Bangladesh Bank plans to sign a memorandum of understanding (MoU) with 10 commercial banks to take various measures on a pilot basis, including regularly publishing their delinquent lists, in a bid to reduce their non-performing loans.

The central bank recently shared this plan with a visiting mission from the International Monetary Fund (IMF).

The IMF mission delivered a statement to senior government officials on Thursday to wrap up its nine-day tour.

A Finance Ministry official said the IMF mission provided its preliminary findings in the statement and a detailed report would be released later.

In the statement, the international lender named four major reform priorities to boost medium-term growth prospects.

These include strengthening corporate governance of banks, adopting risk-based supervision and strict adherence to the current prudential framework, and removing exemptions and phase-in periods for required provisions.

He also spoke of reforming the legal system to support greater enforcement of creditors’ rights and incentives for debtors to make payments.

The IMF said the government had informed them that it would change laws related to banks by the end of this year.

According to the IMF statement, addressing the large number of non-performing loans (NPLs), especially in state-owned commercial banks, remains a major challenge.

“Bangladesh Bank plans to sign MoUs on a pilot basis with 10 commercial banks to devise a credible plan to reduce NPLs,” he said.

“In the meantime, BB (Bangladesh Bank) should resume publishing data on ‘stressed advances’ as it did until 2018,” it read.

“Ensuring classification and provisioning requirements are in line with Basel standards and conducting an asset quality review of SOCBs (state-owned commercial banks) is an important first step,” he added.

Non-performing loans totaled Tk 113,441 crore in March, up 19.3% YoY.

A Bangladesh Bank official said another IMF technical mission would come later to assist the central bank in reducing non-performing loans.

In the IMF statement, it was mentioned that increased supervision, including developing internal NPL management skills and setting operational targets to reduce NPLs, can help initiate active resolution of NPLs in banks.

In the absence of reforms to stem the flow of NPLs, the authorities’ plan to set up a public asset management corporation poses significant fiscal risks, he said.

According to the statement, the government is considering raising gasoline, octane, liquefied natural gas (LNG) and electricity prices in the coming months.

He noted that subsidies for energy, fertilizer and food have increased, as well as support for vulnerable people and farmers.

But a new prioritization of capital and current spending is expected to contain the fiscal deficit for FY22 as budgeted at 5.1 percent of GDP, it said.

The IMF projected that the fiscal deficit would reach 5.5 percent of GDP in fiscal year 23, partly driven by higher subsidies and weak revenue collections.

In the absence of adequate revenue mobilization, budget financing is increasingly reliant on costly domestic debt, eroding fiscal space, he said in the statement.

The government has set aside an allocation of Tk 82,745 crore to run its subsidy program for the fiscal year 2022-23.

A Finance Ministry official said the amount of the subsidy may need to be increased if fuel, fertilizer and LNG prices rise on the world market.

Of the total allocation, subsidies worth Tk 18,000 crore for power, Tk 15,000 crore for fertilizer and Tk 6,000 crore for LNG have been set aside.

The IMF mission opined that the war between Russia and Ukraine has interrupted the solid recovery from the pandemic and poses serious macroeconomic challenges for the country.

In line with world events, rising commodity prices, supply disruptions and slowing external demand have pushed inflation to its highest level of 7.6 percent in June since 2014, he said.

The current account deficit has widened to 3.5 percent of GDP between July and May and the taka has depreciated 9 percent since March, it said.

Additionally, foreign exchange reserves were down to 5 months of prospective imports from their 7-month high at the end of FY21, it added.

Near-term growth is expected to be hit by a slowdown in Europe and the US, which account for more than 80 percent of total export demand, the IMF forecast.

Inflation, fueled by commodity prices, is expected to peak in the third quarter of FY22 and remain elevated, it said.

Persistent inflationary pressures, faster tightening of financial conditions and larger-than-expected slowdowns in major advanced trading partners and China could put further pressure on reserves and the taka, it noted.