Assessing Fiscal Risks in Bangladesh - Ricerca sull'intelligenza artificiale specializzata al MIT

Assessing Fiscal Risks in Bangladesh
Leandro Medina∗

This paper identiﬁes, quantiﬁes, and assesses ﬁscal risks in Bangladesh. By
performing sensitivity analysis and using stochastic simulations, it measures
risks arising from shocks to gross domestic product growth, the exchange
rate, commodity prices, and interest rates. It also analyzes speciﬁc ﬁscal and
institutional risks, including those related to the pension system, issuance of
guarantees, state-owned commercial banks, and external borrowing and debt
management strategies. The paper ﬁnds that ﬁscal aggregates are particularly
sensitive to shocks to commodity prices and the exchange rate. Other factors
that could affect ﬁscal aggregates are the unfunded pension system and limited
institutional capacity.

Keywords: Bangladesh, commodity prices, contingent liabilities, exchange rate,
ﬁscal risks, guarantees, pensions, sovereign debt
JEL codes: E62, H63, H68

IO. introduzione

Fiscal risks are factors, often outside a government’s control, that can lead
to ﬁscal aggregates differing from forecasts. As noted in Cebotari et al. (2009),
these differences can be large and may result from a variety of shocks such as
deviations of macroeconomic variables from expectations (per esempio., shocks to economic
growth, interest rates, the exchange rate, and terms of trade); natural disasters; calls
on government guarantees; and institutional weaknesses. The 2008–2009 global
ﬁnancial crisis and its aftermath illustrated that the materialization of ﬁscal risks
can lead to signiﬁcant ﬁscal liabilities.

These risks are likely to continue to be a root of tension for economies in all
income groups, and their size, timing, and nature will have substantive implications
for policy making, particularly in low-income economies, which tend to have less
degrees of freedom in terms of policy buffers (IMF 2016).

∗Leandro Medina (corresponding author): Economist, International Monetary Fund, Washington, DC, stati Uniti.
E-mail: lmedina@imf.org. I would like to thank Bernardin Akitoby, Nathaniel Arnold, Mark De Broeck, Rodrigo
Cubero, Lars Engstrom, Andrew Hodge, Timothy Irwin, Souvik Gupta, Chita Marzan, Geremia Palomba, Sandeep
Saxena, Mauricio Soto, Seng Guan Toh, seminar participants from the Bangladesh Ministry of Finance, IL
managing editor, and the anonymous referees for helpful comments and suggestions. Special thanks also go to Ranjit
Chakraborty, Habibur Rahman, and Rouf Talukder for their support, help, and clariﬁcation regarding ﬁscal issues and
dati. The views expressed in this article are those of the author and do not necessarily reﬂect the views and policies
of the Asian Development Bank, its Board of Governors, or the governments they represent; or of the International
Monetary Fund, its Executive Board, or its management.

Asian Development Review, vol. 35, NO. 1, pag. 196–222
https://doi.org/10.1162/adev_a_00111

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Assessing Fiscal Risks in Bangladesh 197

Even though most South Asian economies are commodity importers
(particularly oil) and have underdeveloped and/or unfunded pension systems
and weak state-owned enterprises, there has been limited progress in analyzing,
assessing, and managing ﬁscal risks in these economies.

In the case of Bangladesh, which is a commodity-importing economy with
an unfunded pension system, weak state-owned enterprises and state-owned banks,
and a substantive amount of sovereign guarantees issued in recent years, such an
assessment is extremely valuable as it would not only quantify the ﬁscal risks facing
Bangladesh and therefore help authorities hedge against those risks, but also set the
tone for other South Asian economies facing similar risks.

This paper intends to help close this gap by assessing ﬁscal risks in
Bangladesh following both analytical and descriptive approaches. Primo, it identiﬁes
the different sources of ﬁscal risks in Bangladesh. Secondo, using analytical
methodologies, it assesses the sensitivity of the ﬁscal balance and public debt
to macroeconomic shocks and conducts stochastic analyses of the impacts of
such shocks on the public debt-to-gross domestic product (GDP) ratio. Third, Esso
evaluates the impact of speciﬁc sources of ﬁscal risks such as those originating
from contingent liabilities and the pension system. Finalmente, it assesses risks that
emerge from the government’s institutional capacity limitations, including budget
forecasting errors, external debt management, and data discrepancies. Based on this
analysis, the paper also proposes measures to mitigate some of the most severe risks
that Bangladesh faces.

Results suggest that in Bangladesh a variety of factors may cause ﬁscal
outturns to diverge from forecasts. The ﬁscal balance is particularly sensitive to
shocks to macroeconomic variables such as commodity prices and the exchange
rate. Additionally, speciﬁc factors, such as calls on government guarantees or the
recapitalization of state-owned banks, could negatively impact ﬁscal aggregates.
Results also highlight the impact of risks derived from the unfunded pension system
and limited institutional capacities.

The paper draws on two strands of the literature covering ﬁscal risks and
debt sustainability. Regarding the former, the results are consistent with Cebotari
et al. (2009) who, building on experience from different economies, conclude
that macroeconomic shocks and calls on contingent liabilities often have major
implications for ﬁscal sustainability. Inoltre, Hemming (2006) assesses the
impact of guarantees and other instruments on debt, arguing that greater use
should be made of scenario analysis to stress test debt projections under alternative
assumptions about calls on guarantees.

This paper also builds on the extensive literature on debt sustainability and
its determinants (Vedere, for example Chalk and Hemming 2000; Gali and Perotti 2003;
Wyplosz 2005; Celasun, Debrun, and Ostry 2006). When debt rises, in particular
external debt, beyond certain thresholds, an economy’s ﬁscal balance becomes
more vulnerable to shocks, leading in extreme cases to a debt crisis as explained

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198 Asian Development Review

by Obstfeld and Rogoff (1996). Celasun, Debrun, and Ostry (2006) study debt
sustainability in emerging economies and ﬁnd that an explicit quantiﬁcation of risks
could help in designing consolidation strategies. Inoltre, debt sustainability is
of particular relevance for low-income economies, given that they generally have
high levels of vulnerability to exogenous shocks, suffer from political instability
and weak institutions, and their debt structure is usually denominated in foreign
currency.

The rest of the paper is organized as follows. Section II presents the
main classiﬁcations for analyzing ﬁscal risks. Section III assesses the impacts of
macroeconomic risks by quantifying budget sensitivity to different shocks and
conducting stochastic analyses (fan charts) for the path of public debt. Sezione
IV and section V deal with different contingent and policy-speciﬁc risks facing
Bangladesh. Section VI discusses policy implications and section VII concludes.

