Dinner Remarks Given at the Ministers of Economic Affairs Committee by Shigemitsu Sugisaki Deputy Managing Director of the IMF

October 14, 2003

Dinner Remarks
Ministers of Economic Affairs Committee

Mr. Shigemitsu Sugisaki
Deputy Managing Director of the International Monetary Fund
Dhaka, Bangladesh
October 14, 2003

1. Minister Rahman and distinguished guests, it is a pleasure to join you tonight, to listen to your thoughts about the economic opportunities and challenges facing Bangladesh. Let me say a few words about the global economy, about how we see the outlook for Bangladesh in particular, and about how the Fund hopes to support your reform agenda.

First, on the global economy

2. This is a time of increasing optimism. Global growth is projected to rise from 3¼ percent in 2003 to about 4 percent next year, led by the United States. Asia once again is a bright spot. It is expected to grow at 5 percent in 2003 and 5¼ percent in 2004, continuing to distinguish itself as the fastest growing region in the world. The balance of risks to world growth has improved, but we should not be complacent. Countries still need to redouble their efforts to implement structural reforms.

On the outlook and the challenges for Bangladesh

3. Turning now to Bangladesh, let me say at the outset that in my capacity as Deputy Managing Director, I have been seeking since 1997 to establish a closer working relationship between the Fund and your country. It is only now, under the current government, that we were able to successfully conclude a PRGF arrangement with Bangladesh. This reflects our support for the direction of economic reforms your government is pursuing. Credit for this effort must go to the current economic team that has worked so hard to make this possible.

4. The benefits of these policies are already becoming apparent. The economy is showing renewed vigor. Industrial activity and exports are rebounding. Inflation is being held in check, even after needed adjustments in key prices. A smooth transition to a floating exchange rate has been achieved, and international reserves today are two and one half times the level when the government took office. For this fiscal year, the projected real GDP growth of 5.5 percent is well within reach, given continued supportive fiscal and monetary policies and further progress with structural reforms.

5. The key challenge now for Bangladesh is to move to a higher growth path to help create jobs, and over time lift the country out of poverty. Your government is moving forward with a home-grown strategy to raise growth to 7 percent and to halve poverty by the year 2015. We share this vision and are supporting it with funding and technical support.

6. At the center of this strategy are reforms to boost private sector growth, improve the investment climate, and diversify exports. This is a pro-growth and pro-poor strategy that grapples squarely with the structural flaws of the economy. And this is a strategy, which we understand from our discussion, enjoys broad support across the spectrum of society..

7. What must be done to boost investment and diversify exports? Despite low-cost labor, Bangladesh is a high-cost place to do business. Impediments to investment include an unreliable power supply, high real interest rates, corruption, and weaknesses in law and order. These factors have resulted especially in lower foreign direct investment (FDI) than in other fast growing countries in East Asia.

8. The government's strategy is tackling these problems through a package of reforms. I want to stress four areas where decisive and steadfast actions will be crucial to success:

9. First, increasing spending on education, health, and infrastructure. We support your strategy to accommodate a larger budget deficit for the next few years, to permit an increase in government spending on human capital development and physical infrastructure. Such spending should help to strengthen skills and boost productivity. But at the same time, sustained improvements in revenue will be essential. Tax administration, in particular, is in need of modernization to improve the collection and the "fairness" of existing taxes.

10. Second, reforming the nationalized commercial banks (NCBs) to lower interest rates, and stem new nonperforming loans. If this reform succeeds, the NCBs should become more efficient and should be able to cut their lending rates. Moreover, all banks should see their funding costs and lending rates fall, if the government can rein in its own domestic borrowing needs to a prudent level, and if adequate external assistance is assured.

11. Third, reforming the state-owned enterprises (SOEs), especially in the energy sector. Inefficient SOEs have been a serious drain on the budget. Realistic pricing that reflects the cost of production is a first step. But for these enterprises to become viable, there is a need for restructuring their operations to reduce waste and improve bill collection. For the power sector, in particular, the investment required to upgrade infrastructure is enormous, and it is right that the World Bank is gearing up its lending program to support the government's own efforts. The Asian Development Bank is also playing an important role in this sector.

12. Fourth, strengthening governance. Building institutions for better governance and strengthened efforts to enhance law and order are essential to reducing the costs of doing business and thereby creating a more enabling environment for private sector investment. Curbing corrupt practices that allow, for example, tax evasion or loan default will also give the Bangladeshi people a fairer deal, as well as helping to enhance Bangladesh's image in a competitive world. We, therefore, very much welcome the ongoing efforts to set up an independent Anti-Corruption Commission and we look forward to its early functioning in an effective manner.

13. We recognize that this is a challenging reform agenda that will require vigorous debate to build national consensus and political courage to carry out. Broad support from the international community, financially and technically, will also be vital for success.

Finally, the role of the Fund

14. To conclude, the Fund is fully engaged in Bangladesh. As I mentioned, we are supporting this effort through the recently approved loan under the PRGF and also through our program of technical assistance to help build capacity. I welcome this chance to hear your views this evening, and can assure that the Fund is committed to supporting your country.





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