OREANDA-NEWS. November 19, 2015. An International Monetary Fund (IMF) staff team, led by Mr. Rodrigo Cubero, visited Dhaka for discussions on the 2015 Article IV Consultation with Bangladesh. The mission met with the Minister of Finance, Bangladesh Bank Governor, Finance Secretary, Banking Secretary, National Board of Revenue Chairman, other senior officials, as well as representatives of the business and banking sectors, labor unions, nongovernmental organizations, think tanks and development partners.

At the conclusion of the visit, Mr. Cubero made the following statement:

“Over the two years since the last Article IV Consultation (the regular review that the IMF conducts of its members’ economies), prudent policies have underpinned Bangladesh’s strong macroeconomic performance, supported by the recently completed Extended Credit Facility arrangement with the IMF. Real GDP growth has been robust, inflation eased, international reserves increased significantly, and the public debt-to-GDP ratio remained stable at a moderate level. In FY16 inflation and real GDP growth rates are expected to be similar to FY15, with growth supported by higher public sector wages, public investment and remittances. The external current account is expected to remain in a moderate deficit. Over the medium term, provided that policies remain prudent, growth is projected to increase gradually to 7 percent, reflecting a further ramp-up in public investment and stronger private investment as regulatory and infrastructure constraints are eased and the financial sector strengthens.

“This favorable record notwithstanding, the Bangladesh economy faces important challenges. The tax revenue-to-GDP ratio is one of the lowest in the world. Public spending on infrastructure and social safety nets is also low compared with countries at similar levels of development. Private investment has been constrained by infrastructure bottlenecks, particularly in energy and transport, and by a high regulatory burden. The banking system is burdened by a high level of nonperforming loans and weak corporate governance (particularly in state-owned banks), which place upward pressure on interest rates and hamper credit flows to the economy. And Bangladesh remains one of the world’s most vulnerable countries to natural disasters and climate change.

“Against this backdrop, the staff team and the authorities discussed policies and reforms to build up resilience in the economy; create fiscal space (including through higher revenues) for growth-enhancing spending; boost private investment and diversification; and strengthen inclusion.

“Maintaining high and inclusive GDP growth will require increased public spending on cost-effective projects in power and transport infrastructure and climate change adaptation, as well as on well-targeted social safety nets; steps to strengthen the business climate, including through streamlined tax and customs procedures and foreign exchange regulations; and continued progress in financial inclusion.

“To create the fiscal space for increased public spending in critical areas, it is necessary to improve tax revenues significantly. The mission commends the authorities’ progress in implementing the new VAT Act towards a launch in July 2016. In addition to mobilizing additional resources, the new VAT is designed to protect the poor and small businesses; to make tax administration more transparent; and to reduce taxpayers’ compliance costs. VAT implementation should be complemented by continued efforts to strengthen tax administration, particularly through automation. Further steps to reform inefficient and regressive subsidies would also create room to boost safety nets for the most vulnerable. Financial reporting and transparency in state-owned enterprises should be strengthened, including by conducting independent external audits.

“To strengthen the financial sector and stimulate credit, investment and growth, efforts should continue to focus on enhancing financial regulation and supervision, including by avoiding regulatory forbearance and strictly enforcing existing rules, adopting risk-based supervision, and strengthening governance and oversight of the state owned banks. The staff team welcomes steps to reduce reliance on National Savings Certificates (NSCs) as a financing vehicle for the government. NSCs set an artificially high floor on bank rates, thereby discouraging investment, and raise interest costs for the government, thus reducing fiscal space for targeted transfers to the poor.

“The IMF stands ready to support the government’s reform efforts through policy advice and capacity building, including on monetary and fiscal policies, financial sector supervision and regulation, and macroeconomic statistics.

“The team would like to underscore the excellent, cooperative relationship between Bangladesh and the IMF, and thanks the authorities for their warm hospitality and productive discussions.”