II. Classiﬁcation of Fiscal Risks

As mentioned above, ﬁscal risks are factors that may cause ﬁscal outcomes
to deviate from expectations. These can result from a variety of shocks such as
deviations of macroeconomic variables from projections, natural disasters, calls on
government guarantees, and institutional weaknesses. It is helpful to organize ﬁscal
risks in a manner that differentiates between (io) general economic risks such as those
arising from shocks to macroeconomic variables (per esempio., commodity prices, GDP
growth, exchange rates); (ii) speciﬁc ﬁscal risks, mainly from contingent liabilities,
whether explicit or implicit; E (iii) structural or institutional risks, such as weak
institutional capacity and spending rigidity (Budina and Petrie 2013). These risks
are then assessed based on their impacts on the budget and debt stock (Figura 1).

General economic risks operate through a variety of channels such as shocks
to GDP growth, inﬂation, the exchange rate, interest rates, and commodity prices.
These shocks affect expenditure (per esempio., through the subsidy bill), revenue, E
consequently the stock and dynamics of public debt.

Realizations of contingent liabilities (questo è, obligations triggered by an
uncertain event), can also create substantial ﬁscal risks. A contingent liability can be
explicit or implicit. In the ﬁrst case the conditions are clearly stipulated in policies or
legal obligations, while in the second case the obligation arises from the expectation
that the government will provide support should a particular event occur.1 Fiscal
risk analysis has traditionally focused on explicit contingent liabilities arising from
the contractual or legal obligations of the government. Tuttavia, noncontractual
commitments are also critical for ﬁscal sustainability (Cottarelli 2014), particularly
those emanating from the ﬁnancial sector. A feature of implicit contingent liabilities

1For an analysis of the ﬁscal implications of contingent liabilities, see Brixi and Schick (2002), Irwin (2003),

and Hemming (2006).

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Assessing Fiscal Risks in Bangladesh 199

Figura 1. Types of Fiscal Risks

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Fonte: Author’s compilation.

is that their hidden and/or uncertain nature can tempt governments to avoid dealing
with them in a timely fashion. Tuttavia, this may exacerbate the problem when they
are eventually realized as the size of the liabilities may have grown in the interim.

Structural or institutional weaknesses can also create policy risks and
constrain the effectiveness of ﬁscal risk management. Coordination problems
between different levels of government can impede the government’s ability to
implement the desired ﬁscal policy or hamper its ability to respond to shocks.
Limited capacity to identify and manage ﬁscal risks can exacerbate an economy’s
exposure to existing ﬁscal risks. When policy makers lack good information, ﬁscal
management becomes more difﬁcult, increasing the likelihood of policy errors.
As noted by Budina and Petrie (2013), this situation can be compounded if the
institutions and actors responsible for speciﬁc risk management functions are not
clearly identiﬁed, if those responsible lack the necessary authority, or if budgeting
systems undermine effective management.

200 Asian Development Review

The benchmarks of ﬁscal risk magnitude vary with the risk and the
government, as well as the macroeconomic situation and buffers. Some of these
risks are related to an unfunded pension system in an economy with a growing
population, while others have to do with increasing the amount of sovereign
guarantees in foreign currency or with weak state-owned enterprises.

It is important to be able to disclose, analyze, and assess these ﬁscal risks.
The benchmark will change from economy to economy, though it is very difﬁcult to
propose a threshold above which ﬁscal risks are high. Based on historical evidence,
IMF (2016) aimed at addressing this issue by performing a battery of tests.

The framework outlined above will guide the identiﬁcation of ﬁscal risks in

Bangladesh in this paper.

III. Quantitative Macro-Fiscal Sensitivity and Debt Dynamics

Macroeconomic shocks (per esempio., shocks to GDP growth, commodity prices, E
interest rates) can be a source of signiﬁcant risk to a government’s budget at a
given point in time as well as to the evolution of public debt. This section assesses
the sensitivity of Bangladesh’s ﬁscal balance and public debt to macroeconomic
shocks, and conducts stochastic analysis of the impacts of such shocks on the public
debt-to-GDP ratio.2

UN.

Sensitivity Analysis

Bangladesh’s ﬁscal aggregates are sensitive to variations in macroeconomic
variables, including commodity prices, the exchange rate, interest rates, and GDP
growth. Shocks to these variables impact ﬁscal performance and some of these
variables have been particularly volatile in the past few years.

This section examines the impacts on ﬁscal outcomes of changes in the
forecast values of key variables.3 The analysis focuses individually on 1 standard
deviation permanent shock to commodity prices (oil and urea), the exchange rate,
the domestic interest rate, and GDP growth (Figura 2).4 The shocks are assumed to
have taken place from the start of ﬁscal year (FY) 2014. The near- and medium-
term effects of the shocks are illustrated through their impact on the overall ﬁscal
balance and total public debt (deviations from baseline) in Table 1.

2The analysis uses GDP from FY1996 as the base year. Bangladeshi authorities have started publishing a
rebased GDP series, with FY2006 as the base year. Nominal GDP in FY2013 was about 16% higher under the
rebased series compared with FY1996.

3For a full description of the data, see Appendix 2.
4Permanent shocks are deﬁned as permanent deviations with respect to the baseline. See Appendix 2 for a

full description.

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Assessing Fiscal Risks in Bangladesh 201

Figura 2. Shocks to Macroeconomic Variables

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FY = ﬁscal year, GDP = gross domestic product.
Fonte: Author’s calculations.

Tavolo 1. Budget Sensitivity to Macroeconomic Shocks
(deviation from baseline as share of GDP), 2014–2018

FY2014

FY2015

FY2016

FY2017

FY2018

Scenario A (30% increase in commodity

prices or 1 SD)

Overall balance
Total debt

Scenario B (10% depreciation in exchange

rate)

Overall balance
Total debt

Scenario C (130-basis-points increase in

domestic interest rate or 1 SD)

Overall balance
Total debt

Scenario D (0.7% decrease in real GDP

growth or 1 SD)

Overall balance
Total debt

−0.9
0.9

−0.9
3.6

−0.2
0.2

−0.1
0.1

−0.8
1.8

−0.9
4.6

−0.2
0.5

−0.1
0.2

−0.6
2.4

−0.8
5.4

−0.3
0.7

−0.1
0.3

−0.4
2.8

−0.6
6.0

−0.3
1.0

−0.1
0.4

−0.4
3.1

−0.6
6.6

−0.3
1.3

−0.1
0.5

FY = ﬁscal year, GDP = gross domestic product, SD = standard deviation.
Sources: Bangladesh authorities and author’s calculations.

