IMF tells Bangladesh to focus on containing inflation, rebuilding external resilience

Rahul Anand, IMF staff mission chief for Bangladesh, speaks at a press conference in Dhaka on Nov 9, 2022. Rahul Anand, IMF staff mission chief for Bangladesh, speaks at a press conference in Dhaka on Nov 9, 2022.

The International Monetary Fund has advised Bangladesh to focus on containing inflation and rebuilding external resilience in the near-term as the global lender approves the second tranche of $4.7 billion loans for the country.

This will require a calibrated monetary policy tightening, supported by a prudent fiscal policy stance, a more flexible exchange rate system, and growth–boosting reforms, Rahul Anand, IMF Mission Chief for Bangladesh, said in a media briefing.

A greater flexible exchange rate system will help alleviate foreign exchange pressures and rebuild external buffers, Rahul said on Thursday, according to a statement from the IMF.

By growth–boosting reforms, the IMF meant reforms that target the most binding structural constraints on Bangladesh’s economic activity.

For this, Rahul outlined a few areas. First, raising tax revenues and rationalising non-priority expenditure is key, he said.

This will allow the authorities to increase investment in social development and climate spending. Continued efforts to enhance public financial and investment management are also needed to increase spending efficiency and mitigate fiscal risks.

Second, modernising the monetary policy framework and improving policy transmission will foster macroeconomic stability.

Further reforms to modernise the exchange rate framework and strengthen foreign currency reserve management would enhance external resilience.

Third, reform priorities should also focus on addressing vulnerabilities in the financial sector by strengthening banking regulation, supervision, and governance.

“We would also encourage deepening of capital markets to help mobilise private financing to support growth objectives,” Rahul said.

He said further trade liberalisation and enhancements to the investment climate will boost foreign direct investment and help diversify exports. Raising productivity, including through education and skills development, as well as further increasing female labour participation will further boost growth potential.

“And finally, I noted climate spending earlier. Building resilience to climate change and natural disasters is a priority for achieving high, inclusive, and green growth. To do that, improving efficiency in climate spending and mobilising climate financing will be crucial.”

The IMF Executive Board completed the first review of the IMF-supported programme and the Article IV consultations on Dec 12.

The board’s approval unlocked disbursements of about $468.3 million of the second tranche of the Extended Credit Facility/ Extended Fund Facility,

Additionally, the board’s approval also unlocked about $221.5 million, as the first tranche of the Resilience and Sustainability Facility, a concurrent programme to help address the country’s large climate financing needs.

MOST PROGRAMME TARGETS MET

The IMF mission chief for Bangladesh said the country’s economy has continued to face economic challenges. “External headwinds, coupled with initially inadequate domestic policy response, have made macroeconomic management challenging.”

“An unprecedented reversal of the financial account deteriorated the overall balance of payments in FY2023, leading to continued pressures on FX reserves and the Taka.”

In response to these shocks, the authorities have taken several measures to deal with macroeconomic challenges. Bangladesh Bank has tightened monetary policy, allowed greater exchange rate flexibility, and unified the multiple exchange rates. The authorities also kept the fiscal primary balance within the programme target.

“Thanks to these efforts by the authorities, and despite the difficult macroeconomic environment, the overall program performance has been broadly satisfactory. I am happy to report that most programme targets and reform commitments were met,” Rahul said.

He said the programme has supported the authorities’ efforts to preserve macroeconomic stability and protect the vulnerable, while accelerating economic reforms and delivering on the climate agenda despite significant challenges and uncertainty.

“Going forward, we need calibrated monetary tightening, supported by a neutral fiscal policy stance and greater exchange rate flexibility. This will help restore near-term macroeconomic stability and bolster external resilience.

“Restoring macroeconomic stability and accelerating growth-oriented reforms will be key to meet the country’s aspirations to reach upper-middle income status by 2031.”