The COVID-19 pandemic continues to be an unprecedented global phenomenon reshaping economies and affecting the lives of people everywhere. An International Monetary Fund (IMF) staff team visited Dhaka in December 2021 to hold discussions in the context of the 2021 Article IV Consultation with Bangladesh which included policy discussions related to the COVID-19 pandemic. To better understand how the IMF perceives Bangladesh’s progress during these trying times, Colors Business’s Advisory Editor Ziaul Karim recently spoke to IMF’s Resident Representative to Bangladesh Jayendu De. Jayendu’s work focuses on maintaining close IMF engagement with authorities, donors, international institutions, and other stakeholders. Most recently he served as desk economist for Bangladesh, Lao P.D.R, Maldives, and Myanmar and was based in Washington D. C. He has participated in several IMF Article IV missions and has led sector discussions on issues ranging from external assessments to debt sustainability.
Responding to Bangladesh’s performance during the COVID-19 crisis, Jayendu highlighted Bangladesh’s resilience compared to other regional peers. According to the IMF team’s preliminary findings, the quick and decisive actions by the authorities, supported by the external environment, led to a much quicker rebound in Bangladesh. Growth is expected to pick up to 6.6 percent in FY22 as the impact of COVID-19 abates and policies remain accommodative.
Pointing to Bangladesh’s robust economic growth and impressive development indicators, Colors followed up about the structural and policy measures Bangladesh needs to address to reach upper-middle-income status by 2031. Jayendu emphasized that the foremost reform effort should be the long-standing challenge of raising tax revenues, which is critical to increasing public investments to support the poor and vulnerable. He clarified that would require the modernization of the tax system and improvements in revenue collection, for instance, by simplifying the VAT rate structure and tackling implementation challenges. He added that financial sector reforms to enhance banking regulation and supervision, and improved corporate governance and legal systems remain important. From a longer-term perspective, the central bank’s focus on modernizing its monetary policy framework and moving towards interest rate targeting will contribute to preserving price stability. While discussing what needs to be done to support private sector-led growth, underpinned by exports and investments, he emphasized that structural reforms should focus on improving governance, diversifying exports, increasing productivity, and building climate resilience to lift growth potential.
Continuing this discussion, he added that reducing fiscal risks – by increasing revenue and enhancing fiscal policy frameworks – is necessary to scale up inclusive and productivity-enhancing investments, while safeguarding fiscal sustainability. These are important as the fiscal deficit is projected to increase as the pandemic-related spending increases. Creating greater fiscal space related to modernizing revenue administration, streamlining tax expenditure, separating National Savings Certificates (NSC) from direct budget financing, and adopting a fuel pricing mechanism will help accommodate additional social, developmental, and climate-related spending. Recent NSC price changes are welcome. Efforts to reform the NSC scheme not only help reduce fiscal risks but remain important for developing capital markets.
He also highlighted the importance of addressing structural weaknesses in corporate governance, regulatory, supervisory, and the legal framework to stem non-performing loan (NPL) growth in the context of preserving the stability of the financial system, particularly during the post-pandemic recovery stage. In the absence of reforms, financial sector risks could be a drag on medium-term growth prospects. He added that the need to ensure that classification and provisioning requirements are in line with Basel standards is the important first step towards NPL resolution.
When asked about the caps on the lending and borrowing rates and when they should be phased out, he explained that the caps on the lending and borrowing rates limit policy space and that these should be phased out to strengthen market-based pricing, improve credit allocation and monetary transmission. This should be included in the shorter-term reform priorities related to the modernizing of the monetary and exchange rate framework.
He also noted Bangladesh Bank’s significant role in implementing a monetary policy that can help normalize inflationary pressures as the economy rebounds from the pandemic. Jayendu added that the central bank should closely monitor inflationary pressures and stand ready to adapt and adjust using meaningful policy tools to achieve both inflation and growth objectives. Lower demand from the COVID-19 shock kept inflation close to the central bank’s target in FY21 despite monetary easing. While food prices increased in the early parts of FY21 because of supply-side pressures, including floods; they have eased since November 2020. Non-food inflation has been creeping up in recent months. As domestic activity picks up, the central bank should remain vigilant against inflationary pressures and be prepared to fine-tune policies to balance growth and price stability. Similarly, with abundant liquidity in the system, the central bank should strike a balance between supporting the recovery and maintaining price and financial stability.
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 staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society. In Bangladesh, the IMF team met with the central bank governor, chairman of the National Board of Revenue, finance secretary, leaders of the banking sector, representatives of labor unions, and development partners to better understand Bangladesh’s reform efforts.