IMF steps back from PSI agreement with Bangladesh

Dhaka, Sep 18 (UNI) The International Monetary Fund (IMF) has stepped back from the much-talked-about Policy Support Instrument (PSI) agreement with Bangladesh amid widespread criticism and government's unwillingness.

''Bangladesh government said they're not interested (in PSI),'' IMF adviser for Asia Pacific and Department Thomas Rumbaugh told a press conference here today, wrapping up their two-week visit to Bangladesh.

Rumbaugh led an IMF team to Bangladesh during September 5-17 to assess the recent economic developments and hold discussions with Bangladesh authorities on possible future IMF support, including PSI, for the government's reform efforts.

He, however, assured of IMF's continued support to Bangladesh either through a new PRGF arrangement or through consultations and policy dialogue during the next regular visits and that would depend on the desire of Bangladesh.

''We're not sure if it's the best time for Bangladesh to go with IMF,'' he told a correspondent.

Rumbaugh said both the Bangladesh government and the IMF team have agreed that the PSI would not be suitable option for the country at this moment.

Asked about the conditions that might have created criticism, he said those are the existing ones. Among them are the monetary policy which is not being implemented effectively, revenue performance that should be improved, and problems of SOEs and NCBs.

''There had not been a tight monetary policy in Bangladesh last year,'' Rumbaugh said, replying to a question whether the tight monetary policy has contributed towards slowing down private sector credit.

''This is associated, in part, with uncertainty related to the government's concerted anti-corruption drive, a drive that should lay the foundation for a fairer and more transparent business climate and stronger growth in the future,'' he said in his opening statement.

He added that the ongoing efforts to reassure the business community that the anti-corruption drive will be properly targeted and hopefully help restore the confidence. ''The supply side has to recover.'' The IMF executive, however, noted that the already disrupted construction activity, the recent slowdown in RMG exports, dampen investment and the possible adverse impact of flood would result in a lower GDP growth than last year unless there is a sharp rebound in private sector activity.

He said the private sector credit growth has slowed down to 15 per cent as of June 2007, which was not due to monetary tightening but a result of uncertainty and reduced confidence in the business community.

The commercial banks currently have substantial liquidity, as evidenced by a historically low loan-to-deposit ratio, and this poses risks for future inflation.

''Bangladesh Bank should continue to absorb excess liquidity to anchor inflationary expectations and avoid a credit boom as confidence returns,'' he said, adding that market forces could be allowed a bigger role in determining interest and exchange rates.

He, however, said lending rates to the private sector should not be increased now.

Replying to a question, he said the inflation would continue to increase further in the next couple of months and later it would have a downtrend, particularly in the second half of the current fiscal year.

UNI