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Economy to blast off again from Oct: IMF
AKM Zamir Uddin
There appears to be glimmer of light at the end of the tunnel after the International Monetary Fund yesterday projected that the Bangladesh economy would pick up from the second quarter of next fiscal year from the coronavirus-induced downturn.
The Washington-based multilateral lender agency, however, said the country’s GDP growth would stand at 3.8 per cent this fiscal year against the previous projection of 7.4 per cent as the coronavirus pandemic has severely affected the economy.
This means, growth is projected to decline by about 4.50 percentage points fiscal 2018-19, in what would be the largest one-year decline in the last three decades.
Growth next fiscal year would be 5.7 per cent.
The organisation disclosed the projection in a report, which has prepared for the approval of $732 million in emergency funding to the country under its credit facility and the rapid financing instrument.
The credit support was approved on May 29 in order to mitigate the balance of payment crisis because of the ongoing economic recession.
A good number of stimulus packages amounting to close to Tk 100,000 crore taken by both the government and the central bank will help the economy to rebound.
In addition, the government reopened the economy on May 31.
CPI inflation has been around the Bangladesh Bank (BB) target of 5.5 per cent, with increases in non-food inflation offset by a decline in food inflation.
Despite signs of disruptions in the domestic food supply chain, overall inflation is projected to remain broadly unchanged, owing partly to a bumper harvest in the agriculture sector.
But the IMF has also mentioned some downside risks for the economy in the days ahead.
“External risks include a prolonged COVID-19 outbreak that would delay and slow down recovery in exports and remittance inflows.”
Oversupply in the oil market could continue to slow down economic activity in the Middle East countries, which are the most important sources of remittance for Bangladesh.
Remittance had soared 20 per cent in the first eight months of the fiscal year but have started to decline from March. In May, inflows dropped off 14 per cent year-on-year to $1.50 billion.
Some Bangladeshi diaspora workers have elected to return, while those that remain are likely to experience job losses amid a stall in economic activity.
After a modest decline in the first three quarters of fiscal 2019-20, exports in April contracted 83 per cent year-on-year.
COVID-19 has heavily affected the garment sector, with reports of more than $3 billion in orders already cancelled, leading to many factories to shut down.
An estimated 3.5 million Bangladeshis work in the garment sector and about one million workers have reportedly been laid off.
A larger outbreak of COVID-19 might require longer containment measures by the authorities, which could increase social discontent, further weaken domestic demand, and disrupt the lives of Bangladeshi people, the IMF warned.
The multilateral lender has suggested the central bank to strengthen its monitoring on the banking sector during the ongoing pandemic.
The already-weak banking sector could face further challenges in maintaining its asset quality and providing necessary support to the private sector due to the ongoing economic fallout.
Controlling stressed assets of the banking sector will be imperative with banks bearing the entire credit risk for the stimulus package routed through banks.
Effective supervision by the Bangladesh Bank needs to continue while strengthening the corporate governance of commercial banks.
Loans under the stimulus package should be effectively targeted and monitored by the authorities with necessary due diligence and risk assessment considerations by banks to preserve banking soundness while providing support where most needed.
Banks can be encouraged to undertake prudent re-negotiations for loans that have deteriorated due to the shock.
But loan reporting, classification and provisioning standards should not be eased.
Before the pandemic, at the end of 2019, reported default loans approached 9 per cent, with state-owned commercial banks’ classified loans reaching 24 per cent.
The authorities have already started amending several laws to enforce more discipline, but repeated loan rescheduling, regulatory forbearance and failure to deal with weak and insolvent banks hindered progress.
To strengthen the banking sector, the authorities should focus on introducing effective and risk-based supervision and avoid regulatory forbearance.
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