Overall outlook and developments

2. As brought out in the staff report, Bangladesh has made substantial progress in strengthening macroeconomic conditions and structural policies under the ECF arrangement. The economy continues to exhibit favorable developments despite a challenging global environment. Exports are picking up, remittances remain strong and inflation pressures have eased over the past year, supported by prudent fiscal and monetary policies, complemented by the support of the ECF arrangement. International reserves by the program’s definition, stood at US$14.5 billion as of end-April 2013, almost doubling the equivalent import cover compared to late 2011.

3. All the quantitative performance criteria (PC) as of end-December 2012, and most of the indicative targets at end-December 2012 and end-March 2013 under the ECF arrangement have been met as also have key structural benchmarks. The new value added tax (VAT) law which was passed by the National Parliament in November 2012 is now in the implementation phase, following the approval of an implementation plan and timetable. Draft amendments to the Bank Companies Act aiming to strengthen banking system governance and the supervisory mandate of the Bangladesh Bank (BB) have also been submitted to the National Parliament. All the prior actions under the second review of the ECF arrangement have been completed. These and other details of the policy program are set out in the Memorandum of Economic and Financial Policies (MEFP), which extends the authorities’ commitments to end-June 2014.

4. The authorities are of the opinion that prudent policies have strengthened the economy’s capacity to respond to shocks and will also provide an anchor to preserve macroeconomic stability as the country approaches national elections, due by January 2014. However, they acknowledge that there are some signs that- political tensions and episodes of violence in recent months may be affecting economic activity.

5. In addition, the tragic building collapse in April 2013 in Savar on the outskirts of Dhaka may impact the garment sector. The authorities have taken various steps to allay international and domestic concerns in the wake of this tragedy. They have closed down as many as 20 factories, which were not fulfilling prescribed safety norms. In addition, they are working in consultation with international business and development partners to address safety issues in readymade garment (RMG) factories across the country. They have set up a Cabinet Committee to scrutinize safety measures in the sector and are also revising the building code to prevent recurrence of such incidents. They have also set up a Committee to revise the minimum wage. The authorities wish to assure everyone that they will do all that is required to try and ensure that such incidents do not recur.

6. The authorities feel that it is also important to place this in context. Following the removal of various restrictions in international trade in textiles in the first decade of this century, Bangladesh has quickly moved to become one of the leading RMG exporters in the world. The country has earned foreign exchange equivalent of US$ 19.1 billion during 2011-12 from the sector. More importantly, the development of the sector has also proved to be an agent of social change. There are around 3.6 million employees in the sector, of which, around 2.88 million are women. The success of the RMG export sector is often seen as the reason for improvement in the overall position of women in the country. It may be noted that population growth and the fertility rate in Bangladesh is lower than the South Asian average.

Fiscal policy

7. Turning to more general policy issues, Bangladesh is on track to meet the 2013 fiscal target of an overall budget deficit (excluding grants) of 4.5 percent of GDP. Though tax revenue has fallen short of program indicative targets as supplementary duties and other taxes on imports have been lower than expected reflecting slower import growth, expenditure has been kept under control, in part through containment of fuel and electricity subsidies following administered fuel price increases. In the immediate term, the authorities are seeking to buttress revenue collections through more aggressive tax enforcement focusing on recovering arrears at state owned enterprises (SOEs), curbing leakages from bonded warehouses and by a comprehensive rollout of the Alternative Dispute Resolution mechanism at the customs level. They are also following through with the implementation of the revenue measures announced in the 2013 fiscal budget.

8. The authorities are also committed to adhering to a programmed budget deficit (excluding grants) target of 4.3 percent of GDP in fiscal year 2014. While slowing economic activity could make tax revenue targets more challenging, they intend to strengthen revenue collections in fiscal 2014 by further removing exemptions and phasing out truncated bases for the VAT, as well as strengthening auditing and compliance. On the expenditure side, following a series of retail price adjustments over the past 18 months, they will emphasize cost containment measures for fuel and electricity subsidies. They intend to further boost social-related spending and significantly increase capital spending in the Annual Development Program (ADP), within the programmed spending envelope including the continuation of the Padma Bridge project, in order to meet key social and developmental goals.

