Bangladesh eyes additional World Bank support for post-LDC dreams

Bangladesh will ask the World Bank (WB) to extend its technical cooperation in export diversification, boosting competitiveness, expanding investment, and improving trade logistics for a smooth and sustainable graduation from the status of the least developed country, scheduled for 2026.

"World Bank may also assist the country's initiatives aimed at enhancing human capital and institutional capacity development to facilitate a seamless transition," says a brief prepared for Finance Minister AH Mahmood Ali for the spring meetings of the World Bank and International Monetary Fund in Washington on 15-20 April. 

The finance ministry believes Bangladesh's external debt lies far below the threshold level and the government has 'adequate repayment capability'. 

However, the government remains cautious about the exchange rate risk that comes from the appreciation of the local currency, as stated in the briefs for the lenders, determining the country's debt sustainability strengths and risks ahead. 

The finance minister will share his concerns with the two global lenders about macroeconomic challenges, such as higher inflation and the depreciation of taka against major trade currencies, which have slowed development momentum.    

The ministry says in its papers that, considering the recent macroeconomic developments and challenges, the GDP growth target has been set at 6.5%, keeping inflation within the targeted level of 7.5% for FY24.

In its latest development update, the World Bank projected Bangladesh's economic growth may fall to 5.6% this year before returning gradually to above 6%, as elevated inflation will weigh on consumption, pushing five lakh people into extreme poverty afresh. 

Annual inflation may stay at 9.6% before easing to 8.5% next fiscal year.   

Many briefs have been prepared detailing Bangladesh's long-term strategic plans and climate change adaption plans to pinpoint future investment needs and where development partners should finance. 

One of the documents acknowledges Bangladesh's economic challenges, such as rising inflation, external imbalances, and financial sector vulnerabilities. It says strong and immediate policy actions will be critical for Bangladesh to stay on course to achieve long-term goals.   

Another brief states that Bangladesh needs to create jobs, increase human capital, and build efficient infrastructures to attract private investment and improve business competitiveness to achieve its vision of attaining upper middle-income status by 2031. 

It also lists development priorities such as diversifying exports beyond readymade garments, making urbanisation more sustainable, and strengthening public institutions to accelerate growth.

Why Bangladesh needs more budget support  

In the joint meeting of two development partners, the finance minister is expected to explain why Bangladesh currently needs more budget support than before in response to measures taken to curb the pandemic, bring the economy back to life and again absorb shocks from price volatility and supply disruptions caused by the Russia-Ukraine war. 

Bangladesh implemented a mass vaccination programme free of cost to curb the Covid outbreak. It took up 28 fiscal and stimulus packages to overcome pandemic shocks before the war brought new challenges. 

"The government has been borrowing additional amount as budget support and project supports to address the adverse situation created by the war and to finance the Covid-19 response and recovery-related project and programmes out of regular borrowing," says the brief prepared for the finance minister for the IMF-WB meeting.

It mentioned how Bangladesh's scope of mobilising foreign assistance in concessional terms has been less than in previous years as it graduated to a lower middle-income country (LMIC). 

"Most of the development partners have already adjusted their financial terms and conditions either by shortening maturity and grace period or by increasing interest rates," it points out. 

"On the other hand, to meet investment needs, especially for some big and nationally important projects, borrowing on non-concessional terms from bilateral sources has increased," it adds.

Bilateral debts accounted for 40% of Bangladesh's external debt stock in FY23, up from 31% in FY20. 

Economic Relations Division data show as of 30 June 2023, borrowing from multilateral sources totaled $37.25 billion, while loans from bilateral sources were $25.15 billion.

However, Bangladesh has been in development partners' good books for its ability to manage external debt prudently and sustainably, it says, citing IMF-WB's Debt Sustainability Analysis, which assessed Bangladesh at low risk of external and overall debt distress. 

The finance ministry documents claim that despite a phenomenal increase in external debt, Bangladesh's prudent borrowing policy helped it maintain its reputation as a 'non-defaulting party' and comfortably service its debt.