202 Asian Development Review

Figura 3. Commodity Prices, 1980–2012

Fonte: IMF Commodity Prices Database.

Commodity Prices

Bangladesh’s ﬁscal position is sensitive to commodity prices, particularly oil
and urea, that tend to move together and whose volatility has recently increased
(Figura 3).5 Shocks to these commodity prices operate through both the revenue
and expenditure sides. On the revenue side, an increase in commodity prices results
in a rise in import-related tax revenue, which in total accounts for over 30% Di
tax collections.6 On the expenditure side, the same shock would translate into an
increase in the subsidy bill, speciﬁcally payments related to fertilizer (urea) E
fuel subsidies, such as those to the Bangladesh Chemical Industry Corporation and
Bangladesh Petroleum Corporation (BPC).7

Consumption of fuel and urea is subsidized in Bangladesh.8 In FY2013, total
subsidies were 3.1% of GDP, of which energy-related subsidies reached 1.7% Di
GDP and fertilizer subsidies were 1% of GDP.

The impact on revenue of the rise in import-related tax collections is not
enough to offset the much larger effect on expenditure; Perciò, the overall effect
is negative. The analysis suggests that a 1 standard deviation increase in the prices of
oil and urea (roughly a 30% price increase) would reduce the overall ﬁscal balance
(questo è, increase the ﬁscal deﬁcit) by 0.6% of GDP above the baseline on average

5Urea is used as a basic input in the production of rice fertilizers.
6For simplicity, this analysis assumes zero elasticity of commodity import volumes with respect to prices.
7The analysis here assumes that the authorities do not adjust retail energy or fertilizer prices and therefore

the ﬁscal balance absorbs the entirety of the shock. This is clearly a worst-case scenario.

8For the purposes of this analysis, it is assumed that shocks to oil prices are transmitted on a one-to-one basis

to international fuel prices.

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Assessing Fiscal Risks in Bangladesh 203

each year. It would also lead to a cumulative increase in the stock of debt of 3.1%
of GDP above the baseline over 5 years.

Exchange Rate

While the exchange rate has been very stable over the past few years in
Bangladesh, a shock to the exchange rate would affect the ﬁscal balance and debt
stock through a variety of channels.9 A depreciation in the taka–dollar exchange
rate has an impact on domestic prices and (through them) on nominal revenue and
expenditure. Beyond that, depreciation has a direct impact on both revenue and
expenditure. In the case of revenue, the impact is associated with import-related
taxes. On the spending side, the main items affected are (io) the fertilizer subsidy
bill, (ii) payments to BPC for oil imports (constant volumes assumed), (iii) IL
externally ﬁnanced portion of the Annual Development Program (capital spending),
E (iv) interest payments on external debt.10 Additionally, there is a valuation effect
on external debt: the nominal taka equivalent value of public debt denominated
in foreign currency would move on a one-to-one basis with the exchange rate
change.11

Results show that a permanent 10% depreciation in the taka–dollar exchange
rate would reduce the overall ﬁscal balance (questo è, increase the deﬁcit) by 0.8% Di
GDP on average annually with respect to the baseline and increase the stock of debt
by around 6.6% of GDP over 5 years.

Domestic Interest Rates

Interest expenses are a small share of

total ﬁscal expenditure in
Bangladesh.12 Therefore, shocks to interest rates have a limited impact: UN 1 standard
deviation rise in domestic interest rates (130 basis points) would reduce the overall
ﬁscal balance by 0.3% of GDP with respect to the baseline and push up the stock of
debt by 1.3% of GDP over 5 years.13

Gross Domestic Product Growth

In terms of its direct impact, economic growth mainly affects the revenue
side of ﬁscal aggregates in Bangladesh, including value-added tax (import and

9The exchange rate has been very stable in Bangladesh and therefore shocks measured in terms of 1 standard
deviation are small. This study will focus on the impact of a more realistic large shock: UN 10% depreciation, che è
slightly below the largest depreciation that has occurred over the past 10 years.

10Following Ahmed and Islam (2004UN), this paper assumes a low pass-through from exchange rate

movements to inﬂation, speciﬁcally a coefﬁcient of 0.2.

11External debt at the end of 2013 stood at about 45% of total debt and about 16% of GDP.
12Shocks to interest rates on external debt are not assessed in this paper as interest payments on external debt

are low in Bangladesh, reﬂecting the prevalence of concessional external debt.

13Ahmed and Islam (2004B) ﬁnd that investment spending at the aggregate level does not respond to changes

in interest rates in Bangladesh.

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204 Asian Development Review

domestic), import tax, supplementary duties, and income tax. As is standard in
studies for other developing and emerging market economies, and following IMF
(2009), this paper assumes the elasticity of revenue with respect to growth to be
equal to 1 and the elasticity of expenditure with respect to growth to be equal
A 0.14

Results show that a 1 standard deviation decline in GDP growth (around 0.7
percentage points) would reduce the overall ﬁscal balance by 0.1% of GDP with
respect to the baseline and push up the stock of debt by 0.5% of GDP over 5 years.
The relatively small effect is the reﬂection of two factors: (io) a small tax
base as tax revenue collections in Bangladesh are among the lowest in the world
at around 9% of GDP; E (ii) the low volatility of growth in the past few years,
which implies that shocks to growth measured in terms of 1 standard deviation are
piccolo. Ovviamente, the tail event of a larger and more sustained shock to growth would
produce a larger deterioration in ﬁscal aggregates.

Stochastic Analysis of External Debt Dynamics

In some cases, macroeconomic shocks do not hit an economy in isolation but
occur simultaneously. In crisis episodes (tail events), a negative shock to real GDP
may occur in parallel with a shock to the exchange rate, interest rates, and inﬂation.
The cumulative impact of such shocks on public debt may be signiﬁcant.

It is important to assess the effects of these shocks on external debt for
three reasons. Primo, exchange rate ﬂuctuations generate volatility that affect debt
servicing as well as the debt burden in local currency terms. Secondo, a default on
external obligations can freeze access to international markets. Finalmente, an increase
in macroeconomic volatility could reduce foreign investors’ willingness to roll over
external debt.15

Using fan chart analysis, this section illustrates the frequency distribution
of projected external public debt-to-GDP ratio paths generated by shocks to key
macroeconomic variables. Fan charts are a tool to depict the possible evolution
of the public debt ratio over the medium term and to visually assess ﬁscal risks
from macroeconomic shocks. Sample statistics based on historical data (1996–
2012) for the real GDP growth rate, effective real interest rate on government
debt, primary balance, and real exchange rate are used to generate the sample
means and the variance–covariance matrix that deﬁnes a joint normal distribution of
these macroeconomic variables. Draws for each one of the variables from the joint
normal distribution are used to generate the shocks—calculated as the value drawn
minus the sample mean—that are applied to the baseline projections for each of

14These assumptions are admittedly simplistic: the elasticity of revenue could be higher than 1 as some types
of revenue (per esempio., income taxes) tend to move more than proportionately with income, while some expenditure (per esempio.,
social transfers) may well increase when growth falters, even in Bangladesh.

