## 1. Addressing the Rohingya Refugee Crisis ## Source details **Canonical URL:** [1. Addressing the Rohingya Refugee Crisis](https://www.imf.org/-/media/files/publications/cr/2018/cr18158.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18158.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18158.pdf.json) --- ### Context and recent macroeconomic developments - Growth and structure - GDP growth has averaged more than 6.0 percent over the last decade. - Output growth accelerated to 7.3 percent in FY17 from 7.1 percent in FY16. - Private consumption contributed about 2/3rd of the FY17 growth. - Growth driven by manufacturing and services; output composition continues to shift away from agriculture. - Inflation - Headline CPI inflation rose to about 6 percent in the second half of 2017 due to flood-related food-price increases. - Overall inflation in March 2018 fell to 5.7 percent (y/y). - Non-food inflation remained broadly stable. - External sector and reserves - The current account (CA) turned into a deficit in FY17; the CA deficit reached 0.6 percent of GDP. - Remittances declined by 14.0 percent in FY17 after having grown 12.5 percent on average over the prior decade. - Foreign exchange reserves increased slightly to US$34.0 billion (seven months of imports). - RMG exports stagnated. - Monetary and credit conditions - In FY18, reserve and broad money growth slowed, falling below Bangladesh Bank (BB) targets. - Private sector credit grew over 18.0 percent; credit to the public sector has been falling. - BB reduced the maximum advances-to-deposit ratio (ADR) from 85.0 percent to 83.5 percent in January 2018 (ADR limit for Shariah-based Islamic banks reduced from 90 percent to 89 percent). - With tightening liquidity, deposit and lending rates began to increase. - Fiscal position - FY17 fiscal deficit was 3.4 percent of GDP, below the 5.0 percent of GDP budget target. - H1 FY18 revenue and expenditure grew less than budgeted; H1 deficit was below 1.0 percent of GDP. ### Near-term outlook and risks - Near-term projections - Growth expected to remain strong at around 7.0 percent in FY18. - Inflation expected to remain below 6.0 percent, close to BB’s 5½ percent average inflation target. - Current account deficit projected to widen to close to 2.0 percent of GDP in FY18. - Key near-term risks - Upside risks: robust global demand for exports; stronger recovery of remittances. - Downside risks: resumption of political unrest ahead of elections; higher inflation from second-round effects of food-price shocks; sustained increases in NPLs and weak bank governance; deterioration in SOCBs affecting fiscal balance. - External risks: impact from global trade conflicts depends on developments; if higher tariffs are not globally applied and the RMG sector is excluded, direct impact could be relatively small. - Authorities’ near-term view - Authorities project FY18 growth to be 7.6 5 percent and expect easing inflation in H2 FY18 with crop harvest recovery. - They expect a somewhat stronger balance of payments than staff, remaining slightly positive, reflecting anticipated strong exports and remittances. ### Rohingya refugee crisis — facts, response, and risks (Box 1) - Key facts (dates and counts preserved) - Latest exodus began on August 25, 2017. - As of March 2018, 671,000 Rohingya had crossed over into Bangladesh. - Estimated refugee population before August 2017: 217,000 in Cox’s Bazar; new arrivals bring total close to 900,000. - Around 336,000 members of the host community have been affected by the expansion of the Kutupalong-Balukhali site. - An arrangement reached in November 2017 provided for repatriation expected to be completed by January 2020; progress has been slow. - International response and funding - October 2017: international community pledged US$360.0 million under the Rohingya Refugee Crisis Response Plan to meet needs until end-February 2018. - Several donors announced in-kind assistance worth more than US$50.0 million. - March 2018: second Joint Response Plan launched with a funding request of US$951.0 million (about 0.4 percent of GDP) to cover needs until end-2018. - UNHCR launched a supplementary appeal for 2018 amounting to US$238.0 million. - Budgetary impact and dependence on donors - Precise budget impact depends on relief comprehensiveness, donor support continuation, and government capacity to address unmet needs. - Authorities confident that, with external financing and some re-allocations, additional spending pressures can be met without exceeding the budget deficit target. - Immediate-term risks and protection challenges - Monsoon rains: flooding and landslides present an acute risk; camps face significant flood and landslide risks. - Congestion: at least 150,000 refugees considered at risk and urgently requiring relocation. - Medium- and long-term implications - If repatriation does not proceed swiftly, impacts could be large; donor support could wane; pressures on natural resources and host-community tensions could rise. - Policy priorities - Investments needed in key social services, economic infrastructure, and environmental rehabilitation. - Continued donor support is essential to meet spending needs. ### Near-term macroeconomic management — monetary and macroprudential policies - Recent BB actions (April 2018) - Reduced CRR from 6.5 percent to 5.5 percent. - Reduced repo rate from 6.75 percent to 6.0 percent. - Extended deadline for banks to meet reduced ADR to March 2019. - Increased share of state-owned agencies’ deposits placed in private banks from 20 to 50 percent. - Staff recommendations - Monitor impact of monetary easing closely and be ready to tighten should inflation increase. - Remain vigilant against second-round price effects from elevated food prices and rising inflation expectations. - Prefer targeted conditional liquidity support and enhanced supervision of weak banks over broad monetary easing. - Utilize macroprudential policies to mitigate financial stability risks from accelerating credit growth. - Enforce ADR limits strictly and avoid relaxing existing caps on credit growth in SOCBs. - Monetary framework reform priorities - Move from quantity-based policy toward interest rate targeting over the medium term. - Emphasize: (i) price stability as BB’s primary objective; (ii) greater exchange rate flexibility; (iii) further development of financial markets; (iv) strengthened forecasting of banking and government sector liquidity. - Cybersecurity - Of the US$81.0 million stolen in the 2016 reserve heist, approximately US$15.0 million has been recovered; discussions continue on recovering the remainder. - Authorities have enhanced internal IT security and updated the ICT Security Policy; continuous upgrades remain necessary. ### External developments and exchange rate policy - External position assessment - Overall external position in FY17 assessed broadly in line with fundamentals and desired policies. - FY17 CA deficit mainly reflected higher investments (capital imports). - After long appreciation, the Taka real exchange rate has recently started to depreciate vis a vis trading partners. - Reserve coverage remains adequate at seven months of imports. - Given high concessional borrowing share, external debt distress risk remains low. - Exchange rate flexibility recommendation - Staff recommend gradually increasing exchange rate flexibility to better buffer external shocks, preserve reserves, and increase monetary policy autonomy. - Remittances - Remittances have more than doubled over the past decade, reaching around US$15 billion in FY16. - Inflows declined sharply in FY17; official inflows rebounded in FY18 as GCC economies recovered and policy measures were taken. - Remittances expected to reach US$14.0 billion by June 2018 (see remittance forecasts). ### Fiscal policy — stance, reforms, and public financial management - Fiscal stance and guidance - Fiscal policy should aim to keep the public debt ratio broadly stable while increasing tax revenues. - Given strong growth, no need for fiscal stimulus; FY18 fiscal deficit expected to remain at around 4.0 percent of GDP (staff view). - Authorities reaffirmed commitment to prudent fiscal policy and expect ADP implementation to accelerate while keeping deficit within the 5.0 percent of GDP budget target. - Tax revenue mobilization - Tax revenues below 10.0 percent of GDP. - Priority: implement the delayed VAT soon, preferably with a single tax rate and broad base. - Continue direct tax reform focusing on simplification and base broadening. - Strengthen tax administration: enhanced risk-based auditing, online taxpayer registration, electronic filing. - Registered taxpayers increased from 1.9 million in 2016 to 3.3 million in 2018 thus far. - Public financial management reforms - IBAS++ and the new Budget and Accounting Classification System (BACS) will improve timeliness of monthly and annual fiscal data. - Further reforms should improve transparency, financial control of budget allocations, real-time monitoring of budget execution, and integration of recurrent and ADP spending. - A forthcoming Public Investment Management Assessment (PIMA) will help strengthen the framework. ### Banking sector weaknesses and recommended reforms - Key facts and indicators - NPLs remain high and continue to grow; problem acute for SOCBs. - SOCBs: NPLs approaching 30 percent of total loans; provisioning below required levels by Tk. 75.7 billion (0.4 percent of GDP). - Total amount of SOCBs‘ loans: 1,317 billion Taka (6.7 percent of GDP); NPLs are 385.9 billion Taka (2.0 percent of GDP). - PCBs overall capitalized at around 12 percent of regulatory assets; two PCBs below the 10 percent regulatory requirement. - SOCBs average capital ratio: 5.6 percent; three out of six SOCBs below regulatory requirement. - Recent governance concerns: amendment of the Bank Company Act increases family members allowed on private bank boards from two to four; directors’ tenure extended from six to nine years. - Recommended actions - Strengthen banking regulation and supervision; avoid regulatory forbearance. - Move towards risk-based supervision. - Give BB regulatory powers, including power to remove directors from a SOCB’s board. - Strengthen internal control, risk management, corporate governance; enhance legal and financial framework for loan recovery and creditors’ rights. - Establish a resolution regime aligned with international best practice. - Near-term SOCB actions: strictly enforce Annual Performance Agreements (APA) and Memoranda of Understanding (MoU); make public recapitalization conditional on meeting APA/MoU targets; adopt strict remedial actions if targets missed. - Medium-term: reassess need for several SOCBs, clearly formulate public policy role, implement divestment program to reduce number of SOCBs. ### Capital markets and National Savings Certificates (NSCs) - Issues with NSCs - In FY17, about two thirds of the fiscal deficit was financed by NSCs; issuance reached 2½ percent of GDP, a record high. - Large issuance raises: cost of government financing; weakens debt management; reduces liquidity of government security markets; limits supply of risk-free assets for banks. - Reform recommendations - Tighten and strictly enforce eligibility: create a database recording existing holders, reduce number of instruments, review eligibility criteria, limit access to retail investors. - Revise pricing mechanism: link NSC rates directly to government security yields to reduce attractiveness. - Authorities’ position - Authorities acknowledge high issuance hampers capital market development; a reform plan approved to create a database of existing investors linked to National Identity Cards as a first step. ### Tax, inclusion, diversification, and structural reforms - Tax reform and revenue - Urgent VAT implementation; overhaul direct tax system; strengthen tax administration. - Inclusive growth and female labor participation - Boosting female labor force participation is key; required measures include higher spending on education and vocational training, access to health services, investment in rural infrastructure, and strengthening legal frameworks. - Financial inclusion - Mobile financial services expansion: active mobile money accounts increased from 0.5 million to 27 million between 2012 and 2017 (other annex figures: 0.7 million to 27 million between 2014 and 2017). - Policy measures: caps on mobile transactions, no-frill accounts, mandated rural branch openings, National Payment