Banking Sector Risk:The state-owned banks are especially vulnerable to shocks, as both asset quality and governance are weak. The gross non-performing loans ratio of the sector increased to 10.5% in 1Q of calendar year 2014 from 8.9% in 4Q13, while the ratio for state-owned banks only was 21.9% in 1Q14. Bangladesh Bank seems committed to strengthening the poor governance in the banking sector, but has indicated it would need more extensive powers to do so. Fitch expects the state-owned banks would need additional capital in the medium term, which would imply crystallisation of contingent liabilities for the sovereign. Substantial strengthening of the balance sheets and governance in the banking sector would be credit positive, while greater-than-expected deterioration in the banking sector‟s asset quality, prompting substantial government support, would be credit negative. [Source: Fitch Rating Agency]

Political Risk: Violence in the run-up to the parliamentary elections in January 2014 had a moderately negative impact on economic growth, but did not paralyse the economy. This most recent episode in Bangladesh’s political history highlights prolonged high political risk levels. Continued political polarisation and uncertainty may impact economic activity through long-term investment decisions. Reduction of political risk, for instance through reduced polarisation between the main political parties, would make future disruptions of economic activity less likely. Protracted substantial disruption of economic activity as a result of materialising political risk would be credit negative. [Source: Fitch Rating Agency]

Currency Risk:

[Source: Fitch Rating Agency]

Fiscal Policy

Bangladesh has maintained aggregate fiscal discipline. This has been achieved despite political instability and widespread poverty and social needs. Given a highly constrained revenue capacity, Bangladesh has allocated spending well to meet strategic priorities. External debt indicators are well within sustainable thresholds. Spending in the social sectors has been sustained, financing for rural development and especially rural infrastructure has increased, and support for targeted poverty reduction programs, including social safety nets for the poor, has continued.

The main source of government revenue is tax revenue. Public revenue principally consists of direct and indirect taxes and they account for more than 80 percent of the total receipts. The rest comes from different non-tax collections such as fees, charges, tolls etc. Rising trend in revenue collection continued as it rose to 13% percent in FY2013-14.

Foreign CurrencyLong-Term IDR

BB−

Short-Term IDR

B

Local CurrencyLong-Term IDR

BB−

National Board of Revenue (NBR) under the Internal Resource Division is dispensing with the twin responsibilities of formulation of tax policy and its implementation. During FY 2013-14, various steps were taken to rationalise direct and indirect taxes with an aim to mobilize adequate domestic resources for investing in infrastructure development. This will help attain higher growth to reduce poverty at a faster rate, achieve self sufficiency in food production and ensure food security, expand export-oriented industries, develop domestic industries, enhance industrial productivity and create employment opportunities.

The principal objectives of huge public outlays each year are to build physical infrastructure for attracting investment, reducing poverty and developing human resources. The increasing trend of allocation and expenditure in physical infrastructure sector and socio-economic infrastructure sector through ADP is consistent with the twin goals of the government: achieving higher growth and reducing poverty. [Source: Ministry Of Finance]

External Debt

The outstanding domestic debt as percentage of GDP was 17.46 percent, whereas the outstanding external debt was 18 percent in FY 2012-13. Government borrowed more from non banking system than the banking system in FY 2013-14.

The external debt increased by USD 296 million in FY 2013-14 compared to FY 2012-13, whereas the debt increased by USD 9.7 million in 2012-13 compared to the previous fiscal year. The total external debt stood at USD 23250 million in 2013-14, whereas it was USD 22085.5 million, USD 22095.2 million and USD 22981.4 million in FY 2010-11, FY 2011-12 and FY 2012-13 respectively.

Exchange Rate

The Taka-Dollar daily exchange rate fluctuated as a result of imbalances between daily demand for and supply of US dollar in Bangladesh. Excess supply of US dollar pushed the rate down resulting in appreciation/strengthening of Taka against US dollar. Stable Taka-Dollar exchange rate with fluctuations within a comfortable margin proved conducive for foreign trade, investment, price stability, economic growth, employment, capital market, etc. Although nominal and real exchange rates are highly positively correlated, fluctuations in the latter unleashed greater influences on reallocations of real global resources, corporate profitability with foreign exposure, foreign debt servicing and repayment obligations, cost of living, etc. Accordingly, pre-emptive monetary and fiscal adjustments were made as a part of macroprudential policy.