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IMF: Bangladesh needs to boost productive investments to sustain growth

  • Published at 11:36 am June 9th, 2018
  • Last updated at 11:59 am June 9th, 2018
4th span of Padma Bridge
File photo: The fourth span of the Padma Bridge Kazi Nazrul Islam/Dhaka Tribune

The IMF recommends boosting public investment to upgrade infrastructure, spur more private sector activity, and ultimately create more jobs

Bangladesh will need to enhance productive investments through a more efficient financial sector, better infrastructure, and an improved business environment to sustain its strong growth, the International Monetary Fund says in its annual assessment of the economy.

The South Asian country has maintained a stable and robust growth over the last decade with significant progress in poverty reduction and improved social indicators.

Bangladesh, undergoing a transformation from a low-income to a middle-income economy, has continued to generate strong growth driven by consumer spending and investment, the IMF report, published on June 8, noted.

In an interview with IMF Country Focus, Daisaku Kihara, IMF mission chief for Bangladesh, said an average growth of more than 6% over the last decade has significantly lifted the per capita income. 

Bangladesh has diversified away from an agrarian to a more manufacturing-based economy with rapid growth in the ready-made garment industry, Kihara said.

The IMF’s report recommends boosting public investment to upgrade infrastructure, spur more private sector activity, and ultimately create more jobs.

For the authorities to raise the revenues needed to support these policies, Bangladesh needs more revenues to finance infrastructure investment and social spending, he added.

Kihara noted that tax revenues in Bangladesh are currently low at 9% of the GDP while the average tax revenue to GDP ratio for non-resource rich, low-income countries is around 15%.

The priority, he said, is to implement the delayed value-added tax, preferably with a single rate, reaching a broad base to help raise much-needed revenue. 

“Tax policy reform should also be supported by continued efforts to strengthen tax administration and improve tax compliance with online registration and filing of tax returns,” the IMF official added.

Strengthening banking sector

Despite the strong economic growth, Bangladesh’s banking sector continues to struggle.

Kihara noted that the banks remain the main source of financing for companies in Bangladesh. “Their ability to extend credit at reasonably priced terms is important to keep [the economic] growth strong,” he said.

But this will require strong balance sheets and efficient operations, he noted, adding that there is “significant room for improvement,” given that non-performing loans continue to increase, particularly in the state-owned commercial banks.

“The health of the banking sector can be improved by strengthening banks’ internal control and governance, expediting loan recovery procedures, and improving creditors’ rights with a more effective legal system,” he said.

“At the same time, regulators should enforce resolutely existing regulatory standards and deal promptly with banks that fail to observe these standards,” the IMF official added.

Financial inclusion

In today’s digital economy, increasing access to financial services is becoming more important.

“Bangladesh has been a pioneer in financial inclusion,” Kihara said, replying to a question on what the country is doing to promote financial inclusion, and if these efforts are reaching the rural areas.

Some of the notable initiatives are the introduction of microfinance, mobile financial services, and agent-based banking. 

The authorities also promote lending for small and medium-sized enterprises and women entrepreneurs, and require that banks open at least 50% of their branches in rural areas. 

“These efforts have improved the ratio of bank deposit accounts in the adult population and credit provided to small and medium-sized enterprises run by women,” he said.

“They have also helped to boost the number of women entrepreneurs and the number of active mobile money accounts. The forthcoming National Financial Inclusion Strategy will carry forth this momentum.”

Rohingya crisis and Bangladesh’s economy

More than 700,000 Rohingyas have taken shelter in Bangladesh since the Myanmar security forces launched a brutal crackdown targeting the mainly Muslim ethnic minority in late August last year.

Kihara said the economic and budgetary impact has been limited so far, thanks partly to the attention and financial support of the international community.

He noted that the spending pressures could increase in the future.

“Important challenges remain,” the IMF mission chief for Bangladesh added.

These include reducing the risk of flooding and landslides in the refugee camps as monsoon approaches, maintaining cooperative relations with the host communities, and providing key social services and infrastructure.