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Bangladesh: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria Supplementary Information

Author(s):
International Monetary Fund
Published Date:
February 2004
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Information about Asia and the Pacific Asia y el Pacífico
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I.Introduction

1. This supplement provides an update on economic developments and recent policy measures as envisaged under the PRGF arrangement based on information that has become available since the issuance of the staff report. Reflecting recent developments, the staff appraisal with respect to the interest rate adjustment for National Savings Certificates (NSCs) has been modified.

II. Recent Economic Developments And POlicy Implementation

2. Monetary policy remains prudent and quantitative targets for end-December are likely to be observed with significant margins. While the 12-month reserve money growth was on a moderate upward trend during September-October (8 percent, y-o-y), reflecting in part an increase in NFAS growth in broad money was stable (15 percent, y-o-y) with a pickup in private sector credit. The external position has further improved with gross official reserves reaching $2.6 billion at end-December (from $2.4 billion at end-November). However, NBR revenue remains short of the program target in November, owing mainly to weak collections in customs duty.

3. The authorities announced on December 31 that, effective January 1,2004, interest rates on new issues of National Savings Certificates (NSCs) would be reduced by 1½ percentage points to 11 percent and 10½ percent, respectively, for the 5-year savings certificate and the 3-year bonus certificate. This action is broadly consistent with the understandings under the PRGF (MEFP ¶ 16). However, interest rates on other government savings instruments (mainly postal savings deposits, amounting to 12 percent of the current stock of government savings instruments) were not adjusted. In addition, as a form of social protection, the authorities have exempted new NSC issues on a temporary basis from the ½ percentage point withholding tax on interest income to provide some protection to fixed income holders of these instruments. The authorities agreed that this transitional arrangement will be reviewed with the staff by June 2004.

4. With respect to tax administration, further efforts were made to modernize the Large Taxpayer Unit (LTU) and set up the Central Intelligence Unit (CIU) to monitor tax compliance. File transfers from some 400 local offices to the LTU have nearly been completed and revenue collection from selected large taxpayers has started. The organizational chart for the CIU has been approved and significant progress has been made to recruit staff, make budget provisions, and allocate office space and equipment.

5. Reforms of the nationalized commercial banks are advancing according to schedule. For Agrani, the winning bid for management contract is currently under final approval by the Prime Minister, and the new management team is expected to be in place by March 1 as envisaged. The evaluation of bids for management support contracts for Sonali and Janata is under way and is expected to be completed by end-January.

6. Progress has also been made with respect to governance. The authorities indicated that the Cabinet has recently modified the Independent Anti-Corruption Commission (IACC) bill to address certain issues raised by civil society, including on the selection of commission members. Under the bill, the IACC will be given financial independence similar to the High Court and also granted its own prosecutorial powers. The IACC bill is expected to be submitted to parliament in the session that starts on January 18. In addition, implementation of the procurement guidelines has started, which inter alia calls for compulsory external audit of all agencies that have procurement contracts that exceed Tk 100 million per year. Furthermore, the government is considering a proposal for a comprehensive reform of the National Board of Revenue, with technical support from the World Bank.

III. Staff Appraisal

7. The last sentence of paragraph 35, with respect to the NSC rate adjustment, is modified as follows:

The staff welcomes the interest rate reductions on NSC instruments, as they represent a key step in the direction of increased interest rate flexibility. Another rate adjustment will be needed at mid-year, as envisaged under an automatic formula in the program, so as to further align NSC rates with market interest rates. However, it is regrettable that the rate adjustments were not extended to cover the full range of government savings instruments (particularly, the 3-year postal deposits). This gives rise to the risk of a significant shift from NSCs to postal deposits, undercutting the government’s efforts to reduce its borrowing cost and to remove the distortion to the financial system created by the government paying above market interest rates on these instruments. Accordingly, the staff urges the authorities to adjust the rates on other government savings instruments without delay, and to apply the planned mid-year interest rate adjustments to all such instruments.

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