1. The Fund welcomes this opportunity to take part in the Development Forum. Bangladesh has committed itself to an agenda of pro-poor growth and social development. The IMF, together with the World Bank, the Asian Development Bank and bilateral donors, supports this agenda through policy advice, technical assistance, and financial support. The starting point for our support is Bangladesh’s poverty reduction strategy, the outline of which was laid down in the National Strategy for Economic Growth, Poverty Reduction, and Social Development (I-PRSP). Intensive work is on-going to produce a full-fledged Poverty Reduction Strategy Paper by the end of this calendar year.

2. On this basis, the IMF’s Executive Board approved a three-year program under the concessional Poverty Reduction and Growth Facility (PRGF). The PRGF supports a reform strategy aimed at boosting economic growth for a faster reduction in poverty, mainly through addressing longstanding impediments to investment and private-sector led growth. Bangladesh has already received two disbursements under the PRGF arrangement and the authorities and IMF staff have just concluded discussions for the second year program.

3. This Development Forum comes at an opportune time to reflect on the achievements over the past year since the finalization of the I-PRSP. It also is an occasion to discuss the challenges ahead. This will be the focus of the remainder of my statement.

One Year Ahead: Achievements

4. Overall economic performance has been strong, with growth anticipated to increase to 5 ½ percent for the year. This economic growth is supported by a rebound in exports and good harvests. But, unforeseen increases in import prices have pushed up inflation, which is set to reach 6 percent. Buoyed by the strong performance of exports and enhanced remittances, official reserves have increased over the last year, to the equivalent of three months of imports.

5. The Government’s sound macroeconomic policies and advances in structural reform are to be credited for the economic achievements. The fiscal deficit has been kept well under control, despite some underperformance on the tax revenue front, and monetary policy has been cautious while providing adequate room for loans to the private sector. Together with reforms in the management of monetary policy and rationalization in interest rates of government saving instruments, these policies have resulted in a gradual reduction in lending rates. The floating of the Taka in May 2003 was well-managed, and the modest depreciation of the Taka vis-à-vis the U.S. dollar since then has bolstered the competitive position of Bangladesh’s exporters. Finally, the Government has been careful to contract new external debt only on the most favorable terms.

6. Structural reform has been characterized by successes and some setbacks. The difficult political climate and capacity constraints have slowed down the pace of reform in some areas. Good progress, although with some delays, was made in tax administration and reform of the Nationalized Commercial Banks (NCBs). But, reform of State Owned Enterprises (SOEs) has stalled due to stiff opposition by vested interests and in spite of the availability of severance payments to affected workers.

7. Critical progress was made in the National Board of Revenue (NBR) by setting up a newly expanded Large Taxpayer Unit (LTU) for income tax and a Central Intelligence Cell (CIC), and tackling leakages through the bonded warehouse system. The first results of these reforms are already starting to show in tax collections and the identification and curbing of tax evasion.

8. Headway was also made with NCB reform, but at an uneven pace. Limits on new lending by NCBs have been implemented through well-monitoring Memorandums of Understanding with the Bangladesh Bank. Progress has been made with procuring management support for the NCBs, although on a delayed timetable. In particular, a sales advisor has been contracted for Rupali bank and a new management team has been identified for Agrani bank. In addition, the process for selecting management support teams for Sonali and Janata is going forward. Finally, bank-by-bank resolution strategies have been mapped out by the authorities, in consultation with the IMF and World Bank staff.

9. SOE reform has been much slower than anticipated a year ago. Heavy resistance from labor unions has for the time being halted closure and privatization of manufacturing SOEs. For the SOEs in the energy sector, with the assistance of the World Bank automatic pricing formulas were introduced in May 2003. Nevertheless, domestic prices lagged higher international prices, and the SOEs in the energy sector have sustained sizable losses.

The Challenges Ahead: Increased Risks Require More Efforts

10. Over the last decade, Bangladesh achieved solid growth (averaging 5 percent) with manageable inflation, and improved social indicators. However, it remains among the world’s poorest countries, with a high poverty rate. Meeting its Millennium Development Goals (MDGs) by 2015 will require much faster economic growth and more effective pro-poor policies. Growth and private investment have been held back by the poor state of physical infrastructure, the high cost of doing business, limited human capital, and poor governance.

