December 14, 2023
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
PARTICIPANTS:
Moderator:
AMIT KHETARPAUL
Communication Department, IMF
Panelists:
RAHUL ANAND
Mission Chief for Bangladesh, IMF
PIYAPORN SODSRIWIBOON
Deputy Mission Chief for Bangladesh, IMF
JAYENDU DE
Resident Representative in Bangladesh, IMF
MR. KHETARPUAL: A very good morning to all of you in Dhaka, and good evening to my colleagues here in Washington. Welcome to this press briefing on the first review of IMF-supported program in Bangladesh and the 2023 Article IV Consultation. My name is Amit Khetarpaul and I work in the Communications Department at the IMF. Joining me are some of my colleagues, Rahul Anand, who is the Mission Chief for Bangladesh, Piyaporn Sodsriwiboon, who is the Deputy Mission Chief for Bangladesh, and Jayendu De, who some of you may know already, he is the Resident Representative based in Dhaka. And then I also have a couple of other colleagues joining us, including Pemba, who's been in touch with you.
Before we begin, let me just quickly walk you through the mechanics of our briefing. First of all, as and when you're speaking, we would appreciate if you turn your camera on if your Internet, obviously, bandwidth allows you to do that. That way it feels a little bit more interactive. Thank you to those who already have. This briefing is on the record. We, as you may know, we have issued up a press release already on this topic a couple of days ago, on Tuesday DC time. And just a few hours ago we posted the staff report on imf.org. So feel free to refer to it if you haven't already. And Pemba, can I request you to please maybe drop a link in the chat so that everyone has access to it, can just use it for their convenience. Okay, so I will now invite Rahul to share some opening remarks for a few minutes, and we can then follow that up with Q&A. So with that, Rahul, can I turn over the microphone to you?
MR. ANAND: Thank you so much, Amit, and welcome to everyone. Thank you for joining this press briefing. So let me start by some opening remarks. The IMF Executive Board completed the first review of the IMF-supported program and the Article IV consultations on December 12. As some of you may have seen in our press release, the Board’s approval unlocked disbursements of about US $469 million of the second tranche of the Extended Credit Facility and the Extended Fund Facility, bringing the total disbursements under the ECF, EFF thus far to about $938 million US dollars. Additionally, the Board’s approval also unlocked about $222 million US dollars, as the first tranche of the Resilience and Sustainability Facility, RSF, a concurrent program to help address the country’s large climate financing needs.
As Amit mentioned earlier today, we published the staff report, Pemba has just kindly put the link in the chat, which provides all necessary details of our assessment. So let me summarize some key issues first, and then I will take your questions.
Bangladesh’s economy has continued to face economic challenges. External headwinds, coupled with initially inadequate domestic policy response, have made macroeconomic management challenging. An unprecedented reversal of the financial account deteriorated the overall balance of payments in FY-23, leading to continued pressures on FX reserves and the Taka.
In response to these shocks, the authorities have taken several measures to deal with macroeconomic challenges. Bangladesh Bank has tightened monetary policy, allowed greater exchange rate flexibility, and unified the multiple exchange rates. The authorities also kept the fiscal primary balance within the program target. Thanks to these efforts by the authorities, and despite the difficult macroeconomic environment, the overall program performance has been broadly satisfactory. I am happy to report that most program targets and reform commitments were met.
So, what should be the priorities going forward? In the near-term, the focus should be on containing inflation and rebuilding external resilience. This would require a calibrated monetary policy tightening, supported by prudent fiscal policy stance. At the same time, a more flexible exchange rate system will help alleviate foreign exchange pressures and rebuild external buffers.
In addition, we also need to focus on growth enhancing reforms. By that, we mean reforms that target the most binding structural constraints on Bangladesh’s economic activity. Let me outline a few areas.
First, raising tax revenues and rationalizing non-priority expenditure is key priority. This will allow the authorities to increase investment in social development and climate spending. Continued efforts to enhance public financial and investment management are also needed to increase spending efficiency and mitigate fiscal risks.
