IMF country report-2013: Export slump threat to reserves

The International Monetary Fund (IMF) has sounded apprehension that the escalating violence in domestic politics and lack of fiscal restraint in an election year may create greater vulnerabilities to the national economy, IMF country report-2013 on Bangladesh published on Tuesday said.
It feared in the report that domestic tension coupled with threats to production
setback, particularly in the garment sector and the crisis in Eurozone areas may further bring backlash to Bangladesh economy.
Although imports have fallen sharply to reduce pressure on balance of Payment, a new threat such as an ‘export slump’ may cause a sharp fall to foreign currency reserves, IMF said suggesting that the government should take moves to beef up reserves from now.
Some other threats that IMF apprehends in the coming days and months are destabilizing exchange rates following pressure on reserves. The fear is based on the fact that although remittance may continue up the feared export slump may still bring down the reserves.
It may require refocusing the entire fiscal and monetary policies with greater exchange rate flexibility, moderate fiscal easing and to keep inflation in control along with control over election related cost.
IMF further said, fiscal slippage may lead to higher bank borrowing by the government to make more fund available to development financing thereby increasing pressure on the banking sector and on Bangladesh Bank to provide additional fund to the government.
The global monetary watchdog said fiscal tightening is essential including readjustment of monetary targets. Moreover, there is a need for greater interest rate flexibility to reduce spending and help banks build reserves.
It has therefore advised the government to centrally build up sufficient foreign exchange reserves to deal with external payment liability at a time when political uncertainty and the Eurozone slowdown may hit together.
The global economic slowdown coupled with election-year uncertainty in Bangladesh poses the most immediate challenge to policymakers, the IMF said in its report.
“Although the spillovers from the Eurozone crisis appear manageable so far, the government should still take pre-emptive measures to build external and fiscal buffers,” the IMF said. “These same buffers could also mitigate the effects of domestic strife ahead of upcoming elections.”
The IMF identified escalating violence and lack of fiscal restraint ahead of the national elections as one of the vulnerabilities for the economy.
Given the country’s export dependence on Eurozone, where about half of the exports go, intensification of the crisis in the region might derail the economy and bring backlash to Bangladesh exports, the IMF said.
The garment sector-which accounts for 80 percent of the country’s exports and employs about four million workers, mainly women-would particularly be affected, it said.
The sector’s exports, however, could also be affected by “a backlash” from the Tazreen fire tragedy in November 2012, further said IMF’s risk assessment.
“Balance of payments (BOP) pressures could intensify on a deeper export slump, destabilising the exchange rate and pressurising reserves.”
If the risks come true, greater exchange rate flexibility would be needed to be coupled with moderate fiscal easing keeping the inflation and reserves in mind, the IMF said.
IMF expects election-related costs to be contained within the bounds of the Extended Credit Facility (ECF) programme, but the possibility of fiscal slippages still looms large.
Fiscal slippages would lead to higher bank borrowings, increasing the burden on banking sector for development financing and the government’s reliance on Bangladesh Bank (BB) financing with spillovers to monetary policy.
IMF has called for fiscal tightening, readjustment of monetary targets in such situation. Further deterioration of state owned banks’ finances poses yet another major risk to the economy, IMF’s risk assessment predicted.
“The financial performance of the SOCBs, even before factoring in recent frauds, points to the need to minimise systematic and fiscal risks.”
To safeguard the banking system, strict enforcement of BB’s memoranda of understanding with the state banks, aggressive pursuit of loan recoveries and a broader strategy to reinvigorate the state banks’ operations are needed, it said.
World oil price shock poses another risk and the balance of payment would come under renewed pressure, while fuel-related subsidies could destabilise the fiscal stance, the agency report said.
IMF recommends an automatic fuel price adjustment to contain subsidies, temper demand and protect reserves while the overall fiscal stance to need to be prudent. Over the medium term, value-added tax implementation, coupled with income tax reforms, could form the base for a modern tax regime, it said while on expenditures side a series of price adjustments over the past 18 months made possible containment of electricity and fuel subsidies.

Source: The New Nation


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