Dhaka, Bangladesh (BBN)– Bangladesh’s investment needs are large, and will require stepping up intermediation of the country’s underutilized pool of savings over longer horizons, the International Monetary Fund (IMF) said on Thursday.
The IMF made the observation after concluding its Article IV mission, led by Brian Aitken, visit for assessment of the Bangladesh’s macro-economic situation from February 26 to March 9.
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, the IMF mission chief said in a statement.
“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,” the IMF explained.
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.
“Modernizing the tax system will be needed to boost Bangladesh’s 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.
“The Bangladesh economy will continue to rely on exports and remittances 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,” it noted.
The IMF also 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. 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 Bangladesh Bank’s target.”
It also said: “Looking ahead, 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.”
During the visit, the mission met with the Finance Secretary, Bangladesh Bank Governor, Executive Chairman Bangladesh Investment Development Authority, Secretary Bank and Financial Institutions Division, Chairman National Board of Revenue, other senior officials, as well as representatives of the business and banking sectors, labor unions, think tanks and development partners.
At the meetings, the staff team and the authorities discussed 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.