On a prolonged review of Bangladesh's economic fundamentals, the International Monetary Fund paints a gloomy picture and suggests large-scale urgent reforms for a turnaround with its extended fund support.
Bangladesh will receive another much-sought-after dollop of US$645 million from the IMF's ongoing credit programme as the exhaustive review of the country's economic and financial situation ended with a staff-level agreement on the lending.
The government-IMF consensus on the fourth tranche of the $4.7-billion lending package -- bound with strings that commit Bangladesh to carrying out comprehensive reforms -- was reached Wednesday. The funds will be disbursed following requisite approvals.
The Bangladeshi authorities requested an additional US$750 million worth of financial assistance to maintain macroeconomic stability and strengthen the country's resilience to external shocks, the lender said in a release.
In its latest forecast based on firsthand assessment by its mission, the IMF pared down Bangladesh's real gross domestic product (GDP) growth in the current fiscal year of 2024-25 to as low as 3.8 percent, weighed down by various adversities the economy faced in the past several months, including the August mass uprising.
"Real GDP growth is projected to slow to 3.8 percent in fiscal year (FY) 2025 due to output losses caused by the public uprising, floods, and tighter policies but is expected to rebound to 6.7 percent in FY2026 as policies relax," the Washington-based financier said in the new release.
It predicts inflation is likely to remain around 11 per cent, annual average year on year, in FY2025 before cooling to 5.0 percent in FY2026, supported by tighter policies and easing supply pressures.
"However, the outlook remains highly uncertain, with risks skewed to the downside," the IMF says at the end of an over two-week-long reappraisal mission in Dhaka.
The two sides also forged a staff-level agreement on the policies needed to complete the third review of the authorities' programme supported by the IMF's Extended Credit Facility, Extended Fund Facility, and Resilience and Sustainability Facility.
The accord is subject to approval by the IMF Executive Board, which is expected in the coming weeks.
"The Bangladesh economy continues to grapple with persistent challenges and is facing emerging external financing needs," it says in agreeing to carry on bankrolling development recipe.
"To address these issues, the authorities requested an augmentation of IMF financial assistance (SDR 567.2 million, approximately US$750 million) to maintain macroeconomic stability and strengthen the country's resilience to external shocks," the press release mentioned.
According to the release, the authorities have committed to sustaining revenue-based fiscal consolidation to address the emerging external-financing gap, tightening monetary policy to control inflation, and to fully implement exchange-rate reforms to ensure greater flexibility.
Also, they have pledged to establish a healthy and competitive financial sector and are advancing their climate agenda to promote sustainable, inclusive, and green growth, adds the release.
Chris Papageorgiou, IMF's Mission Chief for Bangladesh, led the staff team during December 3-18 to discuss economic and financial policies in the context of the third review of the IMF-supported programme
"The timely formation of an interim government has fostered a gradual return to economic normalcy," Mr. Papageorgiou says in the statement.
However, economic activity has slowed significantly, and inflation remains elevated. Capital outflows, particularly from the banking sector, have pressured foreign-exchange reserves. Additionally, tax revenues have declined, while spending pressures have increased. These challenges are further exacerbated by stress in parts of the financial sector, the Fund says.
It notes that amid significant macroeconomic challenges, the authorities requested an augmentation of $750 million in IMF financial support to Bangladesh under the ECF and EFF arrangements.
This increase would bring the total financial assistance under the ECF and EFF arrangements to nearly $4.0 billion, alongside concurrent RSF arrangements of $1.3 billion.
After completion of the third review, $645 million will be made available, comprising $426 million under the ECF and EFF and $219 million under the RSF.
"To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial," the IMF suggests as remedies for a turnaround.
It suggests that fiscal consolidation should prioritise the swift implementation of additional revenue measures like removing tax exemptions, while restraining non-essential spending.
"Coupled with monetary tightening, greater exchange-rate flexibility and safeguarding foreign-exchange reserve buffers will strengthen the economy's resilience to external shocks," it notes.
The lender says Bangladesh's low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably increased revenue, focusing on rationalising exemptions, improving compliance, and separating tax policy from administration.
A comprehensive strategy is also needed to curb subsidy spending and address arrears in the electricity and fertiliser sectors.
The IMF also underscores the need for addressing vulnerabilities in the banking sector. "Immediate priorities include accurately assessing non-performing loans, ensuring the effective implementation of existing regulations, and formulating a roadmap for financial sector restructuring."
It has also identified necessary key actions which involve conducting an asset-quality review and adopting a recovery and resolution framework aligned with global standards.
"Simultaneously, the authorities should advance risk-based supervision, while legal reforms are needed to strengthen corporate governance and regulatory frameworks. Institutional reforms to enhance Bangladesh Bank's independence and governance will be critical for the successful implementation of financial-sector reforms."
Moreover, says the IMF, "Enhancing governance, along with greater transparency, is critical to improving the investment climate, attracting foreign direct investment, and diversifying exports beyond the ready-made garment sector."
And building resilience to climate change is vital to reduce macroeconomic and fiscal vulnerabilities, it says, adding that the government should focus on implementing climate-sensitive fiscal reforms and investing in sustainable, resilient infrastructure.
© 2024 - All Rights with The Financial Express
