IMF prescribes greater exchange rate flexibility

Bangladesh has to pursue greater exchange-rate flexibility to get rover the jitters over depleting foreign-exchange reserves, the IMF says to reaffirm its financial-recovery suggestions.

"…it's important that the next stage of the reform agenda is to allow greater exchange-rate flexibility, which would help you address the problems in the external sector and the financial account," Krishna Srinivasan, the International Monetary Fund's director for Asia and Pacific, said Tuesday.

"And once you do that, you'll see a greater sense of stability coming back in the external accounts, which in tandem with improvements the government is making on the fiscal, you should see more sustained recovery from the crisis that every country has faced in the region because of multiple shocks and the COVID pandemic."

Mr Srinivasan was briefing newsmen in Singapore on the occasion of release of IMF's Regional Economic Outlook for Asia and the Pacific.

He said Bangladesh is a country which proactively showed to the IMF for support for its homegrown programme. The programme has two components-one is macroeconomic stability while the other is addressing the longer structural issues related to climate change.

"On macro-performance so far there have been significant improvements," he said.

On growth for Bangladesh in 2024 the IMF now predicts 5.7 per cent and in 2025 it can be 6.6 per cent.

The IMF has seen improvements in the country's monetary-policy framework and also in the fiscal performance.

"I think where Bangladesh was struggling a little bit was the fact that while the current account was adjusting well, partly because there were restraints on imports and so on," he said.But, the IMF executive notes, the financial account wasn't doing very well.

"So, in some sense, you could see the bleeding of reserves and taka coming under pressure," he noted about the currency devaluation and its impact on reserves.

In the Regional Economic Outlook report the IMF says the growth in Bangladesh is projected to slow mildly to 5.7 per cent this year (from 6.0 per cent in 2023) reflecting a "tighter policy stance".

On regional economic situation, Mr Srinivasan said the Asia-Pacific region is marked by both resilient growth and rapid disinflation.

The growth is better than previously projected but will slow from 5.0 per cent in 2023 to 4.5 per cent in 2024. The region remains inherently dynamic and accounts for about 60 per cent of global growth, he said.

And drivers of growth are as heterogeneous as the region, straddling from resilient domestic consumption in most ASEAN countries, to strong public investment in China and, most notably, in India, and to a sharp uptick in tourism in the Pacific Island countries.

The IMF feels that disinflation has advanced throughout the region, although at different speeds-in some cases it remains above target, like in Australia and New Zealand, while in others, it is at or close to central bank targets, like in Japan, and in some cases there are deflation risks like in China and Thailand.

"China is a source of both upside and downside risks. Policies aimed at addressing stresses in the property sector and to boost domestic demand will both help China and the region. But sectoral policies contributing to excess capacity will hurt China and the region," the Outlook observes.

Also, geoeconomic fragmentation remains a significant risk, it states and spells out the dos for the regulators.

"Asian central banks should continue to focus firmly on domestic price stability and avoid making policy decisions overly dependent on anticipated interest-rate moves by the Federal Reserve."

The Fund suggests that Asian countries should continue to allow the exchange rate to act as a buffer against shocks while advancing fiscal consolidation is an urgent priority both to lessen the burden of higher debt levels and interest costs and to rebuild the fiscal space needed to address medium-term structural challenges.

"Supervisors should continue to vigilantly monitor the build-up of risks associated with the pass-through of tighter monetary policies to corporate and household balance sheets," it alerts.

The multilateral financier also cautions that industrial policies, which have been on the rise in the Asia-Pacific region and globally, can lead to unintended consequences, like trade distortions which risk reinforcing fragmentation.

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