## 1bgdea2019001 ## Source details **Canonical URL:** [1bgdea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1bgdea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1bgdea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1bgdea2019001.pdf.json) --- ### Recent developments and macroeconomic outcomes - Real GDP growth increased to 7.9 percent in FY18. - Private consumption growth was exceptionally strong in FY18, influenced by the rebound in remittance and exports growth. - Average annual inflation picked up slightly to 5.8 percent in FY18 due mainly to higher food prices. - The current account deficit expanded to 3½ percent of GDP in FY18 with higher import growth of 25 percent, reflecting capital goods imports for mega infrastructure projects and temporary flood-related food imports. - Gross official reserves: 33.0 (billions of U.S. dollars) in FY18. - Exports, f.o.b.: 40.7 (billions of U.S. dollars) in FY18 (annual percent change 12.5 percent). - Imports, f.o.b.: -56.9 (billions of U.S. dollars) in FY18 (annual percent change 4.5 percent). ### Near-term outlook and projections - Growth projections: - Growth is projected to be strong at above mid-7 percent in FY19 and FY20. - Authorities’ estimate: 8.1 percent growth in FY19. - Drivers: - Recovery after pre-election slowdown in private investment; robust growth expected led by private consumption with strong remittance inflows and smaller negative contributions from net exports. - Inflation and external balance: - Average annual inflation expected close to the central bank’s 5½ percent target. - Current account deficit projected to decline to around 2 percent of GDP with export and remittance growth of 13 percent and 11 percent, respectively; import growth expected to slow to 5 percent from FY18. - Staff macro projection table (selected): - Real GDP growth current: 2018/19 8.0, 2019/20 7.6, 2020/21 7.3, 2021/22 7.3, 2022/23 7.3, 2023/24 7.3. - Inflation current: 2018/19 5.8, 2019/20 5.8, 2020/21 5.6, 2021/22 5.5, 2022/23 5.5, 2023/24 5.5. - Primary fiscal deficit (percent of GDP) current: 2018/19 3.1, 2019/20 3.0, 2020/21 2.9, 2021/22 2.6, 2022/23 2.4, 2023/24 2.4. - Current account deficit (percent of GDP) current: 2018/19 2.0, 2019/20 2.1, 2020/21 2.1, 2021/22 2.0, 2022/23 2.0, 2023/24 2.0. ### Risks to the outlook - Risks are tilted downward. - Key downside risks: - Slow progress in resolving the Rohingya refugee crisis; limited repatriation of over 700,000 Rohingya refugees; Joint Response Plan called for mobilization of around US$1 billion for CY2018 and 2019. - Slow progress in banking sector reforms undermining financial stability and growth, posing fiscal risks. - Weaker-than-expected global growth slowing exports and remittances. - Rising protectionism and natural disasters. ### Executive Board and staff assessments - Commendations: - Directors commended strong and stable economic performance, reduced income poverty, and improving social indicators. - Commended Bangladesh Bank for keeping inflation broadly stable and fiscal discipline by authorities. - Policy guidance: - Promote productive investments and upgrade the economic policy framework to reach upper middle-income status. - Gradual increase in exchange rate flexibility to buffer external shocks, preserve foreign reserves, and modernize the monetary policy framework. - Keep public debt ratio broadly stable and step up revenue efforts to finance infrastructure, support the vulnerable, and meet climate costs. - Resolve banking sector weaknesses: high NPLs and rising restructured/rescheduled loans require resolute reform measures. - Improve public financial management, public investment management, tax administration, AML/CFT framework, export diversification, business environment, and human capital. - Create fiscal space for climate adaptation and mitigation; manage natural disaster impacts; promote climate-friendly investments. ### Key policy recommendations (Main policy recommendations) - Monetary: - Bangladesh Bank should monitor inflation developments closely and stand ready to adjust its stance as needed. - Gradual increase in exchange rate flexibility recommended to help buffer shocks and preserve reserves. - Fiscal: - Fiscal policy should keep the public debt ratio broadly stable. - Raising tax revenue is indispensable to finance infrastructure investment; coordinate tax administration and tax policy. - Banking sector: - Comprehensive reform: enhanced regulation and supervision, SOCB reforms, tighter criteria for loan rescheduling/restructuring, stronger corporate governance, enhanced legal systems for loan recovery. - Governance and public finance: - Continuous improvements in public financial management and anti-corruption frameworks. - Business environment and climate: - Improve business environment to boost private investment and export diversification. - Create fiscal space for adaptation and mitigation of climate risk, manage natural disaster impacts, and promote climate-friendly investments. --- ### 8. Monetary policy has been supportive — stance, risks, and recommended reforms - Monetary aggregates (as of May 2019): - Reserve money growth: 16 percent (yoy), above BB’s FY19 target of 8 percent. - Broad money growth: close to the 12 percent target. - Growth of M3 higher by about 2 percentage points than M2 growth (includes NSC issuance). - Credit and interest rates: - Growth of credit to the private sector slowed from its late-2017 peak; expected to remain solid. - Bank deposit and lending rates broadly stable. - Constraints on rate reduction: need to reduce advances-to-deposits ratio from 85 percent to 83.5 percent; high issuance of NSCs adverse to bank deposits; high and growing NPLs. - Authorities tried to keep lending rates in single digits through moral suasion. - Inflation outlook and risks: - Inflation broadly stable around the BB target following April 2018 easing. - Inflation expectation survey points to elevated expectations of 6-7 percent. - Nonfood inflation increasing moderately; potential impacts from electricity tariff increases and VAT reform. - Authorities saw inflation risk as broadly balanced; noted decelerating monetary and credit growth and a bumper harvest in FY19 reducing food inflation. - Banking sector asset quality (selected figures): - NPL ratio: 9.3 percent at end-2017 → 10.3 percent at end-2018. - SOCB end-2018 NPL ratio: 30 percent. - Total stressed advances (NPLs + restructured + rescheduled loans) exceed 20 percent of total loans. - Total stressed advances amount to almost 9 percent of GDP. - SOCB shortfall in required capital: 1 percent of GDP (authorities’ estimates). - Shortfall in NPL provisions: Tk 66 billion (close to 12 percent of required provisions) at end-2018. - Recommended banking-sector actions (time-bound plan highlights): - Avoid regulatory forbearance; impose strict and prompt remedial actions; preserve BB independence; adopt risk-based supervision; establish clear entry/exit strategy and an emergency financing facility. - Comprehensive review of banking sector assets, building on special audit for SOCBs in trade finance. - Tighten criteria for rescheduling/restructuring and limit repeated use. - Strengthen corporate governance, internal controls, loan concentration limits, fit and proper criteria, and beneficial owner identification. - Strengthen legal systems to expedite loan recovery and address willful defaulters. - Reassess SOCBs’ role: consider limiting number with clear public mandates and converting or closing others. - Monetary policy framework: - BB operates a de jure monetary targeting regime using reserve money as operational target. - Recommendation: adopt a rule-based interest rate targeting regime with market-based instruments. - Required building blocks: bolster understanding of inflation drivers, improve liquidity monitoring and forecasting, develop a well-functioning interbank market. ### Authorities’ views on banking measures - Authorities agree high NPLs are a concern but expect ongoing measures will be effective. - Most banks maintain sufficient provisions and net NPLs are relatively moderate; NPLs concentrated in SOCBs. - Loan rescheduling viewed as sometimes preferable to prevent output and employment losses; maximum of three reschedulings enforced with adequate provisioning. - Authorities working on legal definition of willful defaulters, a bank merger policy, and setting up an asset management company. - BB states it does not allow regulatory forbearance but considers economic costs when providing borrower relief. --- ### 26. A well-developed capital market — issues and reform options - Role and impediments: - A developed capital market important to support future growth. - Government securities market development hampered by rapid on tap sale increases of NSCs offering higher interest than government securities. - NSC cap enforcement has been difficult; a purchaser database expected to help enforce upper limits. - NSC reform measures and recommendations: - Recent measure: tax on NSC interest income increased from 5 percent to 10 percent to reduce incentives to buy NSCs and narrow NSC-to-deposit yield spread. - Recommended reforms: tie NSC rates to market yields; consider separating NSC issuance from direct budget financing via a separate entity using proceeds to buy government securities. - Governance and fiscal framework / public financial management: - New Budget Accounting and Classification System (BACS) under iBAS++ adopted; expected to improve reporting and enable accrual accounting in future. - Staff emphasized strengthening public investment management: align projects with priorities and financial resources; improve appraisal and selection; strengthen oversight of public corporations; integrate ADP with medium-term budget. - Electronic government procurement coverage should continue. - Medium-term debt management strategy (MTDS): - Last MTDS prepared in 2014; recent NSC increases reduced relevance. - New MTDS should consider reduced concessional financing with upcoming graduation from LDC status and increased market-based securities issuance due to NSC reforms. - Tax administration and revenue mobilization: - Improve tax administration via IT: electronic taxpayers’ registration, electronic filing of income tax and VAT returns; strengthen NBR’s risk-based auditing. - Governance and anti-corruption: - Control of corruption improved but remains modestly below South Asia and low-income country averages. - ACC lacks sufficient investigation capacity; asset declarations underused; recommend publication/verification of declarations and sanctions for non-compliance. - Reforms to reduce corruption vulnerability: strengthen financial oversight, public investment management, reduce taxpayer-tax collector interactions, improve AML/CFT, simplify regulatory procedures. - AML/CFT framework: - Progress guided by 2016 MER; sustained reforms needed: adopt risk-based supervision, increase bank capacity (particularly SOCBs), strengthen preventive measures for PEPs, define beneficial ownership, improve access to identifying information. - Economic diversification and business environment: - Need to diversify into more complex products; current revealed comparative advantage products have low complexity. - Reforms to