IMF gives top marks to BB for latest monetary policy

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Jonathan C Dunn

FE Report
The International Monetary Fund (IMF) disfavours the provision of any across-the-border fuel subsidy, saying such subsidies, if given, should only be allowed for selected target groups.
"Bangladesh can't really support any generalised subsidy to everybody for fuel products," the IMF Resident Representative Jonathan C. Dunn told reporters while answering to queries in his Dhaka office Sunday.
The IMF executive board has already suggested for operationalisation of an automatic pricing formula for fuel oil in Bangladesh to ensure more timely adjustments.
It also has recommended for adjustment of local natural gas prices in order to "encourage efficient gas usage and raise government revenue."
"It is our advice that the prices for fuel oil should be adjusted on the basis of global market," Jonathan said, adding that any generalised subsidy policy is very costly for the country that may eventually impair financial discipline.
The IMF official suggested to the government for taking alternative measures for poor people who might be adversely affected by price adjustment of fuel.
He questioned the practice of generalised subsidy on fuel oil saying that around 40 per cent consumers in the country did not require it.
Jonathan ruled out the allegation leveled against IMF for putting pressure on the government to increase prices of fuel oil.
"We have dialogues with the government on a continuous basis. You know the government is a sovereign entity," he added.
He further said the Bangladesh Bank (BB) has announced its latest monetary policy aiming to keep prices stable in the market after acknowledging the inflationary pressures in the economy.
"Each central bank's primary responsibility is to keep prices stable," the IMF official said, adding that the inflationary pressures on the Bangladesh economy are from both supply-side and demand-side factors.
Earlier, the IMF recommended further monetary tightening in the face of strong inflows and higher inflation, and with money and credit aggregates above targeted levels in Bangladesh.
"The recent pickup in inflation could become entrenched in the absence of corrective policies," the IMF executive directors say in a report, published in Washington on June 29. Inflation has picked up to 7.0 per cent reflecting increases in both food and non-food prices.
About the fourth monetary policy announced by the central bank Thursday last, Jonathan said, "We support the policy. It is appropriate right now for Bangladesh."
He, however, expressed surprise about the comments made by members of the Centre for Policy Dialogue (CPD) who cast their opinions that the BB's new monetary policy had been formulated in accordance with the IMF prescriptions. The discussion on the national economy, which is going on in Bangladesh, is part of a healthy debate, Jonathan added.
The BB Governor Salehuddin Ahmed also ruled out the CPD's comment, saying that the central bank itself prepared the monetary policy on the basis of their own considerations.
"The policy would not have any negative impact on the economy. It would not hamper production and we will remain alert so that the credit flow to the private sector is not affected," the BB governor told reporters.
The central bank chief also said the BB has formulated a 'good monetary policy' which the IMF has appreciated as well.
About the credit flow to private sector, the IMF official said that in the recent months although the credit flow to the private sector declined marginally, but is still very high on the basis of the estimates about the country's gross domestic product (GDP) and the rate of inflation.
"….growth rate of private sector credit that mirrors a part of the aggregate demand grew at 15.6 per cent which was lower than previous year's growth rate of 17.1 per cent," the BB said in its monetary policy.
However, the credit growth to the private sector declined by 2.48 percentage point in the July-April period of the fiscal 2006-07 because of the political uncertainty, inefficiency of utility services and cautious monetary policy of the central bank, bankers said.
The private sector credit growth fell to 11.72 per cent in the period from 14.20 per cent in the corresponding one of the previous fiscal, according to the central bank statistics.
The IMF official emphasised the need for ensuring the quality of credit to the private sector and reduction of the volume of non-performing loans through gearing up the recovery drive to improve the financial health of the country's banking system.