IMF Mission to Bangladesh

Following recent dialogue with the Bangladesh authorities, the mission is pleased to announce that it has reached a broad agreement in principle with the Bangladesh authorities on a three-year program arrangement to be supported by the IMF’s Extended Credit Facility in the amount of SDR 639.96 million (120 percent of quota). The agreement reached is subject to approval by the IMF’s management and Executive Board.

Under a prospective IMF-supported program, the authorities aim to put Bangladesh on a higher growth trajectory, as necessary to accelerate poverty reduction and achieve middle income status by the next decade. Over the course of the program, balance of payments (BOP) needs are expected to intensify, mainly stemming from import-intensive investment in infrastructure and power sectors necessary to unleash growth. In IMF staff’s view, BOP pressures are expected to persist for some time, necessitating meaningful policy adjustment and reform. The IMF-supported program is expected to catalyze other financing.

In this context, the authorities look to raise tax revenue by around three percentage points of GDP during the program period, building on momentum of recent tax administration reforms and factoring in passage and implementation of new VAT and income tax laws. They also plan to boost public and private investment by strengthening public financial management and operationalizing a private-public partnership framework. Adequate spending in key priority social sectors and on targeted transfers to protect the vulnerable will continue. The authorities are also committed to further strengthening the financial sector and its oversight, improving monetary and exchange rate operations, and enhancing Bangladesh’s integration into the regional and global economy through a more open trade and investment regime.

Despite a challenging global environment in recent years, Bangladesh has posted solid economic performance, with growth close to 6 percent in FY2010. Conditions are expected to improve over the medium term, with ready-made garment exports and investment demand providing a boost. These factors are creating supportive conditions in FY2011, although they are also being accompanied by rising import growth and slowing remittance flows. As a result, growth is expected to be slightly above 6 percent this fiscal year. Inflation is expected to average 7 percent in FY2011, on an anticipated moderation of commodity price increases.

Following several years of a widening current account surplus, it is likely to narrow significantly to around ½ percent of GDP in FY2010, compared to 3¾ percent in FY2011. While exports should remain strong, imports are rising sharply this year due mainly to higher food, fuel, and cotton prices, with oil import volumes also growing rapidly as Bangladesh addresses its power deficit. Remittances are expected to fall on a year-on-year basis in FY2011 mainly due to an ongoing decline in migrant worker outflows, adding pressure on the BOP.

Fiscal policy is being adjusted to accommodate an increase in public investment in FY 2011 associated with higher Annual Development Program implementation. The authorities are also committed to bringing operating losses of large power and energy-related state-owned enterprises on budget. The rise in expenditures is expected to be partly offset by higher revenues arising from ongoing improvements in tax administration. By the mission’s measure, the overall budget deficit is likely to increase by about ¾ percentage points of GDP to around 4 percent of GDP in FY2011.

In view of this policy easing, BB will need to remain vigilant in containing inflation pressures. Monetary policy should be appropriately tight, buttressed by greater interest rate flexibility. This stance could also help contain downward pressure on the exchange rate arising from a more accommodative fiscal policy and less supportive current account. Greater exchange rate flexibility could also help safeguard foreign reserves and reduce external vulnerability. Under these circumstances, private sector credit growth is expected to moderate to about 18 percent (year-on-year) in FY2011. Bangladesh Bank should continue to strengthen its supervision and oversight of the banking system, focusing on improving the financial conditions of state-owned commercial banks and ensuring all banks comply with new capital adequacy requirements. In addition, it should continue working in tandem with the Securities and Exchange Commission to ensure banks and their subsidiaries take necessary actions to mitigate risks from stock market volatility.