Bangladesh: Requests for an Arrangement Under the Extended Fund Facility, Request for Arrangement Under the Extended Credit Facility, and Request for an Arrangement Under the Resilience and Sustainability Facility-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
02 Feb 2023
eISBN:
9798400232206
ISBN:
9798400232206
Language:
English
Keywords:
climate financing needs; financing gap; financial support; disaster risk financing strategy; EFF disbursement; Climate finance; Climate change; Commercial banks; Fiscal risks; Global
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1. Amid multiple external shocks, macroeconomic challenges have intensified in Bangladesh. A robust economic recovery from the COVID-19 pandemic was interrupted by Russia's war in Ukraine. Rising global commodity prices, supply disruptions, and slowing external demand have led to a sharp widening of the current account (CA) deficit, depreciation of the Taka, and a large decline in foreign exchange (FX) reserves. While there is not a full-blown crisis, rising inflation, slowing economic activity, and strict austerity measures to deal with the shock are compressing demand, hurting the poor most.

Abstract

1. Amid multiple external shocks, macroeconomic challenges have intensified in Bangladesh. A robust economic recovery from the COVID-19 pandemic was interrupted by Russia's war in Ukraine. Rising global commodity prices, supply disruptions, and slowing external demand have led to a sharp widening of the current account (CA) deficit, depreciation of the Taka, and a large decline in foreign exchange (FX) reserves. While there is not a full-blown crisis, rising inflation, slowing economic activity, and strict austerity measures to deal with the shock are compressing demand, hurting the poor most.

Context

1. Amid multiple external shocks, macroeconomic challenges have intensified in Bangladesh. A robust economic recovery from the COVID-19 pandemic was interrupted by Russia's war in Ukraine. Rising global commodity prices, supply disruptions, and slowing external demand have led to a sharp widening of the current account (CA) deficit, depreciation of the Taka, and a large decline in foreign exchange (FX) reserves. While there is not a full-blown crisis, rising inflation, slowing economic activity, and strict austerity measures to deal with the shock are compressing demand, hurting the poor most.

2. Even as Bangladesh tackles these immediate challenges, addressing long-standing structural issues remains critical, with climate change as an added concern. While on track to graduate from the Least Developed Country (LDC) status by 2026, Bangladesh aspires to reach upper middle-income status by 2031. However, substantial gaps remain in social and development spending, tax revenue mobilization, the scale and diversification of exports, foreign direct investment (FDI) inflows, and vibrancy of the investment climate.1 Multipronged structural reforms, as outlined in Bangladesh's 8th five-year plan (FYP), are needed to close these gaps, deal with the challenges of the gradual loss of preferential trade treatments and concessional financing and improve governance. The authorities recognize these challenges and the need to tackle climate change issues, which expose the economy to large risks that could threaten macroeconomic stability.

3. The authorities have requested a 42-month Fund-supported program to restore macroeconomic stability. Bangladesh would risk falling into a subpar equilibrium of low growth, low investment, and weak human development, if left to restore macroeconomic stability on its own. With strong ownership by the authorities, the arrangements under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) are designed to advance reforms for inclusive, green and sustainable growth, while protecting macroeconomic stability, easing demand management measures and rebuilding buffers.

4. To help address the large climate financing needs, the authorities have also requested a concurrent program under the Resilience and Sustainability Facility (RSF). Bangladesh is highly vulnerable to climate change. Access under the RSF will underpin an ambitious reform plan to address the significant adaptation challenges facing Bangladesh, while helping catalyze additional official and private finance and enhancing climate mitigation efforts.

Recent Developments, Outlook, and Risks

A. Recent Developments

5. The Bangladesh economy is facing several serious macroeconomic challenges.2 Russia's war in Ukraine has led to (i) headline inflation rising to a decade high of 9.5 percent year-on-year in August 2022; (ii) the CA deficit sharply widening to 4.1 percent of GDP in FY22 from 1.1 percent of GDP in FY21; (iii) the Taka depreciating by 23 percent year-to-date; and (iv) gross FX reserves3 (BPM6 definition) declining to US$25.7 billion, as of end-November 2022, from their peak of US$40.7 billion in August 2021 (Text chart). Despite these abrupt changes, the overall external position remained broadly in line with the level implied by fundamentals and desirable policies in FY22 (Annex I).

uA001fig1

Bangladesh: External Sector Developments in 2022

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

6. The authorities have responded with stringent demand management measures. Bangladesh Bank (BB) increased the repo rate by 100 basis points cumulatively during May and December 2022 to 5.75 percent and has signaled further tightening bias for FY23. Unsterilized FX sales have reduced liquidity in the system, with short-term and long-term government yields rising sharply. While greater exchange rate flexibility was allowed to reduce FX pressures, disorderly market conditions have resulted in an arrangement characterized by multiple exchange rates for different market participants. The prices of fuel, fertilizer, gas and electricity were raised. In addition, the government has imposed transitory restrictions on some non-essential imports,4 slowed the implementation of import-intensive development projects, closed diesel-fueled power plants, introduced rolling blackouts, reduced in-office hours, shortened the school week, and introduced other measures to curtail energy demand. While these measures have suppressed import demand, exchange rate pressures remain high and FX reserves continue to decline, albeit at a slower pace. These demand control measures could prolong the ongoing hardships and will likely hurt both near-term growth and medium-term economic potential.

B. Outlook and Risks

7. Global headwinds are expected to weigh on the near-term outlook and inflation is set to remain elevated (Table 2–5). In FY23, real GDP growth is projected to slow to 5.5 percent due to demand management measures. Average headline inflation in FY23 is expected to increase to 8.9 percent, driven by rising domestic food and fuel prices and the pass-through of large Taka depreciation. High inflation, while adding to economic uncertainty, will reduce consumer spending. Meanwhile, export growth is forecast to slow, albeit from a high base in FY22, in line with slowing demand from Europe and the United States which together account for nearly 80 percent of total external demand.

8. Fiscal and external imbalances are likely to persist with emerging financing gaps. The overall fiscal deficit is expected to widen to 5.6 percent of GDP in FY23 due to lower tax revenues and elevated expenditures, including subsidies. Given strict import controls, the CA deficit is expected to improve to 3.2 percent of GDP in FY23. Considering Bangladesh's large financing needs for pursuing development goals and concurrent necessity of maintaining adequate FX reserves, a financing gap of about US$9.1 billion is expected to emerge over FY23 and FY26 (Table 9).

9. Bangladesh remains at a low risk of external and overall debt distress. Despite increased external borrowing in the near term, favorable debt dynamics in the medium term keep the public and publicly guaranteed external debt-to-GDP ratio on a declining path, and the overall public debt-to-GDP ratio is expected to stabilize at around 42 percent of GDP.5 All external debt and debt service indicators remain below relevant thresholds under the baseline, but the space to absorb shocks is limited as the present value of the debt-to-exports ratio would temporarily breach its respective threshold in an extreme scenario.

10. There are considerable uncertainties surrounding the outlook and risks are tilted to the downside. Main external risks include intensifying spillovers from Russia's war in Ukraine, further commodity price shocks, larger-than-expected slowdown in Bangladesh's major trading partners, and local COVID-19 outbreaks. Domestically, elevated non-performing loans (NPLs) could dampen growth prospects, while slow progress on the Rohingya crisis could lead to donor fatigue. The risk of natural disasters is a continuous threat. On the upside, swift implementation of priority reforms could improve growth potential and strengthen climate resilience (Annex II).

Key Elements of the ECF/EFF Arrangement

In the near-term, the ECF/EFF program aims at restoring macroeconomic stability, relaxing financing constraints to prevent disruptive adjustment, and rebuilding FX reserves to further cushion the impact of external shocks. Over the medium term, the ECF/EFF will support a much needed scale-up in social and development spending and boost Bangladesh's growth potential. Reforms under the ECF/EFF will focus on (i) creating fiscal space for priority spending while stabilizing debt; (ii) strengthening the financial sector to mobilize productive investment; (iii) boosting productivity and exports to generate good quality jobs; (iv) enhancing the investment climate to meet large financing needs; and (v) modernizing monetary, fiscal and financial systems to prepare for LDC graduation.

A. Program Objectives

11. Restoring macroeconomic stability and preventing disruptive adjustment are key objectives of the ECF/EFF arrangement (Text Chart). High dependence on imports, elevated commodity prices, economic slowdown in major trading partners, tighter global financial conditions and heightened global uncertainties will keep the Balance of Payments (BoP) under pressure for some time. Recent measures to restore external balance are unsustainable, as they would severely suppress domestic demand to curtail imports, thus leading to disruptive macroeconomic adjustments. These measures are disproportionately affecting the poor and the vulnerable and, if they remain in place, would drag medium-term growth prospects— with a risk of inflicting lasting economic scars. Under the baseline scenario, net international reserves (NIR) would likely fall to an unsustainable level of around 2.5–2.6 months of import coverage. The ECF/EFF arrangement, along with its catalytic role in mobilizing other financing, will help rebuild reserves, while supporting a relaxation of strict demand and import management measures. Over the medium term, the program will enable a much needed fiscally sustainable scale-up in social and development spending. The ECF/EFF disbursements and associated reforms are expected to increase the NIR to around 4 months of prospective imports between FY23 and FY26, and debt would stabilize at 42 percent of GDP.

uA001fig1a

Bangladesh: Net International Reserves 1/

(Months of Prospective Imports)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: IMF Staff Estimates.1/ Net international reserves are gross reserves minus the central bank FX liabilities.

12. The ECF/EFF program is also expected to help accelerate overdue macroeconomic reforms. The program adjustments—including tax revenue measures, public sector management, and financial sector reforms—will increase the resource envelope to meet critical spending needs, while avoiding crowding out private investment. The proposed policy mix will be anchored by the NIR and primary deficit paths that are compatible with long-term debt sustainability. Over the medium-term, reform efforts will help raise investment and sustain high growth, enabling a successful graduation from LDC status (Box 1).6

Supporting Inclusive, Sustainable, and Green Growth in Bangladesh

Despite remarkable progress in reducing poverty, Bangladesh faces significant challenges to further enhance human development, living standards, and vulnerability reduction. Strong growth performance over the past decade has contributed to a remarkable reduction in poverty. However, a large part of the population still lives in extreme poverty and remains highly vulnerable to covariate shocks such as COVID-19. Government spending to address such covariate risks remain low and lagging that of peers. While the coverage of social assistance programs has increased over time, the level of total spending and the adequacy of benefits have been subdued and the bulk of the population is underserved. The low level of government revenue has further constrained public expenditure on important developmental objectives.

uA001fig2

Bangladesh: Health, Education, and Infrastructure Spending

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: IMF FAD Expenditure Assessment Tool (EAT), World Health Organization.

Substantial investment in human capital and infrastructure will be needed to achieve Bangladesh's aspiration to reach upper-middle income status and meet the Sustainable and Development Goals (SDGs). Bangladesh needs an additional US$928.5 billion in financing to implement the SDGs between 2017 and 2030, of which the public sector is expected to contribute about a third. Alongside, Bangladesh will require additional financing of 3–4 percent of GDP annually for its climate-related investments.

A well-designed policy mix will enhance the budget envelope for social spending and public investment to support Bangladesh's development objectives. Given subdued private investment dynamism, closing the financing gaps for sustainable development and climate investment on government borrowing alone (about 14 percent of GDP per year) would set Bangladesh's public debt on a rapid rise and increase vulnerability to a wide range of shocks. In staff's view, a modest increase in the fiscal envelope for additional development spending, supported by concessional borrowing, domestic revenue mobilization, and other mutually reinforcing reform measures will yield a tangible improvement in economic and social outcomes toward the medium term, without exacerbating domestic and external imbalances. Reform efforts should prioritize measures to (i) strengthen domestic revenue mobilization and public administration and spending efficiency, (ii) rekindle financial sector reforms, (iii) jumpstart private investment, and (iv) attract FDI inflows. These public actions will, in addition, help support the private sector development, further mutually reinforcing the reform impacts. With strong and credible implementation of reforms, gross investment including private and public investments is expected to rise by about 4 percent of GDP during the program period without jeopardizing external stability.

Table 1.

Bangladesh: Sequencing of Reforms Under the ECF/EFF and RSF, FY23–FY26

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Note: Green highlights consider reform measures under the RSF.

13. Strong ownership, sustained support from development partners (DPs), and appropriate prioritization and sequencing of reforms are crucial. The authorities have demonstrated strong commitment by proactively taking several measures that would have been prior actions (¶6). The authorities' reform agenda under the program is laid out in the authorities' Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP), which are consistent with Bangladesh's 8th FYP. The program will prioritize the implementation of the most urgent and critical reforms, gradually increasing the pace of reforms during the program period (Table 1). Wherever possible, the program will also exploit synergies and seek complementarity with other DPs' priorities. During the first year, the ECF/EFF arrangement will be underpinned by the quantitative performance criteria (QPC), indicative targets (IT), and macro-critical structural benchmarks (SBs) (Table 11). The implementation of reforms will be supported by IMF capacity development (Table 13).

B. Fiscal Policy

14. Fiscal policy reforms will be geared toward creating fiscal space to increase social spending and investment sustainably. Bangladesh's tax-to-GDP ratio is one of the lowest in the world, constraining critical spending. Extensive exemptions, complicated tax codes, and weaknesses in revenue administration have resulted in low tax productivity across all major taxes. Meanwhile, reliance on national saving certificates (NSCs) has resulted in high government borrowing costs. Key objectives include enhancing revenue mobilization, reducing issuance of NSCs, containing subsidies, and increasing spending efficiency with fiscal institutional reforms. The program envisages tax revenue mobilization efforts of additional 0.5 percent of GDP annually in FY24 and FY25 and 0.7 percent of GDP in FY26, contributing to higher social spending and public investment (Text Chart).7 As a result, the overall fiscal deficit is expected to improve from 5.6 percent of GDP in FY23 to 5 percent of GDP by program-end, underpinned by a primary deficit of around 3.3 percent, which is consistent with public debt remaining below 45 percent of GDP through FY43 (MEFP, ¶8).

uA001fig3

Bangladesh: Tax Revenue

(Percent of GDP)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: IMF Staff Projections.

15. Raising revenues will require a multipronged approach. The program includes a series of carefully sequenced reforms, which comprise both tax policy and revenue administration measures and will be anchored in a medium-term revenue strategy (expected to be finalized by mid-2024).

  • Tax policy reforms. Key areas for policy reform include rationalizing tax expenditures, simplifying the tax rate structure and broadening the tax base, as part of an overarching strategy of shifting the tax burden from trade-related taxes toward income and value-added taxes (MEFP ¶9). The authorities have committed to identify and adopt in the FY24 budget tax revenue measures amounting to 0.5 percent of GDP (SB for end-June 2023). Subsequent budgets for FY25 and FY26 would incorporate additional revenue measures of 0.5 and 0.7 percent of GDP respectively, which will be identified in part with the help of IMF technical assistance (TA) on estimating tax expenditures.

