Bangladesh: 2023 Article IV Consultation, First Reviews Under the Extended Credit Facility Arrangement, Arrangement Under the Extended Fund Facility, and the Resilience and Sustainability Facility Arrangement, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh
Author:
International Monetary Fund. Asia and Pacific Dept
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Publication Date:
14 Dec 2023
eISBN:
9798400260315
Language:
English
Keywords:
IMF TA; headline inflation; IMF budget support; IMF-World Bank Debt Sustainability Analysis; IMF support; Credit
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1. Bangladesh’s economy has been buffeted by multiple shocks. Russia’s war in Ukraine disrupted the strong economic recovery from the COVID-19 pandemic. Rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability. Continued global monetary tightening, coupled with existing vulnerabilities, has challenged near-term macroeconomic management.

Abstract

1. Bangladesh’s economy has been buffeted by multiple shocks. Russia’s war in Ukraine disrupted the strong economic recovery from the COVID-19 pandemic. Rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability. Continued global monetary tightening, coupled with existing vulnerabilities, has challenged near-term macroeconomic management.

Context

1. Bangladesh’s economy has been buffeted by multiple shocks. Russia’s war in Ukraine disrupted the strong economic recovery from the COVID-19 pandemic. Rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability. Continued global monetary tightening, coupled with existing vulnerabilities, has challenged near-term macroeconomic management.

2. In addition to tackling immediate challenges, Bangladesh needs to address longstanding structural issues, including vulnerabilities related to climate change. Bangladesh is on track to graduate from Least Developed Country (LDC) status by 2026, but to achieve its aspiration to reach upper middle-income status by 2031 would require rebuilding macroeconomic stability and addressing long-standing structural issues. While substantial progress has been made since independence, closing remaining gaps in socio-economic development, and tackling climate change challenges remain critical.

3. The IMF Executive Board approved a 42-month arrangement under the ECF/EFF and RSF in January 2023 to support the authorities’ efforts to stabilize the economy and further their structural reforms agenda. The Fund-supported program aims at restoring macroeconomic stability and preventing disruptive adjustment in the near term, while accelerating the authorities’ economic reforms and delivering on the climate agenda. Program performance is broadly on track; however, dealing with escalated external pressures would require additional efforts. The program will lay the foundation to unlock Bangladesh’s growth potential, harness its demographic dividend and support long-term inclusive and green growth.

Recent Developments, Outlook and Risks

A. Recent Developments

4. Growth has decelerated and inflationary pressures remain elevated. Real GDP growth slowed to 6 percent in FY23,1 from a strong post-pandemic recovery at 7 percent. Rising costs of living have suppressed real wage and eroded purchasing power, constraining private demand. Investment remained subdued on the back of lower capital spending to safeguard foreign exchange (FX) reserves. Headline inflation reached a decade high of 9.9 percent year-on-year (y-o-y) in August 2023, reflecting both recurrent cost-push shocks from high and volatile food and fuel prices as well as the pass-through from the Taka depreciation. Even as non-food inflation started to moderate in recent months, underpinned by tightening monetary policy, food inflation has experienced an unexpectedly large uptick since August 2023, keeping headline inflation elevated (Figure 2).

5. The current account deficit has narrowed considerably, but the external position remains vulnerable (Figure 1–3).2 Similar to other small open economies, the FX market in Bangladesh has experienced significant fluctuations, amid rising global inflation and continued monetary tightening in major economies. In response, Bangladesh Bank (BB) has allowed greater exchange rate flexibility, unified the prevailing exchange rates, and tightened monetary policy. In FY23, the Taka depreciated by 15.2 percent against the U.S. dollar. and 4.5 percent in real effective terms. Due to import compression and relatively resilient exports, the current account (CA) deficit has narrowed considerably (0.7 percent of GDP in FY23 compared to 4.1 percent of GDP in FY22). Nevertheless, the overall balance of payments (BOP) has deteriorated, given an unprecedented reversal of the financial account leading to FX shortages. Gross international reserves (GIR) and net international reserves3 (NIR) declined to US$20.3 and US$15.9 billion respectively, as of October 31, 2023. Bangladesh’s external position at end-FY22 is assessed to remain broadly in line with the level implied by fundamentals and desirable policies (Annex II).

6. Monetary policy tightening has accelerated, amidst persistently high inflation and FX pressures. BB raised the policy rate twice in FY24 to 7.25 percent (by 50 basis points (bps) in July and 75 bps in October), marking a cumulative increase of 250 bps since the start of the tightening cycle in May 2022. This together with unsterilized FX sales reduced liquidity in the financial system (Figure 2). Amid tight financial conditions and sluggish credit demand, credit to private sector grew moderately at 9.1 percent in FY23, compared to the average growth rate of 15.4 percent before COVID (FY14-FY19). Credit to government rose by 15.7 percent, partly substituting for a decline in net issuance of national savings certificate (NSC) in FY23.

7. Fiscal developments were shaped by external adjustments (Figure 4). Exacerbated by import compression and sluggish private consumption, tax revenue collections underperformed, and the tax-to-GDP ratio declined to 7.4 percent. At the same time, demand containment efforts led to an under-execution of both current and capital spending, offsetting the revenue shortfall. As a result, the overall fiscal deficit in FY23 was kept at 4.6 percent of GDP, compared to 5.6 percent of GDP at the program approval. The composition of domestic budget financing changed in FY23. With net issuance of high-cost NSCs turning negative on falling household savings and liquidity shortages in the banking system, unabsorbed government securities were devolved to BB at below market clearing interest rates. Public debt rose from 37.9 percent at end-FY22 to 39.8 percent of GDP at end-FY23.

B. Outlook and Risks

8. With appropriate policy responses, macroeconomic conditions are expected to gradually stabilize. The near-term outlook is weaker than envisaged at the time of program approval, reflecting larger and more persistent global headwinds and economic hardships (Table 1–4).

  • Growth and inflation. Real GDP growth in FY24 is projected at 6 percent, down from 6.5 percent projected at program approval. Continued export growth momentum is expected to be a primary growth driver, while private demand is projected to remain subdued, due to inflation persistence and continued monetary policy tightening. While investment is anticipated to gather momentum as FX pressures ease, this uptick is likely to be offset by a simultaneous recovery in imports. Inflation is projected to gradually moderate to 7.2 percent y-o-y by end-FY24, compared to 5.9 percent projected at program approval, as inflation expectations are expected to remain elevated on the back of second-round effects from rising fuel and food prices and the pass-through from Taka depreciation.

  • Fiscal. The fiscal stance is expected to stay neutral, with overall fiscal and primary deficit-to-GDP ratios in FY24 broadly unchanged from FY23, underpinning the authorities’ coordinated policy efforts to tame inflation. This entails the primary deficit-to-GDP ratio of around 2.8 percent in FY24, compared with 3.3 percent projected at program approval. The joint IMF-World Bank Debt Sustainability Analysis (DSA) assesses that Bangladesh remains at low risk of external and overall debt distress. While the assessment is unchanged from the previous DSA, the current DSA revises up assumptions on domestic interest rates in line with recent developments and further expected monetary tightening leading to higher public debt indicators.

  • Balance of Payments (BOP). The CA deficit is projected to remain compressed at around 0.8 percent of GDP in FY24, compared with 4.2 percent projected at program approval. As contractionary domestic policies take effect and global uncertainties subside, the financial account is projected to improve, including through timely repatriation of export proceeds. Reflecting the actual outturns, ongoing FX pressures and BOP adjustments, GIR and NIR are projected to continue to fall in terms of prospective import coverage in the near term, though projected to steadily rise to the level adequate to cover around 4 months of prospective imports in the medium term.

9. Uncertainty surrounding the outlook remains high and risks are tilted to the downside (Annex III). Higher global commodity price volatility amid intensification of climate and geopolitical shocks could add to inflationary pressures, CA deficit, and higher fiscal burdens. Weaker growth in Bangladesh’s major trading partners could adversely affect exports and remittances. Domestically, delayed adjustments to monetary and exchange rate policies and insufficient efforts to address elevated non-performing loans (NPLs) in the banking sector could undermine financial stability and dampen growth prospects. General elections scheduled for January 2024 could further add to economic uncertainty. On the upside, prompt implementation of priority reforms could lift potential growth and strengthen climate resilience.

10. The authorities broadly shared staff’s assessment of economic outlook and risks. They acknowledged that global macroeconomic uncertainties are creating significant headwinds for the Bangladesh economy. The authorities expect near-term economic outlook to improve, as they projected the economy to grow by 7.5 percent in FY24, driven primarily by strong exports, and inflation to moderate to 6 percent y-o-y by June 2024, on the back of tight monetary policy measures and prudent fiscal stance. The authorities expect the current and financial accounts to register a slight surplus in FY24.

Program Performance

11. Even in a difficult environment, the overall program performance has been broadly on track with few exceptions. The ECF/EFF and RSF arrangements have helped accelerate key reforms to build the foundation for economic resilience and sustainable development. These include:

  • Performance Criteria (PC). Amid heightened FX pressures, driven by global uncertainty and inadequate domestic policy response, the end-June 2023 PC on NIR was missed. The end-June 2023 PC on the primary balance (PB) was comfortably met, as public spending was curtailed. The continuous PC on external payments arrears was also met.

  • Indicative Targets (ITs). The end-June 2023 IT on tax revenue collections was missed, primarily due to weaker-than-expected earnings reports and consumption activities, as well as import compression. ITs on reserve money, priority social spending, and capital spending for end-June 2023 were met.

  • Structural Benchmarks (SBs). The authorities have made good progress toward implementing structural conditionality for the first review with six SBs met (Text Table 1). The Bank Companies (Amendment) Act 2020 (BCA) has been approved by Parliament. Due to procedural delay, the Finance Companies Act (FCA) 2020 has been rescheduled to be submitted to new Parliament by March 2024 (end-March 2024 SB). On October 31, 2023, FCA was passed by Parliament.

  • RSF Reform Measure (RM). RM1 has been observed, as a sustainable public procurement (SPP) policy paper and an associated action plan have been adopted. The SPP policy is consistent with international best practices in green public procurement.4

  • Other Program Commitments. The authorities have also made good progress on other key reforms committed under the Memorandum of Economic and Financial Policies (MEFP). These include transitioning to a single exchange rate for all market participants, adopting the policy rate as an operating target, developing climate stress test framework with IMF Capacity Development (CD) support, implementing the safeguards recommendations, and improving macroeconomic statistics.

