Changes in Economic Policy

Rate of growth in GDP

Channeling adequate resources into prioritised productive sectors of the economy essentially depends on revenue earning of government. The major share of revenue earning comes from taxes. The economy has been witnessing a decelerated rising trend of collection of tax revenue which does not comply with the increased demand for expenditure of the government. As a result, a rising trend of gap between total revenue and total expenditure has been noticed over the recent periods. In

the backdrop of this decelerated rise of revenue collection vis-à-vis increased demand for government expenditure, the government has to rely on borrowings from both domestic and foreign sources in order to finance the deficit in budget, in other words, gap between its total revenue earning and total expenditure. This policy of borrowing from both domestic and foreign sources to finance the deficit in government budget balance causes the economy to experience two particular impacts that adversely affect the fiscal management in the country.

First, borrowing by the government from domestic sources may come from commercial banks as well as central bank. Borrowing from commercial banks creates a crowding out effect causing unavailability of funds for private investments in the economy. As a result, private investment falls and the economy has already been experiencing a decline in its private investment that eventually causes the rate of growth to turn down. On the other hand, dependence on central bank for financing budget deficit causes the bank to print new money that, in turn, creates an inflationary pressure leading to disrupts in fiscal management in the economy.

Second, the government has largely been relying on foreign sources in order to finance the deficits in its balance of budget, which reckons a much worrying scenario for the economy as regards rising payment of both principal and interest on foreign loans. The country has been repaying its large foreign loans with higher amount of interest payments that causes the non-development expenditure to increase. As a result, increased non-development expenditure does not allow the government to allocate adequate resources for development activities in the country. Consequently, the development expenditure falls and falling development expenditure causes the rate of growth to decline in the economy.

However, another important issue of financing budget deficit should not remain unnoticed. The country has been receiving a notable amount of foreign aid since its independence. Of late, a significant amount of this foreign aid has been being utilised in financing the deficits in the budget. As a result, a large portion of such aids goes in the form of non-development expenditure and, therefore, the implementation of development projects loiters due to lack of finance in the economy as well.

Finally, a major portion of tax revenue comes from indirect sources. In FY 2013-2014 (up to January 2014), the collection of indirect tax is as high as 69 percent vis-à-vis a direct tax of only 31 percent of total tax collection. While direct tax causes the rich to pay tax on their income, indirect tax exerts much pressure on the meagre income of the marginalised people in the country. Therefore, it is obvious from the current scenarios of tax collection that a large burden of indirect tax to be paid by the marginalised people essentially exacerbates the economic hardship of them in the society, while many eligible people for paying direct tax remain untaxed. Such low level of direct tax collection is attributed to weak legal and institutional arrangements by the government, while another reason is the lack of goodwill among the rich to pay direct tax.

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