Reducing banking sector woes should get priority: IMF

The International Monetary Fund Logo. Photo: Reuters file

Resolutely addressing the high level of non-performing loans in the banking sector in Bangladesh is essential to address financial stability risks and associated fiscal risks, said the International Monetary Fund (IMF) today.

“Reducing elevated banking sector vulnerabilities and increasing tax revenues should receive priority attention,” it said in a statement.

A comprehensive, credible, and time-bound action plan could notably focus on strengthening banking sector supervision and avoiding regulatory forbearance, a close assessment of banking sector assets, tighter criteria and limited use of rescheduling or restructuring of loans.

The action plan should also focus on improving corporate governance, reforming the legal system to strengthen creditor rights, redefining the role and mandate of state-owned commercial banks, and developing bank crisis management and resolution mechanisms, according to the IMF.

An IMF staff team, led by Daisaku Kihara, visited Dhaka from June 16 to June 27 to hold discussions 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.

In the statement, Kihara said economic growth in Bangladesh continues to be strong.

Inflation increased slightly, mainly due to higher food prices. Export growth has picked up recently, based on solid performance of the ready-made garments sector. Remittances 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 FY2019-20, with growth projected at above mid-7 per cent and inflation close to the central bank’s target.”

Kihara said monetary policy should 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. Fiscal policy should keep the public debt ratio stable by strengthening revenue mobilisation and containing spending pressures from higher subsidies, accompanied by efforts to improve public investment management.”

According to the IMF, important challenges remain to realise the authorities’ aspiration to reach upper middle-income status and preserve the resilience and sustainability of growth.

Reform priorities include: reducing elevated banking sector vulnerabilities; creating fiscal space to address social needs; infrastructure requirements; climate change vulnerabilities; and diversifying the economy by strengthening the business environment through improved governance.

The IMF said implementation of the new VAT Law in FY 2020 is a step towards modernisation of the tax regime, but its revenue impact is uncertain because of multiple rates and implementation challenges.

“Efforts to increase tax revenues should continue. Tax policy reforms should focus on tax base broadening and ensuring tax compliance.”

The organisational structure of the National Board of Revenue needs to be modernised to improve its coordination and efficiency, it said.

During the visit, the team met with the Bangladesh Bank governor, the finance secretary, the chairman of the NBR, as well as other senior officials, members of parliament, representatives of the business and banking sectors, labour unions, think tanks, and development partners.