"Although Bangladesh's external debt-to-GDP ratio is 'quite comfortable,' an increase in external borrowing and debt servicing liability in recent years is a cause of concern," said Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD).

"When the government approached the IMF for funds [the IMF approved a $4.7 billion loan package and started disbursing it], it indicated that we are now concerned with external borrowing," the economist observed.

Debt distress low, but exchange rate poses risk

At the end of FY23, Bangladesh's public sector debt to GDP ratio was 15.59%, against the threshold of 40%, which reveals Bangladesh's solid solvency position. 

Debt to export plus remittance was 86% in FY23, much below the limit of 180%.  

Bangladesh's debt service obligation to export stood at 5.81% in FY22, below the 15% threshold, mirroring its good liquidity condition.

These data reveal that Bangladesh's foreign debt sustainability is far below the maximum risk limit.

However, exchange rate volatility remains a concern.

The nominal exchange rate of taka against dollar depreciated by 15% in a year at Tk108 in FY23 and fell further to Tk110 at the end of February 2024. 

The Bangladesh Bank is going to introduce a crawling peg exchange rate management system which is expected to reduce market volatility and stabilise the foreign exchange market, according to the finance ministry papers prepared for the Washington meeting.

Economists also support a crawling peg system, saying the sooner it is implemented, the better the foreign exchange management.

"The Bangladesh Bank should quickly spell out how it will operationalise crawling peg modality as delays may incentivise keeping foreign currency abroad," said CPD's Mustafizur Rahman at an event on 3 April.

"Local currency should be depreciated at a more accelerated pace to bring more competitiveness in export," he said at the dialogue titled "Bangladesh's External Public Borrowings and Debt Servicing Capacity: Are There Reasons for Concern?"

Mustafiz added that once the market aligns with the dollar, the fiscal burden of the Tk11,000 crore subsidy provided by the government and banks will be eliminated. 

Economist Ahsan H Mansur, executive director of the local think tank Policy Research Institute (PRI), also believes the crawling peg system will be effective if adjusted to the real effective exchange rate.

In its latest report on Bangladesh, the World Bank said the crawling peg system would need to be a market-clearing exchange rate mechanism that reduces the gap between formal and informal exchange rates, attracts remittances through formal channels, and helps rebuild external buffers. 

Gross foreign exchange reserves have declined sharply over the past year, reaching $20.8 billion in February 2024. The net reserve stands below the threshold set by the IMF for the next tranche of its $4.7 billion loan scheme. 

The 2 April World Bank report pointed out that exchange rate reform would also help ensure sufficient foreign exchange liquidity, essential for fulfilling debt service and other external payment commitments.  

Support for LDC graduation and beyond

The global lenders have the scope for increased collaboration with Bangladesh to "facilitate the country's seamless progression towards graduation, its subsequent graduation to an upper-middle income country and successful execution of its Delta Plan-2100," reads the brief.  

Bangladesh plans to use the WB-IMF meetings from 15 to 20 April as a platform to promote the causes of graduating least-developed countries. It believes these countries deserve a new innovative incentive package in addition to existing trade-related international support measures beyond graduation, at least until 2030, the terminating year for the UN's sustainable goals.

The preferential market access based on lower tariffs and the duty-free-quota-free arrangement should be continued for an extended period after graduation to support the government and the private sector. 

Besides, benefits provided under the TRIPS (trade-related intellectual property rights) agreement should continue for a reasonable period.

Otherwise, it will pose a threat to the potential growth of the pharmaceutical industry and cast a negative impact on the overall health sector in LDCs, the brief says.

"Graduating LDCs should be rewarded and incentivized for their better performances," it says. 

Bangladesh is slated to graduate from LDC status in November 2026 and is expected to get trade privileges extended until 2029, when zero-tariff market access will cease. 

The country will then not be able to offer export incentives, and the process of withdrawing cash support has already started in January.