## _cr07234

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### Executive Summary — Background and Key Findings
- Growth outlook and external position: described as robust; growth in FY07 projected at 6¾ percent (reported elsewhere as 6.7 percent).
- Inflation: picked up to over 7 percent by March 2007; FY07 CPI inflation reported at 7.2 percent.
- Reserves and external flows:
  - Net international reserves at over $3 billion by March; gross reserves reported elsewhere reaching $4.8 billion as of mid-June.
  - Remittances and exports growing at annual rates of 25 percent and 21 percent (periods referenced in the source).
- Monetary and fiscal slippages:
  - Broad money growth reached 22 percent in December; private sector credit grew close to 20 percent.
  - Domestic financing of the budget exceeded end-December PRGF performance criterion; Bangladesh Bank missed end-December NDA performance criterion but NDA came below target by end-March.
- Program performance:
  - Most PRGF macroeconomic objectives attained, including the shift to a flexible exchange rate regime and external viability.
  - Key disappointment: revenue-to-GDP ratio rose by less than ½ percent of GDP over four years of the program; FY07 revenue-to-GDP around 10.4–10.7 percent (figures reported inconsistently across source).
- TG reform actions: corporatization of NCBs, energy price adjustments (fuel up 16–21 percent in April; electricity tariffs up 5 percent in March), governance measures, and removal of ad hoc treasury system (auction mechanism introduced).

### Key Policy Issues and Staff Recommendations
- Monetary policy:
  - Staff recommended monetary tightening to curb inflationary pressures; BB policy of “cautious restraint” while inflation below 7 percent noted, but inflation rose above 7 percent.
  - Scope for greater exchange rate flexibility given improved reserve position; staff advised moderating reserve accumulation and removing restriction on transferability of proceeds from nonresident taka accounts.
- Revenue and tax reform:
  - Staff argued for fundamental overhaul of the revenue system; administrative reforms alone insufficient.
  - Recommended steps: separate tax policy from administration; form a tax reform commission; confirm no further tax holidays after end-June 2008.
  - FY08 budget revenue target: 10.7 percent of GDP (authorities’ plan).
  - Staff proposals to raise revenue: adjust land valuation for property transfer fees; increase vehicle registration fees; consider eliminating tariff exemptions; consider increases in nonfuel excises; adjust top marginal personal income tax rate from 25 percent to 30 percent.
- Financial sector and banking:
  - Strengthen prudential rules and enforcement amid rapid credit growth.
  - Corporatization/privatization of NCBs to improve intermediation; Rupali Bank privatization noted as important milestone.
  - Staff welcomed amendments to Banking Companies Act to strengthen loan classification and raise minimum capital requirements.
- SOE, pricing, and governance:
  - Further pricing reform needed: fuel, electricity, natural gas, and fertilizer adjustments required.
  - BPC accumulated losses and overdue loans amount to 1.6 percent of GDP; assuming BPC nonperforming loans in budget would increase overall deficit to 5.2 percent of GDP (FY08 preliminary budget assumption).
  - Recommended measures to avoid re-accumulation of BPC losses: automatic price adjustment mechanism; operational efficiency improvements; ensure commercial trade financing without government guarantee.
  - Governance: anti-corruption drive under TG; Anti-Corruption Commission reconstituted; AML/CFT framework strengthened with Financial Intelligence Unit initiated May 2007.

### Political Background and Recent Developments
- Political events:
  - Elections scheduled for January 2007 did not occur; emergency rule declared and TG installed; outgoing BNP government stepped down on October 28, 2006.
  - TG led by Fakhruddin Ahmed announced elections before end-2008.
- TG reform and institutional measures:
  - Reconstituted Election Commission; new voter list and voter IDs planned.
  - World Bank proceeded with Development Support Credit IV approved May 29.
  - TG approved corporatization of remaining NCBs (structural performance criterion) and met structural benchmarks on FX positions, ad hoc treasury elimination, and social safety net review; did not meet LTU coordination and unique taxpayer ID benchmarks.
- TG operational measures:
  - Sale of remaining minority shares of Rupali Bank approved; intervention to manage Oriental Bank; container terminal at Chittagong placed under private management; committee established to review fuel prices regularly.

### Progress Toward PRGF Objectives and Structural Reforms
- Macroeconomic outcomes:
  - GDP growth averaged 6.4 percent (past performance); FY07 growth projected at 6.7/6¾ percent.
  - Inflation target under program was to reduce to less than 4 percent; actual FY07 CPI around 7.2 percent.
  - Gross reserves projected to reach US$3.2 billion by 2005/06; observed higher values subsequently.
  - Export growth (goods only) FY07 figure 19.9 (percent, series format preserved).
  - Central government deficit FY07 around -3.5 percent of GDP; domestic financing FY07 at 1.9 percent of GDP.
  - Revenue-to-GDP rose to 10.4 in FY07; poverty spending increased to 7.1 percent of GDP.
- Structural reform progress:
  - Slow and sporadic; revenue and NCB reforms emphasized under PRGF, governance and SOE reform covered by other donors.
  - Nominal protection remains at 24 percent; further tariff reductions needed.
- Petroleum pricing:
  - Diesel prices about 20 percent below break-even levels; domestic petroleum prices at 88 percent of break-even on average; diesel at 80 percent of break-even.

### Economic Outlook, Development Challenges, and Risks
- Growth and inflation projections:
  - Growth expected around 6½–7 percent over the medium term.
  - Inflation expected to be contained around 6½ percent in FY07 (staff view), but pass-through of international oil prices could temporarily raise inflation.
- External sector and reserves:
  - Double-digit export growth expected to be sustained; current account could slip to a small deficit in FY09 as imports and financing strengthen.
  - International reserves projected to increase with higher aid and foreign investment.
- Risks:
  - External dependence on garment exports; vulnerability to competition and global market shifts.
  - Political stability critical; TG’s ability to deliver credible elections central to outlook.
  - Administrative price controls on commodities may be counterproductive and create market distortions, potentially causing shortages and additional price pressures.

### Fiscal Policy, Budget, and Debt Management
- FY08 preliminary budget (staff projection vs. preliminary budget in percent of GDP):
  - Total revenue: 10.7 10.7
  - Total expenditure: 15.9 16.2
  - Current expenditure: 8.9 9.3
  - Of which: Pay and allowances: 2.3 2.5
  - Of which: Subsidies and transfers: 2.8 3.1
  - Capital spending and net lending: 7.0 6.9
  - Overall balance (excluding grants): -5.2 -5.6
  - Excluding BPC debt operation: -3.6 -4.2
  - Net financing: 5.2 5.6 (External 1.5 2.0; Domestic 3.7 3.6)
- Fiscal composition and assumptions:
  - Authorities plan revenue increase to 10.7 percent of GDP via land value adjustments, vehicle registration fee increases, elimination of some tariff exemptions, and VAT extension to previously exempt services.
  - Authorities plan increase in development spending by 0.6 percent of GDP consistent with implementation capacity; MTBF expansion to 14 ministries planned.
  - Assumption: stock of BPC nonperforming loans of 1.6 percent of GDP to be assumed by government; these loans constitute two-thirds of BPC’s bank borrowing stock.
- Debt and DSA:
  - Recent DSA (Country Report No. 06/406, November 2006) showed low risk of external debt distress and moderate risk of public debt distress; staff consider conclusions fundamentally valid.
  - Authorities requested TA to improve debt management; update of the DSA planned in early 2008.

### Monetary and Exchange Rate Policies
- Monetary conditions:
  - Ample liquidity from exports and remittances main challenge; rapid credit expansion and monetary aggregates exceeding program targets.
  - BB stated policy of “cautious restraint” to support 7 percent real GDP growth so long as inflation remains below 7 percent.
  - Staff recommended tightening following recent jump in inflation above 7 percent and April fuel price hike.
- Market instruments and conduct:
  - Adherence to auction calendar for government securities; steps to develop secondary market and yield curve.
  - Staff recommended eliminating the up-front tax on government securities.
- Exchange rate and reserves:
  - Staff supports flexible exchange rate regime; central bank purchased over $400 million since January to restrain taka appreciation.
  - Staff urged greater exchange rate flexibility and removal of restriction on transferability of proceeds from nonresident taka accounts.

### Financial Sector Issues and Banking Soundness
- Structure and trends:
  - Commercial banks account for 90 percent of financial system assets.
  - Bank asset shares: NCBs and SDBs fell from 68 percent in 1997 to 41 percent in 2006.
  - Private bank assets growing at 22–28 percent annually; some smaller banks lending growth 30–40 percent.
- Capital shortfalls and NPLs:
  - After Rupali divestment, capital shortfall of three remaining NCBs around 2 percent of GDP (doubling to 4 percent if international rules applied).
  - Estimated capital shortfall of 2–3 percent of GDP in four development banks.
  - Three out of 40 private banks do not meet 9 percent capital adequacy ratio and are on BB’s watch list.
- Asset quality and provisioning (selected indicators, exact source values preserved):
  - NPLs to gross loans aggregate: Dec 02 = 28, Dec 05 = 14, Dec 06 = 13.
  - NPLs—NCBs: Dec 02 = 34, Dec 05 = 21, Dec 06 = 23.
  - NPLs—SDBs: Dec 02 = 56, Dec 05 = 35, Dec 06 = 34.
  - Provisioning ratio aggregate: Dec 02 = 25, Dec 05 = 24, Dec 06 = 26.
  - Interest margin to average assets aggregate: Dec 02 = 1.4, Dec 05 = 2.3, Dec 06 = 2.0.
  - Return on assets aggregate: Dec 02 = -0.2, Dec 05 = 2.2, Dec 06 = 1.3.
- Staff recommendations:
  - Strengthen prudential regulations and enforcement; implement NCB corporatization with qualified directors; review role of development banks; continue FSAP follow-up and consider FSAP update.

### SOE, Price, Energy, and Governance Issues
- SOE quasi-fiscal costs and energy pricing:
  - April fuel price adjustments: petrol +21 percent; diesel and kerosene +16 percent; expected to reduce annual SOE losses from around ¾ percent of GDP (FY06/FY07) to about ½ percent of GDP in FY08 absent further changes.
  - Domestic petroleum prices at 88 percent of break-even on average; diesel at 80 percent of break-even and below prices in bordering India.
- BPC and SOE liabilities:
  - BPC accumulated losses and overdue loans equal 1.6 percent of GDP; mission supported issuing government securities to assume overdue loans and budgetary provisions.
  - To avoid re-accumulation of losses: (i) introduce automatic price adjustment mechanism; (ii) improve BPC operational efficiency; (iii) ensure BPC seeks trade financing on commercial terms without government guarantee.
  - BPC accounts for about two-thirds of accumulated SOE losses; remainder in state airline, fertilizer, and power companies.
- Natural gas pricing:
  - Gas priced considerably below international levels, encouraging CNG conversion and forfeiting revenue; gas price adjustment necessary for complete energy sector reform.
- Governance and anti-corruption:
  - TG’s anti-corruption campaign: arrests of businessmen and senior officials; Anti-Corruption Commission reconstituted; first three cases initiated by special courts.
  - Steps to improve fiscal transparency: list of government guarantees included in budget; steps to reflect SOE losses directly in the budget.

### Data, Statistics, and Fund Engagement
- Data adequacy and weaknesses:
  - Macroeconomic data adequate for surveillance but significant weaknesses remain in national accounts, GFS, and BOP coverage.
  - ROSC recommendations: strengthen BBS legal mandate, establish business register, improve inter-agency cooperation, adopt updated CPI weights, and compile quarterly national accounts.
- Monetary and BOP data timeliness (selected dates preserved):
  - Exchange rates latest observation 5/10/07.
  - Broad money latest observation Mar. 2007 (received 5/9/07).
  - CPI latest observation Mar. 2007 (received 3/07/07).
  - Central bank balance sheet latest observation Mar. 2007 (received 5/9/07).
- Fund technical assistance and engagement:
  - Multiple missions 2005–07 across STA, MFD, FAD, LEG on data ROSC, bank restructuring, bond market development, tax administration, and Financial Intelligence Unit setup.
  - World Bank DSC-IV approved $200 million; policy and investment lending ongoing.

### Key Quantitative Indicators (selected exact series as presented)
- Real GDP (percent change) FY03–FY13: 5.3, 6.3, 6.0, 6.6, 6.7, 6.7, 7.0, 7.0, 7.0, 7.0, 7.0.
- CPI inflation (annual average) FY03–FY13: 4.4, 5.8, 6.5, 7.2, 7.2, 6.5, 5.0, 4.0, 4.0, 4.0, 4.0.
- Total revenue (percent of GDP) FY03–FY13: 10.3, 10.2, 10.5, 10.7, 10.4, 10.7, 11.1, 11.5, 11.9, 12.2, 12.2.
- Exports, f.o.b. (billions of U.S. dollars) FY05–FY13: 6.5, 7.5, 8.6, 10.4, 12.5, 15.0, 17.1, 19.5, 22.1, 25.1, 28.5.
- Gross official reserves (US$ billions) FY05–FY13: 2.5, 2.7, 2.9, 3.5, 5.0, 5.7, 6.9, 8.1, 9.2, 10.2, 10.8.
- Current account balance (millions of U.S. dollars) FY05–FY13: -557, 572, 293, 536, 192, -138, -463, -944, -1,482, projection -2,139.
- Trade balance (millions of U.S. dollars) FY05–FY13 (selected): FY05 -3,297; FY06 -2,879; FY07 -3,426; FY08 -3,457; FY09 -4,350.
- BPC loans and losses: accumulated overdue loans from NCBs amounting to 1.6 percent of GDP.