Bangladesh: Program Implementation Program Targets Under the ECF/EFF Arrangement 1/

(In billions of Taka, unless otherwise indicated)

article image
Sources: Bangladesh’s authorities; and IMF staff.

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

The original NIR floor was set at US$24,462 million at the time of program approval. Adjusted for lower-than-expected budget support in FY23, NIR floor was revised down by US$718 million, the difference between the actual level and the projected level of disbursements under the program.

12. Corrective policy actions are needed to restore external sustainability and to create more fiscal space for priority growth-enhancing expenditures. Considering ongoing external pressures, the end-September 2023 PC on NIR was missed. In this regard, the authorities are committed to urgently adopt corrective policy actions that entail further monetary tightening, supported by neutral fiscal policy stance, and greater exchange rate flexibility. The authorities have requested IMF CD to perform value-added tax (VAT) and income tax diagnostics including tax expenditure assessments that will support end-June 2024 revenue mobilization SB and provide the basis for revenue-raising measures for the remaining periods of the program. The authorities are making progress toward other program targets and reform commitments for future reviews (Table 10 and 11, and MEFP Table 2 and 3).

Near-Term Policy Mix to Rebuild Resilience

Sustained monetary tightening, supported by neutral fiscal policy stance and greater exchange rate flexibility, is needed to restore near-term macroeconomic stability, and bolster external resilience.

13. Monetary and exchange rate policies should focus on containing inflation and restoring external stability. Despite some moderation, inflation expectations remain above the authorities’ inflation target range of 5–6 percent.5 To counter high inflation and continued pressure on the Taka, BB has further tightened the monetary policy stance with the primary objective of closing the negative real interest rate gap by end-FY24 (MEFP, ¶20).6 This includes the policy rate increase of 75 bps in October 2023 and an increase of the mark-up margin on the reference lending rate (by 50 bps) to facilitate the transmission of such policy rate hike. To support monetary tightening, the authorities have ceased devolving government securities on BB since early-August 2023 and plan to keep devolvement at zero for the remainder of FY24. They are committed to phasing out the practice completely in the medium term, in line with the recommendations of the IMF technical assistance (TA) (MEFP, ¶21). As a result of these tightening measures, the yield curve on government securities has shifted upwards by 200 bps on average across all maturities since end-June 2023, real interest rates have risen approaching zero, and private sector credit growth has continued to slow (Text Figure 1). Against this backdrop, the current pace of monetary tightening seems appropriate, and the authorities based on the incoming macroeconomic should continue the current tightening bias until the disinflation process is firmly established. Greater exchange rate flexibility, while transitioning to a more flexible exchange rate regime by adopting a crawling arrangement with a band corridor as a transitional arrangement, would help build external resilience (MEFP, ¶23).

14. Near-term fiscal policy should support monetary tightening. The FY24 budget targets an overall deficit of 5.2 percent of GDP, but a lower deficit would help rein in inflation and BOP pressures and avoid crowding out private investment amid tighter financing conditions. Against this backdrop, the fiscal policy stance should remain neutral for FY24, with the primary deficit-to-GDP ratio unchanged from FY23. This will entail curtailing non-priority spending, while protecting priority social spending and capital investment in line with program objectives. Should external pressures further intensify, or inflation prove more persistent, the authorities should stand ready to tighten fiscal policy—while safeguarding support to the vulnerable—to complement the efforts of the monetary authorities.

Text Figure 1.
Text Figure 1.

Monetary Policy Tightening

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

15. The authorities underscored that reducing inflation and restoring external stability remain a top priority. They agreed with the proposed near-term policy mix and have started to tighten the monetary policy stance by raising the policy rate, further liberalizing the reference lending rate, and discontinuing monetary financing of the budget deficit. The authorities concurred with a neutral fiscal policy stance and intended to cut non-priority spending, while protecting social spending and growth-enhancing expenditure in line with the IMF-supported program objectives. The authorities stand ready to further tighten monetary and fiscal policies as necessary. They acknowledged the need for greater exchange rate flexibility and stressed that the transition of exchange rate regime should be gradual and non-disruptive, in which they have sought IMF TA to support the transitional arrangement.

Toward Robust, Inclusive, and Sustainable Growth

Multi-pronged policy reforms to create additional fiscal space for developmental spending; modernize monetary, fiscal and financial frameworks; enhance governance and reduce corruption vulnerability; attract private investment to lift productivity; and strengthen climate resilience, would be needed to buttress inclusive and green growth.

16. The Article IV policy discussion focused on reform priorities to support Bangladesh’s development objectives. With LDC graduation, Bangladesh will gradually lose access to concessional financing and preferential trade treatments, which have played a key role in boosting export competitiveness. Bangladesh’s aspiration to become upper-middle income status by 2031 requires sustaining high pro-poor growth (above 8 percent), which entails, among others, developing new growth engines, creating conducive environments to attract investment, investing in human capital, and addressing climate vulnerabilities. To achieve these development objectives, reform priorities need to focus on increasing the budget envelope for social spending and public investment through greater domestic revenue mobilization and spending efficiency, modernizing policy frameworks, strengthening financial sector, and expediting macro-structural reforms to jumpstart investment and support private sector development.

A. Fiscal Policy

17. Supported by the IMF program, raising revenue will create additional fiscal space for social spending and investment. Bangladesh’s tax-to-GDP ratio is one of the lowest in the world and has fallen in recent years. The low tax revenue collection has constrained critical spending for longer-term economic development.7 The FY24 budget and the newly amended Income Tax Law have added a number of revenue measures in line with program commitments, which include (1) increased applicable taxes on tobacco, land registration, foreign loans and travel; (2) an environmental surcharge on multiple car ownership; (3) removal of several VAT exemptions; and (4) increased import duties on select products. These measures are expected to contribute to additional revenue collection of 0.5 percent of GDP in FY24 (MEFP, ¶10). These measures will also be complemented by concerted efforts of the National Board of Revenue (NBR) to expand the tax net and reduce leakages in revenue collection via digitalization of tax collection, use of risk-based audits, and tax literacy campaigns (MEFP, ¶12).

18. Sustainable revenue mobilization will need multi-pronged and sequenced reform efforts. NBR, in consultation with international development partners, is formulating a Medium and Long-Term Revenue Strategy (MLTRS) that will provide a comprehensive framework to improve revenue collection over the next 4–6 years. The MLTRS is expected to be finalized and adopted by the first half of 2024 (MEFP, ¶11). At the same time, IMF CD on VAT and income tax diagnostics will assist the authorities in assessing tax expenditures and identify revenue-raising measures for FY25 and FY26 budgets. An initial tax expenditure report covering personal and corporate income taxes and VAT will be published with the FY25 budget (end-June 2024 SB) and updated in following years (MEFP, ¶11). To strengthen tax administration, NBR is establishing compliance risk management units (CRMUs) within the customs and VAT wings by end-December 2023, and a CRMU for the income tax wing is expected by early 2024. As the next step, NBR’s VAT and income tax wings should develop a tax compliance improvement plan (end-June 2024 SB).

19. Further rationalization of expenditure is vital to contain near-term spending pressures and ultimately channel resources toward social and development spending. Budget allocation on subsidies in FY24 remains high (around 2 percent of GDP) as domestic electricity and fertilizer prices remain below cost-recovery levels, despite having been raised several times in 2022 and 2023. It is important to reduce budget subsidies by adjusting domestic electricity, gas and fuel prices more regularly to reflect global price movements and to gradually clear domestic arrears to state-owned energy and fertilizer companies accumulated in FY23.8 The authorities reaffirmed their commitment to adopt a formula-based pricing mechanism for petroleum products by end-December 2023 (SB and RM2 for end-December 2023) and to implement it no later than March 2024 (MEFP, ¶13). The government expanded its social protection programs in the FY24 budget and recently launched its new Universal Pension Scheme (UPS). The latter aims to widen public pension coverage to private sector employees, both formal and informal. Fiscal implications are estimated to be limited in the near term, while the scheme could support institutional investment over time MEFP, ¶17).9

20. Continued progress on public financial and investment management, fiscal risk analysis, and fiscal transparency remains important to enhance fiscal governance. Enhancing debt and cash management will help foster the optimal use of budget resources. To this end, the authorities are developing a policy note to guide decisions on expanding the Treasury Single Account (TSA) and a plan to sustainably reduce net NSC issuance to below ¼ of total net domestic financing by FY26 (both end-December 2023 SBs). As a next step, the Medium-Term Debt Management Strategy (MTDS) should be updated to cover FY25-FY27 (end-June 2024 SB). It remains important to continue expanding the fiscal risk statement to cover major risks from SOEs, guarantees and public private partnerships (PPPs) as well as from climate change (see RM5) in the FY25 budget (MEFP, ¶19). Better public investment management (PIM) is needed to enhance project prioritization and execution, while greater fiscal transparency and risk management will help bolster governance and investor confidence (MEFP, ¶14).

21. The authorities reconfirmed their commitment to sustainably raise revenues and rationalize expenditure to create space for priority social and development spending. They cited import compression and reduced activity as major challenges to near-term revenue mobilization. However, they are confident that revenue measures included in the FY24 budget and the new Income Tax Act, coupled with improved tax administration through digitalization and enhanced enforcement, should yield revenue gains of ½ percent of GDP in FY24. The authorities noted that strengthening tax compliance risk management, developing an MLTRS and maintaining ongoing efforts, such as increasing taxpayer registration, launching a new tax return preparer scheme, and rolling out electronic fiscal devices, will help raise tax revenues over the medium term. The authorities highlighted their efforts to contain budget subsidies by raising fuel, natural gas and electricity tariffs as well as fertilizer prices in 2022 and 2023. Going forward, they plan to lock in zero structural subsidies for petroleum products by implementing a periodic formula-based price adjustment mechanism and to adjust electricity prices to cost recovery. They reaffirmed their commitment to stop including capacity charges, in case of renewing the contract, to power producers.

22. The authorities continued to advance fiscal reforms that promote efficient fiscal management. The authorities are strengthening debt management to reduce financing costs, notably through enforcing reforms to the NSC system initiated since 2020 and are improving public financial management in the areas of fiscal risk analysis, cash management, and fiscal reporting. The UPS was launched in August 2023 to improve the financial protection of Bangladesh’s growing elderly population.

