Bangladesh’s banking sector vulnerable: IMF

The International Monetary Fund’s Executive Board has warned that existing vulnerabilities in Bangladesh’s banking sector, exacerbated by the pandemic, could impair the country’s medium-term growth.

At the Article IV consultation with Bangladesh on March 2, the directors emphasised that continuing with sound macroeconomic policies, modernising policy frameworks, and addressing structural impediments will be key to successfully graduating from the Least Developed Country status and realising the country’s aspiration of reaching upper-middle income status.

“Directors noted that the pandemic increased existing vulnerabilities in the banking sector that could impair medium-term growth. They stressed the need to strengthen banking regulation and supervision, improve corporate governance, and reform legal systems to stem the flow of high non-performing loans, particularly in the state-owned commercial banks,” IMF said in a press release.

Directors commended the authorities for exercising fiscal prudence and maintaining a low risk of debt distress, while noting that Bangladesh’s capacity to repay the Fund remains sound.

They lauded Bangladesh for reacting quickly and decisively to address the economic fallout of the pandemic, which has facilitated a faster recovery. Directors recognised Bangladesh’s impressive economic growth and social development, but noted the risks, including from the uncertain path of the pandemic, low vaccination rates, and vulnerabilities to climate change, the press release said.

Although GDP grew by 3.5 per cent in FY20, it is estimated to have picked up to 5 per cent in FY21. Growth is expected to pick up to 6.6 per cent in FY22 supported by a robust rebound in exports, continued implementation of the stimulus packages, and accommodative monetary and fiscal policies. Headline CPI inflation is projected to rise to 5.9 per cent in FY22 driven by higher international commodity prices.

The fiscal deficit is projected to peak at 6.1 per cent of GDP in FY22 as the authorities increase pandemic-related spending. The current account deficit is projected to widen to 2.4 per cent of GDP in FY22 as imports rebound and remittances moderate.

The uncertainty around the outlook remains high and risks are tilted to the downside, they noted.

Directors highlighted the need to closely monitor inflation developments and stand ready to normalise monetary policy. They suggested phasing out caps on interest rates to improve credit allocation.

They encouraged the authorities to continue modernising the monetary policy framework and suggested to gradually increase exchange rate flexibility. Noting that reserves coverage is adequate, they emphasised the need to safeguard reserves and cautioned against using them for nonmonetary purposes.

Directors noted that to lift growth potential, structural policies should focus on diversifying exports, increasing FDI, enhancing productivity, investing in human capital and addressing corruption, the press release said.