## cr17147

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### Recent developments
- Output
  - Official statistics: output growth rose to 7.1 percent in FY16, from 6½ percent in the preceding fiscal year.
  - Growth drivers: robust domestic demand—particularly government consumption and private investment—and external demand; supply-side drivers: industry and services; sectoral shift away from agriculture.
- Inflation
  - Headline CPI inflation (annual average) fell to 5½ percent by end-2016, below the 5.8 percent FY17 target.
  - Nonfood inflation declined to 4½ percent in December 2016, compared to 7 percent a year ago.
  - Contributing factors: favorable agricultural production and falling global commodity prices.
- Balance of payments
  - Revisions to FY16 BOP: exports held up, imports were revised down, resulting in a $4½ billion improvement to the previously estimated trade deficit.
  - FY16 current account surplus revised from ½ percent of GDP to 1.7 percent of GDP.
- Monetary and fiscal developments
  - Bangladesh Bank kept policy rate, cash reserve ratio, and statutory liquidity ratio unchanged during FY16 and first nine months of FY17.
  - Reserve money growth reached 30 percent in FY16, double the Bank’s target.
  - Broad money growth close to target due to a falling money multiplier.
  - Credit to private sector (percent change, end of fiscal year): FY13 10.8; FY14 12.3; FY15 13.2; FY16 16.8; FY17 14.0.
  - FY16 fiscal outturn: deficit of 3½ percent of GDP compared to budgeted 5 percent. Public debt stable at around 33 percent of GDP.
- Reserves and exchange rate
  - Gross official reserves (billions of U.S. dollars): FY13 15.1; FY14 21.4; FY15 24.9; FY16 30.2; FY17 32.3.
  - Reserves in months of prospective imports: FY13 4.1; FY14 5.8; FY15 6.5; FY16 7.2; FY17 7.0.
  - Exchange rate (taka per U.S. dollar; period average): FY13 79.9; FY14 77.7; FY15 77.7; FY16 79.3.
  - Exchange rate (taka per U.S. dollar; end-period): FY13 77.8; FY14 77.6; FY15 77.8; FY16 81.3.

### Outlook and risks
- Near-term projections
  - FY17 output growth expected close to 7 percent (staff projection: around 6¾ percent; authorities projected 7.2 percent).
  - Inflation projected to increase somewhat from the lowest level in five years but remain close to Bangladesh Bank target given: moderate money and credit growth; stable inflation expectations; temperate private wage growth.
- Medium-term projection scenarios
  - Maintaining growth of around 7 percent per year requires increased public and private investment, reforms to support capital market development, and improved investment efficiency.
  - Without such reforms, medium-term growth could fall to as low as 5 percent.
  - If investment increases in a high-growth scenario, investment-related imports would push the current account into a modest but manageable deficit.
- Key risks
  - Downside near-term risks: resumption of political unrest; security concerns; protracted slowdown in key export markets (particularly the EU); weaker remittances.
  - Excess liquidity in the banking sector poses latent macro-financial risk.
  - Structural constraints: lack of basic infrastructure (commercial access to electricity, roads, rail) constraining private investment and growth.
  - External risks: weakening remittances and lower export demand could materially reduce reserve coverage and current account balances.
- Reserve adequacy projections
  - Baseline medium-term: reserve coverage declines somewhat but stabilizes above 5 months of imports.
  - Adverse three-year scenario (starting FY18) with export growth at 5 percent (instead of 7 percent) and remittance growth at 2¼ percent (instead of 4½ percent): coverage drops to 4½ months of imports.

### Policy assessment and recommendations
- Monetary policy
  - Directors commended Bangladesh Bank for prudent conduct.
  - Recommendation: increase sterilization efforts through open market operations to mop up excess liquidity and contain financial sector risks; avoid a more abrupt future tightening.
  - Move toward a more price-based monetary framework (interest rate targeting, active use of repo/reverse-repo corridor) recommended as preparatory steps.
- Fiscal policy and revenue mobilization
  - Directors welcomed commitment to launch modern VAT on July 1, 2017; estimated direct revenue benefit: 1 percent of GDP per year.
  - Mobilizing domestic revenue is a priority to permit increased public investment and strengthened social safety nets.
  - Recommendations: modernize the VAT, continue improving the income tax regime, strengthen tax administration, and improve budget formulation and execution to enhance credibility.
  - Fiscal policy should focus on keeping public debt broadly stable.
- Banking sector and financial stability
  - Reforms should strengthen regulation and supervision and address balance sheet weaknesses in loss-making state-owned commercial banks (SCBs).
  - Recommendation: reduce reliance on high-cost National Savings Certificates (NSCs) as a government financing vehicle; consider better targeted and less costly alternatives for social policy goals.
  - Specific SCB reform measures: improved governance, gradual recapitalization, credit growth limits, automated financial reporting, legal reforms for loan recovery, and eliminate government influence over lending decisions.
- Structural and capital market reforms
  - Develop capital markets to intermediate underutilized savings over longer horizons and finance long-term private investment.
  - Preconditions: clear government bond issuance strategy, debt management framework, broaden institutional investor base.
  - Policy steps: phase out surrender requirements, deepen foreign exchange market, allow more two-way exchange rate movements, and execute a reliable government borrowing and debt management strategy.

### National Savings Certificates (NSCs) — fiscal and financial implications
- Design and recent trends
  - NSCs: about a dozen instruments with maturities 3–5 years; single-lender ceiling set at Tk3 million (about $40K).
  - Outstanding stock: over 40 percent of total domestic public debt, or nearly 10 percent of GDP.
  - Issuance sharply accelerated in recent years and continues to grow; demand-driven rather than aligned with government borrowing plans.
- Costs and distortions
  - Interest paid on NSCs amounts to about 1 percent of GDP.
  - Higher-than-budgeted NSC interest rates increased total cost of budget borrowing by an estimated ¼–½ percent of GDP annually.
  - NSC dominance limits issuance of treasury bills and bonds, impeding development of a deep and liquid government securities market and complicating banks’ liquidity management.
  - Absence of a secondary market for NSCs and their on-demand nature hampers monetary policy transmission and sterilization operations.
- Policy recommendations on NSCs
  - Significantly reduce budget reliance on NSCs and gradually phase out outstanding stock, replacing it with treasury bonds and bills.
  - Dampen household demand for NSCs by lowering their interest subsidy; consider automatically linking NSC rates to market rates.
  - Enhance enforcement and monitoring to prevent circumvention of single-lender ceilings.
  - Consider targeted, less costly alternatives (e.g., expanded social safety nets) with costs reflected on-budget.

### Banking sector indicators and risks
- Selected indicators (as presented in source)
  - Capital Adequacy Ratio:
    - SCBs: 10.8 8.3 6.4 5.9 (years presented)
    - Private: 12.6 12.5 12.4 12.4 (years presented)
  - Nonperforming loans:
    - SCBs: 19.8 22.2 21.5 25.1 (years presented)
    - Private: 4.5 5.4 9.4 4.6 (years presented)
  - Return on assets:
    - SCBs: 0.6 -0.6 -0.0 4 -0.2 (as presented)
    - Private: 1 1 1 1 (as presented)
- Observations
  - SCBs represent about a quarter of total banking system assets and suffer from legacy loans, high NPLs, low profitability, and implicit government guarantees that encourage risk-taking and quasi-fiscal losses.
  - Staff recommends stricter supervision, recovery framework improvement, and tying recapitalization to governance and performance reforms.

### Key statistics (selected, FY2013–17)
- Real GDP (annual percent change): FY13 6.0; FY14 6.1; FY15 6.6; FY16 7.1; FY17 6.8 (Est./Staff proj.).
- GDP deflator (FY13–17): 7.2; 5.7; 5.9; 6.6; 7.0.
- CPI inflation (annual average FY13–17): 6.8; 7.3; 6.4; 5.9; 6.8.
- CPI inflation (end of period FY13–17): 8.1; 7.0; 6.3; 5.5; 6.8.
- Total revenue and grants (percent of GDP FY13–17): 11.2; 10.9; 9.9; 10.4; 10.8.
- Total central government debt (percent of GDP FY13–17): 34.5; 33.9; 33.9; 33.1; 33.7.
- Broad money (M2) (percent change FY13–17): 16.7; 16.1; 12.4; 16.3; 15.1.
- Exports, f.o.b. (billions of U.S. dollars FY13–17): 26.6; 29.8; 30.7; 33.4; 35.3.
- Imports, f.o.b. (billions of U.S. dollars FY13–17): -33.6; -36.6; -37.7; -39.7; -43.3.
- Current account balance (billions of U.S. dollars FY13–17): 2.4; 1.4; 2.9; 3.7; -0.9.
- Current account balance (percent of GDP FY13–17): 1.6; 0.8; 1.5; 1.7; -0.4.
- Nominal GDP (billions of taka FY13–17): 11,989; 13,437; 15,158; 17,296; 19,764.

### Remittances
- Recent magnitude and trend
  - Remittance inflows more than doubled from $6 billion to $15 billion over the last ten years.
  - Over the same period remittances accounted for 8½ percent of GDP on average.
  - Remittances are close to eight times larger than FDI flows into the country.
  - In FY16, remittances dropped to $15 billion (6.8 percent of GDP) from $15¼ billion (7.9 percent of GDP) in FY15.
  - Inflows in July 16–March 17 dropped by over fifteen percent compared to same period in the previous year.
  - Inflows forecasted to drop to 12¼ billion in FY17.
- Drivers
  - Primary driver: economic slowdown in the GCC countries due to low oil prices; GCC accounted for about 60 percent of remittances.
  - Secondary driver: shift to informal transfer methods (hawala/hundi), reducing official recorded remittances.
- Policy considerations
  - Recovery to historical levels expected to be slow over short- to medium-term given weaker GCC growth and downside risks.
  - Potential policy responses include enhancing social transfers and allowing exchange rate adjustments while using reserve buffers to smooth volatility.

### Debt sustainability assessment (DSA) — key outcomes
- Risk assessment
  - Risk of external debt distress and overall debt distress assessed as low.
- Baseline projections
  - PV of PPG external debt to GDP ratio projected to increase from 8.5 percent of GDP in FY17 to 10.2 percent in FY22, rising close to 11 percent of GDP by FY37.
  - PV of public debt to GDP ratio projected to rise from 31 percent in FY17 to 33.8 percent in FY22 and stabilize thereafter.
- Fiscal assumptions and sensitivities
  - DSA assumes VAT launch in July 2017 and consequent revenue gains.
  - Debt indicators remain within policy-dependent solvency thresholds under baseline but are sensitive to weaker growth or failure to improve revenues.
- Selected macro projections (Current DSA FY16–FY20)
  - Real GDP growth: 7.1 6.8 7.0 7.0 7.0.
  - Inflation (annual average): 5.9 6.8 6.0 5.5 5.5.
  - Fiscal deficit (percent of GDP): -3.4 -4.7 -4.4 -4.2 -4.1.
  - Current account (percent of GDP): 1.7 -0.4 -1.0 -1.6 -2.0.
  - Remittance growth: -3.0 -17.0 3.5 3.5 4.5.
- Policy implications
  - Maintain moderate deficits and concessional borrowing; strengthen debt management and monitoring of NSCs; boost low budget revenue to preserve fiscal sustainability and create space for public investment.

