Statement by the Staff Representative on Bangladesh February 11, 2013

Fiscal performance has been broadly in line with program targets. As a result, the current account deficit has narrowed, reserves have increased significantly, and headline inflation is under control. However, implementation of structural benchmarks has lagged, necessitating sharper focus and greater ownership by the authorities. The global economic slowdown coupled with election-year uncertainty in Bangladesh poses the most immediate challenge to policymakers. The balance of risks is to the downside in the near term, potentially putting pressure on growth and inflation and undermining financial stability.

Abstract

Fiscal performance has been broadly in line with program targets. As a result, the current account deficit has narrowed, reserves have increased significantly, and headline inflation is under control. However, implementation of structural benchmarks has lagged, necessitating sharper focus and greater ownership by the authorities. The global economic slowdown coupled with election-year uncertainty in Bangladesh poses the most immediate challenge to policymakers. The balance of risks is to the downside in the near term, potentially putting pressure on growth and inflation and undermining financial stability.

Statement by the Staff Representative on Bangladesh February 11, 2013

The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.

1. Budget performance through November 2012 was broadly in line with the programmed fiscal outlook for FY13 (July 2012–June 2013), with the overall deficit (excluding grants) estimated at 0.9 percent of GDP in the first five months of FY13. However, preliminary estimates show National Board of Revenue tax collections to December 2012 fell short of the indicative target under the Extended Credit Facility (ECF) arrangement by about 0.2 percentage points of GDP, on slower growth in value added and trade-related taxes, although income taxes continued to perform well.

2. Bangladesh Bank (BB) announced a 50 basis point cut to its repo rates in its half-yearly (January–June 2013) monetary policy statement (MPS) released on January 31. On February 3, the regular repo rate was reduced to 7.25 percent, the reverse repo rate to 5.25 percent, and the special (penalty) repo rate to 10.25 percent. Notwithstanding lingering inflation risk, the MPS justified the rate cut—the first since late 2009—against the backdrop of heightened global uncertainty and decelerating private credit growth, with BB’s real GDP growth forecast in FY13 in the range of 6.1–6.4 percent compared to the government’s target of 7.2 percent. Nonetheless, BB’s monetary targets remain aligned with achieving those set out under the ECF arrangement.

3. On January 31, 2013, the Bangladesh authorities formally notified the World Bank that the government of Bangladesh was withdrawing its request for renewed funding of the Padma Multi-Purpose Bridge project, citing different timeframes for project implementation. The World Bank’s US$1.2 billion IDA credit for the bridge was terminated in June 2012 following citation by the Bank of a lack of sufficient action in addressing corruption related to the project. With the government’s notification, two other major co-financers—the Asian Development Bank and Japan International Cooperation Agency—have also cancelled their credits. Staff had assumed that the project would be implemented over a four-year period starting in the second half of 2013 (i.e., in FY14), including in the baseline scenario of the joint IMF-World Bank Debt Sustainability Analysis Update. The authorities have indicated that they remain committed to building the bridge and are exploring alternative technical and financing arrangements, with a view to commencing construction in FY13 by initially reallocating expenditures. At the same time, they expect to continue their own investigation of corruption allegations. Absent the project, the immediate impact would be a modest reduction in medium-term growth. Assessing the full impact of the government’s decision on fiscal, external, and debt sustainability will require further information on new financing modalities on bridge construction, which staff will raise during the second program review. However, the authorities have given their assurances that any budgetary and financing impact in 2013 will be contained within quantitative performance criteria and indicative targets agreed under the ECF arrangement.

Bangladesh: First Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for Waiver of Nonobservance of a Performance Criterion—Staff Report, Staff Statements and Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bangladesh
Author: International Monetary Fund. Asia and Pacific Dept