Domestic resource mobilization could become a binding constraint for implementing 8 FYP: CPD
Dhaka, 8 December 2020:
Center for Police Dialogue (CPD) on Tuesday published a research paper on ‘Eighth Five Year Plan: Addressing COVID-19 Challenges and Sustainable LDC Graduation’. In the CPD’s Virtual dialogue the findings of research were disseminated.
The CPD research revealed that inadequate good governance in public investment projects harnessing targets and corruption in public investment projects overburdened lack of fiscal space.
In view of the 8FYP, the CPD had underlined the need of reforms and institutional strengthening to enable the economy to create greater fiscal space through higher domestic resource mobilisation, raise allocative efficiency and efficacy of resource allocation concerning public expenditure, raise labour productivity and enhance competitive strength of the economy.
The think tank had drawn attention to some of the fault lines in view of fiscal-monetary management, banking sector performance, debt sustainability issues, labour market pressure, skills deficit, and demands of compliance required of a post-LDC global system. We have put forward a number of policy recommendations to address the embedded weaknesses and to tackle newly emerging challenges. We have pointed out that implementation of the 8FYP will call for a renewed political commitment in view of the election pledges made by the ruling party in its election manifesto which had put the vision of the economy that will need to be geared to higher growth, of a society which will be inclusive and a development process which is founded on well-governed institutions and corruption-free implementation.
The Research was lead by Dr Fahmida Khatun, Executive Director; Professor Mustafizur Rahman, Distinguished Fellow; Dr Khondaker Golam Moazzem, Research Director; and Mr Towfiqul Islam Khan, Senior Research Fellow, CPD and Towfiqul Islam Khan the Coordinator of the CPD IRBD 2020 Team.
The CPD focused on the following issues Public Finance, Employment-friendly Investment and Industries, Banking Sector and Monetary Policy, Prioritising Trade Issues in the 8 FYP and External Finance for Development of Bangladesh in the research.
The Eighth Five Year Plan (8th FYP), which will be implemented during FY2021-25, is currently being finalised before placing it to the NEC for final approval. The draft plan document had to be revisited on account of adjustment because of the COVID-19 pandemic. The 8th FYP is expected to take into cognizance the experiences and lessons learnt from the 7th FYP (FY2016–20). The experience and result of implementing the 7th FYP have been rather mixed. The COVID-19 pandemic has caused major disruptions in macroeconomic management as the plan period reached its final year inFY2020.
According to CPD, the 8th FYP will need to be informed by three key challenges: Economic recovery and rebound in post-COVID period, Graduation from the LDC group by 2024, Second crucial (five-year) lap in implementing the SDGs by 2030 and the 8th FYP must also address electoral pledges of the ruling party made prior to 2018 National Election.
The key objectives of the analysis were to capture the dynamics of the macroeconomic performance during the 7th FYP period with a view to understanding the benchmark macroeconomic scenario for the 8th FYP period. Review the impact of COVID-19 on macroeconomic performance during FY20 and FY21 and its possible implications for achieving the targets set forth for 8th FYP. Review possible impact and implications of Bangladesh’s graduation from the LDC group in 2024. Recommend policy priorities in view of 8th FYP to enable Bangladesh have robust COVID recovery and prepare for sustainable LDC graduation, with a view to achieving key goals and targets of the SDGs.
CPD also emphasized on a set of issues to be taken up for review and analysis from the perspective of 8th FYP. They were revenue mobilization and public expenditure, employment-friendly investment and industrialization, monetary policy and banking sector, international trade and external finance for development.
The CPD focused on revenue mobilisation targets and revealed that the revenue-GDP ratio target of 16.1 per cent by FY20 will be missed by a large margin. 9.9 per cent in FY19 against the 7FYP target of 15.1 per cent. FY20 alone cannot make up for the large gap notwithstanding COVID-19 induced economic slump. Income tax share could not rise up to the role as was envisaged in 7FYP. Composition of revenue mobilisation has hardly changed. The 8FYP may consider a revenue-GDP ratio target of 14.1% by FY25 – conservative compared to the ambition set out by 7FYP.
According to the CPD analysis, the ambitious total public expenditure target could not be reached. Total public expenditure-GDP ratio crossed the 15% mark for the first time in FY19. However, the related 7FYP target for the corresponding year target was 20.1%. The upcoming 8FYP may target this share to be 19.1% by FY25. The target of ADP expenditure as a share of GDP could not be met during the 7FYP period. This scenario would have been better if the entire amount earmarked for ADP could be spent in each fiscal year – during FY16-FY19, ADP utilisation rate, on an average, was only about 80%. There are serious concerns as regards the quality of ADP spending along with programmed project costs, which have been repeatedly pointed out by CPD in successive IRBDs.
Analysing Annual Development Programs (ADP) Targets CPD said ADP expenditure as share of GDP for a number of key sectors could not reach the targets envisaged in 7FYP.
Although ADP expenditure in education and technology exhibited some improvement in the recent years, it is mainly due to the inclusion of Rooppur Nuclear Power Plant project as part of this particular head. The failure to invest adequately in health and social protection became even more apparent in view of the COVID-19 pandemic. In the upcoming 8 FYP period, sectoral shares of education and technology, health and social protection in total ADP may increase while the opposite may be the case for transport and communication and LGRD.
