Prices hitting new highs prompt the International Monetary Fund (IMF) to predict that the price inflation in Bangladesh may far overshoot the estimation for this fiscal, and to suggest monetary-policy action.
Based on a reappraisal of the country's macroeconomic developments, the Fund forecasts that the headline consumer price index (CPI) inflation may rise to 5.9 per cent in the fiscal year (FY) 2021-22, largely driven by higher international commodity prices.
Thus, it says, keeping a close watch on the inflation-related developments is imperative to cool down the uptrend by taking fit measures.
"(The IMF) directors highlighted the need to closely monitor inflation developments and stand ready to normalise monetary policy," the IMF says in a statement issued Thursday after conclusion of Article IV Consultation with Bangladesh.
The average inflation rate in FY '21 was recorded at 5.56 per cent, up by 0.16 percentage points from the government-set target of 5.4 per cent.
People in Bangladesh are now experiencing severe inflationary pressure with most of the essential commodities going beyond the purchase capacity of poorer-and middle- income-group of people.
The prices of the essential items spike afresh ahead of the month of Ramadan, and after repeated raise in edible-oil rates during the last couple of months the millers are again trying to raise its price by creating artificial supply shortage on the market, analysts say.
Increased numbers of people are queuing, both from lower and middle-income groups, before the open-market-sale trucks of the Trading Corporation of Bangladesh (TCB) to get essential items at subsidised prices under limited government market intervention.
Economists differ with the rates of inflation being announced by the Bangladesh Bureau of Statistics and say the actual inflation is much higher.
The IMF board of directors further estimated that Bangladesh's economy could grow 6.6 per cent by the yearend, supported by a robust rebound in exports, continued implementation of the stimulus packages, and accommodative monetary and fiscal policies.
The directors suggest that structural policies should focus on diversifying exports, increasing foreign direct investment (FDI), enhancing productivity, investing in human capital and addressing corruption to lift growth potential in Bangladesh.
Praising Bangladesh's achievements the Washington-based development financier says the country has made substantial progress in its first 50 years of independence.
Since 2010, the per-capita real gross domestic product (GDP) growth, averaging 5.0 per cent annually, has resulted in a steady decline in poverty, with increasing access to education and healthcare, it notes.
The macroeconomic policies in recent years have been successful in keeping inflation stable, debt-to-GDP ratio low, and external buffers adequate, it adds.
"The authorities reacted quickly and decisively to address the economic fallout of the pandemic," the IMF says, adding that centring the crisis with macroeconomic stability, the authorities announced support packages worth Tk 1.9 trillion (or 6.0 per cent of GDP) with space from curtailing non-priority current spending and suspending low-priority capital projects.
Meanwhile, the fiscal deficit is projected to peak at 6.1 per cent of GDP in FY '22 as the authorities increase pandemic-related spending. The current-account deficit is projected to widen to 2.4 per cent of GDP in FY '22 as imports rebound and remittances moderate.
"The uncertainty around the outlook remains high and risks are tilted to the downside," it says on a note of caution.
The IMF directors recognise Bangladesh's "impressive" economic growth and social development, but underline the risks at the same time, including from the uncertain path of the pandemic, low vaccination rates, and vulnerabilities to climate change.
They also emphasise that continuing with sound macroeconomic policies, modernising policy frameworks, and addressing structural impediments will be key to successfully graduating from the least-developed-country status and realising the country's aspiration of reaching upper-middle-income stature.
The directors commend the authorities for exercising fiscal prudence and maintaining a low risk of debt distress, while noting that Bangladesh's capacity to repay the funds remains sound.
They underscore that modernising revenue administration and implementing tax- policy reforms would help raise revenues to sustainably increase development, social, and climate spending.
"Revenue measures should be accompanied by measures to rationalise spending and improve spending efficiency."
The IMF also suggests phasing out caps on interest rates to improve credit allocation. It encourages the authorities to continue modernising the monetary- policy framework and suggests gradually increasing exchange-rate flexibility.
Noting that reserves coverage is adequate, it also emphasises need to safeguard reserves and cautions against using them for non-monetary purposes.
The IMF board notes that the pandemic increased existing vulnerabilities in the banking sector, which could impair medium-term growth.
They also call for exiting the Covid-19 policies in a timely and orderly way, monitoring bank asset quality closely, and ensuring adequate capital buffers.
They also stress the need to strengthen banking regulation and supervision, improve corporate governance, and reform legal systems to stem the flow of high non-performing loans, particularly in the state-owned commercial banks.
The IMF directors urge the authorities to implement the recommendations of the 2021 safeguards assessment and to further strengthen the anti-money laundering/ combating the financing of terrorism framework.
Further developing capital markets and strengthening governance to attract private financing will also be necessary.
They also welcome the efforts to build resilience to climate change and natural disasters, including by allocating budgetary support for climate adaptation, and encourage the authorities to undertake reforms to help catalyse climate financing.
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