### Administrative recommendation
- Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

*International Monetary Fund — Staff Report for the 2017 Article IV Consultation (Bangladesh), source: cr17147.*

### 7.1 percent, from 6½ percent in the previous fiscal year. Headline inflation continued to ease,

### cr17147 - 7.1 percent, from 6½ percent in the previous fiscal year. Headline inflation continued to ease,

### Recent developments
- Output
  - Official statistics reported output growth rising to 7.1 percent in FY16, from 6½ percent in the preceding fiscal year.
  - Growth was supported by robust domestic demand—particularly government consumption and private investment—and external demand.
  - Supply-side drivers: industry and services; sectoral shift away from agriculture.
- Inflation
  - Headline CPI inflation (annual average) fell to 5½ percent by end-2016, below the 5.8 percent FY17 target.
  - Contributing factors: favorable agricultural production and falling global commodity prices.
  - Nonfood inflation declined to 4½ percent in December 2016, compared to 7 percent a year ago.
- Balance of payments
  - Revisions to FY16 BOP: exports held up, imports were revised down, resulting in a $4½ billion improvement to the previously estimated trade deficit.
  - FY16 current account surplus revised from ½ percent of GDP to 1.7 percent of GDP.
  - Overall balance of payments improved as a result.
- Monetary and fiscal developments
  - Bangladesh Bank kept policy rate, cash reserve ratio, and statutory liquidity ratio unchanged during FY16 and first nine months of FY17.
  - Reserve money growth reached 30 percent in FY16, double the Bank’s target.
  - Broad money growth was close to the target due to a falling money multiplier.
  - Credit to private sector supported robust activity; credit growth figures (FY13–17): 10.8, 12.3, 13.2, 16.8, 14.0 (percent change, end of fiscal year).
  - FY16 fiscal outturn: deficit of 3½ percent of GDP compared to budgeted 5 percent. FY17 showed similar deviations with both revenues and spending growing less than budgeted.
  - Public debt stable at around 33 percent of GDP.
- Reserves and exchange rate
  - Gross official reserves (billions of U.S. dollars): 15.1 (FY13), 21.4 (FY14), 24.9 (FY15), 30.2 (FY16), 32.3 (FY17).
  - Reserves in months of prospective imports: 4.1, 5.8, 6.5, 7.2, 7.0 (FY13–17).
  - Exchange rate (taka per U.S. dollar; period average): 79.9, 77.7, 77.7, 79.3 (FY13–16).
  - Exchange rate (taka per U.S. dollar; end-period): 77.8, 77.6, 77.8, 81.3 (FY13–16).

### Outlook and risks
- Near-term outlook
  - In FY17, output growth is expected to remain close to 7 percent.
  - As global commodity prices pick up, inflation is projected to increase somewhat from the lowest level in five years but remain close to the Bangladesh Bank target with:
    - moderate money and credit growth,
    - stable inflation expectations,
    - temperate private wage growth.
- Medium-term outlook
  - Maintaining output growth of around 7 percent per year would require:
    - increased public and private investment,
    - reforms to support capital market development,
    - improved investment efficiency.
  - Robust growth supported by increased investment expected to lead to higher investment-related imports, pushing the current account into a modest but manageable deficit.
- Risks
  - Downside near-term risks: resumption of political unrest; security concerns affecting confidence and investment; protracted slowdown in key export markets; weaker remittances.
  - Excess liquidity in the banking sector poses a latent risk to macroeconomic stability.
  - Structural constraints: lack of basic infrastructure (commercial access to electricity, roads, rail) constrains private investment and growth.

### Policy assessment and recommendations
- Monetary policy
  - Directors commended Bangladesh Bank for prudent monetary policy conduct.
  - Recommendation: increase sterilization efforts because the Bank has been sterilizing only part of the liquidity from external inflows; this would help contain financial sector risks and avoid a more abrupt future tightening.
  - Monetary policy is better placed to manage short-term demand fluctuations.
- Fiscal policy and revenue mobilization
  - Directors welcomed the authorities’ commitment to launch the modern VAT on July 1, 2017.
  - Mobilizing domestic revenue should be a policy priority to allow increased public investment and strengthened social safety nets.
  - Recommendations: modernize the VAT, continue improving the income tax regime, and strengthen tax administration.
  - Fiscal policy should focus on keeping the public debt to GDP ratio broadly stable.
  - Directors noted the FY17 budget relied on overly ambitious revenue growth and capital spending projections; recommended improving credibility of budgeting through better formulation and execution.
- Banking sector and financial stability
  - Banking sector reforms should aim to further improve regulation and supervision and address balance sheet weaknesses in loss-making state-owned banks.
  - Directors called for reducing reliance on high-cost National Savings Certificates as a government financing vehicle; consider better targeted and less costly alternatives that achieve social policy goals without distorting financial markets.
- Structural reforms
  - For middle-income status, need to boost investment and modernize policy-making practices and institutions.
  - Emphasis on developing capital markets to improve intermediation of underutilized savings over longer horizons and removing financial sector distortions.
  - Move toward a more price-based monetary and exchange rate policy and increase transparency and credibility of budget practices.

### Key statistics (selected, FY2013–17)
- Real GDP (annual percent change): FY13 6.0; FY14 6.1; FY15 6.6; FY16 7.1; FY17 6.8 (Est./Staff proj.)
- GDP deflator: 7.2; 5.7; 5.9; 6.6; 7.0 (FY13–17)
- CPI inflation (annual average): 6.8; 7.3; 6.4; 5.9; 6.8 (FY13–17)
- CPI inflation (end of period): 8.1; 7.0; 6.3; 5.5; 6.8 (FY13–17)
- Total revenue and grants (percent of GDP): 11.2; 10.9; 9.9; 10.4; 10.8 (FY13–17)
- Total central government debt (percent of GDP): 34.5; 33.9; 33.9; 33.1; 33.7 (FY13–17)
- Credit to private sector by the banking system (percent change, end of fiscal year): 10.8; 12.3; 13.2; 16.8; 14.0 (FY13–17)
- Broad money (M2) (percent change): 16.7; 16.1; 12.4; 16.3; 15.1 (FY13–17)
- Exports, f.o.b. (billions of U.S. dollars): 26.6; 29.8; 30.7; 33.4; 35.3 (FY13–17)
- Imports, f.o.b. (billions of U.S. dollars): -33.6; -36.6; -37.7; -39.7; -43.3 (FY13–17)
- Current account balance (billions of U.S. dollars): 2.4; 1.4; 2.9; 3.7; -0.9 (FY13–17)
- Current account balance (percent of GDP): 1.6; 0.8; 1.5; 1.7; -0.4 (FY13–17)
- Gross official reserves (billions of U.S. dollars): 15.1; 21.4; 24.9; 30.2; 32.3 (FY13–17)
- Nominal GDP (billions of taka): 11,989; 13,437; 15,158; 17,296; 19,764 (FY13–17)

*International Monetary Fund — Staff Report for the 2017 Article IV Consultation (Bangladesh).*

### 9.      Outlook. The macroeconomic situation is likely to remain broadly stable in FY17. Output

### 9. Outlook. The macroeconomic situation is likely to remain broadly stable in FY17. Output

### Outlook and growth projections
- Output growth is expected to be robust at around 6¾ percent in FY17.
- Inflation, after declining to its lowest level in five years, is projected to increase somewhat as global commodity prices pick up, but is projected to remain close to the Bangladesh Bank’s target given:
  - moderate money and credit growth,
  - stable inflation expectations, and
  - temperate private wage growth.
- Over the medium-term:
  - growth of 7 percent per year is achievable, but only with an increase in public and private investment and reforms that underpin capital market development and improve investment efficiency;
  - without these reforms and with investment levels staying as they are and capital markets remaining underdeveloped, medium-term growth could fall to as low as 5 percent;
  - if investment increases in line with the high-growth scenario, investment-related imports would be expected to push the current account into a modest but manageable deficit.

### Risks
- Main downside risks to the outlook:
  - resumption of political unrest as the next election cycle approaches,
  - a rise in extremism,
  - a further deterioration in the security situation affecting confidence and investment,
  - a protracted slowdown in key export markets (particularly the EU),
  - a further weakening of remittances.
- Additional risks:
  - a sustained appreciation of the U.S. dollar could require adjustments to the nominal exchange rate to avoid harming export competitiveness;
  - excess liquidity in the banking sector presents a latent risk to macroeconomic stability.
- Upside possibilities:
  - export demand and remittances could surprise on the upside.

### Authorities’ views on the outlook
- Authorities broadly agreed with the staff’s outlook but projected FY17 growth at 7.2 percent (somewhat higher than staff’s projection).
- Authorities expect a stable environment in the run up to the elections and no threat of political instability in the near to medium term.
- They argued reform initiatives to improve the business climate and address infrastructure bottlenecks should boost productivity and potential growth.
- Bangladesh Bank agreed that projected global commodity price increases will exert upward pressure on prices but saw domestic inflation staying within the Bank’s projection.
- Authorities shared concern about potential impact of weaker remittances, but argued much of the slowdown may result from measurement gaps related to a shift away from banking toward informal channels.

### Near-term policies — Monetary policy
- The Bangladesh Bank operates a quantity-based policy regime, aiming to keep broad money growth in line with its inflation objective; it maintains a managed peg to the U.S. dollar under a relatively closed capital account.
- Achievements to date:
  - inflation stabilized in the 6–7 percent range,
  - credit growth has reached levels sufficient to support economic activity,
  - broad money is in line with the Bank’s target,
  - the exchange rate has been consistent with maintaining competitiveness and rebuilding reserve buffers.

### Near-term policies — Credit risks and monetary operations
- The Bank has taken a passive approach to domestic liquidity management, sterilizing only part of the liquidity from external inflows. Consequences:
  - market interest rates remain low and short-term real rates negative for some time,
  - concern that a sustained low interest rate environment may encourage excessive risk-taking by banks and loosen lending standards, risking an unsustainable credit boom as in 2011.
- Recommendation:
  - The Bank should increase sterilization efforts now through open market operations to contain financial sector risks and to head off a more abrupt and disruptive tightening later.
  - The fiscal costs of sterilization are a necessary result of good monetary and exchange rate policy; the Bank would need to be able to carry out this policy without concern for its balance sheet.

### Near-term policies — Fiscal policy
- Fiscal stance:
  - fiscal policy should continue to be oriented toward keeping the public debt ratio broadly stable;
  - this year’s budget deficit target of 5 percent of GDP is consistent with that principle.
- Observations and risks:
  - the budget is based on overly ambitious projections for revenue growth and correspondingly ambitious capital spending targets; realized shortfalls for both are likely to offset each other to some extent;
  - scope to improve the credibility of the budgeting process remains large given large deviations in past outturns.
- Debt outlook:
  - the public debt-to-GDP ratio is projected to increase but remain below 40 percent of GDP;
  - this favorable outlook is sensitive to assumptions of continued robust growth and revenue gains from the upcoming VAT launch.

