Interviewed by Syed Md. Rakeen, Team MBR

Dr. Sadiq Ahmed was educated at Dhaka University, London School of Economics, and Boston University. He joined the World Bank in Washington, D.C., as a Young Professional in 1981. He served in various top positions, including Chief Economist for the South Asia Region, Country Director for the Pakistan and Afghanistan Programme, and Sector Director of Poverty Reduction and Economic Management for the South Asia Region. In 2009, he took early retirement from the World Bank to establish the Policy Research Institute of Bangladesh (PRI) along with two other colleagues, where he serves as the Vice Chairman. Team MBR was in conversation with Dr. Sadiq Ahmed and was fortunate enough to receive his take on the national budget for FY2023–24.

Syed Md. Rakeen: For FY2023–24, the GDP growth target has been set at 7.5%. Do you think that the target economic growth is achievable amidst global economic uncertainty?

Dr. Sadiq Ahmed: Bangladesh has an immense medium- to long-term growth potential, as illustrated by the solid growth performance of the 2009–2019 period. The rapid recovery from COVID-19 is also a testimony to the resilience and underlying strengths of the economy. But over the past 15 months, Bangladesh has been going through a serious macroeconomic crisis that remains to be addressed. In this environment, the GDP growth rate fell to 6% in FY2022–2023, as compared with the target of 7.5%. The rapid decline in imports due to import controls, power sector outages owing to shortages of primary fuel, and the escalating costs of production due to high domestic inflation have all hurt the growth rate. The private investment rate has been falling owing to import controls, a shortage of foreign exchange, and business uncertainty. Non-RMG exports have been falling, declining by 7% in FY2022–2023.

These adverse macroeconomic developments are ongoing, and there are no signs that they will reverse soon. In this situation, the GDP growth outlook for FY2023–2024 remains highly uncertain, and the most likely outcome would be that the ambitious 7.5% GDP growth target set for FY2023–2024 will not be met.

Syed Md. Rakeen: In FY2023–24, the private investment-GDP ratio is predicted to reach 27.4% from 21.8% in FY2022-23, and it will require a massive injection of BDT 404,097 crore in the form of private investment to achieve this projection. From your perspective, can Bangladesh achieve this massive target of private investment growth given the recently published contractionary monetary policy?

Dr. Sadiq Ahmed: The first point to note is that the actual private sector investment rate was 23.6% of GDP and not 21.8% in FY2022-23. Even so, this target of 27.4% of GDP for the private investment rate in FY2023–2024 is highly unrealistic. It does not appear to have been based on any serious thinking about the current macroeconomic environment or the near-term outlook. Even in the best of times when the macroeconomy was stable and the growth rate was accelerating, the private investment rate never exceeded 25% of GDP (FY2018–2019). It has been fluctuating around 23-24% of GDP over the past four years. So, it is a total mystery where this target came from or what types of assumptions have been made.

Not only has the domestic private investment rate been declining since FY2018–2019, but foreign direct investment (FDI) flows have also been lacklustre in Bangladesh. For example, as compared with a total FDI inflow of USD 837 billion in developing countries in 2021, Bangladesh got a mere USD 3 billion even at a time when the macroeconomy was stable. In comparison, China got USD 181 billion, India received USD 45 billion, Indonesia got USD 20 billion, and Vietnam received USD 16 billion. The main reason for this weak FDI performance is the high cost of doing business in Bangladesh. Global doing business indicators continue to rank Bangladesh's investment climate at the bottom 15% of the countries surveyed and substantially below countries like India, Vietnam, Thailand, and Indonesia. On top of this, while macroeconomic stability used to be a strong point for Bangladesh, the country is now facing serious macroeconomic instability. To attract higher volumes of FDI, Bangladesh will need to stabilise the macroeconomy and also address the constraints that increase the cost of doing business. Importantly, this cost has to be lowered to the extent that FDI firms find Bangladesh a more attractive place to do business than their competitors. So, it will be impossible to achieve a 27.4% GDP private sector investment rate in FY2023–2024.

