READOUT ON IMF VISIT TO BANGLADESH

UNCLAS DHAKA 001800

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON ETRD BG
SUBJECT: READOUT ON IMF VISIT TO BANGLADESH



1. (SBU) Summary: An IMF team visited Bangladesh from
March 27 to April 9 to hold Article IV consultations and the
third review of the economic program supported by the Poverty
Reduction and Growth Facility (PRGF). The team's overall
assessment was positive. Bangladesh is on target for
approval in June of an additional $105 million tranche under
the PRGF. End summary.


2. (SBU) IMF resident representative Jonathan Dunn briefed
local donors and diplomats on April 17 on the results of the
IMF team visit to Bangladesh. The team cited strong economic
growth in the first half of FY 2005 (July - December, 2004),
driven by expansion in the construction, manufacturing and
services sectors and a strong recovery in exports. IMF
projects GDP growth for FY 2005 at 5.3-5.5 percent, somewhat
below ADB projections of 6 percent. Inflation remains
moderate (5.5% through December 2004) but is accelerating,
mainly due to rising energy and food costs.


3. (SBU) Revenues are somewhat below annualized
projections; however, receipts are historically higher in the
last quarter (March-June) and could follow a similar pattern
this year. IMF believes effective enforcement, not tax
increases, is the key to improving tax revenues. IMF
advocates a restructuring of the National Board of Revenue
(NBR) along functional lines. This would replace the current
structure based on tax categories (customs, excise, VAT and
income). An NBR plan to hire an "audit czar" to oversee all
auditing functions is seen as a step in the right direction.


4. (SBU) The IMF also recommends a review of the extensive
zero rate tariff classifications, recommending substitution
of a small marginal rate. Unlike dutiable goods, zero rate
goods are not subject to pre-shipment verification; hence,
many dutiable goods are "misclassified" into zero-rate tariff
items.


5. (SBU) Foreign exchange reserves remain steady at $3
billion, equivalent to three months of imports. Rising costs
of imported commodities, especially rice, scrap metal and
energy are putting pressure on foreign reserves. High demand
for capital machinery imports is also creating pressures on
reserves. These pressures are offset, however, by continued
strong remittances and an increase in the country's credit
line from Islami Development Bank for energy purchases. The
taka continues to depreciate slightly against the dollar,
which the IMF views positively.


6. (SBU) Real interest rates remain close to zero and are
low for the region. Low interest rates are one factor in the
rapid expansion of credit and are fueling construction and
investment in the manufacturing sector. The uncertain fate
of tax holidays for new investment, scheduled to expire in
June 2005, is a contributing factor. The IMF has recommended
that the tax holiday program (typically valid for five years)
not be renewed, and the BDG has shown some willingness to
adopt the IMF's recommendation. Predictably, however, the
potential end of cheep/free money and tax breaks has brought
howls of protest from politically powerful industrialists.
According to Dunn, the IMF questions whether the BDG will
find the political will to follow through, especially with
the upcoming 2006/07 elections.


7. (SBU) The IMF is projecting continued growth in exports
at 4-5% for FY 2005, and acknowledges this figure could be
low. (ADB and government projections are nearly double the
IMF figure.) FY 2005 figures do not fully reflect the impact
of the end of the Multi-Fiber Arrangement, as current
ready-made garment (RMG) exports are still filling orders
placed in fall, 2004. As the order lag works through the
system, export growth could slow. That said, IMF cited
consolidation in the weaker parts of the RMG sector and
continuing new investment in competitive factories as
positive signs. The woven and knitwear sectors in particular
are benefiting from low and duty free access to EU markets;
however, potential changes in EU GSP programs could have a
negative effect on Bangladesh.


8. (SBU) Finally, the IMF reported reaching a new
agreement on the sale of the Rupali national commercial bank,
bringing Bangladesh back on track to receive the next tranche
under the PRGF. The management team in place at Agrani bank
is working well with bank management and a similar team is
expected to be in place shortly at Janata bank. The BDG
remains reluctant to denationalize Sonali bank, but does have
a competent management team in place, the team said.
THOMAS