business climate and human capital are key. - One Stop Service virtual platform consolidated company registration procedures. - Judicial reforms: monitoring to ensure commercial disputes settled within 500 calendar days by December 2019; commercial courts to be created at district levels. - Climate change: - Bangladesh vulnerable; CFF created in 2014 to track mitigation/adaptation investments. - Policy options: gradually eliminate costly energy subsidies; consider phased carbon taxes; enhance financial cover for disasters; stimulate climate-friendly investments; mobilize external funding. ### Staff appraisal — macro and policy summary (selected) - Macroeconomic performance: solid—strong growth, moderate inflation, narrowing current account deficit. - Growth drivers: rebound in remittances and exports supporting private consumption. - Inflation: within 5-6 percent range, broadly in line with BB target. - Current account projected around 2 percent of GDP; risks tilted downward (weaker global growth, protectionism, slow banking reforms). - Policy highlights: - BB to monitor inflation and adjust policy promptly. - Gradually increase exchange rate flexibility. - Increase revenues: expand tax base and modernize tax administration, simplify multiple VAT rates. - Banking sector priorities: enhanced regulation/supervision, risk-based supervision, SOCB reforms, tighter rescheduling criteria, stronger governance, improved legal systems. - Develop capital market and reform NSC system (pricing mechanism and separation from direct budget financing). - Improve public financial management and anti-corruption frameworks. - Expand export diversification and human capital to broaden private investment outside RMG. - Continue climate change efforts: create fiscal space for adaptation/mitigation and promote climate-friendly investments. - Recommendation: next Article IV consultation on the standard 12-month cycle. --- ### Box 2. Acting on Climate Change — vulnerability, actions, and policy options - Vulnerability and impacts: - Sixty percent of Bangladesh’s land surface is at five meters or less above sea level. - 1998 flooding affected over two-thirds of the country and caused damages/losses close to 5 percent of GDP. - Experts worry one-third of population may be at risk of displacement from rising sea levels and coastal erosion. - Projected physical impacts by 2050: loss of 17 percent of land surface and 30 percent of food production. - National commitments and fiscal tracking: - Bangladesh accounts for less than 0.35 percent of global GHG emissions. - Submitted 2015 UNFCCC targets: reduce emissions in power, transport, and industry sectors by 5 percent below Business-As-Usual by 2030. - Climate Fiscal Framework (CFF) created in 2014; as of June 2018, 8.8 percent of national budget allocated to climate change adaptation and mitigation (largest share to adaptation). - Financial instruments and sector actions: - BB has promoted environmental risk in lending and green banking since 2008. - US$200 million Green Transformation Fund established in 2016. - Policy options and priorities: - Reduce and gradually eliminate costly energy subsidies that may cost more than 3 percent of GDP; mitigate impacts on poorest via targeted transfers. - Consider phased carbon tax on selected fuel products; could raise up to 1.5 percentage points of GDP in revenue. - Enhance financial cover for disasters via contingency line in budget and insurance mechanisms (e.g., catastrophe bonds). - Create conducive environment for climate-friendly investments: tax pollution, incentivize green products, attract foreign investors using clean technologies. - Mobilize greater international financial support in line with Paris Agreement commitments. --- ### Public debt and Debt Sustainability Analysis (DSA) — composition, projections, and implications - Public debt in FY18: - Public debt: US$91 billion in FY18, around 34 percent of GDP. - Domestic debt: 56 percent of total public and publicly guaranteed debt stock. - Composition of domestic debt: more than half NSCs; around one third treasury bonds. - NSC yield: around 11 percent; government bonds of similar maturities: between 5 and 6 percent. - Authorities rolled out online database to track NSC purchasers; no plans to reform NSC interest rates. - External PPG debt (end-FY18): - External PPG debt: US$40 billion in FY18, around 15 percent of GDP. - Creditor composition: Multilateral 62.5 percent; Bilateral 22.7 percent. - Selected creditor shares: - World Bank (IDA): 14,201.7$ US$ million — 35.2 percent. - Asian Development Bank: 8,847.7$ US$ million — 21.9 percent. - Japan: 4,705.1$ US$ million — 11.7 percent. - China: 1,997.4$ US$ million — 4.9 percent. - Short Term Debt: 1,947.0$ US$ million — 4.8 percent. - Guarantees (SOE): 4,030.0$ US$ million — 10.0 percent. - DSA macro assumptions and outcomes: - Favorable debt dynamics under projected medium-term growth of around 7 percent and effective interest rate around 3 ½ percent. - Baseline current account balance (percent of GDP): FY19 -2.0; FY20 -2.1; FY21 -2.1; FY22 -2.0; FY23 -2.0; FY24 -2.0; FY25 -2.0. - Gross official reserves (US$ Million) baseline: FY19 33,011; FY20 33,423; FY21 33,303; FY22 32,655; FY23 31,999; FY24 31,456; FY25 30,782. - Reserves in months of imports baseline: FY19 5.3; FY20 5.0; FY21 4.6; FY22 4.3; FY23 3.9; FY24 3.6; FY25 3.3. - Medium- and long-term external public debt baseline (percent of GDP): FY19 14.5; FY20 14.6; FY21 14.6; FY22 14.4; FY23 14.3; FY24 14.1; FY25 13.9. - Scenario analysis — Annex IV (selected): - Scenario A (downside): Current account deficit deteriorates to reach 5.6 percent of GDP in FY25 under assumptions on remittances decline, higher LNG and capital imports. - Financing Option 1 (external borrowing): reserves coverage declines to 2.8 months of imports in FY25; external public debt increases to around 18 percent of GDP by FY25. - Financing Option 2 (30 percent of contribution absorbed by reserves): reserves coverage declines to 2.3 months; external public debt increases to around 17 percent of GDP by FY25. - Scenario B (downside + export diversification upside): Current account deficit in FY25 will be 3.1 percent of GDP if exports increase by 3 percent of GDP by FY25. - If external debt covers additional deficit: external debt to GDP ≈ 15 percent in FY25. - If reserves absorb 30 percent: external debt to GDP ≈ 15 percent and reserve coverage ≈ 2.6 months in FY25. - Scenario A current account balance (percent of GDP): FY19 -2.5; FY20 -3.1; FY21 -3.5; FY22 -4.1; FY23 -4.6; FY24 -5.2; FY25 -5.6. - Scenario B current account balance (percent of GDP): FY19 -2.5; FY20 -2.9; FY21 -3.1; FY22 -3.3; FY23 -3.5; FY24 -3.5; FY25 -3.1. - DSA stress-test conclusions: - All external debt indicators below thresholds under baseline and stress tests. - External PPG debt-to-GDP ratios decline from 15 percent in FY2018 to around 13 percent in FY2029. - Overall assessment: low risk of external debt distress and low overall risk of debt distress. - Policy implications: - Continue to seek concessional financing where possible. - Staff advise NSC reform to develop the domestic debt market. --- ### Annex I, Annex III and Annex V — risk matrix, external assessment, and capacity development priorities - Risk Assessment Matrix (selected risks, likelihood, time horizon, and recommendations): - Banking system problems (high NPLs): Relative Likelihood M; Time Horizon ST, MT; Expected Impact M – H; Recommended action: address weak corporate governance, regulatory weaknesses, reassess SOCBs. - Rohingya refugee crisis and weakened donor support: Relative Likelihood M– H; Time Horizon ST, MT; Expected Impact M – H; Recommended action: increase fiscal space while keeping deficit broadly under control and sustain international support. - Rising protectionism: Relative Likelihood H; Time Horizon MT, LT; Expected Impact M – H; Recommended action: diversify exports away from RMG and seek new markets. - Weaker global growth: Relative Likelihood M- H; Time Horizon ST, MT; Expected Impact M – H; Recommended action: moderate fiscal easing if temporary, exchange rate adjustment if protracted, accelerate structural reforms. - External Sector Assessment (CY18): - Overall external position broadly in line with fundamentals; EBA-lite CA gap 0.2 percent. - Reserve coverage adequate around 6 months of imports; FY18 first year of reserve depletion since FY11. - REER developments: Taka appreciated vs Euro by 4.3 percent (y-o-y) in April 2019; REER appreciated by 7 percent (y-o-y); Taka depreciated by 1.3 percent (y-o-y) vs USD. - Staff advice: gradually expand exchange rate flexibility; clarify intervention purpose, amount and timing. - Capacity Development (Annex V and Section 3 priorities): - Strengthening tax revenue administration: risk-based auditing, VAT reform support. - Managing fiscal risks: improve fiscal reporting via iBAS++ and BACS; define framework for fiscal risk analysis; manage FX risks in debt management strategy. - Strengthening banking supervision/regulation: implement risk-based supervision, establish bank risk profiles, corporate governance and AML/CFT support; forthcoming FSSR. - Modernizing monetary policy framework: shift from quantity-based regime to interest-rate operational target; improve liquidity management, forecasting, FX intervention policy, and government securities market. - Statistics and training: GDP rebasing target ambition by June 2020; SARTTAC training and FEEM course revamp. ### Authorities’ statements and views (selected) - Authorities’ macro claims and targets: - Real GDP growth increased to 8.1 per cent in FY19 (provisional). - Authorities’ FY20 targets: GDP growth 8.2 per cent and inflation 5.5 per cent. - End-June 2019 inflation: 5.47 percent. - Current account deficit: 1.7 percent of GDP in FY2019 (3.2 percent in FY18). - Foreign exchange reserves: US$32.72 billion at end-FY2019, cover of 5.9 months of imports. - Fiscal stance: - FY20 budget anchored at 5 percent fiscal deficit-GDP ratio; authorities reconfirm commitment to keep deficit at 5 percent of GDP. - VAT reform implemented July 1, 2019; VAT automation and electronic modes rollout. - Expectation of reduced NSC issuance lowering interest payments. - Banking sector and financial stability: - Authorities agree on concern over high NPLs concentrated in SOCBs; maintain most banks have sufficient provisions and net NPLs moderate. - Enforce maximum of three reschedulings; working on willful defaulter definition; considering bank mergers and an asset management company. - Governance and climate: - Authorities prioritize controlling corruption and commit to climate resilience measures through CFF; emphasize affordable energy provision while incentivizing cleaner technologies. *International Monetary Fund. Staff report for the 2019 Article IV consultation on Bangladesh (discussions took place in Dhaka during June 16–27, 2019).