Bangladesh’s policy responses to mitigate external imbalances inadequate: World Bank

Bangladesh's policy responses to mitigate external imbalances have so far been inadequate although risks have deepened for the country owing to geopolitical tensions, said the World Bank today.

In its Bangladesh Development Update, the Washington-based lender said geopolitical tensions, which rose markedly after Russia's invasion of Ukraine, could increase further, encompassing a larger set of countries.

At the same time, risks identified in recent global forecasts have materialised over recent weeks, with a series of bank failures in the United States and Europe.

"In this context, Bangladesh is facing near-term risks in sustaining economic growth, reining in inflation, and reducing the current account deficit without being disruptive to the supply side," the WB said. 

"Relatively low external indebtedness and vaccination success enabled the economy to restart swiftly. However, the policy responses to mitigate external imbalances have so far been inadequate."

The multilateral lender said the uncertain availability of foreign currency is an impediment to business development, as much as the price of foreign exchanges and the level of interest rates.

"These may compound the effect of costlier imports and weaken the taka further."

Contingent liabilities from high non-performing loans (NPLs) and insufficient capital in state-owned banks, as well as any recapitalisation of or facilitation of resolution processes for privately-owned financial institutions, could result in higher domestic debt, it said. 

"Finally, the fiscal deficit could rise unexpectedly in the run-up to the general election in January 2024 if additional spending measures are adopted or policy reform implementation is deferred."

The fiscal deficit is projected to rise to 4.4 per cent of GDP FY23, narrowing over the medium term.

In the near-term, revenue growth is expected to remain tepid as a result of declining imports. Over the medium term, revenues will rise with increasing trade, improving domestic economic activity, higher incomes, and ongoing efforts to strengthen tax administration.

Public expenditure is expected to match the rapid pace of GDP growth.

Subsidy expenditure is expected to rise in the near term, modestly widening the deficit in FY23. Over the medium term, growth in subsidy expenditures will be contained by pricing reforms.

Capital expenditure on infrastructure megaprojects is expected to keep pace with GDP growth. Over the longer term, rising public expenditure requirements to meet infrastructure needs, mitigate climate vulnerabilities, and accelerate human capital will require additional domestic revenues. Total revenues are expected to remain at 8.5 per cent of GDP in FY23.

"Although revenues are expected to gradually increase, this ratio remains among the lowest in the world," said the WB.