### Authorities’ views on near-term policies
- Bangladesh Bank: current policy stance consistent with its inflation objective; broad money and credit growth within the Bank’s targets; liquidity declining recently as credit growth picked up and current account surplus eased; readiness to adjust policy and liquidity management as credit growth approaches program ceilings.
- Fiscal authorities: agreed budget should focus on maintaining public debt broadly stable and that monetary policy is better suited for short-term cyclical management.

### Macroeconomic policy reforms — Monetary and exchange rate framework
- Current framework (broad money targets and a managed exchange rate peg) has worked well but is not suitable for a middle-income country with a more developed financial sector and global integration.
- Recommendation to shift toward a price-based framework—interest rate targeting and a more market-based exchange rate—with preparatory steps including:
  - deepening the foreign exchange market by phasing out any remaining surrender requirements,
  - allowing more two-way exchange rate movements to incentivize hedging,
  - beginning to use the repo/reverse-repo interest rate corridor more actively to enhance signaling and transmission.

### Macroeconomic policy reforms — Fiscal sustainability and revenue mobilization
- Prudent fiscal policy has kept public debt moderate, but raising public investment and social spending to meet growth ambitions without compromising sustainability requires boosting low budget revenue and modernizing the tax system.
- The new VAT will be central:
  - estimated direct revenue benefit: 1 percent of GDP per year,
  - a successful launch in July 2017 would signal commitment to structural reforms,
  - VAT law expected to improve compliance, reduce tax evasion, and serve as a building block for future tax policy reforms.
- Next steps: considerable scope to broaden the direct tax base through a modern Direct Tax Code.

### Macroeconomic policy reforms — Improving budget practices
- As Bangladesh moves toward middle-income status and external capital market access, budget transparency and credibility become more important.
- Current concerns:
  - many operations whose costs are not reflected as budget primary expenditure (state-owned enterprise losses, policy-based lending by state-owned commercial banks, subsidies to retirees’ savings) are hidden or borne by non-fiscal agents.
- Recommendations:
  - transform where possible hidden costs into explicit fiscal expenditures and reflect them on-budget,
  - consolidate extra-budgetary funds and bring them into the formal budget net,
  - improve comprehensive reporting of fiscal operations outside the central government.

### Maintaining external resilience — Developments and prospects
- Developments:
  - rapid growth in garment exports and remittances (nearly two-thirds of remittances originate in the Gulf countries) have dominated the balance of payments and restored reserves to around seven months of imports;
  - productivity growth has allowed significant real exchange rate appreciation (over 25 percent since 2013 or 6½ percent since the last Article IV Consultation).
- Prospects:
  - despite real appreciation, Bangladesh’s external position remains strong with adequate reserve levels and current account surpluses;
  - at the current real exchange rate the current account is forecast to decline to a deficit of about 2 percent of GDP over the medium term due to higher investment-related imports and moderate remittance inflows.

### Exchange rate management and reserve adequacy
- Policy guidance:
  - maintain foreign exchange reserves sufficient to ensure resilience given exposure to external shocks;
  - under the baseline scenario weaker current account will reduce reserve coverage somewhat but stabilize it at a still-adequate level exceeding five months of imports;
  - even modestly weaker-than-projected remittances growth, export demand, or commodity prices could reduce coverage considerably.
- Recommended approach:
  - Bangladesh Bank should continue flexible exchange rate management, actively allowing nominal rate adjustments as needed to preserve reserve buffers;
  - exchange rate should be the main tool to buffer the domestic economy against sustained external shocks;
  - if current account prospects are stronger than expected and persistent, allow nominal appreciation; if inflows are temporary, intervening to maintain the nominal peg is justified.

### Sovereign wealth fund proposal
- Cabinet approved a proposal to create a “sovereign wealth fund” to make the central bank’s reserves available to finance large infrastructure investment projects:
  - proposed allocation: $2 billion in foreign exchange per year,
  - maximum allocation: $10 billion (out of $32 billion in total reserves).
- Status and recommendation:
  - government in early stages; few concrete details or guidelines public;
  - if launched, careful design and execution required to prevent encumbering reserves in ways that could harm external resilience or hamper future access to global capital markets.

### Authorities’ views on external resilience
- Authorities agreed external position remains strong but acknowledged dependence on remittances is a concern.
- Bangladesh Bank emphasized foreign exchange policy allows sufficient flexibility and will continue managing the rate to smooth temporary fluctuations; noted the Taka has been steadily depreciating against the dollar for some months reflecting market forces and balance of payments developments.

### Macro-financial structural reforms — Banking sector
- Banking sector performance differs significantly between private and state-owned banks, suggesting scope to strengthen oversight and limit systemic risks.
- Reform priorities:
  - improve supervision,
  - contain risks from loan concentration and banks’ exposure to capital markets,
  - improve legal and financial framework for loan recovery.
- State-owned commercial banks (SCBs) specifics:
  - represent about a quarter of total banking system assets,
  - continue to suffer balance sheet weaknesses largely from legacy loans to large borrowers lacking repayment incentives and limitations in the legal system hampering recovery,
  - high non-performing loan ratios, with recent increases partly reflecting improved loan classification and reclassification of previously restructured loans,
  - tasked with public policy initiatives influencing lending decisions,
  - implicit government deposit guarantee keeps them liquid but may lead to growing quasi-fiscal losses and impede financial sector modernization.
- Government’s reform strategy for SCBs:
  - improved governance,
  - gradual recapitalization,
  - credit growth limits,
  - automated financial reporting.
- Additional measures to ensure success:
  - introduce legal and regulatory changes to streamline loan recovery,
  - eliminate government influence over lending decisions,
  - improve incentives for SCBs to operate on a commercial basis.

### Banking sector indicators (selected years and measures as presented)
- Capital Adequacy Ratio:
  - SCBs: 10.8 8.3 6.4 5.9 (years presented in source)
  - Private: 12.6 12.5 12.4 12.4 (years presented in source)
- Nonperforming loans:
  - SCBs: 19.8 22.2 21.5 25.1 (years presented in source)
  - Private: 4.5 5.4 9.4 4.6 (years presented in source)
- Return on assets:
  - SCBs: 0.6 -0.6 -0.0 4 -0.2 (as presented)
  - Private: 1 1 1 1 (as presented)

*International Monetary Fund staff report material summarized from the provided text.*

### 27.      Authorities’ views. The authorities reiterated their commitment to improve the performance

### cr17147 - 27.      Authorities’ views. The authorities reiterated their commitment to improve the performance

### Authorities’ views on state-owned commercial banks
- Authorities reiterated commitment to improve the performance of the state-owned commercial banks.
- Expected coordinated efforts between the banks, the Bangladesh Bank, and the Ministry of Finance to hold the banks to agreed-upon performance criteria will yield results.
- Bangladesh Bank emphasized that they will continue to hold the state banks to the same regulatory standard as private commercial banks.
- Authorities recognized the need to streamline the legal framework for loan recovery given longstanding non-performing loans; proposals under consideration include modifications to the Bank Companies Act.
- State banks will continue to play an important public policy role by:
  - financing certain priority infrastructure projects; and
  - improving access to financial services through their extensive branch network.

### Developing capital markets — intermediation and investment needs
- Staff analysis: maintaining growth at its historical pace will require a significant increase in private investment.
- While there is scope for FDI, most investments will need to be financed domestically, requiring stepping up intermediation of the country’s underutilized pool of savings over longer horizons.
- At present firms finance their investments almost fully from their own retained earnings (Box 2).
- Commercial banks’ ability to carry out long-term intermediation will remain limited; developing capital markets for financing long-term private investment would:
  - increase the level of investment; and
  - aid the efficient intermediation of savings (Annex IV).

### Reform efforts on capital markets
- Government formulated a Capital Market Development Master Plan after the 2011 stock market crisis aiming to:
  - address institutional weaknesses in the equity market;
  - create an environment fostering new products such as corporate bonds, asset-backed securities, and derivatives;
  - expand institutional investors to include mutual funds, insurance companies, and pension funds.
- Progress made in improving function and regulation of equity markets.
- Remaining challenges (Annex IV) include:
  - rules and regulations pertaining to capital markets including addressing the slow court system;
  - tax distortions and legal impediments to corporate bond issuance;
  - need for improved coordination among regulatory bodies.

### Preparatory steps for capital market development
- Development of capital markets is gradual and requires coordinated reforms across legal, regulatory, and institutional fronts (Annex IV).
- A deep and liquid government bond market is prerequisite for instruments for long-term intermediation to evolve, providing a risk-free yield curve benchmark for pricing corporate bonds.
- This requires:
  - a clear government bond issuance strategy; and
  - a debt management framework so investors can anticipate a reliable supply of fixed-income securities.

### Budget financing impediments to capital market development
- Budget financed mainly domestically; external financing relatively stable at around 1 percent of GDP.
- Part of domestic financing comes from banks’ purchase of treasury bills and bonds.
- Non-bank borrowing via National Saving Certificates (NSCs) has sharply accelerated in recent years and continues to grow (Box 3).
- Higher-than-budgeted borrowing through NSCs:
  - limits issuance of treasury bills and bonds, preventing development of a deep and liquid market for government securities; and
  - locks up a large share of long-term savings in subsidized instruments that would otherwise be channeled into institutional investor funds.

### Other implications of NSC dominance
- Cost:
  - Interest paid on NSCs amounts to about 1 percent of GDP.
  - Given the significantly higher NSC interest rates, the outstanding stock of NSCs issued has already raised the total cost of budget borrowing by an estimated ¼–½ percent of GDP annually, and these costs continue to rise.
- Liquidity:
  - Complicates banks’ liquidity management by limiting the supply of liquid and safe government securities available for banks to meet their regulatory requirements.
- Hamstrings conduct of monetary policy:
  - Central bank’s operational independence constrained by its need to limit losses on its balance sheet; prevalence of NSCs can distort monetary policy.
  - Shortage of government securities is a key reason sterilization costs are borne by the central bank.
- Reduces effectiveness of monetary policy:
  - Absence of a secondary market for NSCs—which force savers to commit their funds for 3–5 years (or face a penalty)—prevents timely and efficient adjustment of intermediation and slows transmission of monetary policy changes.

### Policy recommendations on NSCs and bond market development
- Significantly reduce the budget’s reliance on NSCs and gradually phase out the outstanding stock, replacing it by increasing issuance of treasury bonds and bills.
- Dampen household demand for NSCs by lowering their interest subsidy.
- Consider a mechanism that automatically links NSC rates to market rates (as has been done for India).
- Consider more targeted and less costly alternatives to NSCs—such as expanding the social safety net and reflecting the costs on-budget—to achieve social policy goals without distorting financial markets, hindering monetary policy, and impeding capital market development.
- Further steps to develop a deep and well-functioning government bond market, starting with:
  - execution of a reliable government borrowing and debt management strategy; and
  - development of a base of domestic institutional investors.
- Improve budget planning and monitoring to increase predictability of the government’s cash flow needs as part of the strategy.