* ### 7.9 percent. Private consumption growth was exceptionally strong, influenced by the rebound in ### 1bgdea2019001 - 7.9 percent. Private consumption growth was exceptionally strong, influenced by the rebound in ### Recent developments and macroeconomic outcomes - Real GDP growth increased to 7.9 percent in FY18. - Private consumption growth was exceptionally strong in FY18, influenced by the rebound in remittance and exports growth. - Average annual inflation picked up slightly to 5.8 percent in FY18 due mainly to higher food prices. - The current account deficit expanded to 3½ percent of GDP in FY18 with higher import growth (25 percent), reflecting the need for capital goods linked to mega infrastructure projects and temporary flood-related food imports. - Gross official reserves: 33.0 (billions of U.S. dollars) in FY18. - Exports, f.o.b.: 40.7 (billions of U.S. dollars) in FY18 (annual percent change 12.5 percent). - Imports, f.o.b.: -56.9 (billions of U.S. dollars) in FY18 (annual percent change 4.5 percent). ### Near-term outlook and projections - Growth is projected to be strong at above mid-7 percent in FY19 and FY20. - After a slowdown in private investment before the election in last December, robust growth is expected, led by private consumption with strong remittance inflows and smaller negative contributions from net exports. - Average annual inflation is expected to be close to the central bank’s 5½ percent target; non-food inflation slightly picked up over the last few months. - The current account deficit is projected to decline to around 2 percent of GDP with strong export and remittance growth (13 percent and 11 percent, respectively) while import growth is expected to slow to 5 percent from high growth in FY18. - Authorities’ estimate: 8.1 percent growth in FY19. ### Risks to the outlook - Risks are tilted downward. - Slow progress in resolving the Rohingya refugee crisis could add to social tensions as well as spending pressures; donor support will remain essential. Progress in repatriating over 700,000 Rohingya refugees has been limited. The Joint Response Plan called for the mobilization of around US$1 billion for CY2018 and 2019. - Slow progress in banking sector reforms could undermine financial sector stability and growth, and pose fiscal risks. - Weaker-than-expected global growth could slow exports and remittance inflows. - Rising protectionism and natural disasters present additional downside risks. ### Executive Board and staff assessments - Executive Directors commended the authorities for Bangladesh’s strong and stable economic performance, reduced income poverty, and improving social indicators. - Directors noted that to realize growth potential and reach upper middle-income status, the authorities need to promote productive investments and upgrade the economic policy framework. - Directors commended Bangladesh Bank for keeping inflation broadly stable but urged close monitoring and readiness to adjust policy promptly if warranted. - Directors encouraged a gradual increase in exchange rate flexibility to help buffer external shocks, preserve foreign reserves, and support modernization of the monetary policy framework. - Directors commended fiscal discipline and encouraged keeping the public debt ratio broadly stable; they stressed the need to step up efforts to increase revenues to finance infrastructure, support the vulnerable, and meet potential climate change costs. - Directors expressed concern about the continued weak financial situation in the banking sector, including high nonperforming loans and rising restructured/rescheduled loans, and called for resolute reform measures. - Directors underscored the importance of improvements in public financial management and governance, better public investment management and tax administration, and progress in strengthening the AML/CFT framework. - Directors emphasized greater export diversification, improving the business environment, and boosting human capital to increase integration into global value chains. - Directors welcomed efforts to address vulnerability to climate change and recommended creating fiscal space for adaptation and mitigation, managing natural disaster impacts, and promoting climate-friendly investments. ### Key policy recommendations (Main policy recommendations) - Bangladesh Bank should monitor inflation developments closely and stand ready to adjust its stance as needed. A gradual increase in exchange rate flexibility would help buffer the economy against external shocks and preserve the level of reserves. - Fiscal policy should continue to keep the public debt ratio broadly stable. To finance needed infrastructure investment, raising tax revenue is indispensable, requiring a coordinated approach in both tax administration and tax policy. - Comprehensive reform is required to address banking sector weaknesses: enhanced banking regulation and supervision, SOCB reforms, tighter criteria for loan rescheduling/restructuring, stronger corporate governance in the banking sector, and enhanced legal systems to accelerate loan recovery. - Continuous improvements in public financial management and frameworks to limit vulnerability to corruption will help reach upper middle-income country status. - Improving the business environment is critical to boost private investments and promote export diversification. - The authorities should consider options to create fiscal space for necessary adaptation and mitigation of climate risk, manage the impact of natural disasters, and promote climate-friendly investments. *International Monetary Fund. Staff report for the 2019 Article IV consultation on Bangladesh (discussions took place in Dhaka during June 16–27, 2019).* ### 8. Monetary policy has been supportive ### 8. Monetary policy has been supportive ### Monetary stance and monetary aggregates - As of May 2019, reserve money growth was 16 percent (yoy), above the 8 percent target of Bangladesh Bank (BB) in FY19. - Broad money growth was close to the 12 percent target. - The growth of M3 - a broader measure of financing which includes the issuance of National Saving Certificates (NSCs) – has been higher by about 2 percentage points than M2 growth. - Growth of credit to the private sector slowed from its peak in late 2017, reflecting the BB’s measures as well as investors’ cautious stance before the election, but is expected to remain solid. ### Interest rates, deposits, and lending - Bank deposit and lending rates have been broadly stable recently. - Factors preventing further rate reduction: - banks’ need to reduce the advances-to-deposits ratio from 85 percent to 83.5 percent; - the adverse impact of high issuance of NSCs on banks’ deposits; - high and growing nonperforming loans (NPLs). - The authorities tried to keep lending rates in single digits through moral suasion. ### Inflation outlook and risks - BB should monitor inflation developments closely and stand ready to adjust its stance as needed. - Following the easing of monetary policy in April 2018, inflation has remained broadly stable at around the BB target. - Sources of potential inflationary pressures: - Growth continues to be strong, and BB’s real repo and call money rates remain close to zero or negative. - BB’s survey points to elevated inflation expectations (6-7 percent). - Nonfood inflation has been increasing moderately in recent months. - Potential inflation impacts of the announced increase in electricity tariffs and the VAT reform (see ¶16 and ¶18). - Authorities’ assessment: agreed that inflation needs to be monitored closely but saw the risk as broadly balanced; noted decelerating growth of monetary and credit aggregates until recently and a bumper harvest in FY19 leading to declining food inflation. ### Banking sector asset quality and implications for monetary policy - NPL dynamics and stressed assets: - NPL ratio increased from 9.3 percent at end-2017 to 10.3 percent at end-2018. - Most NPLs are in the State-Owned Commercial Banks (SOCBs), with an end-2018 NPL ratio at 30 percent. - Total stressed advances (NPLs, restructured and rescheduled loans) now exceed 20 percent of total loans. - Total stressed advances amount to almost 9 percent of GDP. - SOCB shortfall in required capital is at 1 percent of GDP, based on the authorities’ estimates. - The shortfall in NPL provisions reached Tk 66 billion (close to 12 percent of required provisions) at end-2018, up from close to zero in 2013–14. - Effects: - Worsening asset quality limits banks’ ability to engage in new lending and limits access to credit. - Loan rescheduling and restructuring have been growing; BB requires banks to keep provisioning for these loans. - Published NPL ratio likely underestimates potential problems due to growing rescheduling/restructuring and court stay orders. ### Recommended banking-sector actions and financial-stability measures - A comprehensive time-bound action plan should include: - Avoid regulatory forbearance; impose strict and prompt remedial actions upon banks. Preserve BB’s independence and autonomy. Continue efforts to adopt risk-based supervision. Introduce and enforce a clear entry and exit strategy for banks, and establish an emergency financing facility for solvent but temporarily illiquid banks. - Proceed with a comprehensive review of the entire banking sector’s assets, building on the ongoing special audit for SOCBs in trade finance. - Tighten the criteria for rescheduling/restructuring of loans and avoid their repeated use; introduce clear criteria to limit BB’s involvement when banks grant rescheduling/restructuring. - Strengthen banks’ corporate governance: address insufficient internal control and risk management, observe loan concentration limits, and strictly enforce and update fit and proper criteria, including identification of beneficial owners of significant or controlling interests. - Strengthen legal systems to support banks to recover NPLs, particularly from willful defaulters; strengthen capacity and efficiency of the court to expedite legal processes. - Reassess the role of SOCBs: consider a limited number of SOCBs with clear public mandates receiving transparent budget support; convert other SOCBs to banks operating on commercial principles or close them. ### Authorities’ views on banking sector measures - Authorities agreed that continued high NPLs are a source of concern but expect ongoing measures will address the situation effectively. - They noted most banks maintain a sufficient level of provisions and that net NPLs are relatively moderate. - Authorities emphasize that NPLs are concentrated in several banks, particularly SOCBs. - They view loan rescheduling as sometimes preferable to prevent loss of output and employment when adverse events outside borrowers’ control occur, and enforce a maximum of three reschedulings with adequate provisioning. - Authorities are working on a legal definition of willful defaulters, discussing a bank merger policy, and setting up an asset management company to take over NPLs from banks. - Authorities stated BB does not allow regulatory forbearance but considers economic costs when providing relief to borrowers. ### Monetary policy framework and capital market development - BB currently operates a de jure monetary targeting regime, using reserve money as its operational target. - An eclectic approach to signal monetary policy stance, combined with high NPLs, weakens the effectiveness of the monetary transmission mechanism. - Recommendation: Adopt a rule-based interest rate targeting regime with market-based monetary instruments to improve transmission. - Required