## _cr11314 ## Source details **Canonical URL:** [_cr11314](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11314.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11314.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11314.pdf.json) --- ### Growth performance and emerging imbalances - Real GDP growth: 6.7 percent in FY11 (July 2010–June 2011); 6.1 percent in FY10; decade average 5.8 percent. - Inflation: headline reached 11.3 percent (y/y) in August 2011; nonfood inflation 8.8 percent in August 2011; three-year high in overall inflation noted. - External: balance of payments went into a deficit in FY11 for the first time in a decade despite record export growth. - Exchange rate: taka depreciated by around 7 percent against the U.S. dollar over 12 months to end-September 2011. - Reserves: gross official reserves US$10.0 billion at end-FY11 (2.9 months of prospective imports of goods and nonfactor services); US$10.1 billion at end-FY10 (3.4 months); US$9.4 billion (2.6 months) as of end-September 2011. ### Medium-term targets and structural constraints - Government targets: growth to 8 percent by FY15 and 10 percent by FY21 (Vision 2021 and Sixth Five-Year Plan, 2011–15). - Poverty projection: decline from 31.5 percent in FY10 to 22.0 percent in FY15 if targets realized. - Structural constraints: - FDI: well under 1 percent of GDP annually. - Infrastructure: deficit described as enormous. - Employment: limited opportunities; many workers seek employment abroad. - RMG sector: employs four million workers, 80 percent women; rapid expansion. ### External vulnerability and scenarios (Box 1) - Openness: total exports 21 percent of GDP in FY11; exports concentrated in RMGs to the E.U. and the U.S. - Shock scenario (global downturn akin to 2008–09): - Current account could deteriorate by an additional ½ percentage point of GDP in FY12. - GDP growth could be lower by up to ¾ percentage point relative to the FY12 baseline. - Additional reserve losses of around US$500 million, bringing reserves to around two months of forward import cover by end-FY12. - Reserves adequacy projection: foreign reserves projected to decline to around 1½ months of import cover by FY15 under the current outlook. - Caution: returning to administrative measures and moral suasion to cope with low reserves would be counterproductive and could discourage remittance inflows through formal channels. ### FY11 fiscal stance and financing - Overall deficit (including grants): estimated at 3.7 percent of GDP in FY11. - Financing: deficit financed almost entirely domestically, with a sizable portion from Bangladesh Bank (BB). - Revenue: - Tax revenue surpassed 10 percent of GDP; tax buoyancy and administrative reforms credited. - Nontax revenue missed targets due to delays in telecommunications fees and other receipts. - Expenditure: - Annual Development Program (ADP) spending increased to 4.2 percent of GDP. - Subsidies and transfers, including net lending to BPC, far exceeded budget. - Budget financing composition: - External aid inflows fell substantially in FY11. - Domestic nonbank financing declined; domestic bank financing rose sharply. - BB provided increased ways and means advances and overdrafts and targeted liquidity support to primary dealers. ### Monetary policy and transmission (FY11) - Stance: monetary policy remained accommodative; partial tightening undertaken. - Policy rates and reserves: - BB raised its repo rate cumulatively by 275 bps to 7.25 percent (since August 2010). - Cash reserve requirement increased in December 2010. - Central bank missed its reserve money target by a wide margin. - Credit growth: - Private credit growth peaked at 29 percent (y/y) in March 2011; moderated to 23 percent (y/y) in August 2011. - Monetary targets table excerpts reported (FY09–FY12 percent change): - Reserve money17.231.93.518.113.021.016.0 - Broad money (M2)17.519.215.522.415.221.418.5 - CPI inflation (average)9.06.76.57.36.58.87.5 - Operational issues: repo auctions severely oversubscribed; BB resorted to open market purchases and regular and emergency repo support; banks’ lending rate caps mostly lifted in March 2011 followed by 200–300 bps rise in base rates; bank-by-bank CDR ceilings imposed. ### Constraints on monetary effectiveness and recommended framework changes - Constraints: - Multiplicity of objectives in BB’s Monetary Policy Statements obscures price-stability focus. - High weight of food in headline inflation weakens link between monetary aggregates and prices. - Until late 2010, BB effectively operated an exchange rate targeting framework; unsterilized FX interventions increased reserve money above programmed levels. - Policy inconsistency: tightening undercut by expanded repos, FX overdrafts to SOCBs, and direct financing of government deficit (almost half of RM expansion). - Policy implication: strengthen monetary policy framework, clarify BB’s primary objective (price stability), improve understanding of money–price dynamics, and enhance central bank independence. ### Financial sector stability — vulnerabilities and indicators - Banking system: - Solvency risks among some banks increasing due to liquidity pressures, stock market exposure, and weak supervision. - Equity market: main Dhaka index fell by about a third from its December 2010 all-time high when market capitalization exceeded 50 percent of GDP. - SOCBs: adjusted average CAR drops to 1.5 percent from reported 9.5 percent at end-June 2011 when special accounts deducted. - Supervisory outcomes: - 40 out of 47 banks in compliance with new Basel II-consistent minimum CAR of 9 percent at end-June 2011. - As of end-August 2011, 13 banks exceeded the CDR limit imposed in mid-2011. - Specific risks: - Stock market exposure: stress tests suggest SOCBs’ adjusted capital depleted with a further 25 percent decline in stock prices. - Merchant bank subsidiaries: under-supervised; potential off-loading of risk to parents. - Liquidity pressures from rapid credit expansion, stock correction, heavy government funding needs, and weak secondary markets. - Policy responses: - BB imposed CDR ceilings of 85 percent (90 percent on Islamic banks). - Bangladesh Fund established as a Tk 50 billion (0.6 percent of GDP) investment pool in March 2011. ### Fiscal quasi-fiscal costs and subsidies - Subsidy trajectory and fiscal impacts: - Fuel subsidy: could rise to about 1.6 percent of GDP in FY12 from 1.0 percent in FY11 and 0.1 percent in FY10. - Electricity and fertilizer related subsidies: expected around 1½ percent of GDP in FY12. - Food-related subsidies: around ¾ percent of GDP in FY11. - SOCB loans to SOEs: 1.9 percent of GDP at end-FY11; half to BPC. - BPC’s outstanding debt to IsDB estimated at 0.6 percent of GDP at end-FY11 (government-guaranteed; captured in the DSA). - Break-even: staff estimated retail diesel price would have to rise by another 44 percent for BPC to break-even even after latest hike. - Reform needs: price adjustments for fuel and electricity, regular audits, addressing SOE inefficiencies, and moving to cost recovery to free resources for targeted safety nets. ### Outlook and risks - Near-term (FY12 projections): - Real GDP growth projected at 6.3 percent in FY12. - Inflation projected at 10.7 percent (y/y) at end-FY12. - Current account likely to slip into a deficit in FY12 of around ¾ percent of GDP. - Gross official reserves projected to decline to US$9.1 billion (2.3 months of import cover) by end-FY12. - Medium-term (FY13–16): - Real GDP growth projected to average 6¾ percent during FY13-16. - Import cover expected to fall below 1.5 months over the next several years; reserves pressure to persist. - Downside risks: - Continued loose macro policies; weak policy anchors; weaker growth in mature economies; insufficient progress on infrastructure and tax reform; lax oversight of financial markets. - Upside possibilities: - Gains in RMG market share or increased manpower exports could cushion growth and external prospects. ### Policy discussions: easing subsidy pressures and creating fiscal space (Section 13.A) - Official projection: overall deficit (including grants) projected to widen to 4.5 percent of GDP in FY12. - Staff view: - Expenditures likely tilted to subsidies; external financing weaker than budgeted; domestic financing requirement large and may fall on BB. - Recommend upfront fuel and electricity price adjustments with targeted safeguards; bring subsidy costs fully on budget. - Prefer automatic adjustment mechanism to depoliticize pricing decisions. - Caution: securitization of SOCB loans to SOEs only as part of broader subsidy reforms. - Specific priorities: - If domestic prices not adjusted, total subsidy costs expected to rise to 3.4 percent of GDP in FY12 from 2.2 percent in FY11. - Tax reforms: timely approval of new VAT law and direct tax code to reach medium-term tax revenue target of 13 percent of GDP; VAT implementation could take 18–24 months. - PFM: accelerate SPEMP; update ROSC; implement PEFA recommendations (transparency in intergovernmental operations, oversight of aggregate fiscal risk, expenditure controls, internal audit, fiscal reporting). - Debt management: finalize strategy by end-2011; limit medium- to long-term nonconcessional borrowing to high-return infrastructure; ensure treasury yields reflect market conditions. ### Authorities’ views on fiscal reforms and subsidies - Authorities broadly shared staff views and noted: - Need to increase cost recovery for energy. - Considering phased retail petroleum price increases; committed to semi-annual tariff increases for power over next three years, contingent on increased supply. - Hope new VAT and direct tax laws could be sent to Parliament in FY12 but acknowledged political challenges. - Recognized recent rise in domestic borrowing was unsustainable; interested in external budget support until tax base expanded. ### Monetary tightening and exchange rate policy (Section 13.B) - Staff recommendations: - BB should be prepared to further increase the repo rate and limit market operations to meeting temporary liquidity needs. - Reserve money growth should serve as the nominal anchor; net domestic assets of BB as operating target. - Staff expect reserve money growth to be 22 percent in FY12 against official target of 16 percent. - Increase interest rate flexibility: make repo, interbank, and treasury bill rates more responsive; phase out remaining lending rate caps. - Operate a flexible exchange rate: allow buying and selling rates guided by commercial bank averages; limit BB intervention to smoothing short-term volatility; modify reserve management guidelines to incorporate FXODs terms and use. - Exchange rate assessment: staff view exchange rate broadly in line with fundamentals; estimated taka undervaluation has fallen during the past year; BOP pressures and reserve losses projected to continue. ### Financial sector reform priorities (Section 13.C) - Strengthen supervision and enforcement: - BB to strengthen supervision, focus on SOCB governance, ensure bank compliance with capital adequacy. - Bring merchant bank subsidiaries under BB supervisory framework. - New stock market exposure limits for banks (25 percent of regulatory capital) recommended. - Regulatory guidelines on loan loss classification and provisioning to align with international best practices by end-2011. - Implement crisis contingency plans, lender of last resort facilities, and prompt corrective action framework. - Bank governance: - Finalize amendments to Bank Companies Act and submit to Parliament by end-2011 to give BB sole legal authority to act against noncompliant banks. - Defer approving new banking licenses until supervisory capacity strengthened. ### State-Owned Commercial Banks (SOCBs) and market oversight - SOCBs: - Need elaboration of plans to strengthen financial position and governance using external audits. - Government should refrain from interfering in SOCBs to avoid undermining profitability and provisioning. - SOCBs need to accelerate amortization of unrealized losses held in special accounts. - Equity market oversight: - Strengthen governance, book-building, listing and reporting requirements; provide clear sanctions; establish stable margin lending requirements. - Authorities agreed broadly and committed to improved coordination of onsite and offsite examinations, demutualization plans for Dhaka and Chittagong exchanges, and anti-money laundering framework strengthening. ### Real and external sector projections (selected numeric highlights) - Real GDP (y/y percent change): FY09 5.7; FY10 6.1; FY11 6.7; FY12 6.3; FY13 6.4; FY14 6.6. - CPI inflation (annual average): FY09 6.7; FY10 7.3; FY11 8.8; FY12 10.7; FY13 8.6; FY14 8.2. - Exports, f.o.b. (US$ billions): FY09 15.6; FY10 16.2; FY11 23.0; FY12 26.3; FY13 30.6; FY14 35.5. - Exports annual percent change (memorandum): FY11 41.7. - Imports, f.o.b. (US$ billions): FY11 -30,332 (reporting format as in source). - Current account balance (US$ millions): FY09 2,536; FY10 3,737; FY11 999; FY12 -849; FY13 -1,139; FY14 -1,126. - Workers' remittances (US$ millions): FY09 9,689; FY10 10,987; FY11 11,650; FY12 12,815. - Gross official reserves (US$ billions): FY09 7,444; FY10 10,140; FY11 10,034; FY12 9,110; FY13 8,334; FY14 7,701. - GIR in months of imports: FY11 2.9; FY12 2.3; FY13 1.9; FY14 1.6. ### Debt sustainability (DSA) — main findings - Public and publicly guaranteed external debt: face value equivalent to 21.6 percent of GDP at end-FY11. - Domestic debt: 21.3 percent of GDP at end-FY11; net domestic government debt (including government deposits) 18.1 percent of GDP at end-FY11. - DSA baseline: - PV of external debt-to-GDP: from 17½ percent in FY11 to about 8½ percent in FY32 (indicative threshold: 40 percent). - PV of debt-to-exports: from 75 percent in FY11 to 26 percent in FY32 (indicative threshold: 150 percent). - Standard stress tests do not breach external thresholds. - Risks: - Including domestic debt makes debt burden indicators less favorable. - Low domestic revenue base raises concern over total debt and debt service. - Energy sector risks (rental power, slow tariff adjustment, higher oil prices) could raise SOE operating losses and contingent liabilities. - SOCB recapitalization needs and absorbing SOE losses could increase contingent liabilities. - Policy implications: - Prudent fiscal policy, expand domestic resources, contain subsidy costs, prioritize concessional external borrowing for infrastructure, strengthen debt management capacity, and develop a comprehensive public debt database. ### Infrastructure, power, transportation, and PPPs - Power sector constraints: - Electricity shortages average 1,800 MW a day during peak hours; load-shedding averages 1,000–1,200 MW a day. - Government plan: more than double electricity generation by 2016; expected addition around 2,200 MW by end-2011. - Medium term (2012–16): planned new power plants with more than 12,000 MW total generating capacity. - Regional Grid Interconnection Plan: import 500 MW a day from India by end-2013 (AsDB funding approved in 2010; PPA pending). - Transport: - Only 10 percent of roads paved. - Padma River multibridge project: US$2.9 billion combined road-rail bridge; scheduled to open in 2015; financing: government US$0.5 billion; development partners US$2.4 billion (World Bank IDA US$1.2 billion; AsDB US$615 million; JICA US$420 million; IsDB US$140 million). - Dhaka Elevated Expressway: government approved March 2011; estimated cost US$2 billion; PPP basis. - Port infrastructure: - Chittagong port handles about 92 percent of external trade; ranked 107 out of 139 countries in port infrastructure quality. - Planned master plan for Chittagong port with AsDB technical support; revive Mongla port. - PPP institutional and financing measures: - PPP Advisory Council, PPP Office under Prime Minister’s Office, PPP Unit in Ministry of Finance. - Bangladesh Infrastructure Finance Fund (BIFF) established; BIFF to function akin to India’s IIFCL. - AsDB providing PPP TA. - Financing constraints: - Domestic savings nearly 30 percent of GDP but concentrated in banking system; maturity mismatches hamper long-term project financing. - Need for domestic bond market and new funding vehicles for PPPs. - Food security: - Food inflation peaked at 14.4 percent (y/y) in April 2011; moderated to 12.7 percent in August 2011. - Food grain imports rose 128 percent in FY11 to US$1.9 billion. - Official food reserves rose to 0.89 million metric tons at end-June 2011 from 0.52 million metric tons at end-June 2010. ### Statistics, safeguards, and IMF relations - Data adequacy: broadly adequate for surveillance but shortcomings in national accounts, fiscal, and external statistics. - National accounts rebasing: work program to update base year from 1995/96 to 2005/06; new series expected by early 2012. - Safeguards assessment of BB (July 2011): governance structure and legal underpinning need updating; certain BB operations not monitored by BB’s board; audit committee oversight ineffective. - IMF–World Bank collaboration (October 2011): coordinated support across tax policy, PFM, debt management, monetary and exchange rate policy, financial sector, energy sector reform, statistics, and structural policies. - IMF membership/quota and Fund relations: - Joined August 17, 1972. - Quota: 533.30 SDR Million. - Outstanding ECF arrangements and emergency assistance data reported. *Source: IMF staff report excerpts — Bangladesh 2011 Article IV Report (content unit _cr11314).