Cut links to stock risks: IMF

The International Monetary Fund (IMF) wants Bangladesh Bank (BB) to seriously address concerns with the commercial banks' over exposure to the stockmarket.
“We hope Bangladesh Bank will work diligently to ensure that banks and their subsidiaries take necessary action to mitigate the risks from stock market volatility,” said David Cowen, deputy division chief of IMF for Asia-Pacific and team leader of the visiting team.
An IMF mission visited Bangladesh on December 6-15 to discuss the overall macroeconomic situation under Article IV consultation and possible lending arrangements for $1 billion.
The IMF agreed to lend Bangladesh $1 billion under its Extended Credit Facility (ECF) programme, provided its board approves in February.
The loan will be available on a concession (at less than 1 percent interest rate), but Bangladesh has to give IMF some formal commitments, such as fiscal reforms, monetary operations and moves to strengthen the financial sector.
The IMF team looks concerned with stockmarket volatility and the banks' over-involvement in it. Cowen said the banking sector, as a whole, needs risk-based supervision to ensure new capital adequacy requirements.
He said Bangladesh Bank (BB) as the regulator has issued a number of circulars, including setting the investment limit at 10 percent of a bank's liabilities, to reduce risk exposure of banks to the stockmarket.
“BB should closely monitor that all those regulations are being followed by the banks. If necessary, other action may be taken,” said the IMF team leader. The IMF also advised the central bank to continue work with the Securities and Exchange Commission in this regard.
On the cap imposed by BB on the bank lending rates, Cowen said, “We want removal of most of the caps and the banks should be allowed greater flexibility in setting the rates."
On Bangladesh's macroeconomic outlook, the IMF said the country will grow better in the current fiscal year because of improvements in garment exports and investment demand.
“Growth is expected to be slightly above 6 percent this fiscal year and inflation at an average of 7 percent on anticipated moderation of commodity price increases,” said Cowen in his written statement.
The IMF observed that the balance of payment (BOP) will be under pressure due to a significant increase in import payments for fuel, food and cotton. In addition, remittance is expected to fall on a year-on-year basis for the ongoing decline in migrant worker outflow, adding pressures on the BOP.
The budget deficit is also likely to increase by 0.75 percentage points of GDP to around 4 percent this year, it said.