### Authorities’ views on capital market development and NSCs
- Authorities shared staff’s assessment of importance of developing a stable and well-functioning capital market and noted progress on the Capital Market Development Master Plan, particularly regulation and supervision of the stock market.
- To minimize risk of excessive stock market valuations, authorities emphasized banks need to improve monitoring of how loans are used to ensure they are not diverted toward stock market share purchases.
- Bangladesh Bank has tightened monitoring to ensure statutory limits on exposure to the stock market are observed.
- Authorities emphasized NSCs play an important social role by providing support to vulnerable segments in the absence of unemployment insurance and wide pension coverage; eliminating NSCs outright would not be viable now.
- Authorities recognized excessive reliance on NSCs for budget financing impedes capital market development and hampers monetary policy management.
- Conceded NSCs are currently poorly targeted and misuse of the system is increasing.
- Working on proposals to improve monitoring to better understand who benefits from NSCs.
- Considering options for aligning NSC rates with market interest rates, and open to reviewing eligibility criteria and limits on purchases of NSCs.

### Other issues
- Anti-money laundering and counter-terrorism financing (AML/CFT):
  - Bangladesh has made some progress but gaps remain.
  - Asia/Pacific Group on Money Laundering (APG) completed its assessment of Bangladesh’s AML/CFT system; report formally adopted at the APG Annual Meeting in September 2016.
  - Significant progress since 2009 Mutual Evaluation Report, reflecting political commitment and leadership, but much work still needed.
  - Authorities preparing an action plan to address shortcomings.
- Safeguards assessment:
  - The 2011 update safeguards assessment found governance and legal structure needs updating to strengthen autonomy and better safeguard resources.
  - Since then Bangladesh Bank implemented key recommendations and continued modernizing its internal audit function.
  - FY16 financial statements audited by two local firms that are members of the global network of independent audit firms; provided unqualified (clean) audit reports with emphasis of matter paragraph concerning funds paid out through unauthorized transactions in February 2016, where management explains why it believes funds are recoverable.
  - Bank’s audit committee was reestablished in April 2017.

### Staff appraisal — key findings and recommendations
- Recent policy mix:
  - Steady monetary policy management and fiscal discipline strengthened macroeconomic stability.
  - Economy benefited from favorable external demand, high remittances, and low commodity prices.
  - Outcomes include strong output growth, falling inflation, moderate public debt, and a rebuilding of external resilience.
- Outlook and policy priorities:
  - Solid macroeconomic performance is set to continue this year, with growth projected to remain close to current levels and inflation broadly in line with Bangladesh Bank’s target.
  - Maintaining past growth performance will become increasingly challenging over the medium term; requires upgrading macroeconomic policy-making practices and institutions to support ambition to reach middle-income status.
- Risks to near-term growth:
  - resumption of political unrest;
  - security concerns affecting confidence and investment;
  - protracted slowdown in key export markets;
  - weaker remittances.
- Monetary policy recommendations:
  - Bangladesh Bank should increase efforts to mop up excess liquidity in the banking sector which could be increasing financial sector risks and poses a latent risk to macroeconomic stability.
  - Monetary policy stance should be adjusted as needed to keep inflation broadly stable; Bangladesh Bank should be prepared to tighten its stance if credit growth begins to accelerate.
- External and fiscal recommendations:
  - Preserve foreign exchange reserves buffers to ensure resilience; economy will continue to rely on exports and remittances for growth.
  - Exchange rate should continue to be managed flexibly as needed.
  - Modernize the tax system to boost low budget revenue and allow room for public investment and social spending without compromising fiscal sustainability; launching the new VAT in July 2017 as planned will be central to this effort.
- Financial sector and capital markets:
  - Investment needs are large and require stepping up intermediation of underutilized savings over longer horizons.
  - Policies to develop capital markets for financing long-term private investment would greatly improve future growth prospects.
  - Important impediment: increasing reliance on high-cost NSCs for budget financing prevents development of a deep and liquid market for government securities.
  - Consider better targeted and less costly alternatives that achieve social policy goals without distorting financial markets.
- Administrative recommendation:
  - Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

*Source: IMF country report text (cr17147).*

### Box 3. National Savings Certificates and Budget Financing

### Box 3. National Savings Certificates and Budget Financing

### Design and features
- Introduced as a saving scheme for small savers and to provide a safety net for certain groups of population (senior citizens, women, retired government employees, non-resident Bangladeshis, and physically challenged people).
- About a dozen different instruments with maturity 3–5 years, available on demand.
- Investors pay a penalty if they withdraw money before the end of the term.
- A single-lender ceiling has been set at Tk3 million (about $40K) to ensure the scheme mainly attracts small savers.
- The scheme does not prohibit participation of a person based on income.

### Role in budget financing and recent trends
- The outstanding stock of NSCs reached over 40 percent of total domestic public debt, or nearly 10 percent of GDP.
- NSCs’ role in financing the budget has sharply accelerated in recent years and continues to grow.
- With falling bank deposit rates, the issuance of national savings certificates has increased (as shown in the monetary and liquidity figures for Jan. 2011–Jan. 2017).

### Drivers of growth and fiscal/financial risks
- Issuance is demand-driven (determined by public demand for these certificates and not the budget borrowing plans of the Ministry of Finance); an increase in the interest rate spread relative to deposits will increase the stock.
- Sporadic downward revisions of NSC rates have not kept pace with falling inflation and market interest rates, increasing NSC’s implicit subsidy.
  - Footnote: In May 2015, NSC rates were reduced by about 2 percentage points.
- Current environment of excess liquidity and low rates paid on bank deposits has particularly amplified NSC take-up.
- Abuse and circumvention risks:
  - Single-lender limits are easy to circumvent, making abuse of the NSC system difficult to prevent.
- Fiscal cost and crowding-out concerns:
  - High NSC yields relative to market rates create an implicit fiscal subsidy and may crowd out other government marketable debt issuance.

### Policy implications and recommendations
- Align NSC interest rates more systematically with market rates and inflation to reduce the implicit subsidy.
- Enhance enforcement and monitoring to prevent circumvention of single-lender ceilings.
- Integrate NSC issuance considerations into budget borrowing plans to manage fiscal risks arising from demand-driven issuance.
- Monitor banking-sector liquidity and deposit rates, as excess liquidity and low deposit rates materially affect NSC demand and fiscal exposure.

*Source: IMF staff summary of Box 3, “National Savings Certificates and Budget Financing,” from the IMF report on Bangladesh.*

### Annex I. Bangladesh: Risk Assessment Matrix (RAM)

### Annex I. Bangladesh: Risk Assessment Matrix (RAM)

### External risks and potential impacts
- Structurally weak growth in key advanced and emerging economies (EMs).
  - Potential impact: Erosion of Bangladesh’s cost advantage in the European market if the taka/US$ rate is kept stable while the US$ continues to appreciate against the euro; pressures on the balance of payments (BOP) could emerge.
  - Policy response:
    - Further nominal appreciation against the US$ should be resisted in the near term.
    - If appreciation pressures prolong into the medium term, the exchange rate should be allowed to adjust.
    - Fiscal policy should aim at reducing the defict and financing needs.
- Significant further strengthening of the US dollar and/or higher rates.
  - Policy response: Moderate fiscal easing by allowing automatic stabilizers (mostly on the revenue side) to operate and increasing transfers to the poor as needed; reserve buffers could be used through sterilized intervention to cushion the shock and smooth exchange rate volatility.
- Retreat from cross-border integration (weaker growth and retreat from trade liberalization in EU and US).
  - Potential impact: Adverse effect on export growth, mainly the garment industry, with negative BOP impact; mitigation from relatively low-income elasticity of demand for garment exports and Bangladesh’s cost competitiveness.
  - Policy response:
    - If temporary shock: similar response as for resumption of political violence.
    - If protracted: allow exchange rate adjustment and adjust fiscal policy to keep the deficit broadly in line with the fiscal anchor, protecting social spending on the poor via restraint in other current expenditure.

### Commodity and remittance-related external risks
- Lower energy prices (Bangladesh is a net oil importer).
  - Potential impacts:
    - Benefits from lower oil prices on the trade bill.
    - Negative channel: weaker job prospects for Bangladeshi workers in the GCC (from which about two-thirds of remittances originate) could reduce remittances, negatively affecting domestic demand and the BOP.
    - Note: Remittances are about four times larger than oil imports.
  - Policy response:
    - Fiscal transfers to the poor and vulnerable should be enhanced.
    - The currency should be allowed to depreciate but reserve buffers could be used to smooth exchange rate volatility.

### Domestic risks and potential impacts
- Resumption of intense political turmoil and deterioration in security conditions.
  - Potential impact: Adverse effects on confidence, investment and growth; BOP pressures from lost export production; fiscal consolidation efforts could slip; inflation could rise; travel advisories and warnings from business leaders observed.
  - Policy response:
    - If shock is temporary: moderate fiscal easing, use reserve buffers to smooth exchange rate volatility.
    - If protracted: allow exchange rate adjustment and fiscal consolidation to protect social spending.
- Further deterioration in the financial health of state-owned banks (SBs).
  - Observations: SBs have high NPLs, low profitability, and sizeable capital shortfalls (but do not face liquidity pressures).
  - Potential impact: Negative effect on the fiscal balance if SB balance sheets deteriorate further.
  - Policy response:
    - Recapitalization should be tied to reforms to improve long-term viability of state banks, including governance reforms, stricter controls over lending activities, and more aggressive recovery of bad loans.
    - State banks should be held strictly accountable to numerical targets agreed with the authorities.
- Large revenue shortfalls relative to projections.
  - Potential impact: Continued revenue underperformance would compromise spending on growth-critical investment projects and social safety nets; failure to launch the new VAT would jeopardize debt sustainability.
  - Policy response:
    - The new VAT (twice delayed) should be implemented in July 2017 as scheduled.
    - Further reforms to strengthen tax administration are necessary over the medium term.

*Source: IMF staff.*

### Annex II. Remittances in Bangladesh

### Recent trends and magnitudes
- Remittance inflows into Bangladesh have more than doubled from $6 billion to $15 billion over the last ten years.
- Over the same period remittances have accounted for 8½ percent of GDP on average.
- Remittances are close to eight times larger than Foreign Direct Investment flow into the country.
- Remittances have been declining as a share of GDP over the past five years and more recently in absolute terms.
- The slowdown was largest from the GCC countries (5 percent decline), which on average have accounted for 60 percent of remittances, followed by the United States (15 percent) and the U.K. (8½ percent).
- Inflows are forecasted to drop to 12¼ billion in FY17.
- In FY16, remittances dropped to $15 billion (6.8 percent of GDP) from $15¼ billion (7.9 percent of GDP) in FY15.
- Total remittances thus far in the fiscal year (July 16–March 17) have dropped by over fifteen percent compared to the same period in the previous year.

### Key drivers of the slowdown
- Primary explanation: Economic slowdown in the GCC countries reflecting the impact of lower oil prices.
  - Close to ten percent of outward remittances from the GCC countries in 2016 (estimated at $84 billion) went to Bangladesh.
  - The GCC employed about 11.8 million foreign workers as of 2014 (five out of six GCC countries).
  - Remittance outflows from Saudi Arabia fell from $38 billion in 2015 to less than $34 billion in 2016; remittances from Saudi Arabia dropped by almost twelve percent for Bangladesh and eight percent for the Philippines.
- Secondary explanation: Shift of remitters to less costly, informal transfer methods (hawala/hundi) not captured in official statistics.
  - Drivers for informal channels: lack of scrutiny to avoid taxes/fees; convenience and cost; lack of access to formal services due to immigration status or absence of formal means in the country of work.

