The Daily Star caught up with the visiting International Monetary Fund (IMF) deputy managing director, Naoyuki Shinohara, for an interview, in which he spoke at length about the country's progress under the Extended Credit Facility (ECF) programme, the budget for the new fiscal year and the challenges that lie ahead.
The Daily Star (TDS): What are your views on the progress made under the current ECF programme?
Naoyuki Shinohara (NS): Bangladesh has made substantial progress in strengthening macroeconomic conditions and structural policies under the IMF-supported programme—the country is now in a stronger external and domestic position.
International reserve levels have more than doubled from the lows in late 2011, supported by prudent fiscal and monetary policies. Notwithstanding the tepid global economic environment and domestic turmoil in 2013, exports have remained strong, the public debt-to-GDP ratio is gradually declining and headline inflation is now in single digits, with underlying inflationary pressures receding.
Bangladesh has also progressed under the IMF-supported programme in advancing critical structural reforms aimed at expanding tax revenues and reforming subsidies to create fiscal space to boost social and infrastructure spending; improving public financial management; and ensuring a stable financial system.
TDS: The programme concentrated on the banking sector, particularly the state-owned banks. What are your observations on the current state of the sector? What steps do you recommend next for the improvement of state banks' financial health?
NS: Strengthening the financial sector is indeed one of the several priorities under the program. The focus has been on two areas: enhancing financial supervision and regulation and improving the state-owned banks.
The former included broadening the powers of Bangladesh Bank (BB) through amendments to the Bank Companies Act (passed in July 2013). The IMF has also provided dedicated technical assistance to strengthen BB's capacity on banking supervision and regulation.
On the state-owned banks, strengthening governance is essential, in particular credit policies and liquidity risk management. Gradual recapitalisation is also important, as well as maintaining prudent credit growth limits as a stop-gap measure. And automation will help improve financial reporting from branches.
Progress has been made in all these areas, but it is an ongoing reform that requires steady efforts over the medium-term. Strengthening these banks hinges on improving the quality of their lending practices, which in turn will depend on making sure that the management and executive boards of these banks exercise proper, professional oversight and are held ultimately accountable by BB and the government.
TDS: Five instalments of the Extended Credit Facility loan have already been disbursed, with only two more to go. What are the IMF's plans beyond that? Would a similar, or any other, programme be run for Bangladesh?
NS: Bangladesh's ECF arrangement expires in April 2015. The IMF will maintain a close dialogue with the Bangladesh authorities on our mutual engagement, including on whether there will be a successor arrangement.
Whatever the agreed upon modality, the IMF will continue to work with the authorities to support their policies to safeguard macroeconomic and financial stability and ensure sustained, inclusive growth.
We also stand ready to continue providing technical assistance and training in priority areas linked to the authorities' planned revenue, public financial management and financial sector reforms, as well as on macroeconomic and financial statistics.
TDS: Bangladesh's tax-GDP ratio is very low. What steps can the country take to enhance the figure?
NS: That is correct: Bangladesh has one of the lowest tax-to-GDP ratios in the world, and it is critical to strengthen revenues in relation to GDP so as to broaden the fiscal space for priority spending. The authorities are working on this.
Implementation of the new VAT law remains the foremost priority, along with steps to further improve tax administration and enforcement, including further automation and increased staffing and capacity at the National Board of Revenue (NBR).
Increasing accountability for revenue performance at all levels of the NBR will also be crucial.
TDS: What are your views on the budget for the new fiscal year?
NS: The broad goals set in the fiscal 2014-15 budget are commendable. In particular, the government is committed to continuing its focus on improving critical infrastructure; strengthening health, education and social protection; and empowering women.
In terms of macroeconomic and fiscal aggregates, there are differences between the fiscal 2014-15 budget proposals and the projections and targets in the government's own program supported by the IMF.
In line with our expectations at the time of the fourth ECF review mission in April, the budget is more optimistic on revenue projections and has a higher expenditure envelope than the authorities' programme (which is built on revenue outturns and historical expenditure execution rates).
The authorities, however, are committed to keeping budget execution in line with programme targets.
Importantly, the programme accommodates the budget's proposed increase in capital spending under the Annual Development Programme (ADP), of about half percentage point of GDP compared to fiscal 2013-14 (though the budget increase is relative to the original fiscal 2013-14 budget while the programme's is relative to fiscal 2013-14 expected outturns).
This increase is welcome: raising spending in high-development impact projects, particularly in power and transport infrastructure, is necessary to boost growth.
TDS: The local economists unanimously termed the budget's growth projection ambitious. Do you think so, in the global context?
NS: We expect growth in the US and the core Euro area economies to rise in the remainder of 2014 and 2015. This augurs well for the demand for Bangladesh's exports, most of which go to these markets.
That is the demand side. But garment export growth may face headwinds in fiscal 2014-15 from the supply side as the industry temporarily adjusts to higher wages and operational costs from welcome improvements in labour and safety standards and as factories undergo a process of retrofitting and modernisation.
Still, domestic demand is expected to be strong in fiscal 2014-15, supported in particular by a ramping up of public infrastructure investment.
