Considering the fast approaching general election in Bangladesh and a likely post-Brexit economic slowdown in Europe, the International Monetary Fund has identified seven risk areas where Dhaka needs to take policy measures.
Most importantly, political turmoil may return and security conditions could worsen, adversely affecting confidence, investment and growth, the IMF says.
The global financial institution also identified a protracted slowdown in key export markets, particularly the European Union (EU), and a further weakening of remittance as important risk factors that Bangladesh needs to weigh well.
Following the visit of an IMF mission to Bangladesh in April, the executive board of the Washington-based organisation released the report on Bangladesh's macroeconomic situation on Thursday.
It apprehends political turmoil could have impacts on inflation and production of export goods, creating pressures on balance of payments.
The Bangladesh authorities have also shared with the IMF mission its concern about the potential impact of weaker remittance on growth and the balance of payments.
"Companies have announced travel advisories in the recent past, and domestic business leaders have warned about the potential negative impact," noted the IMF, while focusing on security and extremism issues.
It suggested doing more for the poor and keeping a safe foreign exchange reserve, allowing central bank intervention to cushion the shock and smooth exchange rate volatility.
However, the government foresees a stable environment in the run up to the elections and no threat of political instability in the near to medium term, the report said, citing the IMF team's conversations with government representatives.
The concern over political turmoil comes at a time when the BNP, government's main challenger that had skipped the last general elections in 2013, touted its “Vision-2030” showing promise of its likely participation in the end-2018 polls. The ruling Awami League, on the other hand, is presenting strong arguments in favour of its “continuity of power” for the sake of development.
The Bangladesh Bank admitted that the projected rise in global commodity prices will exert upward pressure on prices on the local market, noted the IMF report.
However, the BB considered that domestic inflation would remain within its projection of 5.6 to 5.8 percent.
Noting that the EU and the US account for over 70 percent of Bangladesh's exports, the IMF stated weaker growth could adversely affect export, mainly the garment industry.
It identified the US, Germany and the UK as three main export destinations of Bangladesh and said a risk of slowdown in the EU may hurt Bangladesh's exports.
For example, British garment importers have already started putting price pressures on exports following Brexit announcement. "In the short-term the impact may not be a major concern, but in the long-term rising inflation expectations in the UK from the possible depreciation of the pound will affect exports," the IMF said.
On Bangladesh's banking sector, it found situations in state-run ones more worrying than in the private commercial banks.
"State-owned commercial banks represent about a quarter of total banking system assets and continue to suffer balance sheet weaknesses. These weaknesses are largely the legacy of loans made to large borrowers who lack the incentive to repay, and limitations in the legal system which hamper the banks' ability to recover these loans."
The IMF suggested the government could introduce legal and regulatory changes to streamline loan recovery, eliminate government influence over lending decisions, and improve incentives for the banks to operate on a commercial basis.
The central bank has recognised the need to streamline the legal framework for loan recovery given the longstanding non-performing loans, the IMF report said, noting that proposals to that effect are being considered, including modifications to the Bank Companies Act.
In the 2017-18 national budget, Finance Minister AMA Muhith proposed Tk 2,000 crore for state-owned banks recapitalisation, taking the amount to a new height of over Tk 10,000 crore since 2009.
"Recapitalisation should be tied to reforms to improve the long-term viability of state banks, including governance reforms, stricter controls over lending activities, and more aggressive recovery of bad loans," it said.
According to the report, Bangladesh benefits from lower oil prices as a net oil importer, but low oil prices could weaken job prospects for Bangladeshi workers in the gulf countries, source for two-thirds of the country's remittances.