Bangladesh needs to reform its financial sector through upgrading macroeconomic policy-making practices and institutions including modernizing the financial and tax system so that the country can leap to the next stage of development, said the International Monetary Fund (IMF).
“Maintaining the economy’s past growth performance will become increasingly challenging over the medium term, and will require upgrading the macroeconomic policy-making practices and institutions to support the country’s ambition to reach middle-income status,” IMF mission chief Brian Aitken said at a press conference at Bangladesh Bank headquarters on Thursday.
The IMF mission came here on February 26 on a twelve-day visit to conclude the consultation.
During the visit, the mission met with the finance secretary, Bangladesh Bank governor, Bangladesh Investment Development Authority (BIDA) executive chairman, bank and financial institutions division secretary, National Board of Revenue (NBR) chairman, other senior officials, as well as representatives of the business and banking sectors, labor unions, think-tanks and development partners.
Policies and reforms to preserve macroeconomic stability and contain risks, maintain competitiveness, build buffers against global uncertainties and shocks, mobilize revenue to fund needed public investment without compromising debt sustainability, and build a financial sector that supports a productive use of Bangladesh’s ample savings came up for discussion during meetings between the staff team and the authorities.
The mission chief said Bangladesh’s investment needs are large, and would require stepping up intermediation of the country’s underutilized pool of savings over longer horizons.
“As commercial banks’ ability to carry out this function will remain limited, policies that develop the country’s capital markets for financing long-term private investment would greatly improve future growth prospects,” he added.
He mentioned that an important impediment to modernizing the financial sector arises from the increasing reliance on high-cost National Savings Certificates (NSCs) as a financing vehicle for the government budget, which prevents the development of a deep and liquid market for government securities.
He recommended that the authorities could consider whether there are better targeted and less costly alternatives that achieve the government’s social policy goals without distorting financial markets.
Brian Aitken underscored the need for modernizing the tax system to boost low budget revenue and allow room for public investment and social spending to increase to levels consistent with the government’s growth ambitions without compromising fiscal sustainability.
“Launching the new VAT Law in July 2017 as planned will be central to raising revenue, and will have other significant benefits as well. In particular, it will make tax administration more transparent, it will reduce taxpayers’ compliance costs, and serve as a key building block for a modern tax system more broadly,” he added.
Aitken, however, said steady monetary policy management and fiscal discipline have delivered the macroeconomic stability that allowed the economy to benefit from a favorable external demand, high remittances, and low commodity prices.
“The result has been strong output growth, falling inflation, moderate public debt, and a rebuilding of external resilience,” he said adding that this solid macroeconomic performance is set to continue this year, with output growth projected to remain close to current levels and inflation broadly in line with BB’s target.
He said that the Bangladesh economy would continue to rely on exports and remittance for growth, and remains particularly exposed to the changing external environment.
“It is therefore essential that the country’s foreign exchange reserves buffers, which have been built over the last several years, continue to be maintained at levels adequate to ensure the economy’s resilience,” he added.
He assured that the IMF stands ready to support the government’s reform efforts through policy advice and capacity building, including on monetary and fiscal policies, financial sector supervision and regulation, and macroeconomic statistics.
