US embassy cable - 05DHAKA1800

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