15Risks on domestic debt are lower because domestic debt is not as large as foreign debt and because

monetary and ﬁscal authorities have more control over the domestic debt market.

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Assessing Fiscal Risks in Bangladesh 205

Figura 4. Evolution of External Debt-to-Gross Domestic Product Ratio

Sources: Bangladesh authorities and author’s calculations.

the macroeconomic variables. These “shocked” series of macroeconomic variables
are then introduced into the debt dynamics equation to calculate a distribution of
projected debt paths (see Appendix 1 for details on the derivation).

The results suggest that Bangladesh has a low risk of debt distress. After a
combined shock to key macroeconomic variables, there is a 50% probability that
the external debt-to-GDP ratio would remain between 15% E 20% (Figura 4,
left-hand side). If the draws were restricted to only negative shocks (per esempio., only
draws of negative primary balance), then the probability of higher debt levels would
increase (Figura 4, right-hand side). Even under these assumptions, debt levels
would remain below reasonable thresholds.16

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IV. Speciﬁc Fiscal Risks in Bangladesh

Fiscal risks in Bangladesh do not only arise from disturbances to general
economic variables; they also arise from speciﬁc sources such as the realization of
contingent liabilities. This section assesses the impact on ﬁscal aggregates of the
hypothetical realization of all government loan guarantees and contingent liabilities
from state-owned banks. It also examines the potential long-term impact from the
unfunded pension system.

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UN.

Government Loan Guarantees

The Government of Bangladesh customarily provides guarantees for loans
contracted by the different state-owned ﬁnancial and nonﬁnancial enterprises. Most

16For a discussion on public debt management and debt sustainability in Bangladesh, see Islam and Biswas

(2005).

206 Asian Development Review

loans ﬁnance the implementation of diverse public policies and programs. If the
contracting organization fails to pay the loan in time, the guarantees are invoked
and the liabilities for payment are passed on to the government. Consequently, these
guarantees could eventually turn into outright government debt.

The stock of government guarantees issued before FY2004 was mainly
related to agricultural programs. From FY2004 until FY2012, the issuance of
guarantees was very small and related to agricultural credit. In FY2012, there was
a steep increase in guarantees, mainly those provided to state-owned commercial
banks for lending to nonﬁnancial public enterprises, particularly BPC. Di conseguenza,
the stock of government guaranteed debt (both external and domestic) rose from
3.5% of GDP in FY2004 to 5.7% of GDP (Tk592 billion) at the end of June
2013 (Tavolo 2), of which guarantees provided to state-owned commercial banks
represented around 30% of the total.

Risks emanating from government guarantees are sizable. Should they

materialize in full, they could noticeably increase Bangladesh’s public debt.

State-Owned Banks

The weak balance sheets of state-owned banks represent a tangible ﬁscal
risk (contingent liability) for the Government of Bangladesh. There are eight
state-owned banks in Bangladesh, comprising four commercial banks and four
specialized banks (development banks), which represent around 32% of the banking
system’s assets or roughly 24% of GDP (Figura 5). These banks account for the
majority of outstanding nonperforming loans (NPLs) in the banking sector.17

The state-owned banks have come under renewed stress since 2012,
reﬂecting different factors such as a slowdown in economic activity, increasing
competition, and weak internal governance. Recent cases of ﬁnancial fraud
have highlighted signiﬁcant weaknesses in oversight, internal controls, and risk
management in state-owned banks. At the end of 2013, the capital shortfall at these
banks, compared to the regulatory minimum, stood at 2.5% of GDP.18

The Pension System

There are two potential sources of ﬁscal risks arising from Bangladesh’s
current pension arrangements. Primo, there are those associated with the Civil
Servant Retirement Scheme (CSRS) and the General Provident Fund (GPF). UN

17Lending to state-owned enterprises, even to loss-making ones, does not give rise to NPLs, as nearly all of

these loans are guaranteed by the government.

18The estimates adjust for (io) past due loans shown as “valuation adjustments” in the balance sheets of
state-owned commercial banks, E (ii) additional loan loss provisions that would arise from an assumption of no
recovery of the NPLs. This is therefore a conservative estimate. Capital shortfall estimates are a moving target; COME
the NPLs and capital change, so do the estimates.

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Assessing Fiscal Risks in Bangladesh 207

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208 Asian Development Review

Figura 5. Composition of Banking System Assets as of December 2012
(% of total)

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Sources: Bangladesh authorities and author’s calculations.

second (more hypothetical) long-term risk arises from potential pressures from the
absence of an organized pension system for workers in the private sector, whether
formal or informal.

Civil Servant Retirement Scheme

As in other South Asian economies, the Government of Bangladesh provides
its employees with a noncontributory deﬁned beneﬁt pension, including survivor
beneﬁts. Civil servants are eligible to receive a pension at the age of 59.19 Pensions
depend on the length of an employee’s public service. The civil servants’ salary
structure is divided into 20 grades or categories, with the basic annual salary ranging
between Tk5,000 and Tk40,000, with an average of Tk20,000. Dopo 25 years of
service (or at the age of 59) a civil servant is entitled to a pension of 80% of his or
her prorated last basic salary (with proration based on years of service if less than
25), half of it as a pension payment every month and the other half in a lump sum.
Pension spending on the CSRS is captured in ﬁscal aggregates under current
expenditure. In FY2013, the government assigned Tk60 billion to the pension bill
(0.57% of GDP).

The Government of Bangladesh employs roughly 1.2 million civil servants,
of which around 35,000–40,000 retire every year. Demographic trends will drive up

19See Kim and Bhardwaj (2011). The retirement eligibility age increased from 57 A 59 In 2011.

Assessing Fiscal Risks in Bangladesh 209

Figura 6. Actual and Projected Population over 60

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Fonte: United Nations. World Population Prospects. https://esa.un.org/unpd/wpp/.

the number of retirees per year, with an impact on pension expenditure. Current
United Nations projections estimate that the elderly (individuals aged 60 years
and above) will more than triple as a share of Bangladesh’s total population by
2050 from the current 6% (Figura 6). As the ﬁgure also shows, the increase in the
ratio of the elderly population to the working-age population (known as the old-age
dependency ratio) is even more dramatic.