building blocks for this transition: - Bolster understanding of the drivers of inflation. - Improve liquidity monitoring and forecasting. - Develop a well-functioning interbank market. *Source: 1bgdea2019001 - 8. Monetary policy has been supportive* ### 26. A well-developed capital market ### 26. A well-developed capital market ### Role of capital market and current impediments - A well-developed capital market should play an important role in supporting future growth. - Development of a government securities market has been hampered by rapid increases in on tap sale of NSCs, which offer higher interest rates than government securities. - The introduction of a database is expected to help enforce the upper limits of NSC holdings for each investor and reverse the rapid growth of NSC issuance. - Further reforms are necessary to improve control of budget financing, reduce interest costs, and create conditions for faster capital market development. ### NSC reform measures and recommendations - Recent measure: increase in tax on NSC interest income from 5 percent to 10 percent; expected effect is to reduce incentives for buying the NSC and reduce the spread between NSC yields and bank deposit rates. - Recommended reforms: - Reform the NSC pricing structure by tying NSC rates to market yields. - Consider separation of NSC issuance from direct budget financing; instead, a separate entity managing NSCs would use the proceeds from NSC sales for purchases of government securities. - Purpose of recommendations: to regain control over the composition of government borrowing, reduce issuance pressures on market securities, and support government securities market development. *Authorities’ Views* - Authorities recognize that bringing NSC issuance under control is necessary for modernizing the monetary policy framework and developing capital markets. - Authorities expressed confidence that recent measures to prevent NSC purchase above existing limits will reduce issuance. - Authorities expect the increased tax on NSC interest to reduce the spread between NSC yields and bank deposit rates, reducing demand. ### Governance and fiscal framework: public financial management - A modern accounting and fiscal reporting regime, including the new Budget Accounting and Classification System (BACS) under iBAS++, was adopted recently. - Staff emphasized need to strengthen public investment management through: - (i) better alignment of public investment projects with priorities identified in national and sectoral plans, while ensuring consistency of these priorities with available financial resources; - (ii) an improved project appraisal and selection process; - (iii) stronger oversight of public corporations; and - (iv) integration of the ADP process with the medium-term budget, ensuring approved projects remain within available financial resources. - The relatively low level of public investment efficiency in Bangladesh indicates potentially high growth impacts from this reform. - Coverage of the electronic government procurement system should also continue. *Authorities’ Views* - With implementation of the new BACS in FY19, public financial management will improve significantly. - BACS will provide additional and better-quality information, including on a broader set of government entities, financial assets and liabilities, and location of spending. - BACS will allow for a more detailed, transparent and accurate reporting of budget allocations and expenditures, and enable government to introduce accrual accounting in the future. - Authorities agreed that a coordinated effort is needed to improve public investment management and noted project directors have been given more discretion to utilize project funding to accelerate implementation of development projects. - Authorities stressed significant progress in strengthening public procurement due to the electronic government procurement system. ### Medium-term debt management strategy (MTDS) - The authorities’ work on revising the MTDS is welcome. - The last MTDS was prepared in 2014, but recent rapid increases in NSC issuance reduced its relevance. - A new MTDS should consider implications of possible reduction in concessional financing with the forthcoming graduation from LDC status and increased need for issuance of market-based government securities as a result of ongoing NSC reforms. ### Tax administration and revenue mobilization - Improvement in tax administration should strengthen the fiscal framework as well as revenue outcomes. - Ongoing efforts to use IT, including introduction of electronic taxpayers’ registration and electronic filing of income tax and VAT returns, should continue to minimize interaction of taxpayers and tax collectors and reduce compliance costs. - NBR’s risk management needs strengthening, including through risk-based auditing. ### Governance and anti-corruption measures - Strengthening frameworks to limit vulnerability to corruption will help Bangladesh achieve its goal to reach upper middle-income status. - Control of corruption indicators have improved in recent years but remain modestly below the average for South Asia and low-income countries. - Issues and recommendations: - Anti-Corruption Commission (ACC) lacks sufficient skills and staffing for investigations. - Asset declarations are carried out by appointing authorities for all officials, but declarations should be utilized more effectively to detect risks. - Publication of declarations for key officials, sanctions for non-compliance, and verification of declaration information could strengthen compliance. - Reforms that would help reduce vulnerabilities to corruption include: strengthening financial sector oversight (¶23), improving public investment management (¶28), minimizing interaction between taxpayers and tax collectors (¶30), improving AML/CFT framework (¶32), and simplifying regulatory procedures (¶36). ### AML/CFT framework - Progress has been made to strengthen the legal and regulatory framework guided by the 2016 Mutual Evaluation Report (MER). - Sustained reform efforts remain important to enhance effectiveness, notably by: - adopting risk-based AML/CFT supervision; - increasing capacity of banks, particularly SOCBs; - strengthening implementation of preventive measures, in particular for politically-exposed persons; - establishing a clear definition of beneficial ownership; and - improving access to such identifying information. *Authorities’ Views* - Authorities emphasized controlling corruption is a priority and are working to enhance public awareness on the need to reduce corruption despite capacity and judicial process challenges. - Bangladesh Financial Intelligence Unit has initiated changes in line with MER recommendations and is addressing remaining issues. - Authorities expressed concerns about some third-party indicators on corruption perception, emphasizing their subjective judgments. ### Economic diversification and business environment - Diversification into more complex products will be necessary to increase potential growth as current products with revealed comparative advantage have relatively low complexity. - Production of more complex exports could increase integration into global value chains and make exports more robust to global demand changes. - Facilitating factors include reforms to improve the business climate and boost human capital. - Import tariffs that protect domestic markets and make intermediate inputs more expensive distort incentives to diversify. - Business environment improvements: - One Stop Service virtual platform has merged procedures such as company registration, online payment of registration fees, obtention of a tax identification number, and online VAT registration into a single process. - Reform priorities remain to enhance the judicial system: by December 2019, a monitoring system should ensure commercial disputes are settled within 500 calendar days, and commercial courts are to be created at district levels. ### Climate change - Bangladesh is one of the most vulnerable countries to climate change and natural disasters; government initiated several measures including a Climate Fiscal Framework (CFF) in 2014 to track mitigation and adaptation investments. - A key challenge remains to mobilize more domestic revenue to increase such investments. - Policy options to address climate change include: - (i) gradually eliminate costly energy subsidies; - (ii) consider the phased introduction of carbon taxes; - (iii) enhance financial cover to better manage the impact of natural disasters; - (iv) stimulate climate-friendly private sector investments; and - (v) intensify efforts to mobilize external funding. *Authorities’ Views* - Authorities highlighted commitment to address climate change domestically and internationally and noted the CFF provides a roadmap for climate finance linked to public financial management systems. - Authorities pointed to enhanced resilience to natural disasters and budget provisions to respond to extreme weather events. - On energy subsidies, authorities emphasized provision of affordable energy remains essential over the medium term to sustain rapid economic growth and saw merit in incentivizing cleaner technologies and renewable energy development. ### Staff appraisal — macro and policy summary - Macroeconomic performance continues to be solid, with strong growth, moderate inflation and a narrowing current account deficit. - Real GDP growth remains strong, supported by robust private consumption growth because of the rebound in remittance and export growth. - Inflation has remained within the 5-6 percent range, broadly in line with the BB target, and the current account deficit has declined as import growth slowed while exports accelerated. - Looking ahead, growth is projected to remain solid, but risks are tilted downward. - Current account deficit is projected to remain at around 2 percent of GDP. - Downside risks: weaker-than-expected global growth, rising protectionism, slow progress in domestic banking sector reforms. - Policy recommendations/highlights: - BB should monitor inflation developments closely and stand ready to adjust its policy promptly. - Authorities should continue efforts to gradually increase exchange rate flexibility to buffer against external shocks and modernize the monetary policy framework. - Continue policy efforts to increase revenues: expand the tax base and modernize tax administration, including simplification of multiple VAT rates. - Banking sector priorities include enhanced regulation and supervision, adoption of risk-based supervision, SOCB reforms, tighter criteria for loan rescheduling/restructuring, stronger corporate governance, and improved legal systems to accelerate loan recovery. - Developing a well-functioning capital market will reduce dependence on bank financing and provide an alternative source of financing; more steps needed to reform the NSC system, including reform of the pricing mechanism and separation of NSC issuance from direct budget financing. - Further improvements in public financial management and frameworks to limit vulnerability to corruption will help maintain growth momentum. - Increasing export diversification and boosting human capital will be critical to expand private investment outside the RMG industry. - Efforts to address climate change should continue, including options to create fiscal space for adaptation and mitigation, manage natural disaster impacts, and promote climate-friendly investments. - Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. *Italicized source: IMF staff chapter "26. A well-developed capital market" from the provided PDF content.