Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Bangladesh

IMF News, September 30, 2008

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Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Bangladesh

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Bibliographic details

• Published: September 30, 2008

Background

• Article IV consultation concluded by the Executive Board on September 19, 2008.
• Macroeconomic performance and shocks
  • Real GDP growth in FY08 (July-June) remained strong at above 6 percent.
  • Inflation picked up to average 10 percent over the year, driven by escalating international food and fuel prices.
  • Inflationary pressures expected to remain high with the increase in administered fuel prices implemented on July 1 and signs of emerging demand pressures.
• External sector
  • Nominal exchange rate remained stable in dollar terms in FY08, but depreciated by 6½ percent in effective terms as the dollar's value decreased in international markets.
  • Strong remittance growth, a pickup in garment exports and external assistance kept the current account in surplus despite an increase in the trade deficit.
  • International reserves grew moderately to 2¾ months of prospective imports in a year of increased import demand and high international commodity prices.
• Fiscal developments
  • Overall fiscal balance for FY08 estimated to have been below the budget target.
  • Government revenue collection improved impressively and exceeded the budget target for the first time in recent history, driven by improved taxpayer compliance and collection of tax arrears.
  • Overall fiscal deficit was 3.3 percent of GDP compared with the budget target of 4.5 percent of GDP (excluding historical losses of the petroleum company).
  • Increased external assistance allowed domestic financing to remain below 2 percent of GDP.
• Revenue administration and tax policy
  • Institutional framework for separating tax policy from administration has been established; a new unit will begin work by the end of the year.
  • Two Large Taxpayer Units placed under control of a single member at the National Board of Revenue to improve enforcement.
  • Revenue gains reflected improvement in taxpayer compliance in part from the authorities' new universal self-assessment.
• Monetary and financial developments
  • Growth in monetary aggregates moderated in the first half of FY08 but picked up rapidly in the last part of the year.
  • Broad money growth stood at 17½ percent at end-June.
  • Private sector credit growth reached 25 percent in June, reflecting need to finance increased food imports and Bangladesh Bank's selectively accommodative monetary policy focusing on growth-driving sectors.
  • Financial sector reforms undertaken: strengthen regulatory and prudential framework of Bangladesh Bank (BB); corporatize and improve management of state-owned commercial banks (SCBs); automate stock trading; establish a government securities market.
  • SCBs still account for over 30 percent of total banking sector assets and remain moribund, undermining financial system efficiency.
  • Inflexibility in interest rates in the auction process of government securities has limited operation of the primary dealer system and development of an active secondary market.
• Medium-term outlook
  • Growth projected to increase to around 7 percent over the medium term, driven by improvements in agriculture and expansion in domestic services and construction, supported by strong regional growth momentum.
  • External current account projected to remain broadly in balance, with export and remittance growth offsetting growth in imports arising from higher investment.
  • External assistance and gradually increasing capital inflows expected to underpin a steady increase in international reserve coverage.

Executive Board Assessment

• Commendations and overarching view
  • Directors commended authorities for maintaining macroeconomic stability amid multiple natural disasters and elevated food and fuel prices, which severely pressured incomes, particularly of the urban and landless rural poor.
  • Despite long-term challenge of climate change, Directors judged medium-term outlook favorable.
  • Economic growth expected to increase as key structural reforms take root and the country capitalizes on accelerating regional growth.
• Inflation and monetary policy
  • Preventing an increase in inflation identified as the immediate priority because the poor and vulnerable are hit hardest.
  • With fiscal policy focusing on addressing social impact of higher commodity prices, most Directors saw need to tighten monetary policy to keep inflation expectations in check.
  • Directors welcomed recent action by the central bank in this regard.
• External stability and exchange rate policy
  • Directors agreed macroeconomic policies are consistent with external stability; external current account expected to stay broadly in balance.
  • Current exchange rate policy has allowed the real exchange rate of the taka to remain in line with medium-term fundamentals.
  • Directors broadly agreed more flexibility in the rate would support monetary policy objectives and encourage deepening of the foreign exchange market.
  • Directors urged authorities to adopt a timetable to remove the remaining exchange restriction.
• Fiscal policy, revenue, and social protection
  • Directors congratulated authorities on recent progress in fiscal stability; significant improvement in revenue collections has helped offset increasing energy and fertilizer subsidies and larger outlays on social safety nets.
  • The July increase in administered prices was described as a bold step that prevented deterioration in state-owned enterprise finances.
  • Directors noted more remains to be done to place state-owned enterprises on a secure footing and to increase poverty-reducing spending.
  • Keeping to macroeconomic targets of the FY09 budget considered important in controlling inflation.
  • Directors supported the budget's mildly expansionary stance, given recent fiscal prudence and the need to address social impact of higher food prices.
  • Given current inflationary pressures, Directors encouraged authorities to use any excess revenue collections to reduce domestic financing.
  • Increasing revenue seen as crucial to return fiscal policy to a lower deficit path in the medium term while increasing essential public expenditures.
  • Directors encouraged authorities to revise income tax and value-added tax legislation and to maintain progress in strengthening revenue administration and enforcement.
  • Replacing open-ended price subsidies with more affordable and better-targeted social safety nets recommended to provide fiscal space for increases in public investment and social services.
  • Directors urged authorities to address constraints in implementing the Annual Development Program so that priority spending increases align with development needs.
• Financial sector deepening and structural reforms
  • Further deepening of the financial sector seen as key to achieving growth potential.
  • Authorities encouraged to prioritize strengthening financial positions of SCBs and developing a secondary market for government securities.
  • Directors called on authorities to accelerate implementation of structural reforms and strengthen institutions to attract investment and prevent a slowdown that could jeopardize debt sustainability.
  • Improving infrastructure, particularly in the electric power sector, highlighted as important.

