Information about Asia and the Pacific Asia y el Pacífico
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Bangladesh

Author(s):
International Monetary Fund
Published Date:
April 2008
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I. Background

1. On November 15, 2007, cyclone Sidr struck Bangladesh on the heels of two monsoon floods leaving many dead, injured, or deprived of livelihood. The floods, which occurred between July and September, killed over a thousand people and inflicted substantial damage on the agricultural sector. The cyclone killed 3,400, injured 55,000, and disrupted the lives of almost 9 million people. The number of cyclone fatalities was much lower than in the past, thanks to an improved forecasting and warning system. The impact of the natural disasters was particularly severe in the coastal area, which is home to some of the poorest segments of society.

Impact of Recent Natural Disasters in the Region
Sri Lanka1/Maldives1/Indonesia1/Bangladesh2/
Deaths31,00082225,0004,400
Displaced1.0 million14,000500,0008.7 million
Damage$1.5b$304 m$4–5b$2.7b
(In percent of GDP)(7.5)(35.0)(2.0)(3.7)
NIR (months of imports)2.23.25.72.9
Fund support (SDR million)103.44.1[133.3]
(In percent of quota)(25.0)(50.0)(25.0)
Sources: IMF Country Report Nos. 05/84 and 05/145.

December 2004 tsunami.

2007 floods/cyclone.

Sources: IMF Country Report Nos. 05/84 and 05/145.

December 2004 tsunami.

2007 floods/cyclone.

2. Beyond the human cost, the physical damage caused by the floods and the cyclone is estimated at $2.7 billion or 3.7 percent of GDP.3 The damage inflicted by the floods is estimated at $1.1 billion (1.5 percent of GDP) and comprises loss of crops, houses, livestock, and roads. The damage caused by the cyclone is estimated at $1.6 billion (2.2 percent of GDP) and is concentrated in the agricultural, housing, and transport sectors. The private sector sustained the brunt of the damage and losses.

3. The government program for relief and reconstruction being implemented in FY08 is estimated to cost $850 million. 4 Nearly $450 million in funding has been secured from development partners, including about $220 million in grants (commodity aid and NGO assistance) that will take place outside of the central government’s budget, and $225 million in additional budget support from the World Bank and the AsDB. The direct budgetary cost will be about $450 million and will be financed by the additional budget support, improved revenue collections, and budgetary reallocations. The remaining reconstruction and rehabilitation needs will be implemented over the medium to longer term and are expected to be financed through additional foreign assistance.

4. In the attached letter to the Managing Director dated March 14, the authorities request a purchase in the amount of SDR 133.3 million (25 percent of quota) under the Fund’s policy for emergency assistance related to natural disasters. This purchase would support the authorities’ international reserve position in the face of a sharp rise in disaster-related imports. The letter sets out the authorities’ policy responses to the natural disasters and macroeconomic objectives for the period ahead. In line with the Fund policy on providing emergency assistance for natural disasters to PRGF-eligible countries, the authorities have requested a subsidy on the rate of charge, subject to the availability of subsidy resources. The authorities delayed making a request for emergency assistance until mid-February to provide time to mobilize as much grant funding and other concessional assistance as possible from donors, and to complete a comprehensive damage and needs assessment.

II. Economic Developments Preceding the Disasters

5. Even before the natural disasters, growth was slowing down and inflation was on the rise. Political uncertainty surrounding the emergency transition government and the preparation for elections, the ensuing anti-corruption drive, and the slowdown in the global economy led to a downward revision in the growth forecast from an estimated 6¼ percent in FY07 to about 6 percent for FY08. Price pressures emerged on the back of international commodity inflation, earlier monetary accommodation, and supply bottlenecks resulting from the government’s anti-corruption and anti-hoarding policies. In June 2007, on the eve of the first period of flooding, consumer price inflation stood at 9 percent (year-on-year), up from 6 percent half a year earlier.

6. Revenues were showing early signs of improvement after many years of underperformance, but quasi-fiscal liabilities continued to increase in the energy sector. Overall, the central government’s budget deficit was considered to be on track with revenue improving and slow implementation of the Annual Development Program (ADP) keeping expenditure lower than expected. The ADP implementation rate in the early months of FY08 was the lowest in a decade, as the government’s anti-corruption drive led to greater scrutiny of projects. However, state-owned enterprise (SOE) losses continue to take place. The FY08 budget assumed debt equivalent to 1.4 percent of GDP from the state-owned petroleum company (BPC) for its past losses; but without further adjustments in energy prices, new SOE losses could reach 1–1½ percent of GDP in FY08.

7. The external position was fairly strong, but starting to weaken even before the disasters hit. The most recent debt sustainability analysis (IMF Country Report No. 06/406) found that Bangladesh had low levels of external debt but moderate risk of debt distress overall because of the level of domestic debt.5 However, high food and oil prices were putting pressure on the import bill, while garment exports slowed markedly owing to the global slowdown and lost orders during the period of political turmoil. While remittances continue to grow in excess of 20 percent, import coverage of official reserves was on pace to fall to 3.1 months in FY08, compared to 3.3 months of imports in FY07, even without the impact of the natural disasters.

