Dhaka, Bangladesh (BBN)- The central bank of Bangladesh has recommended preparing an action plan to create some fiscal space to respond to any downturn in economic activities and absorb external shocks arising from the current global financial crisis.

“Plan to accommodate, if necessary, additional fiscal support to expand safety nets and provide assistance to the exporters especially readymade garment (RMG) exporters,” the central bank’s policy analysis unit (PAU) said in a report, released on Thursday.

The policy paper styled ‘Navigating the Global Financial Storm: Challenges for Bangladesh’ also said that the fiscal sector had to withstand significant pressure during last year due to rapidly rising cost of subsidies and other current expenditures.

“As a sensible and quick response, trim low priority expenditure and improve revenue collections to help protect fiscal positions and the government’s ability to respond when needed.” the study added.

It also suggested rationalization of tariffs and duties on imports of nonessential and luxury goods and similar goods produced locally as a means of increasing the fiscal base as well as to support priority domestic production.

The study also suggested revisiting financial sector management aiming to ensure the quality of loans and to keep stable the liquidity position in the banking system.

“Although relatively well protected from the direct effects of the global financial crisis, Bangladesh’s banking sector would probably face more pressure over time,” the PAU study said, adding that the loan quality may deteriorate and liquidity may reduce if economic growth slows.

The study suggested, as short term measures, close monitoring of rising default on borrowings by importers against stocks of essential products imported at higher prices earlier due to anticipated loss by falling world prices and take appropriate actions as necessary.

Regular monitoring of the trend in non-performing assets of banks since there is an apprehension that such assets might rise due to lower profitability of firms especially produced for the export sectors.

“The chain effect may not only affect the industry but the financing banks may also face liquidity problems because of repayment defaults,” the study noted.

Besides, the priority for Bangladesh is to improve the quality of information that the banks and other financial sector institutions put out and those collected by the regulatory agencies, according to the study.

“The important agenda for Bangladesh would be to convert the current global crisis into an opportunity in order to move forward,” it noted.

Clearly, Bangladesh needs to plug in regulatory and supervisory infrastructures and strengthen its regulatory regime in a comprehensive manner covering all institutions dealing with both household savers and institutional investors in order to avoid the creation of any systemic distress, the study added.

BBN/SI/SSR-AD-20November08-11:42 PM (BST)