Low growth, high inflation add to pressures on economy: Fund alerts

High inflation hitting people's living remains a serious concern to the International Monetary Fund as the financier offers another loan tranche of $645 million to Bangladesh that is expected to be available in February.
An IMF mission concludes that low economic growth and high inflation, in particular, add up to the pressures on the country's macroeconomic parameters like balance of payments and foreign-exchange reserves.
The fourth tranche of the IMF's ongoing credit package, however, is bound with two strings for Bangladesh to meet prior to its board's approval.
"Basically the staff-level agreement is subject to two actions prior to going to the board in February," the IMF mission chief for Bangladesh, Chris Papageorgiou, told the press Thursday.
He mentions one prerequisite as higher revenue mobilisation and another as exchange- rate flexibility.
"Once these actions are met, then, I think, by February 5 we have a specific date prior to issuing the papers to our board."
"Then, by the end of February, the amount of $645 million will be allocated to the authorities," he said.
Mr Papageorgiou was briefing newsmen in the conference room of the finance ministry at Bangladesh secretariat in Dhaka following the conclusion of third review mission on $4.7-billion credit programme.
In reply to a query from The Financial Express reporter regarding Bangladesh's gloomy economic scenario painted by the mission, he said, "Indeed, we are building a picture that is not as encouraging."
He said growth being reduced from IMF's previous projection for FY25, around 6.6 per cent, which is now only 3.8 per cent that is a very big change how the IMF sees the economy of Bangladesh slowing down.
"The other side of it is inflation. We do not see inflation coming down at the rates we were expecting. So inflation remains at double digits," he said.
Further, he said, even in November the inflation is staying very high, which has two sources. "One is the supply side, usually we think about it coming from food inflation and there are structural issues why food inflation remains high. And then there is the demand side, which is aggregate demand basically remaining high."
"…so you have a picture of low growth, high inflation that puts additional pressures on the balance of payments, on reserves for example, and things become even worse when you think about the banking sector," said Mr Papageorgiou.
He underscores the need for near-term policy tightening to address emerging external- financing dearth and resist high inflation.
The mission chief said the IMF has been very vocal especially in the area of non-performing loans and how they are recorded, how they are measured. "And, systematically even before the programme we know that these measures are biased. Basically the estimate should be much much higher than what we were getting in the official numbers."
He said the interim government wanted to bring the banking-sector issue in the forefront and to resolve it. "…but, with that we see that the banking sector is also in distress."
The mission chief mentions that Bangladesh used to grow at 7.0 per cent with low inflation even in 2022 and now "we are in a situation where it is slowing at 3.8 per cent with high inflation putting extra pressure on reserves and a banking sector which needs help."
However, Mr Papageorgiou expects a rebound in Bangladesh's economy in the next fiscal year.
He said to meet financing gap in Bangladesh the IMF had discussion with the other international financial institutions like the World Bank, the ADB and even bilateral partners and "we would like to fill that gap with assistance from everyone".
So, the IMF has decided to provide $750 million to close the gap while funding also coming from the Asian Development Bank and the World Bank, he said. Already decision has been taken to disburse $80 million from the additional funding with the release of fourth tranche of credit.
He said revenue mobilisation is a big issue in Bangladesh as there is stagnation in the tax- to-GDP ratio which was 7.0 per cent for a long time, even during the last few months it went down further actually that is one of the lowest in the world.
The Washington-based multilateral financier feels that the revenue-mobilisation effort needs to be priority for two reasons: if revenue is not in place, the country will not have fiscal space for raising social spending and capital spending.
And, also as Bangladesh moves and becomes middle-income country and beyond an emerging market with the revenue "we have never seen a country with so low revenue being able to keep high growth, low inflation growth", the chief said.
He said outflow of dollar is a big concern which is one of the reasons why the banking sector is in distressed levels.
Mr Papageorgiou said Bangladesh bank needs to lessen fund flow to curb inflation. "We are in agreement with the governor to increase further policy rates as needed in the future."
He said the IMF is in favour of some structural changes in the National Board of Revenue, like separation of policy and the administration which may help yield more revenues.
"We have identified also very specific measures where the country can produce more revenues and specifically we are pushing a lot for many exemptions. When we analyze where the problems really accumulate in the revenue side are from hard exemptions that go bad in many, many years," he said.
"So it's not just the problem now, unfortunately it became culture of the country and we try to change it. It takes a lot of effort, it takes political will it's not just economics here. But this is one of the big pushes we are making," he said.
"The other big push we are making is on the flexibility of the exchange rate," added the mission chief.

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