* ### INTRODUCTION __________________________________________________________________________________ 4 ### INTRODUCTION ### Growth performance and emerging imbalances - Official estimates place real GDP growth at 6.7 percent in FY11 (July 2010–June 2011), up from 6.1 percent in FY10 and an average of 5.8 percent over the last decade (Table 1). - Inflation reached double digits, running at a three-year high. - Despite record export growth, the balance of payments (BoP) went into a deficit in FY11 for the first time in a decade; foreign reserves slipped from their highs in late 2010. - To absorb external pressures, the taka was allowed to depreciate vis-à-vis the U.S. dollar over the past 12 months, in contrast to the preceding three years when the exchange rate was kept stable but imbalances built (Figure 1). ### Medium-term growth targets and structural constraints - Government targets under Vision 2021 and the Sixth Five-Year Plan (2011–15): growth to increase to 8 percent by FY15 and 10 percent by FY21. - Poverty rate projected to decline from 31.5 percent in FY10 to 22.0 percent in FY15 if targets are realized. - Key constraints and structural challenges: - Low revenue-low investment-low growth equilibrium needs to be overcome. - Infrastructure deficit is described as enormous (see Appendix I). - Foreign direct investment (FDI) remains well under 1 percent of GDP annually. - Employment opportunities remain limited; many workers seek opportunities abroad. - Rapid expansion in ready-made garment (RMG) exports: RMG employs four million workers, 80 percent of whom are women. ### Focus of the 2011 Article IV consultation - Emphasis on accelerating growth-promoting structural reforms while ensuring a stable macroeconomic environment. - Reform priorities: tax policy and administration, public financial management (PFM), monetary and exchange operations, the financial sector, and the trade and investment regime. - Ongoing dialogue on a possible IMF-supported program, including discussions on a possible three-year Extended Credit Facility arrangement. - Note: In early 2011, a terms-of-trade shock due to rising oil prices and policy accommodation added pressure on the BOP. ### Recent macroeconomic developments (FY11) - Overall assessment: strong expansion in FY11 accompanied by intensified external and inflation pressures. - Growth and inflation: - Growth in FY11 buoyed by services, construction, and manufacturing, led by RMG exports and supported by accommodative policies (Figure 2). - Headline inflation reached 11.3 percent (y/y) in August 2011, primarily pushed up by food prices. - Nonfood inflation reached 8.8 percent in August 2011 owing to demand pressures. - Balance of payments and external flows: - Marked deterioration in the overall BOP in FY11, with external vulnerability on the rise (Box 1). - Export growth was 42 percent; import growth was 42 percent (imports had a larger base). - Export growth was fueled by gains in global market share for RMGs. - Remittances growth slowed owing to declines in manpower exports since 2009. - Current account surplus eroded by almost 3 percentage points of GDP in FY11 to about 1 percent of GDP. - Reserves: - Gross official reserves were US$10.0 billion at end-FY11 (2.9 months of prospective imports of goods and nonfactor services), compared to US$10.1 billion at end-FY10 (3.4 months of import cover). - Reserves movements partly reflected valuation gains (US$639 million) and nonreserve asset sales (US$145 million) by Bangladesh Bank (BB). - Reserves stood at US$9.4 billion (2.6 months of import cover) as of end-September 2011. - Exchange rate: - The taka depreciated by around 7 percent against the U.S. dollar over the 12 months to end-September 2011, notwithstanding about US$1.4 billion in official foreign exchange sales by BB (including FXODs) over the same period. - Recent easing of pressures was attributed partly to seasonal factors and increased use by Bangladesh Petroleum Corporation (BPC) of short-term nonconcessional suppliers’ credit to finance oil imports. - External pressures and policy responses: - To tackle power, transport, and water supply bottlenecks, import-intensive investment rose (notably oil and capital goods for rental power plants), increasing BoP pressures. ### External vulnerability (Box 1) - Openness and concentration: - Total exports were 21 percent of GDP in FY11. - Exports remain highly concentrated in products and destinations; RMG exports to the E.U. and the U.S. are the mainstay. - Global downturn scenario: - Under a scenario akin to the 2008–09 global recession, the current account could deteriorate by an additional ½ percentage point of GDP in FY12. - GDP growth could be lower by up to ¾ percentage point relative to the FY12 baseline. - This would translate into additional reserve losses of around US$500 million, bringing foreign reserves down to around two months of forward import cover by end-FY12. - Reserves adequacy: - Under the current outlook, foreign reserves are projected to decline to around 1½ months of import cover by FY15. - The report notes reliance in the past on administrative measures and moral suasion to cope with low reserves and cautions that returning to these practices would be counterproductive and could discourage remittance inflows through formal channels. ### Fiscal stance and financing in FY11 - Overall deficit: - The fiscal stance in FY11 was moderately expansionary, with an overall deficit (including grants) estimated at 3.7 percent of GDP (Tables 3 and 4, and Figure 4). - The deficit was financed almost entirely domestically, with a sizable portion from BB. - Revenue: - Tax revenue surpassed 10 percent of GDP. - Gains due mainly to tax buoyancy and administrative reforms (automation, registration, and enforcement). - Nontax revenue missed targets due to unanticipated delays in collecting telecommunications fees and other receipts. - Expenditure: - Annual Development Program (ADP) spending increased to 4.2 percent of GDP—its highest level in four years, but still below budget. - Subsidies and transfers, including net lending to BPC, far exceeded the budget due to higher-than-anticipated commodity prices, food security measures (see Appendix II), and subsidy-related transfers to energy and fertilizer-related state-owned enterprises (SOEs), notwithstanding recent fuel price and electricity tariff adjustments. - BPC received financing from state-owned commercial banks (SOCBs) and the Islamic Development Bank (IsDB), which could eventually bear on the budget. - Budget financing composition: - External aid inflows fell substantially in FY11 (previous year had crisis-related AsDB budget support). - Domestic nonbank financing declined further, in part due to less favorable tax treatment and nominal yields on National Savings Certificates. - Domestic bank financing rose sharply. - Suppressed treasury yields shifted added burden onto BB, directly through increased ways and means advances and overdrafts to the government and indirectly through targeted liquidity support provided to primary dealers to encourage participation in treasury auctions. _This summary is based solely on the provided content from the INTRODUCTION section of the 2011 Article IV Report for Bangladesh._ ### 6. Monetary policy remained ### 6. Monetary policy remained ### Monetary stance and transmission in FY11 - Monetary policy remained accommodative in FY11; Bangladesh Bank (BB) took only partial tightening measures despite loose credit conditions and inflation pressures. - Private credit expansion: - Private credit growth peaked at a record 29 percent (y/y) in March 2011. - It moderated to 23 percent (y/y) in August 2011 (the latest available data). - Policy actions and outcomes: - BB began raising its repo rate in August 2010—cumulatively now by 275 bps to the current 7.25 percent—while also increasing its cash reserve requirement in December 2010. - Repo auctions continued to be severely oversubscribed in much of FY11 owing to strong credit demand and negative real rates. - BB occasionally resorted to open market purchases and provided regular and emergency repo support to address liquidity pressures. - Most bank lending rate caps were lifted in March 2011, followed by a 200–300 bps rise in banks’ base rates. - Bank-by-bank credit-to-deposit ratio (CDR) ceilings were imposed around the same time. - Monetary targets and misses: - The central bank missed its reserve money target by a wide margin in FY11. - Table excerpt as published: Reserve money17.231.93.518.113.021.016.0 - Broad money (M2)17.519.215.522.415.221.418.5 - CPI inflation (average)9.06.76.57.36.58.87.5 - (Source reported as Bangladesh Bank; table heading: Bangladesh: Official Monetary Targets and Outturns, FY09–FY12 (Percent change).) ### Constraints on monetary policy effectiveness - Structural and institutional constraints: - Multiplicity of objectives in BB’s half-yearly Monetary Policy Statements obscures focus on price stability. - The link between monetary aggregates and prices has been tenuous; monetary targeting framework weakened by high weight of food in headline inflation and rising second-round effects from food price inflation to nonfood inflation. - Until late 2010 BB effectively operated an exchange rate targeting framework; unsterilized FX interventions increased net foreign assets and reserve money above programmed levels. - Policy inconsistency: BB’s tightening via higher policy rates and reserve requirements was undercut by expanded provision of repos to primary dealers and FX overdrafts to SOCBs, and by direct financing of the government deficit (almost half of RM expansion). - Policy implication highlighted: - The need to strengthen the whole monetary policy framework, clarify objectives, improve understanding of money–price relationships (including lags), and give greater independence to the central bank. ### Financial sector stability concerns - General indicators and vulnerabilities: - Solvency risks among some banks may be increasing, exacerbated by rising liquidity pressures, stock market exposure, and weak supervisory oversight. - Equity markets volatile: the main Dhaka index fell by about a third from its December 2010 all-time high (when total stock market capitalization exceeded 50 percent of GDP). - Attempts to cushion market falls via relaxed margin lending and public support (including the new Bangladesh Fund) may have elevated fiscal risks and created moral hazard. - Banking system specifics: - Basel II adoption noted, but reporting and prudential standards remain weak in places (lenient loan classification; provisioning standards need clearer guidance). - State-owned commercial banks (SOCBs) and specialized banks show significantly weaker FSIs than private banks. - SOCBs: when special accounts (reflecting accumulated losses) are deducted from capital, average CAR drops to 1.5 percent from the reported 9.5 percent at end-June 2011. - Recent supervisory measures and results: - 40 out of 47 banks in compliance with new Basel II-consistent requirement (minimum CAR of 9 percent) at end-June 2011. - As of end-August 2011, 13 banks exceeded the CDR limit imposed in mid-2011. - Specific risk channels called out: - Stock market exposure: recent stress tests suggest SOCBs’ adjusted capital would be depleted with a further 25 percent decline in stock prices. - Merchant bank subsidiaries: newly allowed since October 2010, remain under-supervised with potential off-loading of risk to parents. - Liquidity pressures from rapid credit expansion, December 2010 stock correction, heavy government funding needs, and weak secondary markets. - Policy actions taken: - BB imposed CDR ceilings of 85 percent (90 percent on Islamic banks) to better align credit and deposit growth. - Bangladesh Fund established as a Tk 50 billion (0.6 percent of GDP) investment pool in March 2011. ### Fiscal quasi-fiscal costs and subsidies - Overview: - Subsidy costs increasing rapidly due to higher domestic demand and rising import-related costs of heavily subsidized products—fuel, electricity, and fertilizer. - Broad subsidies largely shield consumers from price movements; major ones absorbed initially by SOEs: BPC (fuel), BPDB (electricity), BCIC (fertilizer). - SOE operating losses covered by loans from SOCBs, direct budget transfers, and/or net lending by government (effectively transfers). - Key figures and projections: - Fuel subsidy cost could rise to about 1.6 percent of GDP in FY12 from 1.0 percent in FY11 and 0.1 percent in FY10. - Even after the latest price hike, retail diesel price would have to rise by another 44 percent, by staff estimates, for BPC to break-even. - Electricity and fertilizer related subsidies expected to be around 1½ percent of GDP in FY12. - Food-related subsidies, though increasing in FY11, appear contained to around ¾ percent of GDP. - SOCB loans to SOEs amounted to 1.9 percent of GDP at end-FY11, of which half were to the BPC. - BPC’s outstanding debt to the IsDB estimated at 0.6 percent of GDP at end-FY11; this debt is government-guaranteed and captured in the DSA. - Fiscal management and reform needs: - Government has indicated budgetary transfers are expected to fully cover SOE losses (a substantial departure from past practice), but major reforms to SOEs are urgently needed to contain costs. - Reforms include price adjustments for fuel and electricity, regular audits, and addressing operating inefficiencies. - Moving to cost recovery could free up resources for targeted safety nets, given evidence of subsidy leakage to mid-to-upper income households. ### Outlook and risks - Near-term projections (FY12): - Real GDP growth projected at 6.3 percent in FY12; domestic demand is the main driver. - Inflation projected at 10.7 percent (y/y) at end-FY12. - Current account likely to slip into a deficit in FY12 of around ¾ percent of GDP, driven by oil imports. - Gross official reserves projected to decline to US$9.1 billion (2.3 months of import cover) by end-FY12. - Medium-term projections: - Real GDP growth projected to average 6¾ percent during FY13-16. - Inflation expected to fall over the medium term on moderate policy tightening, stable commodity prices, and easing supply constraints. - Despite favorable export and remittances outlook, BOP pressures likely to persist as oil import volumes increase and infrastructure investment intensifies; import cover expected to fall below 1.5 months over the next several years. - Downside risks: - Continued loose macroeconomic policies and weak policy anchors could be destabilizing. - Fuel and electricity price adjustments could add to inflation pressures if second-round effects are not managed. - Weaker growth in mature economies could weigh on RMG exports and remittances, worsening BOP pressures. - Insufficient progress on infrastructure and tax reform could dampen investment and growth. - Lax oversight of financial markets could exacerbate fiscal risks if excessive volatility invites public interventions. - Upside possibilities: - Gains in RMG market share or increased manpower exports could cushion growth and external prospects. ### Policy recommendations and priorities (implied in text) - Strengthen monetary policy framework: - Clarify BB’s primary objective (price stability), reduce multiplicity of objectives in policy statements, and improve understanding of money–price dynamics and lags. - Reduce policy inconsistency (limit offsetting liquidity-providing operations when tightening policy) and enhance central bank independence. - Contain subsidy-driven fiscal risks: - Move toward cost-recovery pricing for fuel and electricity to limit quasi-fiscal deficits from SOEs. - Undertake SOE reforms, regular audits, and address operating inefficiencies; redirect savings toward targeted safety nets for vulnerable groups. - Strengthen financial sector regulation and supervision: - Tighten loan classification and provisioning standards and improve transparency of SOCB balance sheets (adjust special accounts). - Strengthen oversight of merchant bank subsidiaries and the Securities and Exchange Commission to limit market manipulation and moral hazard. - Enforce CDR ceilings and monitor liquidity vulnerabilities. - Manage external vulnerabilities: - Mobilize domestic resources through tax reform to finance infrastructure and reduce reliance on imports/contingent liabilities. - Build reserve buffers and manage the current account and financing needs prudently. *Source: IMF staff report excerpt — Bangladesh 2011 Article IV Report.* ### 13. Policy discussions for the 2011 Article ### 13. Policy discussions for the 2011 Article ### A. Easing Subsidy Pressures and Creating Fiscal Space — Overview and Staff Views - Official fiscal stance: overall deficit (including grants) projected to widen to 4.5 percent of GDP in FY12. - Staff concern: expenditures likely to be more heavily tilted toward covering subsidy costs; external financing expected to be weaker than budgeted; domestic financing requirement to remain large and burden continue to fall on BB, potentially undermining monetary targets and heightening inflation risk. - Staff recommendation: upfront adjustments to fuel and electricity prices, coupled with further progress on structural fiscal reforms; bring subsidy costs fully on budget and contain subsidy growth through a committed plan for fuel price adjustments. - Preferred mechanism: an automatic adjustment mechanism to depoliticize pricing decisions; adjustments should include well-targeted safeguards. - Securitization caution: outstanding loans from SOCBs to loss-making energy and fertilizer SOEs should be securitized only as part of broader subsidy reforms. ### A. Easing Subsidy Pressures and Creating Fiscal Space — Specific Policy Priorities - Containing subsidy costs: - If domestic prices are not adjusted, total subsidy costs expected to rise to 3.4 percent of GDP in FY12 from 2.2 percent in FY11, with most increase to cover additional losses by BPC. - Staff urged costs be brought fully on budget and subsidy growth contained via committed fuel price adjustment plan. - Tax reforms: - Timely approval of a new VAT law and direct tax code necessary to achieve medium-term tax revenue target of 13 percent of GDP. - VAT implementation could take 18–24 months, given extensive training, procedural, and automation needs; considerable follow up technical assistance (TA) anticipated. - Priority urged on new income tax provisions; wealth and property tax sections may be more controversial. - NBR outline of tax modernization scheme (2011–16) provides blueprint for a sequenced action plan and capacity building. - NBR actions: begin hiring new tax officers; roll out coordinated individual and business taxpayer identification numbers; plan to implement ASYCUDA World System for customs modernization with UNCTAD support. - Strengthening PFM: - SPEMP expected to guide planning, budgeting, and procurement reforms; project slow to start and should accelerate reforms in cash and debt management. - Staff encouraged updating the fiscal Report on Standards and Codes (ROSC) to gauge progress since 2003. - PEFA assessment (2011) identified: lack of transparency in inter-governmental operations, poor oversight of aggregate fiscal risk from public sector entities, and weaknesses in expenditure controls, internal audit, and fiscal reporting. - ADP implementation: finalize plan to prioritize projects, speed approvals, and strengthen procurement processes by end-2011. - Medium-term macro-fiscal framework being developed to enhance coherence between budget formulation, resource availability, and macroeconomic objectives. - New MoF cell to oversee government funds in PPPs; PPP office established to be staffed by professional managers. - Improving debt management: - MOF formulating a strategy to improve debt management, urged to finalize by end-2011. - Continued reliance on concessional external borrowing recommended; medium- to long-term nonconcessional borrowing should be limited to high-return infrastructure projects and integrated with medium-term fiscal and debt sustainability framework. - Short-term nonconcessional borrowing by BPC should be within broader strategies to raise domestic energy prices and address BOP financing needs. - Domestic borrowing: treasury bill and bond rates should better reflect market conditions; low, nonmarket clearing yields undermine fiscal discipline and monetary framework. - BB, as government fiscal agent, should ensure cut-off rates reflect prevailing supply and demand conditions. - Primary dealers effectively taxed through devolvement, impinging on banks’ profitability and potentially encouraging excessive risk taking. ### A. Easing Subsidy Pressures and Creating Fiscal Space — Authorities’ Views - Authorities broadly shared staff views; cited track record of fiscal prudence and prioritized raising revenue and boosting ADP spending. - Budget framework adopted in FY11 requires quarterly MoF reporting to Parliament, increasing fiscal transparency. - On subsidy costs: - Authorities recognized need to increase cost recovery for energy. - Various scenarios for phased increases in retail petroleum prices under active consideration; concerns about inflation implications weighed against budgetary imperatives. - Authorities committed to semi-annual tariff increases for power over the next three years, contingent on increased electricity supply. - Pending World Bank TA on tracking subsidy schemes and effectiveness. - On tax policy and PFM reform: - Authorities hopeful new VAT and direct tax laws could be sent to Parliament in FY12, but acknowledged political challenges. - SPEMP to guide PFM reforms, focusing initially on strengthening budget planning and execution. - Inter-ministerial coordinating committee established to prioritize ADP projects, including externally funded ones. - On debt management and budget financing: - Authorities recognized need for sound debt management strategy. - Noted Bangladesh received first sovereign rating in 2010 (Moody’s Ba3 and S&P’s BB-); suggested a sovereign issue could be part of medium-term borrowing plans. - Viewed short-term nonconcessional borrowing by BPC as unavoidable for oil imports but accepted recent rise in domestic borrowing was unsustainable. - Indicated treasury rates might need to rise and interest in seeking budget support from the World Bank and other development partners until tax base expanded. ### B. Allowing Monetary Tightening to Take Hold and Market Rates to Adjust — Overview and Staff Views - Monetary policy in FY12 needs to be appropriately tight; effectiveness requires greater policy coordination and consistency. - BB performance weak against its own targets due to lack of central bank independence, inadequate liquidity management framework, and delays in policy responses. - Staff welcomed recent increases in the repo rate, removal of most lending rate caps, and other tightening measures. - Increased exchange rate flexibility allowed in FY11 led staff to reclassify the de facto exchange rate regime from “stabilized” to “crawl-like.” ### B. Allowing Monetary Tightening to Take Hold and Market Rates to Adjust — Specific Policy Recommendations - Tightening monetary policy: - BB should be prepared to further increase the repo rate and limit market operations to meeting temporary liquidity needs. - Reserve money growth should continue to serve as the nominal anchor, with net domestic assets of BB as an operating target. - Staff cautioned fiscal loosening in FY12 could lead to considerable monetary easing if the government depends heavily on BB for financing. - Staff expect reserve money growth to be 22 percent in FY12, against an official target of 16 percent. - Increasing interest rate flexibility: - Repo, interbank, and treasury bill rates should be made more responsive to supply and demand to improve interest rate signals and strengthen monetary policy transmission. - Rationing of taka liquidity in repo auctions should be addressed by letting the repo rate respond to excess demand. - Remaining caps on lending rates should be phased out; moral suasion over deposit rates should be avoided. - Operating a flexible exchange rate regime: - BB should allow its buying and selling rates to be guided by the average buying and selling rates set by commercial banks. - To develop the interbank FX market, BB should limit intervention to smoothing short-term volatility, ensure banks remain within net open position limits, and cease use of moral suasion to keep rates stable. - BB needs to modify reserve management guidelines (approved September 2011) to incorporate provisions on terms and use of FXODs. - Staff cautioned that use of deferred payments for oil imports could put added pressures on reserves. ### B. Allowing Monetary Tightening to Take Hold and Market Rates to Adjust — Exchange Rate Assessment - Staff view: exchange rate broadly in line with fundamentals (Box 5); estimated size of the taka’s undervaluation has fallen during the past year due to less favorable current account balance and more robust medium-term growth outlook under current baseline. - BOP pressures and reserve losses projected to continue over the medium term, suggesting continued downward pressure on the exchange rate. ### B. Allowing Monetary Tightening to Take Hold and Market Rates to Adjust — Authorities’ Views - Authorities generally agreed with staff on monetary and exchange rate policy. - Recognized monetary conditions could warrant further tightening, especially if nonfood inflation continued to rise, but expressed concern about rising lending rates’ impact on growth and a weaker taka on inflation. - Indicated phasing out bank-by-bank ceilings on CDRs once new liquidity management guidelines are in place; suggested remaining lending rate caps might be lifted (mainly on certain export and industrial credits). - Noted a more flexible exchange rate increased transaction volumes in the interbank market and reduced BB’s stock of FXODs. - Acknowledged need to safeguard reserves but indicated BB would likely continue to facilitate lumpy payments for fuel and food imports, with FX transacted in line with commercial bank rates. ### C. Ensuring a Stable Financial Sector in Uncertain Times — Overview and Staff Views - Financial sector reforms are essential to maintain macroeconomic stability, secure growth potential, and minimize fiscal risks. - Since the 2009 FSAP update, measured reforms have taken place, but rapid growth in banking and equity markets is straining supervisory capacity and oversight. - SOCBs remain vulnerable to outside interference, undermining gains from corporatization efforts. ### C. Ensuring a Stable Financial Sector in Uncertain Times — Main Policy Recommendations - Strengthening bank supervision and enforcement: - BB should strengthen supervision and oversight, focus on SOCB governance and finances, and ensure all banks comply with new capital adequacy requirements. - Recommendation that merchant bank subsidiaries fall under BB supervisory and reporting framework to protect parent banks’ capital and limit operational risk. - New stock market exposure limits for banks (25 percent of regulatory capital) could provide added protection if implemented timely. - Regulatory guidelines on loan loss classification and provisioning standards should be brought in line with international best practices by end-2011. - Implement crisis contingency plans, lender of last resort facilities, and a prompt corrective action framework to reduce systemic risk. - Begin steps toward Basel III standards while ensuring strict Basel II compliance by all banks. - Improving bank governance and performance: - Timely finalize draft amendments to the Bank Companies Act and submit to Parliament by end-2011. - Amendments should give BB sole legal authority to act against banks failing to comply with prudential regulations and stipulate fit and proper criteria for directors, officers and key shareholders at all banks, superseding exemptions for SOCBs. - Government should defer approving new banking licenses until supervisory capacity is strengthened, liquidity pressures ease, and strict licensing criteria are in place. *Source: _cr11314 - 13. Policy discussions for the 2011 Article* ### 2011. Regarding the SOCBs, staff saw need ### _cr11314 - 2011. Regarding the SOCBs, staff saw need ### State-Owned Commercial Banks (SOCBs): financial position and governance - Staff saw need for further