IMF worried about rising inflation, subsidy costs

---

FE Report The double digit inflation in Bangladesh will hurt the poor and erode their purchasing power and the external competitiveness of its economy, according to the International Monetary Fund (IMF). Outlining a number of risks and opportunities in the country's economy in coming months, a visiting senior IMF official put forward a four-point recipe for the Bangladesh economy so that it can become a partner of the global engine of growth. "Non-food inflation is a real concern for Bangladesh. Double digit inflation could hurt the poor badly," David Cowen, Mission Chief for Bangladesh, Asia and Pacific Department, IMF, told a luncheon meeting of American Chamber of Commerce in Bangladesh (AmCham). Held at a local hotel on Tuesday, Cowen delivered his speech on 'Macro-Economic Outlook for Bangladesh'. The IMF Mission Chief said inflation has accelerated in the recent period, driven mainly by food prices. The non-food inflation has also moved upward, given second-round of effects of, and the outcome of, pro-cyclical policies, he added. An eight-member Article-4 mission of IMF, led by David Cowen, arrived in Dhaka on September 4 on a two-week visit to review the country's latest macro-economic fundamentals and the balance of payment (BoP) situation. In his speech at the AmCham, the IMF official said the impact of inflation on both global and regional economies might adversely affect Bangladesh's development outlook and impact its economic performance. The excessive loose macro-economic policies as well as weak policy anchors can prove destabilizing, he added. Furthermore, the chief of the visiting IMF Mission said weaker-than expected growth in the advanced economies could weigh on export of ready made garments (RMG) and remittance inflows. Cowen said rising subsidy costs threaten to squeeze the fiscal space needed for social and development spending in Bangladesh. "As a result, domestic financing pressures on the government budget could intensify," Cowen told the meeting. While noting that tax revenues exceeded 10 per cent of gross domestic product (GDP) in fiscal year (FY) 11 -- "a major milestone for Bangladesh" -- he observed that spending of funds under the annual development programme (ADP), though improving, has "remained below target". "The trade deficit is widening, as surging imports outpaced exports in FY11, driven by high global commodity prices, rising oil demand and rapid credit expansion," he added. Describing the external pressure on the Bangladesh economy, Cowen said the country's overall BoP was in a deficit for the first time in a decade, leading to losses of foreign exchange reserve, "notwithstanding positive valuation efforts" in FY11. Slower remittance growth and lower aid inflows, he noted, added further pressure on the country's balance-of-payments (BoP) situation. The Bangladesh Taka "has come under pressure, with a moderate depreciation vis-à-vis the US dollar allowed to facilitate external adjustment," he added. He said by resolving infrastructure bottlenecks, improving business environment, attracting foreign direct investment (FDI) through easing foreign exchange regulations, expanding the export base and accelerating regional integration, Bangladesh could become a potential partner of the global engine of growth. "The global engine of growth will be in Asia for the next few years, with Bangladesh being situated at the cross-roads of the world's most dynamic region," Cowen said. According to the latest data, the rate of annual average inflation went up by 0.31 percentage point to 9.11 per cent in July this fiscal from 8.80 per cent of the previous month while the point-to-point inflation rate rose to 10.96 per cent from 10.17 per cent during the same period. The food price inflation rose to 13.40 per cent in July last from 12.51 per cent of the previous month while that of non-food items reached 6.46 per cent from 5.73 per cent on a point-to-point basis, according to the Bangladesh Bureau of Statistics (BBS) data. The country's BoP showed a deficit of $635 million in FY 2010-11 against the surplus of $2.87 billion of the previous fiscal, according to the Bangladesh Bank (BB). The country's overall trade deficit widened by more than 42 per cent to $7.33 billion in the last fiscal as the import bill rose sharply due to the price-hike of commodities in the global market. In FY11, export earnings stood at $23.008 billion against the import payments of $30.336 billion, the BB data showed. Trade deficit was $5.155 billion in the previous FY 2010. Responding to a question on the situation in the capital market, Cowen said the IMF wants to see the exposure of banks to the capital market at some manageable limit. He said concerted efforts are needed to increase power generation, improve the efficiency of operations in transport and port sectors so that the flow of FDI to the country is increased. He said the fuel prices of Bangladesh are less than those of India, posing a threat to widening the budget deficit. Describing the opportunities for the Bangladesh economy in the future, Cowen said further gains of its RMG exports to the global market, a stronger than anticipated uptick in manpower exports, and additional price relief could provide a cushion to the growth, current account and inflation outlook. Furthermore, accelerated tax, public financial management, and financial sector reforms could boost private sector vibrancy and put Bangladesh on a higher growth trajectory. AmCham President Aftab-ul-Islam and AmCham Executive Director A. Gafur spoke on the occasion.