### Staff Appraisal — Priorities and Recommendations
- Macroeconomic stabilization:
  - Tighten monetary policy to address rapid money and credit expansion and rising inflation.
  - Allow greater exchange rate flexibility; confine intervention to stabilizing disorderly conditions.
- Fiscal and revenue policy:
  - Undertake fundamental revenue system reform to raise revenue-to-GDP substantially; separate tax policy from administration; consider redrafting VAT and income tax legislation; reduce exemptions.
  - In the short run, reduce exemptions, strengthen revenue administration (merge LTUs), and consider modest tax and excise adjustments.
- Financial sector:
  - Strengthen prudential regulation and enforcement; implement corporatization and eventual divestment of NCBs with qualified management; enhance provisioning and apply stricter loan classification.
- SOE and energy sector:
  - Accelerate SOE restructuring and pricing reforms (fuel, electricity, natural gas, fertilizer); combine assumption of SOE nonperforming loans with measures to prevent future losses (automatic price adjustment, efficiency improvements).
- Governance and social protection:
  - Continue anti-corruption and governance reforms; enhance targeted social safety nets to protect the poor during price adjustments.
- Data and capacity:
  - Address statistical weaknesses in national accounts, BOP, debt monitoring, and government finance statistics through Fund TA and other assistance.

*Source: _cr07234 - Executive Summary and excerpts from IMF staff report and authorities’ statement (IMF country document).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- The growth outlook and external position remain robust, but inflation has picked up.
- Strong inflows from remittances and exports have contributed to a more comfortable reserve position, but have complicated monetary management.
- Money and credit aggregates expanded at a rapid rate in the first half of the fiscal year and domestic financing of the budget went off track. As a result, several performance criteria were missed.
- Macroeconomic policies are being brought back in line with program targets, but this process will extend beyond the mid-June expiration date of the PRGF arrangement, precluding completion of the sixth review.
- Most of the macroeconomic objectives of the PRGF program were achieved; a key success is the viability of the external sector following the shift to a flexible exchange rate regime.
- A major disappointment is the failure to significantly raise the low revenue-to-GDP ratio.
- The authorities are targeting a more realistic FY08 budget, with a small increase in revenue supported by specific measures and an increase in development spending consistent with implementation capacity.
- The transitional government (TG) has moved forward with previously stalled reforms, including:
  - significant adjustments in energy prices;
  - corporatization of the nationalized commercial banks;
  - a range of governance reforms.

### Key Policy Issues
- Monetary policy
  - Staff recommended monetary tightening to curb inflationary pressures.
  - There is scope for more flexibility in the exchange rate given the improved reserve position.
- Revenue and tax reform
  - Staff argued for fundamental reform of the revenue system to achieve the full benefits of tax administration reform, support further trade reform, and provide resources for development needs.
- Banking and financial sector
  - Banking risks appear manageable, but stricter prudential rules and enforcement are needed to avoid future potential risks, particularly amid rapid credit growth.
  - Reform of the large insolvent state banks would help improve incentives for greater efficiency of financial intermediation.
- SOE, price, and governance reforms
  - Pricing reform and state-owned enterprise restructuring is still needed.
  - April fuel price increases brought domestic prices more in line with international prices, but further adjustments are needed for fuel, electricity, natural gas, and fertilizer.
  - To increase fiscal transparency, the government plans to assume the nonperforming loans of the petroleum company with the state banks; this step needs support by measures to avoid future losses.

### I. Political Background and Recent Developments
- Elections scheduled for January 2007 did not take place; emergency rule was declared and a transitional government (TG) installed.
- The outgoing Bangladesh Nationalist Party government stepped down on October 28, 2006; the TG, led by former Bangladesh Bank Governor Fakhruddin Ahmed, announced elections before the end of 2008.
- The TG has broad support for its anti-corruption campaign; scores of businessmen and senior officials have been arrested and the Anti-Corruption Commission empowered to proceed with prosecutions.
- The Election Commission has been reconstituted and arrangements are in place to create a new voter list and issue voter IDs.
- The TG’s reform progress encouraged the World Bank to proceed with Development Support Credit IV, approved on May 29.
- Macroeconomic performance in FY07:
  - Growth remains strong at a projected 6¾ percent, spurred by export demand and rising private domestic investment financed by external current receipts and credit growth.
  - Inflation (y/y) edged up to over 7 percent by March 2007 reflecting both food and nonfood prices.
  - Net international reserves at over $3 billion have exceeded program targets, supported by remittances and exports growing at annual rates of 25 and 21 percent, respectively.
  - Fiscal performance weakened in the first half of the year: spending by the outgoing government and weak revenue collection pushed domestic financing well above the end-December PRGF performance criterion.
  - Broad money growth reached 22 percent in December and private sector credit grew close to 20 percent.
  - T-bill rates increased only by 10–22 basis points since June; Bangladesh Bank absorbed a large share of issued government paper and missed its end-December NDA performance criterion.
  - By end-March, NDA had come below the program target and reserve money declined marginally, but remained high due to increased net foreign assets.
- TG actions on stalled reforms:
  - Approved corporatization of the remaining nationalized commercial banks (NCBs) (one of two PRGF structural performance criteria for March).
  - Met three structural benchmarks: (i) eliminating NCBs’ net open foreign exchange position overruns; (ii) eliminating the ad hoc treasury system and introducing an auction mechanism with preannounced quantities; (iii) reviewing and strengthening social safety net programs for FY08.
  - Did not meet benchmarks on improving coordination between large taxpayer units (LTUs) and assigning unique taxpayer ID numbers to large taxpayers.
  - Nonobservance of several performance criteria and revenue delays preclude completion of the sixth and final PRGF review before the June 19 expiration of the PRGF arrangement.
- Other TG measures:
  - Approved sale of remaining minority shares of Rupali Bank;
  - Intervened to manage failing Oriental Bank;
  - Adopted resolutions on separation of judiciary from executive;
  - Placed new container terminal at Chittagong port under private management;
  - Raised electricity tariffs by 5 percent in March and fuel prices by 16–21 percent in April;
  - Established a committee to regularly review and recommend fuel price adjustments;
  - Initiated more comprehensive energy sector reforms in consultation with the World Bank and AsDB.

### II. Policy Discussions
A. Progress Toward Key Objectives of the PRGF-Supported Program
- Most original macroeconomic objectives were attained:
  - Flexible exchange rate regime helped the economy weather external shocks (phaseout of MFA quotas and higher oil prices).
  - Overall government deficit remained well below program targets in each year (mainly due to slow project implementation).
  - Domestic financing was contained except for the overrun earlier in the year.
  - Tangible progress made on some MDG targets: reductions in the poverty rate, improved access to primary education, gender equality, and reductions in child mortality.
- Selected indicators and outcomes (as presented in the source):
  - GDP growth targets and outcomes: FY01–FY07 series culminating in FY07 projection of 6.7 (and reported elsewhere as 6¾ percent).
  - Inflation targets and outcomes: reduction goal to less than 4 percent; observed series with FY07 at 7.2 percent.
  - Reserve targets: build foreign reserves to at least 3 months of imports; gross reserves projected to reach US$ 3.2 billion by 2005/06 and observed series showing higher values.
  - Export growth (goods only): series with FY07 figure of 19.9.
  - Central government deficit: series showing FY07 around -3.5 (percent of GDP).
  - Domestic financing below 2.5 percent of GDP: series with FY07 at 1.9.
  - Revenue-to-GDP: series showing increases to 10.4 in FY07.
  - Poverty spending increased to 7.1 (percent of GDP).
- Revenue performance remains disappointing:
  - Revenue-to-GDP ratio increased by less than ½ percent of GDP over four years of the program.
  - Contributing factors: deficiencies in tax design, slower-than-anticipated administrative reforms (including delays in establishing LTUs), and weak customs administration limiting revenue gains from trade liberalization.
- Structural reform progress:
  - Generally slow with occasional backsliding.
  - PRGF structural agenda emphasized revenue and NCB reforms; governance, SOE reform, and public finance management were covered by World Bank, AsDB, and DfID.
  - Bangladesh continues to rank low on political stability, regulatory quality, and control of corruption, though some progress achieved in improving private sector environment and increasing social spending.
- Achievements with Fund support:
  - Improved foreign exchange market functioning strengthened the taka and export competitiveness.
  - Bangladesh Bank improved central bank operations, liquidity management, and bank supervision, and monitored NCB compliance with performance indicators.
  - Privatization of Rupali Bank is an important milestone toward divestment of other NCBs.
  - Nominal protection declined gradually; nominal protection remains at 24 percent, implying further tariff reductions are needed.
- Petroleum pricing and SOE finances:
  - An automatic pricing formula for petroleum products developed in 2003 was not implemented; diesel prices remain about 20 percent below break-even levels.
  - Below-break-even diesel pricing contributed to losses in the state-owned petroleum company (BPC), straining NCB finances and complicating monetary management.

B. Economic Outlook, Development Challenges, and Risks
- Growth outlook
  - Growth is expected to remain around 6½–7 percent over the medium term.
  - Agriculture expected to pick up in FY08.
  - Buoyant garment exports and remittance flows, and the possibility of higher aid and private flows, will help sustain investment, including in power infrastructure.
  - Productivity gains expected from infrastructure development and increased emphasis on labor skills training.
- Inflation outlook
  - Inflation is expected to be contained at around 6½ percent in FY07, although further pass-through of international oil price increases could temporarily boost prices before inflation begins to decline.
- External sector
  - Strength of the external sector should sustain double-digit export growth, supported by firmer growth prospects in the key European market in FY08.
  - The current account could slip back into a small deficit in FY09 as financing flows and import growth strengthen, but international reserves would increase with higher aid flows and foreign investment.
- Development challenges
  - Providing economic opportunities to the vast poor population will remain an immense challenge.
  - Despite strong growth and poverty reduction, Bangladesh lags regional peers on business climate and key economic and social indicators due to deficiencies in social services and infrastructure.
  - Catching up will require capitalizing on regional growth, improving public finances, and better financial intermediation to provide access to resources and opportunities.
  - If absorptive capacity were significantly enhanced, increased aid could help remove constraints and allow more progress on poverty alleviation.

### III. Staff Appraisal
- Macroeconomic stabilization and structural reform priorities highlighted:
  - Tighten monetary policy to address rapid money and credit expansion and rising inflation.
  - Undertake fundamental revenue system reform to raise revenue-to-GDP substantially.
  - Strengthen prudential regulations and enforcement to contain banking risks amid fast credit growth.
  - Accelerate SOE restructuring and pricing reforms (fuel, electricity, natural gas, fertilizer) and support measures to prevent future losses where the government assumes nonperforming loans.

*Source: _cr07234 - Executive Summary (IMF country document).*

### 14.      A number of risks could lead to slower growth or a weaker external position.

### 14.      A number of risks could lead to slower growth or a weaker external position.

### Risks and outlook
- External position remains highly dependent on garment exports and may be vulnerable to intensified competition and shifting sentiments in global markets.
- A mild slowdown in major economies would likely have a limited impact on demand for the lower-value-added apparel comprising the bulk of exports.
- Political stability is critical for sustaining investor confidence; the destructive political rivalry of the last three decades, together with weak accountability and rule of law, has squandered a good portion of available resources.
- The future outlook will depend largely on the TG’s ability to bring about credible elections while maintaining broad public support.

### Fiscal Policy and Tax Reform
- Overall fiscal discipline has been adhered to, but fiscal performance quality remains weak.
- The overall fiscal deficit and domestic financing have been contained to below 4 percent and 2 percent of GDP respectively, but revenue shortfalls persisted.
- Deterioration of SOE finances and mounting arrears between state entities have undermined the public sector’s financial position; structural rigidities have hampered implementation of the development budget.
- Authorities recognize revenue-raising is challenging amid trade reform and concur on the need to broaden the tax base and continue shifting away from trade taxes.
- Staff welcomed intentions to consider revenue reforms, strengthen public financial management, restructure SOEs, and improve fiscal transparency.

Key staff recommendations and findings:
- A complete overhaul of tax legislation is recommended; administrative reforms alone offer little scope for improving tax revenue.
- Next steps to initiate reform should entail:
  - (i) clearly separating tax policy from administration;
  - (ii) forming a tax reform commission that would oversee the process;
  - (iii) confirming that no further tax holidays will be granted after their planned expiration at end-June 2008.
- FAD expressed willingness to provide follow-up assistance when authorities confirm readiness to move forward.

