Press Release: Statement by IMF Staff Mission to Bangladesh

November 28, 2005

"A team led by Mr. Thomas Rumbaugh, Advisor in the Asia and Pacific Department of the International Monetary Fund (IMF), visited Bangladesh during November 13-24 to hold discussions with the Bangladesh authorities on the fourth review under the Poverty Reduction and Growth Facility (PRGF) arrangement.1 The mission met with Minister for Finance and Planning M. Saifur Rahman, Finance Secretary Siddiqur Rahman Choudhury, Bangladesh Bank Governor Salehuddin Ahmed, and other senior government officials.

"Bangladesh's economy continues to expand. Despite the impact of higher oil prices and devastating floods, growth was strong at 5½ percent in FY05. The economy has withstood well the initial impact of the elimination of Multi-Fiber Agreement (MFA) quotas, and growth momentum appears to have been maintained this year. However, inflation, led by rising food prices, has picked up in recent months. The impact of higher oil prices has been manageable so far as better-than-expected garment exports and continued strong remittances have helped finance higher oil imports. The government's commitment to strictly limit nonconcessional loans is also important for keeping external debt manageable.

"Considerable macroeconomic challenges, however, will need to be addressed in the period ahead. Although the central government's overall deficit was contained to 3½ percent of GDP in FY05, losses in the energy sector state-owned enterprises, which are not included in this figure, continue to accumulate. Despite some tightening in monetary policy, high money and credit growth continue and are contributing to inflationary pressures. Policy adjustments will also be needed to protect the balance of payments position.

"Implementation of key structural reforms has been uneven. Some progress has been made in reforming tax administration and the nationalized commercial banks (NCBs), as well as in liberalizing the trade regime, but stronger efforts will be needed to improve growth prospects. A number of policy measures will also need to be considered to address significant losses being incurred in state-owned enterprises, particularly in the energy sector.

"Relevant institutional structures in the National Board of Revenue have been set up, including the Large Taxpayer Unit (LTUs) for income tax and VAT and the Central Intelligence Cell, but inadequate staffing and resources, particularly in the VAT LTU, are hampering revenue collections. Auditing procedures and enforcement of tax collection are also in need of further improvement. The authorities have identified further steps to strengthen tax administration that will be supported by technical assistance from the UK Department for International Development, the World Bank, and the IMF.

"To increase the efficiency of the financial system and for it to support development needs, the implementation of the bank restructuring program needs to be accelerated. In this regard, the divestment of Rupali Bank needs to move forward, as well as the restructuring and eventual divestment of the other NCBs. Management support teams are now in place at Agrani, Janata, and Sonali Banks. While enhanced controls over the NCBs have slowly improved their financial condition, further restructuring efforts are needed.

"In the face of the phase-out of MFA quotas, regulatory requirements have been reduced to improve the competitiveness of the export sector. Further measures to improve the investment climate will be important for enhancing Bangladesh's competitiveness. These include addressing infrastructure bottlenecks; improving customs administration and other aspects of trade facilitation; further reducing regulatory requirements; and addressing corruption and security concerns.

"The IMF staff also participated in the Poverty Reduction Strategy (PRS) Implementation Forum during November 15-17, together with other development partners. It welcomes the fairly broad participation in the PRS process to forge domestic support for the reforms. In this regard, the IMF will continue to support Bangladesh's efforts to attain its economic potential and achieve the Millennium Development Goals.

"Provided that the government continues to tighten macroeconomic policies to reduce inflationary pressures, and takes measures to accelerate reforms in the NCBs and in the National Board of Revenue, the fourth review under the PRGF arrangement could be considered by the IMF Executive Board in early 2006."

1 Bangladesh's three-year PRGF arrangement was approved in June 2003, with a total lending commitment of SDR 347 million (about US$493 million). The PRGF lending commitment was augmented by SDR 53 million (about US$75 million) in accordance with the IMF's Trade Integration Mechanism (TIM) at the time of completing the second PRGF review in July 2004. The funds made available in the context of the TIM are to help Bangladesh overcome the impact of the removal of the Multi-Fiber Agreement quotas at the end of 2004.


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