Second, modernizing the monetary policy framework and improving policy transmission will foster macroeconomic stability. Further reforms to modernize the exchange rate framework and strengthen foreign exchange reserve management would enhance external resilience.
Third, reform priorities should also focus on addressing vulnerabilities in the financial sector, by strengthening banking regulation, supervision, and governance. We would also encourage deepening of capital markets to help mobilize private financing to support growth objectives.
Fourth, further trade liberalization and enhancements to the investment climate will boost foreign direct investment and help diversify exports. Raising productivity, including through education and skills development, as well as further increasing female labor force participation will further boost growth potential.
And finally, I noted climate spending earlier. Building resilience to climate change and natural disasters is a priority for achieving high, inclusive, and green growth. To do that, improving efficiency in climate spending and mobilizing climate financing will be crucial.
Based on our discussions with authorities and the progress so far, we are encouraged that the authorities remain fully committed to taking necessary steps to restore near-term macroeconomic stability and accelerate economic reforms, while also protecting the vulnerable and delivering on the climate agenda.
At the same time, the authorities are also making good progress on implementing reforms to boost growth. We look forward to the authorities’ accelerated implementation of these reforms, which will help Bangladesh to successfully graduate from the LDC status in 2026 and achieve its aspiration of reaching the upper-middle income status in 2031.
With this, I will open the floor and take any questions that you may have. Thank you again for joining this press briefing.
MR. KHETARPUAL: Thank you. Thank you so much, Rahul. Okay, we will now take your questions. I see we have some interest already. Juust to make this efficient, depending on number of how many hands I have, we may bundle your questions, so it'll be quicker. But whoever's interested, please raise your virtual hand. And we'd appreciate one question at a time. Okay, let me just go and look at my screen here. Okay, the first question, Hossain, please.
MR. HOSSAIN: My name is Tauhid Hossain, I'm working for Jamuna television. This is a 24 hours news channel here in Bangladesh. I have two questions, actually, Mr. Rahul, you have visited Bangladesh quite a few times, and I would like to know about your experience so far with the transformation we are having right now in the financial policy and the monetary policy. Do you think any particular, specific big change here, when we are talking about the transformation and the changes? That is one. Do you think we are on the right track in dealing with the inflation or not? That will be my first question. And my second question will be, what are the things you are going to consider before disbursing the third installment? These are the two questions I'd like to know from you.
MR. KHETARPUAL: Thank you, Tauhid. Maybe I'll take one more and then, Rahul, I'll turn to you. Mushfiqul Fazal, please.
MR. FAZAL: Thank you so much for doing this. My name is Mushfiqul Fazal, I'm working for Washington-based monthly Foreign Policy Magazine, South Asia Perspectives. So, my first question. Some people have suggested that the approval of the second installment prior to a controversial one sided election creates an impression that the IMF is shoring up an autocratic regime and aggravating the ongoing political crisis. What's your comment? Has your own assessment found that government failed to fulfill required reforms in time and a questionable mandate means it would not be able to future commitments either?
MR. KHETARPUAL: Thank you, Mushfiqul. Since we've already had three questions maybe, Rahul, I'll turn to you, and then Syful we’ll come to you after Rahul's response.
MR. ANAND: Let me start with the first question on whether Bangladesh is pursuing an appropriate strategy in addressing inflation and our take on monetary policy modernization. So, as you know, Bangladesh was doing relatively well in terms of containing inflation. Even before COVID, and then the Russia's War in Ukraine led to a rapid rise in inflation because of higher commodity prices, supply side bottlenecks, and large Taka depreciation.
