News and update: IMF sets fiscal agenda for Bangladesh government

Nazmul Ahsan, NewAge, October 26, 2007. Dhaka, Bangladesh

The International Monetary Fund has set economic and financial agenda for the government of Bangladesh in advance for the next fiscal year, asking the latter to implement those to qualify for future assistance.

The lending agency wants the government to agree to implement the policies and fiscal reforms spelt out in a recent document by November, finance and central bank officials said. In its latest move, the IMF asked the government to initiate budgetary exercises by further reducing the zero-tariff facility, tightening tax exemptions scheme and expanding value added tax.

The government is asked to get these recommended budgetary measures for the next fiscal year endorsed by the Fund by May, 2008, one month before the next fiscal year begins. The wish list and conditions summarized in a document, styled ‘economic and financial policies for November 2007,’ have recently been submitted to the Bangladesh Bank and the finance ministry.

Implementation of the conditions is linked to the future assistance from the Fund under its PRGF (poverty reduction growth facility) arrangement, sources said. ‘The attached draft document on economic policies more fully outlines the type of reforms that would be needed to support a request for a PRGF arrangement,’ reads a letter of Thomas Rumbaugh, IMF’s adviser for Asia and Pacific, written to finance adviser AB Mirza Azizul Islam recently. ‘It is drafted to reflect policies to be agreed and implemented by November 2007, a possible date for finalising a PRGF request, as well as policy commitments through December 2008’, the letter further reads.

According to the list, the IMF has asked the government to reach an agreement with the lending agency by May 2008 on the tax measures to be taken in the 2008-09 fiscal year. The government will have to get the Fund’s approval for new income tax law, reduction in number of zero-rated commodities, expansion of VAT to retail level and phasing out of remaining tax exemptions.

The IMF’s latest script on the economic and financial policies will also require the government to rewrite the income tax legislation by February 2008 and assess the cost and efficiency of all income tax exemptions.

Furthermore, it asked the government to enact a new VAT law with a modern invoice-credit based system, and separate excises from VAT. Officials at the finance ministry and National Board of Revenue expressed their reservations over the IMF’s suggestion for further reducing zero-tariff facility in the next budget.

The government drastically reduced the same facility in the current budget amid widespread criticism from industrialists, chamber leaders and economists, they argued. ‘We should not go for further reduction in zero tariff facility and tightening tax exemption to appease the IMF,’ a member of the NBR told New Age. ‘The present government did the same thing in the current budget ignoring the reservation of revenue officials,’ he added.

The budget for the current fiscal year withdrew zero-tariff facility from above 400 items, mostly raw materials and capital machinery at the insistence of the IMF at the last moment, sources said.

Four per cent infrastructure development surcharge has been withdrawn from about 2600 items, of which more than 1600 are finished and luxury products, sources said. Industrialists and economists said the measures cost the local industry heavily and opened the floodgate for less important imports.

Revenue officials said the government cannot withdraw all tax exemptions overnight, which could stall the growth of local industry. An NBR survey in March 2006 revealed that tax exemptions cost the government heavily. Tax relief enjoyed by corporations and big businesses cost the exchequer Tk 350 crore in foregone revenue during the 2004-05 fiscal year alone. These exemptions accounted for nearly 74 per cent of the total revenue forgone by the government in order to encourage and facilitate industry during the period. Currently, tax exemptions are offered to the corporate sector under about 18 categories and another 20 categories at individual level, tax officials said.

Asked about the rationality of the IMF conditions and necessity for further PRGF arrangement, economist Anu Muhammed said no government with dignity can reach agreements with a multilateral lending agency on how to frame its budget and what fiscal measures would be taken. ‘It is humiliating and disgraceful, and the government should reject such diktats outright,’ he told New Age on Thursday.

The economist also opposed any further deal with IMF for PRGF as he believed that there was no link of poverty reduction with the PRGF, which is designed to destroy the country’s industrial base and which has been rejected by many countries.

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