To estimate the potential ﬁscal impact (via spending on the CSRS) from
to decompose the pension

is helpful

expected changes in demographics,
Esso
spending-to-GDP ratio into three factors:

S pending
GDP

(cid:3)

(cid:7)

(cid:2)

(cid:4)

Pop60+
Pop15 − 59
(cid:5)(cid:6)
old-age
dependency
ratio

(cid:8)

S pending
pensioners

∗

(cid:8)

(cid:9)

∗

GDP
Pop15−59
(cid:4)
(cid:7)
(cid:5)(cid:6)
beneﬁt ratio

(cid:2)

(cid:4)

(cid:3)

(cid:7)

pensioners
Pop60+
(cid:5)(cid:6)
eligibility
ratio

The ﬁrst term is the old-age dependency ratio. The second term is the beneﬁt
ratio, deﬁned as the ratio of spending per pensioner to GDP per worker, Quale
provides a measure of the generosity of pension beneﬁts. Absent any changes in
the beneﬁts formula, this ratio is assumed to remain constant at its value at the end
Di 2013 (Di 1.32). The ﬁnal term is the eligibility ratio, deﬁned as the ratio of
the number of individuals receiving a pension to the population aged 60 years and
above, which provides a measure of pension system coverage. This is assumed to

210 Asian Development Review

Tavolo 3. Projected Evolution of Pension Spending Due to Population Aging, 2013–2050

2010 2011 2012 2010–2012 2013 2020 2030 2040 2050

Average

Old-age dependency ratio

0.11

0.12

0.18

0.25

0.36

(population aged 60 years
and older per population
aged 15–59 years)

Beneﬁts ratio

(spending per pensioner
relative to GDP per
worker)

1.32

Eligibility ratio

0.03

0.04

(pensioners per population
aged 60 years and older)

Spending (% of GDP)UN

0.54

0.50

0.55

0.53

0.60

0.90

1.27

1.81

GDP = gross domestic product.
aPension for retired government employees and their families.
Note: The old-age dependency ratio is based on United Nations World Population Prospects data and projections,
while beneﬁts and eligibility ratios are calculated for 2013 and then assumed to remain constant. Spending and GDP
are measured in billions of takas and population aggregates in millions of takas.
Sources: United Nations. World Population Prospects. https://esa.un.org/unpd/wpp/; Bangladesh authorities; E
author’s calculations.

be constant at 0.04 (civil service pensioners were 4% of the elderly population at
the end of 2013), under the assumption that the covered population, in this case
civil servants, and eligibility conditions for a pension, such as the retirement age or
minimum years of service, will not change over time.

Based on these parameters, pension spending is projected to increase from
0.5% of GDP in 2013 A 0.9% of GDP in 2030 and to 1.8% of GDP in 2050 in line
with the expected acceleration of aging after 2030 (Tavolo 3).

General Provident Fund

In addition to the CSRS, there is the GPF for civil servants, che è
a mandatory, deﬁned contribution system in which civil servants contribute a
minimum of 10% of their salaries (there is no upper limit). The notional accounts
accrue interest of around 12% of the GPF stock at year-end. When civil servants
retire, they can withdraw the whole amount plus interest. At any point in time before
retirement, civil servants can borrow up to 80% of their cumulative contributions
from the fund. As of the end of FY2013, the GPF stock of contributions amounted to
Tk204 billion plus Tk24 billion in interest (2.2% of GDP). Unfortunately, nonostante
its name, the GPF is unfunded; the cash ﬂow it generates is not being saved, Ma
rather it is used to ﬁnance the deﬁcit.20 Indeed, the GPF is currently generating
sizable annual surpluses (contributions to the fund minus withdrawals) of around

20For more details, see Alam (2012).

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Assessing Fiscal Risks in Bangladesh 211

Tavolo 4. Universal Age Pensions around the World

Economy

From Year

New Zealand
Mauritius
Brunei Darussalam
Namibia
Samoa
Nepal
Botswana
Bolivia
Mexico City
Kosovo

1940
1958
1984
1990
1990
1995
1996
1996
2001
2002

Qualifying
Age

Pension
(% of per
capita GDP)

Beneﬁts
Transferred
(% of GDP)

65
60
60
60
65
75
65
65
70
65

46
16
10
16
22
10
10
26
11
50

4.3
1.7
0.4
0.9
1.4
0.1
0.5
1.2
0.2
2.7

GDP = gross domestic product.
Fonte: Willmore, Larry. 2007. “Universal Pensions for Developing Countries.” World
Development 35 (1): 24–51.

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Tk30 billion. Tuttavia, as civil servants age and start to retire in larger numbers, IL
net cash ﬂow may become negative, posing a clear ﬁnancial risk.21

Potential Pressures from the Absence of Pension Coverage
for the Private Sector

Bangladesh does not have a formal pension program for the vast majority
of the population. Primo, most of the workforce (an estimated 89% of the total and
an even higher proportion for women) is employed in the informal sector, mainly in
agriculture (ADB 2010). Also, other than a gratuity beneﬁt at retirement, employees
of formal private sector ﬁrms do not have access to any formal old-age beneﬁts
program. Overall, only around 4% of the population over the age of 60 is covered
by the pension system in Bangladesh. The rest rely on their own savings to sustain
themselves in retirement.

The absence of a formal pension scheme for most of the population in
Bangladesh might eventually lead to pressures on the government to provide a
minimum pension. To illustrate the potential costs involved, it would be useful to
estimate the costs of setting up a universal scheme. The best way to do this is to
draw from international experience.

A number of economies—both developed and developing—have put in
place universal pension schemes (Tavolo 4). These pension schemes are often
affordable, simple to administer, and have been successful in tackling old-age
poverty (Willmore 2007).

21Public servants contribute to this fund by a certain percentage of their salary. There is no other source of

receipt for this fund.

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212 Asian Development Review

Tavolo 5. Fiscal Cost of a Universal Pension Scheme in
Bangladesh, 2012

Average monthly beneﬁt (Tk)
Beneﬁciaries (million)
Fiscal cost

Universal Pension from Age

1,500
9.9

1,500
6.7

1,500
4.1

1,500
2.1

% of GDP
% of total government expenditure

1.9
11.9

1.3
8.0

0.8
4.9

0.4
2.5

GDP = gross domestic product, Tk = taka.
Sources: Bangladesh authorities and author’s calculations.

