Report and Recommendation of the President to the Board of Directors

Project Number: 54180-001 April 2020

Proposed Countercyclical Support Facility Loans and Technical Assistance Grant People’s Republic of Bangladesh: COVID-19 Active Response and Expenditure Support Program

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 26 April 2020)

Currency unit – taka (Tk)

Tk1.00 = $0.01173 $1.00 = Tk85.270

ABBREVIATIONS ADB – Asian Development Bank AIIB – Asian Infrastructure Investment Bank COVID-19 – coronavirus disease CPRO – COVID-19 pandemic response option CSF – countercyclical support facility GDP – gross domestic product IMF – International Monetary Fund MOF – Ministry of Finance MSMEs – micro, small, and medium-sized enterprises NPL – nonperforming loan NSC – national savings certificate PEFA – public expenditure and financial accountability PFM – public financial management RMG – ready-made garment SAARC – South Asian Association for Regional Cooperation SMEs – small and medium-sized enterprises TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Bangladesh and its agencies ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 30 June 2020.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Officer-in-Charge Diwesh Sharan, Deputy Director General, South Asia Department

(SARD) Directors Takeo Konishi, Public Management, Financial Sector and Trade

Division (SAPF), SARD Manmohan Parkash, Country Director, Bangladesh Resident

Mission (BRM) Team leader Dongdong Zhang, Principal Financial Sector Specialist, Public

Management, and Trade Division (SAPF), SARD Team members Mohammad Rashed Al Hasan, Senior Project Officer (Financial

Sector), BRM, SARD Brando Angeles, Associate Environment Officer, Environment,

Natural Resources, and Agriculture Division (SAER), SARD Joanne C. Asquith, Principal Evaluation Specialist, Thematic and

Country Division, Independent Evaluation Department Rosemary Victoria M. Atabug, Social Development Officer (Gender

and Development), Gender Equity Thematic Group (SDTC-GEN), Office of the Cluster Head (SDTC), Sustainable Development and Climate Change Department (SDCC)

Angelique Dawn Badelles, Associate Safeguards Officer (Resettlement), Office of the Director General (SAOD), SARD

Ricardo Carlos V. Barba, Principal Safeguards Specialist, Portfolio, Results and Quality Control Unit (SAOD-PR), SARD

Tulsi Charan Bisht, Senior Social Development Specialist (Safeguards), Safeguards Division (SDSS), SDCC

Brian Chin, Social Sector Specialist, Human and Social Development (SAHS), SARD

Amer A. Chowdhury, Senior Public–Private Partnership Specialist, Advisory Division 1 (OPA1), Office of Public–Private Partnership (OPPP)

Nelly Elza Defo, Financial Control Specialist, Loan and Grant Disbursement Section, Controller’s Department

Adelita June P. Gacutan, Senior Operations Assistant, SAPF, SARD

Steven J. Goldfinch, Disaster Risk Management Specialist, Climate Change and Disaster Risk Management Division, SDCC

Pamela Pueo Gutierrez, Project Analyst, SAPF, SARD Ma. Kristina Hidalgo, Senior Financial Sector Officer, SAPF, SARD Soon Chan Hong, Senior Economist, BRM, SARD Uzma S. Hoque, Senior Social Sector Specialist, SAHS, SARD Srinivasan Janardanam, Principal Financial Management

Specialist, SAPF/PFFM, SARD M M Zimran Khan, Associate Project Analyst, BRM Apurva Kumar, Investment Specialist, Private Sector Financial

Institutions (PSFI), Private Sector Operations Department (PSOD) Mukta Malhotra, Public-Private Partnership Specialist, OPA1,

OPPP Kaukab Hassan Naqvi, Senior Economist, Economic Analysis and

Operational Support Division (EREA), Economic Research and Regional Cooperation Department

Lyailya T. Nazarbekova, Principal Counsel, Office of the General Counsel

Mocktar Adamou Ndiaye, Financial Management Specialist, Public Financial Management Division (PFFM), Procurement, Portfolio and Financial Management Department (PPFD)

Adolf Moises S. Nicolas, Associate Operations Officer, SAOD-PR, SARD

Susan Olsen, Senior Investment Specialist, PSFI, PSOD Denise Marie A. Ongkiko, Operations Assistant, SAPF, SARD Mayumi Ozaki, Senior Portfolio Management Specialist, SAPF,

SARD Joanne G. Pabis, Senior Operations Assistant, Transport and

Communications Division, (SATC), SARD Sajid Raza, Financial Management Specialist, SAOD-PR, SARD Xin Ren, Environment Specialist, SDSS, SDCC Celita Janyna Rhor, Principal Procurement Specialist, Procurement

Division 1 (PFP1), PPFD Bidyut K. Saha, Senior Investment Officer, Office of the Director

General, PSOD Magnolia C. San Diego, Operations Assistant, SATC, SARD Nasheeba Selim, Senior Social Development Officer (Gender),

BRM, SARD Sonomi Tanaka, Chief of Gender Equity Thematic Group, SDTC-

GEN, SDCC Deepak Taneja, Principal Treasury Specialist, Treasury Client

Solutions Unit (TDOT-CSU), Office of the Treasurer (TDOT), Treasury Department (TD)

Francesco Tornieri, Principal Social Development Specialist (Gender and Development), SAOD-PR, SARD

Christine Genalin Concepcion Uy, Senior Investment Specialist, Infrastructure Finance Division 1, PSOD

Michiel van der Auwera, Senior Financial Sector Specialist (Social Security), Public Management, Financial Sector, and Trade Division (CWPF), Central and West Asia Department

Jyotsana Varma, Principal Country Specialist, BRM, SARD Adrien Veron-Okamoto, Senior Planning and Policy Specialist

(Institutional Coordination), Special