Press Release: IMF Approves US$490 Million Three-Year PRGF Arrangement for Bangladesh
June 20, 2003
The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 347 million (about US$490 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Bangladesh, which will support the government's economic reform program for 2003-06. The decision will make available immediately to Bangladesh the first disbursement in an amount equivalent to SDR 49.5 million (about US$70 million).
The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.
In commenting on the Executive Board's decision, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, stated:
"Over the past year, Bangladesh's economic performance has strengthened as a result of the authorities' prudent macroeconomic management and renewal of structural reform. The challenges facing Bangladesh now are to build on this record of policy implementation and to put the economy on a path of higher growth with faster poverty reduction.
"Bangladesh's National Strategy for Economic Growth, Poverty Reduction, and Social Development (the I-PRSP) has been prepared under a broad consultative process and provides a coherent and comprehensive policy framework for halving poverty by 2015. Within this strategy, the authorities have adopted a three-year PRGF-supported program designed to maintain macroeconomic stability, accelerate structural reforms that are critical for poverty reduction and growth, and improve the investment climate.
"The principal structural elements of the program comprise fiscal reform, reforms of the nationalized commercial banks (NCBs) and state-owned enterprises (SOEs), more liberal exchange and trade regimes, and improved economic governance. Fiscal reform is centered on a sustained revenue effort and a shift in spending toward investments in infrastructure and human capital, to better support growth and achieve the Millennium Development Goals. The budget for fiscal year 2003/04 is in line with this strategy, providing for significant revenue measures and giving priority to the education, power, and energy sectors. Determined implementation of revenue measures and improved development project selection will be critical, as will be additional steps to improve transparency and accountability in expenditure management.
"The authorities' approach to NCB reform is cautious but represents a meaningful start to addressing the weaknesses in this area. The envisaged audits of these banks should help in defining a resolution strategy for each bank by April 2004. In the interim, attention will need to be placed on strengthening oversight of NCBs and bank management, and restricting NCB lending, to curb the flow of new nonperforming loans.
"The ongoing momentum in reforming SOEs in the manufacturing sector should be reinforced, to substantially withdraw SOEs from this sector. Furthermore, reform of SOEs in the energy sector will be needed to contain fiscal risks and ease critical infrastructure bottlenecks. Recent pricing actions have provided a start, but the authorities will need to make further progress, in consultation with the World Bank, notably by implementing an automatic pricing framework for energy and installing an effective regulatory body.
"For these structural reforms to be successfully implemented, the underlying economic governance issues will need to be decisively tackled. More broadly, institutional changes to improve public resource management will be important," Mr. Sugisaki stated.
Recent Economic Developments
The economy of Bangladesh is undergoing recovery. Over the first half of 2003, industrial production and exports have rebounded by 5 percent. Real GDP growth is thus expected to recover to an estimated 5.2 percent for FY03, driven by agricultural production and strong domestic demand. Meanwhile, inflation remains manageable, at an underlying pace of 5 percent, as the moderate upward trend in food prices observed in early 2003 was stabilized during March-April, and the impact from adjustments in utility and energy prices dissipated gradually. Gross international reserves have been rebuilt to around US$2 billion (or two months of prospective imports) at mid-June, from the low of US$1 billion reached in November 2001.
Prudent macroeconomic policies have contributed to these results. In particular, fiscal policy has been tightened beginning in FY02; revenue was raised by 1 percentage point of GDP, mainly in the nontax area. As a result, the central government budget deficit fell to 4.7 percent of GDP (from 5.1 percent of GDP in FY01), and is on course to fall further to 4.2 percent of GDP in FY03 as budgeted, on account of both revenue measures and expenditure discipline. Monetary policy has also been restrained since early 2002, and excess bank reserves have been reduced substantially. Reserve money remained flat over 2002, through sales of treasury securities by Bangladesh Bank.
Significant steps have also been taken to renew the momentum of structural reforms.
In particular, Bangladesh Bank has gained greater autonomy and expanded authority to supervise the nationalized commercial banks, key loss-making state-owned enterprises have been closed, and adjustments made to utility tariffs and energy prices.
The proposed PRGF-supported program builds on this record of policy implementation, and is focused on the structural reforms critical for putting the economy onto a higher growth path to achieve faster poverty reduction. Attaining a sustainable and rapid growth necessary for halving poverty by 2015—a goal in the Interim Poverty Reduction Strategy Paper (I-PRSP)—will require not only maintenance of macroeconomic stability but also a major improvement in the investment climate. For this, the authorities will need to accelerate structural reforms that are central to addressing the high cost of borrowing, bottlenecks in physical infrastructure, inadequate investment in human capital, and poor economic governance, all of which have been identified as key impediments to growth and poverty reduction efforts.
Under the program, real GDP growth is targeted to rise to 6.5 percent by FY06, to be met largely by external assistance on concessional terms, and official reserves would be built to over three months of imports by end-FY06. To achieve these goals, the key elements in the program are:
- fiscal reform, involving a sustained revenue effort and a shift in spending toward infrastructure and human capital to support growth and the Millennium Development Goals, while keeping public debt sustainable;
- reforms of nationalized commercial banks, including defining bank-by-bank resolution strategies, and in the interim, steps to strengthen bank management and restrain lending to help stem the flow of new bad loans;
- state-owned enterprise reforms, particularly closing/privatizing state-owned enterprises in manufacturing, and reforming state-owned enterprises in the energy sector
- more liberal exchange and trade regimes, by moving to a floating exchange rate regime and continued trade reform, to reduce external vulnerability.
For structural reforms to be successfully implemented, the underlying economic governance issues will need to be decisively tackled. More broadly, institutional changes to improve public resource management will be needed. In this context, the envisaged creation of an anti-corruption commission is key.