching experience in a number of universities in Bangladesh and abroad. He has worked on several flagship World Bank reports on Bangladesh.

MBR: How is the budget of FY 19-20 different from the previous ones?

Dr. Zahid Hussain: The major difference is, this fiscal year’s budget has relatively more realistic targets. Every year we see that the budget size is increasing and revenue, expenditure, deficit follow the suit. However, this time the targets of both revenue and expenditure and also to some extent, foreign finance, are not as over ambitious in terms of growth as we have seen in recent years. We have seen a 30%+ growth projected for revenue, 25%-30% growth in
annual development program which was too ambitious. All the targets that are set this year are also ambitious, achieving the target will be challenging but still the magnitudes are relatively smaller.

MBR: According to you, what is the impact of Budget FY 2019-20 on basic pillars of the economy: Agriculture, Remittance, and Readymade Garments?

Dr. Zahid Hussain: Though the impact of budgetary measures depends on how it is implemented but the economic justification for the additional subsidies given to readymade garments and remittance is not clear. There is nothing new for agriculture. The budget allocation for agriculture subsidy every year is roundabout BDT 9000 Cr and we have seen the same this year. This year agriculture needed some special intervention such as cash support to
the farmers who are badly affected by the low price of rice, which is not discerned in the budget. On the other hand, 2% cash incentives are offered to
inward remittances and 1% cash incentive is offered to the readymade garments sector, for those who are not getting the 4% cash subsidy. This is a year when garment export is doing very well and remittance recovered from last year’s slump. Most probably Bangladesh is going to reach a new height in remittances this year. Our previous height was USD 15.3 billion in FY’15. This year I expect it to exceed USD 16 billion. My question is, these two sectors are doing well anyway, so why we need additional budgetary support for them? Then, of course, not every budgetary measure can be evaluated with economic rationale.

Then the next question is – is budgetary subsidy the best way of providing support they intend to provide? Were there better alternatives which could have avoided the pressure on the budget and at the same time help, who we intend to help? Currently, the exchange rate is overvalued. Allowing the exchange rate to adjust would have achieved the same objective not just for garments and remittance but also for other exports which are not getting these incentives and would also have protected the domestic market-based industries while avoiding the additional financial pressure on the budget. So, I do not think this is the best way of helping them and I am not at all clear about the economic justification.

MBR: Do you think that the new 4-slabbed vat structure is going to benefit the business people/ commoners? Would like to hear your opinion regarding the new VAT regime.

Dr. Zahid Hussain: I think the new vat that we have seen so far has created a lot of confusion about what the system is likely to be when it is applied. Compared to the law that was passed in 2012, the new VAT structure is a mess because of the vagueness of how many rates there are. In the budget
speech, the proposed slabs are 5%, 7.5%, 10%, and 15%. However, when you look at the finance bill, you discover other rates. Another strange feature is the application of different rates at different stages: import, production, wholesale and retail. And thirdly, one of the key characteristics of VAT is that when you buy things you pay VAT and when you sell things you charge or collect VAT from your buyers. So, you are supposed to get back the VAT that you are paying. The budget speech says that, only those who pay 15% VAT, will be given the input tax credit. If others are not given input tax credit, it will essentially become an excise tax, it’s not VAT. And as far as I understand, most of the commodities and services will not be subject to a 15% VAT rate. Most
of them will fall under 5% or 7.5%. It will have a cascading effect on the taxpayer, which was the main problem with the excise tax.

MBR: The corporate sector is worried about the decision of tax imposition on reinvestment opportunities (Stock Dividend and Retained Earnings), in order to promote cash flow into the stock market. What is your take on this initiative?

Dr. Zahid Hussain: This is a very strange decision. The whole idea is to support the stock market and the development of the stock market. Now if we are looking at investor point of view meaning who buy share, they like cash dividends more than stock dividend. New policy of putting additional tax on
retained earnings and stock dividend will encourage cash dividends payment. So, from the investors’ point of view that is a support as they like cash dividends. Again, if you have a well-functioning stock exchange. if you want cash when you are given stock dividend, then you could easily sell the stock and convert it into cash with little transaction cost. But the fundamental problem in our share market is that it is not broad and deep enough. We do not have many good companies who are listed in the stock exchange. So, if we really want to support long term development of share market, we would need to take measures that encourage good companies to enlist. But now in Bangladesh, the option for financing is very limited particularly for long term.When a  business reinvests in diversification or expansion of existing activities, they have to rely a lot on their own retained earnings as a source of finance-that is the equity finance they have. More than 50% FDI that we get every year is actually the reinvested earnings. So, if we are discouraging retention of earnings how the firms would grow and if they do not grow how the stock market is going to flourish?  Though in the very short term, the buyers of shares might get cash benefits for the long term this will discourage the enlistment of good companies and the growth of existing companies will be stunted. They may suffer from liquidity problems. So, the business firms will have to find other ways for not giving dividends and at the same time keeping retain
earnings within the tax-free limit. This will discourage honest accounting practices. Overall this budget is not share market friendly.

MBR: What will be the impact of additional tax burden on digitization?

Dr. Zahid Hussain: The only economic justification I see for this sort of measures is revenue. Revenue to GDP ratio is low, in our country, the vat that we have introduced earlier does not promise too much increase in revenue so the government has to find revenues from somewhere else. These smartphones, SIM cards are very easy to tax and collect. So, from that point of view, there is a revenue justification, but revenue for its own sake is not the ultimate objective. We want to increase revenue to achieve development. If revenue is increased in a way that hinders your own digitalization agenda, why would you want to do it? And smartphone is no longer a consumption good, it is now almost like a capital machinery. You can buy and sell, you can do research, even your studies, you can do official meetings while visiting different places. Although telecom sectors are heavily taxed and the government has imposed another 1.25% on their turnover and additional 5% supplementary tax. It is already paying a lot of revenue and the sector is key in industrialization and modernization agenda. Even agricultural transformation or making sure that the farmers get the right prices the mobile phone is very helpful to know what price is prevailing in which market. So, it is not only in industry, it is everywhere. From that point of view, the revenue justification is not strong enough.

MBR: Can you share some positive aspects of the Budget?

Dr. Zahid Hussain: There are several positive things. One is the overall macro framework which, as in the past, is quite prudent. The 5% deficit target we have seen this for last 10 years, we never achieve 5%, its somewhere between 3.9% to 4.5%. These are within the sustainable thresholds. We do not see any major macro-fiscal stability problem triggered by this kind of budget.

Of course, we have financial limitations because of that we are not able to allocate much money in education and health sector. And there are some new initiatives in the budget like BDT 100 Cr Taka fund for startups and the pilot for crop insurance.