  • Tax administration reforms. There is significant scope for increasing tax compliance and broadening the tax base to sustainably raise tax revenues. To this end, key reforms include (i) establishing compliance risk management units (CRMUs) within the National Board of Revenue (NBR) (SB for end-December 2023) and implementing a compliance improvement plan; (ii) strengthening information sharing between the income tax, VAT, and customs wings of NBR, including to support risk-based audits; (iii) progressively expanding and integrating automation in tax administration; (iv) increasing at-source tax collection; and (v) adopting a modernized Customs Act.

16. Rationalization of energy subsidies will free fiscal resources for social and development spending. While recent price hikes have brought petroleum prices broadly in line with international prices, gas and electricity subsidies are expected to rise to 0.9 percent of GDP in FY23 (Box 2). Over the program period, the introduction of a periodic formula-based fuel price adjustment mechanism will help ensure no structural subsidies for petroleum products (SB for end-December 2023). The authorities will further explore options to gradually reduce gas and electricity subsidies, while strengthening social safety nets (MEFP, ¶11 and ¶15). The recent increase in electricity prices is a welcome step. Reform priorities in social protection include improving targeting, broadening coverage both in rural and urban areas, adopting the government-to-person (G2P) systems, and expanding social insurance. The program will leverage the ongoing programs to strengthen and expand social protection by other DPs. The government's efforts to enhance social safety nets and increase development spending will be anchored by ITs on social and development capital spending under the program.

17. Reforms to the NSCs system are expected to lower interest payments over time. The authorities have taken steps to realign incentives by introducing tiered interest rates, capping issuances, and increasing the tax on earned interest. Moreover, the new Public Debt Act, passed into law in September 2022, criminalizes the provision of false information by NSC investments. Supported by IMF TA, the authorities will build on recent reforms to the NSC system (MEFP, ¶14) and develop a formal plan to reduce net NSC issuance to below 1/4 of total net domestic financing by FY2026 (SB for end-December 2023), to be gradually implemented over the program period.

18. Improved debt and cash management will support optimal use of budget resources. The recently updated Medium-Term Debt Strategy (MTDS) envisages a shift away from expensive domestic financing toward concessional external financing and eventually long-term market financing. With the help of IMF TA, the MTDS will be updated annually and complemented with the timely publication of a quarterly debt bulletin and, once capacity has been sufficiently built, an annual debt portfolio report (MEFP, ¶13). Cash management will be strengthened with the continued expansion of coverage of the treasury single account (TSA), which will be supported by a policy note to guide decisions on integration of bank accounts currently outside the TSA and sequencing of TSA enhancements (SB for end-December 2023). Moreover, progressively greater use of electronic funds transfer (EFT) and development of Integrated Budget and Accounting System (iBAS++) functionalities will reduce leakages and improve commitment controls (MEFP, ¶16).

19. Efficient public investment management will help channel spending toward priority projects. With IMF TA support, the authorities plan to roll out Sector Strategy Papers and Multi-Year Public Investment Program tools to 10 priority spending sectors during the program.8 These efforts will ensure more strategic project selection and aid the eventual production of a consolidated medium-term budget framework that incorporates capital spending under the Annual Development Program (MEFP, ¶12).

20. Enhanced fiscal transparency and fiscal risk management will enhance governance and contribute to raise investor confidence. Under the program, the authorities are committed to publishing fiscal reports and statements on a timelier basis, improving data compliance in line with international accounting and auditing standards, and implementing risk-based internal audits. Ongoing work to collect data of state-owned enterprises (SOEs) will inform a fiscal risk statement, to accompany the budget starting in FY25, and form the basis of an annual SOE sector report, to initially cover the 50 largest SOEs in 2025 (MEFP, ¶17).

C. Monetary and Exchange Rate Policies

21. Monetary and exchange rate policies should focus on containing inflation and stemming reserve losses. Pass through from recent Taka depreciation and increase in fuel prices have added to inflationary pressures. The monetary policy stance will be guided by the inflation outlook (MEFP, ¶18) and will be anchored by an IT (ceiling) on the level of reserve money under the program, as a main operating target of BB. BB stands ready to continue calibrated tightening to counter possible second-round effects from supply-side shocks, re-anchor inflation expectations,9 and stabilize demand for FX liquidity, while carefully safeguarding economic growth amid already curtailed domestic demand. A modest buildup in NIR, as a QPC (floor), is targeted in the first year of the program, with further increases programmed over the medium term, to cover 4 months of prospective imports (MEFP, ¶21). Greater exchange rate flexibility will help accumulate reserves, strengthen external buffers, and build resilience (MEFP, ¶20).

22. Continued progress toward modernizing monetary policy framework and operations is vital. The current eclectic monetary policy regime10 may not be effective in meeting the challenges of a more diversified and open economy after the LDC graduation. BB will continue modernizing its monetary policy framework and operations (MEFP, ¶19) to help promote macroeconomic stability, support financial development, and enhance monetary policy transmission. With support from IMF TA, the authorities are building their capacity to modernize monetary policy formulation and move away from reserve money to interest rate as an operational target by the end of the program period. As first steps, BB will adopt an interest rate corridor system with automatic standing lending and deposit facilities (SB for end-July 2023) and improve liquidity forecasting and management. The authorities have started relaxing lending interest rate restrictions and are committed to removing all caps over the program period. BB will also strengthen its communication and transparency to better signal the monetary policy stance. The authorities are taking steps to implement the recommendations of the 2022 IMF's Safeguards Assessment, which will further strengthen BB's autonomy and governance (MEFP, ¶22).

23. Further strengthening the exchange rate and FX reserve management framework would help build external resilience. The authorities are committed to unifying the multiple exchange rates that resulted from disorderly FX market conditions and will continue to allow the interbank transactions at market-determined rates (MEFP, ¶20). BB will also use the market-determined exchange rate for all official FX transactions on behalf of the government (SB for end-June 2023) and will reverse the temporary increases in margins for opening letters of credit on non-essential imports. BB will strengthen reserves management and will start compiling and reporting the official Gross International Reserves (GIR) as per the Balance of Payments and International Investment Position Manual (BPM6) (SB for end-June 2023). Monetary and exchange rate policy reforms under the program will be properly sequenced to exploit synergies.

D. Financial Sector Policies

24. An orderly exit from the pandemic support measures is needed to reduce the buildup of financial sector vulnerabilities. While COVID-19 policy support helped in the near term, it has added to the existing financial sector vulnerabilities (Table 6). The COVID-19 financial support policies are set to expire in December 2022. As the unwinding of these policies may lead to a gradual realization in the losses in the banking system, asset classifications, in particular restructured loans, should accurately reflect current balance sheet risks and distressed assets be adequately provisioned. To avoid cliff effects, BB will continue to support individuals and businesses that are most at risks under its regular financial support scheme (MEFP, ¶23).

25. A holistic and time bound non-performing loan (NPL) resolution strategy would help address bank balance sheet weaknesses (MEFP, ¶24 and ¶25).

  • Identifying distressed assets. The classification for NPLs should be aligned with international best practices. Restarting reporting banks' rescheduled loans in the annual financial stability report along with NPLs will be a good start (SB for end-June 2023). Some elements of Basel III have been adopted, but with extensive exceptions. Going forward, fully adopting the Basel III standards for measurement of banks' financial statement and provision framework and the adoption of the International Financial Reporting Standard 9 (IFRS 9) will help understand the actual extent of the problem.

  • Formulating the NPL resolution strategy. BB has committed to develop bank-specific NPL resolution and capital restoration strategies and establish effective monitoring and enforcement framework, underpinned by memorandums of understanding (MOUs), to oversee concrete actions adopted by banks. These MOUs will target a reduction of the average NPL ratios to below 10 percent for state-owned commercial banks (SoCBs) and below 5 percent for private commercial banks (PCBs), while increasing capital adequacy ratios and provisioning coverages of SoCBs and PCBs to statutory minimum by 2026.

26. Further strengthening monitoring and supervision of the banking sector is needed to enhance financial sector resilience. Structural weaknesses in supervision, regulation, and governance, coupled with high NPLs and low capital in SoCBs, could be a drag on medium-term growth prospects.11 BB will complete the pilot risk-based supervision action plan (SB for end-June 2023) and prioritize actions to provide adequate and timely supervisory data and a forward-looking analysis of bank balance sheet risks in line with the IMF TA recommendations. Extending the current pilot on risk-based supervision to the wider banking sector and implementing it in a timely manner is critical, just as incorporating specific procedures for Islamic banking operations in the assessment tool and the inspection manual. Developing a macroprudential strategy and conducting scenario-based macroprudential stress test would help manage systemic risk (MEFP ¶26).

27. Stronger governance and regulatory framework will strengthen the financial sector and support medium-term growth objectives. Existing policies for nomination and appointment of directors of SoCBs are being examined by an independent committee, which will suggest policy recommendations to strengthen the corporate governance of SoCBs (MEFP, ¶25). The authorities also plan to submit to the Parliament the Bank Company (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with best practices (SB for end-September 2023). The Bankruptcy (Amendment) Act 2020 and the Money Loan Court (Amendment) Act 2003 will be subsequently submitted to the Parliament by June 2024, and the Negotiable Instrument (Amendment) Act 2020 by June 2025 (MEFP, ¶27). These reforms will help modernize the financial sector, improve the legal environment of credit and business activities, enhance the insolvency regime, and facilitate recovery of loans.

28. Development of the domestic capital market will help mobilize long-term financing to support growth objectives. Expanding the mandate of the credit information bureau (CIB) and allowing it to share data with private borrowers will strengthen credit infrastructure and collateral valuation framework (MEFP, ¶26). Gradually reforming NSCs (¶17) and replacing them with marketable wholesale instruments, implementing the MTDS and developing secondary market for government securities will be important (MEFP, ¶28). A roadmap for bond market will be developed through a joint TA between the IMF and the World Bank on Local Currency Bond Market Diagnostic (LCBM).

E. Macro-Structural Policies

29. Creating an enabling environment will help further expand trade and attract FDI. Bangladesh's trade and FDI remain low by most measures. Reducing relatively high non-tariff barriers (NTBs) and domestic protection, improving trade-related energy and transportation infrastructure, addressing regulatory barriers, and ensuring financing to the private sector are key to increasing export competitiveness, expanding international trade, and attracting FDI (MEFP, ¶29). In coordination with DPs, the authorities are working on designing near-to-medium term trade development and FDI reform priorities.

30. Human capital development is crucial to boosting labor productivity and long-term growth potential. Reform efforts to improve education outcomes and address the gaps in educational and vocational training are key to building skills and reducing informality. Upskilling of female workers is also vital to improve productivity as well as to promote gender equity. The program will leverage the efforts of the United Nations and other DPs who are providing technical and financial support to make progress on gender equality, financial deepening, and human capital development as part of Bangladesh's Sustainable Development Goals (SDGs). Deepening financial inclusion, particularly among women, remains important (MEFP, ¶30).

31. Improving governance and reducing vulnerability to corruption would help enhance the business climate, thus boosting investment. Enhancing fiscal governance and transparency (¶20) as well as improving the efficiency of the financial sector (¶28) remain crucial for attracting investment. Further digitalization of public services and safeguarding the independence of the Anti-Corruption Commission and the Comptroller Auditor General would help promote transparency and reduce corruption.12 This is especially critical, given the new risks of corruption from climate finance and infrastructure projects. Enhancing information collection would help with fully identifying the ultimate beneficial ownership in the financial sector. Moving toward international best practice for risk-based supervision would help further strengthen the AML/CFT framework and mitigate substantial money laundering (ML) risks, including from cross-border activity and trade-based ML (MEFP, ¶31). A detailed roadmap for this purpose will be developed under an IMF TA.

32. Enhancing data quality and availability will support policy making. With IMF TA, the historical rebased GDP data were published recently and the work on compiling the national account and government finance statistics on a quarterly basis are underway (Annex IV and Table 13). The authorities are committed to publish the new consumer price index using the updated index weights and Household Income and Expenditure (HIES) survey (MEFP, ¶37), and plan to publish the national accounts on a quarterly basis when ready (SB for end-December 2023). Similarly, with the IMF support, the financial soundness indicators using a standard approach and with expanded coverage will be published.

Key Elements of the RSF Arrangement

The RSF will complement reforms under the ECF/EFF by supporting the authorities' efforts in tackling climate change challenges to build resilience and catalyze additional official and private finance.

A. Program Objectives

33. The RSF will improve the climate investment potential (Annex III). With current annual climate-related government spending under 1 percent of GDP against the needed 3 to 4 percent of GDP of financing over the next 15 years, Bangladesh has a significant financing need to meet climate change challenges13 (see Table 2 in Annex III for details). Similar to SDGs financing gaps, any climate financing gap will be met by not executing spending in this area. RSF resource will expand the fiscal space to help finance priorities identified in the Bangladesh Delta Plan (BDP2100) and the National Adaptation Plan (NAP), by crowding in other financing, substituting for more expensive domestic financing, improving public debt dynamics, and reducing BoP pressures from import-intensive climate investment. The RSF arrangement is also expected to further strengthen financing prospects by catalyzing additional policy- and project-based lending through DPs. For instance, the WB and the ADB are considering new budget support programs to help with the implementation of various climate-related reforms. The authorities plan to mobilize an additional US$8 billion through public green bonds under BDP2100 and private green financing under the Mujib Climate Prosperity Plan (MCPP). The RSF reforms will not only help strengthen the institutional setup to enable large-scale climate investments, but also support the authorities' plan to mobilize additional private climate financing as well as enhance financial sector assessment of climate risks.

B. Climate Change Policies

34. Bangladesh is among the most vulnerable countries to climate change and natural disasters (Text Chart). The projected damage from tropical cyclones in Bangladesh is estimated at between 1.5 and 6 percent of GDP.14 Slow on-set climate change is forecast to result in total economic costs of 2 percent of annual GDP by 2050 under a business-as-usual scenario and up to 9.4 percent in 2100.15 These climate-related events could disrupt economic activity and cause substantial long-term damage to the economy, putting pressures on the currency, reserves, and public debt, with the effects disproportionately felt by the poor and vulnerable groups (Annex III).

uA001fig4

Bangladesh: Climate Change

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Global Climate Risks; INFORM Global Risks Index; and WRI Climate Data Explorer.1/ Including land-use change and forestry.

35. Bangladesh has made significant progress toward its national climate mitigation and adaptation objectives and has put in place a range of policy tools.

  • Mitigation. Despite its small contribution to global emissions, Bangladesh's updated Nationally Determined Contribution (NDC) makes a robust commitment to reduce greenhouse gas (GHG) emissions by 6.7 percent (with its own efforts), and up to 21.9 percent (with international support) below business-as-usual in 2030. The NDC is being implemented through green transition priorities such as scaling up renewable energy (RE)16, promoting electric vehicles and clean public transport, enhancing energy efficiency in buildings and industrial facilities, and measures to reduce emissions from the agriculture, land-use.17 About 80 percent of Bangladesh's energy supply comes from fossil fuel, but over two-third of this is natural gas.18 At COP26, the authorities announced the cancellation of 10 coal-fired power plant projects approximating US$12 billion in foreign investment and set the target of generating at least 40 percent of total electricity from RE sources by 2041. A new integrated energy and power sector master plan is being prepared to support this goal. Plans to import RE-based electricity from neighboring countries are being finalized and will further help shift electricity generation away from fossil fuel sources. The recent increases in natural gas and fuel prices are also welcome first steps toward market-based and transparent energy pricing (Box 2). The authorities are committed not to increase untargeted subsidies on natural gas-generated energy and electricity as a percentage of GDP during the program period and will consider different options of gradually reducing them.

