IMF Country Report Bangladesh

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The Periodic country report shared by IMF. The report takes a comprehensive look at all the macro economic factors affecting Bangladesh economy and provides a forward looking set of recommendations.

Text of IMF Country Report Bangladesh

IMF Country Report No. 12/94

BANGLADESHApril 2012

REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITYIn the context of the Bangladeshrequest for a three-year arrangement under the Extended Credit Facility, the following documents have been released and are included in this package: Staff Report for the BangladeshRequest for a Three-Year Arrangement Under the Extended Credit Facility, prepared by a staff team of the IMF, following discussions that ended on February 15, 2012 with the officials of Bangladesh on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 28, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

Press Release summarizing the views of the Executive Board as expressed during its April 11, 2012 discussion of the staff report that completed the request.

Staff Statement of April 5, 2012.

Statement by the Executive Director for Bangladesh.

The documents listed below have been separately released. Letter of Intent sent to the IMF by the authorities of Bangladesh* Memorandum of Economic and Financial Policies by the authorities of Bangladesh* Technical Memorandum of Understanding* *Also included in Staff Report The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund Publication Services 700 19th Street, N.W. Washington, D.C. 20431 Telephone: (202) 623-7430 Telefax: (202) 623-7201 E-mail: publications@imf.org Internet: http://www.imf.org Price: $18.00 a copy

International Monetary Fund Washington, D.C.

2012 International Monetary Fund

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BANGLADESHREQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITYMarch 28, 2012

KEY ISSUESBackground: Macroeconomic pressures have intensified since late 2010 due mainly to a negative terms-of-trade shock, rising oil imports, and accommodative policies. More recently, global headwinds and increasing oil prices have accentuated these pressures. As a result, the balance of payments went into a deficit in FY11 (July 2010June 2011) and reserves declined significantly. The 2011 Article IV consultation staff report noted that without policy adjustments and additional external support, further anticipated reserve losses would heighten vulnerability to external shocks and increase risk of a payments crisis. Program objectives: The government of the Peoples Republic of Bangladesh has requested a three-year Extended Credit Facility (ECF) arrangement with access of 120 percent of quota (SDR 639.96 million) in support of their reform program. It aims to restore macroeconomic stability, strengthen the external position, and engender higher, more inclusive growthBangladeshs key development objective. During the program period, the authorities are committed to taking actions to create more fiscal space, reinvigorate the financial sector, and catalyze additional resources to boost social- and development-related spending, tackle power shortages and the infrastructure deficit, and stimulate export-oriented investment and job growth. Main components: Under the ECF-supported program, the main components are upfront macro-tightening measures buttressed by greater exchange and interest rate flexibility, sound debt management, and complementary reforms to tax policy and administration, public financial management, and the financial sector. Longer-term measures are also expected to focus on liberalizing the trade and investment regime. Risks: A further rise in world oil prices could jeopardize the programs fiscal and reserve targets, necessitating additional policy adjustments and external support. Delays in legislative actions, weaknesses in implementation capacity, and opposition to a rationalization of energy subsidies without better-targeted support could undermine program objectives. These concerns will be addressed through extensive policy consultations and sizable technical assistance, as well as safety net reform.

BANGLADESH

Approved By

Masahiko Takeda and Thomas Dorsey

A staff team comprising Messrs. Cowen (head), Almekinders, and Toh and Ms. Kvintradze (Resident Representative) (all APD); Ms. Kaendera (FAD); and Mr. Leichter (SPR) visited Dhaka during November 30 December 13, 2011 and February 715, 2012. Mr. Maino (MCM) participated in the first mission. Mr. Eapen (OED) also joined the December discussions. Mses. Hussiada and Loucks (APD) assisted in the preparation of this report.