CPD projected on Key Challenges of achieving 8 FYP targets and said very narrow fiscal space manifested particularly in the last two years that originated from low revenue-GDP (and tax-GDP) ratio leading to low public expenditure. COVID-19 pandemic has posed further pressure on revenue collection in the backdrop of higher public expenditure demands. Reliance on indirect tax (including on import) with no improvement in share of income tax was detected. This structural limitation will discourage undertaking further trade liberalisation and negotiating free-trade agreements. High incidence of tax evasion and avoidance along with illicit financial flows were projected. Weak enforcement and narrow tax base could not be adequately improved while ad-hoc provisions of tax incentives without any comprehensive assessment have become common practice. Inability to deliver the planned reform agenda in the area of revenue mobilisation was emphasised. Both technical preparations and creating consensus among stakeholders have been lacklustre.
CPD also said, sustained losses incurred by the state-owned enterprises. Effective steps to bring reform and efficacy had been absent. Prioritising sectoral allocations in a constrained fiscal space was needed. Allocations for social sectors continued to be undermined while financing framework for SDGs has become redundant. Inability to deliver public investment projects in a cost-effective and timely manner. Among the countries, public investment is the costliest in Bangladesh; while both time-overrun and cost-overrun have become more common.
Inadequate good governance in public investment projects was identified. Corruption in public investment projects overburdened lack of fiscal space. Limited efforts to ensure transparency and accountability, timely production and dissemination of data have become more difficult while audit reports continued to be delayed.
Domestic resource mobilization could become a binding constraint for implementing 8FYP
CPD suggested for Implementing planned reforms and strategies and highlighted on long standing policy reform issues such as the Customs Act and Direct Tax Act should be implemented at the earliest. Take sincere efforts to implement the programmed strategies including PFM Action Plan 2018-2023 and National Strategy for Preventing Money Laundering and Combating Financing of Terrorism 2019-2021.
For creating fiscal space by broadening domestic resource base initiatives such as wealth tax, property tax and inheritance tax needs to be introduced in a time-bound manner; while sectors such as agriculture and services should be adequately brought under tax net. Ad-hoc provisions of tax incentives must be restrained and a comprehensive assessment of all tax incentives needs to be undertaken.
CPD recommended for strengthening institutions and ensuring good governance through automation of tax administration must be a priority which should include effective and timely implementation of VOP and e-tax return submission and payments; new measures should be taken such as the e-TDS. Strengthening tax administration with ensuring corruption free enforcement should be a priority.
Public expenditure priorities should be revisited in the 8FYP in view of addressing COVID-19, dual graduation and SDG implementation by revisiting public expenditure priorities. The 8FYP needs to be informed by a revised approach as regards financing of SDGs in view of the new realities originating from shrinking fiscal space and COVID-19. In view of the COVID-19 pandemic, health, social protection and education should receive the highest priority when it comes to public expenditure, with introduction of universal health insurance and universal pension schemes – the 8FYP must lay out strategies in view of such public expenditure, with possible relevant projects and their financing plan.
The CPD had suggested for raising efficiency of public expenditure. A Public Expenditure Review Commission must be constituted to understand the dynamics behind high costs of public investment projects and to ensure efficient use of public money. Implementation of public investment projects in a timely manner must be ensured without compromising quality and avoiding cost-overrun. For Establishing transparency and accountability it had focused on the 8 FYP which must emphasise the need for drastic improvement in programming of budgetary targets for both revenue mobilisation and public expenditure. A time bound reporting calendar for public finance data and audit reports needs to be mentioned in the 8 FYP.
In the research, the CPD had highlighted on Projection of investment and employment in the 8FYP. A major benchmark issue of the 8FYP for discussion would be whether the targeted public and private investments in the first year of the 8th FYP (2021) could be delivered in the backdrop of major shocks in FY2020. Total, public, and private investments are targeted to reach 36.9 per cent, 9.2 per cent, and 27.4 per cent respectively at the end of 8th FYP. FDI is targeted to reach 3 per cent of GDP.
Projected trend in ICOR indicates a growing inefficiency in investment during 8th FYP period. In continuation of the earlier plan period, the projected economic transformation targets a further rise in the share of industries (42% of GDP), including that of the manufacturing sector (30.5% of GDP). Based on ILOSTAT and employment elasticity estimated by Khatun and Sadat (2020), the projected employment during the 8th FYP would be only 89.1 lac. It is apprehended that the recovery period of domestic and global economies would be longer than initially expected, which would slow down the scope of employment creation both in local and international markets (The Wall Street Journal, 2020)
Post-graduation would be a challenging period for ensuring employment growth, particularly in the export-oriented sectors and a proactive employment-focused strategy through investment and industrialization will be needed to address the challenges.
The 8FYP is being formulated in view of challenging times ahead: In spite of achievements in some areas, the benchmark 7FYP scenario was below the targets set for FY2019-20 in a number of key areas. Indeed, in many cases, the gaps have widened over years. 8FYP will need to revisit those targets and set the new targets in a realistic manner. The COVID pandemic has no doubt exacerbated many of the challenges facing the Bangladesh economy in 7FYP period. These have undermined achieved success in terms of many indicators such as poverty, employment, distribution of income and overall GDP growth. However, our analysis also demonstrates that many of these challenges predates COVID and their negative impacts have accumulated over time. 8FYP must identify the underlying weaknesses and try to address those, mitigate their adverse implications on the economy.
LDC graduation, in 2024, will require Bangladesh to take adequate preparation so that we can graduate with momentum and graduation is sustainable. This will mean that 8FYP foresees needed steps in anticipation of significant preference erosion and demands on raising competitive strength of the Bangladesh economy. 8FYP period covers the mid-way journey towards attaining the goals and targets of the SDGs by 2030. Accordingly, issues of inclusiveness and equity, and leaving no one behind, must be prioritised in the plan document. In our analyses in the preceding sections, we have focused on three dimensions, concerning a select set of challenging areas: 7FYP benchmarks, Emerging areas and Policy recommendations.