International Monetary Fund (IMF) showed concern for the banking sector of Bangladesh and urged the govt. to reduce vulnerabilities in the sector to ensure sustainable economic growth.
IMF said the government should create fiscal space to address social needs and infrastructure requirements and diversify the economy by strengthening the business environment and improving governance.
The IMF team, led by Daisaku Kihara, came up with the suggestions after completing the discussions with the government from June 16 to 27 on the 2019 Article IV Consultation. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.
IMF analyzed that the banking sector has continued to deteriorate in recent years despite strong growth, especially liquidity pressure in the banking sector is prevailing.
Kihara from IMF said that sustainability of GDP growth will be in question without having efficient channel of finance through banks as such funding is necessary to promote productive investment. He recommended a three-point reform package emphasising reduction in banking sector vulnerabilities to preserve the resilience and sustainability of economic growth.
IMF called for a comprehensive, credible, and time-bound action plan to strengthen supervision in the banking sector and avoid the regulatory forbearance. Tighter criteria and limited use of rescheduling and restructuring of loans are also important to strengthen banks, it said.
Government borrowing from the banking sources has increased in recent period because of a fall in revenue collection. Hence, increasing the tax revenues should be focused on the priority basis, Kihara suggested.
According to the mission chief, implementation of the new VAT law in the next fiscal year is a step towards modernisation of the tax regime, but its revenue impact is uncertain because of multiple rates and implementation challenges.
The VAT and Supplementary Duty Act 2012 was framed in 2011 at the prescription of the IMF to boost revenue collection in the country that has the lowest tax-GDP ratio in South Asia. The law had insisted on a uniform 15 percent VAT rate on all goods and services save for 15 items.
But the 15 percent single rate drew the ire of the business community and certain sections of the society, whose fervent opposition delayed the implementation of the law several times. Now, in a bid to appease them, the government has come up with multiple VAT rates of 5 percent, 7.5 percent, 10 percent and 15 percent.
However, IMF continues to encourage the government to follow a single VAT rate suggesting a single rate is easier to implement and allows taxpayers to comply.
According to the IMF, the organisational structure of the National Board of Revenue needs to be modernised to improve its coordination and efficiency.
On the expenditure side, a priority remains to improve public investment management through better project appraisal and selection and alignment of public investment priorities with national and sectoral plans.
On poverty reduction, IMF praised govt. initiative saying the country has succeeded in fostering a dynamic and fast-growing economy with significant poverty reduction.
IMF predicted the economic growth in Bangladesh continues to be strong. Robust private consumption pushed real GDP growth close to 8 percent in the fiscal year of 2017-18, while inflation increased slightly, due mainly to higher food prices.
IMF also found that export growth has picked up recently, based on solid performance of the readymade garments sector while remittance inflows have also strengthened. This has led to a narrowing of the current account deficit despite higher imports of capital goods.
On monetary policy, IMF suggested the policy should be geared toward containing risks to the inflation outlook stemming from higher global oil prices, rapid economic growth, and elevated inflation expectations. It also recommended continuous efforts to control the issuance of national savings certificates should support deepening of the capital market and reduce budget interest payments.
Sharing the hope for the country’s economic growth to continue, IMF pointed that important challenges will remain to realize the authorities’ aspiration to reach upper middle-income status and preserve the resilience and sustainability of growth.