Abstract
Growth performance in Bangladesh is improving, but macroeconomic imbalances have also emerged. Medium-term growth targets are likely to intensify macroeconomic pressures if not managed well. Longer-term growth prospects hinge on generating sufficient resources to relieve infrastructure bottlenecks and ensuring a competitive business environment focused on labor-intensive activities. There is a need to build on the momentum of recent reforms. To ensure a stable macroeconomic environment, vigilance is foremost required on the fiscal front. The focus is on accelerating growth-promoting structural reforms, while ensuring a stable macroeconomic environment.
On October 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bangladesh.1
Background
Growth performance in Bangladesh has been strong the past few years, bolstered by efforts to reduce longstanding infrastructure bottlenecks and aided by accommodative policies. Export growth also reached a record high in fiscal year 2011 (July 2010–June 2011), driven up by a bustling ready-made garments sector. Official estimates place real GDP growth at 6¾ percent in FY11, up from around 6 percent in FY10. At the same time, macroeconomic pressures are intensifying, with the current account balance deteriorating by around 3 percentage points of GDP to slightly below 1 percent in FY11 and the overall balance of payments (BoP) running a deficit in FY11 for the first time in a decade. Despite strong export growth and supportive remittance inflows, BoP pressures are emanating from rising oil and capital goods imports, volatile commodity prices, and weak aid inflows. Fiscal pressures have also emerged due to increasing subsidy costs, mainly on account of fuel consumption, despite tax revenues having exceeded 10 percent of GDP in FY11—a milestone for Bangladesh. Finally, inflation reached a multi-year high in August 2011, with aggregate demand and food prices the major drivers.
In response, the authorities have allowed greater exchange rate flexibility over the past year to relieve external pressures; undertaken moderate fuel price and electricity tariff adjustments to contain subsidy costs; and attempted to tighten monetary policy, mainly through policy rate hikes and credit-related ceilings. Certain lending rate caps have also been removed. However, Bangladesh Bank has also increasingly been called to provide credit to the government. As a result, fiscal pressures are undermining monetary policy, reducing its effectiveness. Measured reforms have taken place in the financial sector, but rapid growth of the banking system and equity markets is straining supervisory capacity. Despite recently adopted Basel II standards, risks have emerged from liquidity pressures, stock market exposures, and weakened governance, especially at the state-owned commercial banks, in an environment of strong credit expansion.
Notwithstanding global uncertainties, real GDP growth is projected to reach 6.3 percent in FY12 on still supportive domestic demand. Inflation is expected to remain at around 10 percent, given relatively accommodative macroeconomic policies and possible upside pressures from higher food and energy prices and a weaker taka. The current account will likely slip into a deficit in FY12 of around ¾ percent of GDP and remain near this level over the next few years, notwithstanding a favorable exports and remittances outlook, as fuel imports grow and infrastructure investment intensifies. Concomitantly, foreign reserves are expected to decline to 2.3 months of import cover at end-FY12 from 2.9 months at end-FY11, and decrease further over the medium term, absent stronger policy adjustment and timely structural reforms.
Executive Board Assessment
Executive Directors commended the authorities’ economic performance and poverty reduction efforts in a fragile global environment. While the near-term growth outlook is favorable, high commodity prices and accommodative policies are contributing to a deterioration in the current account and inflation pressures. To preserve macroeconomic stability and to boost medium-term growth prospects, Directors stressed the need for prudent macroeconomic policies and advancing the reform process.
Directors emphasized that reducing vulnerabilities while maintaining space for social and development spending will require concerted policy actions. In the fiscal area, they called for well-designed measures to reduce subsidy costs. This will require further adjustments to domestic energy prices, with targeted safeguards to protect the poor. Welcoming the recent efforts to increase tax revenues, Directors encouraged the authorities to press ahead with tax reforms, including modernizing the tax regime and timely approval of the new VAT and income tax laws. They also highlighted the need to strengthen public financial management and to continue to improve Annual Development Program implementation, including more effective use of development partner resources. Directors observed that Bangladesh is at low risk of external debt distress. It will nevertheless remain important to pursue a sound debt management strategy with continued reliance on concessional external financing, careful control over the domestic debt burden, and proper accounting for contingent liabilities.
