The World Bank has extended a $250 million financing to Bangladesh in budgetary support after the country has moved to bring in fiscal and financial reforms to strengthen policies to sustain growth and enhance resilience to future shocks.
On Friday, the Washington-based lender approved the loan, the first of a series of two credits under the second phase of the Development Credit Policy. It will provide another $250 million in the next fiscal year upon implementation of several more conditions.
In a press release, Bernard Haven, a senior economist of the WB, said the financing would help Bangladesh harness digital technologies to ensure green and resilient growth.
“Fiscal and financial sector policies will help sustain growth, while enhancing the coverage and efficiency of social protection programmes will protect the poor and vulnerable during economic shocks and natural disasters.”
The government has moved to bring reforms to various areas, including preparing a bank recovery plan, allowing non-resident foreign digital services companies to submit VAT returns, cancelling 10 coal-based power plants, and formulating the National Tariff Policy.
Last month, the Bangladesh Bank directed all banks to draw up a loan recovery plan so that they can take time-befitting moves to resolve any downside risks emanating from bad debts, liquidity crisis and other factors.
As per instructions, each bank will have to submit the plan to the central bank in January every year. The first strategy, however, will have to be handed in by June 30 this year.
The WB financing came at a time when the country is facing major challenges, caused by the dragging coronavirus pandemic, the outbreak of the Russian-Ukraine war, and commodities price shocks.
“Bangladesh’s macro-financial risks are elevated due to the existing vulnerabilities in the financial sector, including deviations from international regulatory and supervisory standards, weak corporate governance, and the absence of a modern problem bank resolution framework,” said the lender in a document.
The interest rate cap, introduced in April 2020, is an ongoing challenge, distorting private sector credit and affecting bank profitability.
The National Board of Revenue has published a statutory regulatory order (SRO) to allow non-resident VAT registration, while the BB has ordered domestic banks to report non-resident VAT withholdings.
The move will allow foreign companies such as search engines, social media and cloud-based services to remit VAT payments on the digital services they provide in Bangladesh.
Following the publication of the SRO, the world’s largest digital services providers have registered with the NBR.
“This prior action and trigger will together contribute to strengthening VAT and income tax revenues to reduce dependence on trade-based taxes,” the WB added.
Despite rapid economic growth and success in poverty reduction in recent years, Bangladesh has struggled to strengthen its domestic resource mobilisation. The challenges have been highlighted in several policy documents, but revenue generation has continued to disappoint.
“Bangladesh’s aspiration of becoming an upper-middle-income country by 2031 crucially hinges on the improvement of its revenue mobilisation,” said the WB.
The Development Credit Policy programme will also support the development of the National Tariff Policy, which will help modernise trade taxes.
The commerce ministry has already approved the policy, said an official of the ministry. The policy will have to receive green light from the cabinet to get the second tranche of the loan.
Similarly, the finance ministry will need to roll out an enhanced at-source tax withholding system and the automated challan system nationwide and strengthen income tax collections.
The government has already cancelled its planned investment in 10 coal-fired power generation projects having a combined capacity producing 8,451 megawatts of electricity.
“This credit will further accelerate the government’s endeavours to strengthen its policies and regulatory framework to pave the way for a green, resilient, inclusive recovery and low carbon growth,” said WB Country Director for Bangladesh Mercy Tembon.
