In 2023, Bangladesh grappled with persistent volatility in its foreign exchange market, despite concerted efforts by Bangladesh Bank to stabilize the situation through significant dollar sales from its reserves.

Economists have pinpointed policy missteps as the root cause, warning that without a shift in Bangladesh Bank's strategy, the foreign exchange crisis could extend into 2024.

To counter market instability, Bangladesh Bank dispensed a substantial USD $6.7 billion from its reserves in the first half of the fiscal year 2023-24. During this period, it also purchased approximately one billion dollars from various commercial banks, as confirmed by the central bank’s concerned department.

Dr Ahsan H. Mansur, a former senior economist at the IMF, expressed to UNB his concerns regarding Bangladesh Bank’s conservative exchange rate policies. "The increasing demand for foreign exchange is artificial, largely driven by trade-based capital flight. A more competitive exchange rate could significantly curb this trend," Dr Mansur explained.

He further noted that market-based exchange rates could incentivize expatriates and exporters to increase remittances and repatriate export proceeds.

Prof Mustafizur Rahman, a distinguished fellow at CPD, highlighted another challenge: the deferred payment of foreign liabilities, exacerbating the strain on foreign exchange reserves.

Prof Mustfiz emphasized, “Effective monitoring to prevent capital flight, coupled with competitive exchange rates, is crucial for minimizing the dollar shortage.”

Md Mezbaul Haque, Bangladesh Bank’s spokesperson and executive director, outlined the dire situation: "Our import costs are not being offset by export income, and remittances are below expectations. This has led to an acute foreign exchange crisis."

To mitigate this, the central bank sold large volumes of dollars from its reserves, primarily to import fuel, fertilizers, and food. Simultaneously, the bank has been purchasing dollars to bolster reserves, a requirement for securing IMF loans. Yet, the dollar crisis persists, with banks struggling to manage their dollar transactions.

Banks currently buy dollars from expatriates and export earnings at Tk 109.50, while selling to importers at Tk 110 officially. However, many banks are charging over Tk 110 per dollar for sales. Some even buy expatriate income at rates as high as Tk 123 per dollar.

As of November 30, 2023, Bangladesh's foreign exchange reserves stood at $25.02 billion, or $19.40 billion according to the IMF's BPM6 formula. By December 28, reserves had climbed to $27.04 billion, thanks to IMF loan installments, ADB budget support, and various project disbursements.

Despite these increases, upcoming bill payments in early January, 2024 are expected to diminish these reserves once more, highlighting the continuing challenges facing Bangladesh's foreign exchange market.

MSH

Companies and organisations will be required to file tax returns on the income generated by employee welfare funds from the current fiscal year and pay a 27.5 percent tax on the earnings. 

The Income Tax Act 2023 incorporates the provision, lifting the tax exemption and amnesty on the compulsion to file returns for funds such as provident funds, gratuity funds and workers' profit participation funds maintained by the private sector.

The law, however, has exempted government-managed provident funds from taxation, raising questions.

TIM Nurul Kabir, executive director of the Foreign Investors' Chamber of Commerce & Industry, said there were many other avenues to collect tax.

"Employees benefit from provident funds after their retirement. So, the authority should not slap taxes on retirement benefit."

He said while levying the tax, the government has not treated provident funds of the private and public sectors equally.

"It is discriminatory," he said, adding that they would appeal to the tax authority for the withdrawal of the tax on income from provident funds.

Debabrata Roy Chowdhury, director for legal, regulatory and corporate affairs at Nestlé Bangladesh PLC, said the introduction of income tax on trust funds would lower the overall income from such schemes.

"This will have an adverse long-term impact on retired employees of private organisations."

Chowdhury urged the authority to address the issue in line with the spirit of the government's initiatives aimed at ensuring social security for private sector employees.

"The recent introduction of the universal pension scheme for private sector employees is a good example of that."

A senior official of the NBR, on condition of anonymity, said the income of government-managed provident funds was exempted in line with the Provident Fund Act 1925.

He said provident funds under the private sector had been historically exempted and there was no requirement to submit tax returns. As a result, it was unclear whether the funds were properly utilised.

"From now onwards, we will see proper disclosure."

The tax official said the contribution of payroll tax is about 3 percent of the total income tax although it should increase as the economy is growing.

Md Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh, said income from investment in savings certificates, where people invest as a source of future earnings, is already taxed.

"From that perspective, the imposition of tax on provident and other employee welfare funds seems okay."

However, Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue, said social protection for private sector employees was low.

"Provident and other workers' welfare-related funds provide little social protection. The imposition of tax will increase inequality. But there can't be any discrimination in taxation between private and government provident funds."

Khan, citing the latest income tax law that replaced the Income Tax Ordinance 1984, said the NBR tried to find new avenues to increase tax collection and improve the nation's revenue-gross domestic product ratio, which is one of the lowest in the world.

"We can see the desperation of the tax authority to boost collection. This ultimately reveals the inability of the NBR to catch the tax evaders and illicit money makers."