IMF for raising public wages in phases
FE Report | Saturday, 19 July 2008
The International Monetary Fund (IMF) has advised the government to raise salary and wages of public sector employees in phases to keep its fiscal burden manageable.
"Maintaining control over public sector wage hike, particularly in the context of the 2009 Public Wage Commission, will also be important in maintaining fiscal space and moderating the benchmark these increases could set for the private sector. Increases in pay scales will need to be phased in to make the fiscal burden manageable," the IMF said in its statement delivered at the end of Bangladesh-2008 Article IV Consultation.
The IMF's Article IV Consultation made the suggestion following the government's recent announcement that it would form a national pay commission soon for increasing the wages of the public sector employees.
Inflation is likely to return to double digits this month (in July) and remain there throughout the 2008-09 fiscal year because of high credit growth and government spending, emerging wage pressures, soaring international commodity prices and maintaining accommodative monetary policy, said the IMF.
"Growth momentum should remain in the near-term but inflation is likely to increase. With credit growth and government spending fuelling demand, wage pressures emerging, international commodity prices continuing to increase and monetary policy remaining accommodative, inflation is likely to return to double digits in July and remain there throughout FY09," the IMF said in Bangladesh-2008 Article IV Consultation: Concluding Statement.
The rise in domestic inflation was fed by food inflation, which went up to 11.93 per cent in May 2008 from 8.11 per cent in June 2007, while non-food inflation rose to 6.72 per cent from 5.90 per cent over the same period, according to Bangladesh Bank (BB).
Referring to some downside risks, the IMF said that a sustained increase in oil prices would put the balance of payments and fiscal position under significant stress and further reduce near-term growth prospects. Other risks stem from the political environment-if uncertainty increases as the nation passes through local and national elections; delays in policy adjustments that contribute to higher inflation, declines in external demand, and in the longer term, climate change.
"Policy actions to bring inflation under control will be required and are likely to create some temporary headwinds to economic momentum," the IMF said.
The recent increases in energy and fertiliser prices show that the caretaker government is willing to take difficult decisions when necessary, it said and adding that the main priority now is to keep control of inflation while accommodating public expenditure requirements, particularly those stemming from the natural disasters and food crisis.
It said the medium-term growth path envisaged in the macroeconomic framework will require accelerated progress in structural reform areas, particularly in strengthening the fiscal and financial sectors, and deepening the foreign exchange market.
Progress has been made in isolated areas including (but not limited to) strengthening the regulatory and prudential framework of BB, corporatising and improving the management of the state banks, and initiating the development of a government securities market.
The IMF said the banking sector is growing but the state-owned commercial banks (SCBs) still undermine the efficiency of the system. Private banks grew rapidly in FY08 and their financial soundness strengthened. However, the SCBs, which account for over 30 per cent of total banking sector assets, remain mainly moribund, with negative capital and high (30 percent) non-performing loan (NPL) ratios, it added.
"Accelerating progress on strengthening their financial position with a view to eventual divestment remains a high priority in financial sector development. While the progress made in some of the SCBs is encouraging, their increasing NPL ratios are a serious cause for concern. BB needs to continue to closely monitor credit quality across the entire banking system, particularly in the light of accelerating credit growth," the IMF said.
It said volatility in international commodity markets makes it unusually difficult to forecast the fiscal burden of administered prices for state-owned enterprises. Assuming no further domestic price increases, budget provisions for fuel subsidies will require international oil prices to return to around $110 a barrel, current projections of an average price of around $125 a barrel would imply a further Tk 30 billion in subsidies to Bangladesh Petroleum Corporation (BPC).
In addition, escalation in international fertiliser prices means that around Tk 10 billion in additional transfers to BCIC would be required. If overruns remain at these levels the team supports the authorities' plans to cover them from within the expenditure envelope, including from block allocations, potential overlaps between safety net allocations, and the fact that ADP continues to suffer from implementation constraints. In this scenario, any revenue collections over budget estimates should be used to reduce the deficit rather than funding subsidy overruns, it added.
It said the need to deal with any additional SOE losses, should they arise, should be met, by further price increases so that other priority spending on key social and development programmes are not compromised.
In the medium term, increased revenue is crucial to allow fiscal policy to return to a lower deficit path. The FY09 budget should be a temporary deviation from the restrained fiscal position-an overall deficit below 4 per cent of GDP and domestic financing below 2 per cent of GDP-that has served Bangladesh well in the recent past, it said.
The IMF said improvements in tax administration that are underway such as consolidating and extending the coverage of the two Large Taxpayers Units (LTUs), separating policy from administration, and strengthening audit procedures can support further marginal increases in the revenue to GDP ratio. More substantial increases will, however, require a comprehensive revision of income tax and VAT legislation that will modernise the tax system and broaden the base.
IMF suggested improving the quality of public expenditure to accelerate poverty reduction. It will require reducing subsidies to provide fiscal space for increased and better-targeted social spending and public investment. The Medium-Term Budget Framework (MTBF) provides a good basis for re-orienting savings from subsidies towards higher priority objectives, including better quality ADP spending.
