As we step into a new decade, Bangladesh's economy is also entering new terrains. Since independence, the country's gross domestic product (GDP) has been on the rise. Despite internal and external challenges, the country has moved forward. Now, almost half a century after its independence, Bangladesh stands tall with a spectacular GDP growth rate. Alongside this growth, Bangladesh has witnessed a reduction in its poverty level (by a significant level) and increase in its per capita income.

The social progress that the country has made is no less striking, whether it be in regards to life expectancy at birth, maternal mortality, literacy rate, gender parity at school, women's participations in the labour force and much more. In 2018, Bangladesh qualified to be considered for graduation from the category of Least Developed Country (LDC) to a developing country, as it fulfilled all the criteria for graduation set by the United Nations. If everything goes well, Bangladesh will graduate in 2024. The country has already graduated from a low-income country to a lower-middle-income country in 2015, according to the World Bank category of country classification, by fulfilling the income criteria. If the country can maintain this momentum of progress, it will create unlimited opportunities for its people.

However, the fast pace of growth stands out by itself among many disquieting issues. The inequality situation is getting worse with national income and wealth being concentrated among a few ultra-rich people. The stark contrast is visible through the ownership of almost 27.89 percent of national income by the top 5 percent of the population and only 0.23 percent by the bottom 5 percent. Private investment has remained stagnant for a couple of years at 23 percent of GDP. And youth unemployment is as high as 10.6 percent, as opposed to the national average unemployment rate of 4.2 percent. Investment, at present, is mainly dependent on public investment—particularly on the several mega projects that are currently underway. However, domestic resource mobilisation is not promising and is inadequate to finance these projects and other government expenditures.

The National Board of Revenue (NBR) has been unsuccessful in increasing the tax-GDP ratio over the last couple of years as the target has been set too high and the tax net has been narrow. Globally, Bangladesh ranks very low with a minimal tax-GDP ratio. Over a period of 10 years, this ratio has increased only marginally. Thus, in fiscal year (FY) 2009, tax-GDP ratio was 7.5 percent, which leapfrogged to 9.2 percent in FY 2019. Average tax-GDP ratio in developing countries is almost 15 percent. The Seventh Five Year Plan aims to achieve a tax-GDP ratio of 14.1 percent by FY 2020. This is an unachievable target given our pace of success on this front.

The other most pronounced dent to the economy has been done by the poor and declining performance of the banking sector. Saddled with huge non-performing loans, the sector has lost its shine over the last decade or so. Policies are being changed in favour of the powerful and benefits are being awarded to a select few. Good practices, which were previously installed with the objective to have a dynamic banking system, have been reversed to benefit the wilful loan defaulters. Loan rescheduling and write-offs have increased significantly. On the other hand, access to finance for the small entrepreneurs has become difficult. The banking sector is now experiencing a liquidity crunch and credit to the private sector has declined.

In order to make growth sustainable, it is time for the policymakers to broaden their horizon—towards making some visible changes through concrete reforms to the economy. I would like to highlight reforms for only two areas that I find to be critical at this point in time.

The first area in need of reform is the tax system. Despite having a large population size, only about 58 percent of total e-TIN (electronic Tax Identification Number) holders submit income tax return. The target of the NBR is to bring one crore people under the tax net. Broadening of tax net would require concrete actions by the NBR. For example, NBR can use its e-TIN database to identify those who are registered but do not submit tax returns. This database can also be used to find out whether people are paying taxes properly and effectively. The decentralisation plan of NBR by setting up tax offices in every upazilla in the country and to increase Tax Zone from the present 31 to 63 is yet to take off.

After several years, reform in the value added tax (VAT) was undertaken as part of the Extended Credit Facility of the International Monetary Fund. The government adopted VAT and Supplementary Duty Act 2012. However, preparation for implementation of this act is still inadequate. NBR needs to expedite the pace of solving the technical difficulties and ensure hassle free submission of VAT returns. Indeed, this is true for all types of taxpayers. A simple tax system without any fear will encourage taxpayers to pay voluntarily. Like many developed countries, compliant taxpayers should be rewarded and respected. Unfortunately, in our country, compliant taxpayers become the target of tax officials for more tax, whereas the large tax avoiders remain out of their reach. Such practice of tax avoidance creates discrimination among individuals and businesses as they are not on a level playing field. In order to compete in the market, other individuals also get encouraged to avoid taxes. Besides, the failure to tax the rich creates inequality in society as well. Automation can help reduce tax avoidance and increase tax mobilisation to a great extent. Indeed, the answer to most of the economic problems in the country lies with the introduction of better technologies. The faster we adopt technology in all spheres of our lives, the better results we will achieve.

Another important area for reform is the banking sector. Despite so much hue and cry about the malpractices, irregularities and scams in the banking sector, no attention has been paid to reforming and cleaning up the sector once and for all. The banking sector has expanded in Bangladesh in terms of the number of formal institutions, higher number of financial instruments and bigger volumes of assets. However, the performance, efficiency and soundness of the sector are under serious pressure because of the problems mentioned above.

The first and foremost element of any reform of the banking sector should begin with strengthening the central bank, i.e. Bangladesh Bank, by making it independent and sovereign—to take decisions on its own. Interference in Bangladesh Bank's activities goes against the spirit of the Bangladesh Bank Amendment Bill 2003, which was adopted to guarantee the central bank has autonomy. At present, the Ministry of Finance (MoF) has established its authority to oversee the governance of Bangladesh Bank. The central bank even lacks the independence to select members of banks' board of directors, managing directors and deputy managing directors for the state-owned commercial banks.

An autonomous Bangladesh Bank should have the authority to guide, supervise and monitor all public and private banks. Loans which are given on political consideration mostly becomes bad loans as the defaulters are politically backed. Bangladesh Bank should have the courage to disapprove loan requests without close scrutiny and take measures against loan defaulters under the existing law. If laws are inadequate, new law should be formulated and approved in the parliament. The practice of bailing out the losing state-owned commercial banks year after year by the MoF, with public money, should be stopped. Also, the decision to keep 50 percent of government funds with ailing private banks is morally unacceptable.

Several recent policies of Bangladesh Bank are regressive and legitimise corruption. For example, through special policy on loan scheduling and one-time exit announced in May 2019, Bangladesh Bank authorised banks to waive all interest for defaulters, depending on the bank-client relationship. One-time exit policy allows defaulters to pay the bare minimum, which includes bank's cost of funds and principal loan amount, with a condition of having to pay the outstanding within a year. Earlier, Bangladesh Bank provided leverage to the board members of the private banks by increasing both the number of family members allowed to be in the same board and their tenure as board members of banks. That is, number of family members in a private bank's board was increased from two previously to four per family and the tenure was extended from six to nine years consecutively. Bangladesh Bank had taken such decisions at the cost of weakening corporate governance in banks, to fulfil the desire of bank owners. These and many other decisions and policies concerning the banking sector are worrisome and harmful for the economy.

In order to graduate smoothly during its dual transition phase, Bangladesh should take up the reform agenda seriously. The country aspires to become an upper middle-income country by 2031, and a developed country by 2041. Hence, reform should be its key policy priority. This is an extraordinary moment for Bangladesh!

Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.