Friday, May 03, 2024
Bangladesh needs to transition to a more flexible exchange rate regime as it will be important to build external resilience, buffers and foreign exchange reserves, according to the International Monetary Fund (IMF).
Inflation has the worst impacts on the poor and Bangladesh needs to bring inflation back on track, Krishna Srinivasan, director for the multilateral lender’s Asia and Pacific Department, made the observations at a press briefing on the regional economic outlook in Washington, DC on Thursday.
He said it was true that the forex reserve position was yet to go up due to the last general election, which affected part of the international assistance.
"Also, it is more important for Bangladesh to go for a more flexible exchange rate regime for building the resilience of the forex reserve," he said.
Responding to a query, Srinivasan said, “Like many other countries in the region, Bangladesh was also hit by a confluence of shocks, or I would say multiplicity of shocks. You know, of course, following the pandemic, the war in Ukraine, all that disrupted the recovery. Rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability.
“So when you think in terms of the programme, this is a programme owned by the government, supported by the IMF. They have placed emphasis on issues like monetary tightening because inflation is rising high. So they have embarked on macroeconomic adjustment, which is aimed at stabilising the economy.”
He continued, “Now, you're right about the fact that the exchange rate, the reserve position, has not improved as much. And that partly relates to the fact that, of course, you had the elections, which kind of put people on. When you have elections, there's always some uncertainty about the prospects. So that affected part of the financial account.
“But also, I think it's important for Bangladesh to transition to a more flexible exchange rate regime. That will be important to build external resilience and build buffers and build reserves. So I think that is the area where engagement and dialogue continue in terms of allowing the exchange rate to be more flexible so that reserves can be built up, so that, in a sense, will be a key priority for the country going forward.”
The IMF has revised the GDP growth forecast of Bangladesh's economy down to 5.7 per cent, from 6 per cent, in its previous prediction for the current FY2023-24.
The global lender has also projected the inflation rate at 9.3 per cent in Bangladesh for the current fiscal year.
Robust domestic demand fuelled activity
Regarding Asia, Srinivasan said that growth surprised the upside in the second half of 2023 as robust domestic demand fuelled activity, especially in emerging Asian economies.
“Malaysia, the Philippines, Vietnam, and, most notably, India recorded sizable positive growth surprises. Growth for the region reached 5 per cent in 2023, much stronger than growth of 3.9 per cent in 2022, and this represents a 0.4 percentage point higher than what we had projected in the October 2023 Regional Economic Outlook, and the momentum carries over into 2024,” he said.
“We now project the region to grow by 4.5 per cent in 2024, with an upward revision of 0.3 percentage points relative to October. With this, Asia would contribute about 60 per cent of global growth. The region is projected to grow by 4.3 per cent in 2025,” he added.
Srinivasan said, “Now, what will drive growth? The answer depends on the country. In China and India, we expect investment to contribute disproportionately to growth, much of it public, especially in India.
“In emerging Asia, outside China and India, robust private consumption will remain the main growth engine. In some advanced economies, such as Korea, we expect a positive impulse from exports, driven in part by strong global demand for high-end semiconductors. Domestic demand would strengthen only gradually.”
He continued, “And next, we turn to inflation, where Asia is ahead of the curve compared to most other regions. Three groups have emerged during the disinflation process. In one group of countries, notably Korea, Australia and New Zealand, inflation is still above target, boosted by persistent price pressures from services. In a second group, most notably Asian emerging markets and Japan, headline and core inflation are contained. And finally, in countries like China and Thailand, inflation is low.”
“This is due to both falling commodity prices and weak demand, which puts downward pressure on coal prices. Going forward, we expect that inflation will converge to central bank targets, but this requires a differentiated policy approach. [Like] a tighter and longer-term stance on economies where inflation is elevated and accommodative macroeconomic policies leave economies with sizable slack,” he said.
Fiscal buffers
Meanwhile, on Thursday, at another press briefing on the Global Policy Agenda, IMF Managing Director Kristalina Georgieva said, “We have the meetings, and we are presenting our Global Policy Agenda, focusing on three priorities. First, rebuild fiscal buffers. We have long advocated that while central banks pursue the return of inflation to target, they can use some help from the fiscal side.
“Now fiscal restraint is becoming even more important in its own right because fiscal capacity is exhausted in most countries, and that is dangerously high. Last year, global public debt edged up to 93 per cent of GDP. This is some 9 percentage points above the pre-pandemic level. Debt service is also more expensive, as interest rates have increased.”
She said that in a world where crises keep coming, countries must urgently build fiscal resilience to be prepared for the next shock. As hard as it is, when still part of the population needs support and half of the world is going to the polls, the time has come to adopt medium-term frameworks for fiscal consolidation.
“We recognise that one size fits all does not fit all. The pace and speed of consolidation will vary depending on the country's circumstances, as will the balance between mobilising revenue and improving spending efficiency. What is very important is not to forget that the burden should not fall on the most vulnerable people,” she said.
She said, “Over the last few years, the fund has been there for our members when they needed it, as much as they needed it. We provided over $300 billion in financial support to almost 100 countries.
“As many of you have witnessed at the Annual Meetings in Marrakech, our members gave us a strong vote of confidence by increasing our quota resources and injecting concessional funds into the Poverty Reduction Growth Trust and our Resilience and Sustainability Trust. And this month I am very pleased to tell you we have reached our target of $25 billion SDR— this is around US$30 billion — in precautionary balances, our own protection against financial risks.”