So even now, even though the shock actually happened last year, global commodity prices still remain elevated, supply disruptions are there, and exchange rate depreciation is feeding in too, because Bangladesh imports a lot of goods and services. So all this has kept the inflation high in Bangladesh. Monetary policy reacting to this higher inflation, Bangladesh Bank started the tightening cycle last year in May 2022. Since then, cumulatively, they have raised the monetary policy by 300 basis points. In recent times, since October, they have raised the policy rates by almost 125 basis points.
At the same time, they have liberalized the lending rates because it's not only raising the policy rate, but also its transmission into the economy is important for monetary policy to affect demand and hence inflation. They have allowed the smart rate and then they widened the band around the smart rate cap. So what we have seen as a result of these tightening, that the yield curves have moved up on an average by 200 basis points. So what I mean by that is, at the lower end of the government treasury bills and bonds, it's already trading around 10 percent, and the longer end is trading around 11.2 percent. So if you look at inflation, current inflation of 9.5, already the yields are in the positive territory. And as the monetary transmission happens more, we expect this to go up.
Bangladesh Bank, at the same time, also removed the cap on lending rate. So now lending rates are tied to the smart plus 375 basis points. That has also increased. So lending rate for new loans have already risen to above 11 percent. So monetary policy needs to remain tight since inflation still remains high, and that's what we have recommended. And the authorities are already taking steps to implement that by tightening monetary policy. And this monetary policy tightening needs to be calibrated to make sure that inflation is sustainably brought down to the Bangladesh Bank's comfort level of 5 percent to 6 percent. That's where inflation used to be before the external shock set.
So in this backdrop, monetary tightening, as I said, going forward, calibrated monetary policy tightening is needed to sustainably bring down inflation and that will also help restore external stability.
In terms of our impressions on monetary policy modernization, Bangladesh Bank -- I mentioned several features of this modernization, introduction of the corridor system, relaxation or they have removed the cap on the lending rate. Also the transmission has been improving and we have seen the yield curves move.
So on your second question about what will be required for Bangladesh to have the second disbursement. So as you know, and our staff report is out too, the performance of the program is just on the basis of certain criteria mutually agreed between the authorities and the Fund. We have several quantitative targets in terms of on net international reserve. Also on the primary balance, tax revenues, social spending, capital spending. And on top of that, we have lot of structural reform measures that the authorities are implementing under the program. So a broad list is there,in the staff report. We have a table which lists specifically the targets and also lists the structural benchmark.
But just to summarize some of the reforms that's there, is how to improve the tax revenue collection or the revenue mobilization. So there is some structural benchmark on that. How to increase the efficiency of public spending is another area that's important. Monetary policy framework, you asked the question, so there is some movement on the monetary policy modernization. On the public financial management there are certain aspects of those reforms and are there as part of the next program review.
And then on the climate side, the adaptation of the formula based pricing mechanism for petroleum product is one, and also on bringing in climate risks into the financial sector surveillance. So some of these are there, more details you can find in the staff report. There's a whole table.
So going to the question on the elections and related stuff. So let me say upfront that the IMF does not comment on domestic political situation. All I can tell you, as I noted in my opening remarks, that in the response to global shocks, Bangladesh has taken several measures to deal with the macroeconomic challenges and thanks to these efforts, the overall program performance has been broadly satisfactory.
Most program targets and reform commitments were met. And let me add to that, there is a broader consensus on the reform priorities, what is needed for Bangladesh to graduate from the least developed country status and to become upper middle income country by 2031. There is a broad consensus about what's needed. And IMF program is only supporting those broadly agreed or shared set of reforms that have been put together. For example, increasing revenues, it’s a broader consensus that Bangladesh has one of the lowest tax to GDP ratio that needs to go up.
Also, strengthening the financial sector is important for Bangladesh to mobilize financing to meet its large development, social, and climate needs, similarly dealing with climate change. So some of these issues are there is a broad consensus around these issues and the IMF program is actually supporting the authority's efforts in achieving those. So I stop here.
MR. KHETARPUAL: Thank you so much, Rahul. Okay, I'm going to take maybe two more questions. Syful, you're up.
