Bangladesh Bank plans to sign a Memorandum of Understanding (MoU) with 10 commercial banks to take various measures on a pilot basis, including the periodic publication of their defaulter lists, with the aim of reducing their delinquent loans.
The central bank recently shared this plan with a visiting mission from the International Monetary Fund (IMF).
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The IMF mission submitted a statement to senior government officials on Thursday, concluding its nine-day tour.
A finance ministry official said the IMF mission provided its preliminary findings in the statement and a detailed report would come later.
In the statement, the international lender mentioned four main reform priorities to boost medium-term growth prospects.
These include strengthening the corporate governance of banks, adopting risk-based supervision and strictly applying the current prudential framework and removing waivers and transition periods for required provisions.
He also spoke about reforming the legal system to support stricter enforcement of creditors’ rights and incentives for debtors to make repayments.
The IMF said the government has informed them that they will change banking laws by the end of this year.
According to the IMF statement, tackling the high amount of non-performing loans (NPLs), especially in state-owned commercial banks, remains a major challenge.
“Bangladesh Bank is planning to sign MoUs on a pilot basis with 10 commercial banks to devise a credible NPL reduction plan,” he said.
“In the meantime, BB (Bangladesh Bank) is expected to resume publishing data on ‘constrained advances’ as it was done up to 2018,” it read.
“Ensuring classification and provisioning requirements are in line with Basel standards and conducting an asset quality review of SOCBs (state-owned commercial banks) is an important first step,” he added.
Non-performing loans totaled Tk 113,441 crore in March, registering a 19.3% year-on-year increase.
A Bangladesh Bank official said another IMF technical mission would come later to help the central bank reduce delinquent loans.
In the IMF statement, it was mentioned that greater prudential oversight, including developing internal NPL management skills and setting operational targets to reduce NPLs, can help initiate active resolution of NPLs. in banks.
In the absence of reforms to stem the flow of NPLs, the authorities’ plan to create a public asset management company poses significant fiscal risks, he said.
According to the statement, the government plans to raise the prices of gasoline, octane, liquefied natural gas (LNG) and electricity in the coming months.
He observed that subsidies for energy, fertilizers and foodstuffs as well as support for vulnerable people and farmers have increased.
But a new prioritization of current and capital expenditure should contain the budget deficit for FY22, as budgeted at 5.1% of GDP, he said.
The IMF projected the budget deficit to reach 5.5 percent of GDP in FY23, partly due to rising subsidies and weak revenue.
In the absence of adequate revenue mobilization, financing the budget increasingly relies on costly domestic debt, which erodes fiscal space, he said in the statement.
The government has earmarked an allocation of Tk 82,745 crore to run its subsidy program for the financial year 2022-23.
A finance ministry official said the amount of the subsidy may need to be increased if fuel, fertilizer and LNG prices rise in the global market.
Out of the total allocation, subsidies worth Tk 18,000 crore have been earmarked for electricity, Tk 15,000 crore for fertilizers and Tk 6,000 crore for LNG.
The IMF mission said the Russian-Ukrainian war had interrupted the strong post-pandemic recovery and posed serious macroeconomic challenges to the country.
In line with global developments, rising commodity prices, supply disruptions and slowing external demand drove inflation to its highest level of 7.6 percent in June since 2014, it said. he declares.
The current account deficit widened to 3.5% of GDP between July and May and the taka has depreciated 9% since March, he said.
Additionally, foreign exchange reserves have shrunk to 5 months of potential imports from their 7-month peak at the end of FY21, he added.
Near-term growth is expected to be weighed down by a slowdown in Europe and the United States, which account for more than 80% of total export demand, the IMF predicted.
Inflation, driven by commodity prices, is expected to peak in the third quarter of FY22 and remain elevated, he said.
Persistent inflationary pressures, a faster tightening of financing conditions and deeper than expected slowdowns in major advanced trading partners and China could further put pressure on reserves and the taka, he said.