8. Money growth was coming down prior to the disasters, reflecting the slowdown in economic activity. Despite accelerating growth in official reserves and virtually no change in the central bank’s interest rate policy, reserve money growth declined steadily from 34 percent in December 2006 to 16 percent by June 2007. During the same time span, broad money and private credit growth declined by about 5 percentage points to 17 and 15 percent, respectively.

9. The government moved forward with some important structural reforms, which are starting to show results. The government placed the new container terminal at Chittagong port under private management shortly after coming to power. As a result, turnaround time for ships has been cut from 8.7 days in March to 2.8 days in January. To support and extend the recent improvement in tax revenue, the government is implementing several measures in the areas of tax policy and administration: the government has agreed to separate tax administration and tax policy responsibilities, and merge the two Large Taxpayer Units; unique taxpayer identification numbers are being introduced for all taxpayers; and a newly introduced self assessment system has increased individual taxpayer submissions threefold. Significant steps were also made with respect to governance by separating the judiciary from the executive branch, and by strengthening the Anti-Corruption Commission. However, the government has indicated that it will take a more gradual approach to the privatization of state-owned commercial banks after the failure of the Rupali divestment, and is yet to administer an adjustment in energy prices since the last increase in April 2007. The government continues to work closely with the World Bank in these areas.

III. Impact and Policy Response

10. Output losses in agriculture from the floods and cyclone will further reduce growth and increase price pressures. More than 2.4 million acres of cropland are reported damaged, resulting in the loss of almost one-quarter of the November crop that was ready to harvest, and most shrimp farms in the cyclone affected areas have been destroyed. Together with the indirect effect on growth expected from the damage sustained by infrastructure, this is projected to reduce the growth rate staff projected prior to the disasters by ¾ of a percentage point to 5–5½ percent. Since September, inflation increased by a further 2½ percentage points to 11½ percent in January (year-on-year), led by food price increases of 14 percent. As food imports gather pace, inflation is expected to moderate only slightly to 10 percent by end-FY08 given prevailing high international prices.

11. As described in the attached letter, the authorities have introduced several policies in response to the disasters. These include the following:

  • Distributing to vulnerable groups at subsidized prices about 500,000 metric tons of rice imported by the government. The total import need is estimated at 1.25 million metric tons with much of this imported by the private sector.
  • Distributing seeds, fertilizer, and insecticides to disaster-affected farmers.
  • Providing benefits for disaster-related deaths and injuries, cash transfers to repair and rebuild homes, and low-interest loans to fishermen and farmers.
  • Beginning to repair and reconstruct roads, bridges, coastal embankments, and the electricity distribution network.

12. The fiscal impact of these policies will be significant, but donor support, improved revenue, and budget reallocations will contain domestic financing. The fiscal cost of the disaster program for FY08 is estimated at Tk 31 billion ($450 million; 0.6 percent of GDP), of which Tk 18 billion will be for social assistance programs, including subsidized food and fertilizer and the remainder for capital spending. Notwithstanding these costs, as well as higher subsidies to cover SOE losses (not related to the disasters), the overall deficit is expected to be close to budgeted levels, given that revenues are likely to be higher than budgeted and regular capital spending lower than budgeted. The latter is due to the continued low implementation rate to date (partly attributable to the floods) and a deliberate policy decision to delay low-priority projects. Tax revenue collected by the National Board of Revenue rose by 25 percent in the fiscal year to January, led by income taxes and VAT, while the anti-corruption drive contributed to an increase in nontax revenue. The FY08 budget was based on revenue growth of 17 percent, and this target could be exceeded by 0.3 percentage points of GDP. Disaster-related donor assistance amounts to 0.3 percent of GDP, which should allow for total net domestic financing to remain in line with the budget.

13. The balance of payment impact will be only partly financed by higher aid inflows. The impact on exports owing to the damage sustained by the shrimp and fisheries sector is projected to be mild at $60 million. However, disaster-related food and fertilizer imports will boost the import bill by about $530 million ($630 million on a c.i.f. basis). Foreign budget support of $225 million and current transfers of $220 million, mostly in the form of food, will offset some of this impact. The remainder will be borne by official reserves, which would decline below three months of import coverage as a result of the disasters without additional balance of payments support. The exchange rate has remained at Tk 68–69 per dollar with the nominal effective rate depreciating by 4 percent from August through end-February.

Key Balance of Payments Indicators(Without Fund assistance)
Before AfterDisasters Disasters
(In millions of US$)
Exports (f.o.b)13,20213,142
Imports (c.i.f.)20,00620,638
Official transfers87309
Net aid flows595820
(In months of imports of goods and nonfactor services)
Gross official reserves3.12.9

14. The monetary program leaves sufficient space for projected budget financing and private sector recovery without further fueling inflationary pressures. Money growth has lost more momentum in the course of the disasters. Reserve money growth declined by a further 3.8 percentage points to 12.4 percent in December, while broad money growth came down 2.3 percentage points to 14.7 percent. Private credit growth increased to 17.5 percent, partly reflecting directed lending programs encouraged by Bangladesh Bank. The authorities’ monetary policy statement of January 2008 aims to support a recovery in real sector growth while ensuring reasonable price stability.

