Highlighting financial stability risks, the International Monetary Fund (IMF) said on Thursday the banking sector keeps deteriorating even as growth remains robust.
"Resolutely addressing the high level of non-performing loans (NPLs) in the banking sector is essential…," said Daisaku Kihara, the Fund's south Asia Division chief.
The volume of NPLs climbed by more than 18 per cent to Tk 1,108.73 billion in the first quarter (Q1) of the year from Tk 939.11 billion in the previous quarter, according to the central bank's latest statistics.
The IMF official said the situation in the banking sector should be improved immediately because good and efficient banking sector is important to keep the economic growth momentum.
Mr Kihara, who led the IMF Article IV Consultation, made the remarks after wrapping up a 12-day mission in Dhaka.
He recommended a three-point reform package emphasising reduction in banking sector vulnerabilities to preserve the resilience and sustainability of economic growth.
"A comprehensive, credible, and time-bound action plan could notably focus on: strengthening banking sector supervision and avoiding regulatory forbearance; a close assessment of banking sector assets; tighter criteria and limited use of rescheduling/restructuring of loans; and improving corporate governance," he noted.
He laid emphasis on reforming the legal system to strengthen creditor rights; redefining the role and mandate of state-owned commercial banks; and developing bank crisis management and resolution mechanisms.
Other reform priorities are creating fiscal space to address social needs, infrastructure requirements, and climate change vulnerabilities; and diversifying the economy by strengthening the business environment through improved governance.
"Slower tax collection has pushed up the government's bank borrowing in the recent months," Mr. Kihara said while replying to a query about rising trend in government's bank borrowing.
Some liquidity pressure on the banking sector is still prevailing, he maintained.
Tightened criteria and limited use of loan rescheduling will help strengthening the banks, he added.
He also said reducing elevated banking sector vulnerabilities and increasing tax revenues should receive priority attention.
"Diversifying the economy by strengthening the business environment will also enhance resilience of the economy," the IMF official noted.
He said monetary policy should be geared toward containing risks to the inflation outlook stemming from higher global oil prices, rapid economic growth, and elevated inflation expectations.
The IMF projected gross domestic product (GDP) growth at around 7.5 per cent, lower than the government's estimates of 8.2 per cent for the FY 2019-20.
Also, the country's macroeconomic performance is set to remain strong in FY2019-20, with growth projected at above 7.5 per cent and inflation close to the central bank's target at 5.50 per cent, according to the IMF official.
But growth needs to be sustainable and resilient, he said.
Continuous efforts to control the issuance of national savings certificates should support deepening of the capital market and reduce budget interest payments, according to the IMF.
Mr Kihara also talked about the possible impact on the ongoing US-China tariff war, saying that export demand particularly for ready-made garment (RMG) might be shifted to Bangladesh from China.
It may help increase the inflow of net foreign direct investment (FDI) in Bangladesh, which is still low compared with the Southeast Asian countries, the IMF official said.
He said improving the business environment and strengthening framework to limit vulnerability to corruption would also be fundamental to the realisation of development goals.
Meanwhile, the IMF mission warned the revenue impact of the new VAT law is "uncertain" because of multiple rates and implementation challenges.
Buckling under pressure from the business community, the government backtracked from implementing a unified rate and instead opted for four VAT rates-5.0 per cent, 7.5 per cent, 10 per cent and 15 per cent.
Asked whether the global lender was concerned over the multiple rates of new VAT, Mr Kihara replied in the negative, but said this policy will complicate management and make it difficult for businesses to comply with the system.
The IMF mission chief noted that the Fund was not financing VAT reform, but recommended policy change.
He said the Fund suggested a single rate of 15 per cent, but the government spurned that idea as it had to accommodate "some of the concerns of the business sector."
He recommended that Bangladesh should continue to work towards simplifying tax structure and streamline the process.
A simple structure will help modernise tax regime and create a transparent tax system, which in turn will help boost revenue, Mr Kihara said.
That said, he argued implementation of the new law in FY 19-20 is a step towards modernisation of the tax regime.
The National Board of Revenue remains bullish.
If the VAT and Supplementary Duty Act 2012 takes force, it will help the tax collector haul Tk 365 billion in additional revenue during the fiscal year, 2019-20.
The budget for the upcoming financial year will chase an ambitious target of Tk 1.17 trillion VAT, up more than 13 per cent over the outgoing fiscal's revised goal of Tk 1.04 trillion.
Underlining the need for tax policy reforms, Mr Kihara said it should focus on broadening base and ensuring tax compliance.
He also underscored the need for modernising the structure of the National Board of Revenue to make sure that it functions better with more coordination and efficiency.
Ragnar Gudmundsson, IMF resident representative in Dhaka, also spoke at the press briefing.
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