Switch Bangladesh (NPSB). - Implement National Financial Inclusion Strategy with strong accountability. - Export diversification - Exports concentrated: RMG share around 80 percent of total exports. - Diversification opportunities: footwear, leather, pharmaceuticals; policy: invest in infrastructure and human capital, lower barriers for new businesses, review tariff structure to gradually reduce effective protection. ### Debt sustainability, DSA results, and illustrative Rohingya fiscal scenario - DSA headline stock and projections (end-FY17 and projections preserved) - Total public and publicly guaranteed (PPG) external debt: US$35 billion (14.3 percent of GDP). - PV of PPG external debt to GDP ratio: 10.4 percent of GDP in FY17; projected to increase to 13.1 percent in FY23; projected to remain stable reaching 9.2 percent of GDP by FY38. - PV of public debt-to-GDP ratio: 29.2 percent in FY17; projected to increase to 35 percent in FY23 then trend down over the long term. - Macroeconomic projection highlights (FY16–FY20) - Real GDP growth: FY16 7.1; FY17 7.3; FY18 7.0; FY19 7.0; FY20 7.0. - Inflation (annual average): FY16 5.9; FY17 5.4; FY18 5.9; FY19 6.0; FY20 6.0. - Fiscal deficit (percent of GDP): FY16 -3.5; FY17 -3.4; FY18 -4.3; FY19 -4.8; FY20 -4.4. - Current account (percent of GDP): FY16 1.9; FY17 -0.6; FY18 -1.8; FY19 -2.3; FY20 -2.4. - Remittance growth: FY16 -1.6; FY17 -14.7; FY18 9.0; FY19 3.5; FY20 4.5. - Staff illustrative Rohingya fiscal impact scenario assumptions and outcomes - Assumptions: - Over next six years, approximately Tk. 440 billion (US$5.4 billion) will be raised domestically (borrowed with a higher interest rate). - A little over US$ US$1 billion will be borrowed externally on non-concessional terms. - Import growth increases from 8 percent (baseline) to 9 percent. - Outcomes: - Deterioration and breach of the external debt service-to-revenue over the medium term (described as small and temporary under extreme stress). - PV of public debt-to-GDP ratio deteriorates by almost 1.5 percentage points of GDP on average over the projection period. - Scenario reinforces need to create fiscal space by implementing the VAT and rely on concessional financing where possible. - Staff judgment - Risks of external debt distress: low. - Overall debt distress: low. - Temporary breach in extreme stress tests judged small and temporary. - Policy implication: need for donor support to mitigate refugee crisis impact and to rely on concessional financing for project financing. ### Data, surveillance, and engagement with development partners - Data adequacy for surveillance: broadly adequate with shortcomings in national accounts, fiscal, and external sector statistics; planned revisions and technical assistance in progress. - Key statistical points and publication dates preserved where reported (examples: GDP base year 2005/06; planned revision to 2015/16 benchmark expected in financial year 2019/20). - Development partner coordination - Ongoing coordination with World Bank and Asian Development Bank (ADB); ADB cumulative public sector borrowing as of December 31, 2017: US$19.4 billion (260 loans). - Country Partnership Strategy (CPS) 2016–2020 priorities and lending targets noted. - Surveillance cadence - Staff recommends next Article IV consultation be held on the standard 12-month cycle. ### Staff appraisal — consolidated policy recommendations (key messages) - Monetary policy - Monitor impact of recent monetary easing and stand ready to tighten if inflation increases. - Address liquidity problems of individual banks through targeted conditional liquidity support. - Utilize macroprudential policies to mitigate financial stability risks from accelerating credit growth. - Exchange rate policy - Gradually increase exchange rate flexibility to buffer external shocks, preserve reserves, and strengthen monetary policy autonomy. - Fiscal policy - Keep public debt broadly stable over the medium term. - With limited tax revenue growth and no major tax measures envisaged in the next fiscal year, maintain expenditure restraint to keep deficits and public debt within objectives. - Donor support essential to meet spending needs for the Rohingya refugee crisis. - Banking sector priorities - Avoid regulatory forbearance; strengthen regulation and supervision; move from compliance-based to risk-based supervision. - Enhance banks’ internal control, risk management, and corporate governance. - Accelerate NPL resolution and establish a robust resolution framework for troubled banks. - Strictly enforce monitoring of SOCBs and consider reducing number of SOCBs via divestment program. - Structural reforms - Implement VAT reform and direct tax simplification to boost revenues. - Reform NSCs, develop capital markets, and improve business environment to mobilize long-term financing and support diversification. - Boost female labor participation via education, health, infrastructure, and legal measures. - Implement National Financial Inclusion Strategy rigorously. *Source: IMF country report "cr18158 - 1. Addressing the Rohingya Refugee Crisis" (excerpts).* ### 1. Addressing the Rohingya Refugee Crisis ______________________________________________________ 19 ### 1. Addressing the Rohingya Refugee Crisis ### Context and recent macroeconomic developments - GDP growth has averaged more than 6.0 percent over the last decade, shifting the economy toward manufacturing and lifting GDP per capita. - The economy is transitioning from a low-income to lower-middle income status. - Political tensions may increase ahead of general elections in December 2018; terrorism remains a concern. - Output and demand - Output growth accelerated to 7.3 percent in FY17 from 7.1 percent in FY16. - Private consumption contributed about 2/3rd of the FY17 growth. - Net exports contributed negatively in FY17 due to higher imports and slower export growth. - Growth was mainly driven by manufacturing and services; the economy’s output composition continues to shift away from agriculture. - Inflation - Headline CPI inflation rose to about 6 percent in the second half of 2017 due to flood-related food-price increases. - Overall inflation in March 2018 fell to 5.7 percent (y/y). - Non-food inflation remained broadly stable. - External sector and reserves - The current account (CA) turned into a deficit in FY17; the CA deficit reached 0.6 percent of GDP. - Remittances declined by 14.0 percent in FY17 after having grown 12.5 percent on average over the prior decade. - Foreign exchange reserves increased slightly to US$34.0 billion (seven months of imports). - RMG exports stagnated reflecting slower global RMG market growth and domestic security concerns. - Monetary and credit conditions - In FY18, reserve and broad money growth slowed, falling below Bangladesh Bank (BB) targets. - Total domestic credit growth broadly in line with BB target; credit to the public sector has been falling while private sector credit grew over 18.0 percent. - BB reduced the maximum advances-to-deposit ratio (ADR) from 85.0 percent to 83.5 percent in January 2018 (ADR limit for Shariah-based Islamic banks reduced from 90 percent to 89 percent). - With tightening liquidity, deposit and lending rates began to increase. - Fiscal position - FY17 fiscal deficit was 3.4 percent of GDP, below the 5.0 percent of GDP budget target. - Spending control and slower implementation of development projects offset revenue underperformance. - In H1 FY18, revenue and expenditure grew less than budgeted; H1 deficit was below 1.0 percent of GDP. ### Near-term outlook and risks - Near-term projections - Growth is expected to remain strong at around 7.0 percent in FY18, led by private consumption and investment. - Inflation is expected to remain below 6.0 percent, close to BB’s 5½ percent average inflation target. - Current account deficit projected to widen to close to 2.0 percent of GDP in FY18 due to stronger food, industrial raw materials, and capital machinery imports. - Key near-term risks (Annex II) - Upside risks: robust global demand for exports; stronger recovery of remittances. - Downside risks: resumption of political unrest ahead of elections; higher inflation from second-round effects of food-price shocks; sustained increases in non-performing loans (NPLs) and weak bank governance impairing credit supply; deterioration in state-owned commercial banks (SOCBs) affecting fiscal balance. - External risks: impact from global trade conflicts depends on developments; if higher tariffs are not globally applied and the RMG sector is excluded, direct impact could be relatively small. - Rohingya refugee crisis - Slow progress in resolving the Rohingya refugee crisis could intensify economic, political, and social pressures. - Despite the high influx starting in August 2017, the government has kept borders open and provided assistance with international coordination; additional spending has been managed with international support. - Refugee camps face significant flood and landslide risks during monsoons, creating urgent infrastructure upgrade needs. - Continued donor support is essential to meet spending needs. - Authorities’ near-term view - Authorities project FY18 growth to be 7.6 5 percent and expect easing inflation in H2 FY18 with crop harvest recovery. - They expect a somewhat stronger balance of payments than staff, remaining slightly positive, reflecting anticipated strong exports and remittances. - They broadly share staff’s assessment of risks, expect minimal election-related unrest, and note potential second-round food-price effects and Rohingya crisis impacts. ### Near-term macroeconomic management A. Monetary and macroprudential policies - Recent BB actions and rationale - In April 2018, BB eased monetary policy: reduced CRR from 6.5 percent to 5.5 percent and repo rate from 6.75 percent to 6.0 percent. - BB extended the deadline for banks to meet the reduced ADR to March 2019. - The share of state-owned agencies’ deposits placed in private banks was increased from 20 to 50 percent. - The easing responded to tightening liquidity from a weaker balance of payments, limited liquidity redistribution within the banking system, and recent increases in deposit and lending rates; concerns about the bailout of a weak private bank also tightened liquidity. - Staff recommendations - Monitor the impact of monetary easing closely and be ready to tighten should inflation increase. - Remain vigilant against second-round price effects from elevated food prices and rising inflation expectations. - Prefer targeted conditional liquidity support and enhanced supervision of weak banks over broad monetary easing. - Utilize macroprudential policies to mitigate financial stability risks from accelerating credit growth. - Enforce ADR limits strictly and avoid relaxing existing caps on credit growth in SOCBs. - Monetary framework reform - BB plans to move from a quantity-based policy (broad money growth target) toward interest rate targeting over the medium term. - The reform should emphasize: - (i) price stability as BB’s primary objective; - (ii) greater exchange rate flexibility to enhance monetary policy autonomy; - (iii) further development of financial markets; - (iv) strengthened forecasting of banking and government sector liquidity. - Cybersecurity - Of the US$81.0 million stolen in the 2016 reserve heist, approximately US$15.0 million has been recovered; discussions continue on recovering the remainder. - Authorities have enhanced internal IT security, updated the ICT Security Policy, and provided employee training; continuous upgrades remain necessary. - Authorities’ views on monetary policy - Authorities agreed to monitor policy easing closely to guard against inflation rise. - They cited the easing decision’s motivation as liquidity tightening, with broad money growth in single digits and below nominal GDP growth, and the risk of banks sharply cutting business financing. - They expect inflation risk to be contained if a bumper rice harvest materializes and note wage growth is stable. - Acceleration in private credit growth largely reflects large imports for megaprojects and is expected to moderate; nevertheless, in some banks credit growth exceeded prudent levels, motivating the ADR reduction. B. External developments and exchange rate policy - Assessment and recommendations - The overall external position in FY17 is assessed broadly in line with fundamentals and desired policies (Annex III). - The FY17 CA deficit mainly reflected higher