IMF Mission due on Dec 5: Banking sector reform, subsidy to top agenda
The International Monetary Fund will inquire about Bangladesh's progress in reforming the local banking and subsidy sectors as well as ongoing vaccination drive as it is set to hold its first dialogue with the government since the coronavirus outbreak.
The Article IV consultation to be held from December 5 to 15 will focus on five key areas, namely the banking, subsidy, revenue and exchange rate reforms, the Covid-19 vaccination programme, as well as $3 billion in loans that will be extended to the country over a three-year period.
During an Article IV consultation, an IMF team of economists visits a country to assess its economic and financial developments and discuss the country's economic and financial policies with government and central bank officials.
Rahul Anand, assistant to the director of the IMF's Institute for Capacity Development, will lead the mission. The last time an IMF mission came to Bangladesh was in 2019.
The banking sector reform agenda will focus on default loans and the latest situation in the banking industry.
In 2019, the IMF gave a detailed proposal to Bangladesh on how to improve the situation of the banking sector. The crisis-lender has not pursued it because of the pandemic. The upcoming mission will push for the reform agenda, said sources at the finance ministry and Bangladesh Bank (BB).
The issue of non-performing loans (NPL) will get priority. Official figures put the NPL rate at about 8.18 per cent in June.
But in 2019, the IMF said the ratio of bad assets, which stood at 11.50 per cent in the year, would double as not all sources of problem assets are captured by the central bank's definition of defaulted loans.
The coronavirus pandemic exacerbated the NPL scenario as borrowers faced an unprecedented decline in business amid a collapse in demand, weakening their capacity to pay back.
The IMF mission two years ago felt a large number of defaults were by choice and not due to any unexpected financial hardship.
Besides, the balance sheet of some banks, including Padma Bank, has deteriorated.
The government has moved to address the banking reform issue.
It has amended the Bank Company Act. Once the parliament passes the amendment, it will start addressing the bad loan issue.
The amendment includes a provision related to asset management corporations. The government plans to set up a state-run corporation to buy and trade distressed loans off banks as part of its efforts to clean up the financial sector.
The subsidy will be high on the agenda during the talks between the IMF and the government.
The IMF always says that the prices of energy should be aligned with the international markets to keep the budget deficit at a manageable level, officials say.
The government has set a 6.3 per cent budget deficit target for the current fiscal year, but it may overshoot given the surge in commodity prices internationally.
Last week, Bangladesh raised the price of fuel oils such as diesel and kerosene after their prices went up sharply in the global markets.
A finance ministry official, however, says the price increase is not linked to any condition of the IMF. The budget for the current fiscal year has not set aside any funds as subsidies for the fuel sector.
It has allocated Tk 9,000 crore for the power sector. But because of the hike in fuel prices, another Tk 6,000 crore might be needed if the tariff of electricity is increased.
Similarly, the government may need to channel another Tk 2,000 crore to the agriculture sector as subsidies if the price is not adjusted in line with global prices of fertilizer. Prices of most fertilizers surged in 2021, driven by strong demand and higher input costs. Agriculture subsidy currently stands at Tk 9,500 crore.
The government may raise the power and gas prices. The fertiliser price may remain unchanged.
The exchange rate of the taka will be discussed during the meeting.
Although the central bank has introduced a floating exchange rate, it indirectly intervenes in the market when required in order to keep the local currency stable. The IMF wants it to be market-driven.
A BB official says a weak taka will create inflationary pressure, so the central bank does not allow too much depreciation.
In recent times, the taka has come under pressure because of the rise in imports, prompting the central bank to sell US dollars. The BB has sold dollars worth $1.58 billion so far in the current fiscal year, which was nil in the last fiscal year.
The official average exchange rate hovers around Tk 85 per USD.
The IMF mission will also emphasise the reforms in the revenue sector, according to the finance ministry official.
In June 2019, the IMF said the organisational structure of the National Board of Revenue needs to be modernised to improve its coordination and efficiency.
About the vaccination programme, the IMF will discuss the spending related to vaccination drives and the use of donor funds as it sees immunisation as key to turning around from the pandemic.
Since the mass immunisation began in February this year, the government has administered eight crore doses and has targeted to raise it to 12 crore doses by January.
The government has received $940 million from the Asian Development Bank and $500 million from the World Bank to implement the vaccination programme. Another $500 million may come from the Asian Infrastructure Investment Bank and $300 million from Japan.
The government has allocated Tk 10,000 crore in the budget to inoculate the population. So far, about Tk 12,600 crore has been spent on purchasing vaccines.
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