B. Monetary and Exchange Rate Policies

23. Modernizing the monetary policy framework is crucial to improve monetary policy transmission. BB has adopted the interest rate based operational framework and introduced an interest rate corridor system (end-July 2023 SB). To further liberalize the market interest rates, BB has withdrawn the requirement for banks to maintain deposit rates above the 3-months moving average inflation and introduced a market-driven reference lending rate (i.e., the six-month moving average rate of T-bills, the SMART). To enhance monetary transmission, BB is committed to gradually widening the mark-up margin of the SMART (MEFP, ¶22). Additionally, on October 22, 2023, BB has reconstituted the Monetary Policy Committee (MPC) as a formal monetary policy decision-making body and is working toward improving the central bank communications and enhancing transparency with the help of IMF TA. Such reforms would help facilitate the transition to a more forward-looking monetary policy framework, improve monetary policy transmission, and build central bank credibility. Going forward, the authorities’ reform priorities include:

  • Monetary policy framework and transmission. BB should continue operationalizing the interest rate targeting framework and the interest rate corridor system, including by allowing automatic access for all commercial banks to standing deposit and lending facilities (end-March 2024 SB), and streamlining open market operations (OMOs) and the reserve maintenance period (end-June 2024 SB). Furthermore, as recommended by the joint IMF-World Bank TA on Local Currency Bond Market Development (LCBM) Diagnostic, establishing a reliable money market reference yield curve, further liberalizing market lending rates, and phasing out devolvement of government securities on BB remain important to improve monetary transmission.

  • Enhancing central bank communication and governance remain critical for the success of modernization efforts. Progress is being made in implementing recommendations of the 2022 IMF’s Safeguards Assessment, which will bolster BB’s autonomy and governance (¶44). Ongoing IMF TA on monetary policy modernization will inform further improvements in BB communication.

24. Building on recent progress, further reforms to the exchange rate framework would help restore external resilience. BB has abolished the official exchange rate for transactions on behalf of the government and is using the prevailing daily interbank exchange rate announced by the FX dealers’ association (end-June 2023 SB). It has started to publish official reserve assets as per BPM6 definitions (end-June 2023 SB). BB remains committed to further reducing the non-monetary use of FX reserves and not initiating any new non-monetary operations, including FX lending. BB’s adoption of a unified single exchange rate regime is a welcome step; however, FX pressures persist. A move toward a more flexible exchange rate regime would help accelerate repatriation of export proceeds and channel remittances through official channels. To this end, BB agreed that a move toward a crawling peg with a band corridor would be an important interim step to facilitate a non-disruptive transition, with a view of widening of the exchange rate bands in the medium-term (MEFP, ¶23). Moreover, gradually allowing market forces to determine the exchange rate would help build external resilience and support the operation of interest rate targeting framework.10

25. The authorities are committed to further modernizing monetary and exchange rate policy frameworks. The authorities highlighted progress on several milestones in modernizing BB’s monetary policy formulation, implementation, and communication, and plan to step up the modernization efforts, with the help of IMF TA. The authorities are committed to transitioning to a more flexible exchange rate regime, and plan to adopt a crawling peg arrangement in the interim. They acknowledged the importance of allowing market forces to determine the exchange rate. Nevertheless, they cautioned against adjustment costs associated with the move to a more flexible exchange rate regime, including from the exchange rate pass-through to inflation, impact on budget, and unhedged FX exposures. To facilitate a non-disruptive transition, the authorities have requested IMF TA to design and operationalize the transitional arrangement. They remain committed to further reducing the non-monetary use of FX reserves and phasing out LC margin requirements in FY24.

C. Financial Sector Policies

26. Banking sector vulnerabilities persist (Figure 5). System-wide bank capital was broadly stable at 11.2 percent of risk-weighted assets at end-June 2023, but state-owned commercial banks (SoCBs) remain undercapitalized. Asset quality continues to be a concern in SoCBs. At end-June 2023, gross NPLs amounted to 10.1 percent of total loans for the system and 25 percent for SoCBs, with the provisioning maintenance ratio at approximately 79 percent for the system and less for SoCBs.11 Careful monitoring of relatively high share of rescheduled loans, accounting for about 14.4 percent of total loans at end-2022, remains important for timely identification of vulnerabilities.

27. Addressing financial sector vulnerabilities remains crucial to support growth (MEFP, ¶26 and ¶27). 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. Efforts to implement the NPL reduction strategy should be expedited to support growing financing needs of the economy.

  • Strengthening loan classification and provisioning. The publication of comprehensive data on rescheduled loans in the annual financial stability report has enhanced transparency in NPL statistics (end-June 2023 SB). Going forward, to increase the accuracy of asset quality disclosures, the authorities should strengthen loan classification and provisioning rules and eliminate forbearance.12 Issuance of a new circular to replace the 2019 April circular, which relaxed the loan classification, will be important to move to internationally accepted definitions.13

  • Restructuring of SoCBs. The government and SoCBs have jointly formulated a strategy to significantly reduce NPLs and restore capital by 2026. The authorities are committed to enforce the implementation of the strategy and strengthen it further, as needed. The newly adopted Bank Companies (Amendment) Act (2020) and the accompanying circulars14 on Prompt Corrective Action should help enhance BB’s capacity and operational toolkit to facilitate the process of returning weak banks to soundness.

  • Enhancing the legal framework. Following Parliament’s approval of the Bank Companies (Amendment) Act (2020) and the Finance Companies Act (2020), it is important to ensure that these legislations are in line with best practices. Closing remaining gaps in the legal framework, including provisions on the resolution of failing banks, remains important.

28. Effective implementation of risk-based supervision (RBS) is pivotal to safeguard financial stability (MEFP, ¶28). Following the successful completion of the pilot RBS (end-June 2023 SB), BB should further develop its supervisory risk assessment methodology for various risks covering a robust set of objective and qualitative indicators (end-March 2024 SB). The current RBS pilot could also be expanded to encompass the broader banking sector. The formulation of a macroprudential strategy and the execution of scenario-based macroprudential stress tests, facilitated by IMF TA, will help manage systemic risk.

29. Reform efforts to improve governance and regulatory frameworks should continue (MEFP, ¶29). The Bankruptcy (Amendment) Act 2020 and the Money Loan Court (Amendment) Act 2003 and the Negotiable Instrument (Amendment) Act 2020 should be submitted to Parliament as agreed under the program. The successful implementation of these reforms will not only modernize the financial sector but also enhance creditors’ rights, fortify the insolvency framework, and facilitate loan recovery.

30. Capital market development would be key to help mobilize financing for productive investment (MEFP, ¶30). In line with IMF TA recommendations, phasing out central bank devolvement, reforming the primary dealer system, gradually aligning NSC interest rates with market rates, and reducing individual investment limits with the overall objective to replace them with marketable wholesale instruments are needed. The implementation of the MTDS, the development of a secondary market for government securities, the expansion of the non-bank investor base, and the enhancement of the financial market infrastructure will also be important.

31. The authorities remain committed to advance financial sector reforms, supported by the IMF program. While acknowledging high NPLs in SoCBs and certain private commercial banks, the authorities noted that their systemic impacts are expected to be limited as these vulnerable banks constitute a relatively small segment of the overall financial system. They underscored that banks are obligated to maintain full provisioning, even when a NPL is reclassified as performing immediately after rescheduling. At the same time, they highlighted the importance of specific regulatory relaxations, such as the provision for immediate curing of NPLs following rescheduling, as measures intended to provide essential support to viable businesses facing temporary disruptions. To enhance the risk management capabilities of banks and bolster transparency in financial reporting, the authorities plan to adopt International Financial Reporting Standards (IFRS9). The authorities recognized the importance of developing domestic capital market, in which recent reforms have effectively reduced NSC issuances. They agreed that phasing out devolvement and improving the primary dealer system are immediate priorities.

D. Macro-Structural Policies

32. Further trade liberalization and improving the investment climate will support trade expansion, export diversification, and FDI inflows (Figure 6). Bangladesh’s trade profile has remained relatively static over the past decades, characterized by concentrated export and product portfolios.15 FDI inflows have been comparably low at less than 1 percent of GDP over the past two decades. The recently adopted National Tariff Policy 2023 is a welcome step to enhance trade competitiveness and diversify exports. Trade facilitation reforms, including simplified customs procedures, one-stop-shop investor services, and efforts to reduce tariff and non-tariff barriers remain important. Investment in trade-related energy and transportation infrastructure, while gradually reducing regulatory barriers and domestic protections, will enhance business operating environments. Expanding trade and FDI will also ease the FX supply, strengthening external buffers in a sustainable manner (MEFP, ¶31).

33. Boosting productivity and increasing female economic participation are crucial to buttress longer-term growth (MEFP, ¶32). Relative to its peers, Bangladesh’s labor productivity remains low, and skill mismatches are large. Augmenting human capital and technology, alongside targeted skill development, will boost productivity. Addressing educational gaps and refining vocational training will bridge skills disparities and reduce informality. Staff analysis suggests greater gender equality and economic participation of women can yield significant economic gains for Bangladesh. Prioritizing the upskilling of female workers and facilitating their participation into the labor force will not only help boost income and productivity, but also advance gender equity and increase their resilience to economic shocks, including climate change16.

34. Strengthening economic governance and limiting vulnerability to corruption would help enhance the business climate (MEFP, ¶33). Further enhancing fiscal and financial governance (¶19, ¶28), improving transparency, and strengthening policy frameworks (¶22, ¶23) remain critical to enhance the business climate. Progressive digitalization of government administration and services will help promote transparency and reduce corruption. Implementation of the supervisory tools being developed by Bangladesh Financial Intelligence Unit, with the assistance of the IMF, will strengthen the AML/CFT framework and mitigate the risk of money laundering (ML) in the banking sector, including the risk of trade-based ML. Improving skills and staffing of the Anti-Corruption Committee (ACC) will enhance governance and anti-corruption efforts. It also remains important to strengthen the asset declaration process for public officials, including by publishing declarations for key officials, imposing sanctions for non-compliance, better verifying information, and using a standard method to utilize and update the declarations.

