The head of a visiting IMF team yesterday suggested greater authority for the central bank to govern all banks, both private and state-run, to ensure prudential management of the financial sector.
David Cowen, chief of the International Monetary Fund's team, said the amendment to the Banking Companies Act could be an important tool for strengthening the financial sector oversight.
"It's necessary for a well-managed supervisory and prudential framework," he said, urging the government to act on the issue.
He spoke at a dialogue on "State of the Bangladesh Economy, IMF Supported Programme and Future Outlook" at the BRAC Centre Inn auditorium in Dhaka.
The Centre for Policy Dialogue (CPD), a local think-tank, organised the programme.
The comments came as debates continue whether the banking regulator did enough to prevent the swindle of around Tk 3,606 crore from a Sonali Bank branch by Hall-Mark Group and five other companies.
According to the Banking Companies Act, the central bank has full control over private commercial banks and can act on its own if needed. But when it comes to state-run banks, Bangladesh Bank can only advise the government to take any action.
Without specifically mentioning the loan scam, Cowen said the government needs to see these banks as national assets.
There could be strains on the financial institutions and steps should be taken to mitigate risks, he said.
Cowen also urged the government to develop a bond market so that it works alongside bank credits and equity markets.
The IMF official said fuel price hikes are important for the country to contain subsidy costs and protect reserves, backstopped by greater exchange flexibility and possible monetary tightening.
He said the government should implement an automatic fuel price adjustment mechanism to avoid costly delays in oil price pass-through.
Still, the subsidies for energy could continue, he said. "There could be topping up and expansion of directed subsidy schemes such as diesel cards to mitigate impacts on the most vulnerable."
He said the government should look into the issue of fuel subsidies, as the budget is bleeding because of spending for the energy sector, cutting the country's expenditure for social welfare.
Cowen also said, apart from adjusting the prices of fuel and electricity, the government should look at the costs of energy.
"The government will have to see whether the cost is going up because of inefficiencies of BPC (Bangladesh Petroleum Corporation) and PDB (Power Development Board)," he said.
"Costs have to be controlled."
Cowen also joined the raging debates over quick rental power plants, which are blamed for putting a strain on balance of payments and higher electricity tariffs.
"We recognise the quick rental power plants are unnecessary. The government should revisit the issue because of higher costs of electricity generation."
Cowen also said private importers could be allowed to import oil as they can provide petroleum products at cheaper rates compared to the current framework.
At present, state-run BPC is the sole importer of all petroleum products.
During his keynote presentation, Cowen also spoke about four near-term risks Bangladesh will face: intensification of the euro area crisis, a sharp rise in global food prices, world oil price shock and pre-election pressures.
He said greater exchange rate flexibility could be one of the potential policy responses to deal with the impacts of euro crisis on Bangladesh.
Cowen said any sudden shock in the global food prices could deal a blow to Bangladesh's balance of payments. "Fiscal easing associated with measured food imports, open market sales and other safety net operations could be potential policy responses to the food price shock."
He also called for additional monetary tightening for addressing the second round effects of inflation, anchoring expectations, and offsetting the impacts of possible expansionary fiscal policy.
The IMF official also said a lack of fiscal restraint coupled with strained donor relations and tepid non-bank resource mobilisation could spur heavy government borrowing from banks, due to pre-election pressures.
"As a result, balance of payments and inflation pressures could re-emerge, undermining the recent macroeconomic stabilisation gains. Higher bank borrowing could add liquidity pressures at banks and crowd out private sector credit," he said.
Akbar Ali Khan, a former adviser to the caretaker government, said the government should look into inefficiencies in the electricity sector, which could cut cost of power generation.
He also said the problem in the country's financial sector, particularly at the state-run banks, is nothing new.
"We drew up the country's first public financial management in 1991, but we have not been able to solve the problem. It has remained as a trouble."
He said the scam at Sonali Bank should open the eyes of the government. "The government should immediately act on it, otherwise we will have serious problems."
AB Mirza Azizul Islam, another former adviser to the caretaker government, said the public finance management would not improve only by formulating good rules and procedures, as progress is intimately connected with the people who run them.
He also said the government does not have much time in implementing unpopular decisions such as raising the electricity prices.
Ahsan H Mansur, executive director of Policy Research Institute, said the Sonali Bank scam is the beginning of a long story.
He advised the government to conduct an independent and transparent audit into the state bank to assess the damage the politically appointed directors have caused to the bank's financial health.
The economist also called for disbanding the banking and financial institution division of the finance ministry, which has become a vehicle for establishing influences over the state banks.
In his presentation on the IMF-supported programmes, Debapriya Bhattacharya, distinguished fellow of CPD, said the IMF's external credit facility programme may have provided a helpful reference point when the government remains incapable of implementing its own programme.
"We were not able to impose fiscal discipline. The sad point is that we invited international financial institutions to impose discipline," Bhattacharya said.
He warned that Bangladesh's growth prospects would moderate along with a slowdown in investment. "One may expect a decline in GDP growth for a second consecutive year," he said.
The economist also said the government is facing a "fast-closing window of reprieve".
"It may have to settle for a second best option by holding on to macroeconomic stability with moderated economic growth, investment and employment," he said.
Bhattacharya also said the recently exposed crisis in the banking sector indicates that the macroeconomic management and structural reform issues demand a greater politico-economic understanding of the current development challenges of Bangladesh.
Prof Mustafizur Rahman, executive director of the CPD, chaired the session. Amir Khasru Mahmud Chowdhury, a former commerce minister, and Osman Faruque, a former education minister, also spoke.