Revenue administration and FY08 budget intentions:
- Establishment of LTUs has been important; pickup in revenue from the income tax LTU signals potential collection gains.
- Staff recommended consolidation of the income tax and VAT units into a single LTU, introduction of single large taxpayer ID numbers, and strengthening the Central Intelligence Cell.
- In the FY08 budget, authorities plan an increase in revenue to 10.7 percent of GDP based on:
  - adjustment of land values used in assessing property transfer fees;
  - increases in vehicle registration fees;
  - possibly eliminating tariff exemptions and moving some zero-rated items to a higher duty rate.
- Staff also suggested considering increases in nonfuel excises; an adjustment in prices of domestically produced natural gas (substantially below opportunity cost); and adjusting the top marginal personal income tax rate from 25 percent to 30 percent.
- Further reducing exemptions and better revenue administration would supplement revenue while a fundamental reform is initiated.

Expenditure, deficit, and public financial management:
- Expenditure priorities in FY08: higher social safety net spending and a 0.6 percent of GDP increase in the annual development program.
- The overall budget deficit is targeted to increase to 5.2 percent of GDP after assuming the stock of nonperforming loans of the BPC with domestic banks amounting to 1.6 percent of GDP.
- These nonperforming loans represent two-thirds of the total stock of BPC’s bank borrowing to finance its losses.
- The underlying deficit (i.e., the overall deficit excluding the impact of assuming SOE debt) would remain around 3½ percent of GDP.
- Planned expansion of the medium-term budget framework (MTBF) to four additional ministries (for a total of 14) during FY08.
- Adoption of a regulatory framework to implement the Public Procurement Act of June 2006 is expected to improve expenditure efficiency and project implementation.

Debt management and DSA:
- Authorities have requested TA to improve debt management capacity; MCM is considering how best to address this request.
- The most recent DSA (IMF Country Report No. 06/406, November 2006) showed low risk of external debt distress and moderate risk of public debt distress; staff see its analysis and conclusions as fundamentally valid.
- Bank and Fund staff intend to initiate the next update of the DSA in early 2008 in line with the expected timing of the 2008 Article IV consultation.
- Improving debt management and enhancing absorptive capacity would be especially important if additional aid flows materialize.

### Monetary and Exchange Rate Policies
Monetary conditions and inflation:
- Ample liquidity from strong exports and remittances has emerged as the main challenge for monetary policy.
- Rapid credit expansion has occurred; money market rates have remained unchanged since mid-2006; banks’ excess reserves have risen above program levels; monetary aggregates continue to exceed program targets.
- BB stated intention to keep unchanged its policy of “cautious restraint” to support real GDP growth of 7 percent so long as inflation remains below 7 percent.
- Recent jump in inflation above 7 percent, coupled with the expected impact of the April hike in fuel prices, reinforced the need for some monetary tightening to anchor inflationary expectations.
- Authorities were more optimistic than staff that overall inflation would return below 7 percent by end of the fiscal year; they have taken administrative measures to control commodity prices and pledged close monitoring. Next monetary policy statement expected in July.

Market-based conduct and instruments:
- Progress has been made toward market-based conduct: government adherence to auction calendar for government securities (announced September 2006); Ministry of Finance preparing grounds for secondary market and yield curve development; issuance of a large share of long-term securities.
- Steps to encourage primary dealer activity should reduce BB’s need to absorb primary issues of government securities.
- Staff recommended eliminating the up-front tax on government securities, which distorts pricing and may undermine secondary market development.

Exchange rate and reserves:
- Staff supports continued adherence to the flexible exchange rate regime, with interventions confined to countering disorderly conditions and building reserves to targeted levels.
- Real effective depreciation has occurred in response to the phaseout of MFA quotas and increases in international oil prices, supporting competitiveness and reserve accumulation.
- The central bank purchased over $400 million from the market since January to restrain taka appreciation amid strong inflows.
- Staff advised scope to moderate the pace of reserve accumulation and allow greater exchange rate flexibility; urged removal of the restriction on transferability of proceeds from nonresident taka accounts (Annex I).
- Authorities emphasized interventions aim to stabilize market conditions and increase international reserves per commitments in their Memorandum of Economic and Financial Policies; they are, in principle, willing to accept more exchange rate movement but were reluctant to commit a timetable for removing the exchange restriction due to perceived small risk of precipitating capital outflows.

### Financial Sector Issues
- Bangladesh Bank (BB) has advanced reforms to deepen financial markets: strengthened regulatory framework, enhanced off-site and on-site supervision, steps to restructure, corporatize, and privatize large nationalized commercial banks (NCBs).
- Published aggregate indicators show improvements but conceal wide divergences and underlying weaknesses due to underestimation of capital shortfalls.

Capital shortfalls and bank soundness:
- After Rupali’s divestment, the capital shortfall of the three remaining NCBs will be around 2 percent of GDP when adjusting for required provisioning shortfalls (doubling to 4 percent of GDP if international loan classification and provisioning rules were applied).
- Estimated capital shortfall of 2–3 percent of GDP in the four development banks, mainly due to government’s repeated loan forgiveness without compensating the banks.
- Three out of 40 private banks do not meet the required 9 percent capital adequacy ratio and are on BB’s closely-watched list.
- Some banks are underprovisioned and undercapitalized due to lenient classification rules and noncompliance.

NCB restructuring and intermediation:
- Staff called for vigilance in implementing NCB restructuring and divestment; privatization of Rupali and corporatization of the three remaining NCBs will bring them more directly under BB supervision.
- Corporatization should be accompanied by appointment of qualified directors to implement restructuring.
- The role of development banks should be reviewed to improve performance.
- Improving NCB performance would enhance financial intermediation; continued dominance of state banks diminishes incentives to improve sector performance.
- Interest rate spreads are high by comparative standards; inefficiencies allow foreign banks to reap large profits.
- Assets of private domestic banks have been growing at 22–28 percent annually for the past three years; lending by some smaller banks has grown by an average of 30–40 percent.
- Newly introduced provisions will facilitate bank mergers and consolidation of smaller weaker banks.
- Staff welcomed proposed amendments to the Banking Companies Act to strengthen loan classification standards and gradually raise minimum capital requirements.
- BB has been conducting a self-assessment of 2002 FSAP recommendations and requested an IMF/WB mission to review findings and conduct an FSAP update.

### SOE, Price, and Governance Reforms
SOE quasi-fiscal losses and pricing:
- Urgent need to address accumulating quasi-fiscal losses of SOEs.
- April fuel price adjustments of 21 percent for petrol, and 16 percent for diesel and kerosene, will bring annual losses down from around ¾ percent of GDP in FY06 and FY07 to about ½ percent of GDP in FY08 in the absence of further price changes.
- At current levels, domestic petroleum prices are at 88 percent of break-even levels on average; diesel prices at 80 percent of break-even and considerably below prices in bordering India.

BPC and other SOEs:
- BPC’s accumulated losses and associated overdue loans from NCBs amount to 1.6 percent of GDP.
- Mission supported authorities’ intention to issue government securities to assume overdue loans and to make necessary budgetary provisions.
- To avoid re-accumulation of BPC losses, important measures include:
  - (i) introduce an automatic mechanism of price adjustment;
  - (ii) improve operational efficiency of BPC;
  - (iii) ensure BPC increasingly seeks trade financing on commercial terms without a government guarantee.
- BPC accounts for about two-thirds of accumulated SOE losses; the state airline, fertilizer, and power companies account for the remainder.
- Further adjustments in electricity tariffs and fertilizer prices, and financial restructuring of state-owned electricity companies, will be needed.
- Scope exists for further divestment among the remaining 47 SOEs; World Bank and AsDB are working with authorities on regulatory reform to promote investment in expanding power generation.

Natural gas pricing:
- Pricing of natural gas is considerably below international levels, forfeiting significant government revenue and creating distortions by encouraging conversion to CNG.
- Higher gas prices will imply further adjustment in electricity and fertilizer prices, but energy sector reform will be incomplete and distortionary unless gas price adjustment is included.
- Authorities intend to continue adjustment of administrated prices to put SOE finances on a sound basis but were reluctant to adjust natural gas until petroleum, electricity, and fertilizer price adjustments are completed.

*Source: _cr07234 - 14.      A number of risks could lead to slower growth or a weaker external position.*

### 36.      Staff warned that recent administrative measures to control commodity prices

### _cr07234 - 36.      Staff warned that recent administrative measures to control commodity prices

### Commodity prices, administrative measures, and inflation
- Staff warned that recent administrative measures to control commodity prices may be counterproductive.
- Authorities are concerned by increases in the prices of some basic food commodities.
- Staff view: some ongoing and proposed administrative measures that seek to regulate stock levels and pricing policies of private traders could have created market distortions and uncertainty in the business environment, thereby contributing to shortages and additional price pressures.
- Staff encouraged the authorities to contain emerging inflationary pressures through appropriate monetary and exchange rate policies.
- In conjunction with macroeconomic policies, staff strongly supported authorities’ efforts to enhance targeted social safety net programs to provide assistance to the poor and protect their consumption possibilities.
- Policy signal: avoid counterproductive price/stock regulation by private traders; rely on macro policies and targeted social protection.

### Governance, anti-corruption, and public sector oversight
- Tackling governance problems is crucial for improving the investment climate.
- Donors have welcomed the government’s recent emphasis on governance reforms and are providing capacity-building support.
- Strengthening efforts:
  - Capacity of the Ministry of Finance to oversee public expenditure is being strengthened.
  - Comptroller and Auditor-General’s office capacity to carry out independent audits is being strengthened.
  - Reconstitution of the Anti-Corruption Commission, filing of dozens of corruption charges, and launching an investigation period.
  - First three cases of corruption charges of former senior government officials were initiated by the special courts.
  - AML/CFT framework is being strengthened, most recently with the initiation of a Financial Intelligence Unit in May 2007.
  - To improve fiscal transparency, the government now includes a list of government guarantees in the budget document and is taking steps to reflect SOE losses directly in the budget.

### Data, Fund engagement, and PRSP
- Economic data are adequate for surveillance, but significant weaknesses remain.
- Planned Fund TA will support authorities’ efforts to address deficiencies identified in the 2005 ROSC in the areas of national accounts, balance of payments, debt monitoring, and government finance statistics.
- A full PRSP was completed in November 2005.
- Work has been initiated on a PRSP implementation report that is expected to be completed by end-2007.
- Authorities are keen to advance the reform agenda: comprehensive overhaul of the revenue system, improvements in fiscal transparency, administrative reforms of NBR, further financial sector reforms, and expressed interest in a new PRGF arrangement.
- World Bank engagement noted:
  - Recently approved Development Support Credit (DSC-IV) of $200 million.
  - Board discussion scheduled for an education sector policy loan ($100 million) in June 2007.
  - Possible follow-up budget support operation in 2008.

### PRGF appraisal: macroeconomic outcomes and outlook
- Past performance:
  - Growth has averaged 6.4 percent.
  - Inflation was largely contained.
  - International reserves increased to around three months of import coverage.
  - Fiscal deficit and public debt were contained despite revenue shortfalls.
  - Poverty headcount declined by 2 percentage points annually.
  - Several MDG targets are within reach.
  - Revenue targets under the program were consistently missed and progress in some key areas of structural reform was less than envisaged.
- Outlook:
  - With sustained reform efforts, growth is expected to remain around 6½–7 percent.
  - Broad-based growth with low inflation, and revenue enhancement to finance social programs, are crucial for further reducing poverty.
  - Key constraints to address: infrastructure and skill deficiencies, power shortages, perceptions of corruption.
- Exchange rate and reserves:
  - Exchange rate reform was a principal success under the PRGF-supported program, facilitating double digit export growth in the post MFA era and attainment of a more comfortable reserve position.
  - The flexible exchange rate regime has helped maintain competitiveness; remains appropriate.
  - No evidence of a significant misalignment given recent performance of exports and remittances.
  - With international reserves at more comfortable levels, confining intervention to stabilizing disorderly market conditions will allow more flexibility in the nominal rate.
  - Recommendation: remove the remaining exchange restriction on the transferability of funds in nonresident taka accounts; staff does not recommend approval of the restriction given lack of a specific timetable for its removal.
- Monetary policy:
  - Further monetary tightening would help curb inflationary expectations.
  - Recent hikes in food and fuel prices are expected to drive up inflation temporarily and could, in the absence of corrective policies, propel inflation into FY08.
  - Developing a secondary market for securities would enhance monetary policy and support financial sector development.
- Recommendation on consultations:
  - It is recommended that the next consultation with Bangladesh take place within the standard 12-month cycle.