15. Short-term risks to this outlook are largely on the downside. Export growth could decline more than envisaged, particularly if there is a further slowing of world growth, and food import needs could increase further late in the fiscal year if the main (Boro) rice crop, due to be harvested in May, is smaller than projected.

16. The government is working closely with donors to make further improvements in the institutional setting for disaster management. The government has already made substantial progress in this area in recent years. Had it not been for the Cyclone Preparedness Program that allowed four days of advanced warning with evacuation messages delivered house to house, the death toll would have been much greater. The recently completed Damage and Needs assessment has identified three possible modalities in which the government will work closely with donors in the period ahead to help mitigate the impact of any future natural disasters: (i) a Disaster Response Fund that would provide funding for early recovery to avoid diverting budget funds for operations and maintenance; (ii) exploring the possibility of purchasing catastrophic risk coverage from international capital markets; and (iii) establishing a multi-donor trust fund to support a risk mitigation agenda related to global climate change.

IV. Access and Capacity to Repay

17. The authorities have requested a purchase of an amount equivalent to SDR 133.3 million (25 percent of quota) under the Fund’s policy on Emergency Assistance for Natural Disasters along with a subsidy on the rate of charge on this purchase. The purchase—which represents approximately 0.3 percent of Bangladesh’s GDP—would help meet the immediate foreign exchange needs stemming from the disasters, thereby avoiding a decline in Bangladesh’s official reserves below three months of import coverage. Following elections projected to be held by December 2008, and the formation of a new government, it is expected that discussions could resume on a possible new Fund-supported program.

18. As of end-2007, the Fund’s available subsidy resources for emergency assistance amounted to SDR 25 million. Total needs in net present value terms are projected at about SDR 49 million, including those associated with existing cases (SDR 16 million),6 Bangladesh’s request (SDR 24 million) and an expected request for EPCA from another member (SDR 8 million). Based on these estimates, and assuming no further requests for subsidized emergency assistance, available subsidy resources will likely be exhausted by end-2009 if new resources are not secured by that time. In the context of Bangladesh’s request, staff has initiated discussions with potentially interested members on mobilizing additional resources.7 Given the uncertainty associated with the availability of subsidy resources, and consistent with past practice, both the authorities’ letter of intent and the staff report emphasize that subsidization of the rate of charge is subject to resource availability. This is also reflected in Table 5 on Bangladesh’s capacity to repay the Fund.

Table 1.Bangladesh: Key Economic Indicators, FY03–13 1/
Nominal GDP: US$61.9 billion
Main export (percent of total): garment (75)
Population (FY05): 139.5 million
GDP per capita (FY05): US$430
Poverty rate (FY05): 40.8 percent
FDI (percent of GDP): US$760 million (1.1)
Government debt: 46.5 percent of GDP
Foreign government debt: 62 percent of total government debt
Projection
FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12FY13
National income and prices (percent change)
Real GDP5.36.36.06.66.25.06.07.07.07.07.0
GDP deflator4.54.25.15.25.97.97.05.54.54.04.0
CPI inflation (annual average) 2/4.45.810.46.87.210.99.07.04.54.04.0
Central government operations (percent of GDP)
Total revenue10.310.210.510.710.311.111.612.112.512.913.0
Tax8.38.28.58.58.38.89.39.810.210.610.7
Nontax2.01.92.02.22.02.42.42.42.42.42.4
Total expenditure13.713.313.813.913.617.115.115.415.916.316.5
Current expenditure8.17.88.48.49.210.19.49.39.39.39.3
Of which: Interest payments1.91.61.71.81.92.11.91.91.81.81.8
Of which: Subsidies and transfers2.32.42.82.63.03.83.33.33.33.33.3
Annual Development Program5.45.05.04.74.14.04.44.85.35.75.9
Other expenditures 3/0.10.50.40.80.33.11.31.31.31.31.3
Overall balance (excluding grants) 4/-3.4-3.1-3.3-3.2-3.2-6.0-3.4-3.3-3.3-3.4-3.5
Primary balance 4/-1.5-1.4-1.7-1.4-1.3-3.9-1.5-1.4-1.5-1.6-1.6
Financing (net)3.43.13.33.23.26.03.43.33.33.43.5
Domestic 4/1.21.81.72.12.03.61.71.61.61.61.6
External2.11.31.61.21.32.31.71.71.71.81.9
Total central government debt (percent of GDP)51.151.050.148.346.545.543.641.740.138.937.8
Money and credit (end of fiscal year; percent change)
Net domestic assets12.213.517.119.613.416.814.113.413.413.513.8
Credit to private sector12.617.517.018.315.115.114.915.715.014.014.1
Broad money (M2)15.613.816.719.317.515.916.214.514.214.714.6
Balance of payments (in billions of U.S. dollars)
Exports, f.o.b.6.57.58.610.412.113.115.217.520.123.026.2
(Annual percent change)9.515.914.021.615.69.015.515.614.414.613.8
Imports, f.o.b.-8.7-9.8-11.9-13.3-15.5-18.7-21.8-25.6-29.4-33.7-38.6
(Annual percent change)13.113.020.612.116.620.816.517.314.814.614.5
Current account0.20.2-0.60.61.0-0.3-0.4-0.8-1.0-1.1-1.5
(Percent of GDP)0.30.3-0.90.91.4-0.4-0.5-0.9-1.0-1.0-1.3
Gross official reserves (in billions of U.S. dollars)2.52.72.93.55.15.56.47.38.49.811.3
In months of imports of goods and nonfactor services2.92.82.52.73.33.03.02.92.93.03.0
Exchange rate (taka per US$; period average)58.259.564.368.168.8
Nominal effective rate (2000=100)89.082.877.071.266.9
Real effective rate (2000=100)91.991.488.184.683.0
Terms of trade (percent change)-0.5-2.2-4.4-3.70.4
Memorandum item:
Nominal GDP (in billions of taka)3,0063,3303,7074,1574,6755,2976,0086,7827,5848,4399,391
Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year begins July 1.