To illustrate how much it would cost to institute a universal pension scheme

in Bangladesh, two key parameters need to be taken into consideration:

• Age of eligibility (the age at which people get entitled to the pension; IL
higher the age, the lower the overall cost of the scheme). The illustrative
exercise below considers the costs of a universal coverage system under different
eligibility ages (Sopra 60, Sopra 65, Sopra 70, and over 75). The number of potential
beneﬁciaries, using 2012 population estimates, ranges from 2.1 million to 9.9
million.22

• Size of grant (the amount provided to beneﬁciaries). It is common to use
the poverty line as a benchmark. In Bangladesh, the poverty line was calculated
In 2005 at Tk861.6 per month. Applying the Consumer Price Index inﬂation
rate, that poverty line translates into roughly Tk1,500 per month by the end of
FY2013. As shown in Table 6, a universal pension scheme that provides such
an amount would cost between 0.4% E 1.9% of GDP, depending on the age
threshold.

Ovviamente, the ﬁscal cost of a universal pension will increase over time as the
population ages.

Assuming an initial poverty line of Tk1,500 per month (Tavolo 5), a constant
inﬂation rate of 6% (equal to the average for the last 20 years), and nominal GDP
growth of 12%, Figura 5 shows the ﬁscal cost of the universal scheme by age of
eligibility (Figure 7a). Alternatively, it is possible that the poverty line increases
faster than inﬂation over the long term as the basic needs basket widens with
development. Figure 7b shows that path, allowing the pension per capita to grow
in line with GDP per capita. Since the qualifying population is expected to grow
as a share of the total population, total pension spending would grow as a share of

22This exercise takes into consideration the number of people over a certain age in 2012 (speciﬁcally, Sopra

the ages of 60, 65, 70, E 75) and then subtracts the number of retired civil servants.

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Assessing Fiscal Risks in Bangladesh 213

Figure 7a. Fiscal Cost of Universal Pension for Different Minimum Retirement Ages,
2012–2050

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Note: Assumed annual inﬂation rate of 6%.
Sources: United Nations. World Population Prospects. https://esa.un.org/unpd/wpp/; Bangladesh authorities; E
author’s calculations.

Figure 7b. Fiscal Cost of Universal Pension for Different Minimum Retirement Ages,
2012–2050

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Note: Pension increases at same annual rate as GDP per capita.
Sources: United Nations. World Population Prospects. https://esa.un.org/unpd/wpp/; Bangladesh authorities; E
author’s calculations.

214 Asian Development Review

GDP. For the most expensive case (aged 60 years and above), the ﬁscal costs would
be almost 7% of GDP in the long term.

As stated in previous paragraphs, the costs of different universal pension
schemes vary between 1% E 7% of GDP in the medium term. To contain these
costs, the literature generally suggests means testing to target only the needy and
that such programs provide beneﬁts that are sufﬁcient to alleviate poverty but low
enough to minimize incentives to remain outside of the formal pension system.23

V. Institutional Capacity

Risks to the budget and public debt also emerge from the government’s
institutional capacity. This section focuses on three speciﬁc areas that may pose
risks to ﬁscal aggregates in Bangladesh: (io) budgeting practices, (ii) external debt
management, E (iii) data discrepancies.

Budget Practices and Forecasting

Signiﬁcant deviations in outturns vis-à-vis budget ﬁgures have been observed
in recent years in Bangladesh. Consistently, both revenue and expenditure outturns
have fallen behind budget target numbers. During the last 4 years, total revenue
was below the budget target by around 4% on average (0.5% of GDP). The highest
difference has been in nontax revenue, with an average deviation of 16%. Allo stesso modo,
expenditure outturns fell 8.5% behind the budget (1.4% of GDP). The main driver
has been underexecution in capital spending, which falls an average of more than
19% below target every year (Tavolo 6).

Figura 8 shows the revenue and expenditure deviations from the budget as a
percentage of GDP over the last 12 years. The horizontal axis shows deviations
in revenue and the vertical axis shows deviations in expenditure. A negative
number indicates that the outturn was below what was forecasted at the time of
budget preparation. For 11 of the last 12 years, both revenue and expenditure have
underperformed.

The main problem associated with this pattern is that while revenue forecasts
in a budget document are merely projections, the expenditure allocations are
legal spending authorizations. Così, if revenue fails to materialize, there is a risk
that line ministries may still execute in full their spending envelopes, leading to
larger-than-expected ﬁscal deﬁcits and ﬁnancing needs.

External Borrowing and Debt Management

Efﬁcient debt management strategies are important to mitigate the effects
of shocks to ﬁscal aggregates such as macroeconomic shocks and contingent

23See Cottarelli (2014).

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Assessing Fiscal Risks in Bangladesh 215

Tavolo 6. Differences between Outturn and Original Budget, 2009–2012
(% of initial budget)

FY2009 FY2010 FY2011 FY2012 Average Median Average Median

% of GDP

Total revenue
Tax revenue
Nontax revenue
Total expenditure
of which

−4.7
−2.3

−7.0
−4.4
−1.4
−6.9
−7.2 −14.8 −21.3 −21.3 −16.1 −18.0
−9.6
−10.7 −11.0

−4.1
−0.6

−4.0
−1.3

0.0
4.7

−3.3

−8.4

−0.6
Current expenditure
Annual Development −24.1 −16.0 −13.1 −21.1 −18.6 −18.5

−6.8

−1.8

0.7

0.6

Programma

Non-ADP capital

spending

−36.5 −16.6 −41.5 −40.1 −33.7 −38.3

−0.5

−0.6

ADP = Annual Development Program, FY = ﬁscal year, GDP = gross domestic product.
Note: Negative numbers reﬂect an outturn smaller than the budget target.
Sources: Bangladesh authorities and author’s calculations.

Figura 8. Deviation from the Annual Budget
(% of GDP)

−0.5
−0.1
−0.3
−1.4

−0.2
−0.8

−0.5
−0.1
−0.4
−1.6

−0.1
−0.9

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FY = ﬁscal year, GDP = gross domestic product.
Fonte: Author’s calculations.

liabilities, and to keep borrowing under control. This is particularly true of external
debt, which is more likely to suffer shocks to the exchange rate or international
interest rates. While Bangladesh’s total public debt remains below 40% of GDP,
there has been a rapid increase in nonconcessional external borrowing: the annual
average external debt disbursement in FY2012 and FY2013 was around 180%
higher than the annual average for the period FY2005–FY2011 (Figura 9).

216 Asian Development Review

Figura 9. External Debt Disbursement and Amortization

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Note: Borrowing by state-owned enterprises that are supported by government guarantees are not included.
Sources: Bangladesh authorities and author’s calculations.

