Despite strong economic growth, the banking sector in Bangladesh continues to deteriorate, putting the economic stability at risk, according to the International Monetary Fund (IMF).
The observation came from Daisaku Kihara, who was leading an IMF team on a two-week visit to Bangladesh, at a press conference at the Bangladesh Bank headquarters on Thursday.
The delegation, who came here to prepare a review on Bangladesh’s financial sector, pointed out the reported vulnerability in the banking sector among other key challenges for the country to get the upper middle-income status.
The IMF team identified boosting tax mobilisation, implementation of the new VAT law and improving business environment as other challenges for making the economic growth sustainable.
While talking about the financial sector, Kihara said the banking sector issues should be given top priority to maintain growth.
“This is because without having an efficient financial channel, it is quite difficult to maintain growth,” he said adding that only a good and efficient banking sector can channel finance into productive investment.
“Some reform measures, including tightening criteria of rescheduling and restructuring of loans, and improving corporate governance are very important to address vulnerabilities in banks,” he also said.
An increase in bank borrowing reflects the slow pace in tax collection. Constantly relying on the central bank’s financing is not the best practice, Kihara added.
As the issuance of the National Savings Certificate (NSC) is likely to decline, the government will resort to banks for deficit financing – which will eventually create some liquidity pressure on the banking sector.
If the NSC issuance declines, money will shift to bank deposits and that will be the offset mechanism as well.
Kihara suggested reducing non-performing loans (NPL) in order to ease liquidity crunch.
If banks lose money through the NPL, that will decrease availability of resources, hurting the investment both in private and government sectors, he said, adding that the economic growth will be above 7.5 percent in this fiscal year.
The government had projected 8.13 percent for this fiscal year, but it is not the final figure because the year is yet to end.
“I’d like to emphasise that the economic growth not strong enough. Not just having high growth, but at the same time growth needs to be sustainable and resilient. The new VAT law may be a step forward to the modernisation of tax regime. The implementation of multiple rates will be more complicated,” the IMF official said.
Moreover, as the VAT collection goes completely digital, the business sector will get limited time to be prepared for implementing the new system, Kihara added.
“We are continuously encouraging the government to simplify the VAT structure to make the tax regime transparent.”
US-China trade war
About the US-China trade war, he said, it will have both positive and negative impact on Bangladesh.
The ready-made garment sector of Bangladesh will enjoy the positive impact that comes from shifting demands in this sector. The country can have more inflow of the foreign direct investment (FDI), which will in turn help diversify exportable items.
The FDI inflow to GDP has increased dramatically in recent times, but the level is still low in comparison with other South Asian countries.
Kihara suggested that the government should improve infrastructure and business environment to boost foreign investment.
Appreciating country’s robust economic growth, he said, the economy continues to be stronger, fuelled by private consumption.
The monetary policy should be geared toward containing risks to the inflation outlook stemming from higher global oil prices and rapid economic growth, he further suggested.
During 2019 Article IV visit to Bangladesh, the IMF staff team met with Bangladesh Bank governor, finance secretary, chairman of National Board of Revenue and other representatives from banking sectors, labour unions, think-tanks etc.