The International Monetary Fund (IMF) Monday cautioned that the increased government borrowing from the banking system would fuel further the inflationary pressures in future.

The caution came from IMF resident representative Eteri Kvintradze who made the key observations of the Fund on the latest macro-economic developments in Bangladesh public, at a press briefing in Dhaka.
The IMF also suggested the central bank to tighten the monetary policy in order to contain inflationary pressure.

Eteri Kvintradze said high inflation has been eroding domestic purchasing power as well as the country's external competitiveness.

Bangladesh is now facing double-digit inflation, and non-food inflation has also moved upwards in recent months, according to official statistics.

The IMF, however, made a suggestion to increase fuel and electricity prices further to compensate for the high subsidy cost.

The government has increased fuel prices twice in recent period, creating pressure on the people of low and middle-income groups.

The IMF Bangladesh head advocated for gradual fuel and electricity tariff adjustments to mitigate the price spike impact. 

She said the Bangladesh Bank (BB) has rightly increased the cash reserve ratio and the statutory liquidity ratio to combat inflationary pressure on the economy. Monetary policy now remains accommodative although credit growth is down modestly, she added.

Eteri Kvintradze said the rising subsidy cost in Bangladesh has threatened its social and development spending to a great extent.

"If the present trend continues, the total subsidy cost will stand at Tk 315 billion against the budgetary estimation of Tk 19.1 billion."

The IMF mission chief said subsidy amount could be equivalent to 3.4 per cent of the GDP, if there is no move to make price adjustments shortly. She suggested the government to contain subsidy cost and help implement Annual Development Programme (ADP), which now remains much below the target.
A major part of the subsidy money is being eaten up by fuel-oil. "New electricity generation initiatives have pushed up the demand for fuel oil significantly," she added.

She said the overall balance of payments was in deficit for the first time in a decade, leading to foreign reserve loss for the fiscal year 2011-12.

"As a result that local currency Taka has come under pressure, with a moderate depreciation of taka vis-a-vis the US dollar" Eteri Kvintradze told the reporters at the press conference.

"Import is growing faster than export, and remittance flow is growing at a slow pace, putting pressure on the BoP."
Slower remittance growth and lower aid inflow have added further pressure on the BoP, the IMF official said.
She said the country must safeguard foreign exchange reserve to meet its import payment. "It should allow gradual depreciation of taka," she added.

The IMF Bangladesh mission chief said the present credit expansion will put some pressure on the banking sector.

She said: "Some banks are also heavily exposed to stock market, and it creates problems in the market." 
The IMF official said, "The good news is that revenue mobilisation is growing. Tax revenues exceeded 10 per cent of the GDP (gross domestic product) in the fiscal year 20011-12. Definitely this is a milestone for the country." 

She said the government consolidates gain in revenue mobilisation by continued improvement in tax administration along with new business-friendly VAT and income tax laws.

The mission chief said Bangladesh's GDP growth is strong, but it still remains behind the regional average. 
She said exports of the country surged in recent period. "Bangladesh grabbed further market share in the ready-made garment sector."

However, weaker-than-expected growth in the advanced economies could impact the RMG exports and possibly remittances.

She said expanding the export base and accelerating regional integration could also be significant factors to the country's stronger growth performance.

Source: The Finance/ Bangladesh/ 22th Nov 2011