MR. ISLAM: Okay. Rahul, there is a debate among the Bangladesh economists whether Bangladesh should go for full floating exchange rate or a fully market based exchange rate. And IMF, I saw in the last press release, saying that it asked for a greater exchange rate flexibility. Can you suggest how flexible Bangladesh actually can be? Can it go for a full floating exchange rate or not? And I have another question. A couple of years ago, Bangladesh introduced the 6 percent and 9 percent for bank loan lending and deposit deposits and very recently you already mentioned that Bangladesh has removed this 9 percent and 6 percent. So do you think the policy was wrong or was it a wrong decision and it had any negative impact on our economy. Thank you.
MR. KHETARPAUL: Thank you, Syful. Let me take one more. I saw one question in chat, Rahul, though you may have addressed it already, which is what are the potential impact of the upcoming elections on Bangladesh economy. I mean, we mentioned that obviously we don't comment on political situation in the country, but if there's anything else you want to add on the economy, of course. So, maybe we'll take Saiful's question and anything else you want to add.
MR. ANAND: Thanks, Syful and thanks Amit. So, on the first question that you asked about the exchange rate flexibility and what IMF is working on. Given that persistent external pressures, as you have seen with Russia's war in Ukraine and the global shock, there has been a pressure on TAKA and the reserves. So, it is important that TAKA, or the currency, is flexible enough to absorb the external shock because it's the first line of defense against any external shock. And it's important for protecting foreign exchange buffers and also building external resilience. However, moving to a fully fledged floating exchange rate system will require very careful considerations and the transitional steps so that the transition is not disruptive. So, what the authorities are working on with the IMF CD support, where IMF will be providing CD support, is adopting a crawling peg, like an arrangement with a bank corridor. So, this is an intermediate step or a transitional step where exchange rate moves in line with the market supply and demand of the exchange rate in an orderly fashion. And this is something that the Fund is working with the authorities. Greater details are available in the staff report that we have published. There's a whole section or a selected issues paper on this topic. So, I will encourage you to take a look which provides much more detail on this system.
At the same time, Bangladesh bank is, as I mentioned in my previous response, is tightening the monetary. We have also suggested tighter fiscal stance and neutral fiscal stance. So, this transition has to be a part of the mix of the policies that the authorities are implementing to rebuild external buffers. So, we have to look at the whole policy package together in terms of restoring near term external sustainability.
There was a question on the caps. As I mentioned earlier, Bangladesh bank has moved away. They have removed the caps on deposits, they have removed the caps on lending. Rather they have the smart rate in there and then there is a 350-basis point, and they are in fact increasing the band around that smart rate. And in my previous response I mentioned the monetary policy transmission. We have seen a 200-basis point shift in the whole yield curve with the policy increase of 125 basis point. And at the same time Bangladesh bank has also stopped the devolvement. So, put these things together, the yield curves have moved up. Monetary is very tight. Has tightened as the purpose of the policy rate increase. And at the same time the new loans are now above 11 percent. So, the real rates have already become positive. This is something that we have suggested as one of the policy measures to deal with the external pressure that Bangladesh is facing.
MR. KHETARPAUL: Thanks, Rahul. Okay. Looks like Mohammed Kamruzzaman has his hand up again. Did you want to comment?
MR. KAMRUZZAMAN: This is Mohammed Kamruzzaman. I work for TRT World as Bangladesh Correspondent. Actually, there are some debate in our country regarding the official data and the ground reality. I just want to ask you, one of the most talked about issue on the IMF loan. Actually, in Bangladesh, the price hikes of daily commodities. This is a very serious problem. Nowadays hundreds of thousands of people are facing. And they're also raising question whether what actually develop means. What actually the resilience means to the mass people of this country. My just simple question whether you have any assessment regarding the ground reality of the mass people of this country before your next move in regarding the loan?
MR. KHETARPAUL: Thank you, Mohammed. Let me take one more question. Tauhid Hossain, please.