elaboration of plans to strengthen SOCBs' financial position and internal governance, given underlying inadequacies in their capital bases, using the results of the recent external audits as a guide. - The government should refrain from interfering in the operations of SOCBs, as such interference could: - undermine their profitability; - limit proper provisioning; and - exacerbate recapitalization needs. - SOCBs need to accelerate their amortization of unrealized losses being held in special accounts on their balance sheet. ### Equity market oversight - Staff recommended stepped up efforts to improve stock market governance and oversight. - The advisory board set up after the high-level probe of market irregularities should possess the necessary expertise, backed by sufficient capacity building. - Reforms should: - contain risks posed by merchant bank subsidiaries; - strengthen the book-building method and listing and reporting requirements; - provide clear sanctions for trading violations; and - establish a stable set of margin lending requirements. ### Authorities’ views - Authorities broadly agreed with staff views and noted: - the generally weak state of SOCBs—several of which remain technically insolvent—is an active concern; - they remain in close contact with commercial banks that exceed current stock market exposure limits to bring them into compliance; - improved coordination of onsite and offsite bank examinations should facilitate movement toward more risk-based supervision, with the support of the new IMF resident advisor in BB; - a commitment to improve oversight of the securities market and to strengthen laws underpinning the anti-money laundering framework; - plans being formulated to demutualize the Dhaka and Chittagong stock exchanges to improve their governance. ### Other issues: trade, statistics, safeguards - Trade reform: - Bangladesh is making progress in increasing integration with main trading partners. - Addressing trade barriers, which are high even by regional standards, would support integration efforts. - Since January 2011, exports have benefitted significantly from a relaxation in rules of origin requirements for RMG exports to the European Union. - In September this year, duties and quotas on exports to India of 61 items were removed, including on 46 garment products. - Efforts were made to open up transit trade and transshipment through Bangladesh for India’s northeastern states (issue still pending). - Statistics: - Macroeconomic statistics are adequate for surveillance, with authorities committed to strengthening them. - Authorities aim to seek parliamentary approval of the new Statistics Act by end-2011. - Staff welcomed actions by the Ministry of Planning’s Statistics Division to modernize CPI compilation. - Deficiencies in national income accounts and the BOP are expected to be addressed through further IMF TA. - Safeguards assessment: - Staff encouraged BB to implement recommendations of the recent safeguards assessment over the near to medium term. - Priority actions include improving the quality of external audits to ensure compliance with international standards, and strengthening governance over FXODs and reserves management. ### Staff appraisal: growth, macro policies, and financial stability - Growth and balance of payments: - The growth outlook in FY12 is favorable, but overheating pressures threaten macroeconomic stability. - Rising oil and capital goods imports and accommodative policies are putting pressure on the BOP, requiring policy rebalancing and tightening. - Balance of payments pressures are expected to build over the medium term because of import-heavy infrastructure investment and further large increases in oil demand; managing them will likely necessitate exceptional financing and upfront policy adjustment. - Long-term growth and reform priorities: - Longer term growth prospects hinge on generating sufficient resources to relieve infrastructure bottlenecks and ensuring a competitive business environment focused on labor-intensive activities. - To reach emerging-economy status by end-decade, public and private investment rates will need to rise substantially, including FDI. - Necessary conditions include strong tax enforcement and compliance; a stable, well-governed financial system; and a streamlined and transparent trade and investment regime. - Fiscal policy and subsidies: - Vigilance is required on the fiscal front. - Subsidy costs need to be brought under control through upfront fuel price and electricity tariff adjustments, combined with targeted safeguards, to reduce operating losses of the BPC, ease demand pressures, and protect the integrity of the FY12 budget. - Reducing subsidies would reopen space for more social and development spending, though the domestic financing requirement could be large, necessitating greater access to external financing. - Monetary and exchange rate policy: - The balance of risks points to the need for further monetary tightening. - As a first step, BB financing of the deficit should be reduced, accompanied by higher policy and treasury rates and limited liquidity support, to better enable the central bank to achieve its FY12 monetary targets. - Increased interest rate flexibility would help strengthen the monetary transmission mechanism. - Continued exchange rate flexibility is needed to facilitate external adjustment and safeguard foreign reserves; staff consider the exchange rate broadly in line with fundamentals but subject to downward pressure. - Market intervention by BB should be limited to smoothing short-term volatility and consistent with maintaining an adequate reserve cover. - New reserve management guidelines are timely given volatile global markets. - Financial sector priorities: - Financial sector vulnerabilities should be addressed as a matter of priority to ensure system soundness and reduce fiscal risks. - The regulatory and supervisory framework over commercial banks needs to be strengthened and enforced. - Governance over banks, particularly SOCBs, should be fortified to ensure sound banking practices. - Stock market volatility could pose systemic risk to the banking system and create fiscal risk if not managed; market oversight should be strengthened and banks’ exposure carefully monitored. - Statistics and data quality: - Further improvement in the quality and timeliness of statistics would improve policymaking. - Progress in addressing weaknesses in national account and BOP statistics is particularly important. - Greater autonomy to statistical bodies should allow more accurate measurement of policy outcomes. - Exchange restriction: - No timetable exists for removal of the one remaining exchange restriction on the transferability of funds in nonresident taka accounts; staff does not recommend its approval by the Executive Board. *Source: _cr11314 - 2011. Regarding the SOCBs, staff saw need* ### 33. It is recommended that the next ### _cr11314 - 33. It is recommended that the next ### Real and external sector developments - Growth has held up, supported by strong performance of the RMG sector and accommodative policies. - Current account balance has deteriorated due to slowing remittance growth, strong domestic demand, and rising oil and capital goods imports. - Headline inflation is at a three-year high due to food prices and, more recently, demand side pressures. - Inflation has broadly followed a similar trend as in India. - Both export and import growth remain at an elevated pace, propelled by strong demand forces and high commodity prices, with imports increasing from a much larger base, contributing to reserve losses. - Sources: Bangladesh authorities; CEIC Data Company Ltd.; and IMF staff estimates. ### Growth composition and projections (FY 2007–14) - Real GDP (y/y percent change) and sub-sectors contributions shown for 2007–2014 (Est./Proj.). - Real GDP growth entries in Table 1: FY09 5.7, FY10 6.1, FY11 6.7, FY12 6.3, FY13 6.4, FY14 6.6 (percent change). - GDP deflator: FY09 6.5, FY10 6.5, FY11 6.3, FY12 10.0, FY13 9.3, FY14 8.1 (percent change). - CPI inflation (annual average): FY09 6.7, FY10 7.3, FY11 8.8, FY12 10.7, FY13 8.6, FY14 8.2 (percent). - CPI inflation (end of period): FY09 2.2, FY10 8.7, FY11 10.2, FY12 10.7, FY13 8.7, FY14 8.1 (percent). - Nonfood CPI inflation (end of period): FY09 5.9, FY10 5.2, FY11 5.7, FY12 10.8, FY13 7.8, FY14 6.3 (percent). ### External sector — exports, imports, remittances, reserves - Exports, f.o.b. (Table 1, in billions of U.S. dollars): FY09 15.6, FY10 16.2, FY11 23.0, FY12 26.3, FY13 30.6, FY14 35.5. - Exports annual percent change (memorandum): FY09 10.1, FY10 4.2, FY11 41.7, FY12 14.2, FY13 16.6, FY14 15.7. - Imports, f.o.b. (Table 1, in billions of U.S. dollars): FY09 -20,291, FY10 -21,388, FY11 -30,332, FY12 -35,823, FY13 -40,700, FY14 -45,762. - Imports annual percent change (memorandum): FY09 4.2, FY10 5.4, FY11 41.8, FY12 18.1, FY13 13.6, FY14 12.4. - Current account balance (in billions of U.S. dollars): FY09 2,536, FY10 3,737, FY11 999, FY12 -849, FY13 -1,139, FY14 -1,126. - Current account balance (percent of GDP, memorandum): FY09 2.8, FY10 3.7, FY11 0.9, FY12 -0.7, FY13 -0.9, FY14 -0.8. - Workers' remittances (Table 2, transfers, in millions USD): FY09 9,689, FY10 10,987, FY11 11,650, FY12 12,815, FY13 13,840, FY14 14,947. - Gross official reserves (in billions of U.S. dollars, Table 2): FY09 7,444, FY10 10,140, FY11 10,034, FY12 9,110, FY13 8,334, FY14 7,701. - GIR in months of imports of goods and services (memorandum): FY09 3.6, FY10 3.4, FY11 2.9, FY12 2.3, FY13 1.9, FY14 1.6. - Net international reserves (Table 2, memorandum): FY09 5,258, FY10 7,249, FY11 6,725, FY12 6,003, FY13 5,434, FY14 4,887 (in millions USD). ### Export structure and market shares - RMG sector drives export performance: RMG exports (Table 2, in millions USD) FY09 12,348, FY10 12,497, FY11 17,914, FY12 20,422, FY13 23,894, FY14 27,717. - Bangladesh’s export performance index (Mar. 2006–Aug. 2011) outperforms regional averages coming out of the global crisis. - Bangladesh's market share of U.S. garment imports continues to rise slowly following a pullback in 2009; share in Europe remains significantly larger than regional competitors and is rising, buoyed by relaxation of rules of origin. - Growth in remittances slowed in 2010, with a modest uptick in H1 2011; number of workers moving abroad increased earlier, supporting remittance trends. ### Fiscal developments and outlook - Fiscal deficits are projected to widen over the medium term despite increased tax take; subsidy cost is the main driver. - National Board of Revenue reforms are beginning to pay off, raising tax revenue. - ADP spending is rising but still falls short of the budget. - Domestic bank financing rose sharply in FY11, partly due to slowing external aid inflows. - External debt projected to remain on a declining trend; domestic debt is forecast to rise absent fiscal consolidation. - Central government operations (percent of GDP, Table 3): - Total revenue and grants: FY09 10.8, FY10 11.5, FY11 12.2, FY12 13.5, FY13 13.6, FY14 14.1. - Total expenditure: FY09 14.5, FY10 14.6, FY11 16.9, FY12 15.9, FY13 17.8, FY14 17.9. - Overall balance (including grants): FY09 -3.7, FY10 -3.1, FY11 -4.4, FY12 -3.7, FY13 -4.4, FY14 -4.4 (percent of GDP). - Overall balance (excluding grants): FY09 -4.0, FY10 -3.7, FY11 -5.0, FY12 -4.3, FY13 -4.9, FY14 -5.0 (percent of GDP). - Primary balance (excluding grants): FY09 -1.5, FY10 -1.6, FY11 -3.2, FY12 -2.4, FY13 -3.0, FY14 -2.8 (percent of GDP). - Subsidy costs (percent of GDP, memorandum): FY09 1.3, FY10 1.3, FY13 2.2, FY14 3.4, FY15 3.5 (as reported in Table 3 notes). ### Monetary and financial market developments - Private credit growth moderated slowly from a record high in early 2011 but remained elevated. - Reserve money growth remained high due mainly to Bangladesh Bank’s liquidity support to banks and surging credit to government. - Call money rates reflect tightening liquidity conditions; BB repo rates were increased gradually. - Excess liquidity fell along with declining net external inflows and rapid credit expansion despite central bank support. - Interest rates on treasury bills and bonds increased only modestly despite rising inflation. - Dhaka Stock Exchange index fell from its December peak but remained volatile. - Monetary aggregates and rates (selected): - Broad money (M2) (year–on–year percent change, Jan.2007–Aug.2011): series shown; specific FY-end percent changes listed in Table 1 for Reserve money and broad money are reported as placeholders ("......") in the source. - Reserve money (Table 1 entries show large year-on-year changes in period series); contribution to reserve money growth decomposed into net claims on government by BB, other net domestic assets of BB, and net foreign assets of BB. - Interest rates (Jan. 2006–Sep. 2011): call rate, BB repo rate, BB reverse repo rate, 91-day T-bill rate series shown in figures. - Yield curve on treasury bonds and bills presented for Sep. 2011, Jun. 2011, Dec. 2010, Jul. 2010 across tenors 3M–20Y. ### Balance of payments and financing (FY2009–16 projections) - Table 2 highlights (in millions of U.S. dollars, unless otherwise indicated): - Trade balance: FY09 -4,708; FY10 -5,152; FY11 -7,323; FY12 -9,543; FY13 -10,055; FY14 -10,307. - Services: FY09 -1,621; FY10 -1,240; FY11 -2,399; FY12 -3,079; FY13 -3,766; FY14 -4,487. - Income: FY09 -1,361; FY10 -1,484; FY11 -1,354; FY12 -1,470; FY13 -1,595; FY14 -1,720. - Transfers (total): FY09 10,226; FY10 11,613; FY11 12,075; FY12 13,243; FY13 14,277; FY14 15,388. - Capital and financial account balance: FY09 -357; FY10 -134; FY11 -984; FY12 126; FY13 570; FY14 579. - Foreign direct investment: FY09 941; FY10 913; FY11 768; FY12 950; FY13 1,129; FY14 1,342. - Overall balance: FY09 2,058; FY10 2,865; FY11 -922; FY12 -722; FY13 -569; FY14 -547. - Change in gross international reserves (GIR), net of valuation changes (increase -): FY09 -2,043; FY10 -2,827; FY11 978; FY12 925; FY13 776; FY14 632 (in millions USD). - Change in GIR (increase -): FY09 -1,522; FY10 -2,560; FY11 339; FY12 925; FY13 776; FY14 632. ### Central government accounts (selected levels, in billions of taka) - Revenue and grants (levels): FY09 Total revenue and grants 667; FY10 799; FY11 964; FY12 1,247. - Tax revenue: FY09 529; FY10 625; FY11 795; FY12 966. - Grants: FY09 214; FY10 252; FY11 255; FY12 55. - Total expenditure: FY09 643; FY10 671; FY11 852; FY12 1,122. - Subsidies (levels): FY09 88, FY10 116, FY11 330, FY12 303 (in billions of taka, includes transfers to Bangladesh Petroleum Corporation and Bangladesh Power Development Board as noted). - Gross operating balance and net acquisition of nonfinancial assets and net lending/net borrowing entries are reported in the central government accounts tables. *Sources: Bangladesh authorities; CEIC Data Company Ltd.; Eurostat; U.S. Department of Commerce; Office of Textiles and Apparel; and IMF staff estimates.