The country's foreign exchange reserve (forex) situation will come under severe strains in the next twelve to eighteen months, if the existing policies on subsidies, monetary stance and exchange-rate are not adjusted in time, according to the International Monetary Fund (IMF).
Cautioning the authorities concerned about this IMF has indicated that the existing level of forex reserve might come down to its half, in the absence of appropriate policy adjustments to help avert a possible severe pressure on Bangladesh's balance of payment (BoP).
Underscoring the need for stringent policy adjustments, the global watchdog has recommended a set of policy actions for reducing the sustained BoP pressure.
'At the current pace, given the near term outlook, and without policy adjustment, reserve could decline by $4.0-5.0 billion over the next 12-18 months,' reads a near-term policy action of the IMF that was submitted recently to Finance Minister AMA Muhith.
'In that event, the reserve could slip below two months of forward imports-a level not observed in a nearly decade. If so, Bangladesh would be highly vulnerable to external shocks and a possible BoP crisis, necessitating more stringent policy adjustment.'
If subsidies on electricity, fuel, food and fertilizer are not adjusted upfront, the total subsidy in the next fiscal year could be increased to Tk 300 billion or 3.50 per cent of gross domestic product (GDP), warned the IMF.
The near-term policy action of the Fund was submitted to Muhith with a letter from Anoop Singh, its Director for Asia and Pacific Department.
The letter said the IMF is aware that Bangladesh faces more intense BoP pressures than what were originally envisaged, mainly due to selling of foreign exchange reserves.
The foreign currency reserve on June 2 stood at $10.47 billion.
The reserve declined by nearly $0.50 billion during the previous two months, a top official in Bangladesh Bank (BB) said.
'From mid-February 2011, the exchange rate has changed little. However, since then, the sum of foreign exchange (FX) sales and overdrafts (ODs) provided by BB has totaled nearly $0.50 billion,' said the policy actions.
The reserve is "down by around $0.9 billion from their peak in October 2010(inclusive of US $0.3 billion in valuation gains).This accounting nets out Asian Currency Union liabilities and FX ODs, as BB should do, to provide an accurate picture of available foreign reserves."
According to the policy actions of the IMF, foreign exchange intervention of the BB should be limited to smoothening short-term volatility and conducted through the interbank foreign exchange market.
In addition, foreign exchange ODs, which are mainly being settled in taka, should be rolled back, it added.
The Fund urged the BB to refrain from using moral suasion and cease regular foreign exchange sales to the state-owned commercial banks so that exchange rates do better reflect market conditions.
In its policy actions, it asked BB to tighten monetary policy to contain aggregate demand pressures including for imports and possible inflation risks.
"Some of this may occur as lending rates rise, given recent positive move to eliminate most caps. Still, active policy measures may be necessary to reduce credit growth, notably further hikes in BB's repo rate and structural improvements in the repo auction," according the policy actions of the IMF.
Furthermore, the IMF said the BB should stop the practice of providing targeted liquidity support to primary dealers in treasury bills, which may squeeze out commercial banks with temporary liquidity needs, as repo facilities are best designed to handle.
It asked the government to bring down the budget subsidies for electricity and fuel and to reduce overall subsidy costs through price and tariff adjustments.
"Given high oil prices and rising electricity demand, these subsidies should be contained by upfront electricity and fuel-price increases, with follow-up adjustments over the next three years towards break-even prices and necessary safeguards put in place to protect the poor," the policy actions suggested.
"Otherwise, total subsidy costs (food, fertiliser, fuel and electricity) could increase to about Tk 300 billion (around 3.50 per cent of GDP) in FY 12 alone," the IMF cautioned.
The policy actions said the net international reserve must be anchored by a sound and credible exchange rate policy to avert external pressure; foreign exchange ODs, large repo operations and central bank financing of the budget deficit should be discouraged to avoid upward pressure on net domestic assets and the net domestic financing of the government should be lowered to avert crowding out private credit and raising interest rates.
Giving response to the IMF's observation, the MoF officials said the entire situation in the BoP is "not that bad and horrifying" as is predicted by the IMF.
"We have recently raised the prices of power, petroleum products and compressed natural gas. Besides, a 61 per cent hike in fertiliser prices was also effected last week," one of the key MoF officials said.
