Inflation can be reduced to 6 to 7% in next fiscal: Dr Zahid Hussain

Published at : 25 January 2025, 12:16 pm
Inflation can be reduced to 6 to 7% in next fiscal: Dr Zahid Hussain

Dr Zahid Hussain, a prominent figure and former lead economist at the World Bank's Dhaka Office, has expressed optimism that the general point-to-point inflation rate could be reduced to between 6 to 7 percent in the next fiscal year (FY26) if the country is free from natural or political calamities.

"My projection is that it will be possible to bring down inflation within 6 to 7 percent if there is no major disruption. Prices of several commodities are still increasing. The prices of essential items like rice, lentils, and fish, which significantly impact the common people, need to be reduced," he stated.

The esteemed economist shared these insights during an interview with BSS at his residence in the capital. It is noteworthy that the general point-to-point inflation rate in Bangladesh slightly eased in December, reaching 10.89 percent, down from 11.38 percent in November 2024.

Data from the Bangladesh Bureau of Statistics (BBS) indicated that this decline was driven by a fall in both food and non-food inflation. In 2024, point-to-point food inflation decreased to 12.92 percent in December, from 13.80 percent in November, according to BBS data.

Similarly, non-food inflation also saw a slight decline, reaching 9.26 percent in December, down from 9.39 percent in November 2024.

When asked about the possibility of general point-to-point inflation falling below double digits in the coming days, Dr. Zahid stated that while one can hope, it is not something to be counted on.

Regarding GDP growth for the current fiscal year (FY25), he commented, “If 4 percent growth is attained by the end, compared to 1.81 percent in the first quarter, then I would consider it a good achievement given the current circumstances."

He further elaborated, "My projection is that if we can move towards stability in the next fiscal year (FY26), then we could reach a new normal by mid-2026, coinciding with the completion of the election process."

Dr. Zahid emphasized that if this new normal materializes, stakeholders and investors would not wait until June 2026. "Should they perceive that everything is heading in the right direction, they would begin preparations to capitalize on moving early."

He added that if everything proceeds as planned, the country might witness a significant turnaround in investment by the end of this year. "A GDP growth rate of 4.5 to 5 percent in the next fiscal year (FY26) will then be attainable. Subsequently, we can work towards surpassing a 5 percent GDP growth rate and gradually emerge from the middle-income trap."

When asked about the state of the banking sector, he remarked that, unlike the previous regime, the central bank's policies are now being implemented effectively. "We now see much more proactivity and consistency from the central bank," he noted.

Although the central bank has printed money to provide some liquidity support, he mentioned that they did not follow their predecessors' approach to financing the budget. The interest rate caps, both visible and invisible, no longer exist, and the exchange rate has remained stable despite some instability last December.

The eminent economist highlighted that the central bank is making efforts to make the exchange rate more market-based. Banks are now required to send the exact buying and selling rates of foreign currencies twice a day. "In this regard, efforts from the central bank are evident,” he said.

He added that from late 2021 to early 2024, there was a significant drop in foreign currency reserves, declining by at least $1 billion on average each month. However, that trend has now ceased.

"There has been some stability in foreign currency reserves, and the central bank is currently not selling dollars. However, with a gross reserve of $20 billion, this amount is not substantial enough to withstand large-scale political or natural disasters, such as hikes in import costs or declines in export earnings," he explained.

He added, "We do not have sufficient buffers and need to further enhance the reserve.”

Noting the encouraging inflow of inward remittances, he highlighted that this improvement is not due to a sudden rise in expatriate wages or a decrease in their cost of living but is primarily a result of a decline in illicit financial outflows.
 
Dr. Zahid mentioned that it is now difficult to launder money abroad as it was in the past, with many who previously laundered money now in hiding. "You can't guarantee where this trend will go in the future or whether it will revert," he said.

In the past, remittance inflows of $1.30 billion to $1.40 billion per month were considered 'bad performance,' while $1.70 billion or above was seen as 'good performance.' However, the benchmark has shifted, with $2 billion per month now considered the new normal.

"If we can maintain a remittance inflow of $2.20 billion or more on average per month, coupled with the growing number of outbound expatriates, we can term this trend of a 'turnaround' as sustainable," he concluded.

Provident funds to pay 27.5% tax

Published at : 20 September 2023, 04:57 pm
Provident funds to pay 27.5% tax

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."