Inflation still top worry, says IMF country rep

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Mushir Ahmed
The Bangladesh economy has started to recover after a year of woes, but the authorities should check inflation as it might soar further amid a gradual increase in business activities, the IMF representative to Dhaka said Monday.
Jonathan Dunn said the country's exports are showing signs of a turnaround after massive fall in the first five months. Foreign exchange reserve is holding its ground despite huge increase in food import and private sector credit.
"Things are getting better. But the Bangladesh Bank has to keep a careful watch so that inflation does not jump further amid increasing private sector credit... business activities," Dunn said.
"Once business confidence returns, inflation may jump further."
"The authorities need to have policies in place so that inflation does not go higher. Already it's too high. Tackling it is the biggest challenge," he said.
Inflation clocked over 11 per cent year-on-year in January, after maintaining a steady growth since July last year, when it hit the double-digit mark for the first time since 1996.
Dunn said a rising inflation could eat into the country's business confidence, reversing some of the achievements it made over the years.
"Inflation is just corrosive to competition as just any other big things.. there have already been some wage pressures," he said.
The IMF representative said despite the 2007 being one of the challenging years for Bangladesh, the economy has done better than many other countries.
"We would expect the economy to grow somewhere between 5.0 and 6.0 per cent. That's not a bad performance given that the country had two major disasters, record rise in food and fuel prices and a rising inflation," he said
Last June the emergency government projected a seven per cent growth for fiscal 2007-8, after the economy posted a record 6.5 per cent in fiscal 2006-7.
It lowered the forecast to around six after widespread floods in July and August, a devastating cyclone in November and rising import bill due to soaring global prices of commodities and oil.
Dunn said food prices have jumped in the country, due to the galloping prices in the world market, but he differed with some of the economists who say market manipulation is to blame for the price hike.
"It's not happening alone in Bangladesh. Just look at the change in rice prices of Thailand, Vietnam, the Philippines or India. Commodity prices are also increasing there," he said.
"Price in Bangladesh is not increasing more than that of other countries. I don't think there are any evidence of manipulation," he said, adding the government should invest more in agriculture to increase yield per acre in the country.
The IMF representative also called for major reforms in the revenue administration, as the National Board of Revenue (NBR) has consistently failed to collect taxes required for boosting the country's growth and social spending.
The current tax laws and the revenue administration cannot generate enough revenue, he said.
"Since 1991, the country's tax-GDP ratio could never surpass nine per cent. It's has always been around eight per cent. The system is not functioning here properly and it needs to be taken care of," he said.
"But the country badly needs resources to invest in its social sectors, in power, energy and infrastructure," he said, adding Bangladesh needs to double its revenue collection to spur its growth.
"The country cannot achieve higher growth without sorting out NBR," he said, pointing out that the tax administration has been failing to collect the required amount of revenue for nearly two decades.
Dunn also urged a consensus on decades-long government policy on tax holidays for green-field companies.
On one hand the companies seek power, energy and infrastructure facilities from the government, but on the other they don't want to pay taxes needed to boost up public spending, he said.
"The country has to come to a consensus on this special kind of tax holiday whether or not it should be allowed. Continuation of the tax holiday undermines growth and only benefits special interest groups," he said.
He reiterated the IMF's stand on the fuel price increase, saying low prices have only managed to subsidise the rich people, at the expense of the country's millions of poor.
"You have to move away from subsidising the rich. You to have move away from generalised subsidy to targetted subsidy so that the poor can get the benefit meant for them," he said.
The representative also called for developing corporate bond market to finance the country's industrial growth.
"There have been some works on developing a corporate bond market in the last few years. But it has not progressed as much as we have expected," he said.
"Corporate bond market is the key to industrial expansion in any country. You cannot expand your industry only by relying on bank financing, which is costly," he said.
According to the latest Bangladesh Bank data, last year companies have only raised Tk3.10 billion from the stock market. During the same period commercial banks lent Tk124 billion for corporate expansion.