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Bank & Finance - June 2, 2022

Reduce reliance on imports for self-sufficient economy

Says former BB governor Farashuddin

Staff Correspondent: Former Bangladesh Bank governor Mohammed Farashuddin thinks the next national budget should focus on efforts to build a self-sufficient economy by reducing dependency on imports.
Imports grew by 6.8 percent to $58 billion compared to the last fiscal year in the first nine months of this financial year thanks to the hike in commodity prices on the international market
This increased pressure on the foreign currency reserves. Last year the reserves stood at $48 billion but they declined to $42 billion this year, prompting the government to take a flurry of steps, such as wooing expatriates for remittances and restricting imports and overseas travel.
Farashuddin thinks the government still needs to do a lot to stop tax evasion, loan defaults and money laundering. These are the biggest challenges in Bangladesh’s path to a self-dependent economy. “We must act against them.”
Farashuddin, a former personal assistant to Bangabandhu Sheikh Mujibur Rahman, now advises Bangabandhu’s daughter Prime Minister Sheikh Hasina to ramp up efforts to collect taxes. Citing data from the Boston Consulting Group and other research institutions, Farashuddin said 25 million people in Bangladesh earn more than Tk 500,000 annually, but not all of them pay income taxes although they know the law stipulates paying income taxes for annual earnings of over Tk 300,000. “We should explain to them the benefits of paying taxes, how it profits the country.”
Bangladesh’s tax collection rate is much lower than other countries in the world. The tax-to-GDP ratio is below 10 percent, whereas it is close to 20 percent in India, 21 percent in Nepal and almost 13 percent in Pakistan.

Farashuddin pointed out that many people in the rural areas are eligible to pay taxes but the government is not making them pay. “This can’t go on. [Abul Maal Abdul] Muhith proposed to take the tax offices outside [the capital]. This is needed immediately.”

He thinks widening the tax net countrywide will make more investment possible in development.

“Identifying new taxpayers and [collecting taxes from them] is essential and quite possible. If we can raise the number of taxpayers from 2.5 million to 10 million within the next five years, our tax-to-GDP ratio will be boosted to around 19 percent.”

Farashuddin also put the spotlight on over-invoicing in imports, under-invoicing in exports and so-called placement trade – factors that are responsible for a lot of money flowing out of the country.

“Many people are travelling abroad during Eid or Puja. Government officials and politicians are among them. We have information that they are taking a lot of dollars with them and engaging in money laundering.”

He also said the government is losing revenue due to a lack of opportunity to register lands at the right prices. “The biggest issue is corruption, something the government can absolutely prevent.”

He suggested setting a registration fee rate in proportion to the current price of land and increasing dollar prices by five percent to put an end to corruption and boost revenue collection.

“The 2.5 perent incentive on remittances is benefitting the money launderers. So depreciating it [the value of taka] by 5 percent will ensure more money for those who send remittances.”

“They don’t really get the incentive money. If they do, they will definitely send it through banking channels, not on illegal routes.

Remittances have dropped since higher imports caused the dollar to rise in Bangladesh. In the first 11 months of this fiscal year, remittances were 16 percent lower than that of the same period last year.

Over the last 10 years, India lowered the rupee’s value against the dollar by 70 percent while it was 22 percent in Bangladesh. In the past year, Bangladesh lowered the value of the taka against the dollar by 3.18 percent, India 6.5 percent and Pakistan 43 percent.

“Bangladesh is an import-reliant country – this has been repeated too many times over the past 50 years. But I’ve always said Bangladesh was made import-reliant on purpose. It benefits the donors and the buyers.”

To stop this, he suggested raising the prices of imported goods along with the value of the dollar and setting bigger taxes for importing goods which are already produced in the country.

Farashuddin said the government has to ensure investment in these sectors. “Local entrepreneurs must be given big discounts at economic zones to boost investment.”

Elaborating on devaluing the taka against the dollar, he said, “If we depreciate it by 5 percent, import expenditures will rise dramatically. But that’s what’s needed.”

“This will help [halt imports of] things we produce in the country, such as construction materials, furniture, powder milk, bicycle, motorcycle, cars. We will make all these right here and make import difficult. We will deliver support to produce these things, medicines too.”

Farashuddin brought up entering contracts with donor agencies over loan support and using the money yet to be acquired in the industrial sector.

“We have $50 billion in the pipeline. We have to plan the expenditure of this money. We have to spend on industries that will reduce imports.”

“Bangladesh borrowed $91 billion until the end of last year, government and private sector combined. It can borrow another $50 billion anytime it wants.”

The economist urged utilising the economic zones being developed for industrialisation, increasing employment, production and export.

“Among the 100 special zones, 10 are almost complete. We need to accommodate the development of the industries I mentioned… including textiles.”

“If the importers [invest] in the country, rather than importing [goods already produced in Bangladesh], we will provide conveniences, including interest.”

On discouraging imports of cars, Farashuddin said, “The customs duty on cars is lower in Bangladesh compared to many other countries, so too many cars are imported. This needs to be scrutinised.”

He stressed cooperatives to save agriculture and deliver food to people at a lower cost. “Cooperative production and distribution liaison is advised by the Father of the Nation. We will do it in rural areas.”

“Prime Minister Sheikh Hasina believes in this. This is a key method to eliminate discrimination.”

“Farmers will get loans at affordable rates through cooperative societies. They will buy and stock their materials all through the year using the loan money.”
Farashuddin also called for investing in the railways rather than on roads to cut the cost of transportation.

He suggested providing incentives to the coronavirus-affected people who slipped below the poverty line. “As many as 30 million people of Bangladesh’s 170 million-strong population are living in poverty. It won’t surprise me even if the poor are around 35 or 40 million.”

“[Those who met poverty due to COVID-19] should be fed through VGF cards as it was done during the 1998 floods. It was done with reserves of only $2 billion then. Inflation stood at 1.7 percent at that time. There is no reason why it can’t be done now.”

He said, “The first thing Bangabandhu said about macroeconomics management is standing on our own feet, making the economy self-sustaining.”

Expressing his faith in Hasina, Farashuddin said, “She is the one who can do it. She only has to listen to those who speak practically. There should be no place for flattery.”

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