Growth momentum to slow without policy upgrades
Maintaining the past growth performance will become increasingly challenging for Bangladesh without a significant rise in public and private investment, said a top official of the International Monetary Fund.
“Yes, the fast growth of the past could be sustained, but it will not happen automatically,” said Brian Aitken, the division chief of the Asia Pacific department of the IMF.
Aitken's comments came in an interview with The Daily Star on the sidelines of the 2017 IMF-BNM summer conference in the Malaysian capital. The two-day conference ended yesterday.
To sustain the growth momentum, Bangladesh's policy practices and institutions need to be upgraded to better fit with the aspiration of a middle-income country status.
In this respect, one of the key tasks is to develop the country's capital markets for financing long-term private investment that would greatly improve growth prospects, he said.
Boosting government tax revenue is also vital to provide adequate resources for public infrastructure investment and social spending.
The implementation of the VAT and Supplementary Duty Act 2012 would be an important step towards achieving the government's growth ambitions and reaching the middle-income country status, he said.
The new VAT law, which was formulated at the prescription of the IMF, was supposed to take effect from this fiscal year but it was shelved at the eleventh hour following fervent opposition by a section of the business community and lobby groups.
Formulated at the prescription of the IMF, the law called for a uniform 15 percent VAT for most goods and services available in the country, doing away with the existing multiple rates.
The new VAT would have boosted Bangladesh's low budget revenue, allowing the country to raise growth-supporting public investment and social spending, without undermining fiscal sustainability.
“We have attached great importance to implementing the new VAT law,” Aitken said, adding that the failure to implement it and modernise Bangladesh's tax system will make the journey to becoming a middle-income country more difficult, uncertain and longer.
The economist also touched upon the default loan-riddled state-owned banks, which are progressively becoming an Achilles heel for the government.
He said addressing the poor performance of the state banks so that savings are allocated to profitable growth-enhancing projects and not to loss-making undertakings is also important for the country's growth aspirations.
Asked about the disparity in growth forecasts of the multilateral lenders, he said: “It is not unusual for growth forecasts to differ moderately, as in the case of Bangladesh.”
Aitken, however, went on to commend the country's macroeconomic management.
“We view the macroeconomic management in Bangladesh as successful.”
Monetary policy has been managed well, contributing to lowering inflation, and fiscal discipline has kept the deficits and public debt at a moderate level.
In turn, macroeconomic stability, in combination with favourable external demand, has resulted in strong and stable output growth, and increased resilience of the economy to external shocks.
“This solid macroeconomic performance is set to continue this year, with output growth projected to remain close to current levels and inflation broadly in line with the Bangladesh Bank's target.”
About the sliding remittance, he suggested the government research possible reasons behind it and implement policies that make it easier for foreign workers to remit through the official channels.
In recent times, there has been a growing tendency among migrant workers to send money home through illegal methods, which deprive the government of foreign currency.
“However, to the extent that the remittance slowdown reflects worsening economic conditions in other countries, it could be difficult to put in place effective measures to reverse the slowdown.”
There has also been a significant slowdown in remittances from the Gulf Cooperation Council countries -- host to the majority of Bangladesh's migrant workers -- because of the declining economic activities as a consequence of the lower oil prices.
Regardless, Aitken called for an improvement in Bangladesh's business climate, including infrastructure, such that the country can attract more foreign direct investment, which could offset the impact on balance of payments from the slowdown in remittances.
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