* ### Box 2. Acting on Climate Change ### Box 2. Acting on Climate Change ### Vulnerability and projected impacts - Sixty percent of its land surface is at five meters or less above sea level. - The worst episode of flooding in 1998 affected over two-thirds of the country and led to damages and losses estimated at close to 5 percent of GDP. - Experts worry that a third of Bangladesh’s population may be at risk of displacement because of rising sea levels and coastal erosion. - Projected physical impacts include a loss of 17 percent of land surface and 30 percent of food production by 2050. ### National action, commitments, and fiscal tracking - Bangladesh accounts for less than 0.35 percent of global greenhouse gas emissions. - Bangladesh was the first South Asian country to submit targets for adaptation and mitigation activities in the context of the United Nations Framework on Climate Change in 2015, committing to reduce emissions in the power, transport, and industry sectors by 5 percent below Business-As-Usual levels by 2030. - A Climate Fiscal Framework was created in 2014 to track and monitor climate change spending. - As of June 2018, 8.8 percent of the national budget was allocated for climate change adaptation and mitigation activities—the largest share going to adaptation, including crop protection and flood resilient infrastructure. ### Financial sector actions and instruments already used - Bangladesh Bank (BB) has spearheaded efforts since 2008 to: - prompt banks to incorporate environmental risk in lending decisions; and - promote green banking. - A US$200 million Green Transformation Fund was established in 2016. ### Policy options and priorities to create fiscal space, manage disasters, and promote investments - Reduce and gradually eliminate costly energy subsidies, which may be costing the economy more than 3 percent of GDP, while mitigating the impact on the poorest through targeted transfers. - Consider phased introduction of a carbon tax on selected fuel products, notably those consumed by more affluent households, such as petrol and diesel at the pump. This would help raise domestic revenue by up to 1.5 percentage points of GDP, reduce pollution, and encourage the use of cleaner, emissions-saving technologies. - Enhance financial cover against the impact of natural disasters through a dedicated contingency line in the budget and the use of insurance mechanisms such as catastrophe bonds that provide more extensive coverage. - Create a conducive environment for climate-friendly investments, including by taxing pollution, incentivizing green products, and enhancing the business environment to attract foreign investors who promote the use of clean technologies. - Mobilize greater financial support from the international community, in line with commitments under the December 2015 Paris Agreement, including though advocacy and building a pipeline of suitable projects. *Source: Box 2. Acting on Climate Change (excerpt).* ### 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 arrangement in October 2015, the authorities continue to closely engage with the Fund through the Article IV consultations, periodic staff visits, capacity development, and the Resident Representative office. - Since the last Article IV consultation, a number of recommendations have been implemented, but several key important challenges remain. ### Fund advice and authorities’ response (summary table items) - Tighten monetary policy in case inflation increases well above their target. - BB kept monetary policy unchanged as inflation stayed broadly in line with BB’s target (5½ percent). Private sector credit growth was slower in FY19. - Gradually increase exchange rate flexibility. - BB has intervened occasionally in the foreign exchange market to avoid excessive exchange rate fluctuations. The currency has been relatively stable against USD, while REER appreciated. - Keep public debt broadly stable. - The authorities continued to keep fiscal deficit below 5 percent of GDP. The public debt-to-GDP ratio has been broadly stable. - Increase tax revenues, including through the implementation of the VAT reform. - Tax revenue has not increased as percent of GDP. The authorities implemented the VAT reform in FY20, though it came with the introduction of multiple rates. The government also announced some measures to improve tax administration and tax compliance. - Address banking sector vulnerabilities by strengthening banking regulation and supervision. - NPLs continued to increase despite strong economic growth. There is also a growing trend of loan rescheduling and restructuring. The authorities initiated a special audit of SOCBs and raised minimum capital requirement for banks, though they also plan to introduce a new loan rescheduling scheme and relaxed definition of NPLs. - Develop the capital market, including through reform in the NSCs scheme. - A database was introduced to enforce the upper limits of NSC holdings for each investor. The tax on NSC interest income was raised from 5 to 10 percent. However, the level of NSC issuance is still high and reforms in NSC pricing structure will be necessary. - Improve the business environment and promote higher female labor participation. - The government made progress in improving the business environment, including through the One Stop Service Platform. However, expenditures on health and infrastructure to promote female labor force participation are still constrained with low tax revenues. ### Risk Assessment Matrix — key risks, likelihood, and recommended actions - Failure to effectively address the problems in the banking system, including high non-performing loans - Source: Domestic; Relative Likelihood: M; Time Horizon: ST, MT; Expected Impact: M – H - Main impacts: High and increasing non-performing loans and low capital adequacy would hamper the banking sector’s ability to finance business investment, add fiscal burden, and hamper growth. - Recommended policy actions: Address the main causes of weak bank performance, including weak corporate governance, weaknesses in the regulatory framework and regulatory forbearance. Reassess the role of state-owned commercial banks. - Slow progress in resolving the Rohingya refugee crisis and weakened donor support - Source: Domestic; Relative Likelihood: M– H; Time Horizon: ST, MT; Expected Impact: M – H - Main impacts: As repatriation takes time and donor support weakens, social and environmental costs, security concerns and fiscal pressures could intensify. - Recommended policy actions: Increase fiscal space to create room to address the difficult situation of the refugees, while keeping the fiscal deficit broadly under control. Continuous support by the international community will be essential. - Rising protectionism and retreat from multilateralism - Source: External; Relative Likelihood: H; Time Horizon: MT, LT; Expected Impact: M – H - Main impacts: Medium- and long-term slowing of exports of ready-made garments and FDI inflows, weaker current account balance and loss of reserves. - Recommended policy actions: Diversify the composition of exports away from RMG and seek new export markets outside the EU and the US. - Weaker-than-expected global growth - Source: External; Relative Likelihood: M- H; Time Horizon: ST, MT; Expected Impact: M – H - Main impacts: Adverse effects on demand for Bangladesh exports and remittances, leading to a weaker balance of payments and slower economic growth. - Recommended policy actions: If temporary shock, moderate fiscal easing allowing automatic stabilizers and possibly an exchange rate adjustment. If protracted, allow exchange rate adjustment and adjust fiscal policy to keep the deficit broadly in line with the fiscal anchor, protecting social spending on the poor. Accelerate productivity-enhancing structural reforms, diversify the economy, improve business climate and reduce barriers to trade and inward FDIs. *The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. Relative likelihood: “L” (low) < 10 percent, “M” (medium) 10–30 percent, “H” (high) ≥ 30 percent. The RAM reflects staff views as of the time of discussions with the authorities.* ### Annex III. External Sector Assessment — findings and staff advice - Overall assessment: The external position in Bangladesh was broadly in line with fundamentals and desirable policies in CY18. - Current account: The current account has recently entered a deficit, driven by higher imports of capital goods and lower worker remittances in percent of GDP. The EBA-lite CA methodology suggests a negligible gap of 0.2 percent. - Reserve coverage: Remains adequate covering around 6 months of imports. FY18 marked the first year of a depletion of reserves since FY11. The template for assessing reserve adequacy in credit constrained economies suggests around 3 months of import coverage; ranges vary between 2 and 6 months depending on assumed cost of reserves. - Exchange rate developments and policy advice: - The real effective exchange rate (REER) has been appreciating in line with the USD appreciation against other currencies. In April 2019, the Taka appreciated against the Euro by 4.3 percent (y-o-y) and the REER appreciated by 7 percent (y-o-y). During this time, the Taka depreciated by 1.3 percent (y-o-y) against the USD. - The de-jure exchange rate regime is floating, while the de facto arrangement is classified as crawl-like. Bangladesh Bank (BB) intervenes in the spot market to limit volatility and to supply foreign exchange to the market. - Staff advice: Continue to gradually expand exchange rate flexibility; interventions should have greater clarity around their purpose, amount and timing, in line with Fund TA. - Current account dynamics: The current account deficit increased by 3 percent of GDP in FY18 to 3.6 percent of GDP. Imports in FY18 grew driven by larger capital imports related to infrastructure projects, and a one-off surge in food imports due to floods. Worker remittances have been decreasing in percent of GDP; though they grew in FY18, they were not enough to cover the larger trade deficit. - EBA-lite model specifics: - The revised EBA-lite CA model indicates a negligible CA gap in CY18. - The small policy gap reflects contributions from the public health expenditure variable and the capital control variable. - Elasticity used to calculate the REER gap is -13.3 percent. - Resulting REER gap is 1.6 percent, supporting the assessment that the external position is broadly in line with fundamentals. - Note: The REER gap suggested by the EBA-lite REER model is mostly due to the residual. The poor fit of the model to Bangladesh makes it unsuitable. The external sustainability model is not as relevant for Bangladesh as reserves are adequate and the risk of external debt sustainability is low. - EBA-lite numerical indicators and components (as presented) - CA-Actual-2.8% - Cyclical Contributions (from model) 0.1% - Cyclically adjusted CA -2.9% - CA-Norm-3.5% - Cyclically adjusted CA Norm-3.6% - Multilaterally Consistent Cyclically adjusted CA Norm-3.1% - CA-Gap 0.2% - of/which Policy gap -0.3% - Elasticity-13.3% - REER Gap -1.6% - CA-Fitted-3.0% - Residual 0.2% - Natural Disasters and Conflicts 0.9% ### Annex IV. BOP Sensitivity Analysis — scenarios, assumptions, and projections - Baseline: The current account in Bangladesh is projected to remain in deficits into the medium term under the baseline scenario due to structural changes (declining remittances as share of GDP and higher imports). - Structural drivers of higher imports: - Increased reliance on imports of liquified natural gas (LNG). Bangladesh has been importing LNG since 2018; existing domestic natural gas resources are set to be depleted by 2027 if no further exploration is done. LNG imports are around four times more expensive than domestic gas. - Increased infrastructure spending to close a large infrastructure gap, raising capital imports and possibly external debt. - Scenario A (downside): - Assumptions distinguishing Scenario A from baseline: - Remittances will gradually decline to become around 1 percent of GDP lower than the baseline scenario in FY25. - LNG imports will gradually increase to reach twice the amount in the baseline scenario by FY25. - Capital imports will be steady at around 10 percent of GDP compared to a gradual decline to 8 percent of GDP by FY25 in the baseline scenario. - Outcome: Current account deficit deteriorates to reach 5.6 percent of GDP in FY25. - Financing assumptions: - Option 1: Additional deficit fully financed by increase in external borrowing → gross official reserves remain unchanged from baseline, though coverage declines to 2.8 from 3.3 months of imports. External public debt increases to around 18 percent of GDP by FY25. - Option 2: 30 percent of the contribution absorbed by reserves → import coverage declines to 2.3 months and public external debt increases to around 17 percent of GDP by FY25. - Scenario B (downside risks + export diversification upside): - Scenario B incorporates Scenario A downside risks and adds export diversification upside. - Assumptions: - Capital imports increase slightly due to imported inputs into new sectors. - Exports steadily increase and are higher by 3 percent of GDP in FY25. - Outcome: Current account deficit in FY25 will be 3.1 percent of GDP. - Financing outcomes: - If external debt covers the additional deficit: external debt to GDP ≈ 15 percent in FY25 (baseline ≈ 14 percent, Scenario A ≈ 18 percent). - If reserves absorb 30 percent of the deficit contribution: by FY25 external debt to GDP ≈ 15 percent and reserve coverage ≈ 2.6 months of prospective imports. - Key table excerpts (selected projected values, in percent of GDP unless otherwise indicated) - Baseline current account balance: FY19 -2.0; FY20 -2.1; FY21 -2.1; FY22 -2.0; FY23 -2.0; FY24 -2.0; FY25 -2.0. - Scenario A current account balance: FY19 -2.5; FY20 -3.1; FY21 -3.5; FY22 -4.1; FY23 -4.6; FY24 -5.2; FY25 -5.6. - Scenario B current account balance: FY19 -2.5; FY20 -2.9; FY21 -3.1; FY22 -3.3; FY23 -3.5; FY24 -3.5; FY25 -3.1. - Exports (f.o.b.) baseline: FY19 13.5; FY20 13.3; FY21 13.0; FY22 12.7; FY23 12.4; FY24 12.2; FY25 11.9. - Of which RMG baseline: FY19 11.5; FY20 11.3; FY21 11.0; FY22 10.7; FY23 10.4; FY24 10.2; FY25 9.9. - Imports (f.o.b.) baseline: FY19 -18.8; FY20 -18.5; FY21 -18.1; FY22 -17.7; FY23 -17.3; FY24 -16.9; FY25 -16.6. - Private transfers baseline: FY19 5.6; FY20 5.5; FY21 5.4; FY22 5.2; FY23 5.1; FY24 5.0; FY25 4.9. - Workers' remittances baseline: FY19 5.5; FY20 5.3; FY21 5.2; FY22 5.1; FY23 5.0; FY24 4.9; FY25 4.8. - Gross official reserves (US$ Million) baseline: FY19 33,011; FY20 33,423; FY21 33,303; FY22 32,655; FY23 31,999; FY24 31,456; FY25 30,782. - Reserves in months of imports baseline: FY19 5.3; FY20 5.0; FY21 4.6; FY22 4.3; FY23 3.9; FY24 3.6; FY25 3.3. - Medium- and long-term external public debt baseline (percent of GDP): FY19 14.5; FY20 14.6; FY21 14.6; FY22 14.4; FY23 14.3; FY24 14.1; FY25 13.9. - Scenario A (external debt financing) medium- and long-term external public debt FY25 ≈ 17.8 (shown up to 17.8 in the Scenario A table). - Scenario A reserves in months of imports under external debt financing: declines to 2.8 in FY25 (from 3.3 in baseline). - Scenario B outcomes: with export diversification, current account in FY25 ≈ -3.1; external debt to GDP ≈ 15 percent by FY25; reserve coverage ≈ 2.6 months under the assumption that reserves absorb 30 percent of the deficit contribution. ### Annex V. Capacity Development — background and priorities - Background findings: - GDP growth averaged more than 6 percent over the last decade, significantly lifting GDP per capita. Social indicators have also improved. Bangladesh is moving from low-income to lower-middle income status. - Authorities need to modernize the policy framework to sustain robust performance and face new challenges including deeper integration into the global economy and financial markets and reduced availability of concessional assistance by donors. - Recent CD activities: - Bangladesh has extensively benefitted from Fund CD especially after the establishment of SARTTAC. - Recent CD has emphasized key challenges identified in surveillance: low tax revenues, insufficient public investment in infrastructure, monetary policy modernization, and a weak banking sector. - Forward-looking priorities: (heading appears in source; specific forward-looking priorities text not included in provided excerpt.) *Annex I. Response to Past Fund Policy Advice — content drawn from provided IMF document.* ### 3. Forward looking priorities will continue to be guided by key policy recommendations ### 3. Forward looking priorities will continue to be guided by key policy recommendations ### A. Strengthening Tax Revenue Administration - Activities will focus on key reforms to improve tax collection, including adoption of risk-based auditing. - Low tax revenue collection remains one of the most pressing challenges for Bangladesh. - SARTTAC has provided training to help the authorities move forward with risk-based auditing and will continue engagement. - A recent FAD diagnostic mission identified challenges in modernizing tax revenue administration, including strategic governance, compliance risk management and core functions related to tax and customs administration. - Staff will closely engage with the authorities on potential challenges linked to the VAT reform starting in FY20. ### B. Managing Fiscal Risks - CD activities will aim to further improve fiscal reporting following the adoption of the Integrated Budget and Accounting System (iBAS++) and the new Budget and Accounting Classification System (BACS). - Introduction of iBAS++ and BACS is expected to significantly improve the timeliness of data reporting. - SARTTAC has supported the rollout of iBAS++ and will promote improvements in frequency, accuracy, and timeliness of in-year reports. - Other priorities include better managing contingent liabilities amid recent major infrastructure projects, some adopting a PPP scheme. - Fund support will start with defining the framework for fiscal risk analysis and reporting. - There is a growing need to properly analyze and manage foreign currency risks as part of a debt management strategy, building on recently provided support. ### C. Strengthening Banking Supervision and Regulation - CD activities will aim at enhancing Bangladesh Bank’s (BB) banking sector supervision in response to imminent challenges in the banking sector. - SARTTAC assistance includes implementing risk-based supervision and upgrading other supervisory functions. - The workplan aims to assist authorities in establishing risk profiles of individual banks and using them to determine supervisory priorities. - SARTTAC assistance also covers corporate governance and risk management framework and practices in banks. - A forthcoming FSSR will provide an updated assessment of the financial sector with CD needs and help step up engagement on banking sector reform. ### D. Modernizing Monetary Policy Framework - CD activities will support efforts to modernize the monetary policy framework and gradually shift away from the current quantity-based policy regime towards interest rate as an operational target. - Objectives include strengthening the monetary policy transmission mechanism. - Remaining challenges include: - improving liquidity management; - strengthening economic forecasting; - establishing a clear foreign exchange intervention policy; - developing the government securities market; - gradually adopting an interest rate corridor. ### E. Statistics - Activities will focus on improvements in several key macroeconomic data series. - SARTTAC assisted authorities in developing new CPI weights and advised on populating preliminary 2015 supply and use tables for GDP benchmarking/rebasing. - The current base year for the Bangladesh national accounts is FY2006 (2005-2006). - The authorities have the ambition to finish the GDP rebasing by June 2020. - SARTTAC plans to provide further training on public sector debt statistics and assistance on balance of payments statistics. ### F. Training - SARTTAC significantly expanded training opportunities for Bangladesh officials. - Its financial programming and policies course was tailored to Bangladesh’s circumstances and helped enhance skills and knowledge for macroeconomic analysis. - The course will further target a core group of officials in BB, the Ministry of Finance, and other relevant Ministries expected to play key roles in macroeconomic policy making. - SARTTAC will provide further assistance to a training institution in Bangladesh to revamp the Fiscal Economics and Economic Management (FEEM) course delivered by the government’s Institute of Public Finance (IPF). - Following a review of the budget preparation and execution modules, Fund experts will advise on macro-fiscal modules. - The revamped FEEM course will include a one-week training on identified topics at SARTTAC in New Delhi. *Source: 1bgdea2019001 - 3. Forward looking priorities will continue to be guided by key policy recommendations* ### 1. Public debt in Bangladesh stood at US$91 billion in FY18, around 34 percent of ### 1bgdea2019001 - 1. Public debt in Bangladesh stood at US$91 billion in FY18, around 34 percent of ### Public debt composition and domestic instruments - Public debt in Bangladesh stood at US$91 billion in FY18, around 34 percent of GDP. - The majority of public debt is domestic and denominated in local currency. - In FY18, domestic debt was 56 percent of the total public and publicly guaranteed debt stock. - More than one half of outstanding domestic debt is composed of National Saving Certificates (NSCs) and around one third is treasury bonds. - NSCs provide a yield of around 11 percent whereas government bonds of similar maturities provide a yield between 5 and 6 percent. - A cap on the amount of NSCs a person can hold has been difficult to enforce. - Authorities have rolled out an online database to keep track of NSC purchasers and plan to use this database to help downsize the