7 months ago

IMF support to enable govt to recharge reserves

Fund says launching Regional Economic Outlook

International Monetary Fund logo is seen outside the headquarters building during the IMF/World Bank spring meeting in Washington, US on April 20, 2018 — Reuters/Files
International Monetary Fund logo is seen outside the headquarters building during the IMF/World Bank spring meeting in Washington, US on April 20, 2018 — Reuters/Files

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The International Monetary Fund (IMF) says its support programme for Bangladesh will help the country replenish its foreign-currency reserves and enhance the capacity to deal with economic downturn feared ahead.

While launching its 'Regional Economic Outlook Report for Asia and the Pacific' in Singapore Friday, the IMF officials said the war in Ukraine and high commodity prices dampened Bangladesh's robust recovery from the pandemic.

The Bangladesh government has "pre-emptively requested an IMF-supported program that will bolster the external position, and access to the IMF's new Resilience and Sustainability Trust to meet their large climate-financing need, both of which will strengthen their ability to deal with future shocks," the Fund said.

Its observations about strengths and weaknesses of the country's economy -- growth prospects and headwinds from external direction -- came, incidentally, while an IMF team is currently in Dhaka assessing creditworthiness of Bangladesh ahead of a major loan sought for budget support.

Replying to a query IMF's deputy director for the Asia and Pacific Department, Anne-Marie Gulde-Wolf, said Bangladesh has asked for a support programme from the IMF which contains two components: a regular upper-credit tranche (UCT) arrangement and Resilient and Sustainability Trust (RST) programme.

She notes that Bangladesh is still growing strong this year and the IMF expects 7.2 per cent of growth, but there are global headwinds that are quite significant.

"Bangladesh is an export-dependent economy, and with headwinds in its major markets, our forecast for growth next year is 6.0 per cent," she says.

Ms Gulde-Wolf mentions that the taka has depreciated by about 20 per cent while reserves have gone down. "They're still at a comfortable level, but the direction has been towards going down."

Meantime, the IMF delegation has started talks with officials in Dhaka to discuss modalities of the proposed budget-support loans from where Bangladesh expects US$4.5 billion to replenish its foreign-currency reserves.

The 10-member IMF team, led by the agency's mission chief for Bangladesh, Rahul Anand, Wednesday had several meetings with finance secretary Fatima Yasmin and her team at her office in Bangladesh secretariat. The two sides discussed overall economic health of the country alongside reform measures to help the economy navigate the ongoing crises.

On Thursday, they had a number of meetings with Bangladesh Bank officials where they discussed fiscal and monetary policies, dollar prices, and method of forex-reserve calculation, among others.

At the outlook report-launching ceremony the IMF further said growth in the Asia-Pacific region is expected to slow down in 2022 and 2023, reflecting headwinds from global financial tightening, the war in Ukraine, and the sharp and uncharacteristic slowdown in the Chinese economy.

"This challenging conjuncture poses difficult tradeoffs for policymakers," the IMF remarks in its report.

"Asia's strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter…. Despite this, Asia remains a relative bright spot in an increasingly dimming global economy," says Krishna Srinivasan, director of the IMF's Asia and Pacific Department.

He notes that the IMF has cut growth forecasts for Asia and the Pacific to 4.0 per cent this year and 4.3 per cent next year -- down by 0.9 and 0.8 percentage points, respectively, compared to the April World Economic Outlook -- which are well below the 5.5 per cent average over the last two decades.

Mr Srinivasan thinks the region faces three formidable headwinds, which may prove to be persistent. The first, he mentions, is global financial tightening, the second one is the war in Ukraine, and the third is sharp and uncharacteristic slowdown in China.

The Federal Reserve has become much more aggressive in tightening their monetary policy as US inflation remains stubbornly high. This has translated into tighter financial conditions for Asia.

The main impact of Ukraine war on Asia has been through commodities' prices, which have spiked following the invasion and remained high. Most -- but not all -- countries in Asia have seen a deterioration of their terms of trade, and this has been an important factor behind currency depreciations so far this year.

The IMF has marked down Chinese growth for 2022 to 3.2 per cent, its second-lowest level since 1977, reflecting the impact of the zero-COVID lockdowns on mobility and the crisis in the real estate sector. This slowdown is estimated to have important spillovers to the rest of Asia through trade and financial links.

Mr Srinivasan said while inflation rose more modestly in Asia during 2021 than it did in other regions, the sharp volatility in global commodity markets after Russia's invasion of Ukraine in February put additional pressure on Asia's headline inflation in the first half of 2022.

"This increase has been driven by rising food and fuel prices -- particularly in Asian emerging market and developing economies -- but also reflects higher core inflation as the region recovers," he said.

Against this backdrop, Mr Srinivasan stressed priorities like further tightening of monetary policy to ensure that inflation returns to target, and fiscal consolidation to stabilise public debt and support the monetary-policy stance.

He reminds that Asia is now the largest debtor in the world besides being the biggest saver, and several countries are at high risk of debt distress. Public and private debt dynamics are already worse following the pandemic because of slower growth and higher debt levels.

"An integrated approach to tackling these challenges in a timely and well-calibrated way is of the essence while being mindful of the further downside risks," he said.

"While exact policy responses will depend on country-specific circumstances, tackling corporate-debt overhang and mitigating human-capital losses will be important for a wide range of countries in the region."

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