Bangladesh: Selected Economic Indicators, FY2004-08

• National income and prices (percent change)
  • Real GDP: FY04 6.3; FY05 6.0; FY06 6.6; FY07 6.4; FY08 6.2 (Est.)
  • GDP deflator: FY04 4.2; FY05 5.1; FY06 5.2; FY07 6.8; FY08 8.0
  • CPI inflation (annual average): FY04 5.8; FY05 6.5; FY06 7.2; FY07 9.9; FY08 (not listed in table cells beyond narrative)
• Central government operations (percent of GDP)
  • Total revenue: FY04 10.2; FY05 10.5; FY06 10.7; FY07 11.4; FY08 (not listed in table cells)
  • Tax: FY04 8.2; FY05 8.5; FY06 9.1
  • Nontax: FY04 1.9; FY05 2.0; FY06 2.2; FY07 2.3
  • Total expenditure: FY04 13.3; FY05 13.8; FY06 13.9; FY07 13.4; FY08 16.1
  • Current expenditure: FY04 7.8; FY05 8.4
  • Of which: Interest payments: FY04 1.6; FY05 1.7; FY06 1.8
  • Of which: Subsidies: FY04 2.4; FY05 2.8; FY06 2.6; FY07 3.0; FY08 3.6
  • Annual Development Program: FY04 5.0; FY05 4.7; FY06 4.0
  • Other expenditures 2/: FY04 0.5; FY05 0.4; FY06 0.8; FY07 0.3; FY08 3.2
  • Overall balance (excluding grants) 3/: FY04 -3.1; FY05 -3.3; FY06 -3.2; FY07 -4.7
  • Primary balance 3/: FY04 -1.4; FY05 -1.7; FY06 -1.3; FY07 -2.5
• Financing (net)
  • FY04 3.1; FY05 3.3
  • Domestic 3/: FY04 2.1; FY05 2.5
  • External: FY04 1.3; FY05 1.2
• Total central government debt (percent of GDP)
  • FY04 51.0; FY05 50.1; FY06 48.3; FY07 46.0; FY08 43.8
• Money and credit (end of fiscal year; percent change)
  • Net domestic assets: FY04 13.5; FY05 17.1; FY06 19.6; FY07 12.6; FY08 18.0
  • Credit to private sector: FY04 17.5; FY05 17.0; FY06 18.3; FY07 15.1; FY08 25.1
  • Broad money (M2): FY04 16.7; FY05 19.3; FY06 17.6
• Balance of payments (in billions of U.S. dollars)
  • Exports, f.o.b.: FY04 7.5; FY05 8.6; FY06 10.4; FY07 12.1; FY08 14.2
  • (Annual percent change): FY04 15.9; FY05 14.0; FY06 21.6; FY07 15.6; FY08 18.1
  • Imports, f.o.b.: FY04 -9.8; FY05 -11.9; FY06 -13.3; FY07 -15.5; FY08 -19.5
  • (Annual percent change): FY04 13.0; FY05 20.6; FY06 16.6; FY07 25.8
  • Current account (in billions): FY04 0.2; FY05 -0.6; FY06 0.6; FY07 1.0
  • (Percent of GDP): FY04 -0.9; FY05 0.9; FY06 1.4
  • Gross official reserves (in billions of U.S. dollars): FY04 2.7; FY05 2.9; FY06 3.5; FY07 6.1
  • In months of imports of goods and nonfactor services: (table indicates measure but specific FY08 months value given in narrative as) 2¾ months of prospective imports.
• Memorandum item
  • Nominal GDP (in billions of taka): FY04 3,330; FY05 3,707; FY06 4,157; FY07 4,725; FY08 5,419

Public Information Notice (PIN) No. 08/126, September 30, 2008. On Article IV consultations: the IMF holds bilateral discussions with members under Article IV of the IMF's Articles of Agreement.

References

• Bangladesh and the IMF
• Public Information Notices
• https://www.imf.org/en/home