MR. HOSSAIN: Okay. Thank you for giving me the chance, once again. I would like to know about your observation regarding the fact that the Bangladesh is still struggling with the revenue generation. With the current inflation and the other economic turmoil. The revenue board is actually saying that they are actually facing more struggles, more challenges and the revenue generation is not as per their expectations so far. That's why the government has increased the timeline for submitting the income return for two months. So, that's the scenario here in Bangladesh. Considering the fact, can you suggest some specific suggestions regarding the revenue generation? How we can increase it? That is one.
And secondly, the Bangladesh export is dropping. Especially with the ongoing issues with the United States and with the labor issues and all. The R&D sector is actually struggling, and they are getting less orders than before. Do you think this is going to put a great impact on Bangladesh's economy and the export? Because if that happens, the reserve situation will not be improved in a sooner time. So, what is your comment about it. Thank you.
MR. KHETARPAUL: Thank you, Tauhid. Okay, Rahul, I'll turn this back to you.
MR. ANAND: Thanks. So, on the price increase in my very first response, as I mentioned, Bangladesh inflation was very stable around 5-6 percent for a long time before Russia's war in Ukraine started. And the prices have gone up because global commodity prices still remain elevated. There have been supply chain disruptions as well as large TAKA depreciation because Bangladesh imports lot of food items. And in general, Bangladesh is a net importer. So, all this has resulted in higher inflation and the authorities have taken step, as I was explaining in an earlier question on the monetary policy stance in tackling this price increase.
Having said that, under the IMF supported. Program, we are very mindful and that's why we have a social protecting the poor and the vulnerable is one of the key elements, as I said in my opening remarks too. And that's why under the program we want the social spending to be protected. And that's why we have a floor on the social spending which Bangladesh authorities met for the first review. And so, we want the poor and the vulnerable to be protected. But there are all other reforms that are also moving in the same direction. And I will link it to the revenues. As you rightly pointed out, tax to GDP ratio is one of the lowest in Bangladesh. To sustainably increase support for the poor and liberal, it's important that Bangladesh raises tax to GDP. The tax revenues need to go up. At the same time, better targeting of subsidies are required to actually pass on the benefits to the people who actually deserve or who deserve the most. So, these are some of the things the program has. And as I mentioned about the social protection is concerned.
In terms of revenue generation, as we mentioned the last year, as you know, there were measures put in place to control imports and trade related taxes are one of the big components for NBR tax revenues. And as the import compression took place that resulted in lower tax collection. However, your question about what needs to be done, the problem in Bangladesh, tax revenue collection has to be tackled. It will require a multipronged approach. So, we have outlined in detail in the report. But I will just highlight three things.
One, there is a large scope for tax rationalization. So, IMF is supporting the authority's efforts in rationalizing tax expenditures. So, we are providing technical assistance on tax expenditure. One mission has happened. Another one is going to happen early next year. At the same time improving the efficiency of tax administration, increasing the tax base, digitalization, some of these are required tax policy reforms; and all these have to be put together for the revenues to be sustainably increased.
There was a question on the exports and as we have mentioned, and in my previous press conference, I've also mentioned that Bangladesh exports are very concentrated, both in terms of geographical location, but also in terms of products. So, as Bangladesh graduates from the LDC status and as some of the trade related benefits expire, Bangladesh needs to diversify, both in terms of its export items, but also in terms of export destinations. And that will require trade reforms, tariff reforms, which are happening. The new tariff policy was adopted. All this will help Bangladesh reach out to new markets and also diversify its export products.
The other related aspect is FDI. As we have seen in other countries, Bangladesh, the FDI to GDP ratio is one of the lowest. FDI brings in a lot of benefits. It allows the country to get into the global value chain. FDI inflows help get the technology, the management skills. It also helps boost productivity. So, this is another thing that Bangladesh needs to work, and they are already doing in terms of a lot of measures are there.
