Energy crisis, inflationary pressure and shocks of rising oil prices are the major challenges for economy of Bangladesh at the moment, said the research director of the Bangladesh Institute of Development Studies, Zaid Bakht. In an interview with New Age, the eminent economist said that coherence between fiscal and monetary policies is a must for macroeconomic stability, which is often ignored. He thought that the differentiated structure of incentive provided under tax holiday arrangement created various anomalies and suggested replacing the system by a uniform accelerated depreciation allowance system as fiscal incentive for investment. Here are the excerpts of the interview.
  
What are the challenges the economy faces currently?
  
Energy crisis, inflationary pressure, shocks of rising oil prices in international market and mismatches on the monetary and fiscal policies are the major challenges for economy. The other crises are more or less outcome and consequence of these major problems. These challenges in the macroeconomic front are critical. The critical policy dilemma the government now facing is whether to raise the domestic price of oil or not. Because of budgetary crunch and donor pressure, the government would very much like to raise domestic price of oil. But considering the possible inflationary impact of such oil price rise the government is reluctant in adjusting the oil price upward in this election year.
  
How can these issues be addressed through the next budgetary steps?
  
For macroeconomic stability, coherence between fiscal and monetary policies is a must that is not maintained. The government is continuing with contractionary monetary policy, and its borrowing from the Bangladesh Bank has increased sharply.
   To put it into budgetary framework, we can say the challenge of resource mobilisation is top agenda the government has to address. GDP growth is expected to be about 6.5 per cent this year while monthly inflation has a trend rate of more than 6 per cent. Despite significant growth in income tax in recent years, revenue earnings from customs duty still account for about 26 per cent of the NBR taxes. Thus expanding the scope and coverage of the large taxpayers’ unit is necessary.
  
How do you analyse the declining trend of revenue earning from import duty?
 
Declining revenue earning from import duty is the result of gradual reduction in import tariffs following prescription of the IMF. Bangladesh now has four tariff slabs (0, 6, 13 and 25 per cent) in its customs schedule and average applied MFN duty excluding preferences is about 16.5 per cent. Some 496 items at 8-digit HS code fall under the zero ‘import duty category and accounts for 7.5 per cent of the total number of tariff lines. The duty structure should be revised. In this case, raising the slab from zero to a positive level, say 2.5 per cent, and covering all capital machinery under it would be effective.
  
As the country is now going thorough the regime of PRSP, is there any positive impact on the economy or poverty reduction?
  
The key element for achieving the PRSP targets is investment. The government did not finalise the three years rolling investment plan, which means the country has no medium-term planning, let alone long term. The ADP is nothing but an annual programme and it is an ad-hoc in nature. The PRSP targets have to be translated into investment.
  
Employment generation is the key to reducing poverty. For employment generation, major thrust should be development of SME.
  
Has IMF-dictated PRGF programme yielded any result?
  
The government has so far adhered strictly to the dictates of the IMF as required under PRGF conditionality. The government used contractionary monetary measures both to contain inflation and the downslide of the exchange rate but did not apply any direct import control measure such as use of L/C margin and also refrained from intervening in the foreign exchange market for stabilising the exchange rate. The government even allowed borrowing foreign exchange from foreign commercial bank to finance oil import rather than drawing down its own reserve of foreign exchange below the level prescribed by the IMF. Thus the policy response of the government to external shocks had little effectiveness so far in bailing the economy out of these problems.
  
What are the areas budgetary spending should emphasise more and in what areas the government expenditure should be slashed?
  
Shortage of industrial land is a major impediment for the development of the private sector. While a lot of private investment has gone into land development for housing and for commercial buildings, such investment is not coming in developing industrial estates. The budget should provide fiscal incentives for setting up private industrial estates.
  
Energy supply is increasingly becoming a binding constraint to the growth of the economy in general and the industrial sector in particular. Development of the sector should receive high priority in the budget for 2006-07. Projects relating to the modernisation and improvements of Chittagong port need to be implemented on a priority basis.
  
How do you judge the tax holiday arrangement for industries?
  
Fiscal incentives in the form of exemption from payments of income tax under tax holiday arrangement are administered in a highly differentiated manner. The differentiated structure of incentive provided under tax holiday arrangement created various anomalies and abuses in the past, and when the expiry period of the tax holiday approached business community exerted strong pressure for further extension of the tax holiday period. In view of this outcome the government may consider replacing the highly differentiated tax holiday system by a uniform accelerated depreciation allowance system as fiscal incentive for investment.