CPI uses FY96 weights.

Consists of other capital, net lending, food account balances, check float and discrepancy.

Includes assumption of BPC liabilities of 1.4 percent of GDP in FY08.

Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year begins July 1.

CPI uses FY96 weights.

Consists of other capital, net lending, food account balances, check float and discrepancy.

Includes assumption of BPC liabilities of 1.4 percent of GDP in FY08.

Table 2.Bangladesh: Balance of Payments, FY05–08 1/(In millions of U.S. dollars, unless otherwise indicated)
FY05FY06FY07FY08
Est.July 07Without floods & cycloneWith floods & cyclone
Trade balance-3,297-2,879-3,459-5,006-5,597
Exports (f.o.b.)8,57310,42212,05313,20213,142
Of which: RMG sector6,4327,9039,2119,8939,893
Imports (f.o.b)-11,870-13,301-15,511-18,208-18,739
Of which: Crude petroleum and petroleum products-1,602-2,004-2,233-3,156-3,156
Services-870-1,110-1,261-1,676-1,777
Income-680-786-883-1,009-1,050
Transfers4,2905,3476,5547,9198,141
Official current transfers 2/37349787309
Private transfers4,2535,3136,4577,8327,832
Of which: Workers’ remittances3,8484,8025,9797,2357,235
Current account balance-557572952227-283
Capital and financial account balance624-207360208433
Capital account163242490517517
Financial account461-449-130-309-84
Foreign direct investment800675760725725
Portfolio investment032106100100
Net aid flows491432508595820
Aid disbursements9409211,0371,1201,345
Debt amortization-449-489-529-525-525
Other capital 3/-830-1,588-1,504-1,729-1,729
Overall balance673651,312436150
Financing items-67-365-1,312-436-150
Bangladesh Bank-67-365-1,312-436-150
Assets (- increase)-225-554-1,602-526-448
Liabilities 4/15818929090298
Exceptional Financing (identified)531964
World Bank300475
AsDB96146
Other135135
IMF0208
Memorandum items:
Current account balance (percent of GDP)-0.90.91.40.3-0.4
Export growth rate (percent)14.021.615.69.59.0
Import growth rate (percent)20.612.116.617.420.8
Gross official reserves (in millions of U.S. dollars)2,9303,4715,0735,5985,521
(In months of imports of goods and services)2.52.73.33.13.0
Net international reserves (in millions of U.S. dollars)2,0462,2213,5333,9683,683
Medium and long-term external public debt (in millions of U.S. dollars)19,28618,60319,11119,70619,931
(In percent of GDP)32.030.028.225.425.8
Net aid flows/GDP (in percent)1.11.11.61.52.1
Nominal GDP (in millions of U.S. dollars)60,29961,95277,20777,57577,207
Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year begins July 1.

Excludes official capital grants.

Includes trade credits, long-term borrowing, short-term financing for Bangladesh Petroleum Company (BPC), commercial bank net borrowing, and errors and omissions.

Includes Asian Clearing Union balances.

Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year begins July 1.

Excludes official capital grants.

Includes trade credits, long-term borrowing, short-term financing for Bangladesh Petroleum Company (BPC), commercial bank net borrowing, and errors and omissions.

Includes Asian Clearing Union balances.