  • Adaptation. The cabinet, on 31st October 2022, approved the NAP that outlines the adaptation investment requirement and sets out a comprehensive action roadmap across relevant sectors, supported by the BDP 2100 and the MCPP. The implementation of the National Plan for Disaster Management contributes significantly to Bangladesh's climate adaptation agenda. Since 2014, the authorities have put in place a range of climate-related policy tools, notably the Climate Fiscal Framework (CFF), climate change budget tagging, sustainable finance policy for banks and financial institutions and green taxonomy (Annex III).

Fossil Fuel Subsidies in Bangladesh

To further enhance climate mitigation, Bangladesh has ramped up its reform efforts toward transparent market-based pricing of fossil fuels. Reflecting elevated global commodity prices, subsidies for gas and electricity are expected to reach about 0.9 percent of GDP in FY2023 compared to 0.4 percent of GDP in FY2021 (see Box Table 1). To alleviate budget pressures, the authorities in August 2022 raised prices for petrol and octane by close to 50 percent, and prices for diesel and kerosene by 36 percent on top of a 23 percent increases in November 2021, helping keep domestic fuel prices broadly aligned with international prices. Natural gas tariffs were also hiked by 23 percent on average in June 2022 and bulk electricity tariffs were raised by 20 percent in November 2022. Going forward, the authorities plan to regularly adjust petroleum product prices via a formula-based pricing mechanism (SB for end-December 2023, ¶16 and RM2 for end-December 2023) and thereby lock in zero structural subsidies for petroleum products. These actions are expected to help ease budget pressures for energy subsidies and encourage more efficient fuel consumption going forward. In addition, barring further global price shocks, the authorities have committed to not increase these subsidies during the program and explore options to gradually reduce them further, while scaling up social protection schemes (MEFP, ¶33).

Box Table 1.

Bangladesh: Energy-Related Budget Subsidies

(Percent of GDP)

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Sources: Bangladesh authorities; and IMF staff calculations.

36. Additional efforts to strengthen institutions and enhance climate-spending efficiency would help meet climate objectives and mobilize climate finance, particularly from private sources. Guided by the World Bank's Country Climate and Development Report (CCDR) and the IMF's Climate Public Investment Management Assessment (C-PIMA)19, RSF reforms aim at (i) prioritizing and allocating financing for BDP2100, (ii) scaling up climate-smart investment across sectors, (iii) creating an enabling environment and strengthening the institutional framework through better public financial management (PFM) and public investment management (PIM) practices, and (iv) leveraging different financing instruments. Building on the authorities' reform priorities, the RSF reform measures focus on critical areas exploiting synergies and complementing the operations of the World Bank and other DPs (Text Chart). These reforms will help address Bangladesh-specific needs such as boosting the resilience of coastal economy and infrastructure and complementing with nature-based solutions, mitigating the risks and impacts of floods and tropical cyclones, reducing the infrastructure deficit and promoting resilient infrastructure, as well as supporting climate mitigation policy. IMF capacity development (CD), in conjunction with CD provided by other DPs, will support the implementation of these reforms.

37. Policies should prioritize climate-responsive PIM reforms to make infrastructure investment green and resilient. Efficient, green and resilient public investment has multiple benefits, as it creates jobs, spurs growth and stimulates private sector investment and other innovative financing. The authorities will integrate climate considerations in the appraisal and selection of capital projects to improve the prioritization and allocation of resources for the BDP 2100 and scaling up of climate-smart investment as envisaged in the NAP (RM6 for end-December 2024 and RM9 for end-June 2025). The authorities will establish a public asset register module of iBAS++ and will incorporate information on climate-related risks/damages and vulnerability of new public assets to the module (RM10 for end-December 2025). To help leverage private sector climate finance and ensure that public private partnership (PPP) vehicle supports national climate goals, they further plan to update the PPP policy and framework to reflect climate risks and opportunities and develop accompanying guidelines for PPP project proponents and developers (RM8 for end-June 2025 and MEFP, ¶34).

uA001fig5

Bangladesh: Proposed RSF Reform Priorities and Measures

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: IMF Staff.

38. Further improving climate-related fiscal management is a key for an integrated government strategy to combat climate change. The implementation of the CFF is key to the success of Bangladesh's climate strategies and will lay the foundation for sound and transparent climate-sensitive PFM processes. In this context, the authorities will adopt a sustainable public procurement policy paper and an associated action plan to integrate climate and green dimensions into the public procurement process (RM1 for end-September 2023). The Ministry of Finance (MoF) will also develop and implement methodologies for the analysis of macro-fiscal risks from climate change and publish such information in the Medium-Term Macroeconomic Policy Statement (MTMPS) (RM5 for end-June 2024). To protect the most vulnerable, the authorities will develop a national disaster risk financing strategy that integrates social assistance measures (RM4 for end-June 2024 and MEFP, ¶35).

39. Better management of climate-related risks will enhance financial sector resilience and help scale up climate finance. Financial institutions play an important role in mobilizing private climate finance but face significant physical and transition risks.20 To this end, BB will develop and adopt guidelines for banks and financial institutions on reporting and disclosure of climate-related risks in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) (RM3 for end-December 2023).21 To strengthen financial sector resilience, BB will conduct and publish climate stress testing for the overall financial system and update the Guidelines on Stress Testing for banks and financial institutions to include climate change considerations (RM8 for end-December 2024).22 To further promote the mobilization of climate finance and extend the framework to include climate adaptation, BB will update the green bond policy paper, particularly the annex on green taxonomy to be fully aligned with the NAP's strategic investment priorities (RM11 for end-December 2025 and MEFP, ¶36).

Program Modalities

40. Access. Bangladesh is eligible to access the RSF.23 Staff recommends a 42-month blended ECF/EFF arrangement,24 concurrent with an RSF arrangement.

  • ECF/EFF. Given the current outlook and on the strength of envisaged reforms, the proposed total access is SDR 2,468.46 million (231.4 percent of quota) under the ECF/EFF (of which, SDR 822.82 million or 77.1 percent of quota under the ECF and SDR 1,645.64 million or 154.3 percent of quota under the EFF). Semi-annual program reviews and seven equal disbursements are envisaged for ECF/EFF, beginning with the program approval (Table 7A).

  • RSF. Staff proposes access at SDR 1,000 million (93.8 percent of quota, the maximum nominal limit) under the RSF. The proposed high RSF access is based on the strength and ambition of proposed reforms, Bangladesh's large BoP needs associated with the implementation of reforms, its strong track record of climate-related policy reforms (¶35 and Annex III), and sound capacity to repay the Fund. RSF disbursements are envisaged as in Table 7B.

Staff supports the authorities' request for the use of Fund resources (the total of each RSF disbursement and part of ECF/EFF disbursement) for budget support to expand the government's resource envelop to help finance climate priorities and boost social and capital spending, while planned reforms take hold.

41. Financing assurances. The ECF/EFF program is fully financed, without RSF disbursements, with firm commitments of financing for the first 12 months and with good prospects of financing for the remainder of its duration (see Table 9 for details).

42. Capacity to repay (Table 10). Bangladesh's capacity to repay the Fund is adequate and the authorities' track record of servicing IMF debt is strong. Total Fund Credit Outstanding is mostly below or at the bottom of the interquartile range for PRGT borrowing countries, peaking in 2026 at SDR 3.6 billion, equivalent to 0.8 percent of GDP (6.0 percent of exports of goods and services or about 10 percent of gross FX reserves). Total obligations to the Fund peak at 0.1 percent of GDP (0.5 percent of exports of goods and services or 1.0 percent of gross FX reserves) in 2024. The risk of debt distress is assessed to be low and the debt outlook is expected to remain sustainable.

43. Safeguards assessment. An updated safeguards assessment was completed in January 2022. The assessment found capacity challenges that impact internal audit and financial reporting. The BB also needs to strengthen currency operations and IT environment. BB is establishing sound procedures for the compilation and reporting of official reserve assets (SB for end-June 2023). In addition, BB is making progress on implementing the safeguards recommendations and will also engage an international audit firm to conduct external audits, as done under the previous Fund-supported program during 2012–2015.

44. Risks. The main risks to the program are limited scope to relax fiscal or monetary policy in the event of adverse real shocks, given narrow fiscal space, high inflation, and reserve losses. Weaknesses in implementation capacity, political opposition to some proposed reforms, and political risk due to national elections tentatively planned for December 2023 are other risks. These risks will be mitigated by continued engagement and conditionality under the program, as well as contingency fiscal measures such as reprioritization of non-critical spending.

45. Other issue. During the mission, staff learned of a multiple currency practice subject to Fund jurisdiction under Article VIII that arises as a result of an internal governmental exchange rate used for (i.e. transactions by BB on behalf of the government) that differs by more than 2 percent from the prevailing market exchange rate. The measure is not maintained primarily for BoP reasons. The authorities request—and staff support—that the Executive Board approves this measure, as (i) the Bangladesh authorities have committed to a credible strategy to unify the governmental FX rate with the prevailing market FX rate within a reasonable period and is thus temporary (ii) the measure does not materially impede Bangladesh's BoP adjustment, and (iii) does not harm the interests of other members or discriminate among members.

Staff Appraisal

46. Multiple external shocks have weighed significantly on the Bangladesh economy. The spillovers from Russia's war in Ukraine has interrupted the pandemic recovery and intensified external pressures, making macroeconomic management more challenging. Global headwinds are likely to keep balance of payments under pressure in the coming years. Uncertainties surrounding the outlook remain large and risks are tilted to the downside. The authorities acknowledged that measures adopted to restore macroeconomic stability are temporary and need to be unwound to safeguard both near-term growth and medium-term economic potential.

47. While addressing immediate challenges, the authorities need to expedite their ambitious reform agenda to achieve a more resilient, inclusive, and sustainable growth. The economic reform priorities should focus on increasing fiscal space to scale up social and development spending, modernizing the fiscal and monetary policy frameworks, strengthening the financial sector, improving governance, and creating enabling environments for a sustainable and private sector-led growth. Tackling climate change challenges remains important for long-term macroeconomic stability.

48. The ECF/EFF and RSF arrangements support the authorities' priorities. The ECF/EFF arrangement will help restore macroeconomic stability and rebuild buffers, while advancing long overdue economic reforms. Access under the RSF would underpin reforms to address the significant adaptation challenges facing Bangladesh, while helping catalyze additional financing and enhancing climate mitigation efforts.

49. Fiscal discipline has kept Bangladesh at a low risk of debt distress, but higher revenues and enhanced fiscal management are needed to meet social and development objectives. The implementation of the domestic revenue mobilization strategy that relies on both tax policy and revenue administration reforms is expected to sustainably expand the budget envelope for Bangladesh's large development needs, without jeopardizing its prudent fiscal and debt strategy. Fiscal reforms to strengthen the management of public finance, investment, and debt is expected to yield better spending efficiency, governance, and transparency.

50. Monetary and exchange rate policies should focus on containing inflation and rebuilding reserves. The monetary policy stance should be guided by the inflation outlook. Greater exchange rate flexibility should be allowed to help strengthen external buffers. Efforts to modernize monetary policy framework and operations should continue, including to adopt an interest rate corridor, phase out interest rate caps, and improve monetary policy communication.

51. Strengthening the financial sector and developing capital markets are needed to support the authorities' long-term goals. Further reforms to strengthen corporate governance, improve supervision and regulation, and enhance the legal framework remain important to modernize the financial sector and improve credit and business activities. Capital market development is needed to meet long-term financing needs of the economy.

52. Expanding trade and FDI and boosting labor productivity are crucial to increase long-term growth potential. Reform priorities include improving the investment climate, reducing tariff and non-tariff barriers, improving trade-related infrastructure, as well as building skills and reducing informality.

53. Building resilience to climate change and natural disasters will help mitigate macroeconomic and fiscal risks. Additional efforts to strengthen institutions and enhance climate spending efficiency would help meet the authorities' climate objectives. Better management of climate-related risks will enhance financial sector resilience and help mobilize climate finance.

54. Based on the protracted balance of payment needs, substantial climate-related financing requirements, and strong policy commitments, staff supports the authorities' request for a 42-month arrangement under the ECF/EFF and RSF. IMF-supported program will help mitigate the adverse impact of the crisis on the people, support the authorities' aspirations to become an upper-middle income country, and build resilience to climate change shocks that could threaten macroeconomic stability.

Figure 1.
Figure 1.

Bangladesh: Recent Developments: Pressure from External Shock

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Bureau of Statistics; Bangladesh Bank; Haver Analytics, Inc.; CEIC Data Company Limitted; and IMF staff calculations.
Figure 2.
Figure 2.

Bangladesh: Fiscal Developments

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Ministry of Finance; World Economic Outlook; IMF FAD Expenditure Assessment Tool (EAT); and IMF staff estimates.
Figure 3.
Figure 3.

Bangladesh: Monetary and Financial Market Developments

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Bureau of Statistics; Bangladesh Bank; Haver Analytics, Inc.; CEIC Data Company Limitted; and IMF staff calculations.
Figure 4.
Figure 4.

Bangladesh: Banking Sector Developments

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: Bangladesh Bank.
Figure 5.
Figure 5.

Bangladesh: External Sector Developments

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Authorities; Bangladesh Bank; Haver Analytics, Inc.; FRED; Bloomberg LP; INS; and IMF staff estimates.
Table 2.

Bangladesh: Selected Economic Indicators, FY2019–27 1/

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Sources: Bangladesh authorities; and IMF staff estimates and projections. 1/ Fiscal yearbegins on July 1 and ends on June 30. 2/ Includes central government's gross debt, including debt owed to the IMF, plus domestic bank borrowing by nonfinancial public sector and public enterprises' external borrowing supported by government guarantees, including short-term oil-related suppliers' credits. 3/ Program financing (+ purchases, - repurchases) is included under the Financial Account, with consistent sign conversion.
Table 3a.

Bangladesh: Balance of Payments, FY2019–27 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Bangladesh authorities; and IMF staff estimates and projections. 1/ Fiscal year begins July 1 and ends on June 30. 2/ Imports are based on customs data. 3/ Excludes official capital grants reported in the capital account. 4/ Of identified amounts some are pending approval and some are to be disbursed in 2020 after June. 5/ Gross and net international reserves are per BPM6 definition and exclude valuation adjustments. Net international reserves are reported at market exchange rates, and is calculated as the gross reserves minus FX liabilities.
Table 3b.

Bangladesh: Balance of Payments, FY2019–27 1/

(In percent of GDP)

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Sources: Bangladesh authorities; and IMF staff estimates and projections. 1/ Fiscal year begins July 1 and ends on June 30. 2/ Imports are based on customs data. 3/ Excludes official capital grants reported in the capital account.
Table 4a.

Bangladesh: Central Government Operations, FY2019–27 1/

(In billions of taka, unless otherwise indicated)

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Sources: Bangladesh authorities; and IMF staff estimates and projections.