11. The immediate outlook for economic growth and poverty reduction is clouded by the lifting of the quota system under the Multi Fiber Agreement (MFA) at the end of 2004. This will temporarily hold down growth of exports, GDP, and employment below levels attainable in the longer term. It is expected that Bangladesh’s exports of ready-made garments (RMG) to the U.S. will be especially at risk from more intense competition, while its duty-free access to the EU and Canadian markets should allow Bangladeshi exporters to retain some of their competitive edge there. Also, reform elements under the PRGF, notably the flexible exchange rate, the reduction in anti-export bias in trade taxes, and improvements in the investment climate, should help to strengthen export performance over time. The Government has set up a committee to define a comprehensive strategy to manage the transition to a world without MFA quotas, but implementation of all the elements of an effective response will take time and perseverance.

12. To support Bangladesh’s adjustment to the post-MFA world, the IMF is considering to augment Bangladesh’s PRGF access under the newly established Trade Integration Mechanism (TIM). The TIM is aimed at providing additional financial support to countries that are adversely affected in the short term by international trade liberalization, such as MFA phase out, to allow time for adjustment.

13. The challenge ahead will be to create an enabling environment for economic growth in line with meeting the MDGs, while ensuring that the benefits of such growth accrue to the poor. To this end, longstanding impediments to investment and growth will need to be removed, while maintaining macroeconomic balance and external debt sustainability and weathering the adjustment to the post-MFA world. Meeting this challenge requires continued prudent fiscal and monetary policies with intensified and broadened structural reforms.

14. On the macroeconomic front, we particularly welcome the government’s commitments to the following priorities:

· Protecting fiscal sustainability while supporting growth and poverty reduction. This would need to be achieved through strong revenue efforts by expanding the tax base, rationalizing and reducing trade taxes, and improving tax administration. At the same time, expenditure management should ensure increased spending on high quality projects for infrastructure and the priority social sectors.
· Continuing a prudent monetary stance aimed at balancing the need to keep inflation low while supporting economic growth with adequate credit to the private sector.
· Flexibly managing the exchange rate and interest rates. This would strengthen the resilience of the economy to shocks and better guide savings and investment decisions.

15. On the structural front, the agenda remains very large, despite the achievements that have been made so far. Under the PRGF, continued emphasis is being given to the following areas:
· Fiscal reform. A sustained and significant revenue effort over the coming years to fund investments in human capital development, physical infrastructure, and other priority social goals. Appropriate funding will also need to be provided to support these efforts.
· Reform of the NCBs. A determined effort to contain the flow of nonperforming loans and developing and implementing bank-by-bank strategies to resolve the longstanding problems of these banks.
· Trade reform. Concerted efforts to reform the trade system in order to improve competitiveness and reduce the cost of doing business, and help mitigate the impact of the MFA phase-out.
· SOE reform. Regaining the momentum of the reform of the SOEs in the manufacturing sector and reforming of the energy sector SOEs with the support of the World Bank.

16. Improving economic governance is integral to this agenda, without which these reforms cannot succeed. The need for improved governance extends across diverse areas of public resource management, from tax and customs administration, to expenditure management, and to lending practices in the NCBs. Thus, strengthening institutions to better ensure transparency and accountability should be a top priority. At an even broader institutional level, we welcome the passage of the Anti-Corruption Commission Act by parliament and look forward to the continued efforts in this area.

Supporting Poverty Reduction Efforts

17. To successfully advance this wide-ranging reform agenda, the government has consulted widely in the development of the National Strategy and is giving attention to forging domestic support for the reform. Ensuring adequate social safety nets will be equally important, to help ease the transitional costs and mitigate the political risks of reform.

18. To successfully carry out this agenda, and against the background of the MFA phase-out, Bangladesh will need the backing of the international community, both in the form of technical assistance and in financial support on concessional terms.

19. The Fund is prepared to be actively engaged in helping Bangladesh to implement its growth and poverty reduction strategy, through continued technical assistance and financial support under the PRGF. The government is moving ahead with its focused reform agenda consistent with its National Strategy. The Fund looks forward to continuing to play its part in helping Bangladesh advance this agenda, to attain its economic potential and meaningfully bring down poverty for its people.

Thank you.