IMF PRGF REVIEW TEAM GENERALLY POSITIVE,BUT

UNCLAS DHAKA 005933 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON IMF BG BD SUBJECT: IMF PRGF REVIEW TEAM GENERALLY POSITIVE,BUT FRUSTRATED WITH OIL PRICE SUPPORTS AND PACE OF REVENUE COLLECTION ¶1. (SBU) SUMMARY. An IMF team met with BDG officials and with donor countries in preparation for Executive Board review of the next $71 Million tranche under the Poverty Reduction and Growth Facility (PRGF). The tone of the IMF team's meeting and informal discussions with donor countries was generally positive, but expressed frustration over three key points: revenue collection, infrastructure and development spending, and BDG oil price supports. The overall macroeconomic picture they painted was, however, generally favorable and progress was noted in some of the areas of frustration. ¶2. (SBU) The following major points were developed through both the informal presentation by the IMF team and the question and answer period with donor country representatives that followed: - GDP Growth. Strong and sustained generally, but a slight dip is expected this year due to the effect of the mild drought on the agriculture sector. - Poverty reduction. New numbers are reportedly coming out soon, but early opinions are that they will show poverty reduction over the past five years. - Monetary policy. In a big step towards accountability and transparency, the central bank is now publishing semi-annual reports on policy, available online at www.bangladesh-bank.org. - Exchange policy. IMF reported that its concerns are less now than they were a year ago. Remittances, exports, and imports are all up. - Inflation. A little worrisome for IMF, it is around 7% with money and credit growth above IMF's target range. IMF reports that BDG policies are gradually tightening, so as long as BDG continues existing policies, this is acceptable. - Fiscal policy. The deficit is not perceived to be the problem; instead, revenue collection is IMF's chief concern. Bangladesh ranks very low in revenue collection, even among similarly situated developing nations. It is currently collecting around 10.5% of GDP, and in five years only plans an increase to 13% of GDP. IMF targets for countries like Bangladesh would be 15% or more. Total spending by the BDG seems to be under control, but some sector specific spending (i.e. development and infrastructure) is often below the budgeted amount. This may be due to both an overly optimistic revenue projection, as well as over-promising on what the budget can deliver. Next year, the Medium Term Budget Framework (MTBF) is planned to expand from the current four ministries, and IMF hopes this will improve efficiency in the newly covered ministries. - Banking reform. The restructuring of the state-owned non-commercial banks (NCBs) is going slower than IMF had hoped for, but indications in both the local press and at the meeting are that there will not be a break in momentum during the caretaker government. One other positive sign IMF specifically mentioned is the offer to purchase Rupali Bank. The IMF team thought the price seemed correct and the process fit and proper. One of the core problems discussed with respect to the NCBs is the mandated lending to the BDG, especially lending to cover the revolving credit on oil imports. NOTE: BDG has a revolving line of credit to purchase imported oil. The line of credit is repaid when the oil is sold, however the BDG has not been efficiently passing along worldwide price increases to the domestic market, resulting in a large shortfall between the lines of credit's expenses versus repayments. END NOTE - Oil price supports. Along with the problem noted above with the NCBs covering the deficit in import-wholesale prices, is the fact that BD is lagging behind even other Least Developed Countries (LDCs) in passing along oil price increases to consumers. - Tax exemptions. IMF denied media reports that they are demanding the BDG eliminate all tax exemptions and tax holidays. IMF does feel there are probably too many of them, and that a thorough analysis of existing exemptions and holidays be made to come up with a real cost/benefit analysis to be sure they are not giving too much away unnecessarily. This process needs to start now, in IMF's opinion, in order to be in place for the next budget starting July '07. - Alleged food staples price manipulation. IMF discounted recent media reports alleging anti-competitive price manipulation by syndicates of suppliers and wholesalers of staples like pulses and sugar. Based on statistical analysis, it seems that a 7% inflation rate and a deflating currency is to blame for increasing prices, not a sudden market syndication. IMF was quick to add that there may in fact be syndication in the marketplace here, but it just isn't new. ¶3. (SBU) COMMENT: At this point, it is clear that raising fuel prices just before elections is politically unpalitable to the BNP lead goverment. Yet despite continuing concerns about fuel subsidies and revenue collections, the IMF assessment team's tone was generally positive. IMF's cautious assessment may be sufficient to bring the next PRGF tranche to the Executive Board at its October 2006 meeting. Coming this close to the election, denying PRGF money would surely be grist for the political mill and the Board may board may choose to avoid the political fallout from denying PRGF when there are at least some positive accomplishments that they can point towards. The boards decision is important not just for the PRGF funds, but also because the World Bank often looks at IMF's macro-economic assessment and decision on release of PRGF funds as an important factor in its own decision whether to release Development Support Credit funds. BUTENIS