### Revenue performance and tax reform (Box 1)
- Revenue performance:
  - At 8½ percent of GDP, tax revenue compares unfavorably with an average of 13 percent in other Asian countries and 15 percent of GDP in sub-Saharan African countries.
  - Revenue collection at around 10½ percent of GDP (noted elsewhere) is among the lowest in the world and virtually unchanged over the last four years compared to a programmed annual increase of ½ percent of GDP.
- Tax system characteristics:
  - Statutory nominal tax rates for VAT and corporate income tax are comparable to or higher than in other countries, but revenue yields are low.
  - Bangladesh’s revenue productivity (the tax-to-GDP ratio divided by the applicable nominal tax rate) is lower than for other Asian countries.
- Identified causes of weak performance (FAD TA mission):
  - Excessive use of tax holidays.
  - Basic design flaws of key tax laws.
  - Poor compliance.
- Revenue foregone:
  - Authorities estimated revenue foregone from tax expenditures at 2½ percent of GDP, of which almost 90 percent was from indirect taxes.
  - Staff considers the potential revenue gain could be larger in the case of direct taxes due to pervasive income tax incentives, and much smaller for indirect taxes since the estimate includes VAT exemptions on bank interest and on intermediate inputs.
- Potential gains:
  - Cross-country regressions suggest scope to raise the tax-to-GDP ratio by 2–4 percent of GDP over the medium term from a combination of tax system and administrative reforms (including the eventual merger of the LTUs).
- Policy recommendations:
  - Fundamental reform of the tax system should be central to fiscal policy going forward.
  - Responsibility for tax policy and collection should be separated.
  - VAT and income tax legislation should be redrafted to reduce exemptions and make the laws easier to administer.
  - In the meantime, stronger efforts to cut back on exemptions and broaden the tax base are needed.
  - Ongoing tax administration measures need more effective execution; merging the LTUs would improve their effectiveness by pooling information and resources.
  - Revenue reforms would allow for further reduction in tariffs and supplementary duties.

### Public financial management and SOE reforms
- Public financial management:
  - Reforms would help improve efficiency of expenditure and project implementation and could help attract more donor resources.
  - Following adoption of MTBF in 14 ministries, the overall budget should be prepared within a medium-term framework.
  - Impediments to implementation of the annual development program will need to be addressed to improve budget execution.
- SOE reforms:
  - Needed to curb fiscal costs and ease infrastructure bottlenecks.
  - To stem future accumulation of losses, government should combine plans to assume nonperforming loans of the petroleum company with operational restructuring measures and an automatic price adjustment mechanism, and initiate price and governance reforms in other major public enterprises.

### Financial sector performance and risks (Box 2 and banking indicators)
- Financial sector structure:
  - Commercial banks account for 90 percent of financial system assets.
  - Broad money and total credit at 40 and 30 percent of GDP, respectively.
  - Banking assets share of four nationalized banks (NCBs) and five specialized development banks (SDBs) fell from 68 percent in 1997 to 41 percent in 2006.
- Asset quality and provisioning:
  - The last FSAP found that in 2002, 35 percent of NCBs’ and 56 percent of SDBs’ loans were nonperforming; these have declined to 23 and 34 percent, respectively.
  - Only 4 out of 30 private banks have NPL ratios in excess of 10 percent compared to 11 banks in 2002.
  - Provisioning remains low except in foreign banks.
- Recent bank performance indicators (selected figures from table and text):
  - NPLs to gross loans: Dec 02 = 28, Dec 05 = 14, Dec 06 = 13 (aggregate).
  - Nationalized commercial banks NPLs to gross loans: Dec 02 = 34, Dec 05 = 21, Dec 06 = 23.
  - Specialized development banks NPLs to gross loans: Dec 02 = 56, Dec 05 = 35, Dec 06 = 34.
  - Private commercial banks NPLs to gross loans: Dec 02 = 17, Dec 05 = 65, Dec 06 = ?
    - (Note: table lists "1765" under Dec 02 Dec 05 Dec 06 formatting; source formatting preserved as presented.)
  - Provisioning ratio aggregate: Dec 02 = 25, Dec 05 = 24, Dec 06 = 26.
  - Provisioning ratio—nationalized commercial banks: Dec 02 = 16, Dec 05 = 13, Dec 06 = 16.
  - Provisioning ratio—specialized development banks: Dec 02 = 28, Dec 05 = 24, Dec 06 = 22.
  - Provisioning ratio—private commercial banks: Dec 02 = 42, Dec 05 = 50, Dec 06 = 52.
  - Provisioning ratio—foreign commercial banks: Dec 02 = 11, Dec 05 = 52, Dec 06 = 15 36 3 (source table formatting preserved).
  - Interest margin to average assets aggregate: Dec 02 = 1.4, Dec 05 = 2.3, Dec 06 = 2.0.
  - Interest margin—nationalized commercial banks: Dec 02 = 0.7, Dec 05 = 1.5, Dec 06 = 1.1.
  - Interest margin—specialized development banks: Dec 02 = 1.9, Dec 05 = 1.3, Dec 06 = 1.2.
  - Interest margin—private commercial banks: Dec 02 = 1.9, Dec 05 = 2.9, Dec 06 = 2.4.
  - Interest margin—foreign commercial banks: Dec 02 = 1.9, Dec 05 = 4.1, Dec 06 = 3.6.
  - Return on assets aggregate: Dec 02 = -0.2, Dec 05 = 2.2, Dec 06 = 1.3.
  - Return on assets—nationalized commercial banks: Dec 02 = -0.2, Dec 05 = 2.1, Dec 06 = 0.5.
  - Return on assets—specialized development banks: Dec 02 = 0.5, Dec 05 = -3.4, Dec 06 = -3.3.
  - Return on assets—private commercial banks: Dec 02 = 1.7, Dec 05 = 2.5, Dec 06 = 1.8.
  - Return on assets—foreign commercial banks: Dec 02 = 3.3, Dec 05 = 3.9, Dec 06 = 4.1.
  - Source: Bangladesh Bank and Fund staff estimates.
- Performance observations:
  - Asset quality indicators have improved, but provisioning remains low.
  - High interest rate spreads point to widespread inefficiencies; foreign banks reap a return of 4 percent on assets.
  - Private bank lending has increased by an average of 35 percent annually over the last three years.
  - High loan-to-deposit ratios of some banks suggest rising liquidity constraints.
  - Available data do not point to risks from sectoral loan concentration: short-term trade finance and working capital together account for 50 percent of total loans outstanding (and two-thirds of all loans are of less than one year maturity).
  - Housing credit is estimated at less than 5 percent of total lending in the banking system.
- Recommended actions:
  - Bangladesh Bank should build on recent financial sector reforms.
  - Monitoring should be strengthened in the context of rapid credit growth by some banks.
  - Regulations need to be brought more in line with international standards—and be more strictly enforced—so that bank soundness can be more accurately assessed.
  - Staff welcomes authorities’ initiation of a self-assessment of the FSAP recommendations, and their preparedness for an FSAP update.

*Source: IMF staff report text provided in the content unit.*

### 2005. Lending in foreign currency is mainly confined to trade-related credits, and most banks are

### _cr07234 - 2005. Lending in foreign currency is mainly confined to trade-related credits, and most banks are within BB’s limits of net open positions, thereby limiting vulnerability to foreign exchange risk.

### External sector indicators (FY1999–2007)
- Exports and Imports: charted as 12-month percent change (no single-value summary provided in source figure).
- Balance of Payments (In percent of GDP): charted for 98/99–06/07 (no single-value summary provided in source figure).
- Workers' Remittances and Aid Inflows (In percent of GDP) 1/: charted (projection for 06/07 noted in figure caption).
- External Debt (In percent of GDP) 1/: charted with debt service on right scale.
- Gross international reserves (In US$ billion; left scale) and REER index (right scale): charted Apr-07.
- Bangladesh Bank Net Purchases/Sales (+/-) of Foreign Exchange (In millions of U.S. dollars): charted Jan-05–Apr-07.
- Note: Sources include Bangladesh authorities; IMF Information Notice System; International Financial Statistics; and Fund staff estimates and projections. 1/ Projection for 06/07.

### Business climate and infrastructure (Figure 2 highlights)
- Business Disclosure Index (0=less disclosure to 10=more disclosure): comparative chart for South Asia economies (no single-value summary).
- Cost of Business Start-up Procedures (In percent of GNI per capita): comparative chart (2003/2005).
- Time Required to Enforce a Contract 2005 (In days): comparative chart.
- Electric Power Consumption (kWh per capita, average of 1998–2003): comparative chart.
- Internet Users (Per 1,000 people, 1998–2004): comparative chart.
- Fixed Line and Mobile Phone Subscribers (Per 1,000 people): comparative chart.
- Source: World Bank Development Indicators.

### Comparative social indicators (Figure 3 highlights)
- Literacy Rate, Adult Female (Percent of females age 15 and above): comparative chart (1990–2004).
- Literacy Rate, Adult Total (Percent of population age 15 and above): comparative chart (1990–2004).
- Infant Mortality Rate (Per 1,000 births): comparative chart (1992–2003).
- Prevalence of Undernourishment (In percent of population): comparative chart (1999–2002).
- Progression to Secondary School (In percent, 1990–2004): comparative chart.
- Improved Sanitation Facilities (In percent of population with access): comparative chart.

### Key economic indicators, FY03–13 (Table 1, selected series)
- Real GDP (percent change): FY03–FY13 — 5.3, 6.3, 6.0, 6.6, 6.7, 6.7, 7.0, 7.0, 7.0, 7.0, 7.0
- GDP deflator: 4.5, 4.2, 5.1, 5.2, 6.3, 6.7, 5.0, 4.0, 4.0, 4.0, 4.0
- CPI inflation (annual average) 2/: 4.4, 5.8, 6.5, 7.2, 7.2, 6.5, 5.0, 4.0, 4.0, 4.0, 4.0
- Total revenue (percent of GDP): 10.3, 10.2, 10.5, 10.7, 10.4, 10.7, 11.1, 11.5, 11.9, 12.2, 12.2
  - Tax: 8.3, 8.2, 8.5, 8.5, 8.3, 8.6, 9.0, 9.4, 9.8, 10.1, 10.1
  - Nontax: 2.0, 1.9, 2.0, 2.2, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1
- Total expenditure (percent of GDP): 13.7, 13.3, 13.8, 13.9, 14.0, 15.9, 14.3, 14.8, 15.4, 15.8, 15.8
  - Current expenditure: 8.1, 7.8, 8.4, 8.4, 9.0, 8.8, 8.6, 8.6, 8.6, 8.5, 8.5
  - Interest payments: 1.9, 1.6, 1.7, 1.8, 1.9, 2.1, 1.9, 1.9, 1.9, 1.9, 1.8
  - Subsidies: 2.3, 2.4, 2.8, 2.6, 3.0, 2.8, 2.8, 2.8, 2.8, 2.8, 2.8
  - Annual Development Program: 5.4, 5.0, 5.0, 4.7, 4.3, 4.8, 4.9, 5.4, 6.0, 6.5, 6.5
- Overall balance (excluding grants) 4/: -3.4, -3.1, -3.3, -3.2, -3.5, -5.2, -3.3, -3.3, -3.5, -3.6, -3.6
- Primary balance 4/: -1.5, -1.4, -1.7, -1.4, -1.6, -3.1, -1.3, -1.4, -1.6, -1.8, -1.8
- Financing (net): 3.4, 3.1, 3.3, 3.2, 3.5, 5.2, 3.3, 3.3, 3.5, 3.6, 3.6
  - Domestic 4/ 5/: 1.2, 1.8, 1.7, 2.1, 2.3, 3.7, 1.7, 1.6, 1.6, 1.6, 1.6
  - External: 2.1, 1.3, 1.6, 1.2, 1.2, 1.5, 1.6, 1.7, 1.9, 2.0, 2.0
- Total central government debt (percent of GDP): 51.1, 51.0, 50.1, 49.3, 46.9, 46.4, 44.6, 43.1, 41.9, 40.8, 39.8
- Balance of payments (in billions of U.S. dollars) 6/:
  - Exports, f.o.b.: 6.5, 7.5, 8.6, 10.4, 12.5, 15.0, 17.1, 19.5, 22.1, 25.1, 28.5
  - Gross official reserves (in billions of U.S. dollars): 2.5, 2.7, 2.9, 3.5, 5.0, 5.7, 6.9, 8.1, 9.2, 10.2, 10.8
  - In months of imports of goods and nonfactor services: 2.9, 2.8, 2.5, 2.7, 3.2, 3.0, 3.2, 3.4, 3.4, 3.4, 3.2
- Memorandum: Nominal GDP (in billions of taka): 3,006, 3,330, 3,707, 4,157, 4,715, 5,368, 6,031, 6,712, 7,469, 8,311, 9,249
- Notes: Fiscal year begins July 1. CPI uses FY96 weights. Balance of payments presented on BPM5 basis. Table labeled “Projection” for FY06/07.