Debt management

9. The latest debt sustainability analysis (DSA), which updates the joint IMF/IDA DSA from January 30, 2013 reflecting the most recent macroeconomic developments and borrowing needs, indicates that Bangladesh remains at a low risk of debt distress. The authorities will focus on external borrowing, including the contracting and guaranteeing of nonconcessional external debt and on high impact projects to meet critical development needs. They will take steps to strengthen debt management practices ahead of any sovereign bond issuance. They have requested, a Debt Management and Performance Assessment (DEMPA) from the World Bank, the results of which will guide their medium-term debt strategy, to be finalized by December 2013.

10. The authorities have also already established a technical committee on nonconcessional external borrowing chaired by a senior official in the Ministry of Finance. This Committee will meet monthly to monitor and report on nonconcessional borrowing to ensure compliance with the limits set in the ECF program. In addition, the committee will draft revised terms of reference (TOR) for the Cabinet’s Hard-Term Loan Committee (HTLC). The notification for the revised TOR will be issued by June 2013 and will: (i) ensure that the HTLC oversees all nonconcessional borrowing contracts, covering loans, guarantees and trade credits (excluding normal import financing) by the public sector and for all purposes; and (ii) determine nonconcessionality based on the grant element of the credit, in line with international best practices.

Monetary Policy and Bangladesh Bank Operations

11. The authorities will continue to maintain a prudent monetary stance to safeguard macroeconomic stability and keep inflation in check, while allowing adequate space for private credit growth. The end-December 2012 net international reserves (NIR) target (a PC) has been exceeded by over US$3 billion (program definition). The BB will continue to accumulate reserves when market conditions are appropriate and will step up sterilization of foreign exchange intervention to protect program targets. To further deepen the foreign exchange and government debt markets, steps have been taken in April 2013 to: (i) raise limits on banks’ net open positions; (ii) introduce a two-year Treasury bond to better match investor demand; and (iii) remove the one-year holding period for nonresident holdings of Treasury securities. The authorities also remain committed to gradually reducing the devolvement of Treasury securities.

12. The authorities are also undertaking steps towards completion of a full external audit of BB by a global audit firm (a December 2013 benchmark). They have already selected the firm, which was a prior action for this review.

Financial Sector reforms

13. As a centerpiece of the efforts to strengthen the banking system, amendments to the Bank Companies Act (BCA) were submitted to Parliament in March 2013. The authorities aim to strengthen the supervisory mandate of BB, limit special treatments for State Owned Commercial Banks (SOCBs) and strengthen commercial banks’ governance and accountability. The authorities are also taking steps to revise, through an order to be issued by BB, stock market exposure limits for banks consistent with the BCA amendments. Given the deteriorating financial conditions of the SOCBs, the focus will be on measures to strengthen the SOCBs’ performance and financial position and increase their operational independence in order to safeguard the banking system and minimize fiscal risks as brought out in the MEFP.

14. The BB is also making progress towards adoption of a bank resolution framework, having already put in place a number of elements needed for such a framework. Further, the Demutualization Act was passed by Parliament in April 2013. Consistent with this act, the authorities will continue to work towards the approval by the Bangladesh Securities and Exchange Commission of demutualization models and plans, for both the Dhaka and the Chittagong stock exchanges.

The ECF arrangement going ahead

15. To further buttress international reserves while preserving monetary targets, the authorities request an increase in the end-June 2013 PC on net international reserves of the BB and an attendant reduction of the PC on BB’s net domestic assets. They would also like to request a modest increase in the government’s bank borrowing PC ceilings for June 2013, to account for slightly weaker-than-expected non-bank financing, with the overall fiscal deficit on track to meet the programmed target. They also request an increase in the non-concessional debt ceiling to accommodate loan guarantees for critical power infrastructure for the period to June 2014. As indicated earlier, they are putting in place measures to strengthen debt management practices, so as to ensure compliance with program targets.

16. The authorities will continue to maintain close policy dialogue with the IMF to ensure strong performance under the ECF arrangement. They will request for technical assistance as necessary from the IMF and other development partners, in support of their reform agenda. They will also consult with the IMF on the adoption of measures and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such matters. Moreover, they will provide the IMF with information in connection with progress in implementing the policies and achieving the objectives of the program. They also authorize publication of the Letter of Intent and its Attachments, as well as the staff report.