Statement at the Conclusion of the 2008 Article IV Consultation Mission to BangladeshPress Release No.08/177
July 15, 2008
The following statement was issued in Dhaka today after the conclusion of an International Monetary Fund (IMF) staff mission to Bangladesh:
"An IMF team led by Mr. Thomas Rumbaugh, Advisor in the Asia and Pacific Department of the IMF, visited Bangladesh during July 2-15 to conduct the annual Article IV consultation discussions. The mission met with Chief Advisor Fakhruddin Ahmed, Finance Advisor Mirza Azizul Islam, Finance Secretary Mohammad Tareque, Bangladesh Bank Governor Salehuddin Ahmed, National Board of Revenue (NBR) Chairman Abdul Mazid, other senior government officials, and members of academia, the business community, and civil society.
"Macroeconomic performance was remarkably resilient in a year of multiple natural disasters and elevated international food and fuel prices. A strong pick-up in domestic economic activity in the second half of the year and increases in garments exports and remittances enabled growth in FY08 to exceed 6 percent. This, together with external assistance including balance of payments support under the IMF's policy on Emergency Natural Disaster Assistance (ENDA) of US$217 million, steadied the external position. Escalating international food and fuel prices, however, drove up inflation, which averaged almost 10 percent over the year. This put increased pressure on the livelihoods of the poor, who suffer the most from inflation. Increasing subsidies are also putting pressure on the fiscal position, despite strong revenue performance.
"The medium-term outlook is positive as Bangladesh has considerable potential to achieve high growth and sustained poverty reduction. However, the current environment is a very challenging one for macroeconomic management. Managing inflationary pressures will be difficult, and any further sustained increases in international oil and food prices would place stress on the balance of payments and fiscal position, and would inevitably reduce growth and poverty-reduction. Potential political uncertainty surrounding the local and national elections is a short-term risk while dealing with climate change is a huge long-term challenge.
"Macroeconomic policies should aim to ensure a sustainable position is left to the next government. The main priority is to keep control of inflationary pressures stemming from global prices and domestic demand. Some initial increase in inflation is inevitable but there is a role for domestic policies in preventing second round effects where inflationary pressures spill over into wages and general prices. Monetary policy should send an early signal that the authorities are not going to allow the second round effects to become entrenched and avert the need for more drastic actions later. This would complement Bangladesh Bank's objective to maintain stability in the exchange rate and support the continued growth in remittances and international reserves.
"Impressive gains in revenue collections were instrumental in allowing the FY08 fiscal deficit to be within the budget target. This helped to provide space for spending on disaster relief and improved budget coverage of escalating fuel and fertilizer subsidies. The recent substantial increases in fuel and fertilizer prices were essential to fund important increases in social safety net spending while maintaining a sustainable fiscal position in FY09. However, despite the sizeable allocations made in the budget, recent movements in international commodity markets suggest that additional spending for fuel and fertilizer subsidies will likely be required.
"Adhering to the macroeconomic targets of the FY09 budget will also be important to prevent putting further pressure on inflation. If revenue collections exceed budget targets, which is possible given the increase in the base achieved in FY08, the savings should be used to reduce the deficit rather than to finance expenditure overruns. Any additional fuel and fertilizer subsidies should instead be financed as much as possible through reallocations in expenditure. Reducing the implementation of the annual development program to cover increased subsidies could undermine future growth and should be avoided.
"In the medium term, fiscal policy needs to return to a path of lower deficits. Improved revenue performance is therefore essential to allow much needed increases in public expenditure. This will require substantial broadening of the coverage of VAT and income tax as well as continued progress in tax administration and enforcement. Further reductions in poorly-targeted subsidies would allow fiscal space for increases in social spending and public investment.
"To secure the future growth potential of Bangladesh successful financial sector development will be critical. Progress has been made but the agenda is large and Bangladesh has far to go to catch up with other countries in the region. Going forward, there will need to be a comprehensive vision for the financial sector and stronger support for market development, with Bangladesh Bank taking a prominent leadership role. Particular attention should be given to deepening the government debt and foreign exchange markets and improving the operations of the state-owned commercial banks in preparation for their ultimate divestment."