### Balance of Payments, FY05–13 (Table 2, selected figures; In millions of U.S. dollars unless otherwise indicated)
- Trade balance (FY05–FY13, selected): FY05 -3,297; FY06 -2,879; FY07 -3,426; FY08 -3,457; FY09 -4,350; FY10 -4,693; FY11 -4,915; FY12 -5,246; FY13 -5,573; projection FY13 -5,943
- Exports (f.o.b.): FY05 8,573; FY06 10,422; FY07 12,003; FY08 12,499; FY09 14,989; FY10 17,096; FY11 19,507; FY12 22,118; FY13 25,111; projection 28,534
  - Of which RMG sector: FY05 6,432; FY06 7,901; FY07 9,167; FY08 9,484; FY09 11,665; FY10 13,415; FY11 15,427; FY12 17,586; FY13 20,049; projection 22,855
- Imports (f.o.b): FY05 -11,870; FY06 -13,301; FY07 -15,429; FY08 -15,955; FY09 -19,339; FY10 -21,789; FY11 -24,422; FY12 -27,364; FY13 -30,684; projection -34,477
  - Of which crude petroleum and petroleum products: FY05 -1,602; FY06 -2,004; FY07 -2,324; FY08 -2,156; FY09 -2,426; FY10 -2,674; FY11 -2,873; FY12 -3,090; FY13 -3,324; projection -3,603
- Services: FY05 -870; FY06 -1,110; FY07 -1,385; FY08 -1,441; FY09 -1,981; FY10 -2,348; FY11 -2,745; FY12 -3,193; FY13 -3,705; projection -4,298
- Income: FY05 -680; FY06 -786; FY07 -929; FY08 -899; FY09 -1,007; FY10 -1,048; FY11 -1,152; FY12 -1,271; FY13 -1,404; projection -1,554
- Transfers: FY05 4,290; FY06 5,347; FY07 6,033; FY08 6,332; FY09 7,531; FY10 7,951; FY11 8,349; FY12 8,767; FY13 9,200; projection 9,656
  - Official current transfers 2/: FY05 37; FY06 34; FY07 51; FY08 78; FY09 70; FY10 43; FY11 45; FY12 47; FY13 50; projection 53
  - Private transfers: FY05 4,253; FY06 5,313; FY07 5,982; FY08 6,254; FY09 7,461; FY10 7,909; FY11 8,304; FY12 8,719; FY13 9,151; projection 9,604
  - Of which workers' remittances: FY05 3,848; FY06 4,802; FY07 5,585; FY08 5,954; FY09 7,086; FY10 7,511; FY11 7,887; FY12 8,281; FY13 8,695; projection 9,130
- Current account balance: FY05 -557; FY06 572; FY07 293; FY08 536; FY09 192; FY10 -138; FY11 -463; FY12 -944; FY13 -1,482; projection -2,139
- Capital and financial account balance: FY05 624; FY06 -207; FY07 312; FY08 894; FY09 408; FY10 1,312; FY11 1,767; FY12 2,129; FY13 2,543; projection 2,854
  - Financial account (selected): FY05 461; FY06 -449; FY07 62; FY08 680; FY09 -75; FY10 795; FY11 1,172; FY12 1,440; FY13 1,730; projection 1,902
  - Foreign direct investment: FY05 800; FY06 675; FY07 730; FY08 700; FY09 750; FY10 842; FY11 916; FY12 1,000; FY13 1,091; projection 1,190
- Net aid flows 3/: FY05 491; FY06 432; FY07 469; FY08 533; FY09 583; FY10 755; FY11 916; FY12 1,163; FY13 1,360; projection 1,431
  - Aid disbursements: FY05 940; FY06 921; FY07 933; FY08 1,029; FY09 1,101; FY10 1,377; FY11 1,596; FY12 1,873; FY13 2,102; projection 2,194
- Debt amortization: FY05 -449; FY06 -489; FY07 -464; FY08 -496; FY09 -518; FY10 -622; FY11 -681; FY12 -710; FY13 -742; projection -762
- Overall balance: FY05 67; FY06 365; FY07 200; FY08 1,430; FY09 600; FY10 1,174; FY11 1,303; FY12 1,185; FY13 1,062; projection 715
- Financing items (Bangladesh Bank assets/liabilities detail): FY05–FY13 shown; FY05 Assets (- increase) -225; Liabilities 158; FY06 Assets -554; Liabilities 189; FY07 Assets -311; Liabilities 111; FY08 Assets -1,530; Liabilities 100; FY09 Assets -690; Liabilities 90; FY10 Assets -1,159; Liabilities -15; FY11 Assets -1,266; Liabilities -37; FY12 Assets -1,130; Liabilities -55; FY13 Assets -971; Liabilities -91; projection Liabilities -96
- Memorandum items:
  - Current account balance (percent of GDP): FY05 -0.9; FY06 0.9; FY07 0.4; FY08 0.8; FY09 0.3; FY10 -0.2; FY11 -0.5; FY12 -1.0; FY13 -1.4; projection -1.8
  - Export growth rate (percent): FY05 14.0; FY06 21.6; FY07 15.2; FY08 19.9; FY09 19.9; FY10 14.1; FY11 14.1; FY12 13.4; FY13 13.5; projection 13.6
  - Import growth rate (percent): FY05 20.6; FY06 12.1; FY07 16.0; FY08 20.0; FY09 21.2; FY10 12.7; FY11 12.1; FY12 12.0; FY13 12.1; projection 12.4
  - Gross official reserves (in millions of U.S. dollars): FY05 2,930; FY06 3,471; FY07 3,831; FY08 5,001; FY09 5,691; FY10 6,850; FY11 8,116; FY12 9,246; FY13 10,217; projection 10,836
  - Net international reserves (in millions of U.S. dollars): FY05 2,046; FY06 2,221; FY07 2,421; FY08 3,651; FY09 4,251; FY10 5,425; FY11 6,728; FY12 7,913; FY13 8,975; projection 9,690
  - Medium and long-term external public debt (in millions of U.S. dollars) and percent of GDP: FY05 19,286 (32.0 percent); FY06 19,266 (31.1 percent); later years show progression to FY13: 26,007 (21.8 percent) (table contains ellipses for some entries).
  - Net aid flows/GDP (in percent): FY05 1.1; FY06 1.1; FY07 1.2; FY08 1.2; FY09 1.5; FY10 1.6; FY11 1.7; FY12 1.9; FY13 2.0; projection 2.0
  - Nominal GDP (in millions of U.S. dollars): FY05 60,299; FY06 61,952; FY07 66,504; FY08 68,337; FY09 75,814; FY10 82,827; FY11 90,542; FY12 99,128; FY13 108,591; projection 119,093
- Notes: For FY05 includes flood-related donor assistance of US$123 million, plus World Bank loans (DSC II and education) totaling another US$300 million originally planned for FY04. Other capital includes trade credits, long-term borrowing, short-term financing for BPC, commercial bank net borrowing, and errors and omissions. Includes Asian Clearing Union balances.

### Central government operations, FY2005–13 (Table 3, selected series; In billions of taka and percent of GDP)
- Total revenue (In billions of taka): FY05 389.2; FY06 443.7; FY07 525.4; FY08 512.7; FY09 492.0; FY10 572.9; FY11 668.4; FY12 770.6; FY13 887.4; projection 1,012.5; 1,126.7 (table spans multiple columns).
- Tax revenue (In billions of taka): FY05 314.1; FY06 354.2; FY07 429.2; FY08 412.6; FY09 391.3; FY10 459.4; FY11 540.9; FY12 628.7; FY13 729.5; projection 836.7; 931.1
  - NBR taxes: FY05 299.9; FY06 338.9; FY07 410.6; FY08 394.0; FY09 373.6; FY10 436.4; FY11 515.0; FY12 600.0; FY13 697.5; projection 801.1; 891.5
  - VAT, supplementary duties, excises: FY05 161.6; FY06 182.9; FY07 226.2; FY08 216.5; FY09 197.1; FY10 230.6; FY11 271.8; FY12 312.6; FY13 362.8; projection 416.2; 463.1
- Nontax revenue (In billions of taka): FY05 75.1; FY06 89.5; FY07 96.3; FY08 100.1; FY09 100.7; FY10 113.5; FY11 127.5; FY12 141.9; FY13 157.9; projection 175.7; 195.5
- Total expenditure (In billions of taka): FY05 513.3; FY06 578.1; FY07 697.4; FY08 691.2; FY09 658.7; FY10 851.5; FY11 864.7; FY12 991.0; FY13 1,147.4; projection 1,312.5; 1,460.1
  - Current expenditure: FY05 312.5; FY06 350.4; FY07 403.0; FY08 428.2; FY09 424.6; FY10 471.8; FY11 519.8; FY12 576.4; FY13 639.5; projection 710.0; 788.6
  - Interest payments (In billions of taka): FY05 61.8; FY06 75.1; FY07 76.4; FY08 76.0; FY09 90.5; FY10 112.8; FY11 116.5; FY12 127.6; FY13 140.2; projection 154.3; 170.2
  - Subsidies and transfers (In billions of taka): FY05 103.2; FY06 108.6; FY07 125.5; FY08 161.9; FY09 142.6; FY10 148.9; FY11 167.3; FY12 186.2; FY13 207.2; projection 230.6; 256.6
  - Annual Development Program (In billions of taka): FY05 185.8; FY06 194.7; FY07 260.0; FY08 227.6; FY09 203.1; FY10 256.3; FY11 296.7; FY12 359.8; FY13 445.7; projection 536.8; 597.3
- Net lending, Other expenditures, Check float plus discrepancy: table entries provided across years (see source).
- Overall balance (excluding grants): FY05 -124.0; FY06 -134.5; FY07 -172.0; FY08 -178.5; FY09 -166.7; FY10 -278.6; FY11 -196.3; FY12 -220.4; FY13 -260.0; projection -300.0; -333.4
- Primary balance (excluding grants): FY05 -62.2; FY06 -59.4; FY07 -95.6; FY08 -102.5; FY09 -76.2; FY10 -165.8; FY11 -79.8; FY12 -92.8; FY13 -119.8; projection -145.7; -163.2
- Net financing (In billions of taka): FY05 124.0; FY06 134.5; FY07 172.0; FY08 178.5; FY09 166.7; FY10 278.6; FY11 196.3; FY12 220.4; FY13 260.0; projection 300.0; 333.4
  - External financing (In billions of taka): FY05 60.2; FY06 48.1; FY07 83.7; FY08 55.2; FY09 55.9; FY10 78.7; FY11 93.8; FY12 113.0; FY13 140.5; projection 167.0; 185.4
  - Domestic financing (In billions of taka): FY05 63.8; FY06 86.4; FY07 88.3; FY08 111.7; FY09 88.7; FY10 199.9; FY11 102.5; FY12 107.4; FY13 119.5; projection 133.0; 148.0
    - Banks and Nonbanks split provided in table (see source).
- Fiscal ratios (percent of GDP) presented alongside levels (see table for detailed percent-series).
- Memorandum items: Nominal GDP (in billions of taka): FY05 3,707; FY06 4,157; FY07 4,653; FY08 4,682; FY09 4,715; FY10 5,368; FY11 6,031; FY12 6,712; FY13 7,469; projection 8,311; 9,249
- Notes: Fiscal year ends June 30. Cash basis unless otherwise specified. Includes bonds issued to assume BPC liabilities as noted in footnotes.

### Central Bank balance sheet and monetary survey (Tables 4–5, selected entries)
- Table 4: Central Bank balance sheet, end period (in billions of taka) — Net international reserves and net domestic assets series shown for Jun-06 through projected Jun-08 with detailed monthly/interim entries (Sep-06, Dec-06, Mar-07, etc.). Example entries:
  - Reserve money (levels, end period): Jun-06 318; Sep-06 340; Dec-06 360; Mar-07 358; Jun-07 369; Sep-07 417; Dec-07 372; Mar-08 391; Jun-08 386; further monthly projections to Jun-08 included.
  - Currency and Reserves components provided (see table for full monthly detail).
  - Net international reserves (in millions of U.S. dollars) 1/: Mar-07 2,058; Jun-07 2,221; Sep-07 2,221; Dec-07 2,253; Mar-08 2,221; Jun-08 2,478; subsequent projected levels to Jun-08: 2,894; 3,650; 3,800; 3,950; 4,100; 4,250 (flow since start of fiscal year also provided).
- Table 5: Monetary Survey (Year-on-year percent change and levels, in billions of taka), selected:
  - Net foreign assets (levels): Jun-06 203; Sep-06 218; Dec-06 220; Mar-07 223; Jun-07 227; Sep-07 251; Dec-07 234; Mar-08 269; Jun-08 255; projections through Jun-08 up to 385.
  - Net domestic assets (levels): Jun-06 1,528; Sep-06 1,588; Dec-06 1,653; Mar-07 1,640; Jun-07 1,687; Sep-07 1,760; Dec-07 1,714; Mar-08 1,741; Jun-08 1,817; projections through Jun-08 up to 2,056.
  - Domestic credit and components: credit to central government, credit to private sector series available (e.g., Credit to private sector Jun-06 1,261; Jun-07 1,404; Jun-08 projection 1,492; later projections up to 1,726).
  - Broad money (M2) (levels): Jun-06 1,730; Sep-06 1,806; Dec-06 1,873; Mar-07 1,863; Jun-07 1,914; Sep-07 2,010; Dec-07 1,948; Mar-08 2,010; Jun-08 2,072; projections up to 2,442.
  - Year-on-year percent changes and change-since-start-of-fiscal-year detail included in table.
- Memorandum: Broad money multiplier and velocity, net domestic financing (since beginning of FY), and bank/nonbank splits provided.