35. Enhancing data quality and availability will support policy making. Supported by IMF TA, the rebased consumer price index and the historical series of quarterly GDP between FY16 and FY22 have been published and the coverage of the financial soundness indicators has been expanded. The plan to publish the current quarterly GDP by end-2023 (end-December 2023 SB) remains on track. The authorities are conducting labor force surveys on a more frequent basis to enhance labor market analysis. Data provision is broadly adequate for surveillance and program monitoring but further progress is needed, particularly in fiscal and financial statistics.

36. The authorities are stepping up their efforts to expand trade and investment, develop human capital, and strengthen governance. The authorities highlighted progress in negotiating various bilateral and preferential trade agreements, including with South Asian and Southeast Asian economies. In line with their strategies for LDC graduation, they plan to improve trade-related energy and transportation infrastructure and reduce regulatory barriers to bring in more FDI. To upskill the labor force, the authorities are pursuing various initiatives, including vocational training programs. The authorities noted that female labor force participation is rising and is on track to reach the government’s target of 50 percent by 2030. Having introduced gender budget tagging in 2005, the gender budgeting system is being enhanced with the aim of conducting ‘ex-ante’ rather than ‘ex-post’ gender budgeting with support from development partners, and ensuring that adequate resources are channeled toward programs and policies that promote gender equality. The authorities made progress in improving AML/CFT practices, including the adoption of RBS for AML/CFT with ongoing efforts to enhance the RBS toolkit and increased resource allocations for ACC to carry out its mandate effectively.

E. Climate Change Policies

37. Bangladesh is among the most vulnerable countries to climate change and natural disasters and building resilience requires significant climate financing (MEFP, ¶34)17. The recently adopted National Adaptation Plan (NAP) estimates adaptation investment totaling US$230 billion between now and 2050.18 In response, the authorities have put in place policy tools, such as the Climate Fiscal Framework (CFF), climate budget tagging, and sustainable finance policy and taxonomy, to support climate finance mobilization. Supported by the RSF arrangement, the authorities are implementing reform measures (Table 11) to improve climate-spending efficiency and enable large-scale climate investments particularly the priorities identified in the NAP, the Bangladesh Delta Plan (BDP), and the Nationally Determined Contributions (NDC).

38. Climate-responsive public financial management and infrastructure investment are key to Bangladesh’s long-term sustainable growth. Following the adoption of a sustainable public procurement policy paper, the authorities are gearing toward integrating climate considerations in investment in major infrastructure projects and management of public assets (RM6 for end-December 2024, RM9 for end-June 2025 and RM10 for end-December 2025). These reforms will improve the prioritization of resources for the BDP, align infrastructure investments with the NDC, and promote adaptation actions as envisaged in the NAP. With the help of IMF TA, the authorities are conducting the analysis of macro-fiscal risks from climate change in the Medium-Term Macroeconomic Policy Statement (MTMPS) that would support climate-aware planning and budgeting (RM5 for end-June 2024). Developing a National Disaster Risk Financing strategy that integrates social assistance measures, would help to target building resilience for the most vulnerable groups (RM4 for end-June 2024).

39. Better management of climate-related risks will enhance financial sector resilience and help scale up private climate finance. The authorities aim to issue guidance to banks and financial institutions on disclosing climate-related risks by year-end (RM3 for end-December 223) and are building their capacity, with IMF support, to conduct and publish climate stress testing for the overall financial system and updating the Guidelines on Stress Testing for banks and financial institutions to include climate change considerations (RM7 for end-December 2024). Building on Bangladesh’s green bond strategy and sustainable finance initiatives, the authorities will update the green taxonomy to reflect the newly adopted NAP and the BDP to further promote the mobilization of private finance for adaptation investment. So far, the RSF is being complemented by climate finance from development partners (¶43). Efforts to further catalyze private climate finance are ongoing.

40. The authorities recognized the importance of the effective implementation of climate policy, as well as increased efforts to mobilize climate finance. The authorities highlighted good progress in implementing the country’s climate policy, particularly through the NAP, the BDP, and the Mujib Climate Prosperity Plan (RM11 for end-December 2025). The authorities agreed that more needs to be done to ensure that institutional mechanisms are in place to scale up investment in climate adaptation and mitigation. To this end, they plan to establish an inter-ministerial committee to spearhead the implementation of key plans and coordinate strategic climate investments. The RSF would substitute for more expensive domestic financing, thus improving the expenditure composition toward development and social spending. In addition, the authorities are exploring options to further mobilize climate finance in close partnership with development partners, including through the initiatives catalyzed by the RST.

Program Modalities and Other Program Issues

41. The authorities request a waiver for the non-observance of the end-June 2023 PC on NIR which was breached as a result of greater-than-expected worsening in external conditions and policy response that proved inadequate. Staff supports this waiver, based on the proposed corrective actions that entail further monetary tightening, supported by neutral fiscal policy stance, and greater exchange rate flexibility (¶13, ¶14, and ¶15), and given that the underperformance of the NIR has been partly external-driven, amidst aggressive global monetary tightening and the larger-than-expected spillovers into Bangladesh (¶5, ¶12 and Figure 1). As the uncertainty around the general elections subsides, financial flows could again normalize. (¶8).

42. Modification of program targets and new structural benchmarks are proposed for 2023 and 2024.

  • Modification of quantitative performance criteria on NIR and PB for the second review (end-December 2023—Table 7) to reflect the revised outlook, while ensuring that reserve coverage remains adequate and fiscal policy reflects an integrated policy approach in close coordination with monetary and exchange rate policies. Staff assesses the modified NIR path to be consistent with the proposed corrective actions in the near term and transition to greater flexibility around the exchange rate regime and expects the reserve coverage to increase in the medium term.

  • Establishment of new structural benchmarks (Table 10) is proposed to supplement the authorities’ ongoing progress on the reform implementation under the ECF/EFF, guided by the sequencing of reforms at the time of program approval.19 These include additional reforms in the areas of revenue mobilization, public financial management, fiscal transparency, monetary policy framework, and financial sector reforms. Reform measures under the RSF were approved by the IMF Board (Table 11).

43. Financing assurances. FY23 budget financing mostly materialized as envisioned but fell short of the projected amount at the time of program approval by US$718 million, due to procedural delays. Climate financing from the World Bank (WB) and Asian Development Bank (ADB) operations, as expected, has been approved, with additional financing commitment from French Development Agency (AFD).20 Bangladesh’s financing needs remain broadly unchanged from program approval and the ECF/EFF/RSF program is fully financed without RSF disbursements, with good prospects of financing for the remainder of its duration (Table 8). There are firm commitments for the next 12-months of the program and good prospects for the remainder of the program.

44. Capacity to repay (Table 9). Bangladesh’s capacity to repay the Fund is adequate and the authorities’ track record of servicing IMF debt remains strong. Total Fund credit outstanding peaks in 2026 at SDR 3,610.7 million, equivalent to 0.8 percent of GDP (6.4 percent of exports of goods and services or about 12.5 percent of gross FX reserves). Total obligations to the Fund would peak in 2025 at 0.1 percent of GDP (0.5 percent of exports of goods and services or 1.3 percent of GIR). The risk of debt distress is assessed to be low, and the debt outlook is expected to remain sustainable over the medium term.

45. Safeguard assessment. BB is making progress toward implementing the recommendations of the 2022 safeguards assessment. It has improved transparency of its IFRS-based financial statements, established procedures for the reporting of official reserve assets in accordance with the sixth edition of the IMF’s balance of payments and international investment position manual (BPM6), and has been gradually winding down non-monetary use of FX reserves. In addition, BB engaged an international audit firm to conduct the audit for FY23, and the external auditors’ selection policy will be approved to sustain this practice going forward. Steps are also being taken to strengthen internal audit function and improve controls in currency operations and IT environment.

46. Risks to the program implementation. The main risk to the program is the limited scope to relax fiscal or monetary policy in the event of adverse real shocks, given low tax revenues, high inflation, and reserve losses. Weaknesses in implementation capacity, political opposition to some proposed reforms, and political uncertainty due to national elections planned for January 2024 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.

47. Capacity Development. The capacity development strategy is well-aligned with program and surveillance objectives (Annex V). CD has supported the implementation of past IMF staff advice, which also gained good traction (Annex I). CD priorities continue to strengthen key reform implementation in the areas of revenue mobilization, public financial management, banking supervision, capital markets, and macro statistics.

Staff Appraisal

48. Bangladesh continues to face challenges amidst persistent external pressures. Continued global monetary tightening and elevated global commodity prices, coupled with existing vulnerabilities, have kept the Taka and FX reserves under pressure and increased the cost of living.

49. Despite challenges, program performance is broadly on track. All quantitative targets were met, except for the PC on NIR and the IT on tax revenues, which were missed due to adverse spillovers from global economic developments and inadequate policy response. Six out of seven structural benchmarks were met; however, the Finance Companies Act (2020) was passed by Parliament with delay. The reform measure under the RSF has been met.

50. With an appropriate policy mix, the macroeconomic outlook and external position are expected to stabilize. Near-term policy priorities should aim to contain inflation and rebuild reserves. Helped by continued monetary policy tightening and neutral fiscal policy, inflation is expected to moderate. Greater exchange rate flexibility would help alleviate FX pressures and rebuild external buffers. Growth is expected to hold up on the back of relatively resilient exports despite subdued private demand. Nevertheless, risks to the outlook remain tilted to the downside.

51. Monetary and exchange rate policy reforms will help bolster macroeconomic resilience. The ongoing momentum to modernize the monetary policy framework should continue, which will promote greater macroeconomic stability and help better manage inflation. A gradual transition to a more flexible exchange rate regime will enhance the economy’s resilience to external shocks.

52. Broad-based fiscal revenue and expenditure reforms are needed to further expand social spending and investment. A multifaceted revenue strategy should include rationalization of tax expenditures, holistic compliance risk management, and modernization of revenue administration. Reforms to strengthen investment and debt management, improve fiscal risks assessment, and reduce untargeted subsidies would help channel revenues toward much-needed social, developmental, and climate-related spending.

53. Strengthening the financial sector and developing capital markets will support the authorities’ long-term development goals. Policy priorities include implementing NPL reduction strategy and addressing weak bank balance sheets. Strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets will help mobilize financing to support growth objectives.

54. Addressing long-standing structural challenges is crucial to help achieve Bangladesh’s ambition to reach upper-middle income status. Improving the investment climate, reducing tariff and non-tariff barriers, and diversifying exports are important to boost competitiveness. Reducing gender gaps in economic participation and tertiary education, upskilling the labor force, and improving trade-related infrastructure would increase productivity and long-term growth potential. Strengthening governance to limit vulnerability to corruption will help attract investment.

