January 30, 2023

On behalf of the Bangladeshi authorities, we thank the staff for their comprehensive report. Our authorities also appreciate their productive policy dialogue with the staff. They welcome their assessment and recommendations made in the context of their request for the Extended Arrangement Under the Extended Fund Facility, an Arrangement Under the Extended Credit Facility, and an Arrangement Under the Resilience and Sustainability Facility. We will focus our remarks on the macroeconomic outlook and major on-going policy reforms in the economy.

Post-pandemic macro-economic situation

The Bangladesh economy showed strong resilience and recorded positive, though modest, growth during the pandemic period. By prioritizing the infrastructure improvements to provide a clean and hygienic environment and ensuring the availability of appropriate materials and equipment for infection prevention and control, Bangladesh successfully mitigated the impact of COVID-19 on the economy. By end-December 2022, over 77 per cent of domestic population was fully vaccinated and 91 per cent vaccinated with at least one dose. The growth impact of the pandemic was, therefore, limited. In FY 2021-22 (July-June), domestic growth accelerated to 7.2 per cent from 6.9 per cent in FY 2020-21. Authorities recognize that the economy may grow at slower pace than the target set for FY2022-23 largely due to unfavorable external demand conditions on account of slower growth in advanced economies and weaker domestic demand. In its Monetary Policy Statement (January-June 2023), the Bangladesh Bank has projected domestic growth of 6.5 per cent in FY2022-23. Nevertheless, growth projections of various multilateral agencies including the IMF suggest that Bangladesh continues to be a bright spot among peer economies. Under Vision 2021, the authorities target to become an upper-middle-income country by 2031. Given Bangladesh's strong track record of reducing poverty and its commitment towards structural reforms, the objective is attainable.

Like other import dependent economies, Bangladesh faced higher inflation in 2022. The depreciation of the Bangladeshi Taka (BDT) and rising global prices impacted prices of imported items including food, fuel, fertilizer, and other commodities. Moreover, flash floods led to losses in domestic agriculture production and supplies, adding to inflationary pressures. However, inflation has come off its peak of 9.5 per cent in August 2022 to 8.7 per cent in December 2022. Authorities expect inflation to ease further due to declining international commodity prices and a better harvest expected in the next two seasons. The Bangladesh Bank places the ceiling for headline inflation at 7.5 per cent for FY 2022-23. As inflationary pressures warranted domestic monetary conditions to be tightened, the Bangladesh Bank hiked the repo rate by 125 basis points since May 2022. It also undertook unsterilized interventions in the foreign exchange market to reduce liquidity in the banking system. Going forward, the Bangladesh Bank has indicated that it will pursue a cautiously accommodative policy keeping in view the challenges relating to inflation, pressure on the exchange rate and the need to support growth by ensuring adequate flow of funds to productive sectors of the economy.

Global headwinds and other domestic factors have impacted fiscal and external imbalances. Fiscal deficit is projected to increase in FY 2022-23 largely on higher expenditure due to subsidies and reconstruction costs related to natural disasters. However, authorities intend to mobilize greater revenue through various measures going forward.

Exogenous shocks have heightened country's external vulnerabilities as well. Bangladesh's balance of payments came under stress in FY 2021-22 amid a sharp rise in imports relative to exports and a fall in remittances, which together led to more than four-fold increase in the current account deficit (CAD). Even though net inflows under the financial account were broadly resilient, they were inadequate to finance sharply higher CAD. Therefore, foreign exchange reserves depleted by US$7.4 billion in FY 2021-22 (in nominal terms). Despite global headwinds persisting, CAD has been modest in FY 2022-23 so far (July-November) when compared to its level a year ago. Trade credit related repayment pressures, however, led to net capital outflows from the economy. This warranted further withdrawal of reserves of the order of US$6.4 billion during the period. Despite narrowing of the trade deficit in recent months, authorities expect the CAD to remain elevated in FY 2022-23 but modest as compared with FY 2021-22 (as also projected by staff in its Report). Nevertheless, authorities expect that CAD financing may remain a challenge in the period ahead as risks relating to elevated commodity prices, growth slowdown in trading partners, lower remittances, and tighter global financial conditions persist.

Structural and institutional reforms

Our authorities are strongly committed to structural and institutional reforms in various segments of the economy. Taking cognizance of the concentration in the export basket, they have undertaken various measures to diversify the country's export base. Export Policy 2021-2024 aims to create a business-friendly environment for achieving the export target of US$80 billion by FY 2023-24. Authorities are focusing on bilateral agreements with some trading partners and various Committees have been set up to explore the scope in this regard. The Regional Trade Agreement (RTA) Policy 2022 has been approved, which provides guidelines to negotiate, sign and implement trade treaty and aims to expand and diversify the export basket. The Policy also intends to widen the domestic manufacturing base and reduce excessive dependence on limited products. In due course, the RTA Policy 2022 is likely to augment country's capacity to pursue outward-integration strategies in a wide spectrum of areas, including trade in services, investment, trade facilitation, intellectual property, e-commerce and digital trade, employment and movement of natural persons, etc. The authorities recognize the need for reduction in tariff levels and non-tariff barriers to improve external competitiveness in various sectors. A concept note on national tariff policy (proposing a phased reduction) is being prepared, which is expected to be finalized soon. The Budget 2022-23 proposed to reduce taxes on export-focused products to make the “Made in Bangladesh” brand globally competitive.