### Indicative targets and quantitative performance criteria under PRGF (Table 6, selected)
- Ceiling on net domestic assets of Bangladesh Bank (In billions of taka): series for Jun-06, Sep-06, Dec-06, Mar-07, Jun-07 (revised, program, actual) provided; highlighted that targets for FY07 are subject to adjustor for World Bank DSC and other budgetary support and AsDB budget support of $30.69 (Tk2.195 billion at program exchange rate) disbursed on December 10, 2006.
- Ceiling on net domestic financing of central government (In billions of taka): targets and actuals for specified dates.
- Floor on total revenue of the central government 7/: targets and actuals noted (quarterly monitoring and performance criterion from March 2006).
- Floor on cumulative increase of net international reserves of Bangladesh Bank 4/5/6/8/: targets, adjustments, and monitoring notes provided.
- Performance criteria on contracting/guaranteeing short-term external debt by the central government (target 0) and contracting/guaranteeing nonconcessional medium- and long-term debt (In millions of U.S. dollars): table entries include 250, 100, 150, 200, 250 (various dates) with explanatory footnotes. The target excludes certain instruments per footnotes.

### Financial system structure and banking soundness (Tables 7–8, selected highlights)
- Structure of the financial system (number of institutions, end-December 1999–2006):
  - Banks total: 39 (1999) to 48 (2006) with Nationalized commercial banks 4 (1999–2006), Private commercial banks 17 (1999) to 30 (2006), Foreign commercial banks 13 (1999) to 9 (2006).
  - Microfinance institutions: 383 (year not fully specified) rising across entries to 1,000+ in later note.
- Financial system assets (in billions of taka): Banks total series (e.g., 1,444; 1,538; 1,636; 1,913; 2,254; 2,589 across years shown). Private commercial banks assets rising to 1,285 in later year.
- Market capitalization (DSE): 44, 61, 64, 69, 98, 22, 152, 266 (series shown).
- Market share of bank assets (percent): Nationalized commercial banks 71.7 (1999) to 35.3 (2006); Private commercial banks rising from 32.8 to 48.2; Foreign commercial banks around 4.2 to 10.0 across years.
- Capital adequacy and tier 1 regulatory capital to risk-weighted assets: regulatory capital as percent of risk-weighted assets for system and bank groups, with notable negative or low ratios for nationalized and specialized development banks across several years; private and foreign commercial banks showing positive ratios (see table for series).
- Asset quality:
  - Non-performing loans as percent of gross loans (system): 35.6 (1999) down to 13.1 (2006)
  - By bank type (selected): Nationalized commercial banks 37.0 (1999) to 22.9 (2006); Specialized development banks 61.8 to 33.7; Private commercial banks 17.0 to 5.5; Foreign commercial banks 3.3 to 0.8
  - Provisions as percent of NPLs: system 25.4 to 26.3; private and foreign banks with higher provisioning ratios in later years (see table).
  - Number of banks with NPL > 10 percent of loans: counts by bank type across years (see table).
- Earnings and profitability metrics (RoA, gross income as percent of assets, personnel expenses percent of noninterest expenses, spreads): series shown with system and bank-group breakdowns (see table for detailed values).
- Liquidity indicators: liquid assets as percent of total assets and net loans as percent of deposits by bank groups included (see table).

### Banking soundness summary (Table 8 selected ratios, end-December 1999–2006)
- Non-performing loans (system): 35.6 (1999) ... 13.1 (2006)
- Private commercial banks NPLs: 17.0 (1999); 6.5 (2005); 5.5 (2006)
- Foreign commercial banks NPLs: 3.3 (1999); 1.3 (2005); 0.8 (2006)
- Regulatory capital as percent of risk-weighted assets: system series with final value 2.3 (2006); nationalized commercial banks negative values in earlier years; private and foreign commercial banks recording positive ratios (see table).
- Return and income metrics: Gross profits as percent of average assets RoA entries (see table); gross income as percent of average assets system value 8.8 ... 9.2 (later years).
- Spread between reference loan and deposit rate: system values across years include 6.7; 6.7; 6.7; 6.6; 6.1; 5.3; 5.4; 5.7 (series present across table).
- Note: Tables 7 and 8 provide detailed, year-by-year banking-sector indicators including asset shares, capitalization, asset quality, profitability, and liquidity across bank types.

*Source: Data provided by the Bangladesh authorities; IMF staff estimates, projections and analytical tables as presented in the document.*

### 1.   Separating the government's short-term cash liquidity needs from its debt-financing obligations by

### 1.   Separating the government's short-term cash liquidity needs from its debt-financing obligations by

### Policy actions and implementation status
- Eliminating Bangladesh Bank's ad hoc Treasury System and introducing an auction mechanism that is market-related with the amount of auctions preannounced (in line with MFD technical assistance recommendations).
  - Target/completion date: November 30, 2006
  - Status: Observed

- Review and strengthen social programs designed to mitigate the impact on vulnerable groups of fuel price adjustment
  - Target/completion date: December 31, 2006
  - Status: Observed
  - Additional detail: in line with the pricing formula introduced under the World Bank DSC.

- Improving coordination between the VAT and income tax LTUs by:
  - (i) implementing unified selection criteria;
    - Target/completion date: March 31, 2007
    - Status: Not observed
  - (ii) conducting joint audits for at least one-third of eligible audits conducted during June 2006–February 2007;
    - Target/completion date: March 31, 2007
    - Status: Not observed
  - (iii) assigning a unique taxpayer identification number for the LTUs. 1/ 2/
    - Target/completion date: March 31, 2007
    - Status: Not observed

- Eliminate the deficiency in the net open foreign exchange positions of the nationalized commercial banks
  - Target/completion date: December 31, 2006
  - Status: Observed
  - Additional detail: in line with Bangladesh Bank's regulations.

*Source: _cr07234 - 1.   Separating the government's short-term cash liquidity needs from its debt-financing obligations by*

### 5.   Cabinet approval of the corporatization of Agrani Bank, Janata Bank, and Sonali Bank. 1/

### 5.   Cabinet approval of the corporatization of Agrani Bank, Janata Bank, and Sonali Bank. 1/

### Structural action and timing
- Date recorded: March 31, 2007.
- Classification: Indicates structural performance criterion (footnote 1/).  
- Assessment note: Subsection (iii) only will be assessed as a structural performance criterion; subsections (i) and (ii) will be assessed as structural benchmarks (footnote 2/).

### Context within Fund monitoring and arrangements
- PRGF arrangements outstanding: PRGF arrangements SDR million 316.73 — Percent Quota 59.39.
- Financial arrangements history (SDR million):
  - PRGF: Approval Date 6/20/03 Expiration Date 6/19/07 Amount approved 400.33 Amount drawn 316.73.
  - ESAF: Approval Date 8/10/90 Expiration Date 9/13/93 Amount approved 345.00 Amount drawn 330.00.
  - SAF: Approval Date 2/06/87 Expiration Date 2/05/90 Amount approved 201.25 Amount drawn 201.25.
- Projected payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - 2007 Principal 0.00 Charges/interest 3.06 Total 3.06
  - 2008 Principal 4.95 Charges/interest 3.56 Total 8.51
  - 2009 Principal 14.85 Charges/interest 3.51 Total 18.36
  - 2010 Principal 29.70 Charges/interest 3.38 Total 33.08
  - 2011 Principal 49.88 Charges/interest 3.17 Total 53.05

### Safeguards and exchange regime implications
- Safeguards assessment of Bangladesh Bank (BB): completed January 24, 2005; concluded safeguards require further improvement. Identified weaknesses: legal, financial reporting, internal audit, and internal control areas. Recommended measures to address them.
- Exchange arrangement characterization: managed float with no preannounced path for the exchange rate.
  - Historical notes:
    - Until end-May 2003, taka fixed to the U.S. dollar but periodically adjusted.
    - Official band Jan 2002–end-May 2003: Tk 57.4–58.4 per U.S. dollar.
    - Effective end-May 2003, BB no longer announced a trading band for its foreign exchange transactions.
  - Restriction on convertibility and transferability of proceeds of current international transactions in nonresident taka accounts: At last Article IV (June 2005) Executive Board did not approve maintenance of the restriction, but noted authorities’ intent to remove it by end-June 2006.

### Technical assistance and Fund engagement (2005–07)
- 2005 missions and topics:
  - STA: data ROSC (February and March)
  - MFD: bank restructuring (February and September; February and November)
  - MFD: central bank risk-based internal auditing standards (March and August)
  - MFD: bond market development (March and October)
  - MFD: foreign exchange operations (May)
- 2006 missions and topics:
  - FAD: tax administration (February and March)
  - MFD: bank restructuring (February and May)
  - MFD: bond market development (February and August)
  - LEG: setting up a Financial Intelligence Unit (July)
  - MFD: central bank internal audit (August and November)
- 2007 missions and topics:
  - FAD/LEG: tax policy mission to review income and VAT taxes (January)
  - MFD: bond market development (March)
  - MFD: central bank internal audit (March)
  - MFD: bank restructuring (March)

### Key Millennium Development Goal and social indicators (selected figures from Table 10)
- Poverty and nutrition:
  - Poverty headcount ratio 1990 58.8; 1995 ...; 1998 ...; 2001 49.8; 2004–05 40.8; 2015 target = halve 1990 $1 a day poverty and malnutrition rates.
  - Population below US$1 a day (percent): 1990 35.9; 1995 28.6; 1998 26.7; 2001 36.0; 2004–05 ...; 2015 18.
  - Prevalence of child malnutrition (percent of children under 5): 1990 65.8; 1995 57.0; 1998 62.0; 2001 52.0; 2004–05 48.0; 2015 26.
- Education:
  - Gross primary enrollment ratio (percent of relevant age group): 1990 72.0; 2001 86.7; 2004–05 97.0; 2015 100.
  - Female primary enrollment ratio (percent): 1990 66.0; 2001 97.0; 2004–05 98.0; 2015 100.
  - Youth literacy rate (percent of ages 15–24): 1990 42.0; 1995 44.5; 1998 46.5; 2001 48.4; 2004–05 49.7.
- Gender and employment:
  - Ratio of girls to boys in primary and secondary education (percent): 1990 77.1; 1995 76.1; 1998 96.3; 2001 104.3; 2004–05 105.5; 2015 100.
  - Share of women employed in the nonagricultural sector (percent): 1990 17.6; 1995 20.5; 1998 22.2; 2001 22.9; 2004–05 24.2.
- Health and mortality:
  - Under 5 mortality rate (per 1,000): 1990 149; 1995 120; 1998 ...; 2001 92; 2004–05 77; 2015 48.
  - Infant mortality rate (per 1,000 live births): 1990 94; 1995 83; 1998 ...; 2001 66; 2004–05 56; 2015 31.
  - Immunization, measles (percent of children under 12 months): 1990 65; 1995 79; 1998 72; 2001 76; 2004–05 77.
- Environment and access:
  - Forest area (percent of total land area): 1990 7.0; 1995 ...; 1998 ...; 2001 7.0; 2004–05 7.0.
  - Access to an improved water source (percent of population): 1990 71.0; 2004–05 75.0.
  - Access to improved sanitation (percent of population): 1990 23.0; 1995 41.0; 2004–05 48.0.
- Technology and labor market indicators:
  - Fixed line and mobile telephones (per 1,000 people): 1990 2.1; 1995 2.5; 1998 3.9; 2001 8.3; 2004–05 37.0.
  - Personal computers (per 1,000 people): 1990 ...; 1995 ...; 1998 1.0; 2001 1.9; 2004–05 11.9.
  - Youth unemployment rate (percent of total labor force ages 15–24): 1990 2.5; 1995 7.0; 1998 7.0; 2001 10.7.
- General macro indicators:
  - Population (in millions): 1990 104.0; 1995 116.5; 1998 123.9; 2001 131.5; 2004–05 139.2.
  - Gross national income (in billions of U.S. dollars): 1990 31.0; 1995 39.2; 1998 45.1; 2001 49.6; 2004–05 61.3.
  - GNI per capita (in U.S. dollars): 1990 300.0; 1995 340.0; 1998 360.0; 2001 380.0; 2004–05 440.0.
  - Life expectancy at birth (years): 1990 54.8; 1995 58.5; 1998 59.9; 2001 62.6; 2004–05 63.5; 2015 73.
  - Investment (percent of GDP): 1990 17.1; 1995 19.1; 1998 21.6; 2001 23.1; 2004–05 24.0.
- Sources noted in table: Bangladesh Economic Survey 2006, Household Income and Expenditure Survey 2000 and 2005, World Bank database; and Fund staff estimates.
- Footnotes in table:
  - 1/ In some cases the data are for earlier or later years than those stated.
  - 2/ Based on the 1995–96 Household Expenditure Survey and the 2000 and 2005 Household Income and Expenditure Survey; data may not be comparable across time periods due to methodological differences in survey design.
  - 3/ Integrate the principles of sustainable development into country policies and programs and reverse the loss of environment resources. Halve the proportion of people without sustainable access to safe drinking water by 2015.
  - 4/ Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system. Address the special needs of land-locked countries and small island developing states.

