The International Monetary Fund or IMF has lowered GDP growth projection for Bangladesh to 3.8 per cent for fiscal year 2019-2020 from its earlier estimate of 7.4 per cent in the aftermath of the pandemic.
The downward GDP (gross domestic product) growth revision is 3.6 percentage points lower than pre-Covid estimates, according to its Bangladesh report released on Thursday.
The IMF projected readymade garment exports and remittances, the country's two major sources of external financing, to decline sharply.
"Necessary policy responses to prevent a domestic pandemic, including the shutdown of major cities, will inevitably affect economic activities and slow growth," the fund said in its report.
The large share of workers in the informal sector and in daily paid work indicates that a substantial part of the labour force is highly vulnerable to the COVID-19 shock.
It, however, predicted the gradual recovery in the second quarter of FY '21.
"Despite signs of disruptions in the domestic food supply chain, overall inflation is projected to remain broadly unchanged, owing partly to a bumper harvest in the agriculture sector," according to the IMF report.
The Washington-based global monetary watchdog has advised the authorities to re-focus on addressing the banking sector problems, particularly state-owned banks, following the crisis.
The authorities have started amending several laws to enforce more discipline, but repeated loan rescheduling, regulatory forbearance, and failure to deal with weak and insolvent banks hindered progress.
The fund came up with a five-point recommendation to the authorities for strengthening the banking sector of Bangladesh.
The recommendations are introducing risk-based supervision and avoiding regulatory forbearance; strengthening corporate governance in private banks, ensuring that classification and provisioning requirements are in line with Basel standards.
Besides, the fund recommended addressing the poor financial performance of state lenders through improved governance and risk management, a more level playing field, and a clear definition of the public mandate with transparent budget support and putting in place a framework for the effective resolution of weak banks.
"The Bangladesh Bank will also need to monitor closely banking sector conditions given the elevated level of nonperforming loans," the IMF noted.
It said controlling stressed assets of the banking sector will be imperative with banks bearing the entire credit risk for the stimulus package routed through banks.
Loans under the stimulus package should be effectively targeted and monitored by the authorities with necessary due diligence and risk assessment considerations by banks to preserve banking soundness while providing support where most needed, according to the IMF. "Banks can be encouraged to undertake prudent loan re-negotiations targeted to loans that have deteriorated due to the shock, but loan reporting, classification and provisioning standards should not be eased, as it is important to maintain an accurate picture of banks' financial condition," it said.
The IMF advised the central bank to preserve banks' capital resources by temporarily suspending the distribution of capital, including dividends, share buybacks, and increases in executive compensation and discretionary bonus payments.
The country's banking sector is expected to play an important role in channelling assistance to the economy. A substantial portion of the recently unveiled stimulus package will be provided via subsidised bank loans to targeted recipients.
The central bank has asked banks to keep loan, lease, and advance classification unchanged until June 30, though upward classification changes are allowed.
The IMF said lending from the BB for financing working capital loans to industries and smaller enterprises will provide banks with additional resources of 0.9 per cent of GDP.
"Adequate liquidity support will be required from the BB to ensure smooth and unconstrained credit flow to the private sector credit, especially if the recovery rate for the banking sector deteriorates," the IMF noted.
Prime Minister Sheikh Hasina has so far announced a total of 19 stimulus packages worth Tk 1.03 trillion to cushion the shock of novel coronavirus pandemic on various sectors of the country.
The packages, which are 3.7 per cent of the GDP, are being implemented under the supervision of the central bank and the ministry of finance.