Fiscal year begins July 1 and ends June 30. Cash basis, unless otherwise specified.

Comprise budget allocations for safety net programs and other social-related spending, pensions and gratuities, and direct subsidies for food and to the agriculture and export sectors. Other subsidy-related costs (i.e., lending to large energy-related state-owned enterprises (SOEs)) are included in net lending.

Excludes net financing of autonomous and semi-autonomous government bodies, and government lending funds. Includes special bonds issued to the commercial banks for the noncash issued to the state-owned securitization of past subsidy-related loans made to Bangladesh Petroleum Corporation, consistent with the earlier treatment in the fiscal accounts of similar operations.

Includes food account surplus (+)/deficit (-) and extraordinary expenditures.

Includes National Savings Certificates, net purchase of Treausry securities by nonbank entities, and financing through the General Provident Fund.

Table 4b.

Bangladesh: Central Government Operations, FY2019–27 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Bangladesh authorities; and IMF staff estimates and projections. 1/ Fiscal year begins July 1 and ends June 30. Cash basis. unless otherwise specified. 2/ Comprise budget allocations for safety net programs and other social-related spending, pensions and gratuities, and direct subsidies for food and to the agriculture and export sectors. Other subsidy-related costs (i.e., lending to large energy-related state-owned enterprises (SOEs)) are included in net lending. 3/ Excludes net financing of autonomous and semi-autonomous government bodies, and government lending funds. Includes special bonds issued to the commercial banks for the noncash issued to the state-owned securitization of past subsidy-related loans made to Bangladesh Petroleum Corporation, consistent with the earlier treatment in the fiscal accounts of similar operations. 4/ Includes food account surplus (+)/deficit (-) and extraordinary expenditures. 5/ Includes National Savings Certificates, net purchase of Treausry securities by nonbank entities, and financing through the General Provident Fund.
Table 5.

Bangladesh: Monetary Accounts, FY2019–27 1/

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Sources: Bangladesh authorities; and IMF staff estimates and projections 1/ Fiscal year in Bangladesh begins July 1 and ends June 30. 2/ Includes special bonds issued to the commercial banks for the noncash issued to the state-owned securitization of past subsidy-related loans made to Bangladesh Petroleum Corporation. Excludes government lending fund and net credit to autonomous and semi-autonomous government bodies. Excluded items are included in “Other items. net.” 3/ Liabilities arising from banks' foreign currency clearing accounts at BB and nonbank deposits at BB are included in “Other items, net.”
Table 6.

Bangladesh: Financial Soundness Indicators, FY2015-21 1/

(In percent)

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Source: Bangladesh Bank.

Fiscal year in Bangladesh begins July 1 and ends June 30.

Table 7a.

Bangladesh: Proposed Schedule of Disbursement and Timing of ECF/EFF Arrangement Reviews

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Source: IMF.
Table 7b.

Bangladesh: Proposed Schedule of Disbursement and Timing of RSF Arrangement Reviews

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Source: IMF.
Table 8.

Bangladesh: Quantitative Performance Criteria (PC) and Indicative Targets (IT), First Two Reviews 1/2/

(In billions of Taka, unless otherwise indicated)

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Sources: Bangladesh's authorities; and IMF staff estimates/projections.

Fiscal year starts in July and ends in June.

The quantitative targets, indicative targets and program exchange rates are defined in the Technical Memorandum of Understanding (TMU).

Program starting point assumes Board approval in January 2023.

Net international reserves are gross reserves (based on BPM6 definition) minus the central bank FX liabilities and reserves earmarked for quasi-fiscal activities.

Including grants

This quantitative target is applied on a continuous basis.

Social spending that is domestically financed.

Capital investment from annual development program that is domestically financed.

Quarterly target is projected in line with historical quarterly outturns and seasonality patterns reflecting backloaded disbursements.

Table 9.

Bangladesh: External Financing Requirements and Sources, FY2023–26 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Bangladesh's authorities; and IMF staff projections.

Fiscal year in Bangladesh begins July 1 and ends June 30.

Of the prospective financing amounts some are pending approval.

Includes Japan International Cooperation Agency and Asian Infrastructure Investment Bank.

Table 10.

Bangladesh: Indicators of Fund Credit, 2022–46 1/

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Source: IMF staff projections.

Fiscal year in Bangladesh begins July 1 and ends June 30.

Table 11.

Bangladesh: Proposed Structural Benchmarks: 12-Months After Board Approval

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Table 12.

Bangladesh: Proposed Reform Measures Under RSF

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Green Book refers to the Ministry of Planning, 2022, “Guidelines for formulation, processing, approval and revision of development projects in the public sector.”

Table 13.

Bangladesh: Capacity Development Activities to Support Program Priorities

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Annex I. External Sector Assessment1,2

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The EBA-lite methodology estimated Bangladesh's current account norm of -3.4 percent of GDP.

Annex II. Risk Assessment Matrix1/

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Annex III. Building Climate Resilience

A. Climate Change Risks and Impacts

1. Bangladesh is among the most vulnerable countries to climate change and natural disasters (Figure 1). Average temperature levels in the country have risen steadily over the last several decades and are projected to increase further in the future. In a high global emission scenario (RCP 8.5)1, Bangladesh is projected to face a 3.6°C increase of mean temperature by 2100 relative to the 1986–2005 baseline.2 This would likely result in increased frequency of prolonged high heat spells and drought, while flooding would be exacerbated by intensified extreme rainfall and tropical cyclones. Sea level rise also poses a significant risk to infrastructure and population that are concentrated in the coastal areas. These climate-related events could result in substantial damage to the country's economy and loss of life and livelihoods, with disproportionate impact on the poor and vulnerable groups. Climate change and natural disasters are also expected to cause serious effects on Bangladesh's financial sector. For instance, an extreme flood event is estimated to result in financial losses of about US$3–5 billion (3–5 percent of total outstanding loans), with the losses projected to increase over time.3

Figure 1.
Figure 1.

Bangladesh: Countries with High Natural Hazard and Climate Risk

(Ranking 1 to 10; 1 is the most vulnerable)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: Global Climate Risks, INFORM Global Risks Index

2. Climate change risks imply serious adverse macroeconomic and social impacts in Bangladesh. Bangladesh has suffered high and sustained damages from natural disasters over the past several decades. Tropical cyclones are estimated to cause economic losses of about US$1 billion per year in Bangladesh (equivalent to 0.7 percent of GDP), where Cyclone Sidr in 2007 (with upper estimate of US$3.8 billion in losses) and Cyclone Gorky in 1991 (upper estimate of US$3.0 billion in losses) have been the most devastating on record. In 2017, extreme flooding affected 8 million people and led to severe crop destruction, prompting a sharp rise in food prices and imports. This largely contributed to the deterioration of the current account deficit, with direct costs estimated at US$750 million (about 0.3 percent of GDP), turning the overall Balance of Payments (BoP) from a surplus to a deficit in that fiscal year.4 Looking ahead, the expected damages from flooding are also significant, ranging between US$6 billion and US$25.3 billion by 2050 under RCP 4.5 and 8.5 scenarios (or 1.5 percent and 6 percent of annual GDP), respectively.5 Slow on-set climate change, mainly through the effects of warming and sea level rise, is projected to result in total economic cost of 2 percent of GDP by 2050 under a business-as-usual scenario and up to 9.4 percent in 2100 consistent with RCP8.5.6 Climate change is likely to slow down progress on poverty reduction, as the poor are exposed to overlapping shocks and have low adaptive capacity. Among South Asian countries, Bangladesh is the most vulnerable to climate migration, with 4.1 million people estimated to have been displaced in 2019. By mid-century, the number of internal climate migrants in Bangladesh could rise to 13.3 million with higher impacts on women. In addition, the value of asset at risk is projected to double due to future sea level rise.

uA001app2fig1a

Bangladesh: Frequency and Damages of Natural Disasters

(In US$ million)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: EMDAT 2022 Database.

B. National Climate Change Strategy

3. Bangladesh has made significant progress toward its national climate change objectives (Table 1)

  • Mitigation. Despite its small contribution to global emissions (Text chart, paragraph 34), Bangladesh's updated Nationally Determined Contribution (NDC) makes a robust commitment to reduce greenhouse gas (GHG) emissions by 6.7 percent (with its own efforts), and up to 21.9 percent (with international support) below business-as-usual in 2030. The NDC is being implemented through green transition priorities such as scaling up renewable energy (RE), promoting electric vehicles and clean public transport, and enhancing energy efficiency in buildings and industrial facilities, and measures to reduce emissions from the agriculture, land-use, and forestry sectors. About 80 percent of Bangladesh's energy supply comes from fossil fuel, but over two-third of this is natural gas—a relatively clean transition fuel. At COP26, the authorities announced the cancellation of 10 coal-fired power plant projects approximating US$12 billion in foreign investment, and set the target of generating at least 40 percent of total electricity from RE sources by 2041. A new integrated energy and power sector master plan is being prepared to support this goal. Plans to import RE-based electricity from neighboring countries are being finalized and will further help shift electricity generation away from fossil fuel sources. The recent increases in natural gas and fuel prices are also welcome first steps toward market-based and transparent energy pricing. The annual costs of air pollution in Bangladesh are estimated at around 9 percent of GDP; the actions planned as part of the NDC will help avoid these significant costs.7

  • Adaptation. The recently adopted National Adaptation Plan (NAP) sets out a comprehensive implementation roadmap and investment plan on the adaptation agenda. In addition, the Bangladesh Delta Plan (BDP) 2100 outlines adaptive investment needs for water resource management and flood control measures, while the Mujib Climate Prosperity Plan (MCPP) targets raising resources for climate risk reduction for the most vulnerable groups and for a just transition. The 8th Five Year Plan will also anchor the economic policies needed to deliver climate-related objectives over the medium term.

4. Bangladesh is in many ways at the forefront of preparing for climate change, but more is needed.

  • The Climate Fiscal Framework (CFF)—a pioneering approach—was adopted in 2014. It sets out an institutional framework for embedding climate change aspects in Bangladesh's Public Financial Management (PFM) systems and the budget setting process under the Medium-Term Budget Framework (MTBF). Importantly, the CFF is a main tool to facilitate the mobilization of both domestic and international sources of climate finance and help catalyze new climate finance. The CFF has recently been updated to reflect the changing landscape of climate finance and policies, from domestic and international perspectives, as well as to incorporate the crucial role of the financial sector and private sector finance.

  • Climate Change Budget Tagging has been implemented since 2018. The climate budget tagging exercise has been an instrumental tool for Bangladesh to plan and raise climate finance in the overall CFF framework in response to the national climate change goals and other climate relevant investment plans such as the BDP2100 and the MCPP.

  • Bangladesh Climate Change Trust Fund (BCCTF) is the first national climate fund established by a Least Developed Country for institutionalizing national climate finance. The BCCTF has been operationalized since 2010 and is currently managed by the Bangladesh Climate Change Trust and the Government of Bangladesh. It prioritizes and funds projects consistent with the Bangladesh Climate Change Strategy and Action Plan.

  • Sustainable Finance. Bangladesh Bank (BB) joined the Sustainable Banking and Finance Network (SBFN) in 2012 and set the minimum annual target of green finance at 5 percent of total loan disbursement for all financial institutions in 2016. BB also issued the Sustainable Finance Policy for Banks and Financial Institutions in 2020, and the Policy on Green Bond Financing (including Green Taxonomy and Green Bond framework) in 2022. Capital market instruments for promoting green finance are being developed with the country's first two corporate green bonds issued in 2022. In practice, however, Bangladesh's green banking remains limited and green bond market development lags its peers (only 0.5 percent is green, compared to the 5 percent target).

Nevertheless, these policy tools need to be complemented by institutional reforms, funding strategies, enabling macro and financial policies, as well as close coordination among institutions and stakeholders across the various sectors.

Table 1.

Bangladesh: Climate Change Strategies and Plans in Bangladesh

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Sources: Bangladesh's authorities and IMF staff.

C. Costs of Climate Change Mitigation and Adaptation Investment

5. The government has gradually ramped up its climate change-related spending and financing. Bangladesh's climate-related budget allocation across ministries has more than doubled from US$1.4 billion in FY16 to US$2.9 billion in FY22. This constitutes about 7.3 percent of the total budget in FY22, with the largest amount dedicated to climate-related food security, social protection, and health objectives (39 percent of total), followed by climate resilient infrastructure (26 percent), and climate mitigation and low-carbon development measures (17 percent). In addition to the government budget, Bangladesh established the BCCTF and has accessed other international climate financing sources including the Green Climate Fund, the Climate Investment Fund, the Global Environmental Facility, and climate financing through multilateral development banks. However, private green finance (such as through corporate green bonds) is still at a nascent stage of development.

6. Nevertheless, climate investment requirements are large. Table 2 presents Bangladesh's climate related investment needs under different key plans. While there are overlaps between these plans, the overall picture suggests substantial needs for both climate adaptation and mitigation investments. The unconditional NDC mitigation target requires about US$3.2 billion per annum of domestic resources by 2030 (approximately 0.8 percent of FY21 GDP), while meeting the ambitious conditional target would require additional US$14.4 billion per year (3.5 percent of FY21 GDP) by 2030—highlighting the criticality of international financial support.8 Climate adaptation finance needs are also significant. The delivery of climate resilient water resource management, flood prevention, and water supply and sanitation infrastructure planned under the BDP2100 is estimated to amount to US$3.8 billion per year by 2030. The MCPP also suggests large investment needs, with the adaptation component (including climate-smart agriculture, local adaptation, disaster risk financing, and BDP2100 resilience bonds) requiring US$6.4 billion per year and the mitigation component (with a focus on renewable energy, energy efficiency, and clean transportation) requiring US$3.6 billion per year by 2030.

7. Closing the financing gap is a major challenge for Bangladesh. The consolidated cost of climate related investment requirements under key plans would amount to an annual investment of about 3 to 7 percent of GDP by 2030 (Table 2). Accounting for potential overlapping of investment initiatives as well as differences in methodologies and forecast errors around the estimated costs, the World Bank's Country Climate and Development Report (CCDR) on Bangladesh suggests the incremental costs of climate-related investment programs would likely reach 3 to 4 percent of GDP annually over the next 15 years. Given that the current climate-related government spending was just under 1 percent of GDP, Bangladesh has a significant financing gap between its ambitious climate change investment plans and the available funding realized in recent years.

uA001fig01

Bangladesh: Climate Budget Allocation and Expenditure

(ln US$ Billion)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: Ministry of Finance's Climate Financing for Sustainable Development: Budget Report.
Table 2.

Bangladesh: Climate Related Investment Requirements Under Key Plans

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Source: World Bank CCDR.

D. Macro-Fiscal Implications of Climate Change Policies9

8. Bangladesh's exposures to recurrent natural disasters and climate change incurs repeated economic losses with fiscal implications. Bangladesh experienced direct economic losses from natural disasters on average of around 5.6 percent of GDP annually over the past three decades. Natural disasters destroy capital and reduce output in the short run. Government spending needs will rise due to reconstruction costs and fiscal transfers to support those affected, while the disruptions of economic activities will lessen government revenues. As a result, the fiscal deficit could deteriorate, and public debt rise. Additionally, large reconstruction needs would worsen the BoP and put significant pressure on reserves and external sustainability. Overtime, the multifaceted impact of climate change is particularly challenging, where higher frequency and intensity of the disasters would likely aggravate the disaster-related macroeconomic and fiscal implications and result in a gradual permanent reduction in productivity. Bangladesh is assessed as being at a low risk of overall and external debt distress; however, such adverse impacts of natural disasters and climate change could pose significant fiscal risks to Bangladesh.