### Relations with the World Bank and Asian Development Bank (selected substantive items)
- World Bank engagement:
  - World Bank assistance includes investment and policy-based lending, analytical and advisory services, lending and non-lending technical assistance.
  - The PRSP and IMF/World Bank Joint Staff Advisory Note discussed by World Bank’s Board on January 26, 2006; PRSP completed in October 2005.
  - Bank-supported initiatives: Public Expenditure Review, Poverty Assessment (joint with AsDB), Enterprise Growth and Bank Modernization Project (approved June 2004) supporting restructuring, corporatization, and eventual divestment of nationalized commercial banks; Rupali Bank’s divestment nearing completion.
  - World Bank approvals and commitments (as of May 2007):
    - 204 IDA credits, 4 IDA grants, 1 IBRD loan totaling US$12.1 billion in original commitments.
    - Active portfolio: 25 projects representing US$1.78 billion in net commitments and US$1.3 billion in undisbursed funds.
    - FY05 new commitments US$600 million; FY06 new commitments US$461.5 million.
    - FY07 so far: Railways Project (US$40 million) and Development Support Credit IV ($200 million); projected additional commitment US$175 million in FY07.
  - IFC held portfolio as of May 2007: US$132.5 million (US$102.9 million own account; US$29.6 million B-loan participants).
- AsDB engagement:
  - Cumulative commitment and disbursement to Bangladesh as of end-January 2007: $8.2 billion and $5.8 billion, respectively; cumulative outstanding loan $4.8 billion.
  - Sector concentration of public sector lending as of end-December 2006: energy 25 percent, agriculture and natural resources 20 percent, transport and communications 20 percent, education 10 percent.
  - AsDB approved four projects in 2006 totaling $255.10 million and seven technical assistance grants totaling $5.71 million.
  - AsDB Country Strategy and Program (CSP) for 2006–10 approved October 31, 2005: proposes loans about $1.8 billion for 15 projects over first three years; technical assistance grant program about $13.8 million.

### Statistical issues and recommended reforms
- Overall assessment: Macroeconomic data adequate for surveillance, despite major shortcomings in national accounts, government finance statistics and balance of payments. Bangladesh participates in the GDDS; metadata posted since March 2001. ROSC data module mission March 2005 produced cross-cutting recommendations:
  - Legislation should be enacted to define the role of the Bangladesh Bureau of Statistics (BBS) and to provide it with sufficient powers to fulfill its mandate.
  - Inter-agency cooperation should be improved, particularly for generating data on bank financing of the government and debt.
  - Advance calendars for the release of data should be established, disseminated, and observed.
  - The BBS should increasingly use its website to disseminate data and metadata in addition to paper publication.
- National accounts deficiencies and recommendations:
  - Primary deficiency: weakness of source data. BBS lacks an annual national accounts survey of business enterprises; source data primarily from benchmark surveys, biennial manufacturing census, and biannual household expenditure surveys.
  - Many benchmark surveys conducted over five years ago and based on outdated sample frames.
  - ROSC recommendation: BBS establish and maintain a business register for all economic units and conduct annual surveys.
  - Compilation concerns: heavy reliance on fixed input-output ratios; inappropriate deflators and deflation techniques; need for system of price indices for national accounts at constant prices.
  - Bangladesh lacks quarterly estimates of GDP; compilation of quarterly national accounts with AsDB technical assistance included in GDDS plans, but improving annual data sources and methodology is a short-term priority.
- Prices, wages, and employment data issues:
  - Price indices available: CPI, PPI, WPI, unit value indices for external trade.
  - Publication lags: CPI two months; WPI three months; unit value indices annual.
  - CPI and PPI weights outdated; 2005 ROSC reiterated that CPI should use weights derived from 2002 household expenditure survey.
  - Wage data monthly; employment and unemployment data only at irregular intervals.
- Government finance and debt data issues:
  - GFS shortcomings: large suspense accounts not always cleared end of fiscal year; foreign-financed development expenditure substantially understated; inclusion of three nonfinancial public enterprises in central government budgetary accounts (railway, postal office, telephone and telegraph office); some subsidy items classified as net lending.
  - Debt statistics: until recently no systematic compilation; Debt Management Wing established within Finance Division recommended to include government-guaranteed debt.
  - External debt stock data by creditor available with lag of about 8 to 12 months; no automated system for external debt projections.
  - Annual data on government external financing for the budget and foreign grants available with lag of nine months. Domestic financing data from National Savings Directorate with lag of six weeks found to have serious shortcomings.
  - Annual GFS data through fiscal year ending June 30, 2004 provided but coverage limited to budgetary central government; no data collected on local governments. No quarterly or monthly data reported to the IFS. Authorities adopted migration plan to implement GFSM 2001 during GFS mission January/February 2004.
- Monetary accounts:
  - Monthly accounts of BB and other depository corporations available with a lag of six weeks; BB produces a weekly publication available with a lag of about five to six weeks.
  - BB reporting monetary accounts to the Fund electronically.
  - ROSC mission recommendations put into practice: recording on an accrual basis interest earned on BB’s special treasury bills; recording overdrafts as loans rather than netting them out with deposits.
  - BB project to adapt monetary statistics to the Monetary and Financial Statistics Manual methodology; reported test data using standardized report forms (SRFs) introduced in October.

*Source: IMF staff report excerpts in the provided content unit.*

### 2004. These data are being reviewed by STA and will be published in the IFS Supplement on

### _cr07234 - 2004. These data are being reviewed by STA and will be published in the IFS Supplement on

### Data and statistical infrastructure
- Monetary and financial statistics for 2004 are being reviewed by STA and will be published in the IFS Supplement on Monetary and Financial Statistics when finalized.
- Bangladesh Bank (BB) expressed strong interest in establishing an integrated database to:
  - link monetary statistics to accounting records, and
  - yield alternative, transparent, and consistent presentations of monetary statistics for different users.
- Data quality assessments (from the ROSC published December 8, 2005, based on a mission March 2–16, 2005) indicate variable methodological soundness and accuracy across datasets (assessment keys: O, LO, LNO, NO).

### Balance of payments (BPM5 basis) — data strengths and weaknesses
- Compilation basis: Broadly on the basis of the Fifth Edition of the Balance of Payments Manual (BPM5).
- Primary sources: banking and exchange control records; export shipments; enterprise surveys for foreign direct investment (FDI).
- Frequency and dissemination:
  - Summary BOP data compiled and disseminated monthly.
  - Quarterly statistics for all major accounts consistent with monthly data.
  - Annual BOP data presented with detailed classification.
- Identified data gaps and limitations:
  - Data sources for estimating goods for processing are not adequate; adjustments to goods imports and exports are not available.
  - Nontrade activities of companies operating in export processing zones are included; financial transactions of offshore banks are not included.
  - Private sector external borrowing, transactions of foreign direct investors, and workers’ remittances through the informal hundi banking system are not fully incorporated in official published data.
  - Official foreign direct investments may not be fully reported.
  - Data on income and transfers are incomplete.
  - Data on suppliers’ credit to the government are available monthly with a three-month lag, but are not comprehensive.

### Data frequency and timeliness (selected items from the memo table)
- Exchange Rates: Date of latest observation 5/10/07; Date received 5/10/07; 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 5/10/07; Date received 5/10/07; Frequency of data D; Frequency of reporting D; Frequency of publication D.
- Reserve/Base Money: Date of latest observation 5/10/07; Date received 5/10/07; Frequency of data D; Frequency of reporting D; Frequency of publication M.
- Broad Money: Date of latest observation Mar. 2007; Date received 5/9/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Central Bank Balance Sheet: Date of latest observation Mar. 2007; Date received 5/9/07; Frequency of data W/M; Frequency of reporting W/M; Frequency of publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Mar. 2007; Date received 5/9/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Interest Rates: Date of latest observation 5/9/07; Date received 5/9/07; Frequency of data W; Frequency of reporting W; Frequency of publication D.
- Consumer Price Index: Date of latest observation Mar. 2007; Date received 3/07/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation Feb. 2007; Date received 4/15/07; Frequency of data M/Q; Frequency of reporting Q; Frequency of publication Q.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation Mar. 2007; Date received 5/20/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- External Current Account Balance: Date of latest observation Feb. 2007; Date received 5/3/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Exports and Imports of Goods and Services: Date of latest observation Feb. 2007; Date received 5/3/07; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- GDP/GNP: Date of latest observation 2005/06; Date received 5/22/07; Frequency of data A; Frequency of reporting A; Frequency of publication A.
- Gross External Debt: Date of latest observation Jun. 2005; Date received 9/15/05; Frequency of data A; Frequency of reporting A/M; Frequency of publication A.

### Statement by the IMF Staff Representative (June 22, 2007) — recent developments and FY08 preliminary budget
- Inflation and monetary aggregates:
  - April inflation rose to 8.3 percent (y/y), reflecting impact of fuel price adjustments.
  - Staff’s FY07 average annual inflation projection: 7.2 percent.
  - Broad money and credit growth moderated somewhat in April, in line with staff projections.
- External sector and reserves:
  - Buoyant exports and remittance flows sustained in April and May.
  - Gross official reserves reached $4.8 billion as of mid-June.
  - Exchange rate: taka continues to hover around 69 per U.S. dollar.
- FY08 preliminary budget (presented June 7; revenue target consistent with staff projection of 10.7 percent of GDP):
  - Current expenditures higher by 0.4 percent of GDP; expected to be financed by more foreign grants based on updated donor commitments.
  - Main base broadening: extension of VAT to previously exempt services.
  - Plans to adjust various fees and charges to improve nontax revenue.
  - On expenditure side: higher pay and allowances for defense, home affairs, and health; higher subsidies for social safety net programs and for farmers to offset higher diesel prices.
  - Authorities need to be prepared to adjust spending plans if assumed higher foreign financing does not materialize to keep domestic financing within budget limits.
- Trade tax changes:
  - 4 percent surcharge on imports (earmarked for infrastructure) consolidated into tariff system.
  - Two supplementary duty rates merged.
  - A number of goods removed from the zero tariff band as part of an import tariff reform intended to be revenue neutral.
  - Export withholding tax of 0.25 percent introduced.
- Budgetary and revenue reform concerns:
  - FY08 budget does not resolve main issues emphasized by staff: need for timely adjustment of administered prices and fundamental revenue reform.
  - Staff welcomes authorities’ disclosure that initiation of comprehensive revenue system reform is under consideration.
- Tax administration:
  - Proposed introduction of a universal self assessment scheme.
  - Process of assigning unique identification number for taxpayers in LTUs (a structural performance criterion) completed at end-May.
- Financial sector developments:
  - Measures to support development of a secondary market for government debt: elimination of the upfront tax on government bond sales; plans to increase use of yield-based auctions and longer-term bonds.
  - Corporatization of the three NCBs completed in early June; government advertised positions for new managers.
  - Bangladesh Bank raised minimum capital adequacy ratio from 9 to 10 percent of risk-weighted assets as of end-2007.
  - Bangladesh invited to join the Egmont Group of financial intelligence units.
  - Sale of Rupali Bank remains pending (preferred bidder announced end-August 2006; no signs of conclusion).

### Public Information Notice (PIN) No. 07/75 — Executive Board conclusions (June 29, 2007)
- Growth and inflation:
  - Economy grew at over 6½ percent in FY06.
  - GDP growth expected to continue around 6½ percent in FY07.
  - Inflation recently picked up to over 7 percent.
- External position:
  - Reserves reached beyond US$4 billion (approaching three months of imports).
  - Exports and remittances growth: exports growing at 25 percent and remittances at 21 percent (period unspecified in PIN).
- Fiscal and monetary context:
  - Fiscal performance suffers from structural weaknesses; revenue below budget targets.
  - Spending accelerated early in FY07 causing a surge in domestic financing; external disbursement delays aggravated the situation.
  - Development expenditure significantly underexecuted.
  - Growth in monetary and credit aggregates increased in FY07: broad money growth reached 22 percent in December; private credit growth close to 20 percent for much of the year.
  - After better control of government finances since January 2007, monetary aggregate growth declined somewhat but remained above targeted levels.
- State-owned enterprise (SOE) issues:
  - Petroleum prices below breakeven: domestic diesel and kerosene prices around 80 percent of their breakeven level and below prices in neighboring countries.
  - Past losses financed through loans from nationalized commercial banks; about two-thirds of these loans are overdue.
- Financial sector reforms and vulnerabilities:
  - Regulatory framework strengthened; off-site and on-site supervision enhanced.
  - Corporatization and privatization steps taken for nationalized commercial banks.
  - Interest rate spreads remain high.
- Executive Board assessment and recommendations:
  - Directors welcomed maintained macroeconomic stability and growth, and noted achievements toward MDGs.
  - Directors called for fundamental tax reform: broaden tax base; separate tax policy and collection; simplify VAT and income tax legislation; consolidate and strengthen tax administration.
  - Directors welcomed consolidation of import taxes but noted effective protection remains high.
  - Directors urged timely adjustment of administered prices (including recommending automatic pricing formula for fuels) and adjustment of domestically produced natural gas prices.
  - Directors recommended further monetary tightening given strong inflows and higher inflation; allow greater flexibility in the nominal exchange rate and confine intervention to alleviate disorderly conditions.
  - Directors urged removal of remaining exchange restriction on transferability of funds in nonresident taka accounts.
  - Directors encouraged completion of privatization of Rupali Bank and preparation of other state banks for eventual divestment.
  - Data improvements needed: banking soundness indicators, national accounts, fiscal and debt statistics.

