"This is the key challenge for the authorities in Bangladesh," Thomas Rumbaugh, IMF adviser for the Asia and Pacific, told a press briefing at the IMF Resident Mission in Dhaka yesterday.

The IMF official said this replying to a question whether their prescription to contain inflation would be possible if the government raises the fuel prices further and the import cost increases due to the soaring dollar prices.

He insisted on increasing the interest rates further as a means of tight monetary policy. "Some further increases in interest rates may be required to bring inflation in line with other countries," he said.

The briefing was organised at the end of an 8-day mission of an IMF team led by Thomas that reviewed the recent economic developments and the implementation of policies supported by the Poverty Reduction and Growth Facility (PRGF) arrangement.

"It's inevitable that the government will have to adjust the oil prices," Thomas said, adding that the price hike will have onetime impact on the inflation, not a permanent one.

"That's why Bangladesh Bank needs to keep very prudent monetary policy so that the inflation does not go up," he said.

During their visit to Bangladesh, the mission members met Finance and Planning Minister M Saifur Rahman, Finance Secretary Siddiqur Rahman Chowdhury, Bangladesh Bank Governor Dr Salehuddin Ahmed and senior government officials.

"Growth momentum in Bangladesh's economy has been maintained during this fiscal year,"Thomas told the briefing on their observations.

He expected that the GDP growth would be about 6 percent but observed that inflation, though declined slightly, at 6.5 percent was still higher than desirable.

Thomas added that the external current account was better than expected in the first half of FY06 with strong growth in exports and some slowing in non-oil imports.

"Despite these positive developments, considerable macroeconomic challenges remain there," he said, suggesting that Bangladesh Bank should continue the tightened policy during the days to come.

Apart from further raising the interest rates and the prices of fuel oil, the IMF also suggested increasing revenue collection as a matter of priority as the government is preparing the budget of FY07.

On petroleum prices, it observed that the present policy entails considerable and growing economic costs, mainly benefiting higher income consumers, reducing economic efficiency, and only delaying the inevitable adjustments as losses continue to mount on the BPC and the NCBs financial position deteriorates.

Replying to a question, Thomas said there are some liquidity problems in the foreign exchange market while the market needs some improvements in terms of efficiency.

In response to another query, he said it would be possible to register faster GDP growth even if there are some difficulties in agriculture as the industry and services sectors are showing robust growth.

The 3-year PRGF arrangement was approved in June 2003 with a total lending commitment of $493 million, being disbursed in seven instalments, which were later augmented by about $75 million under IMF's Trade Integration Mechanism (TIM).

Five instalments worth $409 million have so far been released with the latest one ($97 million) in February. Discussions on the release of the sixth instalment will take place in May this year if the government continues to implement policies, particularly on the NCBs and the NBR.