9. Accelerating investment in adaptation infrastructure could help buttress a green recovery from the pandemic, mitigate the negative impact of natural disasters, and reduce macroeconomic and fiscal risks for Bangladesh. The potential benefit of adaptation investment is illustrated through model simulations using the IMF DIGNAD model (Figure 2 and Box 1). Investing an additional 3 percent of GDP in physical infrastructure that is capable of withstanding natural disasters—so-called adaptation infrastructure—for the next five years would not only save Bangladesh about 3 percent of GDP in output losses when disaster hits, but scaling up adaptation investment in the near term would also help support the economic recovery from the pandemic. Public debt would be expected to stabilize below 45 percent of GDP, similar to a baseline without additional adaptation investment, though adaptation investment would contribute to a declining debt trajectory over the long run, due to smaller and less persistent output losses and lower post-disaster reconstruction costs.

Figure 2.
Figure 2.

Bangladesh: Simulation of Impact of Ex-ante Adaptation Investment

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Source: IMF staff estimates.

10. Improved public investment management (PIM) and efficiency could further lessen the growth-debt tradeoff for adaptation investment. In practice, the execution of sizeable public investment in adaptation will likely face challenges similar to other public investments, which typically carrying large efficiency losses. Reaping the full benefits of public adaptation projects will thus require institutional reforms and capacity building to enhance the quality and efficiency of public investment and reduce leakages. To illustrate, if PIM efficiency for Bangladesh improves from the current level to the median level among Asian emerging economies, output resilience against natural disasters would be further strengthened and the public debt paths would be more favorable relative to the “just-investing” scenario. The results underscore the importance of PIM reforms that could help amplify the benefits of adaptation investment.

E. Financing Needs and RSF Arrangement

11. Current commitments for climate financing have fallen short of projected financing requirements. The Government of Bangladesh (GoB) calls for additional public and private financing of at least 3.3 percent of GDP by 2025 under its climate plans including the 2021 unconditional NDC and the BDP2100. Nevertheless, the current financing plans and commitments are not adequate to fulfill Bangladesh's large climate investment needs, entailing financing needs of over 2 percent of GDP annually (Text chart).

uA001fig02

Bangladesh: Climate Financing Requirements and Sources

(Percent of GDP)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: GoB, GCF, World Bank's CCDR.1/ Assuming banks were to meet the green finance target at 5 percent of total loan disbursement for all financial institutions.

12. The arrangement under the Fund-supported RSF is expected to support Bangladesh's imminent climate financing needs, while strengthening reform efforts to attract additional climate finance. Macro-critical risks associated with climate change and natural disasters are significant for Bangladesh. The RSF arrangement will provide resources to address climate-related vulnerabilities in Bangladesh, that would in turn support a green economic recovery while maintaining sufficient foreign exchange reserve buffers amid multifaceted external shocks. The RSF would substitute for more expensive domestic financing (e.g., very high interest payments from national saving certificate issuance), thus improving the expenditure composition toward development and social spending. Reform measures under the RSF will aim at supporting institutional reforms to enable large-scale climate investments, lower barriers and risks, and improve the investment environment to help catalyze other financing sources beyond the government budget.

13. The proactive use of market-based climate finance could provide additional resources for climate financing. The authorities plan to mobilize about US$1 billion through public green bonds under BDP2100 and around US$7 billion in private green financing under MCPP. Expansion of green financial instruments including sovereign and corporate green bonds will help channel long-term market-based financing toward climate-related investment. In addition, strengthening assessment and management of climate risks in the financial sector will facilitate green lending by banks. This will require an ecosystem that includes investor and issuer expertise, and data, ratings, and assurance providers to ensure the integrity of green finance instruments. Therefore, improved climate disclosures, green taxonomies or equivalent approaches, and supervisory guidance on climate risk management and climate risk scenarios would help manage climate financial risks and develop green financial markets.

DIGNAD Model Simulations for Bangladesh

The Model. The Debt, Investment, Growth, and Natural Disasters (DIGNAD) model demonstrates the benefits of investing ex-ante adaptation in countries exposed to frequent natural disasters. While investing in adaptation infrastructure results initially in higher public debt, it improves resilience of the economy by reducing (i) the adverse impact of natural disasters on output, (ii) damages to physical assets, and (iii) post-disaster fiscal costs for rebuilding and lifeline support.

Model Calibration. DIGNAD is based on a dynamic general equilibrium model as in Marto and others (2018). The model is calibrated in line with data capturing salient features of an economy under consideration. In the model, natural disasters are expected to affect the economy through five channels: (i) damages to public capital, (ii) damages to private capital, (iii) a temporary productivity loss, (iv) a decline in public investment efficiency, and (v) a loss in credit worthiness. The model simulations present the macro-fiscal outcomes associated with public adaptation investment, economic growth, and debt, relative to those at steady state or no policy change.

Scenario Analysis. To illustrate the macro-fiscal implications of climate change adaptation for Bangladesh, the following scenarios could be considered:

  • Scenario 1: No policy change assumes the authorities invest in standard capital infrastructure and do not scale up investment for adaptation infrastructure during years 1–5, then a natural disaster occurs in year 6 and is calibrated to yield nearly 5 percentage decline in GDP, in line with Bangladesh's historical losses from natural disasters.

  • Scenario 2: Adaptation investment assumes an additional investment in adaptation infrastructure of 3 percent of GDP relative to the no additional investment scenario in years 1–5. The adaptation investment is expected to be financed through concessional public borrowing of about a third of total financing and the remaining financing supported by public private partnerships or private financing.

  • Scenario 3: Adaptation investment along with PIM reforms assumes additional public investment in adaptation infrastructure as in Scenario 2 and improved public investment management (PIM) efficiency associated with PIM reforms. The scenario assumes that the efficiency of public investment would improve by around 20 percent as a result of PIM reform implementation, reaching 65 percent in the Asian emerging economies efficiency scenario from Bangladesh's current level of 46 percent.

Annex IV. GDP Rebasing and its Implications

1. The Bangladesh Bureau of Statistics (BBS) published a rebased GDP series in November 2021. The rebased GDP is anchored on 2015/16 prices and uses the most recent and expanded coverage of various surveys, such as the Survey of Real Estate, the Survey of Travel Agents, and the Transportation Survey. The rebased nominal GDP features nearly 20 percent disproportionate revisions throughout FY2016-FY2021.

Table 1.

Bangladesh: GDP at Different Base Years

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Source: Bangladesh Bureau of Statistics

2. Based on the rebased GDP series, the real GDP grew by 6.9 percent in FY2021, 1.9 percentage points higher than its previous estimate of around 5 percent. This was due to an upward revision to consumption, while investment and net export were revised down. On the production side, stronger manufacturing sector growth which accounts for 23.4 percent of GDP largely contributed to higher GDP growth in FY2021. On the other hand, during FY2017-FY2020, real GDP growth was revised down by about 0.4 percentage points on average, amid downward revisions to consumption and productions of the secondary industry, including manufacturing, and construction.

uA001fig03

Bangladesh: Revisions of FY Real GDP Growth

(In percent, y/y)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Bureau of Statistics and IMF Staff Calculations.
uA001fig04

Bangladesh: Contribution to Real GDP Growth, by Expenditure

(ln percent, y/y)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Bureau of Statistics and IMF Staff Calculations
uA001fig05

Bangladesh: Contribution to Real GDP Growth, by Production

(In percent, y/y)

Citation: IMF Staff Country Reports 2023, 066; 10.5089/9798400232206.002.A001

Sources: Bangladesh Bureau of Statistics and IMF Staff Calculations

3. Reflecting an upward revision to nominal GDP, both current account and fiscal deficit to GDP ratios were lower in most years.

Table 2.

Bangladesh: GDP Rebased and its Implications on Key Indicators

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Source: Bangladesh Bureau of Statistics

4. The recent publication of the new GDP series is a welcome step for a better understanding of the macroeconomic development. The SARTTAC continues to assist the authorities with updating the consumer price index (CPI), as well as compilation and release of the quarterly GDP, producer price index (PPI), index of service production (ISP), quantum index of industrial production (QIIP), supply and use table (SUT) and input-output table (IOT).

Annex V. Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries1

(In percent of the indicated variable)

uA001fig06
Notes:1) T = date of arrangement approval. PPG = public and publicly guaranteed.2) Red lines/bars indicate the CtR indicator for the arrangement of interest.3) The median, interquartile range, and comparator bars reflect all UCT arrangements (including blends) approved for PRGT countries between 2010 and 2020.4) PRGT countries in the control group with multiple arrangements are entered as separate events in the database.5) Comparator series is for PRGT arrangements only and runs up to T + 10.6) Debt service obligations to the Fund reflect prospective payments, including for the current year.7) In the case of blenders, the red lines/bars refer to PRGT+GRA. In the case of RST, the red lines/bars refer to PRGT+GRA+RST.8) In section C charts, the red bar for the country being reviewed appears only if it is among the 35 largest peaks.

Appendix I. Letter of Intent

December 23, 2022

Dhaka

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva:

By pursuing prudent macroeconomic policy during the last 13 years, Bangladesh has been able to maintain macroeconomic stability and achieve high economic growth. It registered consistently high GDP growth during 2009–2019 until the outbreak of the COVID-19 pandemic. During this period, Bangladesh has also made steady progress in social development, e.g., reducing poverty, enhancing life expectancy, improving literacy, and increasing per capita food production and calorie intake.

Bangladesh has successfully weathered the adverse impact of the COVID-19 pandemic and associated economic slowdown largely due to the implementation of a range of timely and effective fiscal and monetary stimulus programs. Low infections, very low mortality, and a high vaccination rate enabled a withdrawal of all restrictions on movement and contributed to a strong rebound of economic activities since the latter half of 2021. The government gratefully acknowledges the Balance of Payments (BoP) and budget support assistance of US$732 million received from the IMF to help the economy mitigate the adverse COVID-19 impact.

The ongoing Russia-Ukraine war has, nevertheless, brought new challenges and thwarted the full recovery from the pandemic. The unprecedented surge in prices of energy, food and other essential commodities and the widespread disruption in international supply chains have adversely affected the global economy, including Bangladesh. These challenges have given rise to a BoP financing need that is expected to be persistent in the medium term. First, higher costs of essential imports like oil, gas, and fertilizer and other key import items like consumer goods, industrial raw materials have led to the widening of trade imbalances and depletion in foreign reserves. Second, a rapid rise and continued firmness in commodity prices and associated increases in government subsidies have added to external and fiscal pressures. Third, monetary tightening and economic slowdown in major trading partners of Bangladesh have led to further pressure on our export-oriented economy, especially at a time when remittances have slowed down.

While dealing with these immediate challenges, we fully acknowledge the necessity of achieving further income growth and poverty reduction, while tackling climate-change challenges that could threaten macroeconomic stability. Our strategy of growth with equity has been embraced in many reform measures announced in our annual budget statements as well as in our Eighth Five-Year Plan. Being one of the world's most vulnerable nations to climate change, Bangladesh has set its course toward achieving climate-resilient development by envisioning various strategies and policies, including a Delta Plan and a series of five-year plans. These plans as well as our National Adaptation Plan, recently approved by Cabinet, have identified our country's adaptation and mitigation priorities in the transportation, power, industry, infrastructure, and agriculture sectors, estimating the additional annual climate financing needs at 2–3 percent of GDP.

Against this background, the Government of Bangladesh is requesting access to IMF resources under the Extended Credit Facility (ECF) in the amount of SDR 822.82 million (77.1 percent of quota) and under the Extended Fund Facility (EFF) in the amount of SDR 1,645.64 million (154.3 percent of quota) over a 42-month period. Upon an approval of this request by the IMF Executive Board, we are requesting an immediate disbursement of SDR 352.35 million (33 percent of quota), of which SDR 117.45 million (11 percent of quota) under the ECF and SDR 234.90 million (22 percent of quota) under the EFF. The ECF/EFF arrangement will help mitigate the near-term pressure on the BoP and on the budget and provide a buffer against shocks until our policy adjustments and reform measures take hold. The Fund's assistance is also expected to catalyze support from other development partners to meet our overall financing needs.

To support our climate change efforts and catalyze additional climate finance from other official and private partners, we are also requesting a supplementary arrangement under the Resilience and Sustainability Facility (RSF) in the amount of SDR 1,000 million (93.8 percent of quota). RSF financing will help us tackle significant climate change challenges by supporting our ambitious reform agenda and creating an enabling environment to attract additional climate financing.

The attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) set out the major objectives of the government's reform program for the period 2023–2026. The current 42-month program is centered on upfront policy actions aimed at preserving macroeconomic stability and gradually rebuilding our reserve buffer, while undertaking macro-critical structural reforms to lay the foundations for achieving upper-middle income status by 2031. In keeping with these objectives, efforts will be stepped up to (a) raise revenues to enable higher development and social spending and enhance fiscal governance; (b) modernize the monetary policy framework; (c) reduce financial sector vulnerabilities and develop capital markets; (d) improve the investment climate and boost productivity; and (e) establish an ecosystem to better adapt to climate change. This reform program is intended to raise saving and investment rates, strengthen our external position, and achieve broad-reaching, labor-intensive, and export-led growth.

We believe that our commitments, as outlined in the MEFP, are adequate to achieve program objectives, but we are prepared to take additional measures, as appropriate, for this purpose. This includes commitments not to impose or intensify restrictions on the making of payments and transfers for current international transactions, introduce or modify multiple currency practices, conclude bilateral agreements which are inconsistent with Article VIII, or impose or intensify import restrictions for balance of payments reasons. To ensure strong performance under the ECF/EFF and RSF arrangements, we will maintain a close policy dialogue with the IMF and pursue capacity development, as necessary, from the IMF and other development partners in support of our reform agenda. In keeping with this, we will 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, we will provide the IMF with information in connection with our progress in implementing the policies and achieving the objectives of the program.

As part of the resources will be lent to the Treasury, the Ministry of Finance and Bangladesh Bank have also finalized a Memorandum of Understanding on their respective responsibilities for servicing financial obligations to the Fund.

In keeping with our policy of transparency, we authorize publication of this Letter of Intent and its attachments, as well as the accompanying staff report.

Sincerely yours,

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Attachments

Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

Overview

1. This memorandum lays out the reform program of the government of the People's Republic of Bangladesh under the 42-month Extended Credit Facility (ECF)/Extended Fund Facility (EFF) arrangement and a concurrent Resilience and Sustainability Facility (RSF) arrangement. It lays out the objectives, policy adjustments and structural reforms needed to restore macroeconomic stability, prepare for least developed country (LDC) graduation, and tackle climate change challenges under the ECF/EFF and the RSF arrangements. Our aim is to lay a strong foundation to reach high-income status by 2041, in line with our Vision 2041. Our 8th Five Year Plan (FYP, FY21–25) sets out specific policies intended to narrow the infrastructure deficit, enhance the business environment, and build climate resilience, while mobilizing resources to create gainful employment opportunities, especially for women, key to promote inclusive and pro-poor growth.

