Press Release No. 10/148

Press Release No. 10/148
April 13, 2010

The following statement was issued in Dhaka on April 12, 2010 after the conclusion of an International Monetary Fund (IMF) staff visit to Bangladesh:

“A team from the IMF visited Dhaka April 6–12, 2010 to discuss budget developments and update understandings on the near-term macroeconomic outlook. They met with Planning Minister A.K Khandker, Bangladesh Bank Governor Atiur Rahman, Finance Secretary Mohammad Tareque, National Board of Revenue (NBR) Chairman Nasiruddin Ahmed, other senior government officials, and members of the private sector and civil society. The team expresses its deep appreciation to the authorities and others for sharing their valuable time and views.

“Bangladesh has weathered the global crisis relatively well. In light of this, the IMF’s outlook in FY2010 (July-June) is broadly unchanged, with real GDP growth expected to moderate slightly to 5 percent, mainly due to sluggish exports. With more supportive external conditions anticipated in FY2011, growth should rise to around 6 percent. Upside risks are mainly strong Annual Development Program (ADP) implementation and more robust private investment, including in infrastructure. On the other hand, downside risks are water and power disruptions—notably the potential impact on manufacturing and agriculture—and possible unevenness in the global recovery.

“Inflation is expected to rise to around 8 percent (annual average) in FY2010 (as originally forecasted in the IMF’s 2009 Article IV Consultation staff report), due largely to higher food and fuel prices. However, pressures should ease slightly in FY2011 given more moderate expected increases in global commodity prices and assuming maintenance of a stable macroeconomic policy stance. The current account should continue to remain in surplus both this year and next, although the pace of growth in foreign reserves may slow in FY2011 on more moderate expected increases in remittances.

“In view of the upcoming budget, discussions focused on fiscal performance so far in FY2010 and the outlook in FY2011. The FY2010 outturn is expected to be moderately expansionary, but ADP implementation is expected to be less than budgeted. In this context, the FY2011 budget should aim at raise tax revenues and increase ADP implementation to boost the economy’s medium-term growth potential and accelerate poverty reduction. Ongoing efforts to broaden the income tax base could deliver sizable revenue gains.

However, prospects for broader revenue growth hinge on other decisive actions to strengthen tax policy and administration, notably in line with the new VAT law expected to be introduced in FY2011.

“Expenditures will need to be prioritized to ensure the necessary resources to resolve infrastructure bottlenecks. In this vein, direct and implicit subsidies should be better targeted to vulnerable groups to ensure adequate fiscal space in other areas and allow fuller cost recovery by service providers, notably in the power and energy sectors. Stronger efforts are also needed to streamline project approvals and implementation capacity and develop an effective framework for public-private partnerships in infrastructure development.

“In support of economic activity, monetary conditions remain relatively lax, but recent signs point to some tightening. Banks’ excess liquidity has been reduced substantially as a result of a pickup in lending. Stronger credit growth could also signal a return of confidence. However, core inflation appears to be on the rise, which bears close watch. Bangladesh Bank will need to continue monitoring conditions closely and be prepared to take early action, as necessary, to contain liquidity pressures. Improving the efficiency of financial markets remains vital for supporting the growth potential. In this regard, more flexible interest rates could help deepen the government bond market and spur financial sector development.”