The authorities are focusing on creating adequate fiscal space by gradually rationalizing subsidies and focusing public spending on development and the social sector. To enhance the revenue situation, they intend to eliminate less effective tax exemptions, simplify the tax rate structure to broaden the tax base, and enhance voluntary taxpayer compliance. All subsidies on petroleum products are proposed to be phased-out and a periodic formula-based price adjustment mechanism is planned for adoption. Similarly, electricity tariffs are proposed to be gradually adjusted to reduce the subsidy component. In fact, the authorities have already started taking steps in this direction. On January 12, 2023, authorities increased the average retail electricity price by 5 per cent and the demand charge for electricity for almost all types of consumers by up to 42 per cent. The gas prices for industries, power generation, hotels and restaurants are also being increased with effect from February 2023.

Our authorities are focusing on governance and institutional reforms as well. Various initiatives, including anti-corruption and preventative actions, are being adopted and executed in order to promote balanced development, to establish good governance, and to improve the delivery of public services. To improve market access and the bidding environment for public procurement, an electronic Government Procurement Portal (e-GP) has already been established in partnership with the World Bank. The e-GP system has enhanced integrity in public procurement. The key features of e-GP that ensure greater transparency include (i) online submission and evaluation of bids, approval, and award of contracts; (ii) reducing external influences; (iii) preserving all procurement documents and transactions online for audit purposes; (iv) validating bidders' information; and (v) online submission and tracking of complaints. Due to limited capacity of the Central Procurement Technical Unit (Ministry of Planning), there is a proposal to set up the Bangladesh Public Procurement Authority (BPPA) with enhanced authority and autonomy. The draft BPPA Act is under review.

Our authorities recognize that a sound financial sector is a pre-requisite to meet the growing financing needs of the economy and to make rapid progress towards the SDGs. The Bangladesh Bank is working to strengthen its supervision and monitoring of the banking sector. With IMF support, the coverage of financial soundness indicators is being expanded. Bangladesh Bank intends to release this data by 2023Q1. The Bank has also undertaken a broad range of policy initiatives that strengthen the domestic banking system. These include inter alia (i) the issuance of guidelines on country risk management and interest rate risk management for banks, (ii) revised guidelines on internal credit risk rating system for banks, and (iii) raising the leverage ratio norms for banks consistent with Basel III norms with effect from 2023. The Bangladesh Bank also intends to train 400 to 500 supervisors in next two years in the area of risk-based supervision.

Infrastructure and Climate Financing

Bangladesh is ranked seventh among the most climate vulnerable countries in the world, but its contribution to global warming is negligible. Authorities are well aware that the country is prone to frequent and erratic rainfall, which causes devastating floods, thereby disrupting lives and livelihoods. The Country Climate and Development Report on Bangladesh, released in October 2022, estimates an average annual loss of about US$1 billion (0.7 per cent of GDP) from tropical cyclones. Rising sea levels also pose a formidable challenge for agricultural production, water supplies, and coastal ecosystems. Due to climate variability and extreme events by 2050, one-third of agricultural GDP may be lost. Moreover, cropland may shrink by 18 percent in Southern Bangladesh and 6.5 percent nationally by 2040.

Recognizing the severity of climate related challenges for the country, authorities have been making sincere efforts to develop adaptation infrastructure in the country. They are trying to integrate issues pertaining to environment with the country's mainstream development policies to ensure economic growth and environmental sustainability. Bangladesh was the first least developed country to set up a Climate Change Trust Fund in 2010 for institutionalizing national climate finance. Furthermore, the Climate Fiscal Framework has been adopted since 2014 and Climate Change Budget Tagging has been operationalized in 2018. Bangladesh has also demonstrated success in disaster preparedness through functioning of initiatives such as the Cyclone Preparedness Programme (CPP) to substantially reduce deaths and damages from such natural disasters. As highlighted by Staff, while Bangladesh is in many ways at the forefront of preparing for climate change, more needs to be done.

While the primary focus of the policy is geared to adapt to substantial climate risks, Bangladesh has also mitigation commitments under the Paris Agreement. The authorities have already outlined priority areas for climate change adaptation and mitigation in national plans with a range of estimated annual financing requirements. However, they acknowledge that funding gap in public spending will fall short of the projected needs for climate adaptation and mitigation. Therefore, their climate related policy efforts need to be supplemented with private investment and external financing. Authorities fully agree with staff's assessment that the existing policy tools need to be complemented by institutional reforms, funding strategies, enabling macro and financial policies, as well as close coordination among institutions.

Summing up

In view of the ongoing stress in balance of payments due to external headwinds and climate related financing needs, our authorities have requested for IMF resources under the Extended Credit Facility (ECF), the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) to be disbursed over a 42-month period. The availability of IMF resources will provide a buffer against external shocks until domestic policy adjustments and reform measures take hold. Authorities are of the view that the supplementary arrangement of SDR 1,000 million (93.8 percent of quota) under the Resilience and Sustainability Facility (RSF) will help them pursue their climate related policy agenda more vigorously. Financing under the RSF will also complement reforms under the ECF/EFF by supporting the authorities' efforts in tackling climate change challenges and catalyzing additional climate finance from other official and private partners. We are sure that the authorities will leave no stone unturned in meeting the objectives of the Program, which is intended to raise saving and investment rates, strengthen the external position, and achieve broad-reaching, labor-intensive, and export-led growth. With due focus on reforms and priorities-based programmes in health, nutrition and population sector, Bangladesh achieved Millennium Development Goal (MDG) related to the health sector prior to the stipulated time and has made remarkable progress in reducing child and maternal mortality and increasing average life expectancy. These achievements are testimony to the authorities' efforts and commitment in pursuing the domestic reform agenda going forward.

Finally, on behalf of the Bangladeshi authorities, we again thank staff for their assessment and policy recommendations to accelerate reforms in the economy. Authorities also thank for Fund's capacity development initiatives for Bangladesh. We also thank Directors for providing their candid assessment on the Bangladesh economy. Directors' favorable consideration of the authorities' request for IMF resources will be highly appreciated.