55. Building resilience to climate change and natural disasters is a key priority for sustainable growth. Additional efforts to strengthen institutions, improve climate spending efficiency, and enhance financial sector resilience to climate-related risks would help meet the authorities’ climate objectives and mobilize climate finance, particularly from private sources.

56. Based on Bangladesh’s overall strong performance and commitments under the program, staff supports the authorities’ request for the completion of the First Review. Staff supports the requests for (i) a waiver for nonobservance of the NIR, (ii) the resetting of one SB to a later date, and (iii) the modification of end-December 2023 performance criteria and indicative targets.

57. It is expected that the next Article IV consultation with Bangladesh will be held on the 24-month cycle in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Figure 1.
Figure 1.

Bangladesh: Pressures from External Shocks

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

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

Bangladesh: Monetary and Financial Market Developments

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

Sources: Bangladesh Bureau of Statistics; Bangladesh Bank, Haver Analytics, Inc.; CEIC Data Company Limitted; and IMF staff calculations.
Figure 3.
Figure 3.

Bangladesh: External Sector Developments

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

Sources: Bangladesh Authorities; Bangladesh Bank, Haver Analytics, Inc.; FRED; INS; and IMF staff estimates.
Figure 4.
Figure 4.

Bangladesh: Fiscal Developments

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

Sources: Bangladesh Ministry of Finance; World Economic Outlook; and IMF staff estimates.
Figure 5.
Figure 5.

Bangladesh: Banking Sector Developments

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

Source: Bangladesh Bank.
Figure 6.
Figure 6.

Bangladesh: Macro-Structural Developments

Citation: IMF Staff Country Reports 2023, 409; 10.5089/9798400260315.002.A001

Sources: IMF’s World Economic Outlook Database, World Bank’s World Development Indicators, Worldwide Governance Indicators, Bangladesh’s National Labour Force Surveys; International Labour Organization; Flores and Others (2022) and IMF Staff Calculations.
Table 1.

Bangladesh: Selected Economic Indicators, FY20–28 1/

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

Fiscal year begins on July 1 and ends on June 30.

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.

Table 2.

Bangladesh: Balance of Payments, FY20–28 1/

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

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

Fiscal year begins July 1 and ends on June 30.

Imports are based on customs data.

Excludes official capital grants reported in the capital account.

Of identified amounts some are pending approval and some are to be disbursed in 2020 after June.

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 3a.

Bangladesh: Central Government Operations, FY20–28 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 3b.

Bangladesh: Central Government Operations, FY20–28 1/

(In percent of GDP, 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 4.

Bangladesh: Monetary Accounts, FY20–28 1/

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

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

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.”

Liabilities arising from banks’ foreign currency clearing accounts at BB and nonbank deposits at BB are included in “Other items, net.”

Table 5.

Bangladesh: Financial Soundness Indicators 1/

(In percent)

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Source: Bangladesh Bank.

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

Table 6a.

Bangladesh: Schedule of Purchases and Disbursements for ECF/EFF Arrangement

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Table 6b.

Bangladesh: Schedule of Disbursements for RSF

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Source: IMF.
Table 7.

Bangladesh: Quantitative Performance Criteria and Indicative Targets 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 8.

Bangladesh: External Financing Requirements and Sources, FY24–26 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 Agence Française de Développement, Asian Infrastructure Investment Bank, and Japan International Cooperation Agency.

Table 9.

Bangladesh: Indicators of Fund Credit, 2024–20461/

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Source: IMF staff projections.

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

Table 10.

Bangladesh: Proposed Structural Benchmarks: 12 Months After Completion of First Review

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including by conducting a one-week main OMO at the policy rate with full allotment, to replace the current multiplicity of daily OMOs, increasing averaging provisions to allow banks cope with short-term liquidity shocks, and aligning the main OMO with the 2-week reserve maintenance period.

Table 11.

Bangladesh: Board Approved Reform Measures Under the Resilience and Sustainability Facility

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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.

Annex I. Implementation of IMF Policy Recommendations1

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Annex II. External Balance Assessment

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Fiscal year starts in July and ends in June.

See 2023 Bangladesh: Selected Issues paper “Toward Greater Exchange Rate Flexibility.”

See 2023 Bangladesh: Selected Issues paper “Toward Greater Exchange Rate Flexibility.

Annex III. Risk Assessment Matrix1/

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view o 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 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.

Annex IV. Capacity Development Strategy

Bangladesh is one of the intensive IMF capacity development (CD) recipients amongst the lower-middle-income countries in Asia. IMF CD, closely aligned with IMF-supported program priorities, focuses on supporting the authorities’ efforts to accelerate macroeconomic reforms including revenue mobilization, public sector management, and the modernization of monetary and financial systems to lay the foundations for the authorities’ aspirations to reach upper middle-income status by 2031.

1. CD aims to assist the Bangladeshi authorities in implementing multipronged structural reforms. While on track to graduate from the Least Developed Country status by 2026, Bangladesh aspires to reach upper middle-income status by 2031. Nevertheless, substantial gaps remain in social and development spending, tax revenue mobilization, the efficacy of monetary policy framework, structural reform areas to diversify export and attract foreign direct investment inflows, and climate change reforms. Against this backdrop, building institutional capacity would be key to support the authorities’ reform implementation.

2. The comprehensive CD program to Bangladesh aims to assist the authorities’ efforts to address capacity gaps and to ensure timely delivery of reforms under the IMF-supported program. CD is currently delivered by both regional advisors from IMF SARTTAC and headquarter-based missions.

Fiscal

3. CD in the fiscal sector is geared toward creating fiscal space to increase social spending and investment sustainably. Mobilizing revenues and rationalizing subsidies is critical to create fiscal space for growth-enhancing spending needs, strengthen social safety nets, and build climate resilience. Improving public spending efficiency, strengthening fiscal transparency, and managing fiscal risks are of paramount importance.

4. Ongoing and planned activities. Ongoing activities include tax expenditure assessment as part of indirect tax diagnostic, tax compliance risk management, fiscal risk management, and strengthening the Treasury Single Account. Going forward, CD will focus on rationalizing tax expenditures, increasing tax compliance, broadening the tax base, and implementing a medium-term revenue strategy on the revenue side. Strengthening cash and debt management and improving public investment management will be priorities on the expenditure side. Continued CD on fiscal risk analysis as well as on developing macro-fiscal forecasting and medium-term macroeconomic framework tools—the latter currently being provided by ICD—will also help build the authorities’ capacity to strengthen fiscal policy making.

Monetary and Exchange Rate Framework

5. CD in this area is supporting the authorities’ progress toward modernizing monetary policy framework and operations. For monetary and exchange rate policies, the focus remains on operationalizing the interest rate targeting framework, increasing exchange rate flexibility, and safeguarding adequate FX reserves. This would help enhance macroeconomic stability and bolster buffers against external shocks.

6. Ongoing and planned activities. CD is currently supporting Bangladesh Bank (BB) to modernize the monetary policy framework, operationalize the recently adopted interest rate-based operating system, and strengthen policy communications. To this end, a Forecasting and Policy Analysis System (FPAS) is being developed, which would help BB carry out an informed decision-making regarding the appropriate level of the policy interest rate, and BB’s open market operations are being streamlined to reduce volatility of money market interest rates, improve monetary transmission, and promote market development. Going forward, CD in this area will focus on improving BB’s liquidity forecasting and management, and strengthening monetary policy transparency and communications. CD on the central bank collateral framework and FX reserve management would help the authorities’ efforts for greater exchange rate flexibility.

Financial Sector

7. CD will help the authorities reduce financial sector vulnerabilities and develop capital markets. Strengthening banking supervision and regulation, improving corporate governance, revamping legal system, and reforming the role of state-owned commercial banks remains important to safeguard financial sector resilience. Capital market development will help not only mobilize long-term financing to achieve growth objectives but also improve monetary transmission mechanism.

8. Ongoing and planned activities. Several CD missions focused on building of a more risk-based approach of banking supervision and addressing implementation difficulties. Recent CD assisted the authorities’ progress in improving and disseminating financial soundness indicator (FSI); assessing market infrastructure for local currency bond markets; and strengthening macroprudential stress testing. Going forward, risk-based supervision (RBS) and capital market development remains priorities. To this end, CD will be concentrated on strengthening supervision regulations, developing local currency bonds, and reforming the National Saving Certificates system.

Climate

9. CD in this area focuses on strengthening institutions and energizing reforms to help authorities’ commitment to climate objectives. To this end, CD activities, closely aligned with the RSF program objectives, would help enhance climate fiscal management and mobilize private climate finance, which should make infrastructure investment green and resilient. IMF CD is closely coordinated with CD provided by other Development Partners.

10. Ongoing and planned activities. Recent CDs on climate risk analysis focused on designing a framework to assess the impact of physical climate risk on the banking sector, and on fiscal risk analysis including climate-related risks. IMF CDs are helping build capacity to conduct regular climate stress testing exercises and align climate change considerations with PIM framework, particularly on project appraisal and selection aspects. Going forward, CD will support the authorities’ progress on climate-responsive asset management, disaster risk financing, and sustainable finance, including catalyzing private climate financing.

Legal Framework and Statistics

11. Improving the quality of statistics requires CD support. High quality, better coverage, and timely dissemination of statistics is imperative as input for well-designed macro frameworks. Progress has been made in strengthening the AML/CFT, and this momentum should sustain.

12. Ongoing and planned activities. Several ongoing CD projects are aimed to help the authorities compile national account, government finance and price statistics and strengthen AML/CFT risk-based supervision. Going forward, CD in the statistics area will be expanded to improve BOP and FSI and CD on the AML/CFT front will help the authorities implement RBS.

Table 1.

Bangladesh: Capacity Development Strategy

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Appendix I. Letter of Intent

November 21, 2023

Dhaka

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva:

This Letter of Intent (LOI), along with the attached update to the Memorandum of Economic and Financial Policies (MEFP), outlines our continued commitments to the policies and objectives of the economic program supported by the Extended Credit Facility (ECF)/Extended Fund Facility (EFF) arrangement and the Resilience and Sustainability Facility (RSF) arrangement. In the face of ongoing macroeconomic challenges, the IMF-supported economic program is pivotal in ensuring macroeconomic stability, facilitating a sustained economic recovery, and promoting stronger, greener, and more inclusive growth over the medium and long term.