investments (capital imports) rather than lower savings. - After long appreciation, the Taka real exchange rate has recently started to depreciate vis a vis trading partners. - Reserve coverage remains adequate at seven months of imports. - Given high concessional borrowing share, external debt distress risk remains low. - Authorities should continue relying on concessional financing for externally-financed infrastructure spending. - Exchange rate flexibility - The de jure exchange rate arrangement is floating; the central bank intervenes to keep relative stability against the US dollar. - Staff recommend gradually increasing exchange rate flexibility to better buffer external shocks, preserve reserves, and increase monetary policy autonomy. - Remittances - Remittances have more than doubled over the past decade, reaching around US$15 billion in FY16. - Inflows declined sharply in FY17 despite higher outflows of migrant workers, due to GCC external conditions and increased informal remittance channels. - GCC economies recovered and authorities took measures to increase formal channel use; official inflows rebounded in FY18. - Authorities’ views on external position - Authorities agreed the CA deficit was driven mainly by large capital imports for mega-projects and food grain imports due to crop losses. - They view reserve coverage as adequate and expect reserves to benefit from stronger export earnings and remittance rebound. - Recent Taka depreciation reflects increased foreign currency demand from higher imports. - Authorities prefer to avoid excessive exchange rate fluctuations and intervene as needed. - They are cautious and gradual in relaxing capital account regulations, having liberalized inflows extensively and taking a gradual approach to resident-owned outflows. C. Fiscal policy - Fiscal guidance and performance - Fiscal policy should aim to keep the public debt ratio broadly stable over the medium term while increasing tax revenues. - Staff welcome expenditure restraint and the authorities’ commitment to keep deficits under control despite revenue shortfalls. - Given strong growth, there is no need for fiscal stimulus; FY18 fiscal deficit expected to remain at around 4.0 percent of GDP. - Budgeted spending growth should align with realistic revenue projections; no major tax policy reforms are planned in FY19. - Priority: restrain spending growth, particularly current expenditures, while urgently boosting tax revenues. - Public financial management reforms - Progress on 2016-21 reform strategy is welcome. - IBAS++ and the new Budget and Accounting Classification System (BACS) will improve timeliness of monthly and annual fiscal data. - Further reforms should improve transparency and financial control of budget allocations, real-time monitoring of budget execution, and integration of recurrent and Annual Development Program (ADP) spending. - A forthcoming Public Investment Management Assessment (PIMA) by Fund staff will help strengthen the relevant framework. *Source: IMF country report "cr18158 - 1. Addressing the Rohingya Refugee Crisis" (excerpts).* ### 24. The authorities emphasized that they remain committed to prudent fiscal policy. They ### 24. The authorities emphasized that they remain committed to prudent fiscal policy. They ### Fiscal policy stance and near-term plans - Authorities reaffirmed commitment to prudent fiscal policy. - Staff view: no additional fiscal stimulus is needed in this fiscal year given the economy’s strong momentum. - Authorities’ view: fiscal policy plays an important role in supporting growth. - ADP implementation will accelerate in the remainder of FY18, but the deficit will stay within the 5.0 percent of GDP budget target. - With elections scheduled for late 2018, no new policy initiatives are planned in the FY19 budget, though some budget allocation may be needed for the Rohingya refugee crisis. - Fiscal policy guided by the 2009 Public Money and Budget Management Act, which stipulates that public debt as a percent of GDP should be reduced gradually every year. ### Growth outlook and challenges - Staff projects medium-term real GDP growth to be around 7.0 percent. - Authorities' 7th Five-Year Plan: growth target of 7.4 percent growth on average between FY16 - FY20. - Growth accounting (Annex V) estimates potential growth over the same period to be a little over 7.0 percent. - Contributions from labor force and productivity expected to be modest; capital formation is the main growth driver. - Key requirements to sustain growth: - Enhance productive investments. - Reform banking sector and develop capital markets to mobilize long-term capital. - Raise tax revenues to create fiscal space to upgrade infrastructure (electricity, roads, rails, ports). - Further efforts to boost female labor participation and financial inclusion. ### Banking sector: current weaknesses and recommended reforms - NPLs remain high and continue to grow; problem acute for SOCBs. - SOCBs: NPLs approaching 30 percent of total loans; provisioning below required levels by Tk. 75.7 billion (0.4 percent of GDP). - Total amount of SOCBs‘ loans: 1,317 billion Taka (6.7 percent of GDP); NPLs are 385.9 billion Taka (2.0 percent of GDP). - PCBs: overall capitalized at around 12 percent of regulatory assets; two PCBs below the 10 percent regulatory requirement. - SOCBs average capital ratio: 5.6 percent; three out of six SOCBs below regulatory requirement. - Recent governance concerns: amendment of the Bank Company Act increases family members allowed on private bank boards from two to four; directors’ tenure extended from six to nine years. - Additional banking licenses under consideration could challenge supervision and regulation. Recommendations to strengthen banking sector: - Strengthen banking regulation and supervision; avoid regulatory forbearance. - Move towards risk-based supervision. - Reforms to give BB regulatory powers, including power to remove directors from a SOCB’s board. - Strengthen banks’ internal control and risk management systems and corporate governance. - Enhance legal and financial framework to expedite loan recovery and strengthen creditors’ rights. - Establish a resolution regime to resolve banks effectively, in line with international best practice. - Near-term actions for SOCBs: - Strictly enforce Annual Performance Agreements (APA) and Memoranda of Understanding (MoU) with SOCBs and fit and proper criteria in selecting SOCB management. - Make public recapitalization conditional on meeting APA/MoU targets; adopt strict remedial actions, including against management, if targets missed. - Medium-term: reassess need for several SOCBs and their roles; clearly formulate public policy role with transparent budgetary support; implement divestment program to reduce number of SOCBs. ### Capital markets and National Saving Certificates (NSCs) - Continued development of capital market necessary to provide long-term financing. - Authorities implementing Capital Market Development Master Plan; ADB support; progress includes better regulations and demutualization of the stock exchange. - Large issuance of NSCs poses an important obstacle and needs urgent address. Drawbacks of continued high NSC issuance: - In FY17, about two thirds of the fiscal deficit was financed by NSCs; issuance reached 2½ percent of GDP, a record high. - Problems caused by high NSC issuance: - Increasing the cost of government financing. - Weakening debt management and hindering control of composition of deficit financing. - Reducing liquidity of government security markets and monetary policy effectiveness. - Limiting supply of risk-free assets for deposit-taking banks. NSC reform recommendations: - Tighten and strictly enforce eligibility to reduce demand for NSCs; reforms could include creating a database recording details of existing holders, reducing number of instruments, reviewing eligibility criteria, and limiting access only to retail investors. - Revise pricing mechanism to reduce attractiveness of NSCs by linking NSC rates directly to government security yields to reduce the spread. Authorities’ views on NSCs: - Authorities acknowledge high issuance hampers capital market development and emphasized NSC reform is a priority. - A reform plan approved: create a database of existing investors and link to National Identity Cards as a first step to improve monitoring and reduce misuse. - Medium- to long-term: consider structural reforms of NSC, including reform of the pricing mechanism. ### Tax revenue mobilization - Tax revenues below 10.0 percent of GDP; urgent tax reforms needed to increase very low tax revenues. - Priority: implement the delayed VAT soon, preferably with a single tax rate and broad base. - Continue work on direct tax reform focusing on simplification and tax base broadening. - Strengthen tax administration: enhanced risk-based auditing, online taxpayer registration, electronic filing of tax returns. - Number of registered taxpayers increased from 1.9 million in 2016 to 3.3 million in 2018 thus far. - Authorities increasing efforts to settle big tax arrears using Alternative Dispute Resolution mechanisms. - Progress made in improving customs risk management with objective to implement a digitalized risk management regime. ### Promoting inclusive growth and financial inclusion - Boosting low female labor force participation is key for raising potential growth (Annex VII). - Female labor force participation remains low relative to comparators; constraints include informality, marital status, skill mismatch, access to finance, poor infrastructure, wage disparities. - Needed measures: - Higher spending on education and vocational training. - Access to health services and quality maternal health care. - Investment in rural infrastructure: clean water, electricity, reliable and affordable transportation. - Strong legal framework to boost participation. - Financial inclusion progress: - Diversification of service delivery channels, including digital financial services (Annex VIII). - Financial literacy improving via programs with Bangladesh Securities and Exchange Commission and companies like MasterCard. - Confidence in formal financial sector still low; strengthening legal and regulatory framework and prompt adoption of new Secured Transactions Law should enhance access to credit. - Implement National Financial Inclusion Strategy rigorously with strong accountability framework. Authorities’ view: - Bangladesh a pioneer in financial inclusion and gender empowerment; strategies included in seventh national five-year plan. - Authorities working with development partners and have initiatives to address skills and education constraints; upgrading infrastructure expected to improve participation. ### Export diversification - Exports remain concentrated in the RMG sector; share of RMG in total exports around 80 percent. - Rising sectors with potential: footwear, leather, pharmaceuticals. - To promote diversification: invest in infrastructure and human capital, lower barriers for new businesses, review existing tariff structure faced by non-RMG sector with objective of gradually reducing effective tariff protection in domestic market. ### AML/CFT framework and safeguards - APG 2016 assessment: significant progress in AML/CFT framework, areas for improvement identified (preventive AML measures, transparency of legal persons and arrangements, money laundering investigations and prosecutions, confiscation). - Need to enhance customer due diligence for politically exposed persons and transparency of beneficial ownership information to mitigate corruption risks. - Continuous institutional cooperation and capacity enhancement in Anti-Corruption Committee (ACC) recommended. Safeguards assessment: - 2011 safeguards assessment update of BB: governance and legal structure need updating to strengthen autonomy and better safeguard resources. - BB faces capacity challenges in risk management, internal audit, and quality of financial reporting. - BB’s audit committee reestablished in April 2017; strong oversight remains critical. ### Staff appraisal: key messages and policy recommendations - Bangladesh economy continues to perform well with strong and stable growth; significant progress in poverty reduction and social indicators. - Sustaining strong growth requires enhancing productive investments via more efficient financial sector, better infrastructure, and improved business environment. - Near-term growth outlook robust; risks broadly balanced: - Downside