Syed Md. Rakeen: In recent times, India and Thailand have adopted the same contractionary monetary policy, which has helped curb inflationary pressure. Do you think that such a contractionary monetary policy will be able to restrict the rising inflation in Bangladesh?

Dr. Sadiq Ahmed: Bangladesh can certainly learn from the successful experiences of all the countries, including Thailand and India, that have managed to sharply lower inflation emerging from an adverse global economic environment. In my view, inflation control in Bangladesh will require several policy actions, such as instituting a market-based interest rate policy and using monetary policy to increase interest rates to an extent that private sector credit growth falls meaningfully; reducing the budget deficit to 4% of GDP to lower aggregate demand; avoiding bank borrowing to finance the budget deficit; and reducing import duties to lower the costs of imports.

Syed Md. Rakeen: It is known that Bangladesh currently has one of the lowest tax-to-GDP ratios in the world, and as per the conditions of the International Monetary Fund (IMF), the National Board of Revenue will have to increase the tax-to-GDP ratio by 0.5% in FY2023–24 and FY2024–25 and by 0.7% in FY2025-26. Will it be possible to meet the requirements of the IMF with the announced revenue collection target of the government?

Dr. Sadiq Ahmed: I have not seen the details of the IMF programme or the policy reforms underlying the revenue targets. Setting ad-hoc tax revenue targets without addressing the inefficiencies of the tax system is a risky business because it can cause further damage to the economy through ad-hoc tax interventions. My review of the tax measures in the national budget FY2023–24 suggests that there are some good features, like the reduction of exemptions, but I do not see any institutional reform of the tax system, which is essential to modernising our tax system and securing a higher tax-to-GDP ratio on a sustained basis.

The tax system of Bangladesh needs to be overhauled and reformed systematically, learning from the good practice examples of countries that have instituted a modern tax system. Critical institutional reforms like the separation of tax planning and research from tax collection; establishing an effective system of self-assessment with no interface between taxpayer and tax collector; setting up a digital tax submissions and payments system; providing for rule-based tax laws rather than discretionary application by the DCT; and securing computer-based selective and productive tax audits using professional auditors are all missing in the tax system of Bangladesh. Instead of asking for ad hoc increases in tax revenues, a more productive approach would be to seek major institutional reform of the tax system. Furthermore, asking NBR to reform itself is not very meaningful. Instead, the government should appoint an expert Tax Reform Commission (TRC) that will suggest the modernization of the tax system based on international best practices. India has benefited considerably from these TRCs. Bangladesh can learn from this experience.

Syed Md. Rakeen: Out of the deficit financing target of BDT 261,785 crore in FY2023–24, BDT 132,395 crore will be provided by the banking sector. Is there any possibility of negative consequences arising as a result of this massive borrowing target? What can be done, in your opinion, to reduce this increased reliance on bank borrowing?

Dr. Sadiq Ahmed: Increasing the resort to bank financing of the fiscal deficit is a highly risky proposal, and I strongly advise against it, especially at a time when inflation is rising. A higher fiscal deficit using bank financing is inconsistent with inflation controls and must be avoided. There are two possible ways to finance the fiscal deficit to minimise the adverse effect of deficit-based government spending on inflation. First, all efforts must be made to mobilise budget-support type foreign loans from multilateral institutions like the World Bank and the Asian Development Bank. Second, the government could borrow directly from the private sector. The government used to do this for a long time through the National Savings Certificate Scheme. This became problematic because the government offered excessively generous interest rates that exceeded market rates. Since the reform of these generous rates has faced a political bottleneck, the next option for the government is to sell T-bills directly to the public by developing an effective secondary market. At a 7-8% interest rate on one-year T-bills, they would attract a lot of interest from private savers.

Syed Md. Rakeen: Do you think that the dire need for Social Safety Net Programmes has been addressed enough in the proposed fiscal policy, considering that the share of Social Safety Net Programmes in the total budget and GDP has reduced and the increase in allocation to this segment (7.34%) in monetary terms is even lower than the inflation rate?