Bangladesh continues to face challenges as external shocks persist, which has made it difficult to restore macroeconomic stability. On the back of substantial import compression and resilient exports, the current account deficit narrowed considerably in 2023. Nevertheless, the financing need for balance of payments (BOP) increased further due to an unprecedented reversal in the financial account, which has impeded our efforts to restore foreign exchange (FX) reserves. In addition, elevated global commodity prices and continued Taka depreciation have kept inflation persistently high, placing disproportionate burden on the poor.

Despite this difficult environment, our program implementation has been broadly on track. We have successfully met all quantitative targets, except for the performance criteria (PC) on net international reserves (NIR) and the indicative target (IT) on tax revenue collections. The underperformance in NIR and tax revenue collections reflects challenging external conditions, including aggressive global monetary tightening and larger-than-expected spillovers into Bangladesh. We have made good progress on structural reforms for the first review, with six out of seven structural benchmarks (SBs) under the ECF/EFF and a reform measure under the RSF met. Parliament also recently approved the Finance Company Act (2020), a structural benchmark for March 2024.

We are committed to take necessary policy actions to preserve macroeconomic stability. In recent months, we have swiftly adjusted our policy mix to restore external stability and contain inflation. We have accelerated our monetary policy tightening, stopped devolvement on Bangladesh Bank and primary dealers, adopted a unified exchange rate, started transitioning toward a flexible exchange rate regime, and kept the fiscal deficit in check. To reflect the revised outlook and policy adjustments, we request the modification of quantitative performance criteria on NIR and primary balance for the second review (end-December 2023).

In view of good progress under the program, prompt recalibration of policy measures, and our strong commitment to program objectives, we request the completion of the first review under the ECF/EFF and the RSF and a waiver for the non-observance of the end-June 2023 PC on NIR. Upon completion of this review, we request the disbursement of SDR 519.02 million (48.8 percent of quota), of which SDR 117.45 million (11 percent of quota) under the ECF, SDR 234.90 million (22 percent of quota) under the EFF, and SDR166.67 million (15.8 percent of quota) under the RSF. The proposed disbursements will help mitigate near-term pressures 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 financial assistance is also expected to catalyze support from other development partners to meet our overall financing needs.

The attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) update the versions dated December 23, 2022, and set out economic objectives of the government’s reform program for the remaining program period 2024–2026. The updated program will continue to be centered on upfront policy actions aimed at restoring macroeconomic stability and rebuilding our reserve buffer, while undertaking macro-critical structural reforms to lay the foundations for achieving upper-middle income status by 2031. Considering persistently difficult external conditions, we commit to step up our efforts to (a) raise revenues to enable higher development and social spending and enhance fiscal governance; (b) modernize the monetary policy framework; (c) transition toward a more flexible exchange rate regime; (d) reduce financial sector vulnerabilities and develop capital markets; (e) improve the investment climate and boost productivity; and (f) establish an enabling environment to better adapt to climate change.

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 seek 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.

Since part of the resources will be lent to the Treasury, the Ministry of Finance and Bangladesh Bank have signed 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

I. Context

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. This memorandum 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.

II. Recent Macroeconomic Development and Outlook

2. Macroeconomic pressures have intensified in Bangladesh. Elevated global food, energy, and other commodity prices, disruptions in international supply chains, and tighter global financial conditions continue to pose macroeconomic challenges for Bangladesh. Our real GDP growth slowed to 6 percent in FY23 from the strong post-pandemic recovery of 7.1 percent. Inflation reached a decade high of 9.9 percent year-on-year in August 2023 and remains elevated. Due to import compression and resilient exports, the current account (CA) deficit narrowed substantially from 4.1 percent of GDP in FY22 (July 2021–June 2022) to 0.8 percent of GDP in FY23. Nevertheless, for the first time in 15 years, our financial account has turned negative, resulting in significant and continued decline in foreign exchange (FX) reserves. Gross international reserves (GIR) have declined further to US$ 21.1 billion at end-September 2023, from US$ 26 billion at end-December 2022. Meanwhile, the Taka has depreciated by about 5 percent over the same period.

3. We have taken a range of measures to maintain macroeconomic stability. We have accelerated the pace of monetary policy tightening and enhanced monetary transmission. Increases in the policy rate and unsterilized FX interventions have reduced liquidity in the banking system. We have allowed greater exchange rate flexibility to reduce FX pressures and raised the prices of fuel, electricity, and fertilizers. While we have maintained letter of credit (LC) margin requirements on the payments by bank deposits on some non-essential imports since July 2022, capital machinery, raw materials, and imports needed for key industries were not part of any such requirements. Moreover, since December 2022, we have started to relax these margin requirements, especially for supporting commercial imports for the SME sector.

4. We have kept the fiscal deficit in check. Tax revenue collections underperformed on account of sluggish private demand and a contraction in imports. However, the revenue shortfall was more than offset by reining in both current and capital spending, while protecting social priority and development spending. As a result, the overall fiscal deficit and public debt in FY23 were contained to 4.6 and 40 percent of GDP, respectively, compared to 5.6 and 42 percent of GDP projected at program approval.

5. We expect the near-term economic outlook to improve, but significant uncertainties remain. Our economy is projected to grow by 7.5 percent and inflation to moderate to 6 percent, as envisaged in our FY24 budget. Nevertheless, we expect challenges to continue in the coming months, given uncertainties including from the upcoming elections, elevated commodity prices, and tight global financial conditions. These will weigh down on our efforts to rebuild FX reserves and contain inflation.

6. To achieve sustainable and inclusive growth, addressing long-standing structural issues, including climate change, remains a top priority. This will require developing new growth engines, increasing productivity to harness demographic dividend, bridging infrastructure gaps, and investing in human capital. We are committed to boosting social and development spending, tax revenues, export diversification, foreign direct investment (FDI) inflows, and the investment climate. Despite 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. 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 amount to 2 to 3 percent of GDP.

III. Program Performance

7. Despite economic challenges and upcoming elections, program implementation has been broadly on track.

  • Performance Criteria (PC) and Indicative Targets (ITs). We have met all PCs and ITs, with the exception of the PC on NIR and the IT on tax revenue collections. The former was missed due to an unprecedented reversal in the financial account, while the performance of tax revenues was impacted by import compression as well as sluggish private consumption.

  • Structural benchmarks (SBs). We have met six out of seven SBs. The Bank Companies (Amendment) Act 2020 (BCA) has been approved by Parliament, and more recently Parliament also approved the Finance Companies Act (FCA) 2020, a structural benchmark for March 2024.

  • RSF Reform Measures (RM). RM1 has been observed, as a sustainable public procurement (SPP) policy paper and an associated action plan was submitted to the cabinet on September 29 and approved on October 23. The SPP policy is consistent with international best practices in green public procurement.

IV. Policy Framework

8. Our reform agenda under the IMF program aims at restoring macroeconomic stability and undertaking structural reforms to promote inclusive and green growth. During the remaining program period (FY24–26), we will bring down inflation to within the range of 5–6 percent by taking appropriate policy measures. We also intend to increase GIR to about 4 months of prospective imports by FY26 through prudent aggregate demand management policies, increased exchange rate flexibility, and structural reforms to boost competitiveness. These measures are 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.

A. Fiscal Policy

9. In FY24, fiscal policy will support monetary tightening, while creating fiscal space to sustainably increase social spending and investment. Given the immediate need to curb inflation and preserve international reserves, we are targeting a neutral fiscal stance in FY24 by keeping the primary deficit broadly unchanged from FY23. This will require rationalizing the budget spending by about 1.8 percent of GDP relative to the approved FY24 budget. In the event that additional pressures on inflation and external accounts materialize, we stand ready to adjust our fiscal strategy as needed to preserve macroeconomic stability. At the same time, we plan to mobilize new revenues which will allow a gradual expansion of development and social spending in line with the IMF’s program objectives. Over the medium term, further tax revenue mobilization as well as rationalizing subsidies and reducing domestic debt financing costs will contribute to creating new fiscal space for priority investment and social spending.

10. We have adopted measures to raise revenue for FY24. As part of our FY24 budget and our new Income Tax Act 2023, we have adopted tax revenue measures which are expected to yield revenue gains of 0.5 percent of GDP in FY24 in line with our program commitment (end-June 2023 SB). These measures include (1) increased applicable taxes on tobacco, land registration, foreign loans, and travel; (2) an environmental surcharge on multiple car ownership; (3) removal of several VAT exemptions; (4) increased import duties on select products; and (5) improved revenue administration. The Income Tax Act 2023, which we adopted in June 2023, further modernizes income tax administration and addresses issues such as base erosion and profit shifting by global internet-based entities and transfer pricing.

11. We will continue to strengthen our revenue mobilization efforts through streamlining tax expenditures and adopting a Medium- and Long-Term Revenue Strategy (MLTRS). We intend to further 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 analyze existing tax expenditures in CIT, PIT and VAT and publish this analysis as part of the FY25 budget (end-June 2024 SB). We will use the analysis to identify measures to rationalize tax expenditures, which will be adopted in our FY25 and FY26 budgets. 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. Moreover, we are formulating an MLTRS, which will provide a structured framework to improve revenue collection over the next 4–6 years. Stakeholder consultations are expected to be completed in early 2024, following which the strategy will be finalized and officially adopted with a target date of June 2024.

12. We are stepping up efforts to strengthen tax administration. Already, we have taken steps to increase taxpayer registration by making it mandatory to present proof of tax return submission to receive 38 government services, which has helped increase the number of registered taxpayers by 1 million in FY23. We also recently launched a new Tax Return Preparer scheme, under which individuals will be supported in preparing their tax returns by qualified agents who will receive a modest financial incentive by National Board of Revenue (NBR) for their services. We plan to reach 10 million registered taxpayers by 2026. We have installed 9,572 electronic fiscal devices (EFDs) as of July 2023. In FY24, we expect to install another 10,000 EFDs, which would yield additional revenue of 4 billion Taka. Looking ahead, we plan to install another 300,000 EFDs over the next five years. More generally, we are moving 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 NBR (end-December 2023 SB). On the latter, a CRMU is being established in the Audit and Intelligence Directorate of the VAT wing. The CRMU for income tax will be created as part of a broader reorganization process of this wing in the first half of 2024. Income tax and VAT wings will work together to develop and gradually implement a comprehensive compliance improvement plan (end-June 2024 SB). A new Customs Act, which aims to modernize customs administration in line with international best practice, has been recently approved by Parliament.