risks: resumption of political unrest, second-round effects from high food prices. - Upside: global demand for exports and recovery of remittances. - Global trade conflicts could affect the outlook. - Monetary policy: - Authorities should monitor impact of recent monetary easing and stand ready to tighten in case inflation increases again. - BB should address liquidity problems of individual banks through targeted conditional liquidity support. - Utilize macroprudential policies to mitigate financial stability risks from accelerating credit growth. - Exchange rate policy: - Gradual increase in exchange rate flexibility would help buffer external shocks, preserve reserves, and strengthen monetary policy autonomy. - Fiscal policy: - Continue to keep public debt broadly stable over the medium-term. - With tax revenue growth limited and no major tax measures envisaged in the next fiscal year, keeping deficits and public debt within objectives requires continued expenditure restraint. - Donor support will continue to be essential to meet spending needs for the Rohingya refugee crisis. - Banking sector priority actions: - Avoid regulatory forbearance; strengthen regulation and supervision; move from compliance-based to risk-based supervision. - Enhance banks’ internal control and risk management systems and corporate governance. - Accelerate NPL resolution and establish a robust resolution framework for troubled banks. - Strictly enforce monitoring mechanism of SOCBs; clearly formulate their public policy role with transparent budgetary support. - Consider reducing number of SOCBs through a divestment program. *Source: cr18158 - 24. The authorities emphasized that they remain committed to prudent fiscal policy. They* ### 49. Efforts to develop the capital market should continue to effectively mobilize long- ### 49. Efforts to develop the capital market should continue to effectively mobilize long- ### Capital market development - The authorities have made important progress in improving the stock market, but thus far, capital market financing remains limited. - Reforming the NSC scheme is a priority. ### Fiscal policy and tax reform - Tax revenues remain low and tax reform is urgently needed to create the fiscal space for improving public investment and social safety nets. - Recommended measures include: - Implementation of the repeatedly delayed VAT reform. - Overhaul of the direct tax system. - Continued strengthening of tax administration. ### Labor participation and financial inclusion - Higher female labor participation and further progress in financial inclusion will help sustain strong and inclusive growth. - Policies to support these objectives include: - Increasing expenditure on health. - Aligning vocational training to market demands. - Improving rural infrastructure. - Strengthening labor laws to help increase female labor participation. - Continuing efforts to boost financial inclusion with improving access to finance, especially for women, and instilling confidence in formal finance. - Increasing financial literacy. ### Surveillance cadence - Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. ### Box 1 — Addressing the Rohingya Refugee Crisis: key facts and response - The latest exodus began on August 25, 2017, when violence broke out in Myanmar’s Rakhine State. - As of March 2018, 671,000 Rohingya had crossed over into Bangladesh. - With an estimated refugee population of 217,000 in Cox’s Bazar before August 2017, new arrivals bring the total refugee population close to 900,000. - Around 336,000 members of the host community have been affected by the expansion of the Kutupalong-Balukhali site, now considered the largest refugee camp in the world, and smaller camps in Ukhia and Tekhnaf. - The Government of Bangladesh kept its borders open, allocated forestry land, and provided assistance to incoming refugees in coordination with humanitarian agencies. - An arrangement was reached between Bangladesh and Myanmar in November 2017 providing for the repatriation of refugees affected by the most recent events, a process expected to be completed by January 2020. Progress has been slow and the UNHCR has underscored that returns should be safe and voluntary, and experts have called for third party involvement. - International response and funding: - In October 2017 the international community pledged US$360.0 million under the Rohingya Refugee Crisis Response Plan to meet needs until the end of February 2018. - Several donors announced in-kind assistance worth more than US$50.0 million. - A second Joint Response Plan was launched in March 2018 with a funding request of US$951.0 million, equivalent to about 0.4 percent of GDP, to cover needs until the end of 2018. - The UNHCR launched a supplementary appeal for 2018 amounting to US$238.0 million to enhance protection of refugees and step up emergency preparedness. *International Monetary Fund — Bangladesh staff report excerpts* ### Box 1. Addressing the Rohingya Refugee Crisis (concluded) ### Box 1. Addressing the Rohingya Refugee Crisis (concluded) ### Budgetary impact and government response - The precise impact of the crisis on the budget depends on: - the comprehensiveness of relief efforts, - the extent to which donor support continues, - the extent to which the government is able to address unmet needs moving forward. - In this fiscal year, authorities are addressing requests by line ministries as they emerge. - Authorities are confident that, with external financing and some re-allocations, additional spending pressures can be met without exceeding the budget deficit target. ### Immediate-term risks and protection challenges - With the monsoon rains, flooding and landslides present an acute risk. - Congestion is a core protection challenge in Kutapalong-Balukali: - at least 150,000 refugees are considered to be at risk and urgently requiring relocation. ### Medium- and long-term economic, social, and environmental implications - If repatriation does not proceed as swiftly as planned, impacts could be large. - Donor support could wane over time. - Refugees are based in an already densely populated area where: - the poverty rate is well above the national average, - there is considerable pressure on natural resources. - These factors could lead to rising social tensions between the Rohingya refugees and host communities. ### Policy priorities and required investments - Underscore the need for investments in: - key social services, - economic infrastructure, - environmental rehabilitation. *Source: Box 1. Addressing the Rohingya Refugee Crisis (concluded), cr18158* ### Annex I. Response to Past Fund Policy Advice ### Annex I. Response to Past Fund Policy Advice ### Overview - After the completion of the Extended Credit Facility in October 2015, the authorities continue to closely engage with the Fund through the Article IV consultations, periodic staff visits and the Resident Representative’s office. - Since the last Article IV consultation, a number of recommendations have been implemented, but some key measures will require more time. ### Fund advice and authorities’ response - Increase sterilization effort to contain financial sector risk. - Authorities’ response: With the weakening of the balance of payments and pick-up in private credit growth, the need to sterilize excess liquidity has abated. To contain financial sector risk, the BB reduced the ADR limit. - Adjust monetary policy as needed to keep inflation broadly stable. - Authorities’ response: Monetary policy was eased in April 2018, reflecting concerns on liquidity, while overall inflation has picked up slightly in 2017. - Keep the public debt ratio broadly stable. - Authorities’ response: In FY17, expenditure growth was kept under control, and the deficit was below 5 percent of GDP. Compared to FY16, public debt-to -GDP ratio has increased only moderately. - Boost low tax revenues, including the launch of new VAT. - Authorities’ response: The planned July 2017 launch of the new VAT was again postponed till July 2019. No major new revenue measures are expected in FY18. - Improve fiscal transparency and reflect government operations explicitly in the budget. - Authorities’ response: Introduction of the Integrated Budget and Accounting System (IBAS++) and the new Budget and Accounting Classification System (BACS) will improve fiscal reporting and transparency. - Continue flexible approach to exchange rate management and preserve foreign reserves buffer. - Authorities’ response: The BB has intervened occasionally in the foreign exchange market to avoid excessive exchange rate fluctuations. The currency has depreciated moderately and the foreign reserves were stable. - Improve governance and recapitalize state owned banks, enforce credit growth limits, streamline loan recovery and eliminate government influence over lending decisions. - Authorities’ response: Credit growth limits have been broadly enforced, and limited recapitalization has taken place. Governance in the state-owned banks and loan recovery remain major challenges. - Support capital market by removing regulatory and tax obstacles to corporate bond issuance, reducing budget reliance on financing from the national savings certificates, and developing a well-functioning government bond market. - Authorities’ response: The authorities continue to implement the Capital Market Development Master Plan. They plan to create a database of savings certificates holders to reduce misuse. However, obstacles to capital market development remain and corporate bond/equity issuance are limited. *Source: Annex I. Response to Past Fund Policy Advice (cr18158).* ### 4. Costs to migrate, including living costs, have increased. Another reason for the ### 4. Costs to migrate, including living costs, have increased. Another reason for the slowdown in remittances ### Migration and living costs: findings - Complex visa procedures, work permits, recruitment costs and airline tickets push up the costs to migrate substantially. - KNOMAD-ILO Migration Costs Survey (2014) indicated Bangladeshi workers were paying costs to migrate to Kuwait ranging between $1,675 and $5,154. - Fees became exorbitant ($15,000, for Bangladeshi workers in 2013) if illegal crossings of international borders were expected. - Policies such as a levy on employers hiring foreign workers in Malaysia increase business costs that could be passed on to the foreign worker, thus reducing real income. - The cost of living faced by Bangladeshi immigrants in migrant countries has also increased. ### Stricter monitoring and regulatory effects - Regulatory non-compliance of companies that provide money transfer services in Saudi Arabia may lead to suspension of services (Saudi Arabian Monetary Authority announcement). - In the UAE, several domestic banks have preemptively stopped providing banking services to some charities, exchange houses, and remittance offices to deter the perception of rising AML/CFT risks. - In the UK, global banks have been reviewing customer bases and business lines and terminating accounts of certain categories of customers, notably money transmitters and fintech firms. - Events of service suspension and account terminations could potentially impair remittance inflows and cause a shift to less transparent and unregulated service providers. ### Fintech, mobile technology, and informal channels - Fintech and mobile technology have improved money transfers and made banking services easier, but have also facilitated the growth of informal channels. - Bangladeshi banks use platforms such as bKash, Rocket, and SureCash for: disbursement of inward foreign remittances; cash in/out using mobile accounts; utility bill payments; merchant payments; salary payments; government transfers and subsidies; tax payments; and person-to-person payments. - Authorities are continuously upgrading payment systems, focusing on creating financial market infrastructure that is safe, efficient, fast, and secure. - Since the introduction of mobile financial services (2011), total transactions and total amounts have increased tremendously: - Over the period December 2013 to February 2018, average daily transactions and amounts using mobile financial services have increased by more than 400 and 300 percent, respectively. - Between 2012 and 2017, the number of active mobile money accounts increased from 0.5 million to 27 million (IMF, Financial Access Survey database and Bangladesh Bank). - Double digit growth rates of remittances seen prior