"Maintaining control over public sector wage hike, particularly in the context of the 2009 Public Wage Commission, will also be important in maintaining fiscal space and moderating the benchmark these increases could set for the private sector. Increases in pay scales will need to be phased in to make the fiscal burden manageable," the IMF said in its statement delivered at the end of Bangladesh-2008 Article IV Consultation.
The IMF's Article IV Consultation made the suggestion following the government's recent announcement that it would form a national pay commission soon for increasing the wages of the public sector employees.
Inflation is likely to return to double digits this month (in July) and remain there throughout the 2008-09 fiscal year because of high credit growth and government spending, emerging wage pressures, soaring international commodity prices and maintaining accommodative monetary policy, said the IMF.
"Growth momentum should remain in the near-term but inflation is likely to increase. With credit growth and government spending fuelling demand, wage pressures emerging, international commodity prices continuing to increase and monetary policy remaining accommodative, inflation is likely to return to double digits in July and remain there throughout FY09," the IMF said in Bangladesh-2008 Article IV Consultation: Concluding Statement.
The rise in domestic inflation was fed by food inflation, which went up to 11.93 per cent in May 2008 from 8.11 per cent in June 2007, while non-food inflation rose to 6.72 per cent from 5.90 per cent over the same period, according to Bangladesh Bank (BB).
Referring to some downside risks, the IMF said that a sustained increase in oil prices would put the balance of payments and fiscal position under significant stress and further reduce near-term growth prospects. Other risks stem from the political environment-if uncertainty increases as the nation passes through local and national elections; delays in policy adjustments that contribute to higher inflation, declines in external demand, and in the longer term, climate change.
"Policy actions to bring inflation under control will be required and are likely to create some temporary headwinds to economic momentum," the IMF said.
The recent increases in energy and fertiliser prices show that the caretaker government is willing to take difficult decisions when necessary, it said and adding that the main priority now is to keep control of inflation while accommodating public expenditure requirements, particularly those stemming from the natural disasters and food crisis.
It said the medium-term growth path envisaged in the macroeconomic framework will require accelerated progress in structural reform areas, particularly in strengthening the fiscal and financial sectors, and deepening the foreign exchange market.
Progress has been made in isolated areas including (but not limited to) strengthening the regulatory and prudential framework of BB, corporatising and improving the management of the state banks, and initiating the development of a government securities market.
The IMF said the banking sector is growing but the state-owned commercial banks (SCBs) still undermine the efficiency of the system. Private banks grew rapidly in FY08 and their financial soundness strengthened. However, the SCBs, which account for over 30 per cent of total banking sector assets, remain mainly moribund, with negative capital and high (30 percent) non-performing loan (NPL) ratios, it added.
"Accelerating progress on strengthening their financial position with a view to eventual divestment remains a high priority in financial sector development. While the progress made in some of the SCBs is encouraging, their increasing NPL ratios are a serious cause for concern. BB needs to continue to closely monitor credit quality across the entire banking system, particularly in the light of accelerating credit growth," the IMF said.
It said volatility in international commodity markets makes it unusually difficult to forecast the fiscal burden of administered prices for state-owned enterprises. Assuming no further domestic price increases, budget provisions for fuel subsidies will require international oil prices to return to around $110 a barrel, current projections of an average price of around $125 a barrel would imply a further Tk 30 billion in subsidies to Bangladesh Petroleum Corporation (BPC).
In addition, escalation in international fertiliser prices means that around Tk 10 billion in additional transfers to BCIC would be required. If overruns remain at these levels the team supports the authorities' plans to cover them from within the expenditure envelope, including from block allocations, potential overlaps between safety net allocations, and the fact that ADP continues to suffer from implementation constraints. In this scenario, any revenue collections over budget estimates should be used to reduce the deficit rather than funding subsidy overruns, it added.
It said the need to deal with any additional SOE losses, should they arise, should be met, by further price increases so that other priority spending on key social and development programmes are not compromised.
In the medium term, increased revenue is crucial to allow fiscal policy to return to a lower deficit path. The FY09 budget should be a temporary deviation from the restrained fiscal position-an overall deficit below 4 per cent of GDP and domestic financing below 2 per cent of GDP-that has served Bangladesh well in the recent past, it said.
The IMF said improvements in tax administration that are underway such as consolidating and extending the coverage of the two Large Taxpayers Units (LTUs), separating policy from administration, and strengthening audit procedures can support further marginal increases in the revenue to GDP ratio. More substantial increases will, however, require a comprehensive revision of income tax and VAT legislation that will modernise the tax system and broaden the base.
IMF suggested improving the quality of public expenditure to accelerate poverty reduction. It will require reducing subsidies to provide fiscal space for increased and better-targeted social spending and public investment. The Medium-Term Budget Framework (MTBF) provides a good basis for re-orienting savings from subsidies towards higher priority objectives, including better quality ADP spending.