The Executive Board of the International Monetary Fund (IMF) yesterday completed the fourth review of Bangladesh’s economic programme under a three-year arrangement supported by the Extended Credit Facility (ECF) and approved a US$140.9m disbursement.
The Executive Board’s decision enabled the immediate disbursement of an amount equivalent to SDR 91.423m [around US$140.9m] to Bangladesh.
This will bring the total disbursements under the arrangement to around US$704.3m. The decision was made without a formal board meeting, according to a message received here from Washington.
The three-year ECF arrangement for Bangladesh was approved by the Executive Board on April 11, 2012 for a total amount equivalent to around US$986m, or 120% of quota.
The IMF says Bangladesh has made further progress in strengthening macroeconomic stability under the ECF-supported programme.
While economic activity was affected by unrest and uncertainty in the run-up to the January 2014 general election, international reserves have continued to increase, the ratio of public debt to GDP is on a downward path, and underlying inflation has been easing.
All performance criteria under the ECF arrangement for end-December 2013 were met. There has also been progress on structural reforms, and all structural benchmarks for this review were completed.
Looking ahead, with greater calm after the elections, domestic demand is expected to recover, and real GDP growth is projected to increase to 6.25% in Fiscal Year (FY) 15 (July 2014 - June 2015).
According to the IMF, the main risk for growth would be a resurgence of unrest. Inflation is expected to decline in FY15 on continued policy restraint, though higher wages and adjustments in administered prices pose upside risks.
The current account of the balance of payments is projected at a surplus of 1.3% of GDP in FY14, and is expected to move into a moderate deficit in FY15.
Macroeconomic policies under the authorities’ programme are set to remain focused on safeguarding stability and building policy buffers. With inflation risks tilted to the upside in the near term, monetary policy should remain prudent.
The fiscal policy will be anchored on a continued gradual reduction of the public debt-to-GDP ratio, while allowing for increased public investment and social spending.
Continued fiscal prudence will also help provide greater room for credit growth to finance a recovery in private investment.
Bangladesh has one of the lowest tax-to-GDP ratios in the world, and it is critical to strengthen revenues so as to broaden fiscal space for priority development spending, while resisting pressures to provide further tax benefits.
Implementation of the new VAT remains the foremost priority, complemented by reforms to strengthen revenue administration.
The programme also embodies reforms to improve public financial management, including by formalising monthly treasury cash flow forecasts, strengthening financial reporting by state-owned enterprises, and tightening debt management procedures.
Bangladesh Bank is expected to continue strengthening financial supervision, while avoiding regulatory forbearance.
Its steps to tighten regulations on related lending and closely monitor banks’ stock market exposures are welcome.
Strengthening the state-owned commercial banks remains another focus of financial reforms, centered on improving governance, automating financial reporting, and recapitalising these banks.
The authorities are moving ahead with their plan for gradual liberalisation of foreign exchange regulations, complemented by a streamlining of trade tariffs and regulations.
Steps have also been taken to improve working conditions in the garment industry, including through a sizeable increase in the minimum wage, and to strengthen the targeting and efficiency of social safety net programmes. The progress on these fronts should contribute to promoting high, sustained, and inclusive growth.