Financial situation in the banking sector deteriorated further along with high vulnerabilities, observed an International Monetary Fund team after a 12-day visit in the country.
The multi-lateral lending agency differed with the government’s GDP growth target for the fiscal year 2019-20, stating that the country’s economic growth would be above 7.5% in FY20.
The team, led by Daisaku Kihara, made the observations at a press briefing held at Bangladesh Bank headquarters in Dhaka on Thursday.
The delegation, among others, also recommended limiting the use of rescheduling or restructuring of defaulted loans for resolutely addressing the high level of non-performing loans, and addressing financial stability and associated fiscal risks.
Appreciating the government move to implement VAT law, the delegation mentioned the multiple rates and implementation remained as a major challenge.
At the briefing, IMF Bangladesh mission resident representative Ragnar Gudundsson and its economist Muhammad Imam Hussain, among others, were present.
Mentioning that the country’s economic growth will continue, Daisaku Kihara said: ‘Important challenges remain to realize the authorities’ aspiration to reach upper middle-income status and preserve the resilience and sustainability of growth.’
The visiting IMF team leaders recommended three types reforms for overcoming the challenges in achieving the goals.
Kihara recommended checking growing volume of non-performing loans (NPLs) as it would decrease available resources for the banks as well as for the government.
Secondly, he recommended that the government should create fiscal space to address social needs, infrastructure requirements, and climate change vulnerabilities.
To address the economic challenges, the IMF team head suggested diversification of the country’s economy by strengthening business environment through improved governance.
On the country’s banking sector, Kihara said: ‘The financial situation in the banking sector continues to deteriorate despite strong growth.’
Strengthening banking sector supervision and avoiding regulatory forbearance were on top of the recommendations of the visiting IMF team.
He also recommended focusing on a close assessment of banking sector assets, tighter criteria and limited use of rescheduling or restructuring of loans.
Improving corporate governance, reforming the legal system to strengthen creditor rights, redefining the role and mandate of state-owned commercial banks and developing bank crisis management and resolution mechanisms were the other financial sector-related proposals.
Asked whether Bangladesh would get benefit out of the US-China trade war, the IMF team leader said that there could be slowdown in the world economy and there could be an increase in demand of RMG from Bangladesh.
He, however, said that what would be the net impact on Bangladesh was yet to be clear.
Appreciating government’s move on implementing VAT law in FY20, Kihara, however, mentioned that the revenue impact was uncertain because of multiple rates and implementation challenges.
Organizational structure of the National Board of Revenue needed to be modernized to improve its coordination and efficiency, he said.
