Accelerating policy adjustments is imperative to ensure the sustainability of Bangladesh's external balance, says the visiting Deputy Managing Director of the International Monetary Fund while detailing an IMF aid package for the country.
The top IMF executive, Antoinette Monsio Sayeh, noted that just like many countries across the globe, Bangladesh is facing macroeconomic challenges from external shocks, like supply disruptions and price spikes coupled with pressures on reserves and exchange rates.
Against the backdrop of rising global commodity prices, supply disruptions and slowdown in external demand, Bangladesh's current-account deficit has widened sharply, accompanied by depreciation of the local currency, taka, she said in an interview with the FE.
Ms Sayeh feels that pressures on the country's balance of payments and thus foreign reserves are expected to remain for some more time, given high dependence on imports, as well as external factors like economic slowdown in Bangladesh's major trading partners, tighter global financial conditions, and heightened global uncertainties.
Mentioning that the authorities have tightened monetary stance and allowed for a more flexible exchange rate to buffer external shocks, she said: "Continued exchange rate flexibility will be important for safeguarding foreign-exchange reserves."
Focusing on an IMF aid package on a proposed loan worth US$4.5 billion, the Fund DMD said, "In the longer term, to achieve a reduction in external vulnerabilities, Bangladesh needs to complement remittances and readymade garment-export receipts. Hence, diversifying exports, attracting foreign direct investment and enhancing competitiveness will all be important to bolster reserves in the medium term."
These, she argues, will help increase export-competitiveness and expand trade by reducing the relatively high non-tariff barriers and improving trade-related infrastructure, especially energy and transportation.
Also, they will help increase FDI flows by improving investment climate and reviewing the regulatory framework. Moreover, scopes will be created to boost productivity by enhancing human capital and the access to technology.
Regarding present economic condition she said Bangladesh's economy recovered fast and strongly from the COVID-19 pandemic as the authorities' took "quick and decisive policy actions".
However, she hastened to add, Russia's war in Ukraine interrupted this recovery, leading to a sharp widening of the current-account deficit, a rapid decline of foreign-exchange reserves, rising inflation, and slowing growth.
"To successfully graduate from Least Developed Country status and achieve middle-income status by 2031, Bangladesh also needs to address longstanding structural issues," said Ms Sayeh.
The dos include mobilising greater tax collections for growth-enhancing investments and greater protection of the vulnerable, attracting private investment and enhancing productivity.
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 seen critical.
On IMF's plans to help Bangladesh deal with the current challenges, she said Bangladesh's request for an IMF-supported programme is part of the authorities' comprehensive set of measures to cushion its economy from the disruptions caused by the ongoing Russian war in Ukraine.
The measures mentioned are targeted towards attaining major goals. "The goals are clear: in the near term, to preserve macroeconomic stability, and in the long-term, to address structural issues to support strong and inclusive growth in line with the authorities' 8th Five-Year Plan," Ms Sayeh noted.
She said in addition to providing financial support to that end, the IMF would also work with the authorities to build capacity in key areas of public administration, such as revenue administration, public financial management, and financial supervision and regulation.
The Liberian economist expects that the Fund's executive board will consider approving the US$4.5-billion-loan programme with Bangladesh on January 30.
On reform requirements tagged to the loan, she said the authorities and IMF staff worked closely on a programme that is most relevant to Bangladesh's current economic and social dynamics.
"It aims to preserve macroeconomic stability, lay the foundations for further growth, while preventing disruptive adjustments to protect the vulnerable. In fact, the programme focuses on social spending, safety net programs and protecting the poor in several ways," she said, and showed three salient features of the IMF recipe.
First, by raising progressive taxes, it aims to increase financing for spending on healthcare, education and clean water, as well as increase access to electricity, transportation and other infrastructure.
Second, keeping in mind that social spending is a core component of the social contract, the programme also aims to protect and increase social spending by including social-spending floors.
Third, expanding well-targeted social spending under the programme will help improve access to basic services and provide economic opportunities for disadvantaged groups.
syful-islam@outlook.com