Directors supported further monetary tightening and continued exchange rate flexibility. They urged Bangladesh Bank to reduce its financing of the budget deficit in line with achieving its FY12 monetary targets, accompanied by higher policy and treasury rates and limited liquidity support. Increased interest rate flexibility will help strengthen the monetary transmission mechanism, and greater central bank independence will improve overall policy effectiveness. In view of external pressures, Directors stressed the importance of limiting foreign exchange market intervention to smoothing short-term volatility and maintaining adequate reserves. They welcomed the new reserve management guidelines, and recommended that they also govern the use of foreign exchange overdrafts.
Directors emphasized that ensuring the soundness of the financial sector is essential to maintain macroeconomic stability and reduce fiscal risks. Key priorities are to strengthen bank supervision and oversight, and improve governance and performance, in particular of state-owned commercial banks. Directors also stressed the need for strong equity market oversight, including to contain systemic risks that could arise from market volatility.
Directors agreed that further progress on key structural reforms will be critical to achieve the ambitious growth and poverty reduction objectives. The focus should be on reforms aimed at relieving infrastructure bottlenecks, enhancing the trade and investment regime, and improving the business environment, including for labor-intensive activities.
Many Directors favorably noted the authorities’ interest in a possible Extended Credit Facility-supported program to help stabilize the reserve position and foster the reform efforts, to be underpinned by strengthened macroeconomic policies.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Bangladesh: Selected Economic Indicators, FY2009-12 1/
Fiscal year begins July 1.
Includes non-ADP capital spending and net lending.
Excludes deposits held in offshore accounts of resident financial institutions, noninvestment grade sovereign bonds, and foreign exchange overdrafts provided by Bangladesh Bank to domestic banks.
Bangladesh: Selected Economic Indicators, FY2009-12 1/
| FY09 | FY10 | FY11 | FY12 | ||||
|---|---|---|---|---|---|---|---|
| Est. | Proj. | ||||||
| National income and prices (percent change) | |||||||
| Real GDP | 5.7 | 6.1 | 6.7 | 6.3 | |||
| GDP deflator | 6.5 | 6.5 | 6.3 | 10.0 | |||
| CPI inflation (annual average) | 6.7 | 7.3 | 8.8 | 10.7 | |||
| CPI inflation (end of period) | 2.2 | 8.7 | 10.2 | 10.7 | |||
| Nonfood CPI inflation (end of period) | 5.9 | 5.2 | 5.7 | 10.8 | |||
| Investment and savings (percent of GDP) | |||||||
| Gross investment | 24.4 | 24.4 | 24.7 | 25.7 | |||
