On May 26, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV Consultation with Bangladesh, and considered and endorsed the staff appraisal without a meeting. [1]

Steady monetary policy management and fiscal discipline have supported macroeconomic stability, allowing the economy to benefit from 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.

Supported by both domestic and external demand, real GDP growth in FY16 accelerated to 7.1 percent, from 6½ percent in the previous fiscal year. Headline inflation continued to ease, falling below 6 percent by the end of 2016, helped in part by favorable agricultural production and falling global commodity prices. International reserves have risen further, and the public debt-to-GDP ratio has remained largely stable at a moderate level. Tax revenue performance has improved somewhat, with revenues-to-GDP ratio increasing moderately. The strengthening of economic growth has been supported by a moderate acceleration of money supply and credit to the private sector.

In FY17, output growth is expected to remain close to 7 percent. As global commodity prices pick up, inflation is projected to increase somewhat from the lowest level in five years, although with moderate money and credit growth, stable inflation expectations, and temperate private wage growth, it is projected to remain close to the target rate of the Bangladesh Bank. Over the medium term, maintaining output growth of around 7 percent per year would require increased public and private investment, as well as reforms to support capital market development and improved investment efficiency. A robust growth supported by increased investment would be expected to lead to higher investment-related imports, pushing the current account into a modest but manageable deficit. The planned launch of the modern value added tax (VAT) in July 2017, together with improvements in tax administration, are expected to boost tax revenues, providing space for increased public investment and social spending.

Executive Board Assessment

Executive Directors commended the Bangladesh authorities for the continued strong macroeconomic performance. Growth has been stable and robust, social indicators have improved, inflation has declined, external reserves have risen and fiscal deficits remained moderate. Directors shared staff’s assessment that while the outlook remains broadly positive, maintaining the output growth would become more challenging and would require not only prudent macroeconomic policies, but also upgrading the macroeconomic policy-making practices and institutions to support the country’s ambition to reach middle-income status.

Directors commended the Bangladesh Bank for a prudent monetary policy conduct. They noted that inflation has been reduced and is likely to remain close to the Bank’s target. Broad money growth, too, is in line with the Bank’s target, and the exchange rate has been consistent with maintaining competitiveness and rebuilding reserve buffers. However, Directors noted that the Bangladesh Bank has been sterilizing only part of the liquidity from the external inflows, and called for an increased sterilization efforts, to contain financial sector risks and to head off the need in the future of a more abrupt and disruptive policy tightening.

Directors welcomed the authorities’ commitment to launch the modern VAT on July 1, 2017. They emphasized that mobilizing domestic revenue should be a policy priority, to allow increasing public investment and strengthening social safety nets. To this effect, Directors emphasized that in addition to modernizing the VAT, efforts should continue to improve the income tax regime and to strengthen tax administration. Director broadly concurred with staff that monetary policy is better placed to manage short-term demand fluctuation and that fiscal policy should focus on keeping the public debt to GDP ratio broadly stable.

Directors noted that the FY17 budget was based on overly ambitious projections for revenue growth and equally ambitious capital spending targets, and that the actual outcomes usually deviate significantly from the budget targets. They noted that there is scope to improve the credibility of the budgeting process, by improving budget formulation and execution.

For Bangladesh to reach middle-income status, Directors underscored the need to boost investment, and to modernize policy-making practices and institutions. In this context, Directors shared staff’s emphasis on the pivotal role of developing capital markets, to improve the intermediation of the country’s underutilized pool of savings over longer horizons. They called on the authorities to reduce the increasing reliance on high-cost National Savings Certificates as a financing vehicle for the government budget. Directors recommended that better targeted and less costly alternatives should be considered that achieve the government’s social policy goals without distorting financial markets.