to 2011 slowed down remarkably and continued to fall after 2011, suggesting that a major portion of remittances were transferred over informal channels after the advent of technology. - Despite World Bank reports that the cost of sending remittances has dropped, informal channels remain popular given their convenience, substantially low costs, less scrutiny, and lack of regulation. ### Remittance inflows: recent trends and forecast - Empirical analysis shows resilience of non-oil GDP growth in the GCC and large-scale hiring of migrant workers supports remittances to South-Asian countries. - Real oil GDP in the GCC declined in 2017, while non-oil growth increased, suggesting some uptick in outflows of remittances in 2017. - The World Bank’s Migration and Development Brief (2017) suggests remittances to low and middle-income countries are expected to recover in 2017 after two consecutive years of decline. - Trends point to a pickup in remittances in FY18; remittances are expected to reach US$14.0 billion by June 2018. ### Authorities’ short-term and medium-term measures to address slowdown - Short-term measures: - Educate migrant workers on the benefits (safety and security) of using formal channels. - Introduce special help desks at airports. - Initiate diplomatic talks with relevant host countries to facilitate policies for removing caps on sending legal income through banking channels. - Increase the number of authorized channels and improve service quality by reducing remitting complexity. - Medium-term measures: - Consider products such as remittance cards incentivized by receiving medical services, priority access for consulate services, and duty-free access at airports up to a specified annual limit. - Work with relevant authorities in host countries to reduce costs of migration by reducing fees of the renewal process of work permits and increasing their renewal periods. - Make remittance services more dependable and easily available by using large networks of NGOs, micro credit institutions, and banks and by introducing agent banking abroad. - Monitor the quality of the labor force and provide more training to outgoing workers. - Form a monitoring committee within the Ministry of Finance to help coordinate and implement these reforms. *International Monetary Fund, Bangladesh: Selected Issues (excerpts).* ### 12. Better infrastructure should increase economic diversification and in turn output. The ### cr18158 - 12. Better infrastructure should increase economic diversification and in turn output. The ### Economic diversification and infrastructure - Diversification is needed to shift away from the RMG sector into other export-oriented activities that may benefit from the low-cost labor comparative advantage. - Diversification should include new products, new trading partners, and increases in the quality of existing products. - New products and growing sectors showing diversification potential: agro-based products, light engineering, footwear and leather, and pharmaceuticals. - Expected benefits of diversification and structural transformation: - Lower output volatility - Greater macroeconomic stability - Boost to growth ### Labor quantity and quality (human capital) - Sustaining strong growth depends on the quantity of those employed (LL_t) and the quality of their human capital (h_t). - Improving h_t entails prudent spending on health and education to improve workforce quality and support diversification and structural transformation. - Observations: - Percent of educated persons in the workforce remains very low compared to comparator countries. - The education index under the Human Development Index has improved for Bangladesh but still has room for improvement versus regional peers. - Declining labor force participation rate will benefit from policies that boost female participation, which remains low relative to comparator countries. - Increasing the share of women in the workforce helps mitigate the impact of population aging in the long run. - Policy levers to boost female participation and labor quality: - Improvements in social safety nets, such as health systems - Higher spending on rural infrastructure, especially transportation - Education investments - Demographic note: - Bangladesh should take advantage of the shift in demographics, as shown by a declining dependency ratio, and implement needed policies and investments to maximize growth potential. ### Total Factor Productivity (TFP) and institutional environment - Boosting TFP (which includes political situation, security, economic policies, and institutional changes) should support growth. - Policy recommendations: - Reassure the business community regarding security and related concerns. - Continue policies to boost financial inclusion while maintaining financial stability. - Pursue reforms (e.g., capital market development) to improve the policy framework to support macro-stability, maintain competitiveness, build buffers against external shocks, and mobilize resources for public investment. *Source: cr18158 - 12. Better infrastructure should increase economic diversification and in turn output. The* ### Annex VI — Enhancing Bangladesh’s Business Environment (selected findings and reforms) - 7th Five-Year Plan (FY16-20) objectives: - Raise share of private investment from 22 to 27 percent of GDP - Mobilize an additional US$10 billion in FDI inflows by the end of the period - Target growth in the range of 7 -8 percent annually on a sustainable basis - Doing Business context: - Bangladesh ranks 177th out of 190 countries in the ease of doing business ranking. - Key areas for progress: getting electricity, accessing credit, enforcing contracts, facilitating trade, and paying taxes. - Institutional action: - National Committee for Monitoring and Implementation of Doing Business Reforms formed in September 2017, with 15 government agencies and BIDA as secretariat; action plan targets a double-digit ranking by 2021. - Key selected reforms in the action plan (with timelines as stated): - Meeting the demand for power: reduce time to obtain a commercial electricity connection from 400+ days to 4 weeks - Accessing Credit: - Increase coverage by the Credit Information Bureau (June 2018) - Enhance online information exchange between Bangladesh Bank and the Microcredit Regulatory Authority (June 2019) - Enact a new Secured Transaction Law (December 2018) - Enforcing Contracts: - Review and analyze the Bangladesh Arbitration Act (December 2017) - Create additional courts in Dhaka and Chittagong for commercial disputes (December 2018) - Set a 365-day limit for disposal of cases - Trading Across Borders: - Review Customs Modernization Strategic Action Plan (March 2018) - Implement an Authorized Economic Operator program (December 2018) - Establish a National Single Window for traders (June 2020) - Paying Taxes: - Enact the Direct Taxes code (June 2019) - Implement a risk management system to enhance auditing of tax payments (November 2019) - Implement the new VAT Law - One Stop Shop (OSS) for investor services: - OSS Bill passed on February 5, 2018, proposing a ‘one stop service committee’ headed by a cabinet minister. - Envisaged benefits: better coordination among agencies; single platform for investor information; interoperability and improved back-end information management; elimination of information duplication; tracking application updates and centralized investor-government communication. - BIDA finalized OSS model and re-engineered process maps for 15 processes across five agencies (BIDA, National Board of Revenue, Office of the Registrar of Joint Stock Companies and Firms, Chief Controller of Import and Export, Capital Development Authority). - Pilot OSS scheduled for July 1, 2018; fully-fledged OSS planned for July 1, 2019. ### Annex VII — Efforts to Boost Female Labor Force Participation - Progress and context: - Tremendous progress in gender equality within five-year plans: gender disparity in primary and secondary education eliminated; maternal mortality declined substantially. - Gender Responsive Budgeting introduced in 2005; as of FY17 forty-three ministries have reported progress on advancing gender equality. - National Women Development Policy provides regulatory framework for protecting women’s rights and privileges. - WEF’s Global Gender Gap Report (2017) recognizes Bangladesh as South Asia’s top performer for improved gender parity. - Challenges limiting female participation: - Large informal sector limits formal sector participation. - High social pressures for women to marry (including before the legal age) increase school dropout and reduce labor force entry. - Educational enrollments do not necessarily translate into market-relevant skills. - Rural disadvantages: lack of safe and reliable transportation and access to clean water. - Access to finance for women continues to be limited despite improvements in financial inclusion. - Gender-based disparities in jobs and wages persist in the RMG sector; automation has shifted hiring toward male workers in some cases. - Policy responses (selected): - Education and vocational training to address labor market demands and social causes such as child marriages. - New Child Marriage Restraint Act adopted in 2017; action plan to end child marriage being finalized. - Programs cited: Female Secondary School Assistance Program; Technical and Vocational Education and Training (TVET) Reform; Skills Towards Employment and Productivity (STEP); Northern Areas Reduction of Poverty Initiative (NARI). - Current annual development plan sets various targets for education and health; Bangladesh’s expenditure on health could benefit from a boost compared with regional countries. - Reducing gender discrimination via strong legal framework; implement proposed amendments to the labor act to ensure compliance with international standards. - Consider exploring policies from other countries, e.g., ‘Back to Work’ in Mauritius. - Policies to improve access to finance for women: directed lending, refinancing facilities, dedicated customer support, and financial literacy programs with agencies and private partners. ### Annex VIII — Financial Inclusion in Bangladesh (selected findings and statistics) - No-frill accounts introduced in 2010 for farmers to receive government transfers; coverage later expanded to other groups. - Mobile financial services and agent-based banking expansion: - Five mobile phone operators, eighteen banks with mobile financial services, and fourteen banks offering agent based banking as of December 2017. - Number of agents for mobile banking services increased from 414,170 in 2014 to 758,570 in 2017. - Number of active mobile money accounts increased from 0.7 million to 27 million between 2014 and 2017. - Agents for agent-based banking have grown, reaching1,847 in Jun 2017. - Microcredit provides 10 percent of private sector credit extended by the banking system. - Other measures promoting financial inclusion: - Mandating banks to open fifty percent of their branches in rural areas. - Launching National Payment Switch Bangladesh (NPSB) for interoperability among banks; NPSB processes interbank ATMs, POS, and Internet Banking Fund Transfer (IBFT) transactions. - More than 9,000 ATMs and close to 36,300 Point of Sales machines countrywide. - Access to finance improvements for SMEs and priority sectors: - Agricultural and Rural Credit Policy and Program set interest ceilings and disbursement targets. - Encouragement for financial institutions to set credit targets for SMEs, especially women entrepreneurs. - Between 2010 and 2017, loan disbursements to women entrepreneurs more than doubled, supported by refinance facilities for banks and NBFIs that provide personally guaranteed uncollateralized loans at preferential rates. ### 5. While these efforts have yielded remarkable progress in financial inclusion, they have ### 5. While these efforts have yielded remarkable progress in financial inclusion, they have ### Progress and emerging challenges - Financial inclusion has expanded through targeted disbursements and mobile finance services. - Non-performing loans (NPLs) have decreased in the agriculture sector compared with three years ago, but there has been a sharp increase in the SME sector during the same period. - Mobile finance services expanded coverage of financial services but increased: - use of informal channels for remitting; and - risks of money laundering/terrorist financing. - Dedicated windows/desks for women and SME