| Private | 19.7 | 19.4 | 19.5 | 19.7 | |||
| Public | 4.7 | 5.0 | 5.3 | 6.0 | |||
| National savings | 27.2 | 28.1 | 25.6 | 24.9 | |||
| Private | 26.5 | 26.1 | 23.1 | 21.5 | |||
| Public | 0.7 | 2.0 | 2.5 | 3.5 | |||
| Central government operations (percent of GDP) | |||||||
| Total revenue and grants | 10.8 | 11.5 | 12.2 | 13.5 | |||
| Total revenue | 10.5 | 10.9 | 11.6 | 12.9 | |||
| Tax | 8.6 | 9.0 | 10.1 | 10.5 | |||
| Nontax | 1.9 | 1.9 | 1.5 | 2.5 | |||
| Grants | 0.3 | 0.6 | 0.7 | 0.6 | |||
| Total expenditure | 14.5 | 14.6 | 15.9 | 17.9 | |||
| Current expenditure | 10.1 | 9.5 | 9.7 | 10.1 | |||
| Annual Development Program (ADP) | 3.2 | 3.7 | 4.2 | 4.5 | |||
| Other expenditures 2/ | 1.2 | 1.4 | 2.1 | 3.3 | |||
| Overall balance (including grants) | -3.7 | -3.1 | -3.7 | -4.4 | |||
| (Excluding grants) | -4.0 | -3.7 | -4.3 | -5.0 | |||
| Primary balance (excluding grants) | -1.5 | -1.6 | -2.4 | -2.8 | |||
| Financing (net) | 3.7 | 3.1 | 3.7 | 4.4 | |||
| Of which: External | 0.4 | 0.9 | 0.3 | 0.7 | |||
| Total central government debt (percent of GDP) | 45.4 | 41.4 | 42.9 | 42.7 | |||
| Money and credit (end of fiscal year; percent change) | |||||||
| Net domestic assets of the banking system | 17.6 | 19.6 | 24.6 | 26.0 | |||
| Credit to private sector by the banking system | 15.5 | 24.2 | 25.8 | 16.9 | |||
| Reserve money | 31.9 | 18.1 | 21.0 | 22.2 | |||
| Broad money (M2) | 19.2 | 22.4 | 21.4 | 20.7 | |||
| Balance of payments (in billions of U.S. dollars) | |||||||
| Exports, f.o.b. | 15.6 | 16.2 | 23.0 | 26.3 | |||
| (Annual percent change) | 10.1 | 4.2 | 41.7 | 14.2 | |||
| Imports, f.o.b. | -20.3 | -21.4 | -30.3 | -35.8 | |||
| (Annual percent change) | 4.2 | 5.4 | 41.8 | 18.1 | |||
| Current account balance | 2.5 | 3.7 | 1.0 | -0.8 | |||
| (Percent of GDP) | 2.8 | 3.7 | 0.9 | -0.7 | |||
| Capital and financial account balance | -0.4 | -0.1 | -1.0 | 0.1 | |||
| Overall balance | 2.1 | 2.9 | -0.9 | -0.7 | |||
| Gross official reserves (in billions of U.S. dollars) 3/ | 7.4 | 10.1 | 10.0 | 9.1 | |||
| In months of prospective imports of goods and services | 3.6 | 3.4 | 2.9 | 2.3 | |||
| Exchange rate (taka per U.S. dollar; period average) | 68.8 | 69.2 | 71.2 | … | |||
| Nominal effective rate (2000=100; period average) | 89.5 | 87.0 | 82.9 | … | |||
| Real effective rate (2000=100; period average) | 105.4 | 108.3 | 108.8 | … | |||
| Terms of trade (percent change) | 1.6 | -4.6 | -6.7 | … | |||
| Memorandum item: | |||||||
| Nominal GDP (in billions of taka) | 6,148 | 6,943 | 7,875 | 9,207 | |||
Fiscal year begins July 1.
Includes non-ADP capital spending and net lending.
Excludes deposits held in offshore accounts of resident financial institutions, noninvestment grade sovereign bonds, and foreign exchange overdrafts provided by Bangladesh Bank to domestic banks.