Table 3.Bangladesh: Central Government Operations, FY2005-08 1/
FY05FY06FY07FY08
BudgetProj.
(In billions of taka)
Total revenue389.2443.7483.4573.0589.6
Tax revenue314.1354.2389.6458.4465.0
NBR taxes299.9338.9371.1438.5445.1
VAT, supplementary duties, excises161.6182.9199.5232.6239.2
Customs duties79.178.481.793.590.2
Taxes on income and profits56.771.586.7108.4111.7
Other NBR taxes2.66.23.14.04.0
Non-NBR taxes14.215.318.619.919.9
Nontax revenue75.189.593.8114.6124.6
Total expenditure513.3578.1634.0885.4906.4
Current expenditure312.5350.4429.8498.8533.0
Pay and allowances84.2100.4128.7135.1135.1
Goods and services56.460.762.474.676.6
Interest payments61.875.190.2107.9109.9
Subsidies and transfers103.2108.6142.5166.7203.8
Block allocations6.95.76.014.57.7
Annual Development Program185.8194.7191.1265.0211.0
Non-ADP capital spending29.538.428.550.371.8
Net lending-5.32.9 3/-11.451.366.6 4/
Other expenditures 2/2.5-1.2-3.920.024.0
Overall balance (excluding grants)-124.0-134.5-150.6-312.4-316.8
Primary balance (excluding grants)-62.2-59.4-60.4-204.5-206.9
Overall balance (excl. grants and BPC debt operation)-237.1-241.6
Net financing124.0134.5150.6312.4316.8
External60.248.159.3119.6124.0
Domestic63.886.491.4192.8192.8
Banks35.058.8 3/41.4147.8160.8 4/
Nonbanks28.827.650.045.032.0
Privatization receipts0.00.00.00.00.0
(In percent of GDP, unless otherwise specified)
Total revenue10.510.710.310.811.1
Tax revenue8.58.58.38.78.8
Nontax revenue2.02.22.02.22.4
Total expenditure13.813.913.616.717.1
Current expenditure8.48.49.29.410.1
Pay and allowances2.32.42.82.62.6
Goods and services1.51.51.31.41.4
Interest payments1.71.81.92.02.1
Subsidies and transfers2.82.63.03.13.8
Block allocations0.20.10.10.30.1
Annual Development Program5.04.74.15.04.0
Non-ADP capital spending0.80.90.60.91.4
Net lending-0.10.1 3/-0.21.01.3 4/
Other expenditures 2/0.10.0-0.10.40.5
Overall balance (excluding grants)-3.3-3.2-3.2-5.9-6.0
Primary balance (excluding grants)-1.7-1.4-1.3-3.9-3.9
Overall balance (excl. grants and BPC debt operation)-4.5-4.6
Net financing3.33.23.25.96.0
External1.61.21.32.32.3
Domestic1.72.12.03.63.6
Banks0.91.4 3/0.92.83.0 4/
Nonbanks0.80.71.10.80.6
Privatization receipts0.00.00.00.00.0
Memorandum items:
Nominal GDP (in billions of taka)3,7074,1574,6755,2975,297
Overall balance, including grants-3.0-2.8-3.0-5.0
Poverty reducing spending6.96.86.96.8
Total central government debt50.148.346.545.5
Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year ends June 30. Cash basis unless otherwise specified.

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

Includes bonds (Tk 10 billion) issued to a nationalized commercial bank to assume BPC’s liabilities.

Includes bonds (Tk 75 billion) issued to three nationalized commercial banks to assume BPC’s liabilities.

Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.

Fiscal year ends June 30. Cash basis unless otherwise specified.

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

Includes bonds (Tk 10 billion) issued to a nationalized commercial bank to assume BPC’s liabilities.

Includes bonds (Tk 75 billion) issued to three nationalized commercial banks to assume BPC’s liabilities.

