Reprioritise spending, bring financial reforms: IMF suggests better use of public money

The government should reprioritise spending, take steps to reduce corruption and initiate financial sector reforms for better use of public money with a view to overcoming challenges brought on by the pandemic, suggests the International Monetary Fund (IMF).

Containing the pandemic and intensifying efforts to reprioritise spending will be crucial, it said.

"The government should step up efforts to support the health system and re-enact containment measures, while ensuring that export and import channels operate safely, as witnessed during the 2021 nationwide lockdown," said the multilateral agency.

The IMF made these observations in a report submitted to the government after an IMF team visited Bangladesh from December 5 to December 15 last year.

According to the IMF, near-term policy measures should make room for health and social spending while enhancing fiscal transparency and governance.

Managing risks amid large-scale uncertainties will require continued support for the economy, close monitoring of the financial sector and gradual rebuilding of buffers for policy manoeuvres as the recovery gets entrenched, it said.

The IMF cautioned that under such an adverse scenario, public finances would be impaired by lower revenue, higher health, social and energy subsidy spending, and contingent liability materialising from explicit and implicit state guarantees provided to state-owned enterprises.

The crisis lender highlighted the importance of strengthening governance to boost investment and said Bangladesh stands to gain from strengthening economic governance and improving the framework to limit vulnerability to corruption.

"Further progress in digitalising the public sector would help promote transparency and reduce corruption."

According to Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, strong economic governance was mandatory for every country for the attainment of economic prosperity.

Agencies such as the IMF always stress on ensuring good governance since there are severe impediments to guaranteeing good governance in countries such as Bangladesh, he said.

The IMF also recommends that the asset declaration process of public servants be strengthened. "Currently, there is no standard method to utilise and update the declaration to identify and mitigate risks," it said.

The IMF said an audit of Covid-19 related health expenditures has begun, with the audit authorities availing information from the Ministry of Finance. During the initial onslaught of the pandemic, the Washington-based multilateral lender provided over $700 million to tackle the impacts of the pandemic on the country's economy.

An audit into the spending of the IMF money has been initiated as it was one of the provisions of the financing, an official of the finance ministry said.

The lender suggests that the governance and legal structure of Bangladesh Bank needs to be updated to strengthen the autonomy to safeguard resources.

The IMF recommends that the government phase out interest caps on lending and borrowing to strengthen market competitiveness and gradually shift away from the financial policy adopted for the pandemic to lessen the build-up of financial sector vulnerabilities.

The IMF said despite strong economic growth, the banking sector was already weak before the pandemic and an orderly exit from Covid-19 financial policies remains important.

Structural weaknesses in corporate governance alongside in regulatory, supervisory and legal frameworks have contributed to a growing non-performing loans (NPLs) ratio over the years, especially in state-owned commercial banks, said the report.

Ensuring that classification and provisioning requirements are in line with Basel standards and conducting an asset quality review of state-owned commercial banks are important first steps towards reducing NPLs.

With the economy rebounding, the BB should closely monitor demand pressures on inflation and stand ready to normalise, said the IMF.

Zaid Bakht, chairman of state-run Agrani Bank and a noted economist, said international agencies always talked about market-based policies. They think that any kind of intervention distorts the market which is not good for the economy, he said.

"But in developing countries, it is often necessary to take some steps in the targeted policy. In our country, the interest rate on loans was much higher than in other countries. The government had to intervene to bring it under control."

Many say that low interest rates will prompt the powerful to get more loans. But powerful people can also take loans when rates are high, he said.

He said the banking sector has not faced any adverse impact in the last two years since the interest rates were fixed. "Rather profits and deposits have increased."

Bakht said the recovery in 2021 was much faster than in 2020.

"I am strongly optimistic that 2022 will be better. So, the loan classification will be able to return to the pre-pandemic state."

A BB official said the central bank has already taken steps to ensure discipline in the financial sector and more measures would be taken.

An IMF mission will soon come to Bangladesh to provide technical assistance and some measures will be taken in consultation with them, according to another official of the finance ministry.