### Risks and policy considerations
- Short- to medium-term outlook: Remittance inflows are projected to drop in the short term and pick up slowly over the medium term in line with the global outlook and GCC prospects.
- GCC-specific risks: Decline in oil prices and production, geopolitical instability, fiscal consolidation, tightening liquidity conditions.
- Policy caution: Some GCC countries considering levying a tax on outward remittances—potential disadvantages include reputational risk, adverse impact on private sector competitiveness, financial disintermediation, and possible exchange restrictions/multiple currency practices subject to Fund approval under Article VIII, Sections 2(a) and 3.
- International experience: Taxes on remittances have been rare and short-lived.
- Overall expectation: Recovery in remittances to historical levels will be slow over the short- to medium term given weaker GCC growth and downside risks.

*Source: IMF staff.*

### Annex III. Reserve Adequacy in Bangladesh

### Recent reserve accumulation and coverage
- Over the past five years: export earnings grew over 8 percent, remittances 5 percent, and FDI 14½ percent.
- Gross international reserves tripled, reaching $32 billion at end–March 2017, from $10 billion in FY12.
- Reserves increased from 3 months of prospective imports to 7 months (or around 8 months of current imports).
- The previous Article IV noted that with a de facto stabilized exchange rate, close to 8½ months of imports was the more appropriate level of adequacy instead of the actual six-month import coverage at that time.
- Reserves are now expected to grow at a five percent average (previous Article IV assumed an eight percent average growth).

### Adequacy assessment and methodology
- Based on IMF methodology for low income countries (LICs), reserves ranging from 3 to 9½ months of imports are assessed as adequate given Bangladesh’s characteristics.
- With a de facto fixed exchange rate arrangement, coverage close to the higher end of this range is more appropriate.
- Conclusion: With actual coverage of close to eight months of imports, Bangladesh’s reserves are adequate but not excessive.
- Cross-country context: Import coverage for Bangladesh is close to the average for LICs in the region but below emerging market economies.

### Risks to reserve adequacy and scenarios
- Main possible shocks to the current account:
  - (i) A further, more-than-projected slowdown in remittances.
  - (ii) Lower external demand for Bangladesh exports.
- Recent dynamics:
  - Remittances continue to decline even though the number of Bangladeshi workers abroad has increased steadily.
  - Total remittances in July 16–March 17 dropped by over fifteen percent compared to the same period in the previous year, attributed to deficit-reduction efforts, low oil prices, and deepening conflicts in Gulf countries.
- External demand risks:
  - The United States, Germany and the U.K. are Bangladesh’s three main export destinations; a slowdown in the EU or depreciation of the pound post-Brexit could hurt exports.
  - Rising protectionist pressures add uncertainty to the export outlook.

### Projection outcomes
- Baseline medium-term scenario: reserve coverage declines somewhat but stabilizes at a still-adequate level of above 5 months of imports.
- Adverse scenario (for three years starting FY18): lower export growth to 5 percent (from 7 percent) and remittance growth to 2¼ percent (instead of 4½ percent), keeping all else equal:
  - Coverage drops to 4½ months of import.
  - Driven by a weaker current account deficit widening to 3 percent of GDP compared to 2¼ percent in the baseline.

*Source: IMF staff.*

### Annex IV. Capital Market Development in Bangladesh

### Annex IV. Capital Market Development in Bangladesh

### Benefits of developing local capital markets
- For governments:
  - Local bond markets allow fiscal deficits to be financed without resorting to financial repression (such as forcing banks to buy government debt) or potentially risky foreign borrowing.
- For private borrowers, firms, and households:
  - Provides improved access to local currency financing including long-term financing for longer-term investment projects.
  - Allows diversification and management of risk, including interest rate and exchange rate risk.
- For savers:
  - Local currency bond markets offer an alternative to investment in local currency deposits, reducing dependence on banks.
- For central banks:
  - A well-developed government securities market improves the monetary transmission mechanism and the effectiveness of monetary policy. A well-established yield curve provides useful information for the conduct of monetary policy.
- For the economy:
  - Capital markets reduce dependency on banks and thus the risk that financing would stop in times of banking sector trouble (capital markets serving as a “spare tire”).
  - Introduce market discipline through stricter reporting and disclosure requirements and provide competition to banks.

### Preconditions and typical development path
- Preconditions for proper functioning of local capital markets:
  - Stable macroeconomic policies and sound macroeconomic frameworks, including monetary policy that does not produce excessive interest rate volatility.
  - A clear government debt management and issuance strategy.
  - A strong and well-functioning legal and institutional environment with investor-friendly laws and strong contract enforcement, sound taxation, accounting, bankruptcy and competition laws.
  - A well-functioning market infrastructure, including trading platforms and the regulatory apparatus that support trading and exchange of information.
  - A critical size of the economy and the investor base (local pension funds, insurances, and savings vehicles can boost local debt markets; foreign investors can support development but are less stable than domestic institutional investors).
- Typical multi-stage development:
  - Development of local government securities markets can jumpstart corporate debt markets by establishing a risk-free benchmark yield curve.
  - Highest credit quality issuers (banks, utilities) typically first to issue debt securities.

### Status of capital market development in Bangladesh (key statistics and observations)
- Dominant role of banks:
  - In FY16, industrial term loans disbursed by banks and other financial institutions amounted to Taka 655 billion ($8 billion, or around 3½ percent of GDP).
  - In contrast, Taka 4 billion in new capital was raised by eleven companies in the stock market through private placements and public offerings in FY16 (Bangladesh Bank, 2017).
  - FY16 public offerings were oversubscribed more than sixteen times, indicating strong demand and shortage of new securities in the primary market.
- Financing structure and investment:
  - Bank loans and the issuance of equity and debt finance combined amount to only one fourth of private fixed capital formation.
  - Internal resources in the form of retained earnings play a very large role in financing investment.
- Stock market history and metrics:
  - A decade ago, Dhaka Stock Exchange capitalization hovered around 5 percent of GDP, then grew rapidly.
  - Between 2009 and 2010, market capitalization as a percent of GDP doubled from 16 percent to 33 percent.
  - Market turnover jumped from 19 percent of market capitalization in 2006 to 114 percent at the peak in 2010.
  - Subsequent major share price correction led to significant investor losses and a government-led Capital Market Development Master Plan.
  - Current stock market capitalization is about 15 percent of GDP—relatively low compared to the low-income and lower-middle income country average of about 20 percent of GDP and far below India’s over 60 percent of GDP.
  - Bangladesh compares better on stock market turnover rate (similar to India and higher than other countries in the region).
  - Broad measure of financial market development: Bangladesh ranks 99 (World Economic Forum, 2016).
- Government debt composition and impact:
  - High share of non-tradable government securities in the form of National Savings Certificates (NSCs) leads to limited tradable securities.
  - The stock of NSCs in Bangladesh is very high in international comparison—nearly the entire government’s budget deficit is currently financed from NSCs.
  - By contrast, in India the national savings scheme constitutes about eleven percent of government financing (ADB, 2015).
  - Large issuance of NSCs reduces demand for Bangladesh government bonds and inhibits development of mutual funds and other investment vehicles.
  - Consequently, government and corporate bond markets are relatively small compared to other countries in the region.

### Impediments identified after the 2011 market crisis
- Main problems impeding capital market development:
  - Limited SEC capability in areas of regulation, surveillance, and enforcement.
  - Limited financial stability oversight and policy coordination between SEC, the Bangladesh Bank and the Ministry of Finance.
  - Weak regulation, governance and operation of stock exchanges.
  - Small institutional investor and mutual fund industry and an underdeveloped insurance industry serving less than two percent of the population.
  - Limited supply of bonds and equities.
  - Inefficient enforcement of mortgage rights; despite the creation of Money Loan Courts (1990), judicial execution is very cumbersome and can take more than 10 years.
  - Excessive dependence of budget financing on non-bank borrowing in the form of non-tradable National Savings Certificates.

### Policy responses: Capital Market Development Master Plan and related reforms
- Government roadmap and plans:
  - Capital Market Development Master Plan 2012–22.
  - Sixth (2011–15) and Seventh (2016–2020) Five-Year Plans incorporate capital market reform objectives.
- Master Plan five strategic objectives:
  - Rehabilitate the SEC by securing its operational and financial independence, strengthening its organizational structure, enhancing the quality and quantity of its staff, and strengthening its information and internal control systems.
  - Strengthen the rules and regulations pertaining to the capital markets, including addressing the slow court system.
  - Upgrade the financial market infrastructure.
  - Create a fertile environment to enable the orderly and sustainable emergence of new products (corporate bonds, asset-backed securities and derivatives).
  - Ensure a fertile environment to enable the orderly and sustainable expansion of institutional investors’ (mutual funds, insurance companies, pension funds) participation in the capital markets.
- Progress since Master Plan launch (with ADB support):
  - Demutualization of Dhaka Stock Exchange and Chittagong Stock Exchange.
  - Efforts to improve coordination between regulators to enhance financial stability.
  - Steps taken to improve investor protection and regulation of the equity market.
  - Adoption of a National Insurance Sector Development Policy (2014) to strengthen the domestic investor base.
- Remaining challenges:
  - Need to strengthen limited regulatory capacity.
  - Improve the poor quality of financial information.
  - Develop a deep and liquid government securities market.

*Source: Annex IV. Capital Market Development in Bangladesh (cr17147) — IMF.*

### Annex VI. Key Reforms under the World Bank and Asian

### Annex VI. Key Reforms under the World Bank and Asian Development Bank Programs with Bangladesh

### World Bank: strategic framework and reform focus (CPF FY16–20)
- CPF covers FY16–20 and is aligned with the Government’s Seventh Five Year Plan; anchored in the Bangladesh Systematic Country Diagnostic (SCD, completed in 2015).
- SCD identified five transformational investments needed to create more and better jobs and accelerate poverty reduction:
  - energy;
  - inland connectivity and logistics;
  - regional and global integration;
  - urbanization;
  - adaptive delta management.
- SCD identified three foundational priorities that are prerequisites for growth:
  - macroeconomic stability;
  - human development;
  - institutions and business environment.
- WB reform areas and instruments:
  - Tax policy and administration
    - Financial support and TA for implementing the VAT law; designing organizational reforms and new administrative processes; VAT implementation support.
  - Public financial management (PFM)
    - Assistance through Strengthening Public Expenditure Management Program (SPEMP) supported by a multi-donor trust fund; focus on core PFM issues in the executive branch, and strengthening parliament and audit institutions’ oversight; IDA leading on public procurement reform and capacity building.
  - Debt management
    - Joint IMF–WB work including on the DSA; IMF coordinating macro assumptions and outlook; IDA providing technical support via PERA, Analytical Support Activity on PFM reforms, and DeMPA.
  - Monetary and exchange rate policies
    - Support to strengthen payments systems at Bangladesh Bank (BB).
  - Financial sector reforms
    - Support to improve BB regulatory and oversight capacity; strengthen SOCBs through automation, improved management systems, business process reengineering, potential governance reforms; foundation for insurance and pension sector.
  - Energy sector reform
    - Leading policy dialogue and investment; further price adjustments needed, including systematic adjustments to domestic fuel prices in line with international price movements; reducing financial and operational inefficiencies in state-owned energy enterprises; incentives and transparent procurement to attract private investment.
  - Social protection
    - Support for improved targeting and consolidation of many programs via National Household Database for objective beneficiary selection and better administration of social safety nets.
  - Trade and investment climate reform
    - IFC targeting incremental reforms following Diagnostic Trade Integration Study; joint IDA–IFC unit to address institutional and policy reforms and provide IDA financing for special economic zones.
  - Statistical policy
    - Sustained engagement focused on poverty, social, development statistics, and statistical infrastructure including IT; modality being worked on to ramp up support.
- WB and Government are exploring modalities for cooperation through a Development Policy Credit; discussions on reforms to support the instrument are ongoing.

