Govt measures bringing inflation down in Bangladesh, but more needs to be done: IMF
"Further actions needed to ensure that inflation is durably coming down and comes back to target sooner than later," said IMF Asia and Pacific Department Director Krishna Srinivasan
The measures taken by the government are bringing down inflation in Bangladesh, the International Monetary Fund (Fund) said.
"Now, what we have seen is they [Bangladesh government] have taken measures to tighten the monetary policy to bring inflation down. And inflation is coming down, but further actions needed to ensure that inflation is durably coming down and comes back to target sooner than later," IMF Asia and Pacific Department (APD) Director Krishna Srinivasan said during a briefing on the Regional Economic Outlook for Asia and the Pacific in Tokyo on Wednesday (31 January).
The IMF official's remarks came as a response to a question regarding the latest monetary policy taken by the Bangladesh Bank.
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He further said Bangladesh has an IMF-supported programme in the context of back-to-back shocks.
"Like many other countries, Bangladesh too had to endure shocks, starting from Covid to the Russia's war in Ukraine and subsequent shocks. In that context, Bangladesh sought access to a Fund supporter programme. And as part of that programme, there are many pillars, and one pillar, of course, is to bring down inflation," he said.
"The other pillar is to make sure that you have fiscal sustainability while protecting the poor and the vulnerable. You also had governance reforms, and you had reforms which were aimed at protecting the poor and the vulnerable through our conditionality," Srinivasan further said in reply to a question.
Responding to the question what else the government could have done to pay the arrears instead of issuing bonds worth billions to clear bank debt against arrears at an interest rate of 7.5%, which is further raising the government's debt total, the IMF official said: "So there it would be important to see what are the choices you have. The government, as part of the IMF-supported programme, is embarking on significant fiscal tightening to ensure that, you know, revenue mobilisation remains robust, expenditures are more targeted and so on."
"So fiscal consolidation in that context can have as an offset, but the question is how much more consolidation can it do? And that's where it's important. In the context of what we have been talking about is in the context of interest rates being high, that countries have to go beyond what they've been doing in terms of fiscal consolidation and further tightening may be needed," he said.
"Again, this is something which the country team working on Bangladesh will be assessing in the months forward to provide a more definitive answer," Srinivasan said.
The Bangladesh government decided to issue special bonds, worth around Tk26,000 crore, with a maximum interest rate of 7.5%, to clear arrears to independent power producers (IPPs) and fertiliser importers that have remained unpaid for months.
The bonds, a debt instrument, will be used as loan repayments to 40 banks on behalf of power producers and fertiliser suppliers.
Fertiliser importers have arrears of Tk12,000 crore while IPPs have arrears of Tk14,000 crore.
When asked if Bangladesh is on track with the IMF loan programme, he said: "Broadly speaking, yes. So we had a review of Bangladesh's program two months ago, I would say, and the review was satisfactory in terms of their meeting, the various -- what we call conditionality in the programme."
"There were some areas where there could be slippages, particularly on the external side. And that's partly because in the run up to the election, the financial account was in some sort of asymmetrically on the current account side. The current account was doing reasonably well because of, you know, surging exports and some import compression," he added.
"The financial account, a lot of money wasn't coming in. Now that the elections are behind, the uncertainty has dissipated, you would expect the financial account to also get back into more resilient," the IMF official further said.
Pressed by a liquidity crunch and soaring money rates, the Bangladesh Bank doubled down on tightening money supply, launching a new monetary policy to subdue the still-elevated inflation which has shown a slowing trend since November last year.
In its new monetary policy announced on 17 January for the second half of the current fiscal year, the central bank increased the key policy rate, also known as the repo rate, by 25 basis points to 8%, effectively making money more expensive for banks.
The central bank has revised downward all money supply targets.
Notably, the private sector credit growth target has been reduced to 10% for June, down from the previous 11%.
Also, the broad money supply has been trimmed to 9.7% from the earlier target of 10%.
At the same time, the central bank has disclosed its intention to implement a "crawling peg" system to stabilise the exchange rate and prevent further depletion of the country's foreign exchange reserves.
This new mechanism will be linked to the real effective exchange rate, measured against the currency basket of trading partner countries and will operate within a predefined exchange rate corridor.
However, the central bank has not provided a specific timeline for this new mechanism to come into effect.
This tightening of monetary policy occurs at a time when private sector credit growth remains sluggish, hovering around the single-digit mark, posing challenges to the attainment of the government's growth target of 6.5%.
The Bangladesh Bank is determined to persist with its stringent monetary policy until the point-to-point inflation recedes to the 6% level, with less emphasis placed on fostering economic growth.
"We do not have any headache about growth, inflation is our main target," said Bangladesh Bank Governor Abdur Rouf Talukder while unveiling the new policy.
Acknowledging the liquidity crisis in banks and recognising that additional tightening might adversely impact investment, he mentioned that a 1% decline in growth would not pose a significant problem. Hence, contractionary monetary policy will continue until inflation comes down to a 6% level.
Meanwhile, the Bangladesh Bank will provide various low-cost credit schemes to support employment. Loans for small businesses will be given at 4% to 5% rates under credit schemes when the market rate is above 12%, the governor said.