Table 4.Bangladesh: Monetary Survey, June 2006—June 2009
ActualProj.
Jun-06Jun-07Sep-07Dec-07Jun-08Jun-09
(End of period; in billions of taka)
Net foreign assets218326339356355457
Net domestic assets1,5881,7881,8211,9512,1042,400
Domestic credit1,7321,9822,0652,1762,3472,660
Net credit to central government296338357419498566
Credit to other nonfinancial public sector12713914785115100
Credit to private sector1,3091,5061,5611,6721,7341,993
Other items, net-144-194-244-225-243-260
Broad money (M2)1,8062,1142,1602,3062,4592,857
(Change since start of fiscal year; in billions of taka)
Net foreign assets32108133029101
Net domestic assets26020032162315296
Domestic credit30125083194365313
Net credit to central government5941208116168
Credit to other nonfinancial public sector40128-54-24-15
Credit to private sector20219755166228259
Other items, net-41-50-50-31-49-16
Broad money (M2)29230845192345398
(Year-on-year percent change)
Net foreign assets17.249.752.041.99.028.5
Net domestic assets19.612.611.010.917.614.1
Domestic credit21.114.514.914.418.413.3
Net credit to central government24.814.011.620.647.613.7
Credit to other nonfinancial public sector46.79.312.9-35.4-17.4-12.7
Credit to private sector18.315.115.917.515.114.9
Other items, net40.235.015.959.125.56.8
Broad money (M2)19.317.115.914.716.316.2
(In billions of taka, unless otherwise noted)
Memorandum items:
Broad money multiplier5.325.365.204.935.475.61
Broad money velocity2.302.212.252.172.152.10
Net domestic financing (since beginning of FY)8691.42391193102
Bank5941.4208116168
Nonbanks2850.03103234
Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections.
Table 5.Bangladesh: Indicators of Capacity to Repay the Fund 2006-14
Projections
200620072008200920102011201220132014
Fund obligations based on existing credit
(In millions of SDRs)
Principal005.014.929.749.963.458.448.5
Charges and interest3.03.53.13.02.92.62.42.01.8
Fund obligations based on existing and prospective credit 1/
(In millions of SDRs)
Principal0.00.05.014.929.783.2130.091.748.5
Charges and interest3.03.57.28.88.78.25.42.51.8
Total obligations based on existing and prospective credit 1/
In millions of SDRs3.03.512.123.738.491.4135.494.250.3
In millions of U.S. dollars4.55.419.037.460.9145.7216.4150.680.3
In percent of exports of goods and services0.00.00.10.20.30.60.80.50.2
In percent of debt service 2/0.70.72.44.46.714.620.314.07.4
In percent of quota0.60.72.34.47.217.125.417.79.4
In percent of gross international reserves0.10.10.30.50.81.62.01.30.6
Outstanding Fund credit 1/
In millions of SDRs316.7316.7445.1430.3400.6317.3187.395.647.1
In millions of U.S. dollars466.8484.1698.3679.4635.3505.9299.5152.875.3
In percent of exports of goods and services3.73.44.43.83.12.21.10.50.2
In percent of debt service 2/68.966.989.680.669.650.628.114.26.9
In percent of quota59.459.483.580.775.159.535.117.98.8
In percent of gross international reserves10.99.111.89.98.15.62.81.30.6
Memorandum items:
Charges and interest, after assumed subsidies (millions of SDRs) 3/4.33.93.83.52.82.11.8
Exports of goods and services (millions of U.S. dollars)12,62714,11915,77418,08720,64723,49426,67729,73932,473
Debt service (millions of U.S. dollars) 2/678724779843913999106710761086
Quota (millions of SDRs)533.3533.3533.3533.3533.3533.3533.3533.3533.3
Gross international reserves (millions of U.S. dollars)4,2725,2975,9416,8307,8429,09610,57611,63612,584
GDP (millions of U.S. dollars)64,81272,44080,43587,25895,517105,257115,925127,674140,614
Sources: Bangladesh authorities; and Fund staff estimates and projections.

Including ENDA purchase of SDR 133.325 millions (25 percent of quota) in April 2008. No subsidization of ENDA purchase is assumed.

Including IMF repurchases and repayments in total debt service.

Subsidization of rate of charge on ENDA purchase is subject to the availability of subsidy resources.

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

Including ENDA purchase of SDR 133.325 millions (25 percent of quota) in April 2008. No subsidization of ENDA purchase is assumed.

Including IMF repurchases and repayments in total debt service.

Subsidization of rate of charge on ENDA purchase is subject to the availability of subsidy resources.

19. In view of the authorities’ policies outlined in the attached letter, it is expected that Bangladesh will be able to discharge its obligations to the Fund in a timely manner. Medium-term growth potential, supported by regional momentum, remains positive. It is also expected that rehabilitation and reconstruction needs beyond FY08 will be financed by external assistance. Gross official reserves are projected to increase steadily and remain at three months of import coverage. As attested by the latest debt sustainability analysis exercise, Bangladesh is at low risk of external debt distress. Debt service is projected to be less than 5 percent of exports of goods and services, and debt service payments to the Fund are projected to remain below 2 percent of gross official reserves throughout the repayment period.

V. Staff Appraisal

20. Following severe flooding, the impact of cyclone Sidr on Bangladesh has been substantial. There has been a considerable impact on the welfare and livelihood of some of the world’s poorest and most vulnerable groups. High international commodity prices and slowing export growth had already reduced the economy’s room for maneuver. Extensive damage to agriculture and infrastructure has led to a sharp increase in import needs, in the near term for food and other primary needs, and put further pressure on the balance of payments and fiscal position.

21. The authorities’ letter of intent outlines the steps that have been taken in response to the disasters, as well as the efforts by the authorities to maintain macroeconomic stability and advance the structural reform agenda. The staff welcomes the authorities’ intention to make use of available external assistance while keeping the overall fiscal framework in line with the original FY08 budget targets. Keeping domestic financing of the budget under control will be important to avoid further aggravating inflationary pressures.

22. Recent progress in revenue performance, if sustained, will be a fundamental element of improved macroeconomic performance going forward. Staff urges the authorities to continue to move forward with reforms underway in tax administration. Policy changes with respect to income taxes and VAT to broaden the base and reduce exemptions will also be necessary to achieve sustainable long-term improvement in revenue performance. Moreover, the on-going quasi-fiscal liabilities being generated in SOEs still need to be addressed, especially with respect to energy pricing policy, to establish a sustainable fiscal policy. Reinvigorating reforms in the state-owned commercial banks, as well as strengthening prudential regulations for the wider banking sector, also remain an important structural priority.