### Asian Development Bank: Country Partnership Strategy (CPS 2016–2020)
- CPS approved September 28, 2016; focuses on priority investments:
  - easing infrastructure constraints in energy, transport and urban development;
  - improving human capital through better education and skills development;
  - promoting economic corridor development;
  - improving rural livelihoods;
  - providing climate and disaster resilient infrastructure and services.
- CPS aligned with Seventh Five-Year Plan (FY2016–FY2020) priorities and aims to contribute to faster, inclusive and environmentally sustainable economic growth.
- ADB lending target under CPS: $8 billion for the period 2016–2020.
- CPS drivers of change prioritized:
  - higher private sector participation;
  - addressing institutional capacity constraints and improving governance;
  - deepening regional cooperation and integration;
  - promoting gender equality;
  - capital market development.
- CPS approach: combine financial support with technical assistance.

### IMF–World Bank collaboration: scope, outcomes, and division of labor (April 2017)
- Collaboration objectives:
  - Promote policies and critical reforms for macroeconomic and financial stability, high growth and poverty reduction.
  - Joint support under the ECF (Apr. 11, 2012–Oct. 29, 2015) helped restore macroeconomic stability and implement reforms in revenue mobilization, VAT Act 2012, tax administration, fiscal expenditure allocation (energy subsidy reduction, social safety nets), PFM, external debt management, banking supervision and regulation (Banking Companies Act 2013), SOCB weaknesses, central bank operations, and foreign exchange liberalization.
- Collaboration mechanisms:
  - Frequent formal and informal exchanges of information; invitations to internal discussions; sharing key documents; staff participation in relevant Board meetings; regular discussion of division of labor; collaboration on Debt Sustainability Analysis (DSA).
  - WB and IMF country teams co-located (WBOD and IMF) in same building in Dhaka.
- Agreed focus areas and division of labor:
  - Tax policy and administration
    - Issue: Bangladesh has one of the lowest tax-to-GDP ratios in the world; new VAT Act, 2012 being implemented for a launch in July 2017; VAT is main tool to boost collections.
    - Division of labor: IMF provides TA and coordinated support (resident advisor until late 2014; TADAT assessment Feb. 2017). IDA provides financial support and TA for implementation (organizational reforms, business processes, taxpayers’ outreach) under the VAT Improvement Program (VIP). Joint Bank-Fund missions executed TADAT and training.
  - Public financial management (PFM)
    - Issue: need to maintain fiscal discipline and improve public expenditure quality; GoB approved PFM strategy 2016-2021.
    - Division of labor: IDA administers SPEMP (MDTF extended five years) and leads public procurement reform and capacity building (PPRP, PPRPII, e-GP expansion; DIMAPPP in advanced preparation). IMF provides TA on cash flow forecasting and management, budget and accounting classification, and budget formulation.
  - Debt management
    - Division of labor: IMF and IDA continue joint work (DSA), IMF coordinates macro assumptions and structural reform support via Article IV; IDA provides technical support via PERA, Analytical Support on PFM, and DeMPA.
  - Monetary and exchange rate policies
    - Division of labor: IMF leads; IDA complements via operations to strengthen BB payments systems.
  - Financial sector reforms
    - Issue: improve governance, NPL situation, operational efficiency, especially SOCBs.
    - Division of labor: IMF supports banking sector reforms and supervision (including prior resident advisor); IMF leads in Article-IV consultations; IDA supports regulatory and oversight capacity of BB.
  - Energy sector reform
    - Findings: subsidy spending has declined as a share of GDP over last three years; need to reduce reliance on expensive liquid fuel for power generation; corporatization resisted by worker unions; need to attract private investment via transparent procurement.
    - Division of labor: IDA leads policy dialogue and investment; IMF focuses on fiscal policy implications.
  - Social protection
    - Issue: social spending protected under ECF, but needs better targeting and consolidation of many programs; rationalization of regressive subsidies can free resources for safety nets.
    - Division of labor: IDA leads development of National Household Database and strengthening central/local administrative platforms for SSNs.
  - Trade and investment climate reform
    - Issue: level playing field and reducing cost of doing business to boost productivity and investment.
    - Division of labor: Trade & Competitiveness (T&C) Global Practice (joint IDA-IFC unit) targets reforms; IDA provides investment financing; IFC provides advisory services (business environment, special economic zones, trade and sectoral competitiveness). IMF reviewed foreign exchange regulations.
  - Statistical policy
    - Issue: improvements in statistics critical for policy formulation and monitoring.
    - Division of labor: IDA focuses on poverty, social, development statistics and statistical infrastructure including IT; IMF focuses on macroeconomic and financial statistics. IDA preparing a new investment loan to enhance Bangladesh Bureau of Statistics (BBS) capacity.

*Source: Annex VI. Key Reforms under the World Bank and Asian Development Bank Programs with Bangladesh (cr17147).*

### 4. The teams agree to continue to keep each other informed of their respective activities,

### 4. The teams agree to continue to keep each other informed of their respective activities, coordinate financial and technical support, and share key documents.

### Relations with the Asian Development Bank — Lending and Technical Assistance Operations
- Cumulative public sector borrowing from ADB as of December 31, 2016: US$18.0 billion (256 loans).
- Technical assistance (TA) grants as of December 31, 2016: US$252.4 million (422 projects).
- ADB supported sectors: energy, transport, social infrastructure, agriculture and natural resources.
- ADB lending approvals in 2016 totaled US$1.1 billion, including:
  - Skills for Employment Investment Program (tranche 2): US$100 million concessional ordinary capital resources loans (COL).
  - Natural Gas Infrastructure and Efficiency Improvement Project: US$167 million (US$67 million from COL).
  - Railway Sector Investment Program—tranche 4: US$50 million.
  - SASEC Chittagong-Cox’s Bazar Railway Project Phase 1—tranche 1: US$300 million (US$90 million from COL).
  - Second Small and Medium-Sized Enterprise Development Project: US$200 million.
  - Dhaka Water Supply Network Improvement Project: US$275 million.
  - Coastal Towns Environmental Infrastructure Project—additional financing: US$6 million.
  - Rural Infrastructure Maintenance Program—PDA: US$2 million COL.
  - City Region Development Investment Program—PDA: US$5 million COL.
- Private sector support: 13 private sector projects worth US$422.3 million as of December 31, 2016.
  - 2016 US$20 million loan to Eastern Bank to finance textile and garment factories meeting 2013 Accord and 2013 Alliance safety standards.

### Country Partnership Strategy (CPS) 2016–2020
- CPS approved: September 28, 2016.
- CPS priority investments:
  - (i) easing infrastructure constraints in energy, transport and urban development;
  - (ii) improving human capital through education and skills development;
  - (iii) promoting economic corridor development;
  - (iv) improving rural livelihoods;
  - (v) providing climate and disaster resilient infrastructure and services.
- Alignment: CPS closely aligned with government’s Seventh Five-Year Plan (FY2016-FY2020).
- ADB lending target under CPS for 2016–2020: US$8 billion (including nonsovereign lending).
- TA resources planned: average of US$4.3 million per annum and above.
- ADB financing sources: market-based financing from ordinary capital resources for major revenue-generating infrastructure projects.
- CPS drivers of change: higher private sector participation; addressing institutional capacity constraints and improving governance; deepening regional cooperation and integration; promoting gender equality.
- Operationalization: through Country Operations Business Plans (COBPs). COBP 2017–2019 approved October 2016.

### Cofinancing and 2016 Cofinancing Examples
- Five-year cumulative (2012–2016) leveraged cofinancing: US$3.5 billion.
- Cumulative direct value-added official cofinancing by end-2016:
  - Investment projects: US$7.5 billion for 58 projects.
  - Technical assistance projects: US$84.9 million for 101 projects.
- 2016 cofinancing examples:
  - World Bank, Chevron USA, Government of Switzerland for Skills for Employment Investment Program—tranche 1 (US$80 million) and tranche 2 (US$4.5 million).
  - Asian Infrastructure Investment Bank for Natural Gas Infrastructure and Efficiency Improvement Project: US$60 million.
  - Danish International Development Agency, Agence Française de Développement, European Investment Bank for Dhaka Water Supply Network Improvement: US$372 million.
  - Japan International Cooperation Agency and KEXIM Bank for Railway Sector Investment Program—tranche 4: US$138.72 million.
  - KEXIM Bank for South Asia Subregional Economic Cooperation Railway Connectivity: Akhaura-Laksam Double Track: US$192 million.

### Economic and Sector Work Program
- ADB publishes annual Asian Development Outlook and Asian Development Outlook Update assessing macroeconomic performance.
- Bangladesh Resident Mission (BRM) prepares a bimonthly Economic Indicators Update and commissions country-relevant studies.

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- Overall: data provision has some shortcomings but is broadly adequate for surveillance; most affected areas: national accounts, fiscal, external sector statistics.

National Accounts
- Current annual GDP time series base year: 2005/06 (benchmark compiled and published by Bangladesh Bureau of Statistics (BBS) in 2013).
- Revision: a revision of the entire GDP time series based on the new 2015-16 benchmark is expected to be published in financial year 2019-20.
- Publication lag: final annual GDP estimates now published four, rather than ten, months after the reference period.
- Data improvements: technical assistance provided to use VAT data from National Board of Revenue (NBR) to compile contemporary estimates; monthly VAT data from NBR expected to be available from July 2017.
- Quarterly GDP: currently not compiled; technical assistance provided to develop a plan for quarterly flash GDP indicators.
- BBS implementing recommendations to (a) improve compilation procedures used to construct GDP; and (b) enhance institutional arrangements and address concerns raised by users.

Price Statistics
- CPI: new CPI series base year 2005/06 introduced July 2012; undergoing further improvements including incorporating recent household survey and COICOP.
- Producer Price Index base year: 1988/89 and requires urgent attention.
- IMF provided technical assistance in these areas.

Government Finance Statistics
- Ministry of Finance revising Budget and Accounting Classification System (BACS) to follow GFSM 2014; new BACS expected to be incorporated into the FY18 Budget.
- Current reporting: budgetary central government flow data reported for GFS yearbook; no stock data reported.
- Coverage gaps: extrabudgetary and local government units outside central government inadequate.
- Bangladesh Bank provides data to World Bank-IMF Quarterly Public Sector Debt Statistics database.
- No published data on assets and liabilities of the general government.

Monetary and Financial Statistics
- Bangladesh Bank (BB) compiles monetary data using SRFs framework; SRFs reported electronically to the IMF regularly.
- Consistent SRF-based time series available from December 2001.
- A survey of Other Financial Corporations (OFCs) not yet available.

