Statement at the Conclusion of the 2011 Article IV Consultation Mission to BangladeshPress Release No. 11/334
September 15, 2011
An International Monetary Fund (IMF) mission led by Mr. David Cowen of the Asia and Pacific Department visited Dhaka and Chittagong during September 5–15 to conduct the 2011 Article IV Consultation discussions. The mission met with Minister of Finance Abul Maal Abdul Muhith, Economic Advisor to the Prime Minister Mashiur Rahman, Bangladesh Bank (BB) Governor Atiur Rahman, Finance Secretary Mohammad Tareque, National Board of Revenue Chairman (NBR) Nasiruddin Ahmed, BB deputy governors, and other senior officials. It also met representatives from civil society, development partners, and the private sector.
Bangladesh’s economy expanded at a strong pace in FY11 (July 2010–June 2011), supported by rapid export growth and accommodative macroeconomic policies. However, inflation has also been on the rise, pushed up by higher food prices and demand-side pressures. Despite strong export performance, the balance of payments (BOP) recorded a deficit in FY11, mainly because of increased oil, textile, capital goods imports, and weak aid inflows. As a result, gross foreign reserves have come down from record levels reached in late 2010. To relieve these pressures, the taka has been allowed to depreciate moderately.
Looking ahead, real GDP growth for Bangladesh is currently projected by the IMF at 6.3 percent in FY12, driven by still-strong garment exports, a firming up of remittances inflows, and better electricity supply. The headline inflation rate is projected to come down modestly by end-fiscal year, mainly due to more moderate expected increases in global commodity prices. Bangladesh should remain fairly insulated from a global growth slowdown. Still, BOP pressures are likely to intensify over the near to medium term because of rising oil import volumes and import-intensive infrastructure investment.
During the mission, discussions focused on the policy framework and structural reforms needed to ensure overall macroeconomic stability and lay the conditions for higher economic growth. The broad targets set forth in the government’s FY12 budget and BB’s July 2011 Monetary Policy Statement provide solid anchors. However, the mission stressed that achieving these targets in FY12 will require better coordination of fiscal and monetary policies. It noted that the balance of macroeconomic and financial risks could necessitate further policy adjustments in order to contain external as well as fiscal pressures and to avoid crowding out private investment.
On fiscal policy and debt management, the mission welcomed the NBR’s progress on improving tax administration, which is contributing to major revenue increases. It stressed that tax policy reforms, led by timely passage of near-finalized value added tax (VAT) and direct tax laws, provide a critical anchor to tax modernization plans under formulation by the NBR. However, the mission also highlighted the pressing need to contain subsidy costs, as their rapid rise threatens to eat away the fiscal space being created by a larger tax take and needed for social and development spending. It urged the Ministry of Finance (MoF) to move forward on public financial management reform, focusing its priorities on strengthening budget accountability and transparency and cash and debt management. The mission cautioned that increased reliance on domestic budgetary financing, including from BB, threatens to undermine macroeconomic stability and necessitates greater interest rate flexibility to ensure a well-functioning Treasury bill and bond market. On external debt, primary reliance on concessional borrowing is expected, in line with the debt management strategy being prepared by the MoF.
Regarding monetary, exchange rate, and financial sector policies, the mission noted the monetary tightening measures taken by BB, but cautioned that still-high credit expansion might require further policy actions. Greater exchange rate flexibility has helped absorb external pressures and deepen the interbank foreign exchange market. The mission recommended that BB move to a more risk-based supervisory framework for banks. Strengthening banks’ internal governance is seen as a complementary step toward ensuring their financial soundness. In this context, the mission noted the need for state-owned commercial banks to be allowed to operate with minimal outside interference and under BB’s sole jurisdiction, consistent with their earlier corporatization. In view of recent stock market volatility, the mission looked forward to timely enactment of measures aimed at helping banks properly manage market exposure and urged a further strengthening in securities market oversight to protect investor interests.