Bangladesh’s risk of debt distress is low based on external debt indicators. Bangladesh’s external debt burden indicators do not breach the relevant policy–dependent indicative thresholds under the baseline scenario and exhibit only a marginal breach under the stress tests.2 Debt burden indicators are significantly worse when domestic debt is included. Accordingly, this analysis reveals a more elevated risk of debt distress on public debt compared to results based solely on external debt. Staffs will monitor closely the evolution of domestic debt and the government’s ability to mobilize domestic resources.
1. The results of this DSA are similar to those of the previous DSA.3 The primary difference between the two is that in the current DSA, one of the thresholds is marginally breached in the most extreme stress test, namely the combination of one–half standard–deviation shocks to net transfers, export growth, GDP growth, and the GDP deflator. This breach emerges largely because the relative magnitude of the shock is substantially higher compared to the previous DSA. As a result of the significant volatility displayed in some of Bangladesh’s historical macroeconomic series, the standard deviation of exports and net transfers has increased; meanwhile, baseline projections for those variables were revised upwards. Since the values of the key parameters under the shock are simulated to be the historical average subtracted of half a standard deviation, this is now much lower vis–à–vis the baseline compared to the analysis done in the previous DSA.4 The projections of debt to GDP in the previous DSA were, by and large, accurate as the actual outturn deviated from the projection by less than 1 percentage point. Moreover, the longer–term debt dynamics under the baseline are similar, but slightly more favorable.
2. Box 1 summarizes the medium–term macroeconomic framework underlying the DSA. Most notably, it is based on projections for growth that are in line with but slightly lower than those in the country’s own medium–term framework, and estimates of external assistance that reflect both expected scaling up in the context of the millennium development goals (MDGs), as well as the country’s ability to absorb additional external financing. Export growth rates are slightly higher in the medium term than historical averages, but taper off to the historical average in the out years. Export performance for 2006 and 20075 was substantially better than projected in the previous DSA, and accordingly projections in the current DSA were revised upward. On the other hand, import growth is also projected to be significantly higher than the historical average throughout the projection period but particularly in the medium term. Finally, due to a strong growth in remittances from Bangladeshis in the United States, United Kingdom, and Gulf states, private net current transfers are expected to continue their increasing trend.
Bangladesh: Macroeconomic Assumptions Underlying the DSA
The macroeconomic assumptions are as follows:
Real GDP growth in the medium term is, at 6.4 percent, above the recent historical average of 5.6 percent, and it picks up in the outer years to 7 percent. This is close to (but slightly lower than) Bangladesh’s own medium–term projections, and assumes continued progress in broad–based structural reforms and increased openness of the economy that should allow Bangladesh to benefit from dynamic growth elsewhere in the Asian region.
Inflation, as measured by the GDP deflator, increases in 2008 due to higher food and energy prices, but then declines and stabilizes at around 4 percent.
The growth ofexports and imports is strong in the medium term (14 percent and 17 percent respectively); as the economy opens both will increase in terms of GDP with imports gaining the most as increasing investment and intermediate goods are imported.
The current account (including grants) moves from a small surplus to a deficit, which peaks in the outer years at about 2 percent of GDP, as a result primarily of continued strong growth of capital and intermediate goods imports related to increasing investment projects. These effects are offset to some extent by strong growth of remittances, which are projected to grow at an annual average of about 13 percent over the medium and long term.
Net aid inflows reach 2 percent of GDP and stabilize in that range (consistent with Bangladesh’s medium–term framework). The projections assume that the grant element of new borrowing decreases over the 20–year period from 48 percent to 39 percent in the out years.
The overall fiscal deficit (excluding grants) is assumed to remain close to the historical average (around 4 percent of GDP), while the primary deficit declines slightly over time. A modest rise is assumed in the revenue-to-GDP ratio (excluding grants) in the initial years (from 11½ percent in FY08 to 13 percent in FY13), supported by efforts to mobilize domestic revenues.
Real interest rates on domestic currency debt are assumed to stay more or less constant at about 3.5 percent.
This DSA has been prepared jointly by World Bank and IMF staffs and in consultation with the Asian Development Bank using the debt sustainability framework for low–income countries approved by the Boards of both institutions. The DSA is based on macroeconomic data gathered in the context of IMF missions to Dhaka in 2008. Estimated debt outstanding and disbursed as of end-FY2007 provides the basis for debt figures.
The low–income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels are policy–dependent. Bangladesh’s policies and institutions, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA), place it as a “medium performer.” The relevant indicative thresholds for this category are: 40 percent for the NPV of debt–to–GDP ratio, 150 percent for the NPV of debt–to–exports ratio, 250 percent for the NPV of debt–to–revenue ratio, 20 percent for the debt service–to–exports ratio, and 30 percent for the debt service–to–revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt.
IMF Country Report No. 06/406 (Annex I).
For example, in the case of net transfers, the shock simulated in this year’s DSA is equivalent to a decline (vs. the baseline scenario) of 6-7 percentage points of GDP, compared to a decline of 4 percentage points simulated in the previous DSA.
All references are to the Bangladeshi fiscal year which runs from July 1 through June 30.
Public debt includes domestic central government debt and external public and publicly guaranteed debt.