Macroeconomic stability should be main focus of next budget: CPD

The Centre for Policy Dialogue (CPD) said the primary goal of the FY25 national budget should be ensured macroeconomic stability. 

At the same time, the think tank believes the government must take stern reform measures in the upcoming budget since the first year of the new term is the most appropriate time for taking strict measures. 

CPD executive director Dr Fahmida Khantun observed these while addressing a media briefing on "Recommendations for the National Budget for the Fiscal Year 2024-2025," held at the CPD's office in Dhanmondi today.

Fahmida highlighted the recommendations across various sectors, including revenue collection, tax structure, inflation control, exchange rate, allocations for health and education, strategic changes in the energy sector and environmental protection. 

“The upcoming budget must include initiatives to advance the marginalised communities. Revenue collection needs to be increased," she said. 

Fahmida said the government must take steps to reduce wastage in its expenditure, to reduce reliance on bank loans. 

Focusing on the importance of proper investment, she said the government must set targets while considering the reality. "Measures must be implemented to curb the rise in prices of daily necessities. Priority should be given on increasing domestic food production," she said. 

Fahmida also recommended expanding the scope of social security needs and increasing incentives in the agriculture sector. "The focus of subsidies should center on assisting the impoverished. Wherever possible, cost-saving measures should be implemented. Emphasis should be given on implementing foreign-aided projects," said the CPD ED. 

The CPD also recommended lowering priorities to projects that have yet to see 10% implementation by March 2024. The think tank said an independent commission should be formed to check if government spending is properly executed. 

Mentioning that meeting the budget deficit will also be a challenge this year, it said foreign borrowing is good for covering the budget deficit, but emphasis must be given on the implementation of conditions. 

CPD indicates that non-bank borrowing has decreased and is expected to decline further. 

The think tank also recommended the tax-free income threshold be kept unchanged for the next fiscal year. It also recommended reducing the existing 15% tax on the provident funds and gratuity to 10% and continuing it. 

The think tank recommended unifying the property tax, closing the opportunity to legalise undisclosed income, and intensifying the installation of EFD machines for VAT collection.

To prevent money laundering, it recommended strengthening the transfer pricing cell, central intelligence cell, and customs intelligence unit by making them work more efficiently and in a coordinated manner. It also recommended strengthening the tax base. Instead of repeatedly pressuring those paying taxes, it said the tax net needs to be expanded. 

"Property tax, wealth tax and tax net need to be clarified in the medium and long-term revenue strategy. There must be an implementation plan," Fahmida Khatun said. 

It said supply side needs to be ensured to stabilise market regarding inflation, Fahmida Khatun said adding "The government is providing various tax waivers and import tariffs to control the prices of goods. It is offering interest rates and funding facilities. But fiscal or monetary measures do not work in the market. 

The CPD executive director said, "The government must move towards clean energy. There are projects related to solar, hydropower, and wind power, but there is no allocation in the budget. The allocation must be provided in next year's budget."

She proposed to extend the tax holiday for renewable energy from five to 10 years. Additionally, she suggested increasing tax waivers for rooftop solar and bringing down the taxes on solar inverters to an affordable level. 

"Incentives could be given for using solar in the industrial sector. Agriculture could be a major area for solar usage, particularly in irrigation. In this case, a 1% lower tax could be applied," said Fahmida. 

She proposed tax incentives for switching from fossil fuel vehicles to hybrid or electric vehicles. To finance the transition to green energy, she suggested seeking foreign sources. 

Fahmida said the allocation for the health sector is less than 1% of GDP, whereas other developing countries allocate more than 1% in this regard. 

“Allocation is necessary to reduce the patient's cost." She also proposed changing the tax system on cigarettes and increasing the tax on bidi and other tobacco products. 

She suggested increasing the health surcharge from 1% to 5% and corporate tax on tobacco companies from 45% to 50%. The CPD executive director also proposed reducing the Advanced Income Tax (AIT) on raw materials for making sanitary napkins and providing concessions in drug manufacturing to make them affordable for the country's poor population. 

Fahmida said the allocation for education is within 2% of GDP. At least 35 developing countries spend more than 2% of their GDP on education.  

She proposed increasing the allocation in this sector. She suggested removing the 5% VAT on tuition fees of English medium schools while reducing import taxes on books to ensure education for all. 

The CPD executive director proposed reducing the corporate tax on private universities, medical colleges, and technical education institutions from 15% to 10%. 

Fahmida suggested ensuring a 1% surcharge collection from polluting industries, increasing taxes on fossil fuel vehicles, and raising taxes in the plastic sector. 

According to CPD, the country's macroeconomic challenges include a decline in revenue collection, liquidity crisis in banks, reduced exports and remittance income, and a decrease in foreign currency reserves. 

Dr Fahmida said the government's development spending was also down, reaching just 25.5% of the planned budget, compared to 27.2% in the previous year. 

She, however, noted a silver lining with the budget deficit reduced to Tk7,885 crore in six months, a decrease from last year's Tk20,000 crore. 

Even though the deficit has decreased, the government's borrowing from the banking system has increased. “This will have a negative impact on the growth of private sector loans," she added. 

As per CPD, the government has increased the interest and repo rate while setting the policy rate at 8% in January 2024 to reduce the pressure. "The government's current approach to managing inflation, such as printing money and releasing dollars into the market, or withdrawing dollars from the market, needs to be changed," Dr Fahmida opined. 

While highlighting concerns in all indicators of the external sector, the CPD executive director said that there has been a sluggish growth in export earnings while imports have also declined. Under the circumstances, implementing stricter import controls could adversely impact medium and long-term investments.

Noting that the foreign currency reserves are still unstable, she said, "Efforts have been made to transition towards a more market-based exchange rate, with Bangladesh Bank implementing a crawling peg system, although its effectiveness remains limited."