entrepreneurs have been set up in creditor institutions to serve as helpdesks and to assist with Know Your Customer (KYC) regulations. ### Policy measures and supervisory actions - Authorities are planning to revisit disbursement targets for priority sectors in consultation with creditor institutions. - Strengthened KYC policies are being implemented to enhance monitoring of borrowers’ credit quality, including requiring the national identity card for accessing credit. - For mobile financial services, authorities have introduced caps on mobile transactions and limits on the number of transactions and amounts.2 - The forthcoming National Financial Inclusion Strategy will provide an overarching framework, focusing on credit growth in priority sectors, SME, gender, and rural areas. - The strategy should be implemented rigorously with a strong accountability framework, supported by periodic surveys and impact assessment. ### Institutional and inter-institutional context - Bangladesh Bank is the source of data and policy implementation referenced (e.g., mobile finance caps).2 - IMF engagement in Bangladesh spans macroeconomic and financial sector policy support, with collaboration across the World Bank and Asian Development Bank noted elsewhere in the document. ### Key statistics and institutional data (as reported in the surrounding annex) - Quota: 1,066.60 SDR Million (100.00 percent) - Fund holdings of currency (exchange rate): 932.60 SDR Million (87.44 percent) - Reserve tranche position: 134.08 SDR Million (12.57 percent) - Net cumulative allocation (SDR Department): 510.40 SDR Million (100.00 percent) - Holdings (SDR Department): 962.43 SDR Million (188.56 percent) - Outstanding ECF arrangements: 630.82 SDR Million (59.14 percent of quota) - Latest Financial Arrangements (In millions of SDRs): - ECF Apr. 11, 2012–Oct. 29, 2015: Amount Approved 639.96; Amount Drawn 639.96 - ECF Jun. 20, 2003–Jun. 19, 2007: Amount Approved 400.33; Amount Drawn 316.73 - ECF Aug. 10, 1990–Sep. 13, 1993: Amount Approved 345.00; Amount Drawn 330.00 - Projected Payments to the Fund (In millions of SDRs): - 2018 Principal 36.57; Charges/Interest 0.02; Total 36.58 - 2019 Principal 82.28; Charges/Interest 0.02; Total 82.30 - 2020 Principal 91.42; Charges/Interest 0.02; Total 91.44 - 2021 Principal 127.99; Charges/Interest 0.02; Total 128.01 - 2022 Principal 118.85; Charges/Interest 0.02; Total 118.86 2 More information on the actual amounts included in this cap are published on the Bangladesh Bank website. https://www.bb.org.bd/fnansys/paymentsys/mobilefin.php *Prepared by Asia and Pacific Department (With inputs from other departments, the World Bank, and the Asian Development Bank).* ### 13. Other structural policies. The World Bank keeps the IMF informed about its work on ### cr18158 - 13. Other structural policies. The World Bank keeps the IMF informed about its work on ### Other structural policies and interagency coordination - The World Bank keeps the IMF informed about its work on governance and anti-corruption, local government and decentralization, and private sector development. Upstream sharing allows the IMF to comment on such work before it is finalized. - 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 (March 2018) - Cumulative public sector borrowing from ADB as of December 31, 2017: US$19.4 billion (260 loans). - Technical assistance (TA) grants as of December 31, 2017: US$258.4 million (432 projects). - ADB approved sovereign loans in 2017 totaling US$1.4 billion, including: - Power System Enhancement and Efficiency Improvement Project: US$616 million (of which US$16 million is from concessional ordinary capital resources loans (COL)) - Third Public Private Infrastructure Development Facility (Tranche 1): US$260 million (of which US$10 million is from COL) - Third Urban Governance and Infrastructure Improvement Project (Additional Financing): US$200 million (of which US$100 million is from COL) - South Asia Subregional Economic Cooperation Dhaka-Northwest Corridor Road, Phase 2 (Tranche 1): US$300 million (of which US$50 million is from COL) - ADB-supported private sector projects as of December 31, 2017: 14 projects worth US$1,005 million. - 2017 approvals for Reliance Bangladesh LNG and Power Project (phase 1): - Loan: US$253 million - Political risk guarantee: US$330 million - Project capacity: 718 MW combined cycle gas-fired power plant (phase 1 of a total 3,000 MW) ### Country Partnership Strategy (CPS) 2016–2020 - CPS approval date: 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. - CPS lending target for 2016–2020 (including non-sovereign lending): US$8 billion. - TA resources average included: US$4.3 million per annum and above. - COBP 2018–2020 approval: August 2017. - Drivers of change prioritized: higher private sector participation, addressing institutional capacity constraints and improving governance, deepening regional cooperation and integration, promoting gender equality. - Five-year cumulative cofinancing (2013–2017): US$3.8 billion leveraged. - Cumulative direct value-added official cofinancing by end-2017: - Investment projects: US$8.2 billion for 61 projects - Technical assistance projects: US$85.7 million for 108 projects - Cofinancing in 2017 (projects and amounts): - Japan International Cooperation Agency — South Asia Subregional Economic Cooperation Road Connectivity-Additional Financing: US$279.27 million - Japan International Cooperation Agency — South Asia Subregional Economic Cooperation Dhaka-Northwest Corridor Road Project, Phase 2-Tranche 1: US$242.52 million - Export Import Bank of Korea — South Asia Subregional Economic Cooperation Chittagong-Cox’s Bazar Railway Project, Phase 1-Tranche 1: US$99.04 million - Export Import Bank of Korea — Secondary Education Sector Investment Program-Tranche 2-Additional Cofinancing: US$76.02 million - Japan Fund for Poverty Reduction — Bangladesh Power System Enhancement and Efficiency Improvement Project: US$2 million ### ADB economic and sector work program (2017) - ADB publications: Asian Development Outlook and Asian Development Outlook Update (annual). - BRM (Bangladesh Resident Mission) bimonthly Economic Indicators Update. - 2017 study completed: Southwest Bangladesh Economic Corridor Comprehensive Development Plan — outlines industries to promote, infrastructure needs, and necessary institutional frameworks, policies and regulations. ### Statistical issues — assessment of data adequacy for surveillance (April 2018) - Overall: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected areas: national accounts, fiscal, and external sector statistics. - National Accounts: - Annual GDP time series base year: 2005/06 (benchmark published by BBS in 2013). - Shortcomings: - Value added of residential dwelling construction depends on data from a 1980/81 survey. - Absence of a comprehensive producer price index reduces the quality of industry price-change estimates. - Planned revision: entire GDP time series based on 2015/16 benchmark expected to be published in financial year 2019/20. - Final annual GDP estimates publication lag: now four, rather than ten, months after reference period. - Technical assistance: use of value-added tax data to compile quarterly GDP estimates and construct a statistical business register. - Price Statistics: - CPI series base year: 2005/06 introduced July 2012; improved coverage. - Concerns raised about CPI reliability; further improvements underway including incorporation of recent household survey and COICOP. - Producer price index base year: 1988/89 (outdated and requires urgent attention). - IMF provided technical assistance in CPI and related areas. - Government Finance Statistics: - Ministry of Finance revising Budget and Accounting Classification System (BACS) to follow GFSM 2014; expected incorporation into the FY18 Budget. - Current reporting: budgetary central government flow data, including COFOG, for the GFS yearbook. No stock data reported. - Coverage of extrabudgetary and local government units outside central government is inadequate. - Bangladesh Bank provides data to the World Bank-IMF Quarterly Public Sector Debt Statistics database. - Monetary and Financial Statistics: - Bangladesh Bank compiles monetary data using standardized report forms (SRFs). - SRFs reported electronically to the IMF regularly; consistent SRF-based time series available from December 2001. - No survey of Other Financial Corporations (OFCs) yet available. - Financial Soundness Indicators: - Bangladesh reports all 12 core and 9 encouraged FSIs for deposit takers and two FSIs for real estate markets for posting on the FSI website. - FSIs are reported with semi-annual frequency and long lag. - External Sector Statistics (ESS): - BB published a quarterly BPM6 compliant time series 2005–2017 for balance of payments and IIP; biannual CPIS June 2014–June 2017; annual coordinated direct investment survey until 2016; quarterly external debt statistics until 2017 Q3. - Improvements aided by Japan Subaccount Project TA. - Further steps needed to improve ESS quality and timeliness; TA planned under SARTTAC ESS follow-up project. - Data Standards and Quality: - Bangladesh participated in GDDS in March 2001; superseded by e-GDDS in 2015. - Implementing e-GDDS: began publishing in October 2017 a set of macroeconomic data in both human- and machine-readable (SDMX) formats. - Objective: subscribe to the Special Data Dissemination Standard. ### Table of Common Indicators Required for Surveillance (As of April 24, 2018) — selected entries (dates preserved) - Exchange Rates: Date of latest Observation 03/2018; Date Received April 2018; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation 03/2018; Date Received April 2018; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - Reserve/Base Money: 03/2018; April 2018; D; D; D. - Broad Money: 03/2018; April 2018; M; M; M. - Central Bank Balance Sheet: 03/2018; April 2018; M; M; M. - Consolidated Balance Sheet of the Banking System: 03/2018; April 2018; M; M; M. - Interest Rates: Date of 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: 03/2017; April 2018; M; M; M. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Dec. 2016; April 2017; M; M; M. - Stocks of Central Government and Central Government-Guaranteed Debt: Jun. 2016; Nov. 2016; Q/M; Q/M; Q/M. - External Current Account Balance: Q4/2017; April 2018; M; M; M. - Exports and Imports of Goods and Services: 01/2018; April 2018; M; M; M. - GDP/GNP: FY2016; Jan/2018; A; A; A. - Gross External Debt: FY2016; Nov. 2016; A; A; A. - International Investment Position: Q4/2017; April 2018; Q; Q; A. ### Debt Sustainability Analysis — summary (Staff Report for the 2018 Article IV Consultation) - This DSA fully updates the May 2017 joint IMF/WB DSA. - Risk assessments: - Risks of external debt distress: low. - Overall debt distress: low. - FY17 fiscal deficit: remains well below the 5 percent of GDP budget target. - Key drivers in FY17: spending control and slower implementation of development projects more than compensated for revenue underperformance. - National Savings Certificates (NSCs) issuance: remains high. - Medium-term outlook: debt ratios projected to remain on a sustainable path, assuming continued spending restraint and deficit used to finance productive investment. - Policy priority: boosting budget revenue is key to creating fiscal space for diversification and growth. - Authorities are delaying VAT reform implementation further by two years. - Key risks: additional costs from spending pressures ahead of the parliamentary elections and costs related to Rohingya refugees. ### DSA background and headline debt stocks (end-FY17) - DSA horizon: analyzes trajectories through FY38. - Total public and publicly guaranteed (PPG) external debt: US$35 billion (14.3 percent of GDP). - Composition of PPG external debt: - Multilateral: 23.3 (percent of PPG debt 66.6) - World Bank (IDA): 13.1 (percent of PPG debt 37.4) - Asian Development Bank: 8.2 (percent of PPG debt 23.5) - Bilateral: 5.8 (percent of PPG debt 16.7) - Japan: 3.2 (percent of PPG debt 9.2) - China: 1.0 (percent of PPG debt 2.9) - Short Term Debt: 2.5 (percent of PPG debt 7.3) - Guarantees (SOE): 3.3 (percent of PPG debt 9.5) - Total public sector domestic debt (end-FY17): Taka 3731.6 billion (Percent of Domestic Debt 100.0) - Bangladesh Bank: 158.7 (percent of domestic debt 4.3) - Deposit Money Banks: 1407.0 (percent of domestic debt 37.7) - T-bills: 235.2 (percent of domestic debt 6.3) - T-bonds: 1117.6 (percent of