23. Staff supports the authorities’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters. The authorities’ requested purchase in the amount of 25 percent of quota is appropriate in view of the damage to the agricultural sector in very poor and vulnerable areas, and the associated large need for food and other imports. It is estimated that this level of access would allow the authorities to maintain international reserves at about three months of import coverage. Staff also supports the request in view of the authorities’ efforts to maintain macroeconomic stability and continue the implementation of reforms after the expiration of the PRGF-supported arrangement in June 2007, as well as their commitment to continue working closely with the Fund in developing their reform strategy in the period ahead.

Figure 1.Bangladesh: External Sector Indicators, FY 2002–08 1/

Sources: Data provided by the Bangladesh authorities; IMF, Information Notice System, International Financial Statistics; and Fund staff estimates and projections.

1/ Projection for 07/08.

ANNEX: Bangladesh: Fund Relations

(As of January 31, 2008)

I. Membership Status: Joined August 17, 1972; accepted the obligations under Article VIII, Sections 2, 3, and 4 on April 11, 1994.

II. General Resources Account:

SDR millionPercent Quota
Quota533.30100.00
Fund holding of currency533.0499.95
Reserve position in Fund0.280.05

III. SDR Department:

SDR millionPercent Allocation
Net cumulative allocation47.12100.00
Holdings0.491.05

IV. Outstanding Purchases and Loans:

SDR millionPercent Quota
PRGF arrangements316.7359.39

V. Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount approved

(SDR million)
Amount drawn

(SDR million)
PRGF6/20/036/19/07400.33316.73
ESAF8/10/909/13/93345.00330.00
SAF2/06/872/05/90201.25201.25

VI. Projected Payments to Fund(SDR million; based on existing use of resources and present holdings of SDRs):

20082009201020112012
Principal4.9514.8529.7049.8863.35
Charges/Interest3.082.982.852.642.35
Total8.0317.8332.5552.5265.69

VII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, Bangladesh Bank (BB) is subject to an assessment with respect to the PRGF arrangement, which was approved on June 20, 2003 and augmented on July 28, 2004. A safeguards assessment of the BB was completed on January 24, 2005 and concluded that substantial risks exist in the legal, financial reporting, internal audit, and systems of internal controls. The assessment proposed recommendations to address them. The authorities have appointed a local affiliate of an international firm to audit, in accordance with International Standards on Auditing, the financial statements of the BB for financial year 2007.

VIII. Exchange Arrangement

Exchange regime.The exchange regime is characterized as a managed float with no preannounced path for the exchange rate. Until end-May 2003, the taka was fixed to the U.S. dollar, but was periodically adjusted. It was devalued on three occasions during 2000–02, when the trading band for BB’s transactions was correspondingly widened or raised. From January 2002 until end-May 2003, the official band for the taka remained unchanged at Tk 57.4–58.4 per U.S. dollar. Authorized dealer (AD) banks set their own buying and selling rates for the U.S. dollar and other currencies generally within the band until October 2002. From November 2002, however, AD banks have set rates outside the band. Effective end-May 2003, BB no longer announced a trading band for its foreign exchange transactions.

At the last Article IV consultation (June 2007), the Executive Board urged the authorities to remove the restriction on the convertibility and transferability of proceeds of current international transactions in nonresident taka accounts.

IX. Article IV Consultation

The previous Article IV consultation was concluded on June 22, 2007 (IMF Country Report No. 07/234).

X. Resident Representative

The resident representative office was established in 1972. The current Resident Representative, Mr. Jonathan Dunn, took up the post in August 2004.

Attachment Letter from the Authorities

Dhaka, Bangladesh

March 14, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

Further to my letter of February 18, 2008, I am writing to request assistance from the IMF under the policy on Emergency Assistance for Natural Disasters (ENDA). The assistance would be used to fill the short-term balance of payments financing gap arising from the consecutive natural disasters that struck Bangladesh in the latter half of 2007. Accordingly, reflecting the severity of the situation, we request a purchase in an amount equivalent to SDR 133.325 million (25 percent of quota) under the Fund’s policy on ENDA and further request a subsidy on the rate of charge on such purchase, subject to resource availability.

The damage from the two natural disasters is severe. We need to ensure that there is no lasting fallout from the natural disasters that have negatively affected people’s livelihoods and the overall economy. Two consecutive floods between July and September 2007 killed over a thousand people and resulted in substantial damage to the agriculture sector. This situation was further compounded by the cyclone that struck the country on November 15, 2007 killing nearly 4,000 people, adversely affecting the lives of 8.7 million people, and severely damaging the rice crop. While we are fortunate that the loss of human life from the cyclone was relatively low due to our effective early warning system, there was substantial loss of assets, including livestock, shelters, houses, roads, bridges, culverts, embankments, and many public utility establishments and equipment. The combined impact of the floods and cyclone is estimated to be around US$2.7billion (3.7 percent of GDP). The damage and losses were primarily in coastal districts, where poverty levels were already higher than the national average.

