Summary

Summary | SANEM-World Bank Seminar: Fiscal Challenges in South Asia

8 October 2023 | BRAC Centre Inn, Dhaka

South Asian Network on Economic Modeling (SANEM) and World Bank organized a seminar titled ” Fiscal Challenges in South Asia” on 8 October 2023 from 10:00 AM to 12:00 PM at BRAC Centre Inn, Dhaka. Dr Franziska Lieselotte Ohnsorge, Chief Economist, South Asia, the World Bank Group; Dr Ahsan H. Mansur, Executive Director, Policy Research Institute of Bangladesh and Barrister Md. Sameer Sattar, President, Dhaka Chamber of Commerce and Industry grace the event as a panelist. Dr Selim Raihan, Professor, Department of Economics, University of Dhaka and Executive Director, SANEM moderated the seminar.

At the beginning of the event, Dr Selim Raihan welcomed all to seminar. In his welcome remarks, he mentioned the relevance of this program as the economy of Bangladesh is going through some challenges and the fiscal challenges are important among those.
Dr Franziska Lieselotte Ohnsorge, highlighted the pressing concerns surrounding Bangladesh’s economic sustainability, particularly its debt situation and revenue base at the keynote presentation. In her call for a comprehensive approach to development, Dr Ohnsorge stressed the importance of prioritizing projects, ensuring quality expenditure, and promoting community involvement with good governance. She emphasized that relying solely on tax administration reforms and automation wouldn’t suffice; a crucial factor is the political will to bolster revenue income. While acknowledging the deficit resulting from Bangladesh’s low tax base, she pointed out that increasing taxes isn’t the sole solution; there’s also a need for spending control. Moreover, she highlighted the challenge of sustaining spending restrictions and the quality of small public services over time.
Dr Ohnsorge pointed to Sri Lanka as an example, underscoring the vulnerability faced by countries with a low revenue base and a burgeoning debt burden. Bangladesh’s tax-GDP ratio, at 7.4% in the fiscal year 2022-23, is among the lowest in South Asia, down from 7.9% in the previous year. Dr Ohnsorge also drew attention to the soaring South Asian debt-GDP ratio, reaching 86% of the region’s total GDP, making it one of the highest worldwide. Although Bangladesh’s debt level is currently comfortable, well below 40% of its GDP, she stressed the importance of mobilizing higher domestic resources. Dr Ohnsorge recognized the significant role of the informal sector in Bangladesh’s economy and the difficulties in taxing it due to low productivity and high administrative costs. To address this issue, she emphasized the need for tax administration to focus on larger, more profitable informal businesses while simultaneously removing obstacles that hinder their growth. Ultimately, her insights underscore the importance of addressing the country’s revenue challenges, optimizing spending, and fostering a conducive environment for economic growth.
Dr Ohnsorge further cautioned that while Bangladesh is not currently unable to meet its foreign debt obligations, it must work diligently to maintain this status. The country’s weak internal revenue collection poses a potential risk, as it may hinder its ability to secure global loans on favorable terms. Dr Ohnsorge underscored that South Asian nations, despite experiencing rapid growth, are grappling with the challenges of high debt burdens and low revenue generation, which could lead to future difficulties in debt repayment. She also expressed concerns about the gradual weakening of economic indicators and potential financial instability during elections in some countries.
Dr Ahsan H Mansur has emphasized the critical importance of ensuring that Bangladesh’s foreign currency reserves do not dip below the $15 billion mark, especially in the lead-up to the next parliamentary election expected in early January. Dr Mansur has urged the country to implement a short-term plan to safeguard its foreign currency reserves, suggesting that all available options be explored, including securing the second installment of a loan from the International Monetary Fund (IMF) and seeking support from the World Bank and other bilateral sources. He has underlined the significance of this election, highlighting those uncertainties may arise as the polls draw nearer. Furthermore, Dr Mansur has pointed out the need for improved expenditure management, highlighting the balance between expenditure control and the importance of public investment in areas such as human capital, education, and healthcare. He has cautioned that a lower tax-GDP ratio could jeopardize the country’s ability to invest in crucial development areas and meet its debt repayment obligations over time.
Dr Mansur has also expressed concerns regarding the government’s management of the economy, citing a lack of effective cost control and high-interest loans, which have contributed to inflation and a weakened currency. He recommended a comprehensive approach, emphasizing the importance of boosting revenue collection, making strong political decisions on inflation control, exchange rates, government spending, domestic borrowing, and diversifying exports. In conclusion, Dr Ahsan H Mansur has called for immediate and urgent reforms to prevent Bangladesh’s foreign exchange reserves from falling below the critical $15 billion threshold, providing a clear roadmap to ensure economic stability and resilience.
Barrister Sameer Sattar emphasized key aspects of Bangladesh’s economic development during a seminar. He underscored the importance of a selective approach to government investments in the current macroeconomic context, focusing on high-quality projects. Barrister Sattar stressed the urgent need to expand the tax base and automate the tax payment system to boost revenue income, addressing the country’s low tax-to-GDP ratio.
Additionally, he called for an extension of the taxation scope, advocating for the inclusion of the informal sector within the tax framework. Barrister Sattar highlighted the issue of the traditional revenue collection system, which he deemed inadequate for expanding the tax net effectively. Notably, he pointed out that a substantial 90% of the country’s total revenue is concentrated in Dhaka and Chittagong, accounting for only 48% of the total GDP. To rectify this imbalance, he suggested the expansion and formalization of the tax net, fostering a tax payment culture, and modernizing revenue collection practices. He emphasized automation, changing the mindset around tax compliance, reducing human interactions in tax collection, and focusing on recruiting highly qualified officials over prioritizing the opening of new tax offices. These measures are crucial for a more efficient and equitable taxation system, contributing to Bangladesh’s economic growth and fiscal sustainability.
Dr Selim Raihan raised significant concerns about the current economic situation in Bangladesh, emphasizing the pressing need for immediate action to address the challenges and prevent further deterioration. He stressed that avoiding these issues and delaying essential policy measures could lead to severe consequences. He called for a strong political will among leaders to prioritize swift economic reforms over national elections, highlighting the urgency of the situation. Drawing on the example of Sri Lanka’s economic decline, he underscored the importance of learning from such experiences to avoid a similar outcome. He pointed out that the onset of the COVID-19 pandemic and the Russia-Ukraine war has strained the country’s economy, making it crucial to address significant economic challenges. He called for proactive solutions and decisive political actions to advance planned reforms outlined in the government’s five-year plan.
Regarding fiscal policy, Professor Selim Raihan stressed the next two to three months’ critical importance for the country’s economy. He warned that without adopting an effective short-term plan within this period, considering the upcoming national election, the situation could worsen significantly. He also highlighted the challenges faced by Bangladesh, including a low tax-to-GDP ratio, a declining trend in this ratio, and issues related to tax evasion culture and political interference. Additionally, Dr Raihan noted that the country’s expenditure on education, health, and social safety nets is lower compared to neighboring nations, indicating a need for increased investment in human capital. In conclusion, these experts’ assessments underscore the urgency of addressing economic challenges and implementing significant policy measures to prevent further decline and enhance the nation’s economic resilience.