Financial Soundness Indicators
- Bangladesh has reported 10 core and 9 encouraged FSIs since August 2014.

External Sector Statistics
- BB published a quarterly BPM6 compliant time series covering 2005 to 2015.
- Reporting to IMF’s Coordinated Portfolio Investment Survey achieved.
- Further steps needed by BB to improve quality, timeliness, and dissemination of ESS.

Data Standards and Quality
- Bangladesh has participated in GDDS since March 2001.
- Data Module of ROSC published December 2005.
- Metadata for e-GDDS had not been updated since 2002.

### Bangladesh: Table of Common Indicators Required for Surveillance (As of May 1, 2017)
- Exchange Rates: Date of latest observation 4/24/17; Date received 4/24/17; Frequency of data D; Frequency of reporting D; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date latest observation 4/24/17; Date received 4/24/17; Frequency D; Reporting D; Publication D.
- Reserve/Base Money: Date latest observation 4/24/17; Date received 4/24/17; Frequency D; Reporting D; Publication D.
- Broad Money: Date latest observation Feb. 2017; Date received April 2017; Frequency M; Reporting M; Publication M.
- Central Bank Balance Sheet: Date latest observation Feb. 2017; Date received April 2017; Frequency M; Reporting M; Publication M.
- Consolidated Balance Sheet of the Banking System: Date latest observation Feb. 2017; Date received April 2017; Frequency M; Reporting M; Publication M.
- Interest Rates: Date latest observation 4/24/17; Date received 4/24/17; Frequency of data W; Frequency of reporting W; Frequency of publication D.
- Consumer Price Index: Date latest observation Feb. 2017; Date received March 2017; Frequency M; Reporting M; Publication M.
- Revenue, Expenditure, Balance and Composition of Financing—General Government: n/a across Date of latest observation, Date received, Frequency of data, Frequency of reporting, Frequency of publication.
- Revenue, Expenditure, Balance and Composition of Financing—Central Government: Date latest observation Dec. 2016; Date received April 2017; Frequency M; Reporting M; Publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date latest observation Jun. 2016; Date received Nov. 2016; Frequency Q/M; Reporting Q/M; Publication Q/M.
- External Current Account Balance: Date latest observation Feb. 2017; Date received April 2017; Frequency M; Reporting M; Publication M.
- Exports and Imports of Goods and Services: Date latest observation Feb. 2017; Date received April 2017; Frequency M; Reporting M; Publication M.
- GDP/GNP: Date latest observation FY2016; Date received Jun. 2016; Frequency A; Reporting A; Publication A.
- Gross External Debt: Date latest observation FY2016; Date received Nov. 2016; Frequency A; Reporting A; Publication A.
- International Investment Position: Date latest observation 2016Q4; Date received April 2017; Frequency Q; Reporting Q; Publication A.
- Notes and footnotes preserved as in source regarding frequency codes and coverage.

### Staff Report for the 2017 Article IV Consultation — Debt Sustainability Analysis (DSA)
- This DSA fully updates the January 2016 joint IMF/IDA DSA.
- Risk assessment: Bangladesh’s risk of external debt distress and overall debt distress is assessed as low.
- Fiscal stance: cautious fiscal policy has kept the public debt outlook benign—total public debt is on a sustainable path.
- Policy priority: boosting Bangladesh’s low budget revenue is key to creating fiscal space for spending on power and transport infrastructure.
- VAT assumption: the DSA assumes the new VAT comes into effect in full in FY18; authorities insist the new deadline will be met.
- Public sector definition for DSA: central government and nonfinancial public enterprises.
- DSA framework: based on joint Fund-Bank DSA for low-income countries; uses indicative thresholds for IDA medium performers (CPIA average rating 3.32 during 2013–15).
- Approval and preparation:
  - Approved By: Peter Allum (IMF) and John Panzer (IDA).
  - Prepared by: International Monetary Fund and International Development Association.
  - Date: May 12, 2017.

A. Background
- DSA horizon: analyzes trajectories of standard debt sustainability ratios through FY37.
- As of end-FY16:
  - Total public and publicly guaranteed (PPG) external debt: US$26 billion (13 percent of GDP or 77 percent of exports of goods and services).
  - Largest creditors: World Bank (IDA) outstanding loans US$12.1 billion; Asian Development Bank outstanding loans US$7.8 billion.
  - Largest bilateral creditor: Japan with outstanding loans of US$2.9 billion.
- Total public sector domestic debt as of end-FY16:
  - 21.3 percent of GDP or 192 percent of central government revenues, including grants.
  - Composition: primarily commercial banks’ holdings of treasury instruments and non-banks’ holdings of national savings certificates (NSCs); includes net credit by Bangladesh Bank and outstanding liabilities of state-owned enterprises to the banking system.

Box — National Savings Certificates (NSCs)
- NSCs: saving scheme for small savers; administered interest rate usually higher than market rates on bank deposits and government securities with similar maturity.
- Instruments: about a dozen with maturities ranging between 3–5 years; available on demand.
- Current outstanding stock: about forty percent of total domestic public debt, or ten percent of GDP.
- Recent trend: issuance sharply accelerated in recent years and continues to grow determined mostly by public demand, not by government borrowing plans.
- Policy and debt management implications: system impedes capital market development and constrains the government’s ability to implement a robust borrowing and debt management strategy.

B. Underlying Assumptions — Main macro changes and projections (FY16–FY20)
- Table: Macro Assumption Comparison FY16 – FY20 (values preserved exactly)

  - Real GDP growth
    - Current DSA: 7.1 6.8 7.0 7.0 7.0
    - Previous DSA: 6.3 6.8 7.0 7.0 7.0

  - Inflation (annual average)
    - Current DSA: 5.9 6.8 6.0 5.5 5.5
    - Previous DSA: 6.5 7.0 6.7 6.4 6.1

  - Fiscal deficit (in percent of GDP)
    - Current DSA: -3.4 -4.7 -4.4 -4.2 -4.1
    - Previous DSA: -4.4 -4.3 -4.1 -4.1 -4.0

  - Current account (in percent of GDP)
    - Current DSA: 1.7 -0.4 -1.0 -1.6 -2.0
    - Previous DSA: -1.3 -1.4 -1.6 -1.8 -2.0

  - Remittance growth
    - Current DSA: -3.0 -17.0 3.5 3.5 4.5
    - Previous DSA: 3.0 6.0 6.0 6.0 6.0

- Key macro points:
  - Real GDP growth: official statistics reported output growth rising to 7.1 percent in FY16 from 6½ percent in preceding fiscal year; medium-term growth of 7 percent per year achievable with increased public and private investment and reforms.
  - Inflation: headline CPI annual average fell to 5½ percent by end-2016; nonfood inflation 4½ percent in December 2016; inflation projected to increase somewhat in FY17 then moderate in the medium term.
  - Fiscal deficit: preliminary data suggest FY16 fiscal deficit fell to around 3½ percent of GDP; first quarter of FY17 recorded a small surplus; DSA assumes VAT launched in July 2017.
  - Current account: FY16 current account surplus revised to 1.7 percent of GDP (from previous 0.5 percent) due to import revisions; projected to widen to about 2 percent of GDP over medium term with adequate international reserves.
  - Remittances: slowdown in FY17 projected to continue; inflows forecast to drop to just over US$12 billion in 2017 and assumed to pick up slightly over the medium term.

C. External DSA
- (Section heading preserved; detailed external DSA tables and scenarios follow in the source beyond the provided excerpt.)

*International Monetary Fund and International Development Association — May 12, 2017*

### 5.      All debt indicators remain well within the respective policy-dependent solvency

### 5.      All debt indicators remain well within the respective policy-dependent solvency thresholds under the baseline scenario.

### Baseline debt projections and remittances
- The DSA baseline scenario does not include remittances because the three year backward looking average (7.6 percent of GDP over FY14-FY16) drops below 10 percent which is the required threshold for including it in a remittance based analysis.
- As a result, the remittance-adjusted thresholds for certain debt ratios are now higher.
- Under the baseline scenario, the PV of PPG external debt to GDP ratio is projected to increase from 8.5 percent of GDP in FY17 to 10.2 percent in FY22, mostly reflecting externally-financed public investment.
- The PV of PPG external debt to GDP ratio is projected to rise slowly and reach close to 11 percent of GDP by FY37.
- Most PPG indicators trend up initially but remain well within the respective policy-dependent solvency thresholds under the baseline scenario.
- Compared to the previous DSA, the threshold for the PV of debt to GDP is now 10 percent higher than with remittances, while the thresholds for PV of debt to exports and debt service to exports are 20 percent higher.

### Risk scenarios and stress tests
- The stress tests with the biggest impact on debt indicators are those involving:
  - a large depreciation,
  - borrowing on less favorable terms,
  - an exports shock.
- Risks to the external front include a protracted slowdown in key export markets—particularly the EU—and a further weakening of remittances. A combination of these could adversely affect the external sector, negatively impact the balance of payments and deteriorate debt ratios.

### Remittances and external sector vulnerabilities
- Total remittances thus far in the fiscal year (Jul 16 – Mar 17) have dropped by over fifteen percent compared to the same period last year.
- GCC countries account for the largest number of migrant workers from Bangladesh and for the largest inflows of remittances into Bangladesh.
- Substantial deficit-reduction efforts, low oil prices and deepening conflicts that continue to weigh on economic activity in the GCC are expected to further affect employment and in turn remittances from these countries.
- Other factors, including measurement gaps related to a shift towards informal channels for transferring funds, have been quoted as possible reasons for remittance declines.
- Global growth is more subdued now than in the past. The United States, Germany and the U.K. represent Bangladesh’s three main export destinations.
- Protracted slowdown in the European Union could hurt exports. Media reports note British garment importers have started putting price pressures on exports following the announcement of the Brexit.
- The Trans-Pacific Partnership, of which Bangladesh is not a member, is no longer flagged as a risk—however, there remains large uncertainty around the impact on global trade from U.S. trade policies.

### Public DSA and fiscal outlook
- Bangladesh’s moderate public debt and rapid growth gives scope for some cautious deficit spending as laid out in this year’s budget target of 5 percent of GDP.
- The budget has been and will continue to be financed mainly domestically with external financing relatively stable at around 1 percent of GDP.
- Per the DSA, the PV of public debt to GDP ratio is projected to increase from 31 per cent in FY17 to 33.8 per cent in FY22 and then stabilizing around that level over the long term as the impact of higher public investment on debt is mostly offset by an expected increase in tax revenue from the new VAT.
- The ratio remains well within the benchmark value under the baseline and for all standard stress tests.
- Debt indicators based on revenues trend downwards over the medium to long term, also on the improvement in tax revenue from the upcoming VAT.

### Conclusion and policy implications
- The debt sustainability assessment remains unchanged and the risk of external debt distress and overall debt distress remains low.
- Boosting Bangladesh’s low budget revenue is key to preserving fiscal sustainability and sustaining growth.
- The favorable debt outlook is sensitive to the assumption of continued robust growth and revenue gains from the upcoming VAT launch.
- The failure to improve revenues would reduce the scope for boosting public investment, with adverse implications on growth and debt dynamics.

*Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17147.pdf*

### 9.      The authorities agreed that Bangladesh continues to maintain a low risk of external

### cr17147 - 9.      The authorities agreed that Bangladesh continues to maintain a low risk of external

### Summary assessment
- The authorities and staff judgment: Bangladesh continues to maintain a low risk of external debt distress along with a low risk of overall debt distress.
- Factors supporting the assessment:
  - Moderate fiscal deficits.
  - Concessional external borrowing.
  - Prudent debt management policies.

### Risks and policy issues
- Rapid expansion of NSCs (National Savings Certificates) identified as a problem by the authorities.
- Implementing the strategies in the MTDS (MTDS 2014) can get complex.
- Authorities are working on proposals to improve monitoring to get a better understanding of who is benefiting from NSCs.
- The DSA in the 2015 Article IV discusses the consequences of failing to introduce the VAT. (Referenced: Bangladesh: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh, Country Report No. 16/27.)

### Selected quantitative indicators and projections (from DSA and PSDS tables)
- External debt (nominal) 1/: 16.0 (2014); 15.8 (2015); 14.3 (2016); 13.5 (2017); projected 12.7 (2018); 12.6 (2019); 12.6 (2020); 12.8 (2021); 13.0 (2022); historical average 15.9; 2027 projection 21.3.
  - of which: public and publicly guaranteed (PPG): 15.0 (2014); 13.4 (2015); 13.4 (2016); 13.5 (2017); projected 13.5 (2018); 13.8 (2019); 14.1 (2020); 14.4 (2021); 14.6 (2022); historical average 15.2; 2027 projection 12.8.
- Change in external debt: -1.0 (2014); -0.2 (2015); -1.5 (2016); -0.8 (2017).
- Identified net debt-creating flows (summary): -3.9 (2014); -4.2 (2015); -4.3 (2016); -1.4 (2017); projected -0.8 (2018); -0.2 (2019); 0.3 (2020); 0.5 (2021); 0.6 (2022); historical average 1.2; 2027 projection 0.9.
- Non-interest current account deficit: -1.1 (2014); -1.9 (2015); -2.0 (2016); -1.2 (2017).
- Exports (percent of GDP): 19.0 (2014); 17.3 (2015); 17.0 (2016); 16.5 (2017); projected 16.2 (2018); 16.0 (2019); 15.9 (2020); 15.9 (2021); 16.0 (2022); historical average 16.6; 2027 projection 18.0.
- Imports (percent of GDP): 25.3 (2014); 22.5 (2015); 21.1 (2016); 21.3 (2017); projected 21.3 (2018); 21.4 (2019); 21.5 (2020); 21.6 (2021); 21.6 (2022); historical average 22.3; 2027 projection 23.9.
- Net current transfers (negative = inflow): -8.6 (2014); -8.1 (2015); -7.0 (2016); -9.1 (2017).
- Net FDI (negative = inflow): -0.9 (2014); -0.9 (2015); -0.9 (2016); -0.9 (2017).
- Endogenous debt dynamics (contribution): -2.0 (2014); -1.4 (2015); -1.4 (2016); -0.9 (2017).
  - Contribution from nominal interest rate: 0.3 (2014); 0.4 (2015); 0.3 (2016); 0.0 (2017).
  - Contribution from real GDP growth: -0.9 (2014); -0.9 (2015); -1.0 (2016); -0.9 (2017).
- PV of external debt (selected): 9.0 (2017); 8.4 (2018); 7.7 (2019); 7.7 (2020); 7.8 (2021); 8.1 (2022); 8.5 (historical); 12.3 (2027); 19.1 (2037).
  - PV of PPG external debt (selected): 8.1 (2017); 8.5 (2018); 8.6 (2019); 8.9 (2020); 9.3 (2021); 9.8 (2022); 10.2 (historical); 11.6 (2027); 10.6 (2037).
  - PV of PPG external debt in percent of exports (selected): 47.9 (2017); 51.4 (2018); 53.0 (2019); 55.8 (2020); 58.9 (2021); 61.3 (2022); 63.6 (historical); 69.9 (2027); 58.6 (2037).
  - PV of PPG external debt in percent of government revenues (selected): 78.9 (2017); 79.8 (2018); 74.1 (2019); 74.0 (2020); 74.7 (2021); 76.2 (2022); 79.3 (historical); 90.6 (2027); 81.4 (2037).
- Debt service-to-exports ratio (in percent): 5.3 (2014); 7.6 (2015); 6.7 (2016); 7.0 (2017); projected 7.1 (2018); 6.5 (2019); 6.6 (2020); 6.5 (2021); 6.7 (2022); 13.3 (historical); 29.2 (2037).
- PPG debt service-to-exports ratio (in percent): 3.7 (2014); 3.9 (2015); 3.4 (2016); 5.5 (2017); 6.1 (2018); 5.9 (2019); 6.1 (2020); 6.2 (2021); 6.5 (2022); 7.7 (historical); 6.7 (2027).
- PPG debt service-to-revenue ratio (in percent): 6.8 (2014); 7.1 (2015); 5.6 (2016); 8.5 (2017); 8.5 (2018); 7.8 (2019); 7.7 (2020); 7.7 (2021); 8.1 (2022); 10.0 (historical); 9.3 (2027).
- Total gross financing need (Billions of U.S. dollars): -0.1 (2014); -1.8 (2015); -0.4 (2016); 1.9 (2017); projected 1.6 (2018); 1.0 (2019); 1.3 (2020); 1.2 (2021); 1.7 (2022); 12.6 (historical); 68.9 (2037).
- Non-interest current account deficit that stabilizes debt ratio: -0.1 (2014); -1.7 (2015); -0.5 (2016); 1.2 (2017); projected 1.7 (2018); 1.6 (2019); 1.9 (2020); 1.9 (2021); 2.0 (2022); historical average 1.8; 2027 projection 2.0.
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): 6.1 (2014); 6.6 (2015); 7.1 (2016); 6.2 (2017); projected 0.6 (2018); 6.8 (2019); 7.0 (2020); 7.0 (2021); 7.0 (2022); historical average 7.0; 2027 projection 6.5; 2037 projection 6.5.
  - GDP deflator in US dollar terms (change in percent): 8.7 (2014); 5.9 (2015); 4.4 (2016); 5.2 (2017); projected 3.2 (2018); 1.9 (2019); 2.4 (2020); 2.1 (2021); 2.1 (2022); historical 2.0; 2027 projection 2.0; 2037 projection 2.0.
  - Effective interest rate (percent) 5/: 1.7 (2014); 3.0 (2015); 2.1 (2016); 1.5 (2017); projected 0.7 (2018); 0.3 (2019); 0.2 (2020); 0.4 (2021); 0.8 (2022); historical 1.1; 2027 projection 1.4; 2037 projection 0.7.
  - Growth of exports of G&S (US dollar terms, in percent): 11.9 (2014); 2.7 (2015); 9.4 (2016); 12.4 (2017); projected 8.9 (2018); 5.6 (2019); 7.6 (2020); 8.0 (2021); 8.6 (2022); historical 9.5; 2027 projection 9.5; 2037 projection 9.5.
  - Growth of imports of G&S (US dollar terms, in percent): 10.7 (2014); 0.3 (2015); 4.8 (2016); 12.2 (2017); projected 15.7 (2018); 9.6 (2019); 9.6 (2020); 9.9 (2021); 9.9 (2022); historical 9.4; 2027 projection 9.4; 2037 projection 9.4.
- Grant element of new public sector borrowing (in percent) (selected projections): 32.0 (2020); 33.1 (2021); 31.0 (2022); 21.7 (historical); 19.7 (2027); 17.6 (2037); 25.9 (average); 11.3; 7.2; 10.1 (other years shown).
- Government revenues (excluding grants, in percent of GDP): 10.4 (2014); 9.6 (2015); 10.3 (2016); 10.6 (2017); projected 11.5 (2018); 12.0 (2019); 12.5 (2020); 12.8 (2021); 12.8 (2022); historical 12.8; 2027 projection 13.0; 2037 projection 12.9.
- Aid flows (Billions of US dollars) 7/: 3.2 (2014); 3.0 (2015); 3.1 (2016); 3.7 (2017); projected 4.6 (2018); 5.2 (2019); 5.5 (2020); 5.7 (2021); 6.1 (2022); historical 8.7; 2027 projection 18.8.
  - of which: Grants: 0.8 (2014); 0.6 (2015); 0.2 (2016); 0.5 (2017); projected 0.8 (2018); 0.9 (2019); 0.9 (2020); 1.0 (2021); 1.1 (2022); historical 1.7; 2027 projection 3.8.
  - of which: Concessional loans: 2.4 (2014); 2.5 (2015); 2.9 (2016); 3.2 (2017); projected 3.8 (2018); 4.3 (2019); 4.6 (2020); 4.7 (2021); 5.0 (2022); historical 7.0; 2027 projection 15.0.
- Grant-equivalent financing (in percent of GDP) (selected): 0.8; 0.9; 0.9; 0.7; 0.7; 0.6; 0.5; 0.4; 0.5 (years shown).
- Memorandum items:
  - Nominal GDP (Billions of US dollars): 172.9 (2014); 195.0 (2015); 218.1 (2016); 237.2 (2017); projected 260.1 (2018); 284.2 (2019); 310.4 (2020); 338.8 (2021); 369.8 (2022); historical 562.0; 2037 projection 1285.9.
  - PV of PPG external debt (Billions of US dollars): 17.3 (2014); 19.7 (2015); 21.9 (2016); 24.8 (2017); projected 28.5 (2018); 32.5 (2019); 37.0 (2020); historical 64.2; 2027 projection 134.0.
  - Gross workers' remittances (Billions of US dollars): 14.2 (2014); 15.2 (2015); 14.7 (2016); 12.2 (2017); projected 12.6 (2018); 13.1 (2019); 13.7 (2020); 14.3 (2021); 15.0 (2022); historical 19.8; 2027 projection 35.5.

### Sensitivity analysis highlights (Table summaries)
- Stress tests reported include alternative scenarios and bound tests (e.g., real GDP growth shocks, export value shocks, US dollar GDP deflator shocks, net non-debt creating flows shocks, combination shocks, and a one-time 30 percent nominal depreciation).
- Representative outcomes (selected):
  - PV of debt-to-GDP ratio: Baseline and scenario values are reported across 2017−2037; one example: baseline values shown (rows) and A2 (less favorable financing) leads to higher ratios in many years.
  - PV of debt-to-exports ratio and PV of debt-to-revenue ratio: baseline and multiple stress scenarios reported with varying increases under depreciation and less favorable financing scenarios.
  - Debt service-to-exports ratio and Debt service-to-revenue ratio: show notable increases under stress scenarios, including one-time 30 percent depreciation where ratios rise materially in affected years.
- Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline): 6/66666666 (table entry as reported).

### Policy implications (as presented in source)
- Maintain moderate fiscal deficits and concessional borrowing to keep external and overall debt distress risks low.
- Strengthen debt management to handle complexities from MTDS implementation.
- Improve monitoring of NSCs to better understand beneficiary profiles and mitigate associated risks.
- Consider VAT introduction implications as discussed in the 2015 Article IV DSA.

*Source: IMF country report content (cr17147) provided in the PDF chapter/section.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17147.pdf_