IMF Completes First Review of Bangladesh's PRGF Arrangement and Approves US$74 Million Disbursement

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Bangladesh's economic performance under its three-year SDR 347 million (about US$517 million) Poverty Reduction and Growth Facility (PRGF) arrangement, which was approved on June 20, 2003 (see Press Release No. 03/92). This decision entitles Bangladesh to the release of a further SDR 49.5 million (about US$74 million) under the arrangement.

The Executive Board also approved Bangladesh's request for a waiver on the nonobservance of structural performance criteria in tax administration and in phasing out the margin requirements on imports. The initial slippage in tax administration has now been redressed, and the delay with respect to the margin requirements was negligible.

The Poverty Reduction and Growth Facility is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion of Bangladesh, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:

"Bangladesh's economic performance has strengthened in the first year of implementation of the government's PRGF-supported economic program. Economic growth has picked up, inflation is in check, and the external position has improved more than expected. The program is on track. The key macroeconomic targets have been achieved to date, and reforms in tax administration and in the nationalized commercial banks are moving ahead after modest initial delays.

"The challenges ahead for Bangladesh are to turn this initial progress into faster and lasting growth with poverty reduction, and to prepare for the potential impact of the phase out of Multifiber Agreement quotas by end-2004. The authorities intend to meet these challenges with determined policy implementation, especially on the structural front, and a strong effort to improve governance and the business climate. Critical policy measures envisaged are reforms in tax administration and the nationalized commercial banks, implementation of the recently adopted government procurement guidelines, and the establishment of an Independent Anti-Corruption Commission.

"The PRGF-supported program for fiscal year 2004 provides for a cautious easing of the stance of macroeconomic policies to better support growth, given the relatively stable financial environment. Bangladesh Bank has taken timely, market-based actions to lower interest rates, including a reduction in the Statutory Liquidity Requirement. Furthermore, the recent reduction in interest rates on National Savings Certificates represents a key step toward making the interest rate structure more flexible. It should help to put downward pressure on interest rates, and also contain the cost of borrowing for financing the budget.

"The budget for fiscal year 2004 targets increases in infrastructure and social spending, financed by external support on concessional terms. Realization of these spending goals will require improvements in public expenditure management and closer tracking and greater transparency of spending. On the revenue front, strong efforts to improve tax administration will be necessary to achieve the budgeted revenue target, in view of lagging revenue performance so far this year. Over the medium term, more fundamental reforms of tax administration, including modernizing the National Board of Revenue, will help underpin the program's revenue target.

"A deepening of structural reforms is crucial to improve the prospects for investment and to maintain fiscal sustainability. Particularly important will be ongoing efforts to strengthen management of the four nationalized commercial banks and to define bank-by-bank resolution strategies by April 2004 as planned. Reform of the power sector and further progress in downsizing the manufacturing SOEs also will be important for improving growth prospects. Budget support to loss-making enterprises needs to be curtailed, and further efforts made to divest them as soon as feasible in order to achieve the authorities' medium-term targets in this area.

"The authorities have started work on the full Poverty Reduction Strategy Paper (PRSP). The PRSP is expected to incorporate a comprehensive assessment of the poverty and social impact of reforms and to be prepared on the basis of broad consultations with civil society," Mr. Sugisaki stated.