Dhaka, Bangladesh (BBN)– The International Monetary Fund (IMF) has welcomed Bangladesh’s move to introduce a modern and identical VAT (value added tax) regime from the next financial year saying that it would help mobilise more internal resources.
“Directors (executive board of directors of IMF) welcomed the authorities’ commitment to launch the modern VAT,” the IMF said in a statement issued on Thursday on conclusion of its Article IV consultation with Bangladesh.
Finance Minister of Bangladesh AMA Muhith proposed introduction of 15 per cent identical VAT for all from July 1, 2017 while placing the proposed budget for the Fiscal Year (FY) 2017-18 at the National Parliament in Dhaka on June 01.
The planned launch of the modern VAT along with improvements in tax administration, are expected to boost tax revenues, providing space for increased public investment and social spending, according to the IMF.
Earlier on May 26, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV Consultation with Bangladesh while it observed that steady monetary policy management and fiscal discipline have supported macroeconomic stability, allowing the economy to benefit from favorable external demand, high remittances, and low commodity prices.
“Supported by both domestic and external demand, real GDP growth in FY16 accelerated to 7.1 percent, from 6.5 percent in the previous fiscal year. Headline inflation continued to ease, falling below 6 percent by the end of 2016, helped in part by favorable agricultural production and falling global commodity prices,” the IMF said.
The IMF highly praised the government for the continued strong macroeconomic performance: “Growth has been stable and robust, social indicators have improved, inflation has declined, external reserves have risen and fiscal deficits remained moderate”.
It also commended the Bangladesh Bank for a prudent monetary policy conduct and noted that inflation has been reduced and is likely to remain close to the Bank’s target.
The IMF, however, noted that the Bangladesh Bank has been sterilizing only part of the liquidity from the external inflows, and called for an increased sterilization efforts, to contain financial sector risks and to head off the need in the future of a more abrupt and disruptive policy tightening.
It emphasized that mobilizing domestic revenue should be a policy priority, to allow increasing public investment and strengthening social safety nets. To this effect, the Board of Directors emphasized that in addition to modernizing the VAT, efforts should continue to improve the income tax regime and to strengthen tax administration.
It also noted that the FY 17 budget was based on overly ambitious projections for revenue growth and equally ambitious capital spending targets, and that the actual outcomes usually deviate significantly from the budget targets. They noted that there is scope to improve the credibility of the budgeting process, by improving budget formulation and execution.
For Bangladesh to reach middle-income status, the IMF underscored the need to boost investment, and to modernize policy-making practices and institutions.
It called on the authorities to reduce the increasing reliance on high-cost National Savings Certificates as a financing vehicle for the government budget and recommended that better targeted and less costly alternatives should be considered that achieve the government’s social policy goals without distorting financial markets.
The IMF statement also noted that the international reserves have risen further, and the public debt-to-GDP ratio has remained largely stable at a moderate level. Tax revenue performance has improved somewhat, with revenues- to-GDP ratio increasing moderately. The strengthening of economic growth has been supported by a moderate acceleration of money supply and credit to the private sector.
In FY17, output growth is expected to remain close to 7.0 percent, the IMF said, pointing out that as global commodity prices pick up, inflation is projected to increase somewhat from the lowest level in five years.