The International Monetary Fund yesterday advised the government of Bangladesh to reduce the vulnerabilities in the banking sector with a view to ensuring sustainable economic growth.
The government should also create fiscal space to address social needs and infrastructure requirements and diversify the economy by strengthening the business environment and improving governance, the Washington-based multilateral lender said.
The IMF came up with the suggestions at a press conference at the Bangladesh Bank headquarters in Dhaka after a staff team of the institution, led by Daisaku Kihara, completed discussions with the government high-ups and stakeholders from June 16 to 27 on the 2019 Article IV Consultation with Bangladesh.
During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.
“The banking sector has continued to deteriorate in recent years despite strong growth. Resolutely addressing the high level of default loans is essential to address financial stability risks and associated fiscal risks,” Kihara said.
“Liquidity pressure in the banking sector is prevailing. And the recovery of default loans will help banks mitigate the problem.”
He said without having efficient channel of finance through banks, it is quite difficult to keep GDP growth sustainable as such funding is necessary to promote productive investment.
The IMF called for a comprehensive, credible, and time-bound action plan to strengthen supervision in the banking sector and avoid the regulatory forbearance.
Tighter criteria and limited use of rescheduling and restructuring of loans are also important to strengthen banks, it said. The authorities should give priority to improve corporate governance and reform the legal system to strengthen creditor rights, Kihara said.
Government borrowing from the banking sources has increased in recent period because of a fall in revenue collection. “Increasing the tax revenues should be focused on the priority basis,” Kihara said.
According to the mission chief, implementation of the new VAT law in the next fiscal year is a step towards modernisation of the tax regime, but its revenue impact is uncertain because of multiple rates and implementation challenges.
The VAT and Supplementary Duty Act 2012 was framed in 2011 at the prescription of the IMF to boost revenue collection in the country that has the lowest tax-GDP ratio in South Asia. The law had insisted on a uniform 15 percent VAT rate on all goods and services save for 15 items.
But the 15 percent single rate drew the ire of the business community and certain sections of the society, whose fervent opposition delayed the implementation of the law several times. Now, in a bid to appease them, the government has come up with multiple VAT rates of 5 percent, 7.5 percent, 10 percent and 15 percent.
The IMF continues to encourage the government to follow a single VAT rate, Kihara said.
A single rate is easier to implement and allows taxpayers to comply.
“Tax policy reforms should focus on tax base broadening and ensuring tax compliance,” the mission chief said.
According to the IMF, the organisational structure of the National Board of Revenue needs to be modernised to improve its coordination and efficiency.
On the expenditure side, a priority remains to improve public investment management through better project appraisal and selection and alignment of public investment priorities with national and sectoral plans. The IMF also lauded Bangladesh’s progress.
The country has succeeded in fostering a dynamic and fast-growing economy with significant poverty reduction, it said. “To preserve and build on that achievement, diversification into more complex products would spur integration into global value chains and make exports more robust to changes in global demand patterns,” Kihara said.
Economic growth in Bangladesh continues to be strong. Robust private consumption pushed real GDP growth close to 8 percent in the fiscal year of 2017-18, while inflation increased slightly, due mainly to higher food prices.
Export growth has picked up recently, based on solid performance of the readymade garments sector while remittance inflows have also strengthened. This has led to a narrowing of the current account deficit despite higher imports of capital goods.
“Macroeconomic performance is set to remain strong in the fiscal 2019-20, with growth projected at above 7.50 percent and inflation close to the central bank’s target,” Kihara said.
Improving the business environment and strengthening frameworks to limit vulnerability to corruption would also be fundamental to the realisation of development goals, he said.
Monetary policy should also be geared toward containing risks to the inflation outlook stemming from higher global oil prices, rapid economic growth, and elevated inflation expectations.
“Continuous efforts to control the issuance of national savings certificates should support deepening of the capital market and reduce budget interest payments,” the economist said.
During its visit, the team met with the central bank governor, the finance secretary, the chairman of the NBR, as well as members of parliament, representatives of the business and banking sectors, leaders of labour unions and think-tanks.