Bangladesh Development Update: Strengthening Domestic Resource Mobilization (Frontiers of Finance)

Summary

• Real GDP growth in Bangladesh slowed significantly to 5.8 percent in FY23 from 7.1 percent in FY22, weighed down by weak private consumption and investment.p.6
• Official gross international reserves declined from US$ 24.8 billion to US$ 20.8 billion over the first eight months of FY24 due to central bank interventions.p.6
• Headline CPI inflation remained above 9 percent since August 2022, driven by supply chain disruptions, currency depreciation, and domestic energy price hikes.p.10
• Officially recognized non-performing loans (NPLs) grew by 20.7 percent year-on-year by the end of December 2023, with gross NPLs reaching 9 percent of total loans.p.14
• The Balance of Payments deficit reached US$ 8.2 billion in FY23 and US$ 4.7 billion during the first seven months of FY24.p.15
• Tax collection grew by 13.9 percent in the first half of FY24, but Bangladesh's revenue-to-GDP ratio remained at a low 8.2 percent in FY23.p.17
• Public debt rose to 35.0 percent of GDP in FY23, with external debt representing 12.9 percent of GDP, maintaining a low risk of debt distress.p.19

Key insights

1. Private consumption and investment weakened in FY23 due to inflation, tight liquidity, rising interest rates, and import restrictions.p.6
2. Monetary transmission in Bangladesh is constrained by a variable cap on bank lending rates, keeping the real policy rate negative.p.6
3. The current account shifted into a US$ 3.1 billion surplus in the first seven months of FY24 due to severe import compression measures.p.15
4. A broader measure of stressed assets, including NPLs, rescheduled loans, and written-off loans, totaled BDT 3,779.2 billion by the end of 2022.p.14
5. Cross-country empirical estimates place Bangladesh in the lower third among middle-income countries in terms of tax effort.p.24
6. Policy choices, such as tax exemptions and truncated rates, caused two-thirds of Bangladesh's estimated BDT 2 trillion VAT gap in FY19.p.26
7. High nominal protection rates and complex para-tariffs create a strong anti-export bias, hindering trade diversification beyond readymade garments.p.28
8. Direct tax expenditures, including exemptions and tax holidays, amounted to 3.5 percent of GDP in FY21.p.32