IMF Executive Board Completes Fourth Review Under Bangladesh's PRGF Arrangement and Approves US$97.2 Million DisbursementPress Release No. 06/23
February 3, 2006
The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Bangladesh's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of this review makes available to Bangladesh a disbursement in an amount equivalent to SDR 67.28 million (about US$97.2 million), after which disbursements will total SDR 283.06 million (about US$409.1 million).
The Board also today reviewed Bangladesh's poverty reduction strategy paper, Unlocking the Potential—the National Strategy for Accelerated Poverty Reduction, and the associated joint World Bank-IMF staff advisory note. Further, the Board approved Bangladesh's request for waivers for the nonobservance of quantitative and structural performance criteria.
The IMF's Executive Board approved Bangladesh's three-year PRGF arrangement on June 20, 2003 (see Press Release No. 03/92) for an amount equivalent to SDR 347 million (about US$501.5 million). The Board also approved on July 28, 2004 Bangladesh's request for activation of the newly created Trade Integration Mechanism with an augmentation of the PRGF amounting to SDR 53.33 million (about US$77.1 million—see Press Release No. 04/161). As a result, the total amount under the PRGF arrangement increased to SDR 400.33 million (about US$578.6 million).
Following the Executive Board discussion, Mr. Takatoshi Kato, IMF Deputy Managing Director and Acting Chair, said:
"Bangladesh's economy has performed well under the PRGF-supported program. The economy has continued to expand, and inflation has been kept in check. Nonetheless, Bangladesh remains a country with a high degree of poverty, serious capacity constraints, and heavy reliance on donor inflows. The authorities will need to maintain sound policies and steadily pursue key structural reforms and capacity building for many years to achieve the objectives outlined in the poverty reduction strategy. After some slippages, key reform measures in tax administration and in the nationalized commercial banks (NCBs) have been implemented.
"A full poverty reduction strategy, titled Unlocking the Potential—the National Strategy for Accelerated Poverty Reduction (NSAPR) was finalized and published. The authorities' policies under the PRGF arrangement have been designed to enable Bangladesh to make progress in achieving its economic and poverty reduction goals. Meeting these challenges will require steadfast implementation of structural reforms and credible actions to enhance governance. Accelerated implementation of reforms of the NCBs, tax administration, and the trade system will also contribute to improved governance and the investment climate. In view of the authorities' limited technical capacity, continued donor assistance will be required for successful implementation of the NSAPR.
"The implementation of fiscal policy has continued to be prudent, and the authorities remain committed to protecting fiscal sustainability. However, determined efforts to improve revenue collections are vital for funding development expenditure and social spending aimed at poverty reduction without jeopardizing fiscal sustainability. While revenue performance has improved, it has still slightly fallen short of the targets set under the program. Efforts need to be stepped up to address the chronic revenue shortages, including by accelerating reforms in revenue administration and reducing tax exemptions and incentives in the context of the FY07 budget.
"The proposed monetary program in Bangladesh Bank's monetary policy statement is consistent with the authorities' inflation and international reserves objectives. Given still high money and credit growth, however, the Bangladesh Bank will likely need to use open market operations more actively to tighten the monetary stance further and to raise interest rates on treasury securities in order to contain inflation. The central bank has taken steps to improve the functioning of the interbank and treasury securities markets with technical assistance from donors. The flexible exchange rate regime has worked well for Bangladesh, and should help mitigate the potential impact of the removal of Multifiber Arrangement (MFA) quotas and high oil prices, thereby safeguarding the balance of payments position.
"The successful divestment of Rupali Bank will help improve market sentiment and facilitate the implementation of the entire bank restructuring program. Despite some improvements, the continued poor financial condition of the NCBs underlines the urgency for decisive actions in this area. The implementation of the bank-by-bank resolution strategies will require strong political support, close monitoring, and technical assistance.
"The energy sector state-owned enterprises (SOEs) continue to be a source of fiscal risk. The increases in global oil prices were only partially passed through to domestic prices, resulting in significant financial losses to the energy sector SOEs that are not sustainable. Further oil price adjustments will be needed. In this connection, the authorities plan to identify measures to mitigate the impact of price adjustments on vulnerable groups.
"Further trade reform will contribute to growth momentum and help bolster confidence in the export sector, particularly following the phasing out of MFA quotas. In light of adverse implications on government revenue of further trade reform, the authorities will need to protect revenue through reforms in revenue policy and administration," Mr. Kato said.
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 the 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 5½-year grace period on principal payments.