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IMF backs energy subsidy cuts

Star Business Report
The government should bring down the cost of inefficient and regressive energy subsidies further to free up money for social and development spending, the International Monetary Fund said yesterday.
Such a move will also allow the country to build on its impressive gains on social welfare indicators over the past two decades, said Naoyuki Shinohara, deputy managing director of the lending agency.
"Tax collections need to be stepped up to create more space for priority social and development spending,” Shinohara said before wrapping up his two-day visit to Bangladesh.
During the visit, the IMF official met Prime Minister Sheikh Hasina, Finance Minister AMA Muhith and senior officials of the central bank.
Shinohara said the authorities highlighted their intention to continue to strengthen public debt management, focusing external borrowing on projects with high social returns.
"They also concurred with the importance of strengthening the financial position of the state-owned commercial banks through enhanced supervision and corporate governance, complemented with gradual recapitalisation as required," he told reporters during a briefing at the IMF office in Dhaka located on the central bank premises.
He said the authorities are also taking important steps to improve the business climate as well as labour and safety conditions for workers.
Shinohara said Bangladesh has made substantial progress in strengthening macroeconomic conditions supported by the IMF's Extended Credit Facility (ECF) arrangement.
"The country now has a stronger external and domestic position, with international reserves more than twice the low levels of late 2011, a
prudent overall fiscal stance, and lower underlying inflation," he said.
Shinohara also praised progress the country has made in carrying out structural reforms.
Following the passage of the new value added tax law in November 2012, preparations are underway for launching the VAT in July 2015, he said.
“Amendments to the Banking Companies Act have significantly strengthened banking system governance, enhancing the supervisory powers of Bangladesh Bank to safeguard financial stability, ” he said.
The IMF official said progress towards achiev-
ing the millennium development goals is also remarkable, particularly on increasing access to primary education and eliminating gender disparity in primary and secondary schools.
"In that sense, what the government is trying to do at the moment is very correct as a priority they are putting on social spending and social inclusion."
He was impressed by the country's determination to transform into a middle-income nation with sustainable and equitable opportunities for all.“Bangladesh has had a remarkable economic and social performance over the past two decades, with significant poverty reduction and low, stable levels of inequality."
He also said Bangladesh has a vibrant economy and strong potential to achieve higher and sustained inclusive growth.
"Realising this potential will require safeguarding macroeconomic stability, further strengthening the financial sector, business climate and labour conditions and building fiscal space to increase the level and quality of spending on health, education, and critical infrastructure."
Shinohara said the IMF would continue to work closely with the government to support the policies and reforms oriented toward safeguarding macro-economic and financial stability and achieving higher growth and further poverty reduction.
He said political stability is an important issue, and the commitment of the government needs to be supported by strong political consensus on various issues. The IMF official, however, declined to comment on the debate over the credibility of the economic data produced by the national statistical agency. "I don't have any knowledge on the quality of the data produced by Bangladesh Bureau of Statistics. Every country has a certain degree of problem with economic data."
He also urged the country to be cautious in adopting capital account convertibility from current account convertibility. "Generally speaking, liberalising market and making it based on the market forces is good. The question is in what ways you should achieve the ultimate goal."
"I think you have to be very careful in taking steps, taking into account all the possible implications on the economy from the unexpected movements it might cause."
Capital account convertibility is a feature of a nation's financial regime that centres on the ability to conduct transactions of local financial assets into foreign financial assets freely and at country determined exchange rates.