amount of new NSCs issued. - There are no plans to reform interest rates of NSCs. ### External PPG debt stock and creditor composition (end-FY18) - External PPG debt stood at US$40 billion in FY18, around 15 percent of GDP. - External PPG debt is predominantly owed to multilateral and bilateral creditors: 62 and 23 percent of outstanding external PPG debt, respectively. - Outstanding External PPG debt by creditor (end-FY18): - Total PPG Debt: 40,374.1$ US$ million — 100.0 percent of PPG debt - Multilateral: 25,214.1$ US$ million — 62.5 percent - World Bank (IDA): 14,201.7$ US$ million — 35.2 percent - Asian Development Bank: 8,847.7$ US$ million — 21.9 percent - Bilateral: 9,183.0$ US$ million — 22.7 percent - Japan: 4,705.1$ US$ million — 11.7 percent - China: 1,997.4$ US$ million — 4.9 percent - Short Term Debt: 1,947.0$ US$ million — 4.8 percent - Guarantees (SOE): 4,030.0$ US$ million — 10.0 percent - Short-term debt is only 5 percent of the outstanding PPG external debt stock and is mainly composed of trade credits. - External debt has helped finance infrastructure projects; recent increase in private external debt is associated with bank borrowing and the activity of trade companies. - As infrastructure needs remain, external debt will likely be the primary avenue to finance large infrastructure projects. ### Macroeconomic assumptions underpinning the DSA - Growth and inflation: - Growth projections in FY19 are higher than in the 2018 AIV because of higher exports of ready-made garments (RMG). - The medium-term growth outlook is slightly higher owing to competitive RMG exports. - Inflation was revised downward due to lower non-food inflation and is projected to remain moderate over the medium-term as GDP growth is projected to be around potential. - Debt dynamics are favorable under a projected growth rate of around 7 percent in the medium term and an effective interest rate of around 3 ½ percent. - Important risks to future GDP growth could arise from lower than expected private sector credit growth. - Fiscal policy: - The primary balance is projected to be marginally weaker due to weaker-than-projected tax revenue growth during the election year, FY19, reflecting the absence of new revenue-increasing measures and implementation of new tax exemptions. - Only a moderate improvement of the primary balance is projected over the medium term, mainly because of a gradual decline in public infrastructure investment, while revenues are projected to grow broadly in line with nominal GDP. - Current account dynamics: - Import growth is expected to slow from high growth in FY18 due to a flood related one-off spike in food imports. - The current account deficit (CAD) is projected to narrow in the short term owing to higher exports of RMG. - Over the medium term, the CAD will remain broadly stable at around 2 percent of GDP. - Reserve coverage in months of imports will gradually decline from around 6 months in FY19 to around 4 months over the medium term. - Financing assumptions: - The share of PPG external financing of total public financing needs was around 33 percent in FY18. - Over the medium term, external financing is projected to decline as a share of total financing as the role of domestic debt markets increases. - The concessionality of debt will decline over the medium term as Bangladesh approaches upper-middle income status. ### Macro projection table (selected entries; current vs previous) - Real GDP growth (in percent change): - Current: 2018/19 8.0, 2019/20 7.6, 2020/21 7.3, 2021/22 7.3, 2022/23 7.3, 2023/24 7.3 - Previous: 2018/19 7.0, 2019/20 7.0, 2020/21 7.0, 2021/22 7.0, 2022/23 7.0, 2023/24 7.0 - Inflation: - Current: 2018/19 5.8, 2019/20 5.8, 2020/21 5.6, 2021/22 5.5, 2022/23 5.5, 2023/24 5.5 - Previous: 2018/19 6.2, 2019/20 6.1, 2020/21 6.0, 2021/22 5.7, 2022/23 5.5, 2023/24 5.5 - Primary fiscal deficit (in percent of GDP): - Current: 2018/19 3.1, 2019/20 3.0, 2020/21 2.9, 2021/22 2.6, 2022/23 2.4, 2023/24 2.4 - Previous: 2018/19 2.9, 2019/20 2.5, 2020/21 2.4, 2021/22 2.4, 2022/23 2.2, 2023/24 2.0 - Current account deficit (in percent of GDP): - Current: 2018/19 2.0, 2019/20 2.1, 2020/21 2.1, 2021/22 2.0, 2022/23 2.0, 2023/24 2.0 - Previous: 2018/19 2.3, 2019/20 2.4, 2020/21 2.2, 2021/22 2.0, 2022/23 1.8, 2023/24 1.8 ### Historical residuals, realism tools, and contingent liabilities - Unexpected changes to debt have been low and negative historically. - PPG external debt historically driven by favorable growth and a positive current account. - Realism tools: - The 3-year adjustment in the primary balance is near the median of the sample of 3-year fiscal adjustments for LICs since 1990 that were under an IMF program. - Growth projections are around the value suggested by a fiscal multiplier of 0.2 applied to the fiscal deficit. - Public and private investment plans are slightly lower in percent of GDP due to revised GDP projections. - Guaranteed SOE debt: - Stock of guaranteed SOE debt is estimated to be around 10 percent of the PPG external debt stock in FY18 or US$4 billion. - Authorities are working to standardize reporting of SOE debt to cover non-guaranteed debt. - The DSA is prepared on a currency basis as data are not available for the residency basis. - Stock of debt linked to PPPs is less than 3 percent of GDP. - Stress tests applied: - Contingent liability shock calibrations use default values for the SOE debt and financial market component. - A natural disaster stress test was applied, calibrated at the default setting of a one-time 10 percent of GDP shock to the external debt-to-GDP ratio. ### Debt coverage and shocks (selected table figures preserved) - Other elements of the general government not captured in coverage: 0.0 percent of GDP - SoE's debt (guaranteed and not guaranteed by the government): 2.0 percent of GDP (used for the analysis) - PPP: 0.0 percent of GDP (35 percent of PPP stock default) - Financial market (default minimum value): 5.0 percent of GDP - Total (2+3+4+5) (in percent of GDP): 7.0 ### Debt carrying capacity and classification - The Composite Index (CI) rating for Bangladesh is calculated as 3.06 and the debt carrying capacity is assessed as strong. - The threshold for a strong classification is a CI score above 3.05. - CI is based on a weighted average of several factors using 10-year averages (5 years historical, 5 years projections) from two WEO vintages: October 2018 and April 2019. ### Debt sustainability outcomes and stress-test results - All external debt indicators are below their respective thresholds under the baseline and stress-test scenarios. - External PPG debt-to-GDP ratios decline from 15 percent of GDP in FY2018 to around 13 percent in FY2029. - The most extreme shock to the external PPG debt-to-GDP ratio is the non-debt flows shock (shock to remittances). - PV of debt-to-exports and debt service-to-exports ratios are well below thresholds; the most extreme shock for these is a shock to exports. - Debt service-to-revenue ratio is on a declining trend and below its threshold; the most extreme shock for this is a one-time depreciation given the currency mismatch. - Overall public debt indicators suggest a low overall risk of debt distress. - The PV of total public debt-to-GDP is well below its indicative threshold; the largest shock to this indicator is a natural disaster (one-time 10 percent of GDP shock). - Indicators in percent of revenues are on a slightly increasing trend, underscoring the importance of increasing the revenue-to-GDP ratio, which is assumed roughly constant in the projection period. ### Assessment and policy implications - Assessment: - Bangladesh has a low risk of external debt distress and a low overall risk of debt distress. - This assessment is reached without the use of judgement as all external debt indicators are below their thresholds and overall public debt is below its indicative threshold. - Policy recommendations: - Authorities should continue to seek concessional financing to the extent possible. - In line with Fund TA, staff advise the reform of NSCs in order to develop the domestic debt market. *IMF staff summary based on the DSA chapter in 1bgdea2019001* ### 11. The authorities agree that the risk of external debt distress and overall risk of ### 11. The authorities agree that the risk of external debt distress and overall risk of ### Authorities' assessment - The authorities agree that the risk of external debt distress and overall risk of debt distress remains low. - The authorities are cautious in contracting external debt and view the low risk of debt distress as an important indicator signaling confidence in the economy. - The authorities emphasize timely servicing of debt and consider themselves "good borrowers." - The authorities recognize: - Infrastructure gaps remain and large infrastructure projects are likely to be financed in part with external debt. - They will face less concessional terms as they proceed toward upper middle income status. - In the authorities' view, these risks are fully contained so far. ### Debt indicators and projections (selected) - External debt (nominal) 2016–2039 (selected years, in percent of GDP): 2016: 18.5; 2017: 18.0; 2018: 20.1; 2019: 18.6; 2020: 18.2; 2021: 17.9; 2022: 17.5; 2023: 17.1; 2024: 16.7; 2029: 14.9; 2039: 15.7; 19.1; 16.7. - Of which: public and publicly guaranteed (PPG) external debt (percent of GDP): 2016: 14.5; 2017: 13.7; 2018: 15.0; 2019: 14.5; 2020: 14.6; 2021: 14.6; 2022: 14.4; 2023: 14.3; 2024: 14.1; 2029: 13.3; 2039: 14.9; 16.5; 14.0. - Change in external debt (percent of GDP): 2016: -0.6; 2017: -0.5; 2018: 2.2; 2019: -1.5; 2020: -0.3; 2021: -0.3; 2022: -0.4; 2023: -0.4; 2024: -0.4; 2029: -0.2; 2039: -0.2. - Net FDI (negative = inflow): 2016: -0.6; 2017: -0.7; 2018: -0.6; 2019: -0.6; 2020: -0.6; 2021: -0.6; 2022: -0.6; 2023: -0.6; 2024: -0.6; 2029: -1.1; 2039: -2.1; -0.8; -0.7. - Gross external financing need (Million of U.S. dollars): 2016: 3374.1; 2017: 9043.8; 2018: 91968.3; 2019: 21031.6; 2020: 17117.4; 2021: 16856.2; 2022: 17279.1; 2023: 17751.2; 2024: 18127.9; 2029: 19604.5; 2039: 55153.5. - Real GDP growth (in percent): 2016: 7.1; 2017: 7.3; 2018: 7.9; 2019: 8.0; 2020: 7.6; 2021: 7.3; 2022: 7.3; 2023: 7.3; 2024: 7.3; 2029: 6.8; 2039: 6.5; average: 6.4; 7.3. - Government revenues (excluding grants, in percent of GDP): 2016: 10.0; 2017: 10.2; 2018: 9.6; 2019: 9.8; 2020: 10.1; 2021: 10.0; 2022: 10.0; 2023: 10.0; 2024: 9.9; 2029: 9.7; 2039: 9.8; average: 10.0; 9.9. ### Debt dynamics and drivers - The public debt trajectory is influenced by: - Endogenous debt dynamics (contribution from nominal interest rate, contribution from real GDP growth, contribution from price and exchange rate changes). - Identified net debt-creating flows including non-interest current account deficit, deficits in balance of goods and services, imports, exports, net current transfers. - Residual factors including exceptional financing, changes in arrears and debt relief; changes in gross foreign assets; valuation adjustments. - Table excerpts show: - Endogenous debt dynamics (selected years, percent of GDP): 2016: -1.9; 2017: -1.5; 2018: -0.9; 2019: -0.8; 2020: -0.7; 2021: -0.6; 2022: -0.6; 2023: -0.6; 2024: -0.6; 2029: -0.5; 2039: -0.4. - Residual (selected years, percent