Press Release No. 06/93

Press Release: Statement by IMF Staff Mission to Bangladesh

May 10, 2006

The following statement was issued today, in Dhaka by Mr. Jonathan Dunn, Resident Representative of the International Monetary Fund (IMF) in Bangladesh:

"A team led by Mr. Thomas Rumbaugh, Advisor in the Asia and Pacific Department of the International Monetary Fund (IMF), held discussions during April 30-May 10 with the Bangladesh authorities on economic developments and the implementation of policies supported by 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.

"The economy's growth momentum has been sustained in spite of stiff competition in the global garment industry. Industrial activity and export growth have remained robust and a rebound in agriculture, following flood-related losses in the previous year, has helped to boost overall GDP growth from 5½ percent in FY05 to an estimated 6½ percent this year. Inflation, as measured by the Consumer Price Index, has declined slightly to 6¼ percent (year-on-year) in March 2006. Higher export and remittance receipts, and some slowing in non-oil imports, have helped preserve the international reserve position in the face of rising world oil prices.

"Prudent fiscal, monetary, and exchange rate policies have underpinned Bangladesh's favorable economic performance. Indicators of fiscal performance are broadly in line with the government's objective of limiting domestic financing to less than 2 percent of GDP. The government budget deficit for FY06 is projected to be somewhat lower than the original budget target of 4½ percent of GDP. Total government expenditure is projected to be lower-than-budgeted by about ½ percent of GDP because of less than full implementation of the Annual Development Program (ADP). While some progress in administrative reform of the National Bureau of Revenue has increased collections of income tax and domestic VAT, total revenue is still likely to fall substantially short of the original budget target, and overall revenue at 10½ percent of GDP for FY06 remains low compared with other countries. In contrast to the relatively careful implementation of the central government's budget, the financial position of several large state enterprises has deteriorated markedly.

"Bangladesh Bank's (BB) gradual tightening of monetary policy has helped reduce inflationary pressures while safeguarding the external position. The floating exchange rate system is functioning relatively well and export competitiveness has improved with the recent depreciation of the real effective exchange rate. Increases of 2-3 percent in interest rates in recent months have contributed to reducing pressure in the foreign exchange market and helped contain inflationary pressures. A further tightening of monetary policy could be needed to safeguard recent gains in macroeconomic stability and preserve the international reserve position.

"A number of challenges continue to pose risks to the macroeconomic outlook. The main risk to near-term growth prospects stems from the failure to address emerging power shortages. Maintaining fiscal sustainability and enhancing poverty reducing spending will require further efforts to raise revenue collection and to improve project implementation. The continued under-pricing of energy products and the resulting substantial deterioration in the financial performance of state enterprises (particularly BPC, PDB, and DESA) pose risks to the government's fiscal position and the banking system.

"The IMF supports the government's objective of raising revenue collections by about ½ percent of GDP annually to allow adequate financing of priority social spending needs and to ensure an equitable tax burden. To achieve this, specific tax policies will need to be incorporated in the FY07 budget and efforts will need to continue to further strengthen the operations of the large taxpayers units and improve collection, enforcement and audit procedures. On the expenditure side, capacity constraints slowing ADP implementation will need to be identified and addressed.

"Bangladesh cannot afford the financial losses and economic costs stemming from the under-pricing of energy products. To deal with increases of about 90 percent in international fuel prices over the last two years, many low-income countries have adjusted domestic petroleum prices and/or improved the targeting of fuel subsidies. In Bangladesh, average domestic petroleum prices are currently about 40 percent below international prices, while electricity tariffs are below production cost and natural gas rates below opportunity cost. In addition to SOE financial losses, considerable economic costs arise from the absence of incentives to improve fuel efficiency, cross-border smuggling, and pressures in the foreign exchange market. Moreover, and contrary to some popular views, the implicit subsidies arising from the under-pricing of diesel, kerosene, electricity and natural gas benefit the wealthiest households much more than low-income households. A more appropriate pricing policy would eliminate subsidies to the wealthiest segments of the population and free up government resources for enhancing transfers and services to low-income groups. The mission has encouraged the government to improve the targeting of any subsidies and to introduce measures to mitigate the impact of price adjustments on vulnerable groups.

"The mission welcomes the renewed momentum behind reforms of the Nationalized Commercial Banks (NCBs). Following several delays, Rupali's divestment is now well under way. Evaluations of prospective investors will need to be conducted carefully and in line with established fit and proper criteria to ensure that a quality investor is found. The planned corporatization of the other three NCBs will increase their autonomy and accountability and bring them fully under the direct regulatory authority of BB. Performance of these three banks will be strengthened through the hiring of key staff on a contract basis and by monitoring performance indicators to be provided to the top management of these banks.

"Provided that the government continues to implement policies aimed at macroeconomic stability, improving the financial position of key state enterprises, and advancing key reforms with respect to the SOEs, NCBs and the National Board of Revenue, Executive Board consideration of the fifth review under the PRGF arrangement could take place in July 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 later augmented by SDR 53 million (about US$75 million) in accordance with the IMF's Trade Integration Mechanism (TIM) to help Bangladesh overcome the impact of the removal of the Multi-Fiber Agreement quotas at the end of 2004. To date, the Executive Board of the International Monetary Fund (IMF) has completed four reviews of Bangladesh's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement, making available total disbursements of SDR 283 million (about US$409 million) and a remaining SDR 117 million (about US$175) million that could be disbursed before the arrangement expires.