The government has moved swiftly to alleviate the impact of these disasters. Following the floods, we activated emergency response committees in affected districts and established an operations center in Dhaka to coordinate relief activities. To assist the flood-affected households, the government also expanded the Vulnerable Group Feeding program by targeting about 3 million additional families. We also distributed clothing and bundles of corrugated iron sheets, along with cash grants and house-building grants.

Following the cyclone, we built on these programs, by establishing food security, shelter, health care, and income support programs in the affected areas. These activities are expected to cost around US$300 million, much of which has been incurred already. We have also begun to repair and reconstruct vital transport and power infrastructure. The long-term reconstruction program is expected to cost around US$1 billion over a five year period.

The overall effect on GDP growth of the two disasters is likely to be around 0.7 of a percentage point in 2007/08, mainly due to the devastating impacts on agricultural production and fisheries in the affected areas. We estimate that the direct budgetary cost of relief activities will be in the order of 0.6 percent of GDP in 2007/08. The additional expenditure is expected to be mostly met from new and existing sources of external concessional financing and from improved revenue performance. Nevertheless, we will have to reprogram a significant amount of budgeted expenditure, mainly from lower priority capital projects, in order to avoid overrunning our domestic financing target.

The most significant impact of the disasters will be on the balance of payments—which were already under pressure from high world oil and food prices and a slowdown in garments exports. We now expect that we will need to import more than 10 times as much rice as in previous years at import prices that are now 60 to 70 percent higher than one year ago. We are, in addition, faced with a requirement to import additional fertilizer at much higher prices in order to help make up food crop losses through a larger Boro rice harvest. With an estimated total short-term need for additional imports of more than $600 million and a disaster-related reduction of exports of around $60 million (on account of lost shrimp exports), the pressure on the balance of payments has intensified significantly and our current account balance is now negative for the first time in several years. Fortunately, the international community has responded positively to our requests for emergency assistance, and emergency aid from the World Bank, AsDB, and key bilateral donors has already filled around $400 million of this financing need. However, a substantial gap still remains and the urgent need for a large volume of food imports in the coming months will lead to a depletion in our international reserve position to below the level we were targeting under the recent PRGF-supported program.

Funds purchased under the ENDA facility would help alleviate these pressures and assist us to continue to maintain our international reserves at above three months of import coverage. We will continue to operate a flexible exchange rate policy, aiming to supplement our international reserve position where possible. The government of Bangladesh does not intend to introduce any new, nor intensify existing exchange restrictions or multiple currency practices as per the provisions of Article VIII of the Fund’s Articles of Agreement. Furthermore, it does not intend to introduce any restrictions on, or changes to prevailing trade or payments arrangements. On the monetary side, we are confident that by containing domestic financing to the government to budgeted levels, we can implement the relief and recovery program while allowing monetary policy to maintain reasonable domestic price stability and support private sector growth.

Looking forward, the public expenditure profile will be influenced by post-disaster relief and reconstruction needs. Reconstruction of the affected areas will also be given priority in the allocation of public investment funds in the 2008/09 Annual Development Program. We remain, however, fully committed to maintaining a prudent fiscal stance and improving fiscal performance by continuing to broaden the tax base and improve the management of public revenues and expenditure.

Recent increases in revenue collections demonstrate our strong commitment to improving the fiscal position. We have recently taken steps to improve revenue administration and plan to step up our efforts in the latter part of this fiscal year, making use of Fund technical assistance, including through merging our Large Taxpayer Units, separating tax policy from administration, revising the income tax law, and improving VAT administration.

We are aware of the risk that low administered prices on fuel and electricity pose to our fiscal stance and intend to adjust these prices toward market rates at an appropriate time in the near future. We will also continue our efforts to reform other loss-making state-owned enterprises, and state-owned commercial banks.

We will continue to work closely with the IMF in monitoring macroeconomic developments and policies. The Article IV consultation in July 2008 will provide a useful opportunity to take stock of our recent achievements and reevaluate the macroeconomic impact of the natural disasters. It will also be a useful forum to discuss how our reform agenda will put in place a sound economic position that continues to reduce poverty and make progress toward MDG targets, while helping to set the stage for possible Fund-supported programs in the future.

Meanwhile, we will appreciate if our request noted in the first paragraph receives a favorable response.

Yours sincerely,

/s/

Dr. A. B. Mirza Md. Azizul Islam

Finance Advisor

Government of Bangladesh

3These estimates are based on the draft Damage, Loss, and Needs Assessment for Disaster Recovery and Reconstruction completed on February 17, 2008 by the government, the World Bank, and 11 development partners.
4The fiscal year runs from July to June. Hence, both the floods and the cyclone occurred in FY08.
5An updated DSA will be prepared for the 2008 Article IV consultation discussions scheduled for July 2008.
6Dominica, Grenada, Maldives, and Sri Lanka (all ENDA), and Cote d'Ivoire and Guinea-Bissau (all EPCA).
7The forthcoming semi-annual update on the financing of the Fund's concessional operations and debt relief to low-income countries will also provide an opportunity to discuss subsidy resource needs for emergency assistance.

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