"We are aware of the situation, but unable to act promptly in accordance with the prescription of the IMF as a democratic government has to think of its electorate prior to bringing about any drastic reforms in subsidies," he added.
Cautioning the authorities concerned about this IMF has indicated that the existing level of forex reserve might come down to its half, in the absence of appropriate policy adjustments to help avert a possible severe pressure on Bangladesh's balance of payment (BoP).
Underscoring the need for stringent policy adjustments, the global watchdog has recommended a set of policy actions for reducing the sustained BoP pressure.
'At the current pace, given the near term outlook, and without policy adjustment, reserve could decline by $4.0-5.0 billion over the next 12-18 months,' reads a near-term policy action of the IMF that was submitted recently to Finance Minister AMA Muhith.
'In that event, the reserve could slip below two months of forward imports-a level not observed in a nearly decade. If so, Bangladesh would be highly vulnerable to external shocks and a possible BoP crisis, necessitating more stringent policy adjustment.'
If subsidies on electricity, fuel, food and fertilizer are not adjusted upfront, the total subsidy in the next fiscal year could be increased to Tk 300 billion or 3.50 per cent of gross domestic product (GDP), warned the IMF.
The near-term policy action of the Fund was submitted to Muhith with a letter from Anoop Singh, its Director for Asia and Pacific Department.
The letter said the IMF is aware that Bangladesh faces more intense BoP pressures than what were originally envisaged, mainly due to selling of foreign exchange reserves.
The foreign currency reserve on June 2 stood at $10.47 billion.
The reserve declined by nearly $0.50 billion during the previous two months, a top official in Bangladesh Bank (BB) said.
'From mid-February 2011, the exchange rate has changed little. However, since then, the sum of foreign exchange (FX) sales and overdrafts (ODs) provided by BB has totaled nearly $0.50 billion,' said the policy actions.
The reserve is "down by around $0.9 billion from their peak in October 2010(inclusive of US $0.3 billion in valuation gains).This accounting nets out Asian Currency Union liabilities and FX ODs, as BB should do, to provide an accurate picture of available foreign reserves."
According to the policy actions of the IMF, foreign exchange intervention of the BB should be limited to smoothening short-term volatility and conducted through the interbank foreign exchange market.
In addition, foreign exchange ODs, which are mainly being settled in taka, should be rolled back, it added.
The Fund urged the BB to refrain from using moral suasion and cease regular foreign exchange sales to the state-owned commercial banks so that exchange rates do better reflect market conditions.
In its policy actions, it asked BB to tighten monetary policy to contain aggregate demand pressures including for imports and possible inflation risks.
"Some of this may occur as lending rates rise, given recent positive move to eliminate most caps. Still, active policy measures may be necessary to reduce credit growth, notably further hikes in BB's repo rate and structural improvements in the repo auction," according the policy actions of the IMF.
Furthermore, the IMF said the BB should stop the practice of providing targeted liquidity support to primary dealers in treasury bills, which may squeeze out commercial banks with temporary liquidity needs, as repo facilities are best designed to handle.
It asked the government to bring down the budget subsidies for electricity and fuel and to reduce overall subsidy costs through price and tariff adjustments.
"Given high oil prices and rising electricity demand, these subsidies should be contained by upfront electricity and fuel-price increases, with follow-up adjustments over the next three years towards break-even prices and necessary safeguards put in place to protect the poor," the policy actions suggested.
"Otherwise, total subsidy costs (food, fertiliser, fuel and electricity) could increase to about Tk 300 billion (around 3.50 per cent of GDP) in FY 12 alone," the IMF cautioned.
The policy actions said the net international reserve must be anchored by a sound and credible exchange rate policy to avert external pressure; foreign exchange ODs, large repo operations and central bank financing of the budget deficit should be discouraged to avoid upward pressure on net domestic assets and the net domestic financing of the government should be lowered to avert crowding out private credit and raising interest rates.
Giving response to the IMF's observation, the MoF officials said the entire situation in the BoP is "not that bad and horrifying" as is predicted by the IMF.
"We have recently raised the prices of power, petroleum products and compressed natural gas. Besides, a 61 per cent hike in fertiliser prices was also effected last week," one of the key MoF officials said.
"We are aware of the situation, but unable to act promptly in accordance with the prescription of the IMF as a democratic government has to think of its electorate prior to bringing about any drastic reforms in subsidies," he added.
Comments
Post a Comment