The Bangladeshi economy has rebounded from Covid-19 much quicker than other countries in the region, said the International Monetary Fund (IMF), adding that growth is expected to pick up 6.6% in the ongoing fiscal year.
Led by Mission Chief for Bangladesh Rahul Anand, an IMF team visited Dhaka earlier this month before releasing a statement on Sunday.
But the forecast by the IMF is 0.6 percentage points lower than the government’s GDP target of 7.2% for the 2021-22 fiscal year.
And the World Bank has projected the growth rate for Bangladesh in FY22 at 6.4%, the lowest, while the Asian Development Bank (ADB) puts it at 6.8% — the highest of the estimates.
Although the GDP growth target set by the Bangladesh government does not match with the projections given by the IMF, economists think that the government will benefit if it takes effective measures by accepting the recommendations given by the institution.
"I think the issues that the IMF has asked the government to look into are reasonable,” said Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office.
“In particular, keeping no foreclosures, fixing exchange rates, focusing on credit growth, reducing inflation, fixing fuel prices, raising taxes, modernizing the revenue collection process — if these can be done, then it will be beneficial to achieving the target set by the government, which is much higher than the IMF estimate," he added.
In its statement, the IMF said that with the economy rebounding, the central bank should closely monitor inflationary pressures and stand ready to normalize.
“Caps on the lending and borrowing rates limit the policy space and should be phased out to strengthen market-based pricing, improve credit allocation and monetary transmission. Greater exchange rate flexibility, together with safeguarding foreign exchange reserves, will help buffer external shocks," it added.
Absent reforms, financial sector risks could be a drag on medium-term growth prospects, the IMF predicts.
Calling Bangladesh’s economic growth and social development since independence impressive, the IMF team said that to reach upper-middle income status by 2031, the country should build on this success while addressing its structural problems and modernizing its policies.
AB Mirza Azizul Islam, former finance adviser to a caretaker government, said: "These recommendations will go a long way in achieving the goals that the government has set. However, it is difficult to implement or pay attention to all of these together. So here, the government and policy makers, especially the Bangladesh Bank, have to fix their priorities.”
Zahid Hussain suggested that the government and Bangladesh Bank look at two main issues for fixing the priorities.
“It is very important to know the exact picture of the balance sheet of our financial sector,” he said.
Now corporate taxes are 25% for everyone, but Hussain thinks this advantage can be taken away from the big organizations.
“And in the cottage, small, micro sector, we have to think about how to make it more logical. Second is to tackle the challenge of inflation, because its effect falls on all sectors,” the economist said.
Regarding the different projections by each organization, Zahid Hussain said that some make the calculations in a very simple manner, while others use complex methods. Moreover, the models and the data used are not the same.
“Besides, it is only natural that two economists should have different opinions. However, the reason for the government's target being much higher is political," he further said.
Despite being hit by multiple waves of the Covid-19 infections, quick and decisive actions by the authorities, supported by the external environment, led to a much quicker rebound than Bangladesh’s regional peers, the IMF said in its statement.
IMF warns of uncertainty
Growth is expected to pick up to 6.6% in FY22 as the impact of the pandemic abates and policies remain accommodative while the country will see a rise to 7.1% in the next fiscal year with more of the population getting Covis-19 vaccines, the IMF said in its statement on Sunday.
However, the IMF warned that the uncertainty of this outlook "remains high" and "risks are tilted to the downside."
Expressing concerns about inflation, which is projected to be slightly higher than the government-set target due to non-food price inflation and fuel price hike, IMF said that fiscal deficit will increase to 6.1% of the total GDP in FY22 due to Covid-19-related spendings.
The current account deficit will also widen due to the import of capital goods, raw materials and commodities.
Despite this, public debt is expected to remain sustainable in the long-term.
It is necessary to support recovery from the pandemic while addressing Bangladesh’s current vulnerabilities, the statement said.
Covid-19-related financial policies must also be phased out in an “orderly” way to reduce the exacerbation of the sector’s vulnerabilities, the statement said.
“The IMF stands ready to support the government’s reform efforts through policy advice and capacity building, including on monetary and fiscal policies, financial sector supervision and regulation, and macroeconomic statistics,” it added.