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First day of mid-term review meet

Donors for faster reforms, pruning of ADP

Star Report
The first round of the midterm briefing to the Bangladesh Aid Group began at the NEC auditorium yesterday with the donor representatives emphasising faster reforms, pruning of the Annual Development Programme (ADP) and midterm fiscal interventions to avoid a large deficit.
They also favoured a more flexible exchange rate policy and prudent action of the government so that it does not crowd out priority private sector activities.
Finance Minister SAMS Kibria. who chaired the meeting. said with positive signs in crop production and 'modest improvement1 in industrial sector, the government's target for a 5.5 per cent GDP growth rate is feasible and a modest one.
Total crop production will be 20.70 million metric tons which will, for the first time, exceed the 20 million MT limit.
On the other hand, the quantum index of medium and large-scale manufacturing industries increased to 166 upto October this year compared with 163 for the corresponding period last year.
Revenue collection increased by 11 per cent to Tk 5702.96 crore in the first six months of the fiscal year, Kibria mentioned adding that non-tax revenue declined due to lower profit earned by Bangladesh Petroleum Corporation and Petrobangla.
He said the food account deficit increased due to higher grain stocking to prevent collapse in agricultural output price.
Overruling the World Bank's view on creait growth, he said growth of overall credit during the first half of 1996-97 is consistent with the trend and the monetary programme with 13-14 per cent growth annually. Credit to the private sector shows a slower growth at 6.5 per cent compared with 11.38 per cent during the same period last year, but this has also improved in the last two months or so. he acknowledged.
Kibria mentioned that till December, total domestic deficit amounted to Tk 1.149 crore compared with Tk 1108 crore during the same period of last fiscal.
"The composition of domestic financing has. however, changed significantly." he said adding that most of it came
from bank sources instead of non-bank sources which has a 'lower cost.'
Dwelling on trade balance. Kibria said exports during July-November 1996 were 121 million US dollars higher than the corresponding period of last year. But imports were 71 million dollars during the period and as a result, the trade balance posted somewhat smaller deficit of 1053 million dollars compared with 1103 million dollars during July-November 1995.
The current account deficit also declined from 651 million dollars in July-November, 1995 to 310 million dollars for the same period this year due to larger remittance and lower payments on services accounts.
"As a result of a smaller current account deficit coupled with a modest surplus on capital account, the overall external balance for the year upto November recorded a significantly smaller deficit of 110 million dollars compared with that of 554 million dollars for the corresponding period of last year," the minister said.
Talking about the ADP, he said the government intends to simplify procedures for project approval.
He also described the steps taken including setting up of Artha Rin Adalat, task force for banks to recover bad loans, and the formation of the Banking Reform Committee to restore discipline in the financial sector.
On privatisation, he said 64 state — owned enterprises including 21 Jute mills. 10 textile mills and 33 other industries has been listed for privatisa-
tion. Besides, the government will off-load shares of 12 companies in the stock market.
He also informed the meeting that the government has’ selected 16 textile mills for divestiture and would take up ten additional textile mills for divestiture in the near future.
The World Bank in its economic update prepared for the meeting, while pointing out that there seems to be a slowdown in activities in manufacturing sector, said production of major industrial items declined in the first quarter of FY 97.
It also noted that the government has not yet movea decisively to prune and rationalise the ADP, nor has it given any clear indication with regard to the intended cut in the ADP size in the revised budget for FY 97.
L. "uo aiso observed that the current slack in import may pack-up in the second half of FY 97 if there is a recovery in the non-agricultural sectors, and the impressive growth in remittances may not be sustained.
Credit to the government showed a sizable 12 per cent growth through November 1996 since June which could easily slow down a recovery in manufacturing activity. But in the event of an accommodating monetary policy, could fuel inflationary pressures.
Donors also felt that fiscal balances are deteriorating due to emerging revenue shortfalls, expenditure overruns and lack of action in pruning the ADP size. They felt that cuts in ADP spending will provide the needed fiscal adjustment, though resistance to deeper ADP cuts might lead to larger than the budgeted deficit.
They also said If the bank borrowing by the government continues, this ?ould worsen macroeconomic balances. The balance of payments situation has also become more uncertain due to a low export growth and possibility of some pick-up in import.
The donors said the government has been unable to back the reform rhetoric with sufficiently quick and substantial actions in key areas and the private sector has probably reverted to the wait-and-see mode as the government appears to be struggling to, get its executive arms together.
The donors were in favour of not going for achieving the budgetary ADP target since it contains a sizable potential for cuts on account of a large number of questionable projects.
They also saw the rate of aid disbursements, which witnessed a 3.4 per cent growth through November over the same period of last year, with less enthusiasm since the growth is far less than the nearly 18 per cent growth assumed by the government for FY 97.
Donors also felt that the existing income tax and VAT exemptions and loopholes includ ing tax holidays should be reexamined and curtailed or withdrawn while further reductions in Income tax rates could be considered.
They also felt that in view of the disappointing progress on the privatisation programme so far. the government should articulate a clear policy and announce its strong commitment to implementing the privatisation programme.