The International Monetary Fund (IMF) is poised to increase pressure on the Bangladeshi government to enhance its revenue mobilisation by making future disbursements of the $4.7 billion loan contingent upon meeting specified tax collection targets.
Until now, tax collection targets have not been included as a Quantitative Performance Criterion (QPC) — the mandatory benchmarks that a country must meet to access instalments under the loan programme.
During their recent visit to Dhaka, the IMF staff mission indicated that they would elevate tax collection targets to QPC status, according to finance ministry officials involved in the negotiations.
The staff mission was in Dhaka last month to assess the country’s performance prior to the release of the fourth tranche of the loan.
"Bangladesh’s low tax-to-GDP ratio necessitates urgent tax reforms to create a fairer, more transparent system and to increase revenue sustainably," stated the staff mission at the conclusion of their visit.
They emphasised rationalising exemptions, improving compliance, and separating tax policy from administration.
IMF’s push for enhanced tax collection follows recommendations for revenue-boosting measures, which were not reflected in the fiscal 2024-25 budget.
These measures include reducing corporate tax exemptions, raising VAT rates to the full 15% statutory rate on several products, introducing an additional tax bracket for high-income earners, and increasing taxes on tobacco and selected products.
IMF estimates these measures could increase Bangladesh’s tax-to-GDP ratio by 0.5 percentage points this fiscal year.
Bangladesh has failed to meet tax revenue collection targets since the programme began in January 2023.
The country is also unlikely to meet the target for the current fiscal year, as tax collection in the first five months was down 2.62% year-on-year to Tk1,30,185 crore. The target for the first half of the fiscal year is Tk2,15,120 crore, with a full-year target of Tk4,78,050 crore.
Achieving this would require a 29% increase from fiscal 2023-24’s receipts.
IMF has urged Bangladeshi authorities to implement several pre-emptive measures, particularly in the revenue sector, to demonstrate commitment to the loan programme before the IMF board considers the fourth tranche’s release next month.
In response, the National Board of Revenue (NBR) announced on Thursday (9 January) a hike in VAT and supplementary duties on nearly 100 goods and services, an unusual mid-year policy shift. Consumers will now pay up to 15% VAT or SD, up from as low as 5% on certain goods and services.
“This move, although unpopular, was likely taken in anticipation of the IMF’s requirement to include tax collection targets as a QPC,” commented Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
Inflation, averaging 10.87% in the first half of fiscal 2024-25, has already placed considerable strain on consumers, and these new tax measures are expected to exacerbate the situation.
Interim government is advised to negotiate with the IMF to avoid including tax revenue targets as a QPC at this juncture, particularly given the economic disruptions caused by the July uprising.
Currently, Bangladesh’s loan programme with the IMF includes three QPCs: minimum net international reserves, ceilings on budget deficits, and limits on external payment arrears, alongside four indicative targets, with tax collection so far being one of the latter.
