$1b IMF loan risky CPD sees emerging tensions in economy

Posted by BankInfo on Mon, Feb 14 2011 03:28 am

The Centre for Policy Dialogue yesterday warned the government about risks of borrowing

$1 billion from the IMF, saying the conditionality-based loans would increase the costs of doing business and limit scope for strategic support to domestic industries.

The think-tank said the borrowing from the IMF (International Monetary Fund) would limit the government's fiscal flexibility and may lead to a contractionary monetary policy.

"We have to maintain policy flexibility and policy autonomy to attain faster growth," said CPD Executive Director Mustafizur Rahman at a dialogue on emerging challenges in Bangladesh on growth, inflation and monetary policy.

CPD organised the programme at the Cirdap auditorium in Dhaka. Chairman of the research organisation Rehman Sobhan chaired the discussion.

The CPD observation came at a time when the government is finalising a $1 billion credit deal with IMF which tagged a number of conditions to the loans.

The conditions include phasing-out of bank lending rate ceilings, further liberalisation of tariff level, pursuing a monetary tightening stance and putting in place new VAT and income tax laws.

The think-tank said some of the conditions such as raising CNG and furnace oil prices, establishment of a framework to monitor losses of state-owned enterprises are in line with the necessary reform agendas.

But citing the United Nation's World Economic Situation and Prospects 2011 report, Rahman said the likely consequences of the IMF conditionalities contradict the UN recommendations.

CPD also observed that Bangladesh economy is going through a turning point and some tensions are emerging.

These include the rising inflation, volatility in the stockmarket and the banks' risky exposure to the market, instability in the foreign exchange market due to a rise in import payments, and a slowdown in remittance inflows.

"If we cannot address these at this moment, it may put the economy into trouble," said the CPD researcher.

Economists also said Bangladesh might be able to attain its growth target. But it might not remain free from soaring prices of foods.

"Inflation is up. But we must not forget that there is a strong domestic demand," said Executive Director of Policy Research Institute Ahsan Mansur.

Mansur said the stockmarket is in a correction mood now. "Let's not bother about it for too long," he said.

He warned about the risk of a drop in remittance inflows. "We have to stabilise our exchange market," said Mansur who was also critical of excessive credit expansion.

Salehuddin Ahmed, a former BB governor, said danger is coming from the forex market.

He said any financial crisis usually preceded by bubble. "The central bank should be cautious about credit bubble."

Ahmed blamed the BB for raising the CRR (cash reserve requirement), saying that the timing was wrong that caused a plunge in the stockmarket.

But BB Deputy Governor Ziaul Hasan Siddiqui said the central bank increased the CRR after it observed a rising trend in inflation last year.

World Bank Lead Economist in Bangladesh Sanjay Kathuria said volatility in inflation creates uncertainty in investment and employment generation.

He said investment remains below the overall savings rate in Bangladesh. But it should be reversed, he said.

News: The Daily Star /Bangladesh/14 Feb 2011

Posted in Economics, News