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IMF lends support to Bangladesh’s reforms aimed at boosting growth, improving investment climate

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
November 2003
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In my capacity as Deputy Managing Director, I have been seeking since 1997 to establish a closer working relationship between the IMF and Bangladesh. It is only now, under the current government, that we have been able to successfully conclude a PRGF Arrangement. This reflects our support for the direction of economic reforms that the Bangladeshi government is pursuing. Credit for this effort must go to the current economic team, which has worked so hard to make this possible.

The benefits of these policies are already becoming apparent. The economy is showing renewed vigor. Industrial activity and exports are rebounding. Inflation is being held in check, even after needed adjustments in key prices. A smooth transition to a floating exchange rate has been achieved, and international reserves today are two and one-half times the level when the government took office. For this fiscal year, a projected real GDP growth of 5.5 percent is well within reach, given continued supportive fiscal and monetary policies and further progress with structural reforms.

Raising the growth rate

The key challenge now for Bangladesh is to move to a higher growth path to help create jobs and, over time, lift the country out of poverty. The government is moving forward with a homegrown strategy to raise growth to 7 percent and to halve poverty by 2015. The IMF shares this vision and is supporting it with funding and technical support. At the center of this strategy are reforms to boost private sector growth, improve the investment climate, and diversify exports. This is a pro-growth and pro-poor strategy that grapples squarely with the structural flaws of the economy. And this is a strategy that, we understand from our discussions, enjoys broad support across society.

Decisive actions needed

What must be done to boost investment and diversify exports? Despite low-cost labor, Bangladesh is a high-cost place to do business. Impediments to investment include an unreliable power supply, high real interest rates, corruption, and weaknesses in law and order. These factors have resulted especially in lower foreign direct investment than in other fast-growing countries in east Asia. The government’s strategy is tackling these problems through a package of reforms. I want to stress four decisive and steadfast actions that will be crucial to success:

  • Increasing spending on education, health care, and infrastructure. The IMF supports the government’s strategy of accommodating a larger budget deficit for the next few years to permit increased government spending on human capital development and physical infrastructure. Such spending should help strengthen skills and boost productivity. But at the same time, sustained improvements in revenue will be essential. Tax administration, in particular, requires modernization to improve the collection and the fairness of existing taxes.

  • Reforming the nationalized commercial banks to lower interest rates and stem new nonperforming loans. If this reform succeeds, the nationalized commercial banks should become more efficient and should be able to cut their lending rates. Moreover, all banks should see their funding costs and lending rates fall if the government can rein in its own domestic borrowing needs to a prudent level and if adequate external assistance is assured.

  • Reforming the state-owned enterprises, especially in the energy sector. Inefficient state-owned enterprises have been a serious drain on the budget. Realistic pricing that reflects the cost of production is a first step. But for these enterprises to become viable, their operations will need to be restructured to reduce waste and improve bill collection. For the power sector, in particular, the investment required to upgrade infrastructure is enormous, and it is right that the World Bank gear up its lending program to support the government’s own efforts. The Asian Development Bank is also playing an important role in this sector.

  • Strengthening governance. Building institutions to improve governance and strengthening efforts to enhance law and order are essential to reducing the costs of doing business and thereby creating a more enabling environment for private sector investment. Curbing corrupt practices that allow, for example, tax evasion or loan default will also give the Bangladeshi people a fairer deal, as well as help enhance Bangladesh’s image in a competitive world. The IMF therefore very much welcomes the ongoing efforts to set up an independent anticorruption commission, and we look forward to its early functioning in an effective manner.

We recognize that this is a challenging reform agenda that will require vigorous debate to build national consensus and political courage to carry out. Broad support, both financial and technical, from the international community will also be vital for success. The IMF is fully engaged in Bangladesh. We are supporting this effort through the recently approved loan under the PRGF and through our program of technical assistance to build capacity. I can assure you that the IMF is committed to supporting your country.

Photo credits: Denio Zara, Padraic Hughes, Michael Spilotro, and Eugene Salazar for the IMF, pages 313, 315, 320-23, and 328; Chriss Ison for Reuters, pages 313-14; Peter Josek for Reuters, page 314; Rafiqur Rahman for Reuters, pages 321-22; and Roger Nord for the IMF, page 327.

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