IMF advises reducing banking sector vulnerability
The International Monetary Fund (IMF) has said reducing banking sector vulnerabilities remains a priority for Bangladesh.
The visiting IMF mission at a media conference at the secretariat on Wednesday also said the government should draw up a proper strategy to reduce non-performing loans and implement it.
The IMF mission further said the Bangladesh Bank should continue the transition to risk-based supervision to enhance financial sector resilience, while continuing legal reforms to improve corporate governance and regulatory frameworks.
Bangladesh had sought a US$ 4.7 billion loan from the global lender. The country has so far received $1 billion in two tranches while it is likely to get another $1.15 billion in the third tranche, subject to the approval of the IMF’s executive board this month.
Earlier, an IMF mission arrived in Bangladesh on 24 April for two weeks for the second review of the loan’s terms and conditions.
The IMF Team completed its mission through a meeting with state minister for finance Waseqa Ayesha Khan Wednesday.
Real GDP growth is projected to moderate to 5.4 per cent in FY24 owing to the ongoing import compression and policy tightening
Later in the evening IMF mission head Chris Papageorgiou addressed a media conference. He said, “Maintaining the reform momentum is critical to align with the authorities’ goal of reaching upper middle-income country status by 2031. Diversifying trade, attracting more foreign direct investment, enhancing the investment climate, and strengthening governance will be crucial in this regard.”
IMF said, “Considering Bangladesh’s low tax-to-GDP ratio, it is imperative to prioritise sustainable revenue generation to bolster investments in social welfare and development initiatives. To this end, tangible tax policy and administrative measures should be incorporated into the FY25 budget to augment tax revenues by 0.5 percent of GDP…. Reducing subsidies, improving expenditure efficiency, and managing fiscal risks will allow for additional spending on social safety nets and growth-enhancing investment.”
Earlier, the International Monetary Fund in April predicted that Bangladesh will have a GDP growth of 5.7 per cent this financial year. But the global lender lowered the rate to 5.4 per cent Wednesday.
“The macroeconomic outlook is expected to gradually stabilise as policy actions start to take hold. Real GDP growth is projected to moderate to 5.4 per cent in FY24 owing to the ongoing import compression and policy tightening. However, it is anticipated to rebound to 6.6 per cent in FY25 as imports rebound and foreign reserve pressures ease.”
Inflation is projected to remain elevated at approximately 9.4 per cent in FY24 but is anticipated to decline to around 7.2 per cent in FY25, on the back of the continued tighter policy mix and projected lower global food and commodity prices
Speaking about inflation, IMF mission chief Chris Papageorgiou said, “Inflation is projected to remain elevated at approximately 9.4 per cent (year-on-year) in FY24 but is anticipated to decline to around 7.2 per cent in FY25, on the back of the continued tighter policy mix and projected lower global food and commodity prices. Nevertheless, uncertainties surrounding the outlook remain high, with risks predominantly leaning towards the downside.”
Answering a newsperson’s question on high inflation rate despite higher interest rate, Chris Papageorgiou said he had information about the declining inflation rate.
In response to a question about bank mergers, Chris Papageorgiou stated that there is a necessity of this initiative of the Bangladesh Bank as among the 61 banks in Bangladesh, some are very strong while others are not.
The IMF team has expressed satisfaction that Bangladesh has introduced a monthly fuel oil price adjustment system. Chris Papageorgiou remarked, “The authorities have made significant progress on structural reforms under the IMF-supported program, including the implementation of a formula-based fuel price adjustment mechanism for petroleum products…. We welcome Bangladesh Bank’s bold actions to realign the exchange rate and simultaneously adopt a crawling peg regime with a band as a transitional step toward greater exchange rate flexibility to restore external resilience. Following the liberalisation of retail interest rates, additional tightening of monetary policy should help alleviate any inflationary pressures resulting from the exchange rate reform.”
In a recent event, former Bangladesh Bank governor Muhammad Farashuddin stated that the IMF never discusses money laundering. However, when questioned about the issue, Chris Papageorgiou stressed that one of the IMF’s most crucial policies is the control of money laundering.
He further explained that establishing good governance includes measures to prevent money laundering.
Reserve conditions relaxed
Meanwhile, the IMF’s net foreign exchange reserve target for Bangladesh until 30 June was set at $20.11 billion. However, the organisation reduced this target by 5.36 billion US dollars to 14.75 billion US dollars.
After facing repeated failures over 16 months to maintain reserves, Bangladesh requested a reduction in the target. The decision to lower the reserve target was reportedly made during an IMF meeting held last Tuesday with Bangladesh Bank governor Abdur Rouf Talukder. Even before this, Bangladesh struggled to meet the prescribed reserve target. At the government’s request, the IMF agreed to lower the target.
Ahsan H. Mansur, executive director of Policy Research Institute (PRI), told Prothom Alo that Bangladesh will never be able to fulfil the condition of reserve target if the policy of selling 11 billion US dollars in 11 months continues.
He emphasised that the exchange rate should be market-based before deviating from this policy.