Dr. Sadiq Ahmed: Despite the government’s official stance to progressively increase public spending on social protection, the level of social protection spending as a share of GDP has been falling over the past several years due to revenue constraints. For example, social protection spending as a share of GDP, excluding spending on civil service pensions, which do not properly qualify as social protection spending for the poor, amounted to a mere 1.0% of GDP in FY2018–2019. It declined further to 0.74% of GDP in FY2022–2023. The prospects for an increase in FY2023–2024 are not bright. The combination of rising inflation and falling spending on social protection is a most unfortunate outcome for the well-being of the poor and vulnerable and must be reversed quickly.

Syed Md. Rakeen: The Gini coefficient, an index to measure the degree of inequality in income and wealth distribution, reached an alarming figure of 0.499 in 2022. Would you kindly share if the proposed national budget for FY2023–24 can reduce the inequality of wealth distribution?

Dr. Sadiq Ahmed: The growing income inequality in Bangladesh is indeed a matter of great concern. I have written extensively on the subject of lowering income inequality in Bangladesh through the use of redistributive fiscal policy, as has been done successfully by many Western European countries. The basic principle of a redistributive fiscal policy is to generate adequate tax revenues using a progressive personal income tax system and to redistribute a significant portion of these revenues to the poor and vulnerable through spending on health, education, and social protection. The Eighth Five Year Plan of Bangladesh proposed the use of this redistributive fiscal policy, but implementation has lagged behind.

In the first place, Bangladesh still relies very heavily on indirect taxes (VAT, customs duties, supplementary duties, regulatory duties, etc.). The use of a progressive personal income tax system is very limited. For example, personal taxes were a mere 1.3% of GDP in FY2022–2023. Additionally, the tax revenues are so low that they can barely cover the financing needs of fixed government commitments like civil service salaries and pensions, interest costs, national security spending (defence, law, and order), material costs, and transfers to local government. The scope for increasing redistributive spending is very limited and relies mostly on deficit financing. In this fiscal reality, there is very little prospect that the FY2023–24 budget will help reduce income and wealth inequality.

Syed Md. Rakeen: Bangladesh is going through a challenging year, with a key focus now centred around achieving macroeconomic stability. Which issues do you think will turn out to be challenging in the implementation of the FY2023–24 budget? Which initiatives can help weather the economic storm that has been brewing?

Dr. Sadiq Ahmed: From my perspective, I see the national budget for FY2023–2024 facing four key challenges, including restoring macroeconomic stability, the challenges of revenue mobilisation, prudent financing of the budget deficit, and protecting social sector spending. I touched on all four aspects in my responses above. I will now briefly comment on the two highest-priority tasks.

The restoration of macroeconomic stability is absolutely the most urgent task. This will require coordinated use of exchange rates and monetary and fiscal policies to boost exports, reduce inflation, raise taxes, and lower fiscal deficits. A uniform and flexible exchange rate combined with lower aggregate demand is the best and most sustainable way to manage the balance of payments. A flexible exchange rate will boost exports and remittances and reduce import demand, which, combined with demand management, will stabilise the balance of payments much more sustainably than import controls. This will also avoid the import constraint on private investment and GDP growth. Demand management by lowering private spending through an increase in interest rates combined with higher taxes and a lower fiscal deficit will help reduce inflation and prevent the exchange rate from overshooting.

The restoration of macroeconomic stability is critically linked to greater public revenue mobilisation. Revenue mobilisation requires a major overhaul of the tax system, as noted earlier. It also requires reforming the state-owned enterprises (SOEs) and generating an adequate surplus from the huge amount of assets locked into these enterprises. For example, the total assets of non-financial SOEs are conservatively estimated at around 20% of GDP. A 10% rate of return on these assets should yield revenue equal to 2% of GDP. In reality, SOEs, on average, have earned a mere 0.3% of GDP between FY2015–2016 and FY2020–2021. Turning around the performance of the SOEs through corporate governance and pricing reforms could yield an additional 1.7% of GDP as revenues for the government.