Go for less costly alternatives to savings tools: IMF

The government's increasing reliance on high-cost savings instruments impedes modernisation of the financial sector and distorts the market, International Monetary Fund said yesterday.

“The authorities could consider whether there are better targeted and less costly alternatives that achieve the government's social policy goals without distorting financial markets,” said Brian Aitken, head of an IMF mission, at a press conference at Bangladesh Bank headquarters.

Aitken and his team visited Dhaka from February 26 to March 9 to assess the health of the Bangladesh economy and financial sector as part of IMF's annual review under an arrangement termed Article IV Consultation.

He suggested Bangladesh maintain a healthy foreign exchange reserve to ward off any external shock and ensure resilience of the economy. The IMF mission shared the observation as a large number of savers prefer investing in savings instruments that yield higher interest than bank deposits.

The government currently offers 11.28 percent interest on five-year tenure savings instruments to finance part of the annual budget. The rate is 5 to 6 percentage points higher than those offered by commercial banks on term deposits.

The government's borrowing from savings certificates stood at Tk 28,894 crore in July-January of the current fiscal year, against its borrowing target of Tk 19,610 crore, according to Bangladesh Bank.

Aitken said Bangladesh's investment needs are large and will require intermediation of the country's underutilised pool of savings.

As commercial banks' ability to carry out this function will remain limited, policies that develop the country's capital markets for financing long-term private investment would greatly improve future growth prospects, he added.

Talking about savings certificates, he said the mission identified some distortions in the financial sector. Removal of this distortion is the precondition for further development of the capital market, he added.

“An important impediment to modernising the financial sector arises from the increasing reliance on high-cost national savings certificates as a financing vehicle for the government budget, which prevents the development of a deep and liquid market for government securities,” said Aitken.

He said the use of savings certificates to finance budget impedes the development of a bond market.

Aitken also talked about large non-performing loans in the banking sector. “The first thing to do is to make sure that state-owned banks are not initiating new loans that will be non-performing down the road.”

The IMF mission, referring to Bangladesh's low tax-GDP ratio in the region, once again recommended modernisation of the tax system so that the government can carry out public investment and social spending in line with its growth ambitions.

Aitken said launching the new VAT law in July 2017 as planned will be central to raising revenue, and will have other significant benefits as well.

“In particular, it will make tax administration more transparent, it will reduce taxpayers' compliance costs, and serve as a key building block for a modern tax system,” said the IMF.

Aitken said the Bangladesh economy will continue to rely on exports for growth and remains particularly exposed to the changing external environment.

“It is, therefore, essential that the country's foreign exchange buffers, which have been built over the last several years, continue to be maintained at levels adequate to ensure economic resilience.”

The IMF's recommendation came at a time when both export earnings and remittance are slowing down. The government also plans to form a sovereign wealth fund with the Bangladesh Bank's foreign currency reserves. Primarily the fund will start with $2 billion and it will be raised in phases to $10 billion in five years, Cabinet Secretary M Shafiul Alam told reporters last month.

Aitken said steady monetary policy management and fiscal discipline have delivered the macroeconomic stability that allowed the economy to benefit from favourable external demand, high remittance, and low commodity prices.

“The result has been strong output growth, falling inflation, moderate public debt, and rebuilding of external resilience. 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 Bangladesh Bank's target,” he said.

But maintaining the economy's past growth performance will become increasingly challenging over the medium term. And it will require upgrading the macroeconomic policy-making practices and institutions to support the country's ambition to reach middle-income status, the IMF said.