* ### 2. Financial balance sheet ### 2. Financial balance sheet ### Bangladesh Bank balance sheet and monetary accounts (end-period; selected figures) - Bangladesh Bank balance sheet (end-period; in billions of taka) - Net foreign assets: 366 528 569 523 530 470 - Net domestic assets: 261 213 251 374 434 626 - Net credit to central government: 271 193 183 307 311 486 - Credit to other nonfinancial public sector: 11 11 11 - Credit to deposit money banks: 615 965 968 474 - Other items, net: -71 -393 -293 966 - Of which: Repos with commercial banks: 0 0 5982 125 182 - Reserve money: 627 741 820 897 963 1,096 - Currency: 394 505 579 605 704 738 - Reserves 2/: 232 235 239 290 257 358 - Growth contributions and changes (year-on-year percent change as shown) - Net foreign assets: 19.5 25.9 6.3 -0.7 -1.6 -6.0 - Net domestic assets: 12.5 -7.7 20.9 21.8 27.9 28.1 - Of which: Net credit to central government: 5.3 -12.3 11.3 15.4 17.8 20.0 - Reserve money (year-on-year percentage change): 31.9 18.1 25.9 21.0 26.3 22.2 - Monetary survey (end-period; in billions of taka) - Net foreign assets: 475 651 685 693 716 639 - Bangladesh Bank: 366 528 569 523 530 470 - Commercial banks: 109 122 116 170 186 170 - Net domestic assets: 2,489 2,977 3,306 3,710 3,820 4,676 - Domestic credit: 2,854 3,355 3,774 4,236 4,344 5,199 - Net credit to central government: 551 496 475 701 729 995 - Credit to other nonfinancial public sector: 88 109 148 146 150 167 - Credit to nonbank financial institutions: 36 41 42 48 48 53 - Credit to private sector: 2,179 2,708 3,109 3,407 3,456 3,985 - Other items, net: -365 -377 -468 -526 -524 -523 - Broad money (M2): 2,964 3,628 3,991 4,403 4,536 5,316 - Currency in circulation: 360 462 529 548 643 658 - Deposits: 2,603 3,167 3,461 3,855 3,893 4,658 - Monetary growth rates (year-on-year percent change as shown) - Net foreign assets: 28.0 37.1 10.6 6.5 7.0 -7.7 - Net domestic assets: 17.6 19.6 24.2 24.6 24.8 26.0 - Domestic credit: 16.5 17.5 24.1 26.3 26.1 22.7 - Net credit to central government: 23.0 -9.9 4.7 41.3 50.0 41.8 - Credit to other nonfinancial public sector: 4.5 24.0 35.2 33.6 33.9 14.4 - Credit to private sector: 15.5 24.2 27.6 25.8 23.2 16.9 - Broad money (M2): 19.2 22.4 21.7 21.4 21.6 20.7 - Deposits: 20.5 21.6 20.8 21.7 20.5 20.8 - Memorandum items (selected) - Required domestic cash reserves (in billions of taka): 143 190 226 252 254 301 - Excess domestic cash reserves (in billions of taka): 89 45 13 38 35 7 - Loan-to-deposit ratio (in percent): 82.3 84.4 89.1 87.3 87.9 ... - Broad money multiplier: 4.7 4.9 4.9 4.9 ... 4.9 - Broad money velocity: 2.1 1.9 1.9 1.8 ... 1.7 - Exchange rate, end of period (taka/U.S. dollar): 69.1 69.5 70.7 74.2 73.6 ... ### Financial soundness indicators (2005–11; end-of-period, percent) - Capital adequacy (selected series) - Regulatory capital to risk-weighted assets (adjusted) 1/: 8.9 5.6 4.1 6.5 8.8 7.6 8.2 - Regulatory capital to risk-weighted assets (unadjusted): 8.9 5.6 9.3 10.4 11.7 9.3 9.7 - Regulatory capital to assets (adjusted) 1/: 4.8 3.2 2.4 4.0 5.3 6.9 7.1 - Regulatory capital to assets (unadjusted): 4.8 3.2 5.6 6.5 7.1 8.5 8.5 - Asset quality - Nonperforming loans to total loans: 13.2 12.8 14.5 11.2 9.0 7.3 7.1 - Loan provisions to total nonperforming loans: 28.3 45.2 43.0 50.1 61.2 62.7 62.5 - Loan provisions to total loans: 3.7 5.8 6.2 5.6 5.5 4.6 4.5 - Profitability (selected) - Return on equity 2/: -11.6 -64.0 19.8 25.0 19.5 21.0 15.5 - Return on assets 3/: -0.6 -2.1 1.1 1.6 1.4 1.8 1.3 - Composition of credit (percent of total; data for 2011 are as of end-March) - Oil and gas: 1.4 1.8 0.8 0.9 1.6 0.7 0.8 - Industry (other): 31.3 32.2 34.5 36.0 36.4 35.5 35.8 - Agriculture: 9.0 8.2 7.7 6.8 6.9 5.7 6.0 - Trade: 22.6 22.1 24.3 24.0 26.6 37.6 37.2 - Construction: 3.8 4.1 3.4 3.3 3.6 7.0 7.6 - Households: 3.4 3.3 4.7 4.8 4.7 6.8 5.6 - Other: 26.1 26.0 22.6 22.5 19.7 6.7 7.1 - Memorandum: Share of assets (percent of total banking system assets) - State-owned commercial banks: 38.1 33.3 33.5 29.8 28.8 28.5 28.8 - Specialized development banks: 8.5 7.9 7.0 6.6 6.5 6.1 5.8 - Private commercial banks: 45.8 50.5 51.1 55.2 57.2 58.8 59.0 - Foreign commercial banks: 7.6 8.3 8.4 8.3 7.4 6.6 6.3 ### Medium-term outlook (FY2009–16; selected projections, percent of GDP and annual percent change) - Savings and investment (percent of GDP; FY09–16 projections) - Gross national savings: 27.2 28.1 25.6 24.9 25.3 26.2 27.0 27.7 - Public national savings: 0.7 2.0 2.5 3.5 3.4 3.6 3.9 4.3 - Private national savings: 26.5 26.1 23.1 21.5 22.0 22.6 23.1 23.4 - Gross investment: 24.4 24.4 24.7 25.7 26.2 27.0 27.5 28.0 - Public investment: 4.7 5.0 5.3 6.0 6.3 6.9 7.3 7.5 - Private investment: 19.7 19.4 19.5 19.7 19.9 20.1 20.3 20.5 - Net exports of goods and services: -7.1 -6.4 -8.8 -10.5 -10.6 -10.5 -10.1 -9.7 - Exports of goods and services: 19.5 18.6 23.1 24.2 25.7 27.2 28.4 29.1 - Imports of goods and services: 26.6 25.0 31.9 34.7 36.2 37.7 38.5 38.8 - Real sector (annual percent change) - Real GDP: 5.7 6.1 6.7 6.3 6.4 6.6 7.0 7.1 - Real GNI: 5.3 6.5 5.6 7.3 6.3 6.6 6.9 7.0 - ICOR (Investment to GDP ratio/real GDP growth): 4.2 4.0 3.7 4.1 4.1 4.1 3.9 3.9 ### Millennium Development Goals (selected indicators; 1990–2015 status) - Goal 1: Eradicate extreme poverty and hunger - Poverty headcount ratio: 59 32 29 — On Track - Poverty gap ratio: 17 7 8 — Goal Met - Income share held by lowest 20 percent: 10 5 ... Needs Attention - Population below minimum level of dietary energy consumption (percent): 28 20 14 — On Track - Goal 2: Achieve universal primary education - Net enrollment ratio in primary education: 61 91 100 — On Track - Proportion of pupils starting grade 1 who reach grade 5, percent: 43 55 100 — Needs Attention - Goal 4: Reduce child mortality (selected) - Under 5 mortality rate (per 1,000): 146 54 50 — On Track - Infant mortality rate (per 1,000 live births): 92 41 31 — On Track - Goal 5: Improve maternal health (selected) - Maternal mortality ratio (modeled estimate, per 100,000 live births): 574 194 143 — On Track - Contraceptive prevalence rate (percent of women ages 15–49): 40 60 72 — Needs Attention - General indicators (selected) - Life expectancy at birth, total (years): 54 66 ... - Population (in millions): 115.6 162.2 ... - Gross national income (in billions of U.S. dollars): 39.1 95.4 ... - GNI per capita, Atlas method (current, in U.S. dollars): 310 590 ... ### Infrastructure development needs — power sector (findings, plans, and projections) - Key constraints and impacts - Inadequate and unreliable power supply is identified as the most debilitating infrastructure constraint to growth, increasing production costs and reducing external competitiveness. - Bangladesh has the second lowest per capita consumption of energy in the region, with less than half of population having access to electricity. - Authorities estimate electricity shortages average 1,800 MW a day during peak hours, or more than a third of current generating capacity. - Frequent load-shedding averages 1,000–1,200 MW a day, disrupting industrial and agricultural production. - Back-up generators cost firms up to 50 percent more than base electricity costs. - Only three-fourths of installed capacity is considered available. - Causes of power sector underperformance - Below-cost administered power tariffs have discouraged private sector investment. - Public sector generates around 56 percent of total electricity production; Bangladesh Power Development Board (BPDB) alone produces 42 percent. - Heavy reliance on gas-fired plants amid crippling domestic gas shortages and ageing plants. - Inefficiencies: high transmission and distribution losses, low plant efficiencies, inadequate plant maintenance. - Government plans and near- to medium-term outlook - Government plan (starting in early 2010) to more than double electricity generation by 2016, relying heavily on private sector participation. - By end-2011, expected addition of around 2,200 MW in electricity generating capacity to the national grid (more than a 50 percent increase in capacity over the past two years). - Medium term (2012–16): new power plants with more than 12,000 MW in total generating capacity are planned; Bangladesh could generate surplus electricity from 2012 onward if projects are commissioned on time. - Regional Grid Interconnection Plan aims to import 500 MW a day from India by end-2013; AsDB approved funding in 2010 but disbursement delayed due to absence of a signed Power Purchase Agreement between Bangladesh and India. - Electricity production plan (MW; table as presented) - 2010: Public 2,555; Private 2,077; Total 4,632 - 2011: Public 8,511; Private 1,343; Total 2,194 (note: figures as in source table layout) - 2012: Public 8,381; Private 1,319; Total 2,157 - 2013 1/: Public 1,540; Private 1,134; Total 2,674 - 2014: Public 1,270; Private 1,053; Total 2,323 - 2015: Public 4,500; Private 1,900; Total 2,350 - 2016: Public 1,500; Private 1,300; Total 2,800 - Total (aggregate in table): 6,704 8,569 15,273 - Source cited in table: Power and Energy Sector Road Map: An Update, 2011. - Note in table: 1/ Includes 500 MW of imported electricity from India. ### Policy-relevant implications and priorities (derived from text) - Scale up public investment to catalyze private investment in infrastructure to reach SFYP targets of 8 percent growth and 32 percent investment rate of GDP by FY15. - Address below-cost administered tariffs to improve investment incentives and reduce fiscal pressure from fuel subsidies linked to power purchase agreements. - Prioritize reducing transmission and distribution losses, improving plant maintenance, and diversifying fuel sources given gas shortages. - Expedite agreements and implementation of Regional Grid Interconnection Plan (500 MW import from India by end-2013) to alleviate near-term shortages. - Manage the balance between quick rental/rental power (rapid but fuel-intensive and costly) and longer-term IPP investments to ensure cost-effective generation capacity expansion. *Source: IMF staff compilation based on Bangladesh authorities; tables and text from the IMF Bangladesh 2011 Article IV Report (Chapter 2, "Financial balance sheet", and Appendix I: Infrastructure development needs).* ### 6. The transportation network has also ### _cr11314 - 6. The transportation network has also ### Transportation network: status and constraints - Only 10 percent of roads in Bangladesh are paved, compared to India’s 47 percent. - The availability of land is the most serious constraint in expanding the road network, given Bangladesh’s status as one of the most densely populated countries in the world. - The existing road network is of poor quality, increasing transport costs and restricting market access, constraining production and employment opportunities—especially in rural areas. - Developing transportation infrastructure is critical to achieving poverty reduction goals and reducing rural migration pressures. - Better transportation infrastructure could improve regional integration, mainly with India. ### Major transport-related projects and priorities - Need to complement large projects with more ambitious plans to develop secondary and tertiary road networks to improve rural-urban connectivity. - Integrate waterways (a major internal transport mode) with water management and dredging activities and associated environmental concerns. Key projects described: - Roads and bridges: - Padma River multibridge project: US$2.9 billion combined road-rail bridge; scheduled to open in 2015; will connect some 30 million people (nearly one-fifth of Bangladesh’s total population) in the southwestern part of the country to the northern and eastern parts. - Project financing: government of Bangladesh US$0.5 billion; consortium of development partners US$2.4 billion, led by the World Bank. - World Bank’s International Development Association (IDA) approved US$1.2 billion; AsDB US$615 million; Japan International Cooperation Agency (JICA) US$420 million; Islamic Development Bank US$140 million. (IDA, AsDB, and JICA credits have yet to be made effective.) - Resettlement efforts have begun to facilitate bridge construction. - Dhaka Elevated Expressway: government approved construction in March 2011 to reduce traffic congestion and improve urban road connectivity; expected to be undertaken on a PPP basis at a total estimated cost of US$2 billion; government called for proposals from interested investors. - Rail links: - Use a portion of the US$1 billion credit line from India’s Eximbank (approved October 2010) to upgrade rail lines and improve railway integration between India and Bangladesh. - Feasibility studies underway for a metro rail in Dhaka with possible external support. ### Port infrastructure: challenges and planned responses - Bangladesh ranks second lowest to Nepal in quality of port infrastructure among South Asian countries and 107 out of 139 countries, according to the Global Competitiveness Report 2010–2011. - Chittagong port handles about 92 percent of total external trade. - Cargo handling growth: 8 percent in 2009 compared to 2 percent in 2008. - Current facilities lack sufficient space and equipment, prolonging wait times and contributing to high shipping and port charges. Planned port-focused actions: - Develop a master plan for Chittagong port with technical support from the AsDB to improve port operating efficiency and intermodal transport logistics. - Revive Mongla port in southwestern Bangladesh as part of the SFYP to provide transit access to neighboring countries (India, Nepal, Bhutan); Ministry of Shipping plans to increase handling capacity and automate port operations. ### Resource mobilization challenges and initiatives - Scaling up infrastructure requires significant resources, long-term technical and financial assistance, and improved coordination between government, private sector, and development partners. - Bangladesh will continue to depend on government and donor resources but needs more effective means to channel domestic savings into infrastructure investment. - Domestic savings rate is described as almost 30 percent of GDP, but the bulk is concentrated in the banking system; maturity mismatches mean domestic banks would find it difficult to fund long-term projects. - Need for new funding vehicles for PPPs and formulation of a domestic bond market. Institutional and financing measures: - Government is developing institutional framework for PPPs: - Issued guidelines for formation, appraisal, and approval of projects. - Establishing a PPP Advisory Council; a PPP Office under the Prime Minister’s Office; a PPP Unit in Ministry of Finance to assess budget implications; and PPP focal points in line ministries. - AsDB providing TA to operationalize PPP steps. - Specific guidelines being formulated for financial participation in PPP projects in three forms: - (i) technical assistance (TA) financing (access to government-sponsored TA funds), - (ii) viability gap financing (bridging financial gaps for economically viable projects), - (iii) infrastructural financing (debt or equity facilities for PPP projects). - Bangladesh Infrastructure Finance Fund (BIFF) established to serve as a financing vehicle for private investment in large infrastructure projects; BIFF expected to operate similar to the India Infrastructure Finance Company Limited (IIFCL), which raises long-term debt domestically and externally backed by a sovereign guarantee. - Lessons from India’s PPP experience: need for a detailed PPP policy ensuring proper planning and risk allocation, adequate protections for private investors, and capacity development in the public