This Selected Issues paper reviews Bangladesh’s recent growth experience and per capita income. The paper identifies several key impediments to growth, namely: poor governance; restrictive trade and regulatory regimes; and inadequate investment in human capital and physical infrastructure. The paper makes the case that the medium-term fiscal strategy should be centered on boosting the revenue performance of the National Board of Revenue (NBR) by reorganizing it along functional lines, adopting a system of self-assessment, establishing a risk-based auditing system, and introducing a unique taxpayer identification number.

Abstract

This Selected Issues paper reviews Bangladesh’s recent growth experience and per capita income. The paper identifies several key impediments to growth, namely: poor governance; restrictive trade and regulatory regimes; and inadequate investment in human capital and physical infrastructure. The paper makes the case that the medium-term fiscal strategy should be centered on boosting the revenue performance of the National Board of Revenue (NBR) by reorganizing it along functional lines, adopting a system of self-assessment, establishing a risk-based auditing system, and introducing a unique taxpayer identification number.

I. Introduction

1. Bangladesh has maintained a stable macroeconomic climate and achieved steady economic growth and poverty reduction in recent years. Despite a difficult political environment, the authorities have continued with the structural reform agenda in tax administration and nationalized commercial banks (NCBs), together with measures to liberalize the investment regime and reform state-owned enterprises (SOEs). Nevertheless, the economy remains among the poorest in Asia. Ambitious and sustainable policy reforms are needed to accelerate growth and fulfill the Millennium Development Goals (MDGs).

2. A roadmap to further poverty reduction has also been cast in the authorities’ Poverty Reduction Strategy Paper (PRSP), which is expected to be published by end-2005. The priorities will be centered on prioritizing near-term policies in key sectors and anti-poverty programs, incorporating the costing of the proposed sectoral projects into the medium-term budgetary framework, improving the monitoring and evaluation mechanism of social development, and initiating a poverty and social impact assessment of the reform strategy. Risks to the implementation of reforms are significant, however. Growth in Bangladesh has been adversely affected by inadequate investment in physical infrastructure and human capital, a fractious political environment, and poor governance in the institutional machinery. Chapter II reviews Bangladesh’s recent growth experience, while Chapters III–V address the key issues that lie at the heart of Bangladesh’s economic revival.

3. Faster and lasting growth is key to poverty reduction in Bangladesh. Bangladesh’s low initial level of income, continued macroeconomic stability, and recent financial sector and other structural reforms have all contributed to sustained increases in per capita income. However, Chapter II identifies several key impediments to growth, namely: poor governance (as manifested by widespread incidences of corruption); restrictive trade and regulatory regimes; and inadequate investment in human capital and physical infrastructure. The growth of the ready-made-garment (RMG) sector over the past decade was fueled in part by the comparative advantage that Bangladesh enjoys from its abundance of low-cost labor. As long as measures are taken to boost labor productivity by strengthening education, improving the investment climate, reducing corruption, and upgrading infrastructure, Bangladesh’s growth prospects will continue to be favorable. Moreover, such reforms will help diversify the economy towards other export-oriented activities that require an abundance of low-cost labor.

4. Bangladesh has been very reliant on the RMG sector for export earnings. This industry has been the primary engine of growth in the manufacturing sector and a critical source of employment, especially for women. In the near term, however, Bangladesh will be confronted by the impact of the phase-out of the Multifiber Trade Arrangement (MFA). As discussed in Chapter III, the potential risks are substantial considering that more than three-quarters of exports stem from the RMG sector. While the early indications suggest that orders for RMG exports have held up well, Bangladesh can not afford to be complacent. The paper outlines key steps that need to be taken to boost external competitiveness. This entails reducing tariffs and duties to decrease the cost of imported capital machinery and textiles, improving port facilities, reducing regulations and customs delays, and maintaining a flexible exchange rate.

5. Strengthening tax administration is vital to maintaining macroeconomic stability and generating sufficient resources to finance pro-poor development spending. However, structural fiscal problems have kept revenue and public expenditure below the path needed for faster reduction in poverty. Chapter IV makes the case that the medium-term fiscal strategy should be centered on boosting the revenue performance of the National Board of Revenue (NBR) by reorganizing it along functional lines, adopting a system of self-assessment, establishing a risk-based auditing system, and introducing a unique taxpayer identification number (TIN). In tax policy, the medium-term priorities should be to widen the VAT and income tax bases and further reduce and rationalize import tariffs and supplemental duties, while identifying alternative revenue sources to protect revenue.

6. Sound expenditure management is key to ensuring that limited government resources are channeled to areas that will contribute the most to sustainable growth. To this end, Chapter IV also discusses several ways to boost the efficacy of the Annual Development Program (ADP), including improving project selection and monitoring, and strengthening procurement guidelines. Additionally, to ensure that the public sector wage bill does not crowd out development expenditures, the paper outlines the broad principles of reform of the civil service.

7. An efficient banking system is critical to boosting savings and productive investment. Chapter V examines bank reform in a regional context. All four countries surveyed—Bangladesh, India, Pakistan, and Sri Lanka—have made significant strides to modernize their banking systems. Bangladesh, in particular, has made significant progress in liberalizing the banking sector, improving prudential controls and supervision, and paving the way towards divesting its NCBs. These reforms have resulted in lower levels of nonperforming loans and improved profitability and capital adequacy.

8. In sum, Bangladesh continues to face significant medium-term challenges, particularly in implementation of the structural reform agenda in a difficult political environment. The authorities’ continued strong commitment to the overall reform process to support fast growth and poverty reduction is reassuring. Nevertheless, much work remains to be done to achieve the MDGs, including maintaining macroeconomic stability, advancing structural reforms, developing a more comprehensive approach to tackle governance issues, and strengthening law and order.

Bangladesh: Selected Issues
Author: International Monetary Fund