Bangladesh: Selected Economic Indicators, FY2009-12 1/
| FY09 | FY10 | FY11 | FY12 | ||||
|---|---|---|---|---|---|---|---|
| Est. | Proj. | ||||||
| National income and prices (percent change) | |||||||
| Real GDP | 5.7 | 6.1 | 6.7 | 6.3 | |||
| GDP deflator | 6.5 | 6.5 | 6.3 | 10.0 | |||
| CPI inflation (annual average) | 6.7 | 7.3 | 8.8 | 10.7 | |||
| CPI inflation (end of period) | 2.2 | 8.7 | 10.2 | 10.7 | |||
| Nonfood CPI inflation (end of period) | 5.9 | 5.2 | 5.7 | 10.8 | |||
| Investment and savings (percent of GDP) | |||||||
| Gross investment | 24.4 | 24.4 | 24.7 | 25.7 | |||
| Private | 19.7 | 19.4 | 19.5 | 19.7 | |||
| Public | 4.7 | 5.0 | 5.3 | 6.0 | |||
| National savings | 27.2 | 28.1 | 25.6 | 24.9 | |||
| Private | 26.5 | 26.1 | 23.1 | 21.5 | |||
| Public | 0.7 | 2.0 | 2.5 | 3.5 | |||
| Central government operations (percent of GDP) | |||||||
| Total revenue and grants | 10.8 | 11.5 | 12.2 | 13.5 | |||
| Total revenue | 10.5 | 10.9 | 11.6 | 12.9 | |||
| Tax | 8.6 | 9.0 | 10.1 | 10.5 | |||
| Nontax | 1.9 | 1.9 | 1.5 | 2.5 | |||
| Grants | 0.3 | 0.6 | 0.7 | 0.6 | |||
| Total expenditure | 14.5 | 14.6 | 15.9 | 17.9 | |||
| Current expenditure | 10.1 | 9.5 | 9.7 | 10.1 | |||
| Annual Development Program (ADP) | 3.2 | 3.7 | 4.2 | 4.5 | |||
| Other expenditures 2/ | 1.2 | 1.4 | 2.1 | 3.3 | |||
| Overall balance (including grants) | -3.7 | -3.1 | -3.7 | -4.4 | |||
| (Excluding grants) | -4.0 | -3.7 | -4.3 | -5.0 | |||
| Primary balance (excluding grants) | -1.5 | -1.6 | -2.4 | -2.8 | |||
| Financing (net) | 3.7 | 3.1 | 3.7 | 4.4 | |||
| Of which: External | 0.4 | 0.9 | 0.3 | 0.7 | |||
| Total central government debt (percent of GDP) | 45.4 | 41.4 | 42.9 | 42.7 | |||
| Money and credit (end of fiscal year; percent change) | |||||||
| Net domestic assets of the banking system | 17.6 | 19.6 | 24.6 | 26.0 | |||
| Credit to private sector by the banking system | 15.5 | 24.2 | 25.8 | 16.9 | |||
| Reserve money | 31.9 | 18.1 | 21.0 | 22.2 | |||
| Broad money (M2) | 19.2 | 22.4 | 21.4 | 20.7 | |||
| Balance of payments (in billions of U.S. dollars) | |||||||
| Exports, f.o.b. | 15.6 | 16.2 | 23.0 | 26.3 | |||
| (Annual percent change) | 10.1 | 4.2 | 41.7 | 14.2 | |||
| Imports, f.o.b. | -20.3 | -21.4 | -30.3 | -35.8 | |||
| (Annual percent change) | 4.2 | 5.4 | 41.8 | 18.1 | |||
| Current account balance | 2.5 | 3.7 | 1.0 | -0.8 | |||
| (Percent of GDP) | 2.8 | 3.7 | 0.9 | -0.7 | |||
| Capital and financial account balance | -0.4 | -0.1 | -1.0 | 0.1 | |||
| Overall balance | 2.1 | 2.9 | -0.9 | -0.7 | |||
| Gross official reserves (in billions of U.S. dollars) 3/ | 7.4 | 10.1 | 10.0 | 9.1 | |||
| In months of prospective imports of goods and services | 3.6 | 3.4 | 2.9 | 2.3 | |||
| Exchange rate (taka per U.S. dollar; period average) | 68.8 | 69.2 | 71.2 | … | |||
| Nominal effective rate (2000=100; period average) | 89.5 | 87.0 | 82.9 | … | |||
| Real effective rate (2000=100; period average) | 105.4 | 108.3 | 108.8 | … | |||
| Terms of trade (percent change) | 1.6 | -4.6 | -6.7 | … | |||
| Memorandum item: | |||||||
| Nominal GDP (in billions of taka) | 6,148 | 6,943 | 7,875 | 9,207 | |||
Fiscal year begins July 1.
Includes non-ADP capital spending and net lending.
Excludes deposits held in offshore accounts of resident financial institutions, noninvestment grade sovereign bonds, and foreign exchange overdrafts provided by Bangladesh Bank to domestic banks.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.