sector. - Nonconcessional external borrowing may be another financing source but should be limited to high priority, high-return projects and managed within a well-integrated medium-term fiscal framework and a national debt management strategy. ### Food security (Appendix II): recent developments and policy responses - Bangladesh is a net food, fuel, and fertilizer importer; recent global commodity price surge has complicated food security efforts. - Food inflation peaked at 14.4 percent (y/y) in April 2011; moderated to 12.7 percent in August (latest available data). - Rice and wheat prices in Bangladesh increased by 13 percent and 12 percent, respectively, in the year preceding April 2011. - About two-thirds of the consumption basket comprises food; 31.5 percent of the population lived below the national poverty line in FY10 (July 2009 to June 2010). - AsDB estimated that a 10 percent rise in food prices in Bangladesh could drag an additional 4 million people into poverty. Government measures over the past year: - Input subsidies: - Expanded fertilizer subsidies (around 0.7 percent of GDP in FY11) in response to rising urea fertilizer costs. - Continued subsidies for diesel and encouraged banks to expand farm loans (agricultural loans are about 6 percent of total loans). - Bangladesh Bank maintains lending to agriculture as a priority sector per the Monetary Policy Statement. - Social safety nets and food distribution: - Various food-related social safety net programs focused on vulnerable groups, food for work, and open market sales of strategic food reserves. - Government released 2.3 million metric tons of food grains in FY11 (mostly rice and wheat)—a 17 percent increase from the previous fiscal year. - Food imports and reserves: - Food grain imports rose by 128 percent in FY11 to US$1.9 billion. - Official food reserves rose to 0.89 million metric tons at end-June 2011 from 0.52 million metric tons at end-June 2010. - Sources of food imports diversified away from India toward Pakistan, Thailand, and Vietnam. - Price developments: - Price of rice was down by about 15 percent from its recent peak as of end-August 2011, partly due to increased imported procurement, emergency release of grain reserves, and a strong boro rice crop harvest in mid-2011. - At current price levels, local farmers appear able to recoup production costs and obtain a fair price. ### Debt sustainability analysis (DSA): summary points - DSA results are similar to the previous DSA: Bangladesh’s risk of debt distress on external debt remains low. - Level of public and publicly guaranteed external debt as a share of GDP in FY11 is in line with the previous DSA, but has improved as a share of exports and revenues given their recent strong growth. - Under the baseline scenario, external debt burden indicators remain below the relevant policy-dependent indicative thresholds and do not breach thresholds under stress tests. - Debt burden indicators are less favorable when domestic debt is included. - New baseline macroeconomic outlook incorporates revised assumptions on public sector external and domestic borrowing plans, following the government’s Sixth Five-Year Plan (FY11–15) (SFYP) and medium-term budget framework; baseline growth assumptions are moderately higher than previous DSA. - Rising demand for oil and capital goods imports (partly associated with ramping up infrastructure investment) leads to moderate current account deficits over the medium to long run and larger external borrowing; projected external debt accumulation over the medium term is higher than in the previous DSA. - Net effect: PV of external debt declines by about 3 percentage points of GDP over the immediate six-year projection period (FY12–17), similar to the previous DSA’s six-year decline; however, the baseline has a less favorable external debt path than the historical scenario in this DSA. *Source: IMF staff report text (2011 Article IV report excerpts).* ### 3. Bangladesh’s current debt stock ### 3. Bangladesh’s current debt stock ### Composition of current debt stock - Public and publicly guaranteed external debt: face value equivalent to 21.6 percent of GDP at end-FY11. - Owed mostly to multilateral creditors, including the World Bank and the Asian Development Bank. - Japan is the main bilateral creditor. - Domestic debt: amounted to 21.3 percent of GDP at end-FY11, up from 20.3 percent in the previous year. - Mainly comprises treasury bills and bonds (42 percent), held mostly by domestic commercial banks, and National Savings Certificates (NSCs) (38 percent), held mainly by the nonbank private sector. - Net domestic government debt (including government deposits): 18.1 percent of GDP at end-FY11 (noted that deposits are mostly held by autonomous and semi-autonomous government bodies outside central government control; public DSA focuses on gross public debt). ### Public domestic debt by creditor (At end-June 2011) - Bangladesh Bank: In Billions of Taka 320 — 19.1 percent of Total Domestic Debt - Advances and overdrafts: 284 — 16.9 - Treasury instruments: 30 — 1.8 - Other obligations: 6 — 0.4 - Commercial banks: In Billions of Taka 663 — 39.5 percent of Total Domestic Debt - Treasury instruments: 615 — 36.7 - Other obligations: 48 — 2.9 - Other: In Billions of Taka 694 — 41.4 percent of Total Domestic Debt - National savings certificates: 634 — 37.8 - Treasury instruments: 60 — 3.6 - Total public domestic debt: In Billions of Taka 1,677 — 100.0 - Total domestic debt (Percent of GDP): 21.3 - Source: IMF staff estimates. ### Public and publicly guaranteed external debt (At end-June 2011) - Total external debt: In Millions of U.S. Dollars 22,922 — 100.0 - Multilateral debt: 19,609 — 85.5 - World Bank: 11,129 — 48.6 - Asian Development Bank: 7,330 — 32.0 - International Monetary Fund: 590 — 2.6 - International Fund for Agricultural Development: 298 — 1.3 - Islamic Development Bank: 181 — 0.8 - Other: 80 — 0.3 - Bilateral debt: 2,647 — 11.5 - Japan: 2,039 — 8.9 - Kuwait: 166 — 0.7 - Korea, Republic of: 152 — 0.7 - United States: 116 — 0.5 - Other: 173 — 0.8 - Short-term debt: 666 — 2.9 - Total external debt (Percent of GDP): 21.6 - Source: IMF staff estimates. ### Note on domestic private external debt - Private sector external debt was estimated at US$1.2 billion at end-FY11. --- ### External Debt Sustainability Analysis — main results - Baseline scenario: - All external debt indicators are expected to decline over the 20-year projection period. - PV of the debt-to-GDP ratio: from 17½ percent in FY11 to about 8½ percent in FY32 (indicative threshold: 40 percent). - PV of the debt-to-exports ratio: from 75 percent in FY11 to 26 percent in FY32 (indicative threshold: 150 percent). - Standard stress tests: - Do not reveal any serious vulnerability; no thresholds are breached. - Remittances: - Increased from about 8 percent of GDP in FY06 to 11 percent of GDP in FY11; this has raised capacity to repay. - Remittances growth slowed significantly in FY11 and are projected to gradually fall over the long term but remain substantial and contributory to lowering vulnerability. - FY11 developments: - Strong growth of exports and revenues in FY11 contributed to lower debt-to-exports and debt-to-revenue ratios. --- ### Macroeconomic assumptions underlying the DSA (Box 1) - Real GDP growth: - Projected to average 6¾ percent a year over the immediate projection period (FY12–17). - Projected to average around 6½ percent a year over the longer run. - Ten-year average cited as 5¾ percent. - Inflation (GDP deflator in domestic currency): - Decelerates from 10.0 percent in FY12 to 6.8 percent in FY17 and slightly more thereafter. - Growth of exports and imports (goods and services) over immediate projection period: - Exports: around 13¼ percent on average. - Imports: around 12½ percent on average. - Previous DSA assumed about 10 percent for both. - Current account: - Projected to slip into a moderate deficit starting in FY12 and remain so over the medium to long run. - Drivers in FY12–17: strong growth in oil and capital goods imports, more moderate remittances growth, and larger foreign direct investment inflows. - Net aid inflows: - Projected to average 1.4 percent of GDP a year in the long term. - In FY12–15, official disbursements projected to rise with net aid inflows averaging about 1.8 percent of GDP owing to Padma Bridge construction (gross disbursements equivalent to around 2.5 percent of GDP). - Grant element of new external borrowing: - Assumed to average about 31 percent in FY12–17. - Real domestic interest rates: - Currently suppressed and negative in real terms; assumed to increase steadily over the medium term. - Primary fiscal deficit (including grants): - Expected to average 2.3 percent of GDP during FY12–17 (about 1 percent of GDP higher than the average of the past 10 years). - Baseline assumes gradual movement to full cost recovery for electricity by mid-decade. - Downside risks noted: - Weak implementation capacity, persistent governance issues, political opposition to reforms, fragile global recovery, dependence on garment exports and remittances. --- ### Public Debt Sustainability Analysis — baseline and risks - Baseline: - PV of public debt-to-GDP ratio remains steady initially, then falls gradually to 38½ percent of GDP in FY32. - Decline in PV of external public debt-to-GDP ratio partially offset by rising domestic debt-to-GDP ratio. - PV of public debt-to-domestic revenue ratio declines steadily in the long run reflecting revenue reforms and tapering public investment. - Alternative scenarios and bound tests: - Projected debt paths are sensitive to alternative assumptions and indicate some risks. - Low-case scenario (Alternative Scenario 1): limited progress on fiscal, financial, trade and investment reforms causes real GDP growth and the primary fiscal balance to remain at historical averages; key debt and debt service ratios rise over the long term. - Risks from energy sector: - Greater dependence on high-cost rental power plants, slower adjustments to electricity prices, and higher world oil prices would increase operating losses of energy-related SOEs and could raise contingent liabilities necessitating budgetary absorption. - Recapitalization needs of state-owned commercial banks (SOCBs), including absorbing SOE losses, could pressure contingent liabilities. - Standardized shock example: - One-time 30 percent real depreciation in FY13 would raise the debt service-to-revenue ratio to 39 percent in FY14, compared with the baseline ratio of 31 percent. ### Public debt definition and notable items - Public debt includes central government domestic debt and external public and publicly guaranteed debt. - Legacy loans of large SOEs to SOCBs currently amount to about 2 percent of GDP. - Short-term external nonconcessional borrowing by Bangladesh Petroleum Corporation (government guaranteed): total stock was US$0.7 billion at end-FY11 and is projected to rise. --- ### Debt management and capacity building - Joint World Bank/IMF mission (September 2010) provided technical assistance to build debt management capacity. - Main recommendations: - Operationalize debt management strategy, choose preferred strategy, develop annual borrowing plans. - Devise comprehensive debt management strategy based on long-term public investment requirements and financing needs. - Account for direct and contingent liabilities from infrastructure and PPP projects, including viability gap funding. - Establish a single, comprehensive, and accurate database on domestic and external debt covering the wider public sector and loan guarantees. - Reforms are aligned with the Strengthening Public Expenditure Management Project to develop capacities for debt policy and management. - Authorities are also working to improve database on private sector external debt. --- ### Views of the authorities - Broad agreement with the DSA. - Government commitments: - Continue to assess budgetary, debt, and growth implications of individual projects and ensure terms of new external borrowing are consistent with the evolving debt management strategy. - If concessional resources fall short, the government might access non-concessional medium to long-term borrowing. - Progress on developing domestic bond markets would create a deeper and more stable source of domestic financing. --- ### Conclusions and policy recommendations - Risk assessment: - Staff view: Bangladesh is at low risk of debt distress based on external indicators, but public debt indicators are less favorable. - Baseline and standard stress tests show little risk related to external debt; none of the external indicators breach indicative thresholds. - Low domestic revenue base makes total debt and debt service, including domestic debt, a concern. - Policy implications: - Prudent fiscal policy is called for given substantial increase in debt ratios when domestic debt is included. - Structural fiscal reforms needed to: - Expand domestic resources. - Contain subsidy costs. - Raise public investment to boost growth. - Mobilize domestic revenues, manage expenditures prudently while protecting priority outlays, and contain contingent liabilities to improve debt indicators. - Higher pass-through of changes in world energy prices would reduce SOE losses and associated subsidy costs, protecting fiscal space for social and development spending and supporting higher growth targeted in the SFYP. - Emphasize effective management of existing debt and new debt accumulation, with primary reliance on concessional external debt over the medium term to finance infrastructure needs. *Source: IMF staff estimates and IMF Article IV Report — Debt Sustainability Analysis (At end-June 2011).