Macroeconomic Conditions

2. Macroeconomic pressures have intensified in Bangladesh. Our economy was recovering strongly from the COVID-19 pandemic until the onset of the Russia-Ukraine war. The unprecedented rise in global food, energy, and other commodity prices and disruptions in international supply chains have adversely affected the global economy, including Bangladesh. Inflation rose to a decade high of 9.5 percent point-to-point in August 2022. Our current account (CA) deficit widened sharply to 4.1 percent of GDP in FY22 (July 2021–June 2022) from 1.1 percent of GDP in FY21. Although exports grew at a high rate, they were more than offset by record high imports. Remittance flows have declined to pre-pandemic levels after the temporary surge during the pandemic.

3. We have taken bold measures to maintain macroeconomic stability. Monetary conditions have been tightened. Increases in the repo rate and unsterilized foreign exchange (FX) interventions have reduced liquidity in the banking system. Greater exchange rate flexibility was allowed to reduce FX pressures and the prices of fuel, fertilizers, electricity and gas were raised. We also imposed a range of restrictions to curb non-essential imports and took measures to curtail energy demand, including imposing rolling power cuts and reducing school and office hours. We acknowledge that these measures, though temporary, are not sustainable and costing our economy and people tremendously.

4. However, we forecast that the pressure on the balance of payments (BoP) is likely to continue in the coming months. Despite FX interventions, the Taka has depreciated by 21.2 percent during April 30-December 5, 2022. Gross international reserves (GIR) have declined to US$27.5 billion in October 2022 from their peak of US$40.7 billion in August 2021. We expect a difficult year ahead given high uncertainties, elevated commodity prices, growth slowdown in trading partners, and tighter global financial conditions.

5. In addition to short term challenges, the aspiration to reach high-income status by 2041 requires addressing long-standing structural issues. To achieve this goal, we need to sustain high pro-poor growth, which will require developing new growth engines, increasing productivity to harness demographic dividend, bridging infrastructure gaps, and investing in human capital. We are committed to boost social and development spending, tax revenues, export diversification, foreign direct investment (FDI) inflows, and the investment climate.

6. We also recognize the need to address long term threats to macroeconomic stability posed by climate change. In spite of being one of the lowest per capita carbon emitting countries, Bangladesh is one of the world's most at-risk nations to climate change. We are at risk of losing 2 to 9 percent of our annual GDP by the mid- and end of the century, respectively. In the Notre Dame Global Adaptation Index, Bangladesh ranks 164 amongst 182 countries for its vulnerabilities to climate disruptions and readiness to leverage private and public investment for adaptive actions. Steady rise of average temperature levels would likely result in increased frequency and intensity of droughts, floods, and tropical cyclones, while sea level rise poses significant risk to coastal infrastructure and populations. Bangladesh has set its course toward achieving climate-resilient development by putting in place various strategies and policies including the Bangladesh Delta Plan (BDP) and the National Adaption Plan (NAP). It is estimated that the annual climate financing needs are 2 to 3 percent of GDP.

Policy Framework

7. Our reform agenda under the IMF program aims at restoring macroeconomic stability and undertaking structural reforms to promote inclusive and green growth. During the program period (FY23–26), we will bring down inflation to within the range of 5–6 percent by taking appropriate policy measures. We also intend to increase net international reserves (NIR) to 4 months of prospective imports by FY26 through prudent aggregate demand management policies, increased exchange rate flexibility, and structural reforms to bolster competitiveness. These measures are also expected to catalyze additional external inflows, including FDI. Finally, we aim to boost growth potential by increasing investments, opening the economy, and enhancing employment opportunities, as outlined in our 8th FYP.

Fiscal Policy

8. Under our program, fiscal policy will be geared toward creating fiscal space to sustainably increase social spending and investment. We will continue to pursue a prudent fiscal policy stance, anchored by the target to keep the primary fiscal deficit (including grants) within around 3.3 percent of GDP to contain public debt below 45 percent of GDP over the medium term. Should downside risks materialize, we stand ready to adjust our fiscal strategy as needed to preserve macroeconomic stability. We will raise development and social spending under the program, while rationalizing subsidies and domestic debt financing costs. To sustainably finance our gradual expenditure expansion, we plan to mobilize additional tax revenue of about 1.7 percent of GDP over the course of the program.

9. We will pursue tax policy reforms to further mobilize revenues. We plan to partially shift the tax burden away from trade-related taxes and toward income and value-added taxes. Our strategy is to eliminate less effective tax exemptions and simplify the tax rate structure to broaden the tax base and enhance voluntary taxpayer compliance. With the help of IMF technical assistance (TA), we will identify measures to rationalize tax expenditures, which will be adopted in our FY25 and FY26 budgets. In the meantime, we will adopt tax revenue measures yielding an additional 0.5 percent of GDP in the FY24 budget (end-June 2023 structural benchmark (SB)). We plan to finalize a new Income Tax Code by end-2023 that will address issues such as base erosion and profit shifting by global internet-based entities and transfer pricing. These measures will ensure that our tax-to-GDP ratio improves even while we gradually eliminate para-tariffs and reduce average nominal protection rates on imports to be in line with our LDC graduation strategy.

10. We will pursue an ambitious tax administration reform agenda to broaden the tax base and boost revenue mobilization. Already, we have taken steps to increase taxpayer registration by making it mandatory to present a proof of tax return submission to receive 38 government services. We will continue our efforts to bring more taxpayers into the net by increasing the number of registered taxpayers to 10 million by 2026. We plan to install another 300,000 electronic fiscal devices over the next five years, expected to yield an additional revenue of Taka 105 billion, with an initial 60,000 planned for FY24. More generally, we will move toward a modern IT-based administration of the VAT and income tax systems, greater at-source taxation, and strengthened compliance risk management. Our near-term priorities include the establishment of compliance risk management units (CRMUs) within the customs and VAT wings of the National Board of Revenue (end-December 2023 SB). The creation of a CRMU for income tax will happen as part of a broader reorganization process of this wing expected to take place in 2024. The three CRMUs will work together to develop and gradually implement a comprehensive compliance improvement plan. Moreover, we are working to develop a Medium-Term Revenue Strategy which will be approved in FY24 and provide a structured framework to improve revenue collection over a 3-5 year horizon. A new Customs Act, which aims to modernize customs administration in line with best international practice, has already been submitted to Parliament.

11. We plan to contain spending on subsidies to safeguard priority spending. Effective steps are being taken to contain the budget pressures stemming from exceptionally high global energy prices. In August 2022, we raised prices for petrol and octane by close to 50 percent, and prices for diesel and kerosene by 36 percent on top of 23 percent increases in November 2021. As a result, we do not expect to provide budget support to Bangladesh Petroleum Corporation (BPC). Natural gas tariffs were increased by 23 percent on average in June 2022 and bulk electricity tariffs were raised by 20 percent in November 2022. Although budget subsidies for natural gas and electricity are expected to rise significantly in FY23, they should remain relatively contained at 0.9 percent of GDP. However, increased subsidies to the order of 0.7 percent of GDP will be required for fertilizer and food this fiscal year, amid large increases in import prices. Going forward, we plan to eliminate all structural subsidies for petroleum products and, to this end, will move to a periodic formula-based price adjustment mechanism (end-December 2023 SB). Furthermore, we will aim at adjusting electricity prices further to reduce subsidies.

12. We will take steps to enhance the effectiveness of public investment to support the achievement of our development goals. In this regard, we will follow our Public Financial Management Action Plan for 2018-2023, which seeks to strengthen strategic linkages between the FYP, Annual Development Program (ADP) and Medium-Term Budgetary Framework (MTBF), and raise investment portfolio quality. We will work to integrate the medium-term budget and ADP processes and produce a consolidated MTBF that includes a medium-term investment program. We will further strengthen project selection by rolling out the Sector Strategy Papers and Multi-Year Public Investment Program tools to 5 sectors by end-2024 and another 5 sectors by end-2025, and identify, at most, the top five capital projects to be pursued in each sector. In parallel, we will reinforce staff capacity to prepare Development Project Proposals (DPPs) and carry out project appraisals.

13. We intend to improve our debt management to reduce financing costs and support capital market development. Our recently updated and published second Medium-Term Debt Management Strategy (MTDS) aims to minimize borrowing costs while ensuring long-term sustainability of fiscal policy. To this end, we will seek to reduce reliance on National Savings Certificates (NSCs) and shift toward more concessional sources of external financing in the medium term while Bangladesh remains eligible for these and, over the longer term, develop local bond markets to tap into long-term market financing. Going forward, with the help of IMF TA, we will update the MTDS on an annual basis and complement it with a quarterly debt bulletin and eventually an annual debt portfolio report.

14. We will reform our NSC system to rationalize interest expenditure and increase fiscal space. We have initiated the reform of our NSC system by introducing tiered interest rates, capping issuances, and increasing the tax on earned interest. In addition, our 2022 Public Debt Act criminalizes providing false information on NSC investments. We will continue monitoring the database of NSC subscribers and enforcing access limits to reduce the scope for misuse, including by fully automating issuances by 2024. To guide the reform process, we will develop a formal plan that will have as its aim a reduction in net NSC issuance to below 1/4 of domestic financing by FY26 (end-December 2023 SB).

15. We will maintain our efforts to enhance the effectiveness of social safety nets and will gradually increase priority social spending. Our recently updated Action Plan to Implement the National Social Security Strategy of Bangladesh, which covers the period 2021–2026, spells out our plans to strengthen and broaden the scope and coverage of our social safety net programs with the goal of lowering income inequality and contributing to higher growth by strengthening human development. Our priorities include better aligning lifecycle transfer programs with Bangladesh's demographic composition, improving targeting, expanding coverage both in rural and urban areas, consolidating existing programs, adopting G2P systems and expanding social insurance. The Universal Pension Management Bill 2022, currently placed in the Parliament, aims to improve financial protection of our growing elderly population, by providing a pension scheme available to all Bangladeshis, and is expected to replace various existing social safety programs over time.

16. We will optimize cash management by expanding the coverage of the treasury single account (TSA) and the use of electronic funds transfer (EFT). Ministry of Finance will conduct a census of all bank accounts held by institutional units of the central government remaining outside the TSA and develop a policy note to guide decisions on their integration and sequencing of TSA enhancements (end-December 2023 SB). We will also begin production of regular cashflow forecasts by the treasury to be shared with the budget department and central bank by FY26. We will progressively expand the use of EFT to cover vendor payments and target a coverage of at least 60 percent of central government transactions by end-2024, which will enable efficient settlement of obligations and reduce leakages. Lastly, we will continue to build out the functionality of our Integrated Budget and Accounting System (iBAS++) to enable commitment controls, reconcile tax receipts and deductions, and support electronic payments.

17. We are committed to improve the quality and timeliness of our fiscal reporting. To this end, we will publish quarterly budget execution reports within 60 days of quarter-end for the first three quarters and 90 days for the last quarter. We will continue to train relevant staff on the International Public Sector Accounting Standards to ensure that government's annual financial statements are compliant with international standards and are submitted for audit within six months of year-end. Moreover, we will institute a modern internal audit function in the government, capable of implementing risk-based internal audits. We will also take concrete steps to improve transparency over state-owned enterprises (SOEs) by systematically collecting financial data on 100 SOEs and using this data to inform a fiscal risk statement, which will initially cover major risks from selected SOEs, guarantees and Public Private Partnerships (PPPs), starting with the FY25 budget and, in later years, also cover macro-fiscal risks related to climate change and natural disasters. Subsequent steps to improve SOE transparency include the production of an annual SOE sector report, to cover the 50 largest SOEs in 2025, and formulation of an SOE governance framework.

Monetary and Exchange Rate Policy and Central Bank Operations

18. The monetary policy stance will be guided by the inflation outlook, while remaining supportive of the economic growth. We have tightened monetary policy by increasing the benchmark repo rate by 100 bps since May 2022 and mopping up liquidity from the banking system through unsterilized FX interventions. However, near-term risks to inflation remain high at a time when growth is expected to slow. Bangladesh Bank (BB) will continue to be guided by inflation and inflation expectations developments and stands ready to continue calibrated tightening of monetary policy to contain second-round effects from food and fuel price shocks and restrain exchange rate pressures, while being mindful of the need to support growth. In the process, BB will also monitor the development of reserve money. Over the medium term, we plan to bring inflation down to the target range of 5-6 percent.

19. We will continue to modernize BB's monetary policy framework and operations. With the help of IMF TA and training, we intend to transition to a flexible monetary targeting in the medium term, with the policy interest rate serving as an operating target. In this process, we have embarked on improving analytical and forecasting capacities and streamlining the decision-making processes at BB through development of a model-based Forecasting and Policy Analysis System (FPAS). As a first step in conducting our monetary operations, we plan to transition to an interest rate corridor system with automatic standing lending and deposit facilities (end-July 2023 SB) and improve liquidity forecasting capacity. In line with the move to an interest rate based system, we have relaxed the lending interest rate cap on consumer loans (14 percent of total loans) and stand committed to remove other caps over the program period. We plan to strengthen BB's communication and enhance transparency of the monetary policy by streamlining our key monetary policy report, the Monetary Policy Statement (MPS), and increasing the frequency of publication (to twice-a-year starting from January 2023). A press release and Governor press conference will follow each policy decision meeting.

20. We remain committed to increasing resilience to external shocks by reforming the exchange rate and FX reserve management framework. Fallout from Russia's war in Ukraine resulted in disorderly FX market conditions, freezing the interbank market. Market responses have led to an exchange rate arrangement characterized by multiple exchange rates for different market participants, helping restart FX interbank transactions. We fully acknowledge the importance to have a single exchange rate and expect the current arrangement to be transitory. As FX availability increases, the market mechanism will ensure transition to a single exchange rate for all participants. BB will also use the market-determined exchange rate for all official FX transactions on behalf of the government (end-June 2023 SB). To safeguard FX reserves from a sharp deterioration in trade balance, we increased LC margins for non-essential imports. We will gradually reverse this measure by December 2023, as FX reserve position improves.

21. We remain committed to rebuilding our reserves. BB commits to a modest Net International Reserves (NIR) buildup in FY23 followed by a further significant increase over the medium term to cover 4 months of prospective imports. We will start compiling and publishing Gross International Reserves (GIR) in line with international standards (end-June 2023 SB).

22. We are making progress to implement the recommendations of the latest IMF's Safeguards Assessment Report. BB has started publishing its financial statements in compliance with International Financial Reporting Standard (IFRS) and is building relevant staff capacity. To enhance our Internal Audit Department (IAD), we have prepared a five-year plan and appointed a chief information security officer to implement the IT audits. We have also updated our terms of references to strengthen the function of IAD, including by applying a risk-based audit methodology. We commit to unwind non-monetary use of FX reserves gradually and not engage in any new non-monetary operations, including foreign currency lending. We have finalized the draft for the emergency liquidity assistance framework and plan to adopt it during the program period. We have started the process for the external cyber risk vulnerability assessment since December 2022. We will conduct an external audit as done during the previous IMF program.