### Selected fiscal and macro figures and projections (FY03–FY07 and FY08 budget table excerpts)
- FY08 Preliminary Budget (In percent of GDP) — Staff projection vs. Preliminary Budget:
  - Total revenue: 10.7 10.7
  - Total expenditure: 15.9 16.2
  - Current expenditure: 8.9 9.3
  - Of which: Pay and allowances: 2.3 2.5
  - Of which: Subsidies and transfers: 2.8 3.1
  - Capital spending and net lending: 7.0 6.9
  - Overall balance (excluding grants): -5.2 -5.6
  - Excluding BPC debt operation: -3.6 -4.2
  - Net financing: 5.2 5.6
  - External: 1.5 2.0
  - Domestic: 3.7 3.6
  - Excluding BPC debt operation: 2.2 2.2
  - Note: Preliminary budget posted for public comment on June 7, 2007.
- Key macro time series (FY03–FY07):
  - Real GDP: 5.3 6.3 6.0 6.6 6.7
  - GDP deflator: 4.5 4.2 5.1 5.2 6.3
  - CPI inflation (annual average): 4.4 5.8 6.5 7.2 7.2
  - Total revenue (percent of GDP): 10.3 10.2 10.5 10.7 10.4
  - Total expenditure (percent of GDP): 13.7 13.3 13.8 13.9 14.0
  - Overall balance (excluding grants) (percent of GDP): -3.4 -3.1 -3.3 -3.2 -3.5
  - Broad money (M2) (end of fiscal year; percent change): 15.6 13.8 16.7 19.3 17.5
  - Credit to private sector (percent change): 12.6 17.5 17.0 18.3 15.1
  - Exports, f.o.b. (billions of U.S. dollars): 6.5 7.5 8.6 10.4 12.5
  - Gross official reserves (billions of U.S. dollars): 2.5 2.7 2.9 3.5 5.0
  - In months of imports of goods and nonfactor services: 2.9 2.8 2.5 2.7 3.2
  - Nominal GDP (in billions of taka): 3,006 3,330 3,707 4,157 4,715
  - Total central government debt (percent of GDP): 51.1 51.0 50.1 49.3 46.9

*Source: IMF staff report and related documentation as presented in the content unit._

### 1.      Introduction:

### _cr07234 - 1.      Introduction:

### 1. Introduction: authorities' position and political context
- The Bangladesh Authorities "take this opportunity to place on record their thanks and appreciation to IMF staff for the Article IV Consultation and the Sixth PRGF Review mission conducted in April 2007."
- "The Authorities are in broad agreement with the observations, recommendations and the policy advice on macro-economic and structural reforms covered in the Staff Report."
- Political developments:
  - Since November 2006 the political situation "began to worsen, and by January 2007, assumed dangerous proportions."
  - Street riots, violent hartals and blockades brought economic and social life "to a virtual standstill."
  - President declared Emergency on January 11, 2007 and formed a new Caretaker Government (CTG) charged to "create a congenial environment to conduct a free and fair election expeditiously and in a transparent manner."
- Anti-corruption measures:
  - CTG "has come down heavily against corruption."
  - "A number of studies in recent years have determined that corruption in Bangladesh consumes 1-2 percent of GDP."
  - Judiciary and Anti-Corruption Commission have been strengthened and "more court houses are being set up to enable quick disposal of the growing number of cases."
- Development progress despite turmoil:
  - Reforms supported by World Bank Development Support Credit (DSC), Poverty Reduction Growth Facility (PRGF) of IMF and DFID-supported Financial Management Reform Programme.
  - Household Income and Expenditure Survey (HIES) findings: "The proportion of people living in poverty fell from 49 percent in 2000 to 40 percent, with the hardcore poverty falling from 34 percent to 25 percent."
  - "In FY 2005-06, economic growth posted a historic high rate of 6.7 percent, thanks to the robust growth of both agriculture and industry."
  - "Bangladesh continues to post current account surpluses reflecting strong growth of export and remittance inflows."
  - "Gross reserves, at over $ 4 billion are comfortable."
- Strategy and budget framework:
  - Development and poverty reduction strategy: "Unlocking the Potential: National Strategy for Accelerated Poverty Reduction (NSAPR)."
  - Budgets aligned with NSAPR; Medium-term Budget Framework (MTBF) extended to "14   important ministries that spend 60 percent of the total budget."

### 2. Budget Highlights
- FY 2007-08 budget major directions:
  - Emphasis on "maintaining a favorable macro economic environment; rationalization of the trade regime; decisive steps to assume SOE liabilities, principally of Bangladesh Petroleum Corporation and Power Development Board;"
  - "Significantly higher allocation in strategic sectors of power and agriculture, including a provision for diesel subsidy to poor farmers facing higher irrigation cost."
  - Safety net programmes "have been deepened and widened and new programs added with more focused targeting."
  - Reconstitution of Anti-Corruption Commission and signing of "UN Convention against Corruption."
  - Judiciary "has been separated from the executive organ."
  - Human resource development "constitutes 25 percent of the total budget allocation with education and health receiving 15.2 percent and 7 percent respectively."
  - "A Universal Self-Assessment Procedure of tax return has been introduced."
  - Tariff structure simplified and "tariff distortion brought to a minimum."
  - Trade regime "has been further liberalized."
  - "Both the VAT net and Income-tax net have been widened."
  - Government borrowings from ad hoc treasury bills "have been replaced by transparent auction based system."
- Consultative process in absence of parliament:
  - Extensive consultations with former finance ministers, finance secretaries, intelligentsia, civil society, NGOs, journalists, and the public both before and after budget announcement.
  - Government allowed "10 days for receiving suggestions, ideas and comments" after the announcement; inputs are being processed.
- Implementation focus:
  - Finance Ministry "is mobilizing its manpower and resources for monitoring the implementation of budget."
  - Special allocations for major ministries to conduct "special/performance audit," outsourced to private audit firms.
  - Finance Division introduced an "Internal Control Manual" to be uniformly applied across ministries/divisions/departments.

### 3. Macro-economic Stability
- Growth and sector performance:
  - "Overall economic growth in FY 2006-07 is likely to be around 6.5 percent" despite turmoil and poor weather for key rice crops.
  - Export and remittance growth in three quarters of the fiscal year: "19 percent and 27 percent respectively."
  - "Credit to the private sector grew at an annualized rate of 19 percent" during the same period.
  - Domestic investment indicator: "21 percent growth in LC settlement for capital machinery."
- Inflation and policy response:
  - Inflation "appears in the horizon as a major concern averaging 7 percent."
  - Bangladesh Bank "is closely watching the situation and will exercise appropriate monetary policy option to contain inflation."
  - Government actions: withdrew import duty on a number of items including rice and wheat; Bangladesh Bank instructed commercial banks "to encourage larger number of new importers of food"; National Task Force and sub-national Task Forces "regularly monitor the prices of essential commodities"; Government "is to double its import of rice and wheat."
- Fiscal and public debt stance:
  - "Cautious monetary policy has been matched by prudent fiscal policy."
  - "The overall fiscal deficit in FY 06 was kept below the target despite revenue shortfall."
  - Revenue to GDP ratio "remains phenomenally low with 10.5 percent."
  - Annual Development Programme implementation shortfall "by about 20 percent" due to resource inadequacy and capacity constraints.
  - Government limited domestic borrowing "to 2 percent of the GDP" to maintain macro stability and avoid crowding out.
- FDI and large investments:
  - "Growth of FDI in Bangladesh averaged 16 percent from 2002 to 2007."
  - "Mittal Group ... signed a Memorandum of Understanding with Board of Investment for investing US$ 2.8 billion in coal, steel and power industries."

### 4. Structural and Institutional Reforms
- Reform scope and commitment:
  - CTG demonstrated commitment through measures covering "the financial sector, state-owned enterprises, the power and energy sector, telecommunications, fiscal policy and broad governance issues."
- Banking, financial and regulatory reforms:
  - Three Nationalized Commercial Banks (NCBs) "are about to be converted into public limited companies to enable them to operate like private banks."
  - From January 2007, mandatory annual credit ratings for all commercial banks by "a Credit Rating Company of good reputation."
  - Reforms in insurance laws "are in process."
  - Financial Reporting Act approved by the Council of Advisors to ensure "international accounting, auditing and reporting standards."
  - Money Laundering Prevention Act "has been made more effective."
- Capital market and divestment:
  - In next fiscal year "more shares of SOEs and Government's share in commercial banks will be off-loaded in the Stock exchange."
  - Listing of new SOEs and sale of bank shares expected to widen and deepen capital market.
  - Government encouraging private conglomerates and mobile phone companies "to raise capital from the market."
  - Rupali Bank divestment "has got stalled owing to frequent shifts in stance by the highest bidder."
- Quasi-fiscal costs and SOE liabilities:
  - Revised FY 07 budget allocated "Taka 15 billion to make the quasi-fiscal costs of the Government more transparent."
  - In FY 2007-08 Government "will assume the total liabilities of Bangladesh Petroleum Corporation (BPC), in the amount of Taka 75 billion arising out of administered fuel price over the past few years."
  - BPC "is being geared up to run on a commercial basis and will be allowed to adjust petroleum prices on a previously agreed automatic price adjustment formula."
- Power sector and transport reforms:
  - Power crisis expected to affect the economy "for at least 3 more years."
  - Government made "highest allocation increase of 51 percent in power sector" and "is building quite a few more power plants."
  - Private sector power producers are encouraged; Bangladesh to "appeal for larger soft-term loan for investment in this sector from development partners."
  - Seaport reforms in Chittagong and Mongla reduced ship turnaround time "from 9 days to 4 days" and handling costs "cut down by 20 percent."
- Fiscal challenge:
  - Low revenue collection "remains a fundamental problem in fiscal management."
  - Revenue as a share of GDP "continues to be stagnant coasting around 10.5 percent."
  - Authorities "have identified this low revenue growth as the main challenge in the fiscal front."
  - Government "expressed their broad agreement with the April 2007 IMF Staff Report suggesting overhaul of tax legislation and separation of revenue collection from policy-making."

### 5. PRGF Programme
- Assessment of PRGF engagement:
  - PRGF engagement with IMF during the past 4 years "has been largely successful."
  - Achievements cited: introduction of "a flexible exchange rate regime" in 2003 without market turbulence; sustained GDP growth; "sustained reduction of poverty and progress in several MDG targets"; several key structural reforms implemented.
  - Price adjustments in fuel, gas and power "have significantly reduced hidden quasi-fiscal costs of the Government."
  - Examples of reforms: corporatization of the NCBs; issuance of unique taxpayer identification numbers to large taxpayers; establishment of Large Taxpayers' Units.
  - Programme target of an increment of "1.5 percent in revenue to GDP ratio during the period could not be met."
  - Revenue to GDP ratio "remains stagnant" partly "due to revenue loss owing to liberalization of international trade regime."
- Post-PRGF intentions and priorities:
  - Authorities prepared to proceed with:
    - "(a) initiating a detailed overview of the current tax legislation through a possible Technical Assistance package from the Fund.  This would be with a view to streamlining existing legislation and plugging loopholes existing at present;"
    - "(b) combining the two Large Tax Payers’ Units (LTUs) and issuing   Unique Tax Identification Numbers (UTINs) to all large taxpayers;"
    - "(c) separating aspects of Tax policy and planning away from administration of tax collection."
  - Authorities believe "these steps are indeed necessary for tax buoyancies to improve in the long run."
- CTG reform commitment and future engagement:
  - CTG "is committed to change" and "has in the last 5 months brought in more fundamental and institutional reforms than what was witnessed in the past several years."
  - Major reforms highlighted: "An Independent Election Commission for holding a free and fair election by end 2008, anti-corruption drive through Anti-Corruption Commission, banking and financial sector reforms."
  - "Many more important reforms will be forthcoming in the coming months."
  - Authorities' goal: "to establish the conditions for sustainable and long-lasting reforms that are oriented to the welfare of the people, enhance efficiency and improve growth performance."
  - Government "have resolved to pursue negotiation for a new PRGF."

*IMF Staff Report: Statement by the Authorities on the Article IV Consultation and Sixth PRGF Review (April 2007).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07234.pdf_