Bangladesh’s government has taken signiﬁcant steps toward improving the
monitoring and contracting of external debt, including through the creation of
a Technical Committee on Nonconcessional Borrowing. Continued efforts to
strengthen the assessment, approval, and monitoring of external loan contracts and
guarantees are needed.

Data Discrepancies

Problems associated with ﬁscal data quality and timeliness may also pose
ﬁscal risks. One signiﬁcant example is the discrepancy between revenue collection
data provided by the National Board of Revenue (NBR) and that provided by the
Ofﬁce of the Controller General of Account (CGA). Part of this discrepancy reﬂects
a timing issue. Taxes are registered by the NBR when they are effectively paid, Ma
they are only booked by the CGA when the amount is deposited into the Treasury
Single Account. If the deﬁnition of revenue is the same and the only difference is
one of timing, at year-end the numbers should be reconciled. Tuttavia, this is not the
case and the gap between the reported series is increasing. Come mostrato in figura 10,
the cumulative gap between NBR and CGA data over the period FY2012–FY2013
was roughly Tk90 billion (almost 1% of GDP), with the CGA data typically well
below that of the NBR data.

These inconsistencies produce uncertainty for ﬁscal policy making and

undermine transparency and accountability.

Assessing Fiscal Risks in Bangladesh 217

Figura 10. Revenue Discrepancies between the National Board of Revenue and the Ofﬁce
of the Controller General of Account

CGA = Controller General of Account, NBR = National Board of Revenue.
Note: The gap is calculated as NBR tax collections as per NBR minus NBR tax collections as per CGA.
Sources: Bangladesh authorities and author’s calculations.

VI. Policy Implications

Policies that could help mitigate the incidence and impact of ﬁscal risks could

include the following:

• Full integration of risks into government policy decision making, both in ﬁscal
management and in the design of an integrated asset and liability management
strategy in coordination with Bangladesh Bank.24

• Building government capacities to analyze and measure ﬁscal risks.25 To achieve
Questo, a system of Treasury cash ﬂow forecasts should be implemented. Even
though there have been attempts to do so, no formal mechanism is in place yet.

• Measures to reduce currency risks in the government liability structure. For
esempio, a cap in the amount of foreign-denominated debt as well as on
foreign-denominated government guarantees.

• A full set of policies and procedures for issuance of loan guarantees, as well as
prioritization and limitation on the amounts of new guaranteed obligations.

24The current fragmentation among debt management entities adds costs to any planning strategy by the

Ministry of Finance and Bangladesh Bank.

25The evidence suggests that the introduction of ﬁscal rules and the setting up of independent ﬁscal councils

to monitor ﬁscal developments can help reduce ﬁscal risks (Debrun, Hauner, and Kumar 2009).

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218 Asian Development Review

• Implementation of a contributory pension scheme for civil servants to replace
the current noncontributory regime, and reforms to the GPF such as the
creation of notional accounts and an investment fund to accumulate the system’s
assets. Consideration could also be given to institutionalizing a noncontributory
pension regime for the poor, as existing transfer mechanisms to the elderly poor
are very low. Additionally, Bangladesh could aim to develop a voluntary deﬁned
contribution retirement scheme for all adults regardless of their employment
status. These schemes are important sources of long-term investment funds in
the domestic ﬁnancial markets in developed and developing economies.

VII. Conclusions

Several factors have the potential to drive actual ﬁscal aggregates away
from projections in Bangladesh. These include (but are not
restricted to)
macroeconomic shocks, contingent liabilities, and institutional weaknesses. Questo
section summarizes the paper’s key ﬁndings and draws policy implications.

The analysis in this paper suggests that the ﬁscal balance in Bangladesh is
sensitive to macroeconomic shocks, particularly shocks to commodity prices and
the exchange rate. A 1-standard deviation increase in commodity prices or a 30%
devaluation in the exchange rate could raise the deﬁcit by 0.6%–1% of GDP on
average per year when compared to the baseline.

Speciﬁc factors, such as calls on government guarantees or increased
recapitalization needs among state-owned banks, could also have a signiﬁcant
negative impact. Should they materialize in full, calls on government guarantees
and further recapitalization needs could add pressure to the budget and increase
Bangladesh’s public debt.

In addition to the most

immediate risks of shocks to macroeconomic
variables and calls on contingent liabilities, risks arising from the CSRS and the
GPF could materialize in the medium to long term. If no changes were made to
the system, the ﬁscal cost of the unfunded pension scheme could increase from
0.5% of GDP in 2013 A 2% of GDP by 2050. Inoltre, if a universal pension
system were to be implemented (only 4% of the old-age population is covered by
the current system), the ﬁscal cost would rise to about 6% or more of GDP per year
by 2050.

Finalmente, risks derived from the government’s institutional capacity could also
take a toll on Bangladesh’s ﬁscal aggregates. Risks emerge from budget practices,
the management of external debt, and data discrepancies. Bangladesh has a tradition
of overstating expected revenue and expenditure in the budget, which could lead to
excessive spending pressures in the short term. Weaknesses in debt management
could lead to riskier debt structures, while data discrepancies produce uncertainty
for ﬁscal policy making and undermine transparency and accountability.

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Assessing Fiscal Risks in Bangladesh 219

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_____. 2004B. “Interest Rate Responsiveness of Investment Spending in Bangladesh: A VAR

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Alam, Md. Shamim. 2012. “Evolution of the Bangladeshi Provident Fund and Its Investment:
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Asian Development Bank (ADB). 2010. The Informal Sector and Informal Employment in

Bangladesh. Country Report 2010. Dhaka.

Brixi, Hana Polackova, and Allen Schick, eds. 2002. Government at Risk: Contingent Liabilities

and Fiscal Risks. New York: Oxford University Press.

Budina, Nina, and Murray Petrie. 2013. “Managing and Controlling Fiscal Risks.” In Public
Financial Management and Its Emerging Architecture, edited by Marco Cangiano, Teresa
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Cebotari, Aliona, Jeffrey Davis, Lusine Lusinyan, Amine Mati, Paolo Mauro, Murray Petrie, E
Ricardo Velloso. 2009. Fiscal Risks: Sources, Disclosure, and Management. Washington,
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Celasun, Oya, Xavier Debrun, and Jonathan D. Ostry. 2006. “Primary Surplus Behavior and
Risks to Fiscal Sustainability in Emerging Market Countries: A “Fan-Chart” Approach.”
IMF Working Paper WP/06/67.