Financial Sector Reforms

23. We are steering an orderly exit from the pandemic support measures. The support measures [have been fully] withdrawn by December 2022, with the expiration of the soft repayment facility to the “Large Industries", Cottage, Micro, Small, Medium Enterprises (CMSME) and agricultural sectors along with the borrowers of the flood-affected region. BB will ensure that the asset classification accurately reflects current balance sheet risks and classified assets, including rescheduled loans, are adequately provisioned. To avoid cliff effects, we will continue to support individuals and business sectors that are most at risk under our regular financial support schemes.

24. We will further improve the statistics of distressed assets to align with international best practices. We have been moving toward Basel III standard for loan classification, capital adequacy and provisioning requirement. We treat material exposures as non-performing when they are more than 90 days past due, or the debtor is assessed as unlikely to pay its credit obligations in full without realization of collateral, regardless of the existence of any past-due amount or of the number of days past due. To better reflect the true state of distressed assets, we will restart reporting banks' rescheduled loans alongside with the non-performing loans (NPLs) in the annual financial stability report (end-June 2023 SB). We plan to reduce the time needed before a bank could write off bad loans. We will develop a plan by 2023 for the banking sector to adopt the IFRS9 and fully adopt the IFRS9 by 2027. We will seek IMF TA for implementing the expected credit loss based provisioning.

25. We are committed to adopt a holistic and time-bound NPL resolution strategy. To reduce bank balance sheet weaknesses, particularly of the state-owned commercial banks (SoCBs), we will pursue bank specific resolutions. We are developing enforceable Memorandum of Understandings (MoUs) to reduce the average NPL ratio to below 10 percent for SoCBs and below 5 percent for private commercial banks (PCBs) by 2026. These MoUs will also aim to increase capital adequacy ratios and provisioning coverages of SoCBs to 10 percent and 100 percent and of PCBs to 10 percent and 100 percent by 2026. To strengthen the corporate governance of SoCBs, a committee is examining the existing policy for nomination and appointment of directors of SoCBs to suggest policy recommendations.

26. We will strengthen BB's monitoring and supervisory role for the banking sector. Further steps will be taken to improve the stability, soundness, and reach of our financial system, anchored by clear oversight responsibilities, strong risk-based supervision (RBS), and proper managerial and operational controls. We have incorporated RBS in BB's five-year strategic plan 2020-2024 to adopt the RBS by 2025. We will complete the current pilot on RBS by finalizing the assessment of the three pilot banks, including one Islamic bank (end-June 2023 SB). The RBS will incorporate specific procedures for Islamic banking operations in the assessment tool and inspection manual. We will also develop in-house expertise to conduct scenario-based macroprudential stress test and pursue climate stress test. We plan to develop a macroprudential strategy document. We will also strengthen credit infrastructure and collateral valuation framework. We plan to expand the mandate of the credit information bureau (CIB), allowing it to share data with private borrowers. Some of these above reforms will be accomplished with the help of IMF TA.

27. We will enhance governance and the regulatory framework for the financial sector. We plan to submit to the Parliament the Bank Companies (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with best practices (end-September 2023 SB). We also plan to submit to the Parliament the Bankruptcy (Amendment) Act 2020 and the Money Loan Court (Amendment) Act 2003 by June 2024, and the Negotiable Instrument (Amendment) Act 2020 by June 2025. These reforms will strengthen the financial sector, enhance the insolvency regime and facilitate recovery of loans. They will also help modernize the financial sector and improve the legal environment for credit and business activities.

28. Under the program, we will further develop the capital market. We will develop a roadmap for local currency bond market development, using IMF TA. NSC reforms, the implementation of the MTDS, the development of the secondary market for government securities, and the modernization of the monetary framework will facilitate capital market development.

Macro-Structure and Governance Reforms

29. We are working to create a conducive investment climate, accelerate trade liberalization and attract more FDI. During the program period, in line with our strategies for LDC graduation, we plan to reduce relatively high non-tariff barriers and domestic protection, improve trade-related energy and transportation infrastructure, and address regulatory barriers. We will work closely with the development partners, which is expected to inform our near to medium term trade development priorities.

30. We will develop human capital to boost labor productivity and long-term growth potential. We will pursue reforms to improve education outcomes and address gaps in vocational training to facilitate formal employment. We are working with the United Nations and other development partners to improve labor productivity, increase female labor force participation and deepen financial inclusion, as part of Bangladesh's Sustainable Development Goals.

31. We remain committed to strengthen governance and combat corruption. We will move toward international best practices on anti-money laundering (AML), by enhancing the RBS, following the roadmap developed with the help of IMF TA. This is critical to mitigate substantial ML risks, including from cross-border activity and trade-based ML. We aim to amend the Companies Act to facilitate the information collection for fully identifying the ultimate beneficial ownership in the financial sector. We will continue to strengthen central bank governance and fiscal transparency. We remain committed to combat corruption by safeguarding the independence of the Anti-Corruption Commission.

Climate Change Policies

32. Addressing the significant adaptation challenges, mobilizing climate finance and enhancing climate mitigation efforts remain our top priorities. With current annual climate-related government spending under 1 percent of GDP against the needed 3 to 4 percent of GDP of financing over the next 15 years, Bangladesh has a significant financing need to meet climate change challenges. On 31st October 2022, the cabinet approved the National Adaptation Plan (NAP) that outlines adaptation investment requirement of US$230 billion between now and 2050. To this end, we will implement reform measures that strengthen institutions to enable large-scale climate investments particularly the priorities identified in the NAP, the BDP, and the Nationally Determined Contributions (NDC). Further, we will undertake reforms to mobilize climate finance including through public and private sources and green bonds, as well as enhance financial sector resilience to climate-related risks. Over the years, we have made significant strides toward meeting our national climate mitigation and adaptation objectives and have put in place a range of policy tools, notably the Climate Fiscal Framework (CFF), climate budget tagging, and sustainable finance policy and green bond policy and taxonomy.

33. We are taking bold steps as we transition to a green and low-carbon economy. We updated the NDC in August 2021 with an increased climate mitigation ambition backed by a robust set of policies and measures. The NDC makes the commitment to reduce greenhouse gas (GHG) emissions by 6.7 percent below business-as-usual in 2030 and up to 21.9 percent if combined with international support. Policy priorities to support these targets include scaling up renewable energy, promoting electric vehicles and clean public transport, enhancing energy efficiency in buildings and industrial facilities, and measures to reduce emissions from the agriculture, land-use, and forestry sectors. We announced at COP26 the cancellation of 10 coal-fired power plant projects involving US$12 billion foreign investment. We also set the target of generating at least 40 percent of total electricity from renewable energy sources by 2041 and are preparing a new integrated energy and power sector master plan to support this goal. We are in the process of finalizing the imports of renewable-based electricity from neighboring countries which will further shift electricity generation away from fossil fuel sources. In addition, we raised natural gas and fuel prices recently and are moving toward a periodic formula-based price adjustment mechanism for all petroleum products (end-December 2023 RM). Barring any further large global commodity price shock, we remain committed not to increase subsidies on fossil-fuel-based energy as percentage of GDP during the program period and will consider different options of gradually reducing them.

34. We are committed to build climate-resilient infrastructure. Making infrastructure investment green and resilient is key to achieving our climate and sustainable development objectives. We recognize that efficient, green and resilient public investment has multiple benefits, as it creates jobs, spurs economic growth and stimulates private sector investment and other innovative financing. We will enhance climate-informed public investment management (PIM) practices to support the prioritization and allocation of resources for the BDP and scaling up of climate-smart investment as envisaged in the NAP. Building on the PIM reform measures, we are committed to integrate a climate perspective in the appraisal and selection of capital projects. To help leverage private sector climate finance and ensure that PPP vehicle supports national climate goals, we will update the PPP policy and framework to reflect climate risks and opportunities and develop accompanying guidelines for PPP project proponents and developers. Furthermore, we will establish a public asset register module of the iBAS++ and will incorporate information on climate-related risks/damages and vulnerability of new public assets to the module, with the help of IMF TA.

35. We plan to improve our climate fiscal management. The implementation of our CFF is key to the success of Bangladesh's climate strategies and will lay foundation for sound and transparent climate-sensitive public financial management (PFM) processes. In the CFF, we set out an institutional framework for embedding climate change aspects in Bangladesh's PFM systems and the budget setting process under Medium Term Budget Framework (MTBF). Importantly, the CFF is among our main tools to facilitate the mobilization of both domestic and international sources of climate finance and help catalyze new climate finance. To support the planning and budget process, we will develop and implement methodologies for the analysis of macro-fiscal risks from climate change and publishing such information in the Medium-Term Macroeconomic Policy Statement (MTMPS). In the context of the National Plan for Disaster Management, we will develop a National Disaster Risk Financing strategy that integrates social assistance measures (end-December 2023 RM). In addition, we will adopt a sustainable public procurement policy paper and an associated action plan to integrate climate and green dimensions into the public procurement process (end-September 2023 RM).

36. We will further enhance financial sector resilience to climate shocks and boost private climate finance. Financial institutions play an important role in mobilizing private climate finance but face significant physical and transition risks. The recent update of the CFF incorporates the essential role of the financial sector and private sector finance. To this end, we will develop and adopt guidelines for banks and financial institutions on reporting and disclosure of climate-related risks in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) (end-December 2023 RM), while drawing on experiences with the implementation of the Guidelines on Environmental & Social Risk Management (ESRM) and existing sustainable reporting practices in Bangladesh. To strengthen financial sector resilience to climate-related risks, we will conduct and publish climate stress testing for the overall financial system and update the Guidelines on Stress Testing for banks and financial institutions to include climate change considerations. We are operationalizing the Sustainable Finance Policy for Banks and Financial Institutions and the Policy on Green Bond Financing (including Green Taxonomy and Green Bond framework). To further promote the mobilization of climate finance and extend the framework to include climate adaptation, we will update the green bond policy paper, particularly the annex on green taxonomy to be fully aligned with the NAP's strategic and investment priorities.

Statistical Policy

37. We will strengthen macroeconomic statistics to better inform policy decisions and monitor targeted outcomes. We have published the rebased national account and plan to publish the new consumer price index. We will publish the national accounts on a quarterly basis (end-December 2023, SB). The financial soundness indicators with expanded coverage will be published. We intend to publish historical monthly BoP data and continue the practice.

Program Monitoring

38. Progress under our program will be monitored through quantitative performance criteria, indicative targets, and structural benchmarks, in order to complete semi-annual program reviews, as summarized in Tables 1, 2 and 3 and guided by the attached Technical Memorandum of Understanding.

Table 1.

Bangladesh: Quantitative Performance Criteria (PC) and Indicative Targets (IT), First Two Reviews 1/2/

(In billions of Taka, unless otherwise indicated)

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Sources: Bangladesh's authorities; and IMF staff estimates/projections.

Fiscal year starts in July and ends in June.

The quantitative targets, indicative targets and program exchange rates are defined in the Technical Memorandum of Understanding (TMU).

Program starting point assumes Board approval in January 2023.

Net international reserves are gross reserves (based on BPM6 definition) minus the central bank FX liabilities and reserves earmarked for quasi-fiscal activities.

Including grants

This quantitative target is applied on a continuous basis.

Social spending that is domestically financed.

Capital investment from annual development program that is domestically financed.

Quarterly target is projected in line with historical quarterly outturns and seasonality patterns reflecting backloaded disbursements.

Table 2.

Bangladesh: Proposed Structural Benchmarks: 12-Months After Board Approval

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Table 3.

Bangladesh: Proposed Reform Measures Under RSF

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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) defines the variables subject to quantitative performance criteria (QPC) and indicative targets (ITs) under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements, as specified in the Memorandum of Economic and Financial Policies (MEFP). It also describes the methods to be used to assess program performance and information requirements to ensure adequate monitoring of the targets.

2. Under the arrangements, the program exchange rate is Bangladesh taka (Tk) 104.95 per U.S. dollar, as agreed at the time of approval of the ECF/EFF arrangements in January 2023. Foreign currency accounts denominated in currencies other than the U.S. dollar and monetary gold will first be valued in U.S. dollars as at the exchange rates and gold prices prevailing on October 24, 2022 (Text Table 1), and then be converted to Bangladesh taka.

Text Table 1.

Program Exchange Rates for ECF-EFF Arrangements

(as of October 24, 2022)

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Sources: Haver Analytics.; and https://www.imf.org/external/np/fin/data/rms_sdrv.aspx.

The U.S. dollar/Taka exchange rate is based on weighted average of exchange rate offered by the banking sector.

3. The data listed in Table 1 will be provided for monitoring performance under the program based on data templates agreed with IMF staff. Under each section, reporting responsibilities are indicated. The best available data will be submitted, so that any subsequent data revisions will not lead to a breach of QPC or benchmarks. All revisions to data will be promptly reported to IMF staff.

Quantitative Performance Criteria and Indicative Targets

4. QPC for end-June 2023 and end-December 2023 and quarterly indicative targets for end-March 2023, end-September 2023 are set out in Table 1 of the Memorandum of Economic and Financial Policies. The continuous performance criteria for each specific period are also set out in this table and will be monitored continuously during these periods.

5. Performance criteria under the ECF/EFF arrangement have been established with respect to a:

  • Floor on the level of net international reserves of Bangladesh Bank (BB), calculated as an end-of-period stock;

  • Floor on primary balance, calculated cumulatively from the beginning of the fiscal year;

6. Performance criteria applicable on a continuous basis have been established with respect to a:

  • Ceiling on the accumulation of new external payment arrears by the central government and BB, calculated in cumulative terms from December 31, 2022.

7. Indicative targets (ITs) have been established with respect to a:

  • Ceiling on the level of reserve money of the BB, calculated as an end-of-period stock;

  • Floor on tax revenue of the central government, calculated cumulatively from the beginning of the fiscal year;

  • Floor on priority social spending by the central government, calculated cumulatively from the beginning of the fiscal year; and

  • Floor on capital development spending undertaken by the central government, calculated cumulatively from the beginning of the fiscal year.

Institutional Definitions

8. The central government is defined as all budgetary units of the government of Bangladesh. It captures balances in the Treasury accounts and for special projects outside the Treasury accounts (as will be measured by government lending funds reported in the monetary accounts).

9. The public sector is defined as the central government, BB, nonfinancial public enterprises, departments, and autonomous and semi-autonomous bodies of all ministries and divisions.

10. Deposit money banks (DMBs) include commercial banks (state-owned, Islamic, private, and foreign-owned) and specialized banks, on which BB compiles data for the monthly monetary survey.

11. The definitions of “debt” and borrowing for the purposes of this TMU are set out in paragraph 8(a) of the Guidelines on Public Debt Limits in Fund-Supported Programs attached to the IMF Executive Board Decision No. 15688-(14/107) adopted on December 5, 2014. For purposes of these Guidelines, “debt” is understood to mean a direct, i.e., noncontingent, liability created under a contractual arrangement under which a value must be provided, in the form of assets (including monetary assets) or services, and under which the debtor also undertakes to make one or more payments in the form of assets (including monetary assets) or services, according to an established schedule. These payments will discharge the debtor from the principal and/or interest liabilities undertaken under the contract. In accordance with the foregoing definition of debt, any penalties or damages awarded by a court as a result of the nonpayment of a contractual obligation that constitutes debt are debt.