* ### 12. The staffs encourage the authorities to ### _cr11314 - 12. The staffs encourage the authorities to ### Strengthening debt management capacity - The staffs encourage the authorities to build on recent steps and move forward as quickly as possible to strengthen debt management capacity. - Important actions include continuing work to develop: - a comprehensive debt management strategy; and - a public debt data base covering both domestic and external debt and integrating it with centralized reporting of all external aid flows. ### Debt sustainability — overview and baseline projections - Sources: Bangladesh authorities; and staff estimates and projections. - Time horizon for many indicators and scenarios: 2012–32 (and specific year points 2012, 2017, 2022, 2027, 2032). - Baseline indicators (selected): - External debt (nominal) series sample: 25.7, 22.3, 22.7, 21.9, 21.2, 20.7, 19.9, 19.1, 18.1, 14.7, 10.9 (table context). - Public and publicly guaranteed (PPG) external debt sample: 24.2, 21.1, 21.6, 20.8, 20.2, 19.7, 19.0, 18.2, 17.3, 14.1, 10.4. - Change in external debt: -2.6, -3.4, 0.4, -0.8, -0.7, -0.5, -0.7, -0.9, -1.0, -0.6, -0.4. - Identified net debt-creating flows: -7.0, -7.4, -3.7, -1.4, -1.3, -1.4, -1.8, -2.1, -2.2, -1.7, -1.9. - Net current transfers (negative = inflow): -11.4, -11.6, -10.9, -8.9, 2.2, -11.0, -10.9, -10.9, -10.8, -10.7, -10.6, -9.8, -8.3, -9.3 (series across table). - Endogenous debt dynamics contribution (examples): -2.9, -2.6, -1.9, -1.0, -1.0, -1.0, -1.0, -1.0, -1.0, -0.7, -0.4. - PV of external debt (sample projection series): 17.4, 17.0, 16.5, 16.1, 15.6, 15.0, 14.3, 11.7, 8.6 (context: percent of GDP or exports in table). - PV of PPG external debt (sample projection series): 16.3, 15.9, 15.5, 15.2, 14.7, 14.1, 13.4, 11.1, 8.2. - Debt service-to-exports ratio (in percent): 4.5, 5.5, 4.0, 7.1, 8.9, 8.6, 7.8, 7.3, 6.9, 5.4, 3.5. - PPG debt service-to-revenue ratio (in percent): 7.9, 8.8, 7.5, 12.8, 17.1, 16.7, 15.3, 13.9, 13.1, 9.4, 6.2. - Total gross financing need (in billions of U.S. dollars): -2.6, -3.8, -0.8, 2.3, 4.1, 4.4, 4.1, 3.7, 3.7, 4.0, 0.3. - Noninterest current account deficit that stabilizes debt ratio: -0.4, -0.6, -1.5, 1.2, 1.3, 1.1, 1.0, 0.8, 1.0, 1.1, 0.2. ### Key macroeconomic assumptions used in projections - Real GDP growth (in percent) (sample series across years and scenarios): 5.7, 6.1, 6.7, 6.0, 0.7, 6.3, 6.4, 6.6, 7.0, 7.1, 7.2, 6.8, 6.8, 6.0, 6.5. - GDP deflator in U.S. dollar terms (change in percent): 6.2, 5.9, 3.3, 2.9, 4.1, 2.2, 2.3, 1.4, 1.9, 1.9, 1.6, 1.9, 1.6, 1.6, 1.6. - Effective interest rate (percent) 7/: 0.9, 1.1, 0.9, 1.0, 0.1, 1.6, 1.6, 1.6, 1.7, 1.7, 1.8, 1.7, 1.9, 2.0, 2.0. - Growth of exports of G&S (U.S. dollar terms, in percent) (sample series): 8.6, 7.4, 36.7, 14.0, 10.9, 13.7, 15.4, 14.7, 13.7, 12.0, 9.9, 13.2, 9.3, 8.7, 9.0. - Growth of imports of G&S (U.S. dollar terms, in percent) (sample series): 3.7, 5.7, 40.6, 14.1, 13.5, 18.1, 13.6, 12.4, 11.3, 10.1, 9.4, 12.5, 8.7, 7.7, 8.4. - Grant element of new public sector borrowing (in percent) (sample series for projection years): 30.2, 31.1, 30.4, 31.1, 30.9, 31.6, 30.9, 27.5, 27.0, 27.9. ### Fiscal and public debt metrics (public sector perspective) - Public sector debt (central government gross debt) series sample: 45.4, 41.4, 42.9, 42.7, 43.0, 43.6, 43.7, 43.6, 43.6, 45.5, 38.4. - Foreign-currency denominated share of public sector debt sample: 24.2, 21.1, 21.6, 20.8, 20.2, 19.7, 19.0, 18.2, 17.3, 14.1, 10.4. - Change in public sector debt: -1.6, -4.1, 1.5, -0.2, 0.2, 0.6, 0.1, -0.1, 0.0, 0.2, -0.8. - Primary deficit (in percent of GDP) sample and projections: 1.2, 0.9, 1.7, 1.3, 0.5, 2.1, 2.7, 2.7, 2.2, 2.1, 2.2, 2.3. - Revenue and grants (in percent of GDP): 10.8, 11.5, 12.2, 13.5, 13.6, 14.1, 14.6, 15.1, 15.4, 16.7, 17.3. - Primary (noninterest) expenditure (in percent of GDP): 12.0, 12.4, 14.0, 15.7, 16.2, 16.8, 16.8, 17.2, 17.6, 18.0, 17.4. - Automatic debt dynamics (sample): -2.6, -2.9, -1.7, -2.7, -2.4, -2.1, -2.2, -2.2, -2.2, -1.2, -0.9. - Gross financing need 2/ (in percent of GDP): 4.6, 3.9, 4.5, 6.3, 8.0, 8.3, 7.9, 7.7, 7.7, 6.5, 4.0. - PV of public sector debt-to-revenue and grants ratio (in percent) sample: 306.9, 279.3, 282.0, 276.8, 268.9, 261.0, 257.9, 255.2, 208.7. - PV of public sector debt-to-revenue ratio (in percent) sample: 324.3, 292.1, 294.6, 287.3, 278.6, 270.0, 266.5, 262.6, 214.3. - Debt service-to-revenue and grants ratio (in percent) 4/: 28.6, 25.2, 21.5, 26.8, 31.0, 31.5, 30.7, 29.2, 28.6, 26.7, 20.9. - Primary deficit that stabilizes the debt-to-GDP ratio (in percent): 2.8, 5.0, 0.2, 2.3, 2.4, 2.1, 2.1, 2.2, 2.1, 1.1, 0.9. ### Sensitivity analysis and stress tests - The most extreme stress test is defined as the test that yields the highest ratio in specified projection years (2018/2021/2022 depending on figure/table). - Stress test scenarios shown include: - A1. Key variables at their historical averages in 2011–31. - A2. New public sector loans on less favorable terms in 2011–31 (assumes interest rate on new borrowing is 2 percentage points higher than baseline; grace and maturity periods unchanged). - B1. Real GDP growth at historical average minus one standard deviation in 2012–13. - B2. Export value growth at historical average minus one standard deviation in 2012–13. - B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2012–13. - B4. Net nondebt creating flows at historical average minus one standard deviation in 2012–13. - B5. Combination of B1–B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 (depreciation defined as percentage decline in dollar/local currency rate, never exceeding 100 percent). - Selected sensitivity outcomes (percent indicators, 2012–32 projections): - PV of debt-to-GDP ratio baseline: 16 (2012), 16 (2013), 15 (2014), 15 (2015), 14 (2016), 13 (2017), 11 (2022), 8 (2032). - PV of debt-to-exports ratio baseline: 66 (2012), 60 (2013), 56 (2014), 52 (2015), 48 (2016), 46 (2017), 37 (2022), 25 (2032). - PV of debt-to-revenue ratio baseline: 123 (2012), 119 (2013), 112 (2014), 104 (2015), 97 (2016), 90 (2017), 68 (2022), 49 (2032). - Under severe shocks (examples): - B2 (Export value growth shock) raises PV of debt-to-exports to 74, 94, 87, 81, 77 (selected years). - B5 (Combination shocks) raises PV of debt-to-exports to 77, 95, 87, 82, 77 (selected years). - B6 (30 percent depreciation) shows notable increases across PV and service ratios (examples across tables). - Table-specific sensitivity snapshots also show projected changes in debt service-to-revenue and debt service-to-exports ratios across scenarios (see tables for full numeric detail). ### Memoranda and other items - Memorandum items (selected): - Nominal GDP (in billions of U.S. dollars) sample series: 89.4, 100.4, 110.6, 120.2, 130.8, 141.4, 154.1, 168.2, 183.2, 281.4, 597.4. - Nominal dollar GDP growth (percent): 12.3, 12.3, 10.2, 8.6, 8.8, 8.1, 9.0, 9.1, 8.9, 8.8, 8.5, 7.7, 8.2. - Gross workers' remittances (in billions of U.S. dollars): 9.7, 11.0, 11.7, 12.8, 13.8, 14.9, 16.1, 17.4, 18.8, 26.9, 48.2. - Aid flows (in billions of U.S. dollars) sample: 0.6, 0.8, 1.0, 1.1, 1.4, 1.5, 1.6, 1.7, 1.9, 2.2, 4.5. - Of which grants (in billions): 0.3, 0.6, 0.7, 0.7, 0.8, 0.7, 0.8, 0.8, 0.9, 1.3, 2.7. - Grant-equivalent financing (in percent of GDP) sample: 1.0, 1.1, 1.0, 1.0, 0.9, 0.9, 0.8, 0.8, 0.8. - Grant-equivalent financing (in percent of external financing) sample: 51.8, 48.8, 46.4, 48.5, 50.1, 50.7, 48.1, 48.6, 48.6. ### Policy implications and priorities (drawn from analysis) - Strengthen debt management capacity rapidly by: - developing a comprehensive debt management strategy; and - creating a public debt data base covering domestic and external debt and integrating it with centralized reporting of all external aid flows. - Continue monitoring vulnerability to external shocks illustrated by stress tests (real GDP growth, export shocks, depreciation, and adverse financing terms). - Maintain fiscal policies and revenue mobilization consistent with reducing debt ratios over the projection horizon (tables indicate targets for revenues, primary balances, and primary deficits that stabilize debt-to-GDP). *Sources: Bangladesh authorities; and IMF staff estimates and projections as presented in the Bangladesh 2011 Article IV Report — Debt Sustainability Analysis (selected tables and figures).* ### ANNEX I. BANGLADESH: FUND RELATIONS ### ANNEX I. BANGLADESH: FUND RELATIONS ### Membership and IMF Quota Position - Joined August 17, 1972; accepted the obligations under Article VIII, Sections 2, 3, and 4 on April 11, 1994. - Quota (General Resources Account): 533.30 SDR Million — 100.00 percent quota. - Fund holdings of currency: 649.57 SDR Million — 121.80 percent. - Reserve tranche position: 0.41 SDR Million — 0.08 percent. ### SDR Department - Net cumulative allocation: 510.40 SDR Million — 100.00 percent. - Holdings: 423.03 SDR Million — 82.88 percent. ### Outstanding Purchases and Loans (SDR Million and percent quota) - Emergency assistance: 116.66 SDR Million — 21.88 percent quota. - ECF arrangements: 222.30 SDR Million — 41.68 percent quota. ### Financial Arrangements (In millions of SDRs) - ECF — 6/20/03 to 6/19/07: Amount Approved 400.33; Amount Drawn 316.73. - ECF — 8/10/90 to 9/13/93: Amount Approved 345.00; Amount Drawn 330.00. - SAF — 2/06/87 to 2/05/90: Amount Approved 201.25; Amount Drawn 201.25. - Note: Extended Credit Facility (ECF), formerly PRGF; Structural Adjustment Facility (SAF). ### Projected Payments to the Fund (In millions of SDRs, based on existing use of resources and present holdings of SDRs) - 2011 Principal: 21.62; Charges/Interest: 0.47; Total: 22.09. - 2012 Principal: 130.01; Charges/Interest: 1.59; Total: 131.60. - 2013 Principal: 91.73; Charges/Interest: 0.67; Total: 92.39. - 2014 Principal: 48.50; Charges/Interest: 0.40; Total: 48.90. - 2015 Principal: 33.65; Charges/Interest: 0.31; Total: 33.96. ### Article IV Consultation and Safeguards Assessment - Previous Article IV consultation concluded on February 25, 2010 (IMF Country Report No. 10/55). - Safeguards assessment of Bangladesh Bank (BB) concluded in July 2011: - Findings: BB’s governance structure and legal underpinning need updating to strengthen autonomy and better safeguard resources. - Important BB operations such as management of foreign reserves and extension of overdraft facilities in foreign exchange are not monitored by BB’s board. - Audit committee oversight is ineffective; current external and internal audit mechanisms are inadequate. - These safeguards are needed as BB seeks to modernize accounting and auditing systems and controls. ### Exchange Arrangement - Exchange regime (de jure): managed float. - De facto classification: Effective October 4, 2010, reclassified from stabilized to crawl-like. - Exchange restriction: At the last Article IV consultation, the Executive Board urged authorities to adopt a timetable to remove remaining exchange restriction on convertibility and transferability of proceeds of current international transactions in nonresident taka accounts. ### Resident Representative - Resident representative office established in 1972. - Ms. Eteri Kvintradze has been Resident Representative since February 2010. ### IMF Technical Assistance, 2010–11 (Selected by Department, Topic, Timing) - LEG: VAT and income tax laws — 2010: December; 2011: February, April, and October. - MCM: Central bank accounting/internal audit — 2008–11: Multiple visits. - MCM: Reserve management — 2010: September. - MCM: Medium-term debt management strategy (joint with World Bank) — 2010: September. - MCM: Bank supervision and risk exposure — 2011: April. - MCM: Banking supervision — 2011: May–present (resident advisor). - FAD: Revenue administration (RA) — 2010–11: Multiple visits by regional RA advisor. - FAD: VAT administration — 2010–11: Multiple visits. - FAD: Macro fiscal framework — 2010–11: Multiple visits. - FAD: Tax administration and VAT reform — 2010: August. - FAD: PEFA assessment (joint with World Bank) — 2010: October. - FAD: VAT implementation framework — 2011: April. - FAD: Public financial management (PFM) — 2011: September (regional PFM advisor). - STA: National accounts statistics — 2011: January and September. - STA: External sector statistics — 2011: July. --- ### ANNEX II. IMF–WORLD BANK COLLABORATION (October 2011) - Collaboration focus: promote critical reforms to maintain macroeconomic stability and improve growth conditions in Bangladesh; strong on-the-ground collaboration via IMF resident representative’s office and World Bank Country Office. - Teams agreed to remain focused on reform areas with specified division of labor: - Tax policy and administration: - Objective: generate revenue to raise public investment to 7–8 percent of GDP by mid-decade. - Actions: develop modern tax regime, legal framework, strengthen tax administration. - Division of labor: World Bank Group, IMF (including regional revenue administration advisor), and Asian Development Bank collaborate, aligned with National Board of Revenue’s tax modernization plan. - Public financial management (PFM): - Objective: improve quality of public expenditure and implementation of Annual Development Program. - Division of labor: IDA leads via Strengthening Public Expenditure Management Program (SPEMP); IMF coordinates through regional PFM advisor. - Debt management: - Observation: Debt burden indicators do not signal debt servicing difficulties, but no integrated debt management strategy or single entity for total public sector debt. - Division of labor: IMF and IDA continue joint work, including joint IDA-IMF Debt Sustainability Analysis; IMF coordinates macroeconomic assumptions and outlook; IDA provides technical support on debt management capacity through SPEMP. - Monetary and exchange rate policies: - Division of labor: IMF leads; IDA complements through operations to strengthen policy formulation and payments systems at Bangladesh Bank. - Financial sector reform: - Objective: support private sector investment via steady sector growth, prudential oversight, risk management, and central bank capacity. - Division of labor: IDA/IFC lead on financial market development and governance; IMF leads on bank supervision and oversight with resident advisor in BB. - Energy sector reform: - Problem: severe power shortages constrain growth. - Policy needs: phased retail and bulk tariff increases to reduce subsidies and create fiscal space; monitoring framework and performance audits for energy-related SOEs; targeted safety nets for higher fuel and electricity prices. - Division of labor: IDA leads on policy dialogue and investment; IMF focuses on fiscal implications. - Statistical policy: - Division of labor: IDA on poverty, social, and development statistics; IMF on macroeconomic statistics. - Other structural policies: - World Bank informs IMF about work on governance and anti-corruption, local government and decentralization, social protection, trade policy and private sector development; IMF provides upstream comments. - Commitment: continue information sharing, coordinate financial and technical support, and share key documents. --- ### ANNEX III. BANGLADESH: RELATIONS WITH THE ASIAN DEVELOPMENT BANK (September 2011) #### Lending and Technical Assistance Operations - Cumulative public sector borrowing from AsDB as of December 31, 2010: almost US$12.1 billion (212 loans). - Technical assistance (TA) grants cumulative: US$202.7 million (363 projects). - Private sector projects supported: eight projects worth US$242.2 million, including Meghnaghat Power Project and GrameenPhone. - AsDB approvals in 2010 totaled US$1.3 billion, including: - Padma River multipurpose bridge: US$615 million (of which US$76 million from ADF). - Natural gas production, transmission, distribution: US$266 million. - Bangladesh-India Electrical Grid Interconnection Project: US$100 million. - City Region Development Project: US$120 million. - Sustainable Rural Infrastructure Improvement Project: US$60 million. - FY2012 (July 2011–June 2012) planned AsDB disbursements: about US$564 million (up from US$407 million in FY2011). - AsDB Loan Disbursement to Bangladesh, FY09–11 (In millions of U.S. dollars) - FY10: Project loans 424; Program loans 649; Total loans 1,073. - Power sector: 72 - Gas transmission and development: 91 - Emergency assistance: 18 - Other: 243 - Countercyclical support: 500 - Public expenditure support: 149 - FY11: Project loans 281; Program loans 126; Total loans 407. - Power sector: 92 - Gas transmission and development: 10 - Emergency assistance: 5 - Other: 174 - Other program loans: 29 - FY12 Proj.: Project loans 518; Program loans 46; Total loans 564. - Power sector: 70 - Gas transmission and development: 105 - Emergency assistance: 0 - Other: 343 - Good governance program: 46 - Source: AsDB. #### Country Partnership Strategy (CPS) and Programs - CPS 2006–10 lapsed December 2010; CPS 2011–15 being prepared and expected for AsDB board consideration in October 2011. - CPS aligned with government’s Sixth Five-Year Plan (SFYP) and AsDB Strategy 2020; objectives include higher growth and accelerated poverty reduction. - CPS priorities: mainstream climate change and environmental sustainability; promote public-private partnerships; foster regional cooperation and integration. - Bangladesh country operations business plan for 2011–13 (approved July 2010): - Comprises 24 projects totaling about US$3.2 billion, including primary education, energy and transport. - TA program for 2011–13: 41 projects, annual allocation about US$7.9 million. #### Co-financing and Donor Participation - 2010 cofinancing examples: - Korea Eximbank: Natural Gas Access Improvement Project — US$45 million. - International Fund for Agricultural Development: Participatory Small-Scale Water Resources Sector — US$10 million. - Islamic Development Bank: Padma Multipurpose Bridge Project — US$140 million. - Japan Agency for International Cooperation: Padma Multipurpose Bridge Project — US$300 million. - World Bank: Padma Multipurpose Bridge Project — US$1.2 billion. - KfW (Germany) grant: Sustainable Rural Infrastructure Improvement Project — US$16 million. - Cumulative direct value-added cofinancing as of end-2010: - Investment projects: US$2.87 billion for 30 projects. - TA projects: US$60.4 million for 74 projects. #### Economic and Sector Work Program - AsDB publications: Asian Development Outlook and Asian Development Outlook Update; Bangladesh Quarterly Economic Update; bimonthly Economic Indicators Update. - Completed thematic assessments and sector studies in support of CPS (2011–15): poverty; private sector development; governance, gender, environment; various sector studies. *Source: ANNEX I–III, Bangladesh: Fund Relations; As of September 30, 2011.