And the third component is improving the competitiveness of Bangladesh, where skill development through vocational training, building skills, also reducing the female or the gender gap and bringing more improving labor force participation of women, reducing economic gender gap. So, some of these things are needed for Bangladesh exports to continue doing well. Bangladesh exports have been, or the garment exports have been the driver of growth in Bangladesh for a long period of time. So, going forward, building on that success and implementing some of the policies that I just mentioned, we expect that exports can continue to boost the growth momentum of Bangladesh. I’ll stop here, back to you, Amit.
MR. KHETARPAUL: Thanks much, Rahul. I wasn't sure, Mushfiqul, if this was an old hand or do you want to come back in?
MR. FAZAL: Corruption is one of the big challenges for Bangladesh and its economy as well. According to Global Financial Integrity Report, 61.6 billion oil siphoned out of Bangladesh from 2006 to 2017, or something like that, which is equivalent to 25 percent of its GDP in the financial year 2016 and 17. So, how are you dealing with these issues, as in government and missionaries and those who are concerning, they're involved corruption and we are not seeing any initiative by the regime where they are. Rather they are patronizing in this corruption and in this regard. So, what is your comment on that?
MR. KHETARPAUL: Thank you, Mushfiqul. Rahul, since we don't have any other question right now, maybe you can take that?
MR. ANAND: So, governance is an important component of the IMF supported program. And there are several program priorities that are geared towards enhancing governance. And I will just list few of them under the program that we are working on. Improving the fiscal governance is very important. So, fiscal management, there are a lot of emphasis under the program on improving the fiscal governance and the eprocurement EGP platform, digitalization. Similarly, on the financial sector side, improving corporate governance, as I mentioned in my earlier response, is one of the key areas, reform areas and the recent passage of the Bank Companies Act definition of willful default. These are some steps and also tightening of the fit and proper criteria for the selection of Directors for the banks. So, these are some steps to enhance the fiscal governance. Strengthening of anticorruption commission, providing them adequate resources is another. So, there are different parts. Central bank governance reforms are there. So, all of this is also there in this report, you can take a look at the specific reform priorities.
Going back to your first part of the question. One of the key priorities of the IMF program is to help the authorities in enhancing their risk-based supervision of AMLCFT and anti-money laundering and counter terrorism funding. So, this is a key area which you alluded to in your question. And this is something that IMF is providing technical assistance and working very closely with BIFU in the Bangladesh bank. And this is one of the key priorities of the program, specifically targeting the points you raised.
MR. KHETARPAUL: Thanks, Rahul. I'm not seeing any other questions, Rahul. And also, we're almost at time. So, before we close, is there any key remarks you want to convey? Rahul, before we close, just kind of repeat some key points here?
MR. ANAND: Sure. Thanks, Amit. So, just very briefly, three points to close. I would like to say that despite significant challenges and uncertainty, the program has supported the authority's efforts to preserve macroeconomic stability and protect the vulnerable. At the same time, accelerating economic reforms and delivering on the climate agenda.
Going forward, what's needed is a calibrated monetary policy tightening supported by neutral fiscal policy and greater exchange rate flexibility. This will help not only restore near term macroeconomic stability, but also bolster external resilience. Restoring macroeconomic stability and accelerating growth-oriented reforms will be key to meet the country's aspiration to reach upper middle-income status by 2031. So, in nutshell, these are the three bullets that I will say as a key takeaway. Thanks.
MR. KHETARPAUL: Thank you, Rahul. With that, we'll bring this press briefing to a close. We will post Rahul's, both his opening and his closing remarks hopefully very soon on the IMF.org. So, you can just go to the Bangladesh country page and access it, hopefully in the next 45 minutes or so. If you have any follow up questions, feel free to reach out to my colleague Pemba. You've already been in touch with him. But for now, thank you all for joining, Rahul, thank you and the mission team and colleagues at the Fund for doing this. Thank you all.
