Statement at the Conclusion of the IMF Mission on the First Review Under the Extended Credit Facility Arrangement with BangladeshPress Release No. 12/472
December 6, 2012
An International Monetary Fund mission, led by Mr. David Cowen, visited Dhaka November 27–December 6, 2012 to continue discussions on the first review under a three-year Extended Credit Facility arrangement with Bangladesh.1 The mission met with the Minister of Finance, Prime Minister’s Energy Advisor, State Minister of Energy, Bangladesh Bank Governor, Finance Secretary, and other senior officials, as well as civil society and development partners.
At the conclusion of the visit, Mr. Cowen made the following statement:
“Under the Extended Credit Facility (ECF) arrangement, performance so far has been generally sound. Quantitative targets are broadly on track, with all performance criteria met at end-June 2012—the first test date under the ECF. Progress has also been made on structural measures, notwithstanding additional time needed to build policy consensus for several key reforms.
“Despite global headwinds, Bangladesh’s economy performed well in FY12 (July 2011-June 2012), with preliminary estimates pegging growth at 6.3 percent. Inflation pressures have eased, given moderate monetary tightening and lower food price inflation. The current account deficit has narrowed and foreign reserves have rebounded as a result of policy adjustments and remittance flows that compensated slowing export growth. To ensure stability, the government has pursued appropriate fiscal restraint, limiting its budget deficit (excluding grants) to an estimated 4.1 percent of GDP in FY12. Underpinning this has been strong revenue collection efforts and containment of fuel and electricity subsidies, as administered price increases helped narrow losses at energy-related state-owned enterprises.
“Looking ahead, we expect real GDP to grow by about 6 percent in FY13, reflecting external uncertainties and the broader global slowdown. Inflation is projected below 8 percent in FY13 and is expected to come down further in FY14 through sound aggregate demand management. The current account deficit will likely further narrow, aided by remittances growth, but could widen over the next few years because of import-intensive infrastructure investment. To reduce external vulnerability, aggregate demand policies are expected to remain geared towards boosting the recent reserves build-up, supported by continued exchange rate flexibility, prudent debt management, and, over the longer term, trade and investment reforms.
“In keeping with efforts to maintain macroeconomic stability, build external buffers, and promote higher growth, the mission and the Bangladesh authorities reached ad referendum understandings on a set of economic policies and reforms focused on:
- Pursuing sound fiscal and debt management: The government has agreed to contain its budget deficit (excluding grants) to 4.5 percent of GDP in FY13, including the settlement of fertilizer subsidy overruns from FY12, with moderate consolidation over the medium term. Underpinning these targets are further tax policy, revenue administration, and public financial and debt management reforms. As a centerpiece of tax reform, a landmark VAT law was approved by the National Parliament in late November 2012. The new law, slated to be implemented by 2015, represents an important step forward in tax modernization and should yield revenue gains in support of Bangladesh’s development priorities. Further efforts will be made to contain subsidy costs, anchored by a fuel price adjustment formula. To mitigate the impact of adjustments on the most vulnerable, agreed fiscal targets will protect social spending by the government. Accelerated implementation of the Annual Development Program and the government’s focused use of non-concessional external borrowing and guarantees should hasten the transition from quick rental to base power generation, an essential pre-condition for reducing subsidy costs and relieving the burden of price adjustments on final consumers.
- Ensuring stable monetary and exchange rate conditions: Bangladesh Bank remains committed to maintaining a restrained monetary policy until nonfood inflation is firmly entrenched in the single digits, backed by an appropriately tight fiscal policy. To this end, BB will rely increasingly on indirect instruments for conducting monetary operations in 2013, letting price signals gain traction in the face of a more liberalized interest rate regime. The exchange rate will be allowed to adjust to market conditions, with interventions by BB limited to smoothing short-term volatility and sterilized, as necessary, to ensure that monetary targets are met.
- Strengthening the financial sector: The government will pursue legal and prudential reforms to strengthen financial sector governance and oversight and reinforce BB’s supervisory mandate and capacity. Amendments to the Banking Companies Act that are being prepared aim to put oversight of all banks on a level playing field and to strengthen internal governance and risk controls, in support of a stable, well-regulated banking system. Enhanced oversight of the state-owned commercial banks will also be pursued to improve their financial performance and increase their operational independence in order to safeguard the banking system and minimize fiscal risks.
“The ad referendum understandings are subject to review by the IMF’s management and its Executive Board in the context of the first review under the ECF arrangement. Upon the Executive Board’s completion of this review, which is expected in January 2013, SDR 91.4 million (about US$141 million) would be made available to Bangladesh, bringing total disbursements under the arrangement to SDR 182.8 million (about US$282 million).”
1 The IMF’s Executive Board approved a three-year arrangement under the Extended Credit Facility on April 11, 2012 in a total amount equivalent to SDR 639.96 million (about US$987 million). See Press Release No. 12/129).