Bangladesh: Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for Modification of Performance Criteria-Staff Report; Debt Sustainability Analysis Update; and Press Release

KEY ISSUESContext: Economic activity was disrupted by political unrest and uncertainty in the run-up to the January 2014 general elections. However, macroeconomic stability was maintained and international reserve buffers have been built up further. As calm returns following the elections and activity normalizes, growth is expected to recover in the second half of fiscal year 2014 (FY14, July 2013–June 2014) and in FY15, supported by domestic demand.Exports, on the other hand, face headwinds as the garment industry adjusts to higher costs from increased minimum wages and stricter labor and safety standards. A resurgence of political violence poses the main risk to the outlook.Program: The program, supported by a three-year Extended Credit Facility (ECF) arrangement for SDR 639.96 million (120 percent of quota) approved in April 2012, remains on track. All performance criteria at end-December 2013 (the test date for the fourth review) were met and all structural benchmarks have been completed.Policy framework: Fiscal and monetary policies are set to retain a prudent stance to safeguard macroeconomic stability. The structural reform agenda remains centered on:(i) strengthening fiscal revenue and tax administration capacity, including through steady implementation of the new value-added tax (VAT); (ii) enhancing public financial management, particularly debt management, cash flow forecasting, and financial reporting in state-owned enterprises; (iii) reforming the state-owned commercial banks through improved governance, credit risk management and internal controls, along with recapitalization; and (iv) boosting inclusive growth through a revamped and well-prioritized public investment plan, enhanced social safety nets, streamlined trade and foreign exchange regulations, and improved labor and safety standards.Staff recommendation: Based on strong program performance to date and the policy framework going forward, staff recommends completion of the review, as well as modification of performance criteria for end-June 2014 on account of reserve over- performance. The authorities have consented to publication of the staff report and theLetter of Intent and attachments.