domestic debt 29.9) - Others: 54.3 (percent of domestic debt 1.5) - Nonbanks: 2165.9 (percent of domestic debt 58.0) - NSCs: 1909.0 (percent of domestic debt 51.2) ### Macroeconomic assumptions and projections (FY16–FY20) — selected series (values preserved) - Real GDP growth (Current DSA): - FY16: 7.1 - FY17: 7.3 - FY18: 7.0 - FY19: 7.0 - FY20: 7.0 - Inflation (annual average) (Current DSA): - FY16: 5.9 - FY17: 5.4 - FY18: 5.9 - FY19: 6.0 - FY20: 6.0 - Fiscal deficit (in percent of GDP) (Current DSA): - FY16: -3.5 - FY17: -3.4 - FY18: -4.3 - FY19: -4.8 - FY20: -4.4 - Current account (in percent of GDP) (Current DSA): - FY16: 1.9 - FY17: -0.6 - FY18: -1.8 - FY19: -2.3 - FY20: -2.4 - Remittance growth (Current DSA): - FY16: -1.6 - FY17: -14.7 - FY18: 9.0 - FY19: 3.5 - FY20: 4.5 ### Key narrative points on assumptions - Real GDP growth strengthened to 7.3 percent in FY17 from 7.1 percent in FY16, driven by domestic demand; projected to moderate to 7.0 percent in FY18. - Inflation increased slightly to 5.9 percent in FY17 (y/y) and is expected to decline to below 6 percent, close to the central bank’s 5.5 percent average inflation target. - FY17 fiscal deficit: 3.4 percent of GDP (well below 5 percent budget target). - Current account turned into a small deficit in FY17: 0.6 percent of GDP in FY17. - Exports growth (FY17): 1.7 percent - Imports growth (FY17): 9.0 percent - Remittances change (FY17): -14.7 percent - Remittances expected to reach US$14 billion by June 2018. *cr18158 - 13. Other structural policies. The World Bank keeps the IMF informed about its work on* ### 5. All debt indicators under the baseline remain well within the respective policy- ### 5. All debt indicators under the baseline remain well within the respective policy- ### Baseline debt outlook - PV of PPG external debt to GDP ratio: - 10.4 percent of GDP in FY17 - projected to increase to 13.1 percent in FY23 - projected to remain stable reaching 9.2 percent of GDP by FY38 - Other PPG indicators remain well within the respective policy-dependent solvency thresholds under the baseline scenario (Figure 1 and Tables 2–3). - The threshold for external debt service to revenue is breached under the extreme stress test scenario under the depreciation shock; the breach is described as small and temporary. ### External risks - Key external risks identified: - Contracting large amounts of short term debt. - A protracted slowdown in key export markets. - A rapid build-up of non-concessional debt. - Short term debt: - Risk highlighted by the small and temporary breach of the threshold in the short term. - RMG sector risk: - RMG sector accounts for around 80 percent of total exports. - Growth in the sector was 0.2 percent in FY 2017 (the lowest in the last fifteen years). - Average growth in the past five years has been half of what it used to be in the five years preceding. - Any slowdown in demand for RMG is a risk given the narrow export basket. - Rapid build-up of non-concessional debt: - Under the Belt and Road Initiative, Chinese authorities planned to finance several infrastructure projects, including investments from Chinese entrepreneurs in telecom, agriculture, power, and energy. - A line of credit with India totaling US$4.5 billion was signed in October 2017. - Higher non-concessionally externally-financed infrastructure spending could push up the debt path. ### Public DSA and fiscal position - Authorities committed to the 5 percent of GDP deficit target for FY18. - Budget targets: increases for both expenditures and revenues: - Expenditures targeted to increase by 26 percent. - Revenues targeted to increase by 32 percent. - Authorities likely to adjust spending in response to weaker revenues partly due to the delay in the VAT reform. - NSC issuance: - Continues at a rapid pace, exceeding the budgeted amount by a large margin. - Led to a net reduction in domestic bank financing. - By end-2017, the stock of NSCs reached more than double the amount compared to outstanding government borrowing from the banking sector. - DSA projection for PV of public debt to GDP ratio: - 29.2 percent in FY17 - projected to increase to 35 percent in FY23 - then trends down over the long term, remaining well within the benchmark value under the baseline and for all standard stress tests (Figure 2 and Tables 4-5). - The relatively high level of total public debt service to revenue ratio underscores the need to boost revenues, including by implementing the delayed VAT reform. - Budget risks: - Spending pressures ahead of the parliamentary elections. - Additional costs associated with the Rohingya refugees. - International support will continue to be essential in addressing the influx of Rohingya refugees. ### Contingent liabilities and SOCBs - Contingent liabilities from high NPLs in state owned commercial banks (SOCBs) could result in higher domestic debt, but potential impact appears manageable. - NPLs approach 30 percent of total SOCBs loans. - Total amount of NPLs represents about 2.0 percent of GDP (magnitude of potential risk to government’s balance sheet). - Actual NPLs could be higher than reported and could increase in the future, but: - Banks’ provisions against bad loans mitigate the fiscal risk. - Authorities are taking steps to address the NPLs in the SOCBs (see Staff Report). - Liquidity concerns in the SOCBs are currently limited. ### Staff's illustrative scenario: Rohingya crisis fiscal impact - Context: - As of March 2018, close to 900,000 refugees reside in Bangladesh. - Medium and long term economic, social, and environmental impacts could be large if repatriation does not proceed swiftly. - International pledges and appeals: - October 2017: international community pledged US$360 million under the Rohingya Refugee Crisis Response Plan to meet expenses until February 2018. - Several donors announced in-kind assistance worth more than US$50 million. - March 2018: a second Joint Response Plan launched with a funding request of US$951 million to cover needs from March until December 2018. - UNHCR launched a supplementary appeal of US$238 million for 2018. - Budget impact assumptions in the illustrative scenario: - Over the next six years, approximately Tk. 440 billion (US$5.4 billion) will be raised domestically borrowed with a higher interest rate. - A little over US$ US$1 billion will be borrowed externally on non-concessional terms given donor fatigue. - Import growth is expected to increase from 8 percent (baseline) to 9 percent to meet increased demands. - Illustrative scenario outcomes: - Deterioration and breach of the external debt service-to-revenue over the medium term. - Other external indicators deteriorate but remain below their respective thresholds. - PV of public debt-to-GDP ratio deteriorates by almost 1.5 percentage points of GDP on average over the projection period. - Scenario reinforces need to create fiscal space by implementing the VAT and need for continued donor support. - Important to rely on concessional financing to the extent possible to maintain sustainability. ### Conclusion - Staff judgment: risk of external debt distress and overall debt distress remains low. - Temporary breach: - Threshold for external debt service to revenue is breached temporarily under the most extreme stress test scenario. - Staff judge the risk of external debt distress to be low given the small and temporary nature of the breach. - Policy implications: - Need for donor support to mitigate the impact of the refugee crisis, especially over the next few years. - For needs arising from the refugee crisis and for project financing, important that authorities rely on concessional financing to maintain sustainability. *Source: cr18158* ### 12. The authorities agree with the low risk of debt distress and consider the level of debt ### 12. The authorities agree with the low risk of debt distress and consider the level of debt ### Authorities' assessment and policy stance - The authorities agree with the low risk of debt distress and consider the level of debt as manageable. - The composition of the current stock of public and publicly guaranteed external debt is largely concessional. - Authorities recognized the need for prudent debt management as terms from creditors are expected to harden reflecting the country’s graduation from lower income status. - They clarified that the current large disbursements reflect debt for large infrastructure. - Fiscal policy continues to be guided by the 2009 Public Money and Budget Management Act, which stipulates that public debt as a percent of GDP should be gradually declining. - The authorities noted that the Rohingya refugee crisis is not expected to have a major impact on government deficits and public debt. - An internal debt sustainability analysis has also been planned. ### Key projections, indicators, and macroeconomic assumptions (selected) - External debt (nominal): 19.1 (2015); 18.5 (2016); 18.5 (2017); 17.5 (2018). - Public and publicly guaranteed (PPG) external debt: 15.1 (2015); 14.5 (2016); 14.3 (2017); 14.2 (2018). - Change in external debt (2018): -0.9. - Identified net debt-creating flows (2018): -0.1. - Non-interest current account deficit (2018): -1.2. - Exports (2018): 14.6 (percent of GDP). - Imports (2018): 20.9 (percent of GDP). - Net current transfers (2018): -8.8 (negative = inflow). - Endogenous debt dynamics (2018): -0.6. - Contribution from nominal interest rate (2018): 0.6. - Contribution from real GDP growth (2018): -1.2. - Contribution from price and exchange rate changes (2018): -0.9. - PV of external debt (in percent of GDP): 14.1 (historical reference), rising to 16.2 and 18.9 in projections. - PV of PPG external debt (in percent of GDP): 9.9 (historical reference), rising to 12.0 and 12.7 in projections. - PV of PPG external debt (in percent of exports): 65.5 (historical reference), rising to 77.9 and 82.4 in projections. - PV of PPG external debt (in percent of government revenues): 97.1 (historical reference), rising to 101.5 and 106.0 in projections. - Debt service-to-exports ratio (in percent): 16.7 (2018); projected values include 15.5, 14.1, 13.0, 11.9, 11.0. - PPG debt service-to-exports ratio (in percent): 11.8 (2018); projected values include 11.2, 10.4, 9.5, 8.7, 8.0. - Total gross financing need (Billions of U.S. dollars): 17.9 (2018); projected path includes 17.8, 16.7, 15.3, 14.8, 14.0; longer-run projections include 21.2 and 84.8. - Key macroeconomic assumptions: - Real GDP growth (in percent): 6.6 (2015); 7.1 (2016); 7.3 (2017); 6.3 (2018); projected 7.0 for the projection period. - GDP deflator in US dollar terms (change in percent): 5.9 (2015); 5.9 (2016); 5.1 (2017); 5.5 (2018); projected 2.0 in later years. - Effective interest rate (percent): 2.7 (2015); 2.2 (2016); 3.6 (2017); 1.7 (2018); projected up to 5.6 in later years. - Growth of exports of G&S (US dollar terms, in percent): 2.7 (2015); 9.4 (2016); 1.8 (2017); 11.1 (2018); projected 10.3 and similar later. - Growth of imports of G&S (US dollar terms, in percent): 0.3 (2015); 5.0 (2016); 9.2 (2017); 11.6 (2018); projected 8.0–9.2 in later years. - Grant element of new public sector borrowing (in percent): projection path includes 27.3, 24.0, 21.4, 21.5, 15.0, 13.4, 20.4, 9.6, 6.8, 8.7 (various projection years). - Government revenues (excluding grants, percent of GDP): 9.6 (2015); 10.0 (2016); 10.2 (2017); 10.5 (2018); projected 10.6–10.8. ### Debt dynamics and public sector debt indicators (selected) - Public sector debt (percent of GDP): 33.7 (2015); 33.3 (2016); 33.2 (2017); projected path includes 34.0, 35.2, 36.1, up to 40.5 and projected 34.3 (2028) and 40.5 (2038 in some tables). - Foreign-currency denominated share of public sector debt (percent of GDP): 15.1 (2015); 14.5 (2016); 14.3 (2017); 14.2 (2018). - Change in public sector debt (2018): 0.8; projected 1.2, 0.9, 0.9. - Primary deficit (percent of GDP): 1.8 (2015); 1.4 (2016); 1.6 (2017); projected 1.4 (2018) and up to 2.9 in some projection years. - Revenue and grants (percent of GDP): 9.8 (2015); 10.1 (2016); 10.2 (2017); 10.7 (2018). - Automatic debt dynamics (2018): -1.7. - Gross financing need (percent of GDP): 7.8 (2015); 6.5 (2016); 9.2 (2017); 9.8 (2018); projected down to 3.9 and lower in later years. - PV of public sector debt-to-revenue and grants ratio (percent): historical and projected values include 281.4, 277.6, 289.7, rising to 342.3 and 294.5 in various projection intervals. - PV of public sector debt-to-revenue ratio (percent): historical and projected values include 