13. We are committed to contain subsidies to safeguard priority spending. Decisive steps are being taken to contain the budget pressures stemming from continuously elevated global energy and fertilizer prices. Having raised fuel prices to reflect global price increases, we did not provide budget support to Bangladesh Petroleum Corporation (BPC) in FY23. Meanwhile, we contained budget subsidies for natural gas and electricity in FY23 to 0.8 percent of GDP and fertilizer subsidies to 0.6 percent of GDP by raising gas and electricity tariffs as well as fertilizer prices in 2022 and 2023. Nonetheless, arrears to the magnitude of 1.1 percent of GDP were accumulated with Bangladesh Power Development Board and fertilizer importers and are now being cleared gradually. 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. We will submit the selected mechanism for approval by our Honorable Prime Minister before the end of the year (end-December 2023 SB) and implement it by March 2024. Furthermore, we will aim at adjusting electricity prices and remain committed to not including capacity charges, in case of renewing the contract, to power producers to further reduce subsidies.

14. We are taking steps to enhance the effectiveness of public investment to support the achievement of our development goals. In this regard, we will follow our updated Public Financial Management Action Plan for FY24–28, 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.

15. We intend to improve our debt management to reduce financing costs and support capital market development. Our Medium-Term Debt Management Strategy (MTDS), covering FY22 to FY24, aims to minimize borrowing costs while ensuring long-term sustainability of fiscal policy. To this end, our strategy is 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. Developing local bond markets will allow us to gradually tap into long-term market financing. Going forward, with the help of IMF TA, we will update the MTDS on an annual basis, starting with a third MTDS covering FY25 to FY27 (end-June 2024 SB), and complement it with a quarterly debt bulletin and eventually an annual borrowing plan.

16. 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. These reforms have helped reduce demand for NSCs, with net NSC issuance turning negative in FY23, affected also by reduced household savings amid the higher cost-of-living. We will continue monitoring the database of NSC subscribers and enforcing access limits to reduce the scope for misuse, including by automating issuances by June 2024. To guide the reform process, we have developed a formal plan on how to sustainably keep net NSC issuance below ¼ of net domestic financing by FY26 (end-December 2023 SB).

17. We will continue our efforts to enhance the effectiveness of social safety nets and gradually increase priority social spending. Our recently updated Action Plan to Implement the National Social Security Strategy of Bangladesh, which covers the period FY21–26, 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 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 Scheme (UPS) was officially launched on August 17, 2023. This is an important new initiative which aims to improve the 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. As of October 17, 2023, 14,731 signed up under the UPS. Among four schemes of the UPS, three schemes are defined contributions, which would not have any fiscal cost. The government contributes only 500 Taka per month per beneficiary under the ultra-poor scheme, which incurs very low fiscal cost as the number of enrollments is insignificant so far.

18. 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 is currently conducting a census of all bank accounts held by institutional units of the central government remaining outside the TSA, and will develop a policy note to guide decisions on their integration and sequencing of TSA enhancements (end-December 2023 SB). We also plan to undertake IMF training to improve cash forecasting and aim for the treasury to produce regular cashflow forecasts to be shared with the budget department and Bangladesh Bank (BB) 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 improve commitment controls, facilitate on-line bill submission, reconcile tax receipts and deductions, prepare budget at Drawing and Disbursing Officer (DDO), and support electronic payments.

19. 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, starting with the third quarter of FY24. 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. The FY22 financial statement was submitted to the Comptroller and Auditor General of Bangladesh on January 30, 2023. Moreover, we are taking steps to institute a modern internal audit function in the government, capable of implementing risk-based audits, by starting with five high-spending ministries/departments. We are also actively working to improve transparency over state-owned enterprises (SOEs). In this regard, we have collected recent financial data on over 120 SOEs through our online portal and are conducting a more thorough analysis of the financial health of a subset of these SOEs to inform a fiscal risk statement, an annual SOE sector report (initially covering the 50 largest SOEs), and an SOE governance framework. The Medium-Term Macroeconomics Policy Statement (MTMPS) for FY24 to FY26 for the first time included a chapter on fiscal risks, which will be extended in the next edition to cover major risks from selected SOEs, guarantees and Public Private Partnerships (PPP) as well as quantitative analysis of macro-fiscal risks related to climate change and natural disasters.

B. Monetary and Exchange Rate Policy

20. To contain inflation and rebuild reserves, we have tightened our monetary policy stance further and remain committed to closing the negative real interest rate gap by end-FY24. On October 4, 2023, BB raised the policy rate by 75 basis points (bps), the highest one-time increase in a decade, marking a cumulative increase of 250 bps since the start of the tightening cycle in May 2022. We have also kept the interbank overnight Call Money interest rate closely aligned with the policy rate by conducting full allotment open market operations (OMOs). BB will continue calibrated tightening of monetary policy to close the negative real interest rate gap to contain second-round effects from food and fuel price shocks, counter exchange rate pressures, and re-anchor inflation expectations back at the medium-term target range of 5–6 percent.

21. To support monetary tightening, we are committed to zero devolvement of government securities in FY24. A reversal in net NSCs issuance in FY23 increased the need to finance our budget by issuing government securities. Amid reduced liquidity in the banking system due to unsterilized FX interventions, this has led to an unprecedented increase in devolvement of unabsorbed government securities on BB in FY23. To strengthen monetary transmission and support monetary tightening, we have stopped devolvement on BB since August 2023, and are committed to keeping it at zero for the remainder of FY24. With the help of IMF TA, we will phase out the devolvement practice completely, as recommended by the joint IMF-World Bank technical assistance on the Local Currency Bond Market (LCBM) development.

22. We will continue to modernize BB’s monetary policy framework and operations. With the help of IMF capacity development (CD), we intend to transition to a flexible inflation targeting framework over the medium term, with the policy interest rate serving as an operating target. We have reached several important milestones toward this objective since January 2023 and remain committed to continued progress. In particular,

  • We have transitioned to an interest rate corridor (IRC) system with standing lending and deposit facilities and announced the adoption of the policy interest rate as an operating target. We will continue operationalizing the interest rate-based framework, in line with the recommendations of IMF TA, including by allowing unrestricted automatic access for all commercial banks to standing deposit and lending facilities (subject to meeting collateral requirements to access the latter facility) (end-March 2024 SB), streamlining the OMOs and reserve maintenance period (end-June 2024 SB), improving liquidity forecasting capacity, and eventually transitioning from fixed-rate-full-allotment system to fixed-quantity-variable-rate OMOs.

  • We replaced the lending interest rate cap with a market-driven reference lending rate (the SMART, which is a six-months moving average rate of 182 days T-bills) supplemented by a maximum mark-up margin for banks of 300 bps in July 2023. To improve transmission of the latest policy rate increase, we have also increased the margin on the SMART rate by 50 bps. In addition, in January 2023, we have withdrawn the previous requirement for banks to maintain deposit rates above 3-months moving average inflation. We remain committed to further liberalizing lending and deposit interest rates over the program period.

  • We continue working on upgrading BB’s monetary policy formulation and communication functions. As part of this effort, we are reconstituting the Monetary Policy Committee (MPC)—a new decision-making body at BB—which will include the BB Governor, three internal and three external members. We have continued building analytical and forecasting capacities and improving the decision-making processes at BB by developing a model-based Forecasting and Policy Analysis System (FPAS). We have increased the frequency of publication of our Monetary Policy Statement (MPS) to twice a year starting January 2023, with the goal to transition it to a quarterly publication. We plan to further strengthen BB’s communication and enhance transparency of monetary policy in the medium term. We also aim to develop and publish a coherent communications strategy that outlines the objectives and operational modalities of BB’s communications.

23. We remain committed to rebuilding our reserves and transitioning to a more flexible exchange rate regime. We will take policy measures necessary to rebuild GIR to cover about 4 months of prospective imports by the end of the IMF-supported program. We have eliminated the official exchange rate for transactions on behalf of the government and adopted a unified single exchange rate. We intend to gradually move toward a flexible exchange rate regime by adopting a crawling peg arrangement with a band corridor in the interim. The specific design and operational details of the interim arrangement will be determined with the help of IMF TA. We are committed to adopting a monetary and fiscal policy stance supportive of and consistent with the choice of the exchange rate regime. As FX availability increases and reserve position improves, we intend to accelerate the reduction of LC margin requirements. Since this measure is not sustainable and is costing our economy and people tremendously, we commit to gradually unwind them, as previously committed by end-March 2024.

24. 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 reiterate our commitment to unwind the non-monetary use of FX reserves and not engage in any new non-monetary operations, including FX 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 have appointed an audit firm affiliated with global firms to conduct an external audit of BB for FY23 and will approve the external auditors’ selection and rotation policy to sustain this practice going forward.

C. Financial Sector Reforms

25. We have exited from the support measures introduced during the COVID-19 pandemic. These measures, which included a soft repayment facility and low-interest working capital loans to the large industry and service sector, expired at the end of June 2023. BB will ensure that the asset classification accurately reflects current balance sheet risks and that classified assets, including rescheduled loans, are adequately provisioned. We will continue to support individuals and business sectors that are most at risk under our regular financial support schemes.

26. 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 plan to issue a circular by March 2024, which will allow us to treat material exposures as non-performing when they are more than 90 days past due. To better reflect the true state of distressed assets, we have published comprehensive data on banks’ rescheduled loans alongside with the non-performing loans (NPLs) in BB’s annual financial stability report. We will continue to strengthen loan classification and provisioning rules and eliminate forbearance. We have reduced the time needed before a bank could write off bad loans from five to three years and plan to reduce further. We have developed a plan for the banking sector to adopt the IFRS9 by 2027 and will seek IMF TA for implementing this plan.

