Abstract
The staff report for the 2007 Article IV Consultation on Bangladesh highlights recent developments and policy discussions. Bangladesh’s growth outlook and external position remain robust, but inflation has picked up. Overall macroeconomic stability has been maintained, but fiscal performance continues to suffer from structural weaknesses. Executive Directors welcomed the planned reforms in the area of public financial management and the adoption by major ministries of the medium-term budget framework. They supported the recent reforms to promote transparency, fair elections, and the prevention of money laundering.
1. This statement provides information that has become available since the circulation of the staff report. It does not alter the thrust of the staff appraisal.
2. Inflation rose further but external indicators remain strong. Reflecting the impact of fuel price adjustments, April inflation rose to 8.3 percent (y/y), consistent with staff’s FY07 average annual inflation projection of 7.2 percent. Broad money and credit growth moderated somewhat in April in line with staff projections. Buoyant exports and remittance flows were sustained in April and May, and gross official reserves reached $4.8 billion as of mid-June, while the taka continues to hover around 69 per U.S. dollar.
3. A preliminary FY08 budget was presented on June 7. While the revenue target is fully consistent with staff’s projection of 10.7 percent of GDP, current expenditures are higher by 0.4 percent of GDP and are expected to be financed by more foreign grants, based on updated donor commitments. The main base broadening measure is the extension of VAT to previously exempt services. The budget speech also announces plans to adjust various fees and charges in support of improved nontax revenue. On the expenditure side, higher pay and allowances reflect an upward correction in allowances and/or new recruitment in the defense, home affairs, and health ministries, while subsidies include a higher allocation for social safety net programs and for farmers to offset the impact of higher diesel prices. Following a two-week period of public comment, the budget is to be finalized and submitted for cabinet approval in late June. In implementing the FY08 budget, the authorities will need to be prepared to adjust spending plans if the assumed higher foreign financing does not materialize so that domestic financing remains within budget limits.
FY08 Budget
(In percent of GDP)
Preliminary budget posted for public comment on June 7, 2007 at www.mof.gov.bd.
FY08 Budget
(In percent of GDP)
| Staff Proj. | Prelim. | ||||
|---|---|---|---|---|---|
| Budget 1/ | |||||
| Total revenue | 10.7 | 10.7 | |||
| Total expenditure | 15.9 | 16.2 | |||
| Current expenditure | 8.9 | 9.3 | |||
| Of which: Pay and allowances | 2.3 | 2.5 | |||
| Of which: Subsidies and transfers | 2.8 | 3.1 | |||
| Capital spending and net lending | 7.0 | 6.9 | |||
| Overall balance (excluding grants) | -5.2 | -5.6 | |||
| Excluding BPC debt operation | -3.6 | -4.2 | |||
| Net financing | 5.2 | 5.6 | |||
| External | 1.5 | 2.0 | |||
| Domestic | 3.7 | 3.6 | |||
| Excluding BPC debt operation | 2.2 | 2.2 | |||
Preliminary budget posted for public comment on June 7, 2007 at www.mof.gov.bd.
FY08 Budget
(In percent of GDP)
| Staff Proj. | Prelim. | ||||
|---|---|---|---|---|---|
| Budget 1/ | |||||
| Total revenue | 10.7 | 10.7 | |||
| Total expenditure | 15.9 | 16.2 | |||
| Current expenditure | 8.9 | 9.3 | |||
| Of which: Pay and allowances | 2.3 | 2.5 | |||
| Of which: Subsidies and transfers | 2.8 | 3.1 | |||
| Capital spending and net lending | 7.0 | 6.9 | |||
| Overall balance (excluding grants) | -5.2 | -5.6 | |||
| Excluding BPC debt operation | -3.6 | -4.2 | |||
| Net financing | 5.2 | 5.6 | |||
| External | 1.5 | 2.0 | |||
| Domestic | 3.7 | 3.6 | |||
| Excluding BPC debt operation | 2.2 | 2.2 | |||
Preliminary budget posted for public comment on June 7, 2007 at www.mof.gov.bd.
4. Several trade taxes were modified in the budget. A 4 percent surcharge on imports (earmarked for infrastructure development) was consolidated into the tariff system, two supplementary duty rates were merged, and a number of goods were removed from the zero tariff band as part of a reform of the import tariff regime that aims to be revenue neutral. At the same time, an export withholding tax of 0.25 percent was introduced. These changes have reduced tariff dispersion by consolidating some charges and may help reduce evasion by removing many goods from the zero rate tariff band, but have had no significant impact on average levels of protection.
5. The FY08 budget does not resolve the main issues emphasized in the staff report, particularly regarding the need for timely adjustment of administered prices and fundamental revenue reform. Timely price adjustment would restrain subsidies and transfers and avoid the need to assume nonperforming loans of loss-making SOEs in the future. The revenue policies announced with the budget should be sufficient to produce the modest improvement in revenue forecast for FY08, but the significant improvement in revenue necessary to meet development objectives over the medium term would require more comprehensive reform as outlined in the staff report. In this regard, the staff welcomes the authorities’ disclosure in the budget speech that initiation of such comprehensive revenue system reform is under consideration.
6. Tax administration reforms also need to be accelerated. With the exception of a proposed introduction of a universal self assessment scheme to encourage voluntary tax compliance, the budget speech did not reveal additional tax administration reforms, such as the needed consolidation of the two large taxpayer units (LTUs) or separation of the tax policy and administration functions. However, the process of assigning a unique identification number for taxpayers in the LTUs (a structural performance criterion for end-March under the PRGF-supported program) was completed at end-May.
7. Further financial sector reforms are under way, but the sale of Rupali Bank is still pending. Several measures were announced with the budget that will support further development of a secondary market for government debt instruments, including the elimination of the upfront tax on government bond sales and plans to increase the use of yield-based auctions and longer-term bonds. Corporatization of the three NCBs was completed in early June and the government has advertised positions for new managers. Bangladesh Bank raised the banks’ minimum capital adequacy ratio from 9 to 10 percent of risk-weighted assets as of end-2007, as part of steps to further strengthen prudential regulations. In recognition of positive steps taken to strengthen its surveillance institutions, Bangladesh was recently invited to join the Egmont Group of financial intelligence units that combat money laundering and terrorist financing. With respect to Rupali Bank, there are no signs of when the preferred bidder, who was announced at end-August 2006, might conclude the purchase.