282.9, 282.8, 294.6, 300.6, 309.4, 318.8, 327.4, 348.4, 299.6. - Debt service-to-revenue and grants ratio (in percent): 26.8 (2015); 25.5 (2016); 55.4 (2017); 49.8 (2018); projected 45.0, 38.3, 39.2, 27.1, 27.0, 26.6, 25.3. ### Stress tests, sensitivity analysis, and scenarios (selected results) - Figure and table notes indicate the most extreme stress test is the test that yields the highest ratio on or before 2028. - In figure b it corresponds to a One-time depreciation shock. - In figure c to a Terms shock. - In figure d to a One-time depreciation shock. - In figure e to an Exports shock. - In figure f to a One-time depreciation shock. - Table scenarios and selected outcomes: - Baseline PV of debt-to-GDP ratio values (selected years): 2018 baseline values and projections show increases (table entries present many year-by-year values). - A2 (New public sector loans on less favorable terms in 2018-2038) produces higher ratios (for example, entries such as 2 10 11 12 12 14 15 18 15 appear in scenario tables). - B6 (One-time 30 percent nominal depreciation relative to the baseline in 2019) is included in bound tests and generates elevated stress outcomes (tables show higher PV and ratios under B6). - Table 5 alternative scenarios include A2: Primary balance unchanged from 2018 leads to public debt rising to 41 (2028) and 46 (2038) in that scenario. - Table 5 bound test B4: One-time 30 percent real depreciation in 2019 yields public debt values such as 30 35 36 36 37 38 41 39 (year-sequence in that scenario). - Memorandum items and sensitivity inputs: - Nominal GDP (Billions of US dollars): 195.1 (2015); 221.4 (2016); 249.7 (2017); 272.6 (2018); projections include 298.5, 326.5, 356.4, 388.9, 424.5, 645.1, 1476.2. - Gross workers' remittances (Billions of US dollars): 15.2 (2015); 14.9 (2016); 12.7 (2017); 13.9 (2018); projected 14.4, 15.0, 15.7, 16.5, 17.3, 23.0, 41.3. ### Policy implications and recommended actions (drawn from authorities' statements and framework) - Maintain prudent debt management as creditor terms are expected to harden with graduation from lower income status. - Continue adherence to the 2009 Public Money and Budget Management Act objective of a gradually declining public debt-to-GDP ratio. - Undertake the planned internal debt sustainability analysis to monitor evolving risks and inform borrowing strategy. - Monitor and manage large infrastructure-related disbursements to ensure debt remains sustainable under alternative scenarios, including less favorable financing terms and exchange rate shocks. *Source: cr18158 - 12. The authorities agree with the low risk of debt distress and consider the level of debt (IMF country report content provided).* ### 1. Our Bangladesh authorities thank staff for the recent frank and productive ### 1. Our Bangladesh authorities thank staff for the recent frank and productive ### Engagement with the Fund and overall assessment - Authorities express appreciation to Management and staff for continued engagement and look forward to further engagement, especially through Fund technical assistance. - Authorities broadly agree with staff’s assessment and recommendations regarding the economy, although there are some differences in views. - They reiterate their strong commitment to maintain macroeconomic stability and promote inclusive growth. ### Recent growth performance and outlook - FY17 GDP growth accelerated to 7.3 percent from 7.1 percent in FY16, driven by robust domestic demand. - GDP growth has averaged more than 6.0 percent over the last two decades. - Authorities project FY18 growth of about 7.65 percent, supported by strong domestic demand, exports and remittances. - Structural drivers: economy diversifying away from agriculture with strong contributions from manufacturing and services; government reform initiatives (including special economic zones) aimed at crowding in private domestic and foreign direct investment (FDI) to create jobs and raise potential growth. ### Investment, FDI objectives, and infrastructure imports - Under the 7th Five-Year Plan (FY16-20) and objective of becoming a middle-income country by 2021, authorities prioritize creating an enabling environment for FDI and private sector engagement. - Targets: raise private investment share from 22 to 27 percent of GDP and mobilize an additional US$10 billion in FDI inflows by the end of the period. - Recent measures: central bank simplified and rationalized the sale process of foreigners' equity investment in public and private entities. - Higher infrastructure-related imports are being undertaken to improve infrastructure to attract FDI and increase economic diversification and output. ### Inflation and monetary policy - Inflation trajectory: after picking up in 2017 following higher flood-related food prices, inflation has declined due to government efforts to increase food imports and is expected to stabilize further in the second half of FY18 with an expected recovery in crop harvests. - In March 2018, year-on-year inflation stood at 5.7 percent. - Non-food inflation has remained broadly stable. - Broad money growth remains close to nominal GDP growth and inflationary pressures are not expected to arise from monetary developments. - Monetary policy stance: will remain prudent; authorities vigilant against upside risks and ready for appropriate adjustments in both policy rates and reserve requirements. ### Risks: food prices, NPLs, and political environment - Authorities broadly share staff’s assessment of risks, including potential second round effects from higher food prices and the impact of higher non-performing loans (NPLs) in the banking system. - Concern: sustained increases in NPLs and weak governance in the banking sector could impair credit extension and support for growth. - Political risk: authorities do not see the likelihood of economic activity being disrupted by political unrest ahead of elections in December 2018; incidents of political unrest have remained contained over the last several months. ### Rohingya refugee crisis risks - Emerging macro risk from slow progress in resolving the Rohingya refugee crisis. - Immediate needs (food, health, shelter, water and sanitation) have been covered by donor support for now. - Risks from delay in repatriation: potential fiscal pressures, social and environmental costs, and security concerns. - Urgent needs: expand and sustain donor support and upgrade infrastructure before the upcoming monsoon season. ### External sector and current account - Authorities agree the recent increase in current account deficit (CAD) stems from large capital imports related to mega-projects and food-grain imports due to crop loss and is likely to continue over the short to medium-term. - Reserve coverage remains adequate at about seven months of imports. - Reserve outlook expected to benefit from strong growth in export earnings and a rebound in remittances. - Authorities confident of improved export performance in RMG and other sectors via bilateral and multilateral trade negotiations to widen market access and diversify the export basket. - Exchange rate: recent depreciation of the Taka reflects increased demand for foreign currency from higher imports; authorities view excessive exchange rate fluctuations as undesirable and intervene as needed to contain volatility. ### Fiscal stance and budgetary outlook - Fiscal deficit (excluding grants) in FY18 is expected to remain at around 5.0 per cent. - Budget financing mainly through National Savings Certificates (NSCs) and from banks and non-NSC sources. - Given encouraging growth projections, no additional fiscal stimulus is planned this year. - No new budget measures expected in the FY19 budget to be presented in June 2018, though some budget allocation may be needed for the Rohingya refugee crisis. ### Revenue mobilization and tax administration - Authorities recognize the urgent need to increase government revenues and raise the tax-to-GDP ratio from its current low level. - Postponing the launch of the VAT reform may have a temporary adverse impact on revenue collection, but authorities expect mitigation from ongoing efforts to strengthen tax administration. - Direct tax policy reforms achievements: increased registration of new taxpayers, significant improvement in return filing, and increased efforts to settle big tax arrears cases pending in the courts. - Customs: progress in improving customs risk management with the objective to implement a digitalized risk management regime. ### Public financial management and budget execution - Authorities have carefully noted staff’s recommendations on strengthening tax administration, control of budget allocations, monitoring of budget execution, and dovetailing of recurrent and Annual Development Program (ADP) spending; efforts will be made for improvements. - Steady progress in implementing the 2016-21 public financial management reform strategy with significant improvements in the timeliness of data reporting for both monthly and annual fiscal data. ### Capital markets and NSC reform - Authorities share view on the crucial role of an effective capital market in mobilizing savings and supporting investment and growth; NSC reform is a priority. - Need to promote market-based saving instruments while ensuring the transition is not abrupt to preserve access to savings instruments during market development. - A reform plan has been approved, including creating a database of existing investors to improve monitoring and reduce misuse. - Medium- to long-term: structural reforms of NSC, including reform of the pricing mechanism, will be considered. ### Banking sector supervision and governance - Central bank engaged in strengthening supervision and corporate governance in banks to lower credit and concentration risks and subsequently lower NPLs. - Assessment: overall banking sector is stable despite capital adequacy concerns in a few banks. - Authorities see scope for improving banking sector regulation and enforcement and are taking urgent steps. - Macro-prudential measures used to restrain unproductive lending: closer surveillance of adherence to guidelines, strict surveillance of end-use of bank loans, encouragement for banks to limit medium- and long-term investment loans to corporate borrowers. - NPL recovery rate remains a challenge partly due to lengthy legal processes. - Central bank has full operational autonomy with respect to supervision of state-owned commercial banks (SOCBs). - Reform of state-owned banks continues to be a government priority; these banks are being recapitalized in a phased manner. - Compliance of SOCBs with their MOUs with Bangladesh Bank is being closely monitored. ### Financial inclusion and microfinance - Bangladesh has been a pioneer in financial inclusion; strategies to promote financial inclusion continue to be part of the central bank’s sustainable growth agenda and are included in the 7th Five-Year Plan. - Measures to enhance microfinance sector (MFS) financial stability: restrictions on opening multiple accounts and instituting transaction ceilings. - Proposal: establish a microfinance credit information bureau for the microfinance regulator to create a sound credit culture and help reduce transaction costs for borrowers and lenders. - Agent banking system (rolled out two years ago) has been expanding significantly as a low-cost, accessible alternative to branch-based services (cash deposits, withdrawals, remittance disbursement, small value loan disbursement and recovery, and cash payments under government's social safety net programs). - Agent banking playing a valuable role in bringing unbanked people in remote areas into the mainstream financial system. ### Social transformation and gender - Economic transformation driven in large part by social changes, including empowerment of women and female labor force participation in RMG, agriculture and service sectors. - Significant strides in educating girls and increasing women's voice in household and public spheres, translating into improvements in children’s health and education and increases in average life expectancy compared to peer countries. - Government has prioritized gender equality in its 7th Five-Year Plan and is working with development partners to address constraints such as lack of skills and education and taking steps to upgrade infrastructure to improve participation. *Source: Authorities’ statement in IMF staff report chapter.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18158.pdf_