A senior official of the International Monetary Fund (IMF) emphasised the need for continuing reforms to make Bangladesh's economy more resilient and resume progress towards achieving the goal of upper- middle-income status.
He said the government should stand ready to continue calibrated tightening to keep inflationary pressures in check, while carefully safeguarding economic growth amid already-curtailed domestic demand.
IMF's Director of the Asia-Pacific Department Krishna Srinivasan made the suggestions in an exclusive interview with the Financial Express during his visit to Bangladesh last week.
He also underscored that the near-term policy priorities of Bangladesh must focus on containing inflation, softening the impact of the economic disruptions on the vulnerable, and building external resilience through continued exchange rate flexibility.
Mr Srinivasan said that in the past decade, Bangladesh achieved impressive economic growth and social development, making steady progress in reducing poverty and across many indicators of the Sustainable Development Goals.
"To successfully graduate from Least Developed Country status by 2026, it is important to build on these past successes and address structural issues to accelerate growth, attract private investment, enhance productivity, and build climate resilience," he said.
He further said that modernising monetary, fiscal and financial frameworks, strengthening governance, and improving the investment climate will be important to attract financing as Bangladesh gradually loses access to concessional financing.
Similarly, reform to increase FDI inflows is crucial for taking advantage of global value chains, raising productivity, and acquiring new knowledge and technology, he noted.
"Given Bangladesh's unique vulnerabilities to the threats of climate change, managing the fiscal, monetary and financial stability risks from climate change - and building economic resilience to such shocks going forward - are also critical," added Mr Srinivasan.
On the current economic conditions of the country, he said that Russia's war in Ukraine has interrupted Bangladesh's robust recovery from the Covid-19 pandemic and created new challenges. The authorities have taken a comprehensive set of measures to address these challenges.
Nevertheless, sustained external pressure, stringent demand control measures, and the loss in purchasing power from high inflation continue to weigh on the near-term economic outlook. Growth is projected to gradually rebound to 6.5 per cent in FY '24, said Mr Srinivasan.
"Despite near-term challenges, Bangladesh's favourable demographics present a significant opportunity. To harness this potential, the country must continue reforms to make its economy more resilient and resume progress towards the authorities' ambition of reaching upper middle-income status," he said.
Regarding mounting inflationary pressure on low and middle-income groups of people, he said, like many countries around the world, the unprecedented rise in global food, energy, and other commodity prices pushed inflation in Bangladesh to a decade-high of 9.5 per cent year-on-year in August 2022.
"Rising domestic food and fuel prices and the pass-through of large taka depreciation have kept inflation elevated," he said.
The Bangladesh Bank (BB) has tightened the monetary policy stance by increasing the benchmark repo rate by 150 basis points cumulatively since May 2022 to 6.25 per cent and signalled further tightening bias for FY '24. In addition, the BB continued mopping up liquidity from the banking system through unsterilised foreign exchange interventions and relaxed lending interest rate caps on selected products, including consumer loans.
He said the monetary policy stance should be guided by the inflation outlook. The authorities should stand ready to continue calibrated tightening to keep inflationary pressures in check, while carefully safeguarding economic growth amid already curtailed domestic demand.
Looking ahead, modernising the monetary policy framework and moving toward an interest-rate-based monetary system should also contribute to preserving price stability, he said.
On carrying out reforms that the IMF suggested lately, Mr Srinivasan said Bangladesh took a comprehensive set of measures to deal with the economic disruptions caused by Russia's war in Ukraine. Bangladesh's request for an IMF-supported programme is part of this comprehensive set of measures to cushion its economy.
In the context of the programme, near-term policy priorities must focus on containing inflation, softening the impact of these economic disruptions on the vulnerable, and building external resilience through continued exchange rate flexibility, he said.
"But the current crisis has also highlighted the need to expedite long-standing structural reforms to accelerate growth, attract private investment, enhance productivity, and build climate resilience," he noted.
Foremost in this effort is the challenge of raising more tax revenues, which is critical to increasing spending in critical areas, including education, health, and public investments to create a conducive environment for growth.
"An enhanced revenue base is also needed to support the poor and vulnerable. This will require modernisation of the tax system and improvements in revenue collection," said Mr Srinivasan.
Bangladesh also needs a more efficient financial sector to improve credit allocation to the most productive economic sectors. This will require a reduction of the government's role in the allocation of credit, as well as enhancement in the effectiveness of banking regulation and supervision, and improvements in corporate governance and legal systems, he noted.
Regarding the constant fall of foreign currency reserves and the release of the second tranche of the $4.7 billion loan, he said the first review of the programme will take place in the Fall of 2023 when the IMF staff team will assess the programme's quantitative targets and progress of reform implementation.
"The authorities are taking steps to meet programme objectives, including rationalising subsidies, cost recovery of energy prices, moving toward a unified market-determined exchange rate, as well as strengthening the monetary policy framework," he said, adding that further increasing exchange rate flexibility and strengthening the forex reserve management framework will enhance external resilience.
On Bangladesh's vulnerability to climate change impacts and the loan from the newly created Resilience and Sustainability Facility (RSF), he said Bangladesh is among the most vulnerable countries to climate change and natural disasters.
The authorities recognise the need to address longer-term climate change, which could threaten macroeconomic stability, and have made significant progress toward addressing them, he said.
The recently approved RSF arrangement will help support the authorities' efforts to build climate resilience. "The RSF arrangement will expand the fiscal space to help finance priorities identified in the Bangladesh Delta Plan (BDP2100) and the National Adaptation Plan (NAP)."
He said the comprehensive reform package under the RSF arrangement aims to strengthen institutions to enable climate investment, improve spending efficiency, and enhance the financial sector's resilience to climate-related risks.
"Given Bangladesh's large climate financing needs, the RSF arrangement is expected to help catalyse additional climate financing from both public and private sources," he noted.
syful-islam@outlook.com