The challenge now for Bangladesh will be to sustain economic growth and poverty reduction. To do so, important constraints on good economic performance will have to be addressed to make further progress a reality. This would include significantly enhancing government revenue performance; improving public financial management; controlling inflation; addressing human resource and infrastructure constraints; and improving overall governance.

The IMF has worked closely with the Bangladesh government to help bring about the significant economic achievements of recent years. The government's economic reforms over the last four years were supported by the IMF's Poverty Reduction and Growth Facility, which disbursed about $475 million in assistance during the period. The IMF has also provided Bangladesh with extensive technical assistance and policy advice.

Economic prospects and challenges were discussed last week in Washington by the IMF executive board, which represents all 185 of the Fund's member countries (the Public Information Notice on that meeting can be found at www.imf.org). This is part of the IMF's regular review of the economic performance of all of its members. For Bangladesh, the Board applauded the maintenance of macroeconomic stability with strong growth and highlighted the shift to a flexible exchange rate regime in 2003 as a key ingredient to this success. However, the board also noted many critical issues that will need to be addressed to carry this success forward and further reduce the still high poverty rate. I will highlight here three of the important macroeconomic issues.

First, government revenue collection is among the lowest in the world. To support the need for better government services and more infrastructure investment, as well as to offset the impact of needed reductions in import tariffs and charges, domestic revenue collection will need to be significantly increased. Low revenue reflects a number of deep-rooted problems in both tax administration and policy. For example, the tax system is riddled with exemptions and incentives. This, combined with weak overall administration, leads to a tax base that is too narrow with weak compliance and enforcement. Many individuals and companies fail to make adequate contributions to the government's revenue efforts.

We believe that this issue can only be addressed through a fundamental reform effort that would include: (1) building on the success of the income tax large taxpayers unit (LTU) by strengthening the value-added tax LTU and merging the two units to improve coordination and overall effectiveness; and (2) undertaking a comprehensive update of income tax and VAT legislation to broaden the tax base.

Second, there is a need for further improvement in public financial management. This is, of course, one of the most important areas of governance. The government has recently taken important steps in this regard, including revisions to public procurement regulations, and improvements in fiscal transparency by reflecting losses of state-owned enterprises (SOEs) directly in the budget. There is much more to be done, both with respect to the management of public funds, as well as in budget formulation and reporting on budget implementation.

Despite recent efforts, the fiscal performance of key SOEs continues to undermine the government's financial position. Increases in fuel and electricity prices have helped to reduced SOE losses, but more adjustments will be required to bring domestic prices in line with the realities of the international market.

We have emphasised many times the inefficiencies of fuel and electricity subsidies and the fact that a large share of the benefits of such policies goes to higher income groups. A rational pricing policy supported by government spending on social safety net programs for low income groups would be a more efficient, equitable, and sustainable policy.

Finally, we continue to believe that the people of Bangladesh are not getting sufficient benefits from the use of their domestic natural gas. Charging a price that is closer to the international value would encourage more efficient use, provide a source of royalty revenue to the government to finance social services and basic infrastructure, and be fairer to future generations.

Third, there remains a need for stronger monetary policy action to counter inflation, which tends to harm the poor more than others. Improvements in the institutional framework of monetary policy, including reforms in government debt management, will contribute to the development of a deeper market for government securities and support overall financial market development. However, there is a need for a stronger policy response. Government efforts to address disruptions to the supply of basic commodities can play a role, but need to be supported by a tighter monetary policy to reduce high rates of growth in credit and the money supply. The rapid pace of lending by some of the domestic private banks could also lead to more nonperforming loans in the future, underscoring the importance of continuing to strengthen Bangladesh Bank regulation and prudential oversight. The efficiency and viability of the financial sector will also be enhanced by the continued restructuring and divestment of the nationalized commercial banks.

IMF technical assistance, which is provided on a grant basis, has been important for supporting reform in the foreign exchange market, developing the institutional framework for monetary policy, and supporting central bank internal operations. This assistance is continuing and the IMF is willing to expand assistance to help achieve fundamental reform of revenue policy and administration.

Addressing the macroeconomic priorities outlined above will go a long way toward providing an environment conducive to addressing broader structural issues critical for sustained development. These include infrastructure constraints, human resource needs, and improving overall governance. The challenges of development are significant, but they certainly are not insurmountable. Ultimately, it is up to the Bangladesh government to decide how the IMF can best assist with its development effort. We are ready to respond accordingly.

Thomas Rumbaugh is Advisor in the Asia and Pacific Department of the International Monetary Fund.