IMF pulls back from signing PSI agreement with govt

---

FE Report
Buckling under pressure from the business and civil society groups, the International Monetary Fund (IMF) has pulled back from pressing the caretaker authority to seal the much-debated Policy Support Instrument (PSI) pact.
The global policy lender has, however, said it would weigh the option of putting in place yet another anti-poverty programme, PRGF, to support the government's reform efforts.
"It's up to the government of Bangladesh to decide how it wants the IMF to help with reform efforts," Thomas Rumbaugh, an adviser for the Asia Pacific Department at the IMF, said Tuesday in a prepared speech at a press conference.
Speaking at the press conference in the city, Rumbaugh noted the IMF team and the government side have agreed that the PSI will not be a suitable option for the country at this moment.
When his attention was drawn to the public interest litigation regarding the controversial PSI deal, the IMF official said that the government would look into its legal aspects.
"Currently, there exists no suitable environment for sealing the PSI agreement. The law will take its own course," he quipped.
The High Court Monday directed the government to explain in two weeks why it should not be stopped from pursuing the PSI deal with the Brettonwoods institution.
Asked about the conditions of the PSI that drew widespread criticism from the business and civil society groups, Rumbaugh said they were mostly "ill-informed," and branded them as "rebel-rousers."
He said his agency stands ready to support the government's efforts through an on-going technical assistance programme that aims to build capacity in the area of macroeconomic management.
"This can be complemented either through a new PRGF (Poverty Reduction and Growth Facility) arrangement or through consultations and policy dialogue during regular visits," the IMF executive, who led a two-week exploratory mission, told newsmen.
Referring to the sluggish economic activity in recent months, the IMF said this is associated, in part, with uncertainty related to the government's concerted anti-corruption drive, a drive that should "lay the foundation for a fairer and more transparent business climate and stronger growth in the future."
"The government's ongoing efforts to reassure the business community that the anti-corruption drive will be properly targeted will hopefully help restore confidence," the IMF executive said.
However, in view of the already disrupted construction activity, the recent slowdown in apparel export growth, dampened investment, and the possible adverse impact of the floods, the GDP growth for fiscal year 2008 is likely to be lower than that of last year unless there is "a sharp rebound" in the private sector activity.
The IMF took note of the recent inflationary build-up, saying the rate of inflation rose to over 10 per cent year-on-year in July.
"This is partly attributable to increases in international food and commodity prices, and partly due to delayed adjustments in monetary policy over the past year," the IMF executive said while explaining the reasons behind the rising inflation.
But Rumbaugh attributed the 15 per cent drop in the private sector credit growth, as of June, to the uncertainty and reduced confidence in the business community, not to monetary tightening.
Buttressing his argument, the IMF official pointed out that commercial banks currently had substantial liquidity, as evidenced by a historically low loan-to-deposit ratio, and this posed risks for future inflation.
Thus, the IMF executive suggested that Bangladesh Bank should continue to absorb excess liquidity through several tools to anchor inflationary expectations and avoid a credit boom when confidence returns.
At the same time, he noted that as the financial sector deepened, market forces could be allowed to play a bigger role in determining interest rates and exchange rates.
The government has confirmed that the overall deficit target and domestic borrowing limit for the current fiscal will be met even in the face of unanticipated flood-related expenditures, facilitated by additional donor financing, he said, referring to his meetings with finance and revenue officials.
He, however, voiced concern over the country's revenue performance, saying the preliminary data for the first two months of the current fiscal are lower than what is required to meet the annual target.
To ensure that the revenue target can be achieved, it will be important to implement all revenue measures already in the FY08 budget, including broadening the tax base by expanding taxpayer registration, strengthening tax policy formulation, streamlining and simplifying domestic tax legislation, and vigorously pursuing tax administration reforms, he suggested.
"Rapid progress in these areas will ensure that the targeted increase in tax revenue of 0.4 per cent of GDP this year is attained and it will lay the foundation for continued improvements in revenue over the coming years" he pointed out.
Rumbaugh noted, continued losses in the largest state-owned enterprises are "a budgetary burden" that largely benefits higher income groups, as has been shown through several studies.
The losses of state-run enterprises generate quasi-fiscal costs of 1.0 to 2.0 per cent of GDP per year, he estimated.
In this connection, the IMF official said there is no other option but to address the energy price issue through further adjustment of administered prices.
He suggested that the energy price adjustment should be accompanied by targeted assistance to low income groups and other vulnerable segments of the population.
Further reform of the financial sector will be important for the country to achieve its full growth potential, Rumbaugh said, adding that the weak balance sheets of the nationalised commercial banks (NCBs) had contributed to the inefficiency of the banking system and to high bank borrowing costs.
With the recent move to corporatise the NCBs, Rumbaugh said there is "a good opportunity" for better oversight and governance of these banks which will pave their divestment.
The IMF official lauded the introduction of an auction calendar and a primary dealer system, saying the steps would help develop an active secondary market for government securities. "This will help establish benchmark yields and promote the development of a corporate bond market."
"We support Bangladesh Bank's efforts in this area and encourage it to further facilitate the development of these markets by allowing greater flexibility of interest rates across all maturities in the primary auctions and by further developing the new primary dealer system for government securities," the official noted.
Country Representative of IMF Jonathon C Donne was also present at the press briefing.
A team led by Thomas Rumbaugh, Adviser in the Asia and Pacific Department of the IMF, visited Bangladesh during September 5-17 to assess the recent economic developments and hold discussions with the authorities on possible future support for the government's reform efforts.
The mission met with Chief Adviser Fakhruddin Ahmed, Finance Adviser Mirza Azizul Islam, Finance Secretary Mohammad Tareque, Bangladesh Bank Governor Salehuddin Ahmed, and other senior government officials.