The main risk in the near future that would lower economic growth, push inflation up and put pressure on the foreign currency reserve is a resurgence of political crisis, International Monetary Fund said yesterday.
IMF released a report on Bangladesh's macroeconomic situation after approving the instalment of the extended credit facility, a financial scheme that helps countries improve their balance of payments.
After prolonged political unrest, calm returned following the January 5 elections; activities and domestic demand are expected to pick up and the trend will continue into the next fiscal year, IMF said.
However, IMF analysed various risks and said further violence and uncertainty, without mentioning a cause, will again affect investment.
“Growth prospects could be affected by a loss of confidence and a slump in investment and consumption,” the report said.
IMF has projected the economy will grow by 6.25 percent in the next fiscal year, while the government aims for 7.3 percent growth.
Pressures on the balance of payments could emerge from a loss in export production and fiscal consolidation could be at risk, according to the report.
Indicating various benefits to be given to exporters to make up for the loss caused by political unrest, IMF said the government needs to resist the pressure to give tax benefits and cash subsidies that undermine fiscal discipline and counter their efforts to strengthen fiscal revenue under the ECF programme.
To reduce the subsidy burden, IMF recommended a hike in the prices of fuel and electricity. “The authorities remain committed to containing energy subsidies and adjusting domestic price accordingly.”
Subsidies should gradually be replaced by well-targeted social transfers, IMF said.
In addition, to reduce energy costs, the rental power plants should be subject to tighter pricing rules and gradually be replaced by base-power plants, the IMF report added.
IMF urged the government to make the new VAT law effective by July 2015 and said Bangladesh has one of the lowest tax-GDP ratios in the world. “It is critical to strengthen revenue in relation to GDP, so as to broaden fiscal space for priority spending.”
Highlighting various weaknesses of the state banks, IMF recommended the government make the banks comply with the conditions imposed on them.
AMA Muhith, finance minister, in a letter to Christine Lagarde, IMF managing director, pledged to carry on the reform programmes, which were released with the report.
“Our reform priorities remain focused on stepping up revenue collection, strengthening the state-owned commercial banks and state-owned enterprises, and improving public financial management,” the minister said in the letter.
Steady progress is being made on implementation of the new value added tax act, with the international tendering process for the automation software already completed and on track for final selection of the software provider by the end of June, the minister added.
To address continued weaknesses in asset quality and profitability of the state commercial banks, Bangladesh Bank is regularly monitoring progress against plans to strengthen governance, risk management and internal control at these banks, and is moving to ensure a penalty for noncompliance, the minister said in the letter.
“These and other details of our policy programmes are set out in the attacked Memorandum of Economic and Financial Policies.”