Even though Bangladesh’s economy is one of the fastest-growing in Asia, the country is facing difficulties with inflationary pressures, increased volatility in global financial conditions, and a slowdown in major advanced trading partners all continue to weigh on growth, foreign currency reserves, and the taka.
The International Monetary Fund (IMF) team conducted a staff visit to Bangladesh’s capital city Dhaka from April 25 to May 7, 2023, to discuss recent macroeconomic developments and implementation of its program.
On Sunday the International Monetary Fund (IMF) completed its staff consultation mission in Bangladesh, led by Rahul Anand, Mission Chief for Bangladesh. The IMF delegation has expressed satisfaction and optimism regarding Bangladesh. In a media release the global lender issued upon completion of its team’s visit to Bangladesh on Sunday, it said, “Against a challenging economic backdrop, Bangladesh remains one of the fastest growing economies in the Asia-Pacific region.”
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IMF Mission Chief Rahul Anand stated that persistent inflationary pressures, elevated volatility of global financial conditions, and a decline in major advanced trading partners continue to weigh on growth, foreign currency reserves, and the Taka.
IMF raises concern
The IMF team has expressed concerns that the nation’s economic growth and foreign exchange reserves may encounter headwinds from both directions and found that the government lacked preparation in few sectors. According to sources from the meeting, the IMF team inquired about strategies to reduce subsidies as required by the loan terms. They inquired as to why the government was considering increasing subsidies in the upcoming budget for 2023–24. What strategies has the government discussed to increase the Gross Domestic Product (GDP) at a rate of 0.5%? Is it sufficient to purchase an electronic fiscal device (EFD) to generate revenue? How could the genuine foreign exchange reserve reach $24.46 billion by June?
The three recommendations by IMF
The meeting addressed roughly three recommendations to the authorities to decrease subsidy, increase revenue collection, and boost forex reserves. The IMF team members were reportedly uncertain as to whether Bangladesh would be able to maintain the target reserve position. In this respect, the IMF mission advised finance officials to take the necessary steps to reduce the balance of payments deficit.
- The need of subsidy rationalization
In the same manner as in the past, the IMF mission sought to rationalize the way Bangladesh government manages its subsidies. Actual subsidy reduction is what rationalization entails. According to the IMF, subsidies are equivalent to direct taxation of citizens. It is preferable for the government to decrease subsidies. The government can then allocate the funds to other sectors.
IMF found that the amount of subsidies in 2022-23FY was Tk 820 billion, and that amount will rise to over Tk 1 trillion in the next financial year. Due to the increase in the price of fuel oil, the Bangladesh Petroleum Corporation (BPC) will no longer require budget assistance, according to sources. The cost of gas and electricity has also increased. Beginning in September, a time-based system will be used to modify the price of fuel oil, and there are plans to increase the cost of electricity. As a consequence of the increase in oil, gas, and electricity prices, no new subsidies will be added, but the existing subsidies will remain in place. The total quantity of subsidy will therefore increase.
- Focusing on Tax-GDP ratio
During its meeting with the finance ministry on Sunday, the IMF primarily inquired about increasing the proportion of taxes to GDP and raised concerns as mentioned above. The international lender wants the Bangladesh government to prioritize revenue sector reform. According to a source in the finance division, the IMF desires a 0.5% increase in the tax-to-GDP ratio in 2023-24.
The IMF was notified that tax EFDs have been purchased and more will be purchased. The government also intends to appoint private agents at the local level for this purpose.
- Increasing Bangladesh’s foreign reserve
The Bangladesh Bank calculated that there are currently $30.98 billion in foreign exchange reserves. After paying the Asian Clearing Union’s (ACU) payment, the total decreased to $29.80 billion.
The government has used $8.20 billion of the foreign exchange reserve for a variety of purposes, including the purchase of bonds, foreign exchange, gold, loans for Bangladesh Biman’s purchase of jet aircraft through Sonali Bank, funds for dredging the Rabnabad channel of the Payra port, and loans to Sri Lanka, which is currently experiencing a financial crisis. IMF has said from the beginning to calculate the foreign exchange reserve while omitting these costs. The reserve would then actually be $21.70 billion, according to the IMF.
According to the terms of the IMF loan, the foreign exchange reserve must expand to $24.46 billion by June 30, $25.30 billion by September 30, and $26.80 billion by December.
Why these recommendations matter?
As the country is dealing with constant money devaluation with inflation and foreign reserve shortage, IMF’s second installment of the loan is necessary. The Bangladesh Bank and Finance Division of the finance ministry, and IMF also requested that the government prioritize these matters that would ensure receipt of the second instalment of the $4.7 billion loan in December.
Former IMF official and executive director of Policy Research Institute (PRI) Ahsan H Mansur said, “We have been telling the government to take steps to increase the forex reserve, raise the tax-GDP ratio, and decrease subsidy.” “IMF is saying these this, not for nothing. They have been saying these as conditions against the loan. Still this is not working. The main problem was to be identified,” he said.
Ahsan H Mansur also said, “Failure to fulfil one or two conditions will not be a serious issue but there will be a possibility that cracks will appear in confidence in the economy of Bangladesh if the number of unfulfilled conditions increases.”