Chalk, Nigel, and Richard Hemming. 2000. “Assessing Fiscal Sustainability in Theory and

Practice.” Paper presented at a Banca d’Italia Research Department Workshop, Perugia.

Cottarelli, Carlo. 2014. “Fiscal Risks and Fiscal Sustainability.” In Post-Crisis Fiscal Policy,
edited by Carlo Cottarelli, Phil Gerson, and Abdel Senhadji. Cambridge, MA: CON Premere.
Debrun, Xavier, David Hauner, and Manmohan S. Kumar. 2009. “Independent Fiscal Agencies.”

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Gali, Jordi, and Roberto Perotti. 2003. “Fiscal Policy and Monetary Integration in Europe.”

Economic Policy 18 (37): 533–72.

Hemming, Richard. 2006. Public-Private Partnerships, Government Guarantees, and Fiscal Risk.

Washington, DC: International Monetary Fund.

International Monetary Fund. 2009. “Computing Cyclically Adjusted Balances and Automatic

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_____. 2016. “Analyzing and Managing Fiscal Risks—Best Practices.” IMF Policy Paper,

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Islam, Md. Ezazul, and Bishnu Pada Biswas. 2005. Public Debt Management and Debt

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Sustainable Pension Systems in the Region. Manila: Asian Development Bank.

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Appendix 1. Methodology for the Production of the Fan Charts

Generating a Distribution for the Debt Path

The sample statistics based on the historical data over the period FY1996–
FY2012 are used to deﬁne the joint normal distribution (normality assumed for
simplicity).

Primo, a ﬁscal reaction function depending on the primary surplus, domestic
real interest rate, real gross domestic product (GDP) growth rate, and real effective
exchange rate is deﬁned. Secondo, an unrestricted autoregression model (VAR)
with these four variables is estimated (using Choleski decomposition factorization)
to generate projections for each of the four variables using (io) a deterministic
projection from the VAR, E (ii) a random shock drawn from a multivariate
normal distribution with the same variance–covariance matrix as the one estimated
in sample errors of the VAR.

The shocks are added to the baseline projected values of the growth, interesse
rate, exchange rate, and primary balance in the calculation of the debt evolution
equation for periods t + 1 to t + k (where k is the length of projection period) A
recursively generate the debt-to-GDP ratio projections, producing 1,000 simulated
debt-to-GDP ratios in each year for which we are projecting.

Once the debt ratio projections are generated, the ratios for each year are
ranked from highest to lowest and the correspondent percentile of the 1,000
simulations is assigned to each ratio in each year. The 10th, 25th, 50th, 75th, E
90th percentiles are extracted and used to produce the fan chart. The increasing
spread of the distribution over the projection period is due to the increased
uncertainty over time since shocks can compound over the years.26

Debt Dynamics

In its most basic form, the evolution of public debt can be characterized as

Dt+1 = Et+1
Et

(1 + i f

t+1)D f

+ (1 + id

t+1)Dd
T

− PBt+1 + Ot+1

(1)

26Shocks are drawn, taking into account only the contemporaneous correlations between variables, but a 90th
percentile debt ratio path can be considered to reﬂect the impact of a sequence of bad shocks each year on the public
debt ratio.

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Assessing Fiscal Risks in Bangladesh 221

Table A2. Baseline Scenario

Standard

Mean Median Deviation 25th

75th Minimum Maximum

GDP growth (%)
Commodity prices (index,

2005 = 100)
Interest rate (%)
Exchange rate
(taka–dollar)

6.0
151.6

6.1
152.6

8.6
67.6

8.4
68.8

0.7
84.2

1.2
12.6

5.5
62.4

8.1
57.9

6.5
231.5

9.5
79.1

4.4
29.2

6.5
45.4

Total public debt (% Di

44.4

43.4

5.1

40.0

48.9

37.6

7.0
265.3

10.7
87.3

53.0

GDP)

GDP = gross domestic product.
Fonte: Author’s compilation.

Subscripts refer to time periods and superscripts f and d refer to foreign
currency- and domestic currency-denominated debt, rispettivamente. D f
is the stock
T
of foreign currency-denominated debt at the end of period t. Dd
t is the stock of local
currency-denominated debt at the end of period t. Et is the nominal exchange rate
(taka–dollar) at the end of period t. i f
t+1 is the effective nominal interest rate on
foreign currency-denominated debt at the end of period t + 1. id
t+1 is the effective
nominal interest rate on domestic currency-denominated debt at the end of period
T + 1. PBt+1 is the government ﬁscal primary balance in period t + 1. Ot+1 are other
factors and the stock-ﬂow residual that ensures that the identity holds.

Et+1
Et

= (1 + εt+1)

(2)

where Et is the nominal taka–dollar exchange rate of period t.
Dividing equation (1) by Yt+1 and replacing (2) into (1)
(cid:2)

(cid:11)

dt+1 =

(1 + εt+1) (1 + i f

t+1) d f

+ (1 + id

t+1)dd
T

− pbt+1 + ot+1

(3)

(cid:3) (cid:10)

1
1 + G

where lower letters represent the contemporaneous ratio to GDP.

Appendix 2. Descriptive Statistics

This appendix aims at describing the baseline scenario data used in this
paper. The main descriptive statistics are presented in Table A2, including each
variable’s mean, median, standard deviation, 25th and 75th percentile, maximum,
and minimum.

GDP growth. Economic growth has been robust in recent years. The baseline
projection of resilient gross domestic product growth is supported by demand-
and supply-side effects of strong public investment to address infrastructural

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222 Asian Development Review

bottlenecks, favorable demographics, and reforms to enhance the investment
climate and improve education and skills.

Commodity prices. Commodity price projections are taken from the

International Monetary Fund’s World Economic Outlook.

Interest rate. Interest rates are assumed to decrease in the medium term in
response to an easing in balance of payment related pressures and ample liquidity.
They are expected to reach an equilibrium at higher levels than the historical
minimum.

Exchange rate. In the baseline scenario, it is expected that the exchange rate
continues to appreciate, consistent with fundamentals. Tuttavia, in case of adverse
shocks of a prolonged nature, such as a sustained trade shock, the exchange rate
should be allowed to adjust. Tightened monetary policy to support the currency
and contain pass-through effects from exchange rate depreciation to domestic
inﬂation should be put in place, while also ensuring an adequate supply of liquidity.
These policies should be complemented with moderate ﬁscal easing, including the
expansion of well-targeted safety net schemes to protect the most vulnerable.

Public debt. The downward path of public debt over the medium term
assumes a moderate consolidation path, anchored by reducing the deﬁcit, including
grants.

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