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MDTA Recent Macroeconomic and PRGF Developments June 17, 2004 By IMF Dhaka office Do not quote
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Bottom Line The economic recovery that started in FY03 strengthened further in FY04 Although inflation has picked up Macroeconomic management remains cautious and all quantitative benchmarks and PCs were met Good headway has been made on the structural agenda, but with some slippages in key areas
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Production and Inflation Real GDP growth is likely to accelerate to 5.5 percent in FY04 from 5.3 percent in FY03 Under program, this will be growth and inflation are targeted at 5.5 percent each Industrial production, services, and exports were main contributors to growth Mainly due to higher prices of imported items, inflation has gone up and will reach 6 percent (year average) in FY04
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Fiscal policies were tighter than programmed The budget deficit for FY04 targeted in the revised budget is 4.2 percent of GDP, and is likely to come out lower, against 4.8 percent in the program Revenues are falling short of the target, as do ADP spending and foreign financingb
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Monetary policy remains prudent This is appropriate in light of the increase in inflation Private sector credit has grown less than programmed, as has credit to government
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The external sector is recovering From the start of FY04, exports grew by 15 percent through April and imports by 18 ½ percent through February Export is led by RMG and frozen food. External debt management has been prudent Gross international reserves now stand at $2.6 billion
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The exchange rate has become a bit more volatile In recent weeks, transient factors have pushed down the taka. The increase in volatility is a sign of a maturing of the exchange rate market.
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Structural Conditionality: Tax Administration Set up CIU: delayed Revamp bonded warehouse system: met Expand audit program to 1,000 taxpayers: not met Expand LTU system to VAT and withholding tax: by end-September Replace tax holiday system with rational investment incentives: by next budget
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Structural Conditionality: NCBs Contracting new management/support for NCBs: delayed Implement MOUs: met; continuous Sign new MOUs with lending cap and recovery targets: at final step Adopt bank-by-bank resolution strategies: at final step Bring Rupali, Agrani, and Janata to the point of sale: Rupali at end-1994, then Agrani and Janata
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Structural Conditionality: Others Adjust NSC rates in line with market developments: to be done Adjust trade taxes: done in budget
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One slide about MFA MFA phase out is a major risk to the program RMG exports have been buoyant due to strengthened competitiveness, especially in the duty-free EU market But Bangladesh is vulnerable due to heavy reliance on quotas Without a policy response, the adverse impact on the BOP could be as much as $1 ½ billion in FY05- 06, or 1 percent of GDP on average Attracting FDI, the flexible exchange rate regime, increased international reserves, liberalizing the regime for imports of RMG inputs, and measures to reduce the social impact should be part of an policy package
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