The International Monetary Fund (IMF) on Sunday completed its staff consultation mission in Bangladesh, led by Rahul Anand, Mission Chief for Bangladesh, with roughly three recommendations to the authorities -- to decrease subsidy, increase revenue collection, and boost forex reserves.
The IMF mission found the government lacking in preparation in the three sectors. The global lender also asked the government to place emphasis on the issues that would ensure receiving the second instalment of the US $4.7 billion loan in December this year, said sources from the Bangladesh Bank and Finance Division of the finance ministry.
The IMF team, however, has expressed its hopes about Bangladesh. In a media release the global lender issued upon completion of its team’s visit to Bangladesh on Sunday, it said, “Against a challenging economic backdrop, Bangladesh remains one of the fastest growing economies in the Asia-Pacific region.”
The organisation, however, pointed to a few challenges too. These are: persistent inflationary pressures, increased volatility of global financial conditions, and slowdown growth in major trading partners.
The visit of the IMF team, led by Rahul Anand, head of the organisation’s Asia and Pacific region, started on 26 April. In the 12 days, the team held meetings with all the departments of the finance ministry, power, energy and mineral resources ministry, commerce ministry, Bangladesh Bureau of Statistics (BBS) and different departments of the Bangladesh Bank (BB). The IMF team also held meetings with representatives of the private sector, bilateral donors and development partners of Bangladesh. On the last day of its visit, the team held meetings with the central bank’s governor Abdur Rouf Talukder and finance secretary Fatima Yasmin.
Sources from the meeting said the IMF team asked about the strategies to decrease subsidy as per the conditions of receiving the loan. They asked why the government was mulling over increasing subsidy in the coming budget of 2023-24 FY. What are the strategies to increase the Gross Domestic Product (GDP) at 0.5 per cent rate that the government has talked about? Is it enough to buy electronic fiscal device (EFD) to realise revenue? How would the actual forex reserve to be increased to $24.46 billion by June?
As the IMF issued a media release, the World Bank also held a press conference after the meeting. However, none of the media releases or the press conference talked about the subsidy and tax-GDP ratio. The finance division is also yet to say anything on this matter.
Subsidies to soar
Like previous times, the IMF mission sought rationalisation of subsidy management of the Bangladesh government. Rationalisation means decreasing the subsidy actually. IMF feels subsidy is directly people’s taxes. It is better for the government if it can decrease subsidy. Then the government can utilise the funds in other areas.
It came to IMF's attention that the amount of subsidy in 2022-23FY was Tk 820 billion which will cross Tk 1 trillion in the coming financial year.
Sources from the meetings said the IMF team was informed that Bangladesh Petroleum Corporation (BPC) will not require budget help anymore due to the hike in the price of fuel oil. Gas and power tariff have also been increased. A time-based system will be adopted for adjusting fuel oil price from September while there is a plan to increase the power tariff more. No new subsidy will increase as a result of hiking the price of oil, gas and power but the previous subsidies will be in place. That’s why the total amount of subsidy will increase.
Tax-GDP ratio
It was learned that like the first day’s meeting, the IMF during its meeting with the finance ministry on Sunday asked most questions on raising the amount of tax in relation to GDP. The global lender wants the Bangladesh government to put stress on reforming revenue sector. The finance division source said IMF seeks 0.5 per cent increase in tax-GDP ratio in 2023-24FY.
The IMF was also told that to realise tax EFDs have been bought and some more will be bought. The government also has planned to appoint private agents at the grassroots for this.
Forex reserve decreasing
As per the Bangladesh Bank calculation, current amount of forex reserve is $30.98 billion. The amount would come down to $29.80 billion after paying the bill of Asian Clearing Union (ACU) today, Monday.
The government has spent $8.20 billion from the forex reserve in different purposes including investing in various bonds, foreign currency and gold, export development fund, loan to Sonali Bank for Bangladesh Biman to purchase jet aircraft, funds for dredging Rabnabad channel of Payra port and loans to crisis-hit Sri Lanka. IMF has been saying from the outset to calculate the forex reserve, excluding these expenses. As per IMF, the reserve would then actually be $21.70 billion.
As per the IMF loan conditions, the forex reserve has to be increased to $24.46 billion by 30 June, by September $25.30 billion and by December the amount has to be $26.80 billion.
Three challenges
In its statement, IMF said the pressure on Bangladesh’s forex reserve and local currency, taka, will remain due to persistent inflationary pressures, elevated volatility of global financial conditions, and slowdown in major advanced trading partners.
The IMF team chief Rahul Anand said, during the visit, we discussed recent macroeconomic and financial sector developments. We also took stock of the progress made toward meeting key commitments under the fund-supported programme.
This will be formally assessed in the first review of the Extended Credit Facility (ECF) / Extended Fund Facility (EFF) / Resilience and Sustainability Facility (RSF) arrangements, which is expected to be undertaken later this year, he added.
Market-based interest rate in July
Following the meeting of IMF team with Bangladesh Bank governor Abdur Rouf Talukder, the central bank’s executive director and spokesperson Mezabul Haque addressed the media conference on Sunday afternoon.
The conditionalities of IMF is to adopt market-based interest rates. Mezabul Haque said the central bank will provide the information about this while announcing the monetary policy in June. The announcement will be implemented from July. He also told the conference that the Bangladesh Bank is moving towards implementing single rate of dollar.
Explaining the decision, Mezbaul Haque said the single rate does not mean the buying and selling rate will be the same. Currently there are several exchange rates. If the difference between rates remains within 2 per cent that is called single rate. This is almost achieved. Now efforts will be made to bring the difference within the limit.
The Bangladesh Bank spokesperson also said an announcement will be made regarding new way to calculate forex reserve in the next monetary policy.
Regarding the response of the IMF team, Mezbaul Haque said, “IMF is happy about the progress made in the joint plan of action though there are some challenges. There is time. Taking those into cognisance we will be able to work satisfactorily.”
When the newspersons asked about the challenges, the Bangladesh Bank spokesperson said, “You are aware of these. There is the forex reserve calculation system. But recently the prime minister visited some countries and all of them extended their support. Our financial account (reserves) will become stronger when the assistance will arrive.”
Following Bangladesh’s request, IMF granted a loan of $4.7 billion on 30 January. The government will have to meet 38 conditionalities to get the soft loan. The global lender will pay the next instalment of the loan if the conditions are met.
Speaking to Prothom Alo, former IMF official and executive director of Policy Research Institute (PRI) Ahsan H Mansur said, “We have been telling the government to take steps to increase the forex reserve, raise the tax-GDP ratio, and decrease subsidy, but nothing has been done.”
“IMF is saying these this, not for nothing. They have been saying these as conditions against the loan. Still this is not working. The main problem was to be identified.”
Ahsan H Mansur also said, “Failure to fulfil one or two conditions will not be a serious issue but there will be a possibility that cracks will appear in confidence in the economy of Bangladesh if the number of unfulfilled conditions increases.”