CONTENTSBACKGROUND ___________________________________________________________________________________ 4 RECENT DEVELOPMENTS AND OUTLOOK ______________________________________________________ 4 POLICY SETTING AND COMMITMENTS ________________________________________________________ 6 A. Reform Pillar #1Fiscal Policy and Reforms ____________________________________________________6 B. Reform Pillar #2Monetary and Exchange Rate Policy Reforms ________________________________9 C. Reform Pillar #3Financial Sector Reforms ___________________________________________________ 11 D. Reform Pillar #4Trade and Investment Reforms ____________________________________________ 12 PROGRAM MODALITIES ________________________________________________________________________ 13 STAFF APPRAISAL ______________________________________________________________________________ 14 TABLES 1. Selected Economic Indicators, FY201015 _____________________________________________________ 26 2. Medium-Term Outlook, FY201015 ___________________________________________________________ 27 3. Balance of Payments, FY201016 ______________________________________________________________ 28 4a. Central Government Operations, FY201015 _________________________________________________ 29 4b. Central Government Operations, GFSM 2001 Classification, FY200913 _____________________ 31 5. Monetary Accounts, December 2010December 2012 ________________________________________ 32 6. Financial Soundness Indicators, 200611 ______________________________________________________ 33 7. Proposed Schedule of Disbursements and Timing of ECF Arrangement Reviews _____________ 34 8. External Financing Requirements and Sources, FY201015 ____________________________________ 35 9. Indicators of the Capacity to Repay the IMF, FY201125 ______________________________________ 36 10. Millennium Development Goals, 19902015 _________________________________________________ 37

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FIGURES 1. ECF Program Focus and Objectives ____________________________________________________________ 20 2. Response to External Pressures ________________________________________________________________ 21 3. Real and External Sector Developments _______________________________________________________ 22 4. Exports, Imports, and Remittances Performance_______________________________________________ 23 5. Fiscal Developments ___________________________________________________________________________ 24 6. Monetary and Financial Market Developments ________________________________________________ 25 BOXES 1. Managing Macro-Distortions Amid Energy Decompression and Subsidies____________________ 16 2. Reserve Adequacy _____________________________________________________________________________ 18 3. Financial Inclusion and Growth ________________________________________________________________ 19 ANNEX I. Macroeconomic Adjustment with a Human Face: Public Social Safety Nets in Bangladesh ____ 38 APPENDIX I. Letter of Intent _________________________________________________________________________________ 41 Attachment 1. Memorandum of Economic and Financial Policies ______________________________ 43 Attachment 2. Technical Memorandum of Understanding _____________________________________ 56

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BACKGROUND1. Over the past 18 months, macroeconomic pressures have intensified in Bangladesh, resulting in a marked deterioration in its external position. These pressures stem mainly from large oil and capital imports associated with new fuelintensive power stations, an oil price-driven terms-of-trade shock, and expansionary fiscal and monetary policies. As a result, the balance of payments (BOP) slipped into a deficit in FY11 (July 2010June 2011) for the first time in a decade. Much of the foreign reserve buffer built during 200910 was used up in 2011, against the backdrop of limited exchange rate flexibility. A now-weaker global outlook and firming in oil prices weigh on the near-term BOP prospects, while ongoing efforts to address power shortages and infrastructure deficit are expected to add to pressures. 2. The government of Bangladesh is seeking a three-year ECF arrangement, in support of a comprehensive reform program. It centers on restoring macroeconomic stability, building an adequate reserve buffer, and laying a foundation for higher, more inclusive growth. Achieving these objectives will require prudent fiscal and monetary policies, deep-seated structural reforms, and exceptional financing in the transitional period. Notably, Bangladesh will need to make a decisive break from its low tax revenue-low capital spending-low investment nexus (Figure 1). Program commitments have been laid out in the governments Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) (Appendix I). During the first year of the ECF arrangement, the main program components center on upfront macroeconomic stabilization, supported by exchange and interest rate flexibility and tax, public financial management (PFM), and financial sector reforms.

RECENT DEVELOPMENTS AND