of GDP): 2016: 4.2; 2017: 1.7; 2018: 0.8; 2019: -1.4; 2020: -0.6; 2021: -0.6; 2022: -0.7; 2023: -0.6; 2024: -0.6; 2029: -0.1; 2039: -1.2; 2.8; -0.6. ### Realism tools, fiscal adjustment, and investment - Realism tools show comparisons of government and private investment across DSAs and contributions to real GDP growth. - Fiscal adjustment and possible growth paths: - Projected 3-year adjustment in primary balance distribution indicates that a 3-year PB adjustment greater than 2.5 percentage points of GDP is approximately the top quartile of Fund-supported program experiences. - Fiscal multipliers illustrated include Multipliers = 0.2, 0.4, 0.6, 0.8 with baseline GDP growth path for 2013–2020 series. ### Stress tests and sensitivity analysis (selected) - Sensitivity analysis covers 2019−2029 for key indicators of public and publicly guaranteed external debt and public debt. - Table 3 (external PPG indicators): Baseline sequences and alternative scenarios include A1 (key variables at historical averages), bound tests B1–B6 (Real GDP growth, Primary balance, Exports, Other flows, Depreciation, Combination), and tailored tests C1–C4 (Combined contingent liabilities, Natural disaster, Commodity price, Market Financing). - Table 4 (public debt indicators): Presents baseline and scenario paths for PV of Debt-to-GDP Ratio, PV of Debt-to-Revenue Ratio, Debt Service-to-Revenue Ratio, and TOTAL public debt benchmark. - Benchmarks/thresholds shown in stress tables (examples): Threshold values listed as 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, etc., and other numeric threshold arrays specific to each indicator and year. ### Key policy-relevant takeaways - Authorities maintain conservative external borrowing practices and prioritize timely debt servicing, contributing to a low assessed risk of external and overall debt distress. - Infrastructure needs will likely require external borrowing; authorities note diminishing concessionality as income status rises. - Stress tests and sensitivity analyses are applied across a range of shocks (real GDP, primary balance, exports, other flows, depreciation, natural disaster, contingent liabilities) to evaluate vulnerability; the authorities judge current risks to be contained. *Statement by Mahinda Siriwardana, Alternate Executive Director for Bangladesh; and Bhupal Singh, Advisor to Executive Director — September 9, 2019* ### 1. Our Bangladesh authorities thank staff for the candid and constructive discussions ### 1. Our Bangladesh authorities thank staff for the candid and constructive discussions ### Macroeconomic overview and growth performance - Authorities reiterate strong commitment to maintaining macroeconomic stability and promoting inclusive growth. - Real GDP growth: increased from 7.9 percent in FY18 (July 2017-June 2018) to 8.1 per cent in FY19 (provisional estimates). - Key growth drivers: high growth in the manufacturing sector, strong domestic demand, high growth in exports and remittances, and political stability. - Inflation: end-June 2019 inflation at 5.47 percent—below the central bank’s target of 5.6 per cent. - Current account deficit: 1.7 per cent of GDP in FY2019 (3.2 percent of GDP in FY18). - Foreign exchange reserves: stock of foreign exchange reserves stood at US$ 32.72 billion at the end of FY2019, providing a cover of 5.9 months of imports. - Broad money and domestic credit growth: moderating, indicating a decline in frothiness of dubious quality lending. ### Staff projections and risks - Staff expects GDP growth to be above mid-7 percent in FY19 and FY20. - Average annual inflation projected close to the Bangladesh Bank’s 5.5 percent target. - Current account deficit around 2 percent of GDP. - Downside risks: weaker-than-expected global growth; slow progress in domestic banking sector reforms; trade tensions (noted as not having negatively affected export growth to date). - Policy implication: central bank should monitor inflation developments closely and stand ready to adjust policy promptly. ### Authorities' FY20 outlook and targets - Authorities' targets for FY20: GDP growth 8.2 per cent and inflation 5.5 per cent. - Policy focus: increased domestic demand through consumption and investment; enhanced external demand by boosting exports. - Risks acknowledged by authorities: sluggish global growth and unsteady remittance inflows due to weaker growth in source countries. ### Monetary policy and inflation dynamics - Following easing of monetary policy in April 2018, inflation has remained broadly stable at around the Bangladesh Bank’s (BB) target. - Potential inflationary pressures: elevated inflation expectations, gradually increasing non-food inflation, and strong growth supported by robust domestic demand. - Offsetting factors: decelerating growth of monetary and credit aggregates until recently; bumper harvest in FY19 leading to declining food inflation. - Authorities agree to monitor economic and financial developments and adjust monetary policy promptly as needed. ### External sector and exchange rate policy - Staff assessment: external position in CY18 broadly in line with fundamentals and desired policies. - Reserve coverage: gross official reserves covering 5.9 months of prospective imports in FY18; expected to gradually decline if imports grow without further reserve accumulation. - Current account: estimated to have narrowed to around 2 percent of GDP in FY19 and projected to remain broadly at the same level over the medium term. - Export concentration risk: rapid growth in readymade garment sector supports growth but concentrated exports pose risks; broader export base recommended to facilitate integration into global supply chains and increase potential growth. - Policy recommendation: continue to gradually expand exchange rate flexibility to better buffer against external shocks. ### Remittances, FDI, and external debt outlook - Authorities expect remittances and export growth to accelerate further. - Ongoing mega infrastructure projects expected to attract Foreign Direct Investment (FDI), further strengthening export growth. - Authorities aim to maintain adequate reserves to support confidence and increase FDI flows. - Given low debt-to-GDP ratio and projected high medium-term growth, authorities express confidence that there will be no risks of external debt distress. ### Fiscal policy and revenue mobilization - FY20 budget anchored at 5 percent fiscal deficit-GDP ratio; authorities reconfirm commitment to keep fiscal deficit at 5 percent of GDP. - Staff view: revenue target appears ambitious, primarily due to assumed increase in revenues by more than 3 percent of GDP—much higher than staff projections. - Staff recommendation: tax policy reforms should focus on tax base broadening and reducing tax concessions and tax avoidance. - Authorities note reforms to boost revenues: - Implementation of the new VAT law on July 1, 2019. - VAT automation and rollout of electronic modes for VAT taxpayers. - Improvements in tax administration and tax compliance. - Increase in number of local tax offices. - Authorities also cite efforts to increase recurrent expenditure savings via: - Recently increased gas tariffs. - Lower interest payments due to expected reduced issuance of high-yielding NSCs. - Termination of the practice of providing advanced payments to autonomous bodies. - External and domestic debt indicators: below respective thresholds under the baseline and stress test scenarios conducted by fund staff (as reported by the authorities). ### Banking sector and financial stability - Staff assessment: financial situation in the banking sector continues to deteriorate despite strong growth. - Nonperforming loan (NPL) ratio: increased from 9.3 percent at end-2017 to 10.3 percent at the end-2018. - Trends noted by staff: growing loan rescheduling and restructuring. - Staff suggested comprehensive time-bound action plan including: - Avoidance of regulatory forbearance. - Comprehensive review of the banking sector’s assets. - Tightening criteria for rescheduling/restructuring of loans. - Strengthening corporate governance and legal systems. - Transparent budgetary support for state owned banks and adherence to commercial principles. - Authorities’ response: - Agree that persistently high NPLs are a concern, but expect ongoing measures to address the situation effectively. - NPLs concentrated particularly in state owned banks. - Most banks maintain a sufficient level of provisions and net NPLs are relatively moderate. - Loan rescheduling/restructuring targeted at borrowers unable to meet original terms due to adverse events outside their control; objective is to prevent unnecessary loss of output and employment. - Enforcement: limit of maximum three loan rescheduling now strictly enforced; all rescheduled loans required to be adequately provisioned. - Bangladesh Bank does not allow regulatory forbearance, while taking into account potential economic costs when deciding on borrower relief. - Working on legal definition of willful defaulters to enable more effective steps. - Bank merger policy under discussion to promote consolidation; setting up an asset management company to take over NPLs being considered. ### Public financial management and governance - Authorities emphasize implementation of the new Budget Accounting and Classification System (BACS) to support better public financial management by providing additional and better-quality information, including on a broader set of government entities, financial assets and liabilities, and location of spending. - Staff view on corruption: control of corruption has improved in recent years but remains modestly below the average for South Asia and low-income countries. - Authorities’ stance: controlling corruption is a priority; efforts to enhance public awareness; challenges remain in capacity and the judicial process. - Bangladesh Financial Intelligence Unit has initiated several changes. - Authorities expressed concerns about third-party corruption perception indicators, emphasizing subjective judgments in such measures. ### Business environment and climate resilience - Improving the business environment remains important to facilitate investment outside the garment industry despite some progress. - One Stop Service virtual platform: merged procedures for company registration, online payment of registration fees, tax identification number, and online VAT registration into a single process. - Reform priorities remain in the pipeline to enhance the judicial system. - Climate change: authorities fully committed to addressing vulnerabilities; commitments articulated in overarching national plans. - Government implementing ‘Vision 2021’, incorporating environmental development as a key goal. - Detailed work plan formulated to achieve environmental targets of SDG’s. - Enhanced resilience to natural disasters developed; budget provisions made each year to respond to possible extreme weather events. - Energy subsidies: provision of affordable energy viewed as essential over the medium term to sustain rapid economic growth. *Source: 1bgdea2019001 - 1. Our Bangladesh authorities thank staff for the candid and constructive discussions* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1bgdea2019001.pdf_