IMF Urges Bangladesh to Moderate Deficit Reduction

A team from the International Monetary Fund (IMF) visited Dhaka April 18–26, 2012 to discuss budget developments and the near-term macroeconomic outlook. The visit came following approval by the IMF’s Executive Board of a three-year arrangement under the Extended Credit Facility (ECF) in mid-April in the amount of SDR 639.96 million (US$987 million at the time of program approval).

The team met with Finance Minister Abul Maal Abdul Muhith, Economic Advisor to the Prime Minister Mashiur Rahman, Finance Secretary Mohammad Tareque, Bangladesh Bank Governor Atiur Rahman, and other senior officials and development partners. It also met with civil society representatives and had good discussions on the main elements of the ECF-supported program at a Bangladesh Bank press seminar, the Policy Research Institute, and BRAC University.

At the end of the visit, Mr. David Cowen, head of the IMF mission to Bangladesh, issued the following statement:

“In view of the government’s upcoming budget, our discussions focused on fiscal performance in FY12 and budget priorities in FY13. Based on performance to date, FY12 budget outturns appear to be in line with targets agreed under the ECF-supported program. Nonetheless, fuel, electricity, and fertilizer subsidies continue to require close watch, given the pressures they have exerted on the budget over the past year.

“Looking ahead, we urged the FY13 budget aim for moderate deficit reduction in order to contain domestic bank borrowing, consistent with program targets. It would also help reinforce monetary restraint, as necessary to tame inflationary pressures and stem reserve losses, will leave ample space for private sector credit growth.

“To achieve these goals, we anticipate decisive actions in the FY13 Finance Bill to strengthen tax administration and policy in order to broaden the tax base and raise overall revenues, supported by a new VAT law and reduced tax expenditures. While we foresee subsidy costs will remain large in FY13, their containment rests on further price adjustments, as needed, and well-anchored fertilizer subsidies to avoid crowding out high impact spending. It is, of course, also necessary to have accompanying steps to strengthen social safety nets to mitigate the impact of energy and food price increases on the poor.

“While accelerating the pace of Annual Development Program (ADP) implementation remains critical to achieving medium-term growth and poverty reduction objectives, we believe the broader envelope for capital spending requires better prioritization. In this respect, more effort should be made to unlock external commitments, so as to help boost ADP spending and contain domestic bank borrowing, in keeping with program targets.”

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