12. External debt, in the assessment of the relevant criteria, is defined as any borrowing or debt service in a currency other than the Bangladesh taka. The relevant performance criteria apply to external debt of the central government, BB, public enterprises that receive transfers from the central government, and other public entities in which the central government holds more than 50 percent of the capital stakes, or any other private debt for which the central government has provided a guarantee that should be considered to constitute a contingent liability. Guaranteed debt refers to any explicit legal obligation incumbent on the central government to reimburse a debt in the event of payment default by the debtor (whether the payments must be made in cash or in kind).

13. Nonbank claims on the central government represent the sum of cash receipts from sales of National Savings Certificates (reported by the National Savings Directorate), Treasury bills and bond holdings outside BB and the DMBs (reported by BB's Debt Management Department), and net flows to the General Provident Fund (reported by the Controller General of Accounts).

Monetary Aggregates

Reserve Money of the Bangladesh Bank—Indicative Target

14. A ceiling applies on the level of reserve money of the BB, which comprises currency in circulation issued by BB (excluding BB holdings of currency) plus deposits of DMBs held at BB. Reserve money excludes DMBs' foreign currency clearing accounts at BB and nonbank deposits at BB.

Adjustment mechanism:

15. If any DMB fails to meet its legal reserve requirement, the ceiling on reserve money will be adjusted downward to the extent of any shortfall in compliance with the requirement.

16. Changes in required reserve regulations will modify the reserve money ceiling according to the formula:

ΔRM = Δr · B0 + r0 · ΔB + ΔrΔB

where ΔRM denotes the change in reserve money; r0 denotes the reserve requirement ratio prior to any change; B0 denotes the reservable base in the period prior to any change; Δr denotes the change in the reserve requirement ratio; and ΔB denotes the immediate change in the reservable base resulting from changes to its definition.

Net International Reserves of Bangladesh Bank—Quantitative Performance Criterion

17. For program monitoring purposes, the Net International Reserves (NIR) of BB is defined as Gross International Reserves (GIR, as defined in paragraph 18) minus the reserve-related liabilities (as defined in paragraph 19). For program monitoring purposes, the stock of foreign assets and foreign liabilities of BB shall be valued at the program exchange rate in U.S. dollars, as described in paragraph 2.

18. GIR of BB are defined as the sum of:

  • Foreign currency assets in convertible currencies held abroad and as vault cash that are under the direct and effective control of BB, readily available for intervention in the foreign exchange market or the direct financing of balance of payments imbalances, and which have received investment grade rating by at least two of the following three rating agencies: Moody's, (a rating of at least Baa), Standard & Poor's (a rating of at least BBB-) and Fitch (a rating of at least BBB-), or held with an investment-grade institution;

  • The reserve position of Bangladesh in the IMF;

  • Holding of SDRs; and

  • Monetary gold.

Excluded from the definition of GIR are:

  • Foreign currency loans to local banks;

  • Deposit with state-owned local banks;

  • Deposits with the International Islamic Trade Finance Corporation (Islamic Development Bank Group);

  • Fixed income securities below investment-grade;

  • Reciprocal deposits acquired by the BB under the 2021 swap arrangement with the Central Bank of Sri Lanka

  • Any other foreign currency assets in nonconvertible currencies and precious metals other than gold; and

  • Any other foreign currency claims, which are not high-quality claims on non-residents readily available for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes.

19. Reserve-related liabilities of the BB are defined as the sum of the liabilities from SDR allocation; and all other outstanding liabilities of Bangladesh to the IMF with a maturity of less than one year; and foreign currency liabilities, with a maturity of less than one year, in convertible currencies to nonresidents, including liabilities to the Asian Clearing Union; the Japan Debt Relief Grant1 (JDRG); the Foreign Currency Clearing Account (i.e., the total amount of Deposit Money Banks' foreign currency deposits held at BB);2 and forward contracts, foreign currency swaps, and other futures market contracts.

20. A floor applies to the level of NIR of the BB. Should the actual disbursement of budget support from development partners be below the projections under the program, the NIR floor will be adjusted downward by the difference between the actual level and the projected level of disbursements under the program. This adjustment is calculated cumulatively from the beginning of the fiscal year.

Fiscal Aggregates

Primary Balance

21. A floor applies on the primary balance of the central government (including grants) measured cumulatively from the beginning of the fiscal year.

22. For program monitoring purposes, the primary balance is defined as the overall balance of the central government excluding interest payments and including foreign grants.

23. Should the actual disbursement of grants from development partners be below the projections under the program, the floor on the primary balance will be adjusted downward by the difference between the actual level and the projected level of disbursements under the program. This adjustment is calculated cumulatively from the beginning of the fiscal year.

Tax Revenue

24. A floor applies on tax revenue of the central government measured cumulatively from the beginning of the fiscal year.

25. For program monitoring purposes, tax revenue is defined as the sum of (i) tax revenue collected by the National Board of Revenue, (ii) tax revenue from narcotics and liquor duty, (iii) tax revenue from motor vehicles, (iv) land development tax, (v) tax revenue from sale of stamps, and (vi) tax revenue from surcharges.

Priority Social Spending

26. A floor applies on priority social spending financed by the Government of Bangladesh calculated cumulatively from the beginning of the fiscal year.

27. For program monitoring purposes, priority social spending comprises all expenditures on education, health, and social safety nets as listed in Text Table 2.

Text Table 2:

Composition of Priority Social Spending of the Government of Bangladesh

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Development Capital Investment

28. A floor applies on development capital investment financed by the Government of Bangladesh, calculated cumulatively from the beginning of the fiscal year.

29. For program monitoring purposes, development capital investment comprises all Annual Development Program (ADP) expenditure in the budget.

External Payment Arrears

30. A continuous ceiling applies on the accumulation of new external payments arrears by the central government and BB.

31. For program monitoring purposes, external payments arrears comprise external debt and debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements. However, nonpayment of external debt service will not give rise to arrears when the Central Government and Bangladesh Bank cannot pay or settle based on the contractual terms solely because of the transfer of funds being rejected owing to intermediary financial institutions' compliance policies, as long as the debt service payments have been paid into an escrow account by the contractual due date, taking into account any contractual grace period. Funds in such escrow accounts may be used only to satisfy the related external debt obligations, and their use or withdrawal for other purposes would constitute a breach of the QPC.

Table 1.

Bangladesh: Data Reporting Requirements

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Table 2.

Bangladesh: Components of Domestic Bank Financing of the Central Government

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1

See 2021 Bangladesh: Selected Issues paper “Bangladesh in Transition.”

2

Fiscal year in Bangladesh starts in July and ends in June.

3

Reports gross reserves in line with international statistical definitions excluding foreign currency assets which are claims on residents or not readily available.

4

BB gradually tightened the minimum requirement of cash margin for payment by bank deposits on selected non-essential imports.

5

Macro-fiscal assumptions under the program (baseline scenario for the debt sustainability analysis (DSA)) include the authorities' climate spending of around 0.6-0.7 percent of GDP in line with historical spending profile, as well as additional climate investment of 0.3-0.8 percent of GDP annually supported by RSF and other financing catalyzed through development partners. The RSF disbursements would help reduce the present value of debt and debt-servicing burdens by substituting for more expensive domestic debt (see Annex III for details). The authorities do not intend to undertake additional climate-related spending, beyond what is already included in the baseline DSA, that would jeopardize risks to public and publicly guaranteed debt sustainability.

6

Bangladesh successfully met the United Nations' criteria including per capita income, human assets, and economic and environmental vulnerability to graduate from the least developed country (LDC). The UN Committee for Development Policy recommended on February 26, 2021 the graduation of Bangladesh from LDC status with an extended five-year preparatory period to ensure recovery from the COVID-19 pandemic. Bangladesh remains eligible to the IMF concessional resources through the Poverty Reduction and Growth Trust (PRGT) on a blended basis.

7

Should downside risks to revenue materialize, the authorities should stand ready to reprioritize their spending plans, including by containing non-essential current spending (e.g., travel expenses) and postponing low-priority capital spending, while safeguarding support to the most vulnerable.

8

The 10 sectors with the highest allocations under the authorities' 8th Five Year Plan include Transport and Communication, Education and Technology, Power and Energy, Local Government and Rural Development, Agriculture, Health, General Public Services, Social Security and Welfare, Housing and Public Works, and Public Order and Safety.

9

Twelve-month ahead inflation expectations increased to 9.4 percent, according to the September 2022 survey, against the BB's implicit medium-term inflation objective ceiling of 5.6 percent for the FY2023. Inflation expectations increased by 1 p.p. compared to the June 2022 survey.

10

The current monetary policy framework has opaque objectives, multitude of policy instruments and weak communication strategy. Interest rate caps, non-market NSC pricing mechanism, and the absence of a well-functioning government securities market further impede the efficiency of monetary transmission and limit the ability of BB to pursue its objectives.

11

The asset share of SOCBs in total banking sector assets has declined from about 55 percent in 1993 to around 20 percent in 2018. According to the World Bank (2019 FSAP DP) and the IMF (2019 FSSR), the combined capital shortfall of SOCBs was around 1 percent of GDP.

12

The COVID-audits were published as required by the RCF/RFI financing.

13

Given very long-term nature of climate financing estimates, the projected financing of Bangladesh's nationally determined contributions (NDC) involves several assumptions and there are large uncertainties around the forecasts.

14

Based on the draft World Bank's CCDR, the range estimate of impact by 2050 under RCP 4.5 and 8.5 scenarios.

15

Ahmed and Suphachalasai. 2014. Assessing the Costs of Climate Change and Adaptation in South Asia. Asian Development Bank. This estimate is used in the Climate Fiscal Framework, but various estimates of climate and disaster impacts exist (see Annex III for more information).

16

There are several incentives, such as tax breaks to drive net-metered solar rooftop installation to increase the share of renewal energy.

17

The Bangladesh National Building Code contains a dedicated chapter on sustainability and energy efficiency.

18

The EU considers natural gas an environmentally sustainable transition fuel in the EU taxonomy.

19

Bangladesh C-PIMA is a desk assessment, and not a full capacity development mission. The latter is proposed as part of the CD needs during the RSF program period.

20

Addressing current vulnerabilities and weaknesses in the financial sector data reporting and risk management is crucial as a precondition for a proper report, assessment, and management of climate-related risks.

21

Such guideline/regulations should set supervisory expectations for incorporation of physical and transition risks into business strategies, risk management, and governance framework, following international standards and good practices, including the principles for the effective management and supervision of climate-related financial risks.

22

The data repository that includes exposures of financial institutions' credit and investment portfolios to carbon emitting industries/corporates and climate hazards could be established as part of the climate stress testing.

24

IMF finance is drawn from General Resources Account (GRA), which consists of the IMF's quota and borrowed resources and is available to all IMF members; and Poverty Reduction and Growth Trust (PRGT), which borrows from IMF members and on-lends these borrowed resources to low-income countries on concessional terms. Bangladesh is classified as presumed blender, eligible for accessing both concessional and non-concessional IMF resources.

1

Bangladesh's external sector assessment was based on the EBA-lite methodology until the 2021 Article IV consultation with a staff report published in March 2022. As its external sector developments have become more systemic and dynamic, Bangladesh was recently added to the EBA country group. Hence, this assessment is based on the External Balance Assessment (EBA) methodology for assessing current accounts and exchange rates.

2

Fiscal year starts in July and ends in June.

1/

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff's subjective assessment of the risks surrounding the baseline (“L” (low) is meant to indicate a probability below 10 percent, “M” (medium) a probability between 10 percent and 30 percent, and “H” (high) a probability of 30 percent or more). The RAM reflects staff's views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Representative Concentration Pathway 8.5 (RCP8.5) is one of the GHG concentration trajectories adopted by the Intergovernmental Panel on Climate Change (IPCC) and represents a 'baseline' scenario that does not include any specific climate mitigation target and corresponds to a high GHG emission pathway.

2

Climate Risk Country Profile: Bangladesh (2021): The World Bank Group.

3

World Bank. Bangladesh Financial Sector Assessment Program, Aide Memoire April 2019.

4

IMF. 2019. Climate Change Mitigation and Adaptation in Bangladesh: Policy Options.

5

World Bank. Bangladesh Country Climate and Development Report, draft June 2022.

6

Ahmed and Suphachalasai. 2014. Assessing the Costs of Climate Change and Adaptation in South Asia. Asian Development Bank. These estimates factor in some adaptation which is dependent upon the levels of income.

8

Given very long-term nature of climate financing estimates, the projected financing of Bangladesh's nationally determined contributions (NDC) involves several assumptions and there are large uncertainties around the forecasts.

9

Cian Ruane and Azar Sultanov (both RES) contributed to the DIGNAD model simulations of macro-fiscal implications of climate change policies.

1

UCT: Upper Credit Tranche, and PRGT: Poverty Reduction and Growth Trust.

1

BB acts as agent on behalf of the Government of Bangladesh for managing the Japan Debt Relief Grant.

2

Deposit money banks (DMBs) include commercial banks (state-owned, Islamic, private, and foreign-owned) and specialized banks, on which BB compiles data for the monthly monetary survey.

Other IMF Content

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Cover IMF Staff Country Reports
Bangladesh: Requests for an Arrangement Under the Extended Fund Facility, Request for Arrangement Under the Extended Credit Facility, and Request for an Arrangement Under the Resilience and Sustainability Facility-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2023: Issue 066
Publisher:
International Monetary Fund
ISBN:
9798400232206
ISSN:
1934-7685
Pages:
125
DOI:
https://doi.org/10.5089/9798400232206.002

Bangladesh: External Sector Developments in 2022

Bangladesh: Net International Reserves 1/

(Months of Prospective Imports)

Bangladesh: Health, Education, and Infrastructure Spending

Bangladesh: Tax Revenue

(Percent of GDP)

Bangladesh: Climate Change

Bangladesh: Proposed RSF Reform Priorities and Measures
Figure 1.

Bangladesh: Recent Developments: Pressure from External Shock
Figure 2.

Bangladesh: Fiscal Developments
Figure 3.

Bangladesh: Monetary and Financial Market Developments
Figure 4.

Bangladesh: Banking Sector Developments
Figure 5.

Bangladesh: External Sector Developments
Figure 1.

Bangladesh: Countries with High Natural Hazard and Climate Risk

(Ranking 1 to 10; 1 is the most vulnerable)

Bangladesh: Frequency and Damages of Natural Disasters

(In US$ million)

Bangladesh: Climate Budget Allocation and Expenditure

(ln US$ Billion)
Figure 2.

Bangladesh: Simulation of Impact of Ex-ante Adaptation Investment

Bangladesh: Climate Financing Requirements and Sources

(Percent of GDP)

Bangladesh: Revisions of FY Real GDP Growth

(In percent, y/y)

Bangladesh: Contribution to Real GDP Growth, by Expenditure

(ln percent, y/y)

Bangladesh: Contribution to Real GDP Growth, by Production

(In percent, y/y)