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Revenue to fall short in crisis

Rejaul Karim Byron
Meeting the revenue target may be a big challenge for the government this fiscal year on the global recession that led to a drastic fall in commodity prices on the international markets.
As a substantial amount of revenues come from import duties, economists said the government's earlier fiscal policy might need a major shake-up to offset the situation.
They stressed preparation of a contingency fiscal response plan and review of the annual development programme (ADP) to focus on priority expenditure.
The finance ministry thinks this time there may be around Tk 1,000 crore shortfall in NBR revenue. However NBR officials said actual deficiency would be higher.
Finance ministry officials said the ministry is rethinking its fiscal policy as the scenario changed after the budget for the current fiscal year was prepared in May- June last year. In the beginning of this month, fiscal coordination council at a meeting discussed the matter. The council will meet again next month and finalise the current fiscal year budgetary target and fiscal policy.
In the last six months of the current fiscal year the revenue growth under NBR was 13.13 percent, which was around 25 percent in the same period last fiscal year. In December the growth was only 3 percent. At import level, there was no growth in revenue rather it fell by 14 percent over the same period last fiscal year.
The revenue collection target under the National Board of Revenue (NBR) was Tk 54,500 crore tn the current fiscal year, which was revised at Tk 53,600 crore due to the situation.
The NBR told the finance minister recently that there might be a big short -fall in revenue collection this time. The budget was formulated keeping in consideration the rising commodity prices on the global markets. In the current budget import duty was reduced. But in the last three to four months commodity prices fell in the world markets resulting in a drop in tax collection on import. Negative impact is also feared in VAT and income tax collection due to the recession, the NBR said.
NBR officials said 42 to 44 percent of the total NBR revenue comes from imports. Fall in the prices of import commodities may result in drastic fall in revenue earning.
Although the ADP implementation rate was 25 percent of the total outlay due to the low growth in revenue earning in the last six months, government borrowing from banks increased.
In the July-December period the government borrowing increased by Tk7,058 crore, whereas Bangladesh
Bank’s government borrowing target for the period wasTk4,300 crore.
The BB told the government that if the trend continues, credit flow in the private sector would be hampered and it would be difficult to continue the central bank's credit programme.
The government has cut the ADP size in the revised budget byTk3,000 crore to Tk 22,500 crore.
Zaid Bakht, research director of Bangladesh Institute of Development Studies, said due to the revenue situation the government should go for quality expenditure. He said the government needs to review the ADP and select projects on priority basis.
Zahid Hossain, a senior economist with the World Bank, said global recession has led to a sharp decline in international commodity prices, which in turn has meant slower growth of import payments than anticipated at the time of
preparing the FY09 budget. As a result, growth in NBR revenue has slowed from 23.1 percent in July 2008 to 13.2 percent in December 2008.
Growth in import-based taxes has slowed from 50.8 percent in July 2008 to 11.9 percent in December. To meet the Tk545 billion NBR revenue target for FY09, NBR revenue collection has to grow by 17.1 percent in the last half of FY09 relative to the same period of the previous year.
This may be difficult to achieve even though revenue grew by 28.8 percent in the last half of FY08, Zahid said.
The economist said the shortfall in achieving the revenue target does not necessarily mean that the budget deficit will overshoot the original 5 percent target of GDP. This is because the fall in international prices also meant that the Tk 101.4 billion provisions made in the FY09 budget for
subsidies to energy and fertiliser will not all be needed.
Bangladesh Petroleum Corporation has reportedly been making profits from petroleum products for the recent months. These savings are likely to offset the revenue shortfall. This, together with the usual underutilisation of the ADP is most likely to help contain the budget deficit at less than 5 percent of GDP, Zahid said.
In order to sustain the increase in the revcnue-GDP ratio achieved last year, the government should put emphasis on domestic resource mobilisation for VAT and income tax collection. There may be opportunistic pressures from the domestic market-oriented business lobbies to raise trade taxes on grounds of increasing revenue. It will be important not to succumb to such pressures, Zahid said.
He said the immediate priority is to prepare a contingency fiscal response plan to cope with the impact of global recession on exports and remittances. A well-crafted policy response that is properly targeted and temporary can make the pain caused by the impact more bearable.
The options include providing soft loans to those affected, temporary increase in export subsidies, extension of Special Bonded Warehouse facilities and measures to reduce the cost of doing business. Accelerating the implementation of public infrastructure projects would also help generate employment, Zahid said.