Growing Unease: Revenue & Inflation

Less foreign loan and assistance for next year Put the load on internal revenue to bear.

Inflation soared to 11.38% in November. Food inflation increased to 14% , indicating central bank has to do lot more to contain inflation. Most surprise came from soybean oil market where govt-subsidized-unbottled oil priced higher than bottled oil,distributed by private companies. Only 5-litre bottled soybean oil is available in the market in the face of overwhelming demand for bottled soybean oil. Private companies stopped supply of bottled soybean oil, urging immediate talks with govt to settle the price debacle. Anarchy in the soybean oil market is pretty old. Distributors are reluctant to furnish any transaction document to the retailer. I wrote a piece about it earlier. On the other hand, an Army subsidiary set up an edible oil plant promising to provide soybean oil in time of crisis. A public bank owes Tk 11 billion to the subsidiary, which even approached the govt to write off the loan. The truth is the soybean oil market remains the most unregulated, undocumented and unsupervised market.

In the IMF's second review report, inflation was forecast to be 9% in 2024 and 7.2% in 2025. But the headline inflation is still in double digit and it is highly unlikely that inflation will decline to 7.2% next year. Since policy rate is still below the inflation rate and as we do not know when the next policy rate hike will come, the contractionary policy will be prolonged.

In the second review, the IMF stresses on "tighter fiscal policy stance,through revenue consolidation," ¹to mitigate the inflationary pressure from exchange rate reform. The job of revenue consolidation is not being done properly. The IMF already held talks with the NBR to know the progress on finalizing the medium and long term strategies on revenue generation, a benchmark scheduled to be completed by December 2024. I still think the decision to lower VAT and tax from sugar and edible oil is an unwise move; it has no reflection in the market but costing the govt lots of revenue (at least Tk 150 billion). Similarly, religious charities and NGOs that have ample fund but engage in political activities should be taxed. Some scheduled banks see large inflow of funds from abroad during the month of Ramzan. Donation tax may be imposed on them. Point is their end use cannot be ensured. So taxing them may at least prevent misappropriation or abuse of this fund. Similarly, microcredit agencies' extra fund generated from 2 years of operation could be taxed instead of not taxing at all. In case of any force majeure, they may get the desired tax relief. Point is both the religious charity and microcredit money have some kind of use in politics. This is creating debate at home and abroad. So it is better to tax them. NBR could at least get Tk 50 billion from this initiative.

On the monetary side, it is a good news that Taka remains stable for more than 4 months. If it remains so for another 4 months, foreign investors' confidence will be back. It is anticipated that Trump administration will not raise the fed policy rate as he will cut the spending abroad. It means that non-food inflation may come down in Bangladesh and lowering the external pressure on monetary policy.Bangladesh Bank is in process of recruiting chief economist. A trained and practicing foreign economist (black/white) will help strengthening forecasting and policy analysis team and Monetary Policy Committee(MPC). I think industry insiders should be included into monetary policy committee. I hope MPC will conduct regular survey across Bangladesh before publishing the Monetary Policy Statement (MPS).

The governor in a press conference apprehended that NPL may reach 25% or 30% of total loans by June next year.Target is to lower it to the benchmark of 8%. But now the NPLs of state commercial banks stood at 22% of total loans. So it is quite an impossible task to bring them to 8% by 2026. Most interestingly, merger and takeover of banks do not bring back confidence on the merged banks. Still many depositors prefer to withdraw their money from the trouble ridden banks.

Increasing dependence on electronic fund transfer in public procurement will reduce corruption in the public sector². Good news is govt is ready to implement the project.

If Bangladesh Bank can introduce extended credit program for farmers and SMEs hit by natural disasters ,it will help them get back on track quickly. Similarly, more tax on tobacco, tax on multiple ACs, AC vehicle will improve our carbon footprint. Increasing tax on tobacco has other benefits too. Since air quality drops in winter, public smoking on the streets create a suffocating atmosphere for nonsmokers, COPD patients,senior citizens and children. Moreover it raises the risk of stroke and brain hemorrhage. Doubling the tax on tobacco could at least lower the incidence of public smoking.

One good news is that Bangladesh met the net international reserve target of $15 billion by December '24. But I cannot figure out how a positive financial account balance will be met next year. There will be less commitment on international aid under Trump presidency. China has already made less loan commitment for next year due to the worsening public debt at home. Moreover, downgrading of credit rating of Bangladesh will make foreign credit hard for private sector. So an optimistic scenario for next year in terms of FDI and foreign assistance is still bleak.

I think as the govt is facing revenue shortage, it may mull introducing universal Tk 1000 tax for every TIN holder. It will at least generate Tk 10 billion. Social spending should be based on "doers should be getters". Lower income bracket of private sector job holders,workers and farmers should get inflation allowance/ long term consumer credit from the govt. It will be appropriate for the govt to focus more on internal revenue generation than to expect more foreign assistance.

References:

1. Staff Report,IMF Second Review Under ECF,EFF And RSF,IMF,June 2024.
2. "IMF's Second Review On Credit Program", Rezaul Hoque, June 27,2024,https://hoquestake.blogspot.com.Link: https://hoquestake.blogspot.com/2024/06/imfs-second-review-on-credit-program.html?m=1