* ### ANNEX IV. BANGLADESH: STATISTICAL ISSUES ### ANNEX IV. BANGLADESH: STATISTICAL ISSUES ### Assessment of Data Adequacy for Surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - Most affected areas: national accounts, fiscal, and external sector statistics. ### National accounts - Main impediment: paucity of source data, which adversely affects the ability of the Bangladesh Bureau of Statistics (BBS) to absorb technical assistance and improve compilation techniques. - BBS does not conduct an annual national accounts survey of business enterprises. - Primary source data: benchmark surveys, a biennial census of manufacturing establishments, and household expenditure survey. - Many benchmark surveys were conducted over five years ago and are based on outdated sample frames. - Compilation shortcomings: outdated source data affect compilation practices and a system of price indices for estimating national accounts at constant prices needs development. - Technical assistance: missions (September 2009 and January 2011) developed and agreed a detailed work program with BBS to update the base year from 1995/96 to 2005/06 and create a comprehensive benchmark estimate and new series with the new base year. - Expected release: the work program envisages the release of a new base year series by early 2012. ### Price statistics - CPI and PPI weights are outdated, introducing uncertainty. - BBS actions: rebasing the base years to 2005/06 and updating weights by incorporating recent household survey data. ### Government finance statistics - 2008 STA multisector mission recommended actions to strengthen analytical usefulness of fiscal data, including: - (i) improve the integration of debt stocks and related financial flows; - (ii) sensitize donors to the need to promptly provide complete data on direct project assistance; - (iii) establish an interagency committee to prepare a migration plan to the GFSM 2001. - Additional needs: map the monthly budget data to GFSM 2001 presentation; disseminate stock data on financial assets and liabilities; broaden coverage to general government. ### Monetary and financial statistics - Bangladesh Bank compiles monetary data using the standardized report forms (SRFs) framework. - SRFs are reported electronically to the IMF on a regular basis. - A consistent time series based on SRF data is available from December 2001. ### External sector statistics - Pressing issues: balance of payments and international investment position statistics, mainly in trade in goods, trade credits, and related financing. - Data source inconsistencies: exports based on customs declarations; imports based on foreign exchange settlements. - Authorities’ efforts: unifying source data based on customs declarations only, in line with STA recommendations, to resolve inconsistencies with national accounts where customs trade data are used in compiling net exports of goods and services. - Bangladesh Bank needs to: - employ additional data sources, apart from settlement data, for the financial account, including for trade credits; - discontinue some adjustments to the financial account that are deemed to be unsound. - International investment position data remain weak. ### Data Standards and Quality - Bangladesh has participated in the GDDS since March 2001. - The Data Module of the ROSC was published in December 2005. ### Bangladesh: Table of Common Indicators Required for Surveillance (As of October 13, 2011) — Selected entries - Exchange Rates: Date of latest Observation 10/13/11; Date Received 10/13/11; 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 10/12/11; Date Received 10/13/11; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - Reserve/Base Money: Date of latest Observation 10/12/11; Date Received 10/13/11; Frequency of Data D; Frequency of Reporting D; Frequency of Publication M. - Broad Money: Date of latest Observation Aug. 2011; Date Received 10/13/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Date of latest Observation Aug. 2011; Date Received 10/13/11; 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 Aug. 2011; Date Received 10/13/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: Date of latest Observation 10/12/11; Date Received 10/13/11; Frequency of Data W; Frequency of Reporting W; Frequency of Publication D. - Consumer Price Index: Date of latest Observation Aug. 2011; Date Received 9/18/11; 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 June 2011; Date Received Aug. 2011; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest Observation June 2011; Date Received 8/23/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External Current Account Balance: Date of latest Observation June 2011; Date Received Aug. 2011; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Exports and Imports of Goods and Services: Date of latest Observation Aug. 2011; Date Received Sep. 2011; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Date of latest Observation FY2011; Date Received Jun. 2011; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Gross External Debt: Date of latest Observation FY2011; Date Received Sep. 2011; Frequency of Data A; Frequency of Reporting A/M; Frequency of Publication A. - International Investment Position: Date of latest Observation Q4 2009; Date Received May 2011; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. *Source: ANNEX IV. BANGLADESH: STATISTICAL ISSUES (September 2011).* ### 3. Given brighter prospects for increasing agricultural and manufacturing output, as well ### 3. Given brighter prospects for increasing agricultural and manufacturing output, as well ### Growth outlook and drivers - Authorities estimate that the economy will grow by 7.0 percent in FY’12. - Substantial increase in remittance inflows in July-September 2011; remittances expected to register higher inflows in the current fiscal year. - Planned contributors to growth: - Prudent fiscal policy measures. - Effective public investment and public-private partnership (PPP) initiatives to crowd in private investment. - Continued reforms in the financial sector and capital markets. - Appropriate monetary and other growth supportive policies. ### Social and poverty progress - Real per capita income increased by more than 130 percent over the past 40 years. - Poverty rate cut by 60 percent over the past 40 years. - Percentage of population living below the poverty line declined from 48.9 percent in 2000 to 31.5 percent in 2010. - Contributing socioeconomic improvements: expansion of primary and secondary education, reduction in infant and child mortality, control of malaria and tuberculosis, reforestation, and improved access to safe drinking water and sanitation. ### Inflationary pressures - Inflation mainly driven by external supply-side factors: international price hikes in food, fuel and fertilizer. - Enhanced internal demand for food and energy also contributing to upward pressures. - 12-month average CPI: - 7.3 percent in FY’10. - 8.8 percent in FY’11. - 9.4 percent till August 2011 in the current fiscal. - Accommodative monetary policies in FY’11 to support higher credit demand may have contributed to the rise. - Authorities expect moderation of price rise with positive supply responses and recent steps to contract monetary expansion and implement domestic supply-side interventions. - Target rate of average inflation kept at around 8.0 percent for FY’12. - Authorities will monitor trends and are ready to take necessary steps if inflation threatens macroeconomic stability. ### Fiscal sector developments - Total revenue estimated in the FY’12 budget likely to reach 12.1 percent of GDP. - Revenue mobilization: - 20 percent growth in FY’11. - National Board of Revenue (NBR) collected taxes grew by 27.8 percent in FY’11, exceeding the budget estimate by nearly 1½ percentage points and the scaled up revised tax revenue estimates by 0.8 percentage points. - Tax-GDP ratio reached 10.1 percent in FY’11 compared to 9.0 percent in FY’10 (first time crossing 10 percent). - Estimated tax revenue growth in FY’12 likely to be 20.4 percent. - Tax policy and administration reforms cited: modernization and automation, expansion of tax net and coverage, reduction of tax exemptions, awareness creation. - Draft new VAT Act under stakeholders’ consultation; Direct (Income) Tax Act drafted with stakeholder consultation to start soon. Some provisions already given effect through the Finance Act and FY’11 and FY’12 budgets. - Annual Development Program (ADP) implementation: 92 percent of revised allocation in FY’11. - Public expenditure reforms: project implementation, procurement, monitoring; rollout of Medium-Term Budgetary Framework; steps to amend project planning/approval/implementation procedures. - Emphasis on attracting private investment through PPP initiatives. - Expenditure on subsidies was 2.2 percent of GDP in FY’11. - Administered prices of fuel oil, compressed natural gas (CNG) and electricity recently raised; plans to further rationalize prices aligning with international prices. - Under power tariff rationalization plan (FY 2009-2014), Bangladesh Power Development Board (BPDB) will reach a breakeven level by FY 2014. - Budget deficit: - 3.9 percent of GDP in FY’11. - Estimated at 5.0 percent of GDP in FY’12 with expected financing mix of 3.0 percent from domestic sources and 2.0 percent from external sources. - External Debt to GDP ratio decreased from 24.3 percent in FY’09 to 20.4 percent in FY’11. - Debt Sustainability Analysis indicates the economy’s risk of debt distress is low. - Draft Medium Term Debt Strategy (MTDS) under preparation and will be finalized by December 2011. ### Monetary and financial sector developments - Broad money (M2) expansion: - 21.3 percent during FY’11 (marginally lower than 22.4 percent in FY’10). - Domestic credit increased by 27.4 percent in FY’11 compared with 17.9 percent in FY’10. - Reserve money (RM) increased by 21.1 percent during FY’11 compared with 16.0 percent during FY’10, driven by increase in net domestic assets of BB by 87.0 percent. - BB raised repo and reverse repo rates four times in FY’11 and once in September during the current fiscal year to rein in monetary expansion and credit growth. - Lending rate caps removed to provide interest rate flexibility; expected to reduce credit flow to unproductive sectors. - Monetary policy stance for first half of FY’12 aims to ensure reasonable price stability and support sustainable high output growth; priority to unhindered flow of private sector credit to productive sectors with focus on agriculture, SMEs and rural economy. - Reforms to modernize and strengthen financial sector: - Draft amendments to Bank Companies Act 1991 posted for public views. - Audits of State Owned Commercial Banks (SOCBs) for FY’10 carried out by internationally-affiliated audit firms. - BB raised risk-weighted capital adequacy ratio for banks to 9 percent from July 1st 2011 and to be further raised to 10 percent from July 1st 2012. ### Capital market reforms - Reform initiatives to develop capital market and restore small investor confidence: - Demutualization of two stock exchanges (Dhaka and Chittagong Stock Exchanges) with requests for comprehensive concept papers. - Revising the book building method, intensifying market surveillance. - Framing a Financial Reporting Act and establishing a Financial Reporting Council to oversee audit and accounting standards. - Authorities expect these initiatives to restore confidence and help market growth. ### External sector developments and balance of payments - Export and import growth in FY’11: - Export receipts increased by 41.7 percent. - Imports grew by 41.8 percent. - Trade deficit of US$ 7.3 billion in FY’11. - Current account balance: - US$ 995 million in FY’11 as against US$ 3737 million in FY’10. - Factors contributing to BoP deterioration: sluggish private transfers including remittances, stagnant FDI, decline in foreign assistance leading to deficits in capital and financial accounts. - Resulting drawdown from foreign exchange reserves and nominal exchange rate depreciation due to higher import demand and slower growth in remittances, FDI inflows and external assistance. - Recent quarterly trends: - Export receipts registered a 22.5 percent growth in July-September, 2011. - Imports grew by 19.6 percent during July-August, 2011. - Remittance growth in the first quarter of FY12 was 9.3 percent as compared to 6.0 percent in FY 2011. - Foreign exchange reserves around US$ 10.0 billion at present—sufficient only to meet import bills for 2.9 months. - Authorities indicate access to IMF resources under a three-year Extended Credit Facility would be crucial for stabilizing the reserve position and strengthening reform efforts. ### Outlook and policy priorities - Bangladesh aspires to reach middle income country status by FY’21. - Current BoP pressures mainly due to rising petroleum and food prices and increased public and private sector investment demand needed for higher growth trajectory. - Authorities expect BoP pressure to ease through efficient and effective macroeconomic management. - Need for appropriate assistance from development partners to balance enhanced infrastructure demand, poverty reduction efforts, and ongoing reform initiatives to achieve sustainable higher growth. *Source: _cr11314 - 3. Given brighter prospects for increasing agricultural and manufacturing output, as well* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11314.pdf_