27. We are taking steps to reduce NPLs and restore capital in state-owned commercial banks (SoCBs). To reduce bank balance sheet weaknesses, particularly of the SoCBs, we will pursue bank specific resolutions. We have developed bank-specific roadmaps to reduce the average NPL ratio to below 10 percent for SoCBs and are developing roadmaps for private commercial banks (PCBs) to reduce NPLs to below 5 percent by 2026. These roadmaps will also aim to increase capital adequacy ratios and provisioning coverages of SoCBs to 10 percent and 100 percent of required provision and of PCBs to 10 percent and 100 percent of required provision by 2026. We will strengthen these roadmaps as needed and enforce their implementation with IMF help. To facilitate this process, the recently enacted Bank Companies (Amendment) Act 2023 (BCA), alongside the related Circular on Prompt Corrective Action (PCA)—anticipated to be adopted by December 2023— will enhance the capacity and operational toolkit of BB to strengthen the balance sheets of weak banks. The BCA will bolster the corporate governance of SoCBs. In addition, we have appointed observers to the SoCBs’ Board to oversee governance and decision-making aspects.

28. We continue to 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 it by 2025. We have completed the current pilot on RBS by finalizing the assessment of the three pilot banks, including one Islamic bank. We will prepare guidance notes detailing the assessment criteria for various risks covering a robust set of objective and qualitative indicators to enhance the accuracy, credibility, comparability, and consistency of the risk assessments (end-March 2024 SB). The RBS will also incorporate specific procedures for Islamic banking operations in the assessment tool and inspection manual. We are developing in-house capacity to conduct scenario-based macroprudential stress test and pursue climate stress test. We have initiated the development of a macroprudential strategy and aim to further refine it by March 2024. We will also strengthen credit infrastructure and collateral valuation framework. We are working toward expanding 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.

29. We will continue to enhance governance and the regulatory framework for the financial sector. We plan to submit to 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 process and facilitate recovery of loans. They will also help modernize the financial sector and improve the legal environment for credit and business activities.

30. To develop capital markets, we will implement the roadmap for LCBM development, devised with the help of IMF TA. We will reform the primary dealer system, gradually align NSCs interest rates with market rates, and reduce individual investment limits with the overall objective to replace them with marketable wholesale instruments. The implementation of the MTDS, the development of the secondary market for government securities, the expansion of the non-bank investor base, and the enhancement of the financial market infrastructure will facilitate capital market development.

D. Macro-Structure and Governance Reforms

31. We are working to create a conducive investment climate, accelerate trade liberalization and attract more FDI. To enhance competitiveness and diversify exports, we have adopted a National Tariff Policy (2023). During the IMF-supported 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 development partners, which is expected to inform our near to medium-term trade development priorities.

32. 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. We are also enhancing our gender budgeting framework to more effectively channel resources toward reducing remaining gender gaps in higher education and economic empowerment.

33. 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. We will implement the supervisory tools being developed by Bangladesh Financial Intelligence Unit, which 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.

E. Climate Change Policies

34. 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. In 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.

35. 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 have prepared 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 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 adjust natural gas and electricity prices as needed to gradually reduce subsidies.

36. 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, focusing on major public infrastructure and government buildings, with the help of IMF TA.

37. 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 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) (end-June 2024 RM). 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-June 2024 RM). In addition, we have adopted a sustainable public procurement policy and an associated action plan to integrate climate and green dimensions into the public procurement process.

38. 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) and the International Financial Reporting Standards on climate-related disclosures (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, with the support of IMF TA. 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.

F. Statistics

39. We continue to strengthen macroeconomic statistics to better inform policy decisions and monitor targeted outcomes. We have published the rebased national accounts and consumer price index. We have published the historical national accounts on a quarterly basis and scheduled to publish the latest quarterly national accounts by November 2023 (end-December 2023, SB). The financial soundness indicators with expanded coverage have been published. We intend to publish historical monthly BOP data and continue the practice.

G. Program Monitoring

40. 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. The second review will take place on or after May 1, 2024 based on end-December 2023 quantitative targets and the third review will take place on or after November 1, 2024 based on end-June 2024 quantitative targets.

Table 1.

Bangladesh: Quantitative Performance Criteria and Indicative Targets 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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including by conducting a one-week main OMO at the policy rate with full allotment, to replace the current multiplicity of daily OMOs, increasing averaging provisions to allow banks cope with short-term liquidity shocks, and aligning the main OMO with the 2-week reserve maintenance period.

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.

Bangladesh: Program Exchange Rates for ECF-EFF Arrangements

(As of October 24, 2022)

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

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-December 2023 and end-June 2024 and quarterly indicative targets for end-September 2023 and end-March 2024 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.

Bangladesh: Composition of Priority Social Spending of the Government

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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

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

2

See 2023 Bangladesh: Selected Issues paper “Toward Greater Exchange Rate Flexibility.”

3

Using program exchange rates.

4

The SPP policy paper is well aligned with international guidance (e.g., those provided by the European Commission and the United Nations Environment Programme) and consistent with other guidance materials from international organizations such as the OECD and the World Bank. The SPP policy has been developed in the overall context of the Climate Fiscal Framework (CFF) to mainstream climate dimension into public procurement processes and consider public procurement as a tool to help lower carbon emissions and protect the environment. The SPP policy also includes an action plan for implementing the SPP going forward.

5

Twelve-month ahead inflation expectations reached their historical maximum of 10.3 percent in December 2022, before moderating to 9.6 percent in March 2023 and 9.7 percent in June 2023, according to BB’s inflation expectations survey. For details, see 2023 Bangladesh: Selected Issues paper “Taming Inflation: Policy Options and Trade-offs.”

6

Staff analysis suggests that the monetary policy tightening should be resolute, but carefully calibrated and data-driven, given the high trade-offs involved and the monetary policy transmission lags. Too gradual a tightening would likely not be credible and thus ineffective in re-anchoring inflation expectations. On the other hand, too rapid a tightening has a disproportionately larger cost in terms of cumulative output loss. Therefore, the optimal policy response would have to carefully weigh the benefits of disinflation against the associate output costs. According to staff analysis, any such optimal policy would have to ensure that forward-looking real interest rate gap approaches zero by the end of FY24. For details, see 2023 Bangladesh: Selected Issues paper “Taming Inflation: Policy Options and Trade-offs.”

7

See, for instance, Box 1. Supporting Inclusive, Sustainable, and Green Growth in Bangladesh in IMF Country Report No. 2023/66.

8

Multiple increases in the domestic prices of fuel, natural gas, electricity and fertilizer have helped to narrow the gaps relative to cost of provision and reduce the need for subsidies. However, financial losses incurred in FY23 were met in part through domestic arrears, which now require clearing, contributing to continued elevated subsidy bills.

9

The UPS is designed with four different packages: (i) formal private sector workers whose employers are expected to match employee contributions; (ii) self-employed and informal workers; (iii) expatriate workers; and (iv) the poor whose annual income is below 60,000 Taka. All packages require contributions by beneficiaries and only the last one, covering the poor, requires a top-up contribution by the government of 500 Taka per month per beneficiary. As of October 2023, about 15,000 people signed up under the UPS.

10

See 2023 Bangladesh: Selected Issues paper “Toward Greater Exchange Rate Flexibility.”

11

The provisioning maintenance ratio represents the proportion of provisions maintained compared to the required provision per regulation.

12

Banks should be required to recognize and immediately write-off economic losses that may arise from any reduction in interest rate and/or extension of term as part of the restructuring.

13

BRPD Circular No. 03, 2019 “Loan Classification and Provisioning”. For detailed discussions, see Box 1, 2019 Article IV Staff Report.

14

BRPD Circular No 03, 2022 “Recovery of Banks” and the forthcoming Circular on Prompt Corrective Actions, developed with the assistance of WB.

15

Salgado, R. and R. Anand, editors. 2023. South Asia’s Path to Resilient Growth. Washington, DC: International Monetary Fund.

16

See 2023 Bangladesh: Selected Issues paper, “Women’s Empowerment, Gender Budgeting, and Intersection with Climate Change.”

17

See further details in Annex III Bangladesh: Building Climate Resilience of IMF Country Report No. 2023/66.

18

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.

19

See details in Bangladesh: Sequencing of Reforms under the ECF/EFF and RSF, FY23-FY26 of IMF Country Report No. 2023/66

20

Climate financing includes, US$500 million from the WB’s First Green and Climate Resilient Development Credit (first in the series), US$500 million from the ADB’s climate change policy-based lending with prospective financing of US$740 million planned for FY24 and US$600 million planned for each FY25 and FY26 respectively, and EUR 300 million planned under AFD’s budget support program during FY24 and FY25.

1

IMF-supported ECF/EFF program draws upon previous IMF policy recommendations. Many of these recommendations are part of the authorities LOI and MEFP.

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: 2023 Article IV Consultation, First Reviews Under the Extended Credit Facility Arrangement, Arrangement Under the Extended Fund Facility, and the Resilience and Sustainability Facility Arrangement, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria-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 409
Publisher:
International Monetary Fund
ISBN:
9798400260315
ISSN:
1934-7685
Pages:
127
DOI:
https://doi.org/10.5089/9798400260315.002
Front Matter
Bangladesh: Staff Report for the 2023 Article IV Consultation, first Reviews Under the Extended Credit Facility Arrangement, Arrangement Under the Extended Fund Facility, and the Resilience and Sustainability Facility Arrangement, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria— Informational Annex
Bangladesh: Staff Report for the 2023 Article IV Consultation, First Reviews Under the Extended Credit Facility Arrangement, Arrangement Under the Extended Fund Facility, and the Resilience and Sustainability Facility Arrangement, Requests for a Waiver of Nonobservance of a Performance Criterion, and Modifications of Performance Criteria—Debt Sustainability Analysis
Bangladesh: 2023 Article Iv Consultation, First Reviews Under The Extended Credit Facility Arrangement, Arrangement Under The Extended Fund Facility, And The Resilience And Sustainability Facility Arrangement, Requests For A Waiver Of Nonobservance Of A Performance Criterion, And Modifications Of Performance Criteria—Updated World Bank Assessment Letter For The Resilience And Sustainability Facility
Statement by Krishnamurthy Subramanian, Executive Director for Bangladesh and Rajeev Jain, Advisor to Executive Director December 12, 2023
Text Figure 1.

Monetary Policy Tightening
Figure 1.

Bangladesh: Pressures from External Shocks
Figure 2.

Bangladesh: Monetary and Financial Market Developments
Figure 3.

Bangladesh: External Sector Developments
Figure 4.

Bangladesh: Fiscal Developments
Figure 5.

Bangladesh: Banking Sector Developments
Figure 6.

Bangladesh: Macro-Structural Developments