Overall, we expect the GDP growth rate to increase to around 6.3 percent in fiscal 2014-15, slightly better than the average over the past decade.
Growth should rise up further over the medium-term if private investment receives a boost from the removal of supply side bottlenecks, particularly in critical infrastructure, and from planned improvements in the business climate.
TDS: Bangladesh Bureau of Statistics' provisional figures say the GDP growth in fiscal 2013-14 would be 6.12 percent, which is higher than the IMF's projection of 5.5 percent. What is your comment on this?
NS: Bangladesh's annual real GDP growth rates have averaged around 6 percent over the past decade. In that context, the provisional growth estimate for fiscal 2013-14 by the BBS is in line with history.
Now, available information suggests a weakening of domestic demand and economic activity in the first half of fiscal 2013-14, weighed down by uncertainty and unrest-related disruptions.
In our forecast, we expected a recovery in the second half of fiscal 2013-14, which has been confirmed by available data, but did not expect it to be strong enough to pull the annual growth rate above 6 percent.
Given the paucity of monthly or quarterly indicators of economic activity, we need to wait until data for the entire fiscal year are available to come up with a firmer estimate of growth in fiscal 2013-14.
We are currently working with the BBS through technical assistance to further improve the scope and coverage of national accounts statistics and macroeconomic data more generally.
TDS: What are the challenges for the economy in the new fiscal year?
NS: In the near term, a challenge on the supply side will be the adjustment of the garment industry to improved working and safety standards. Also, the outlook for remittances, an important driver of private consumption, remains uncertain.
On the policy front, it will be crucial to maintain monetary and fiscal prudence to safeguard the country's strong macroeconomic position and provide a stable environment for private investment.
Improved tax collections are needed to create fiscal space for increased spending in infrastructure projects with high development impact and in well-targeted social protection.
Strengthening the financial sector, including the state-owned banks, and improving the business climate are also needed to boost growth and reduce poverty. Overall, Bangladesh has a vibrant economy that has shown resilience in an environment of tepid global growth and uncertainty.
The authorities' prudent macroeconomic policies under the IMF-supported programme allow them to take on these challenges from a position of strength.
TDS: How do you think Bangladesh fares against its peer countries?
NS: In macroeconomic terms, Bangladesh has fared well when compared with other low-income countries in Asia.
On average, Bangladesh's GDP growth and inflation rates have been comparable to those of its peer countries over the past decade, but Bangladesh had lower volatility in both growth and inflation. This speaks to the resilience of the economy.
And, with its adequate level of international reserves and lower-than-average public debt-to-GDP ratio, Bangladesh is now even better placed to respond to adverse shocks.
Bangladesh also compares well in terms of broader indicators of development. For instance, it has achieved better outcomes in life expectancy, child mortality and access to water and sanitation than countries at similar income levels.
Poverty has nearly halved from 57 percent in 1990 to 31.5 percent in 2010, while inequality has remained broadly stable over that period, defying regional and global trends.
An area where Bangladesh can do better is in the ease of doing business. For instance, it ranks below the average for low-income countries in the World Bank's Doing Business report in areas such as access to electricity, property registration and contract enforcement.
TDS: A new government has taken over in Bangladesh this year. What are your expectations from it?
NS: We expect the authorities to maintain prudent macroeconomic policies and to continue to press ahead with their priority reform agenda as underlined in their IMF-supported programME. Those policies should underpin sustained higher growth and poverty reduction.
TDS: What is opinion on the global economic recovery? Will the US and the EU finally get back on their feet? What is the IMF's stance?
NS: We expect the global recovery to gain further momentum in 2014-15, with global GDP growth projected to improve further to about 3.5 percent in 2014 and about 4 percent in 2015 (from 3 percent in 2013), although we are currently updating these projections, and the revised set will be published with the World Economic Outlook's Summer Update in mid-July.
We expect much of the growth impetus to come from the advanced economies. In the United States, after a weak first quarter of 2014 (due mainly to bad weather), growth is expected to pick up and close at about 2 percent for 2014 and 3 percent for 2015, reflecting supportive monetary policies and a smaller drag from fiscal consolidation.
Growth is projected to be positive but varied in the Euro area: stronger in the core, but weak and fragile in countries with high debt (both private and public) and financial fragmentation, which will both weigh on domestic demand.
In emerging market and developing economies, growth is projected to pick up gradually in 2014 and 2015, helped by stronger external demand from advanced economies. Yet, growth in emerging market economies will face some headwinds in an environment of tighter external financial conditions and lower trend growth.
Continued policy vigilance is needed, as downside risks still dominate the near-term outlook.
In advanced economies, major concerns include risks from low inflation (particularly in the Euro area), the possibility of protracted low growth, and in some cases, risks stemming from over-valued property prices.
In emerging market economies, unexpectedly rapid normalisation of US monetary policy or renewed bouts of high risk aversion on the part of investors could result in further financial turmoil and difficult adjustments in some countries with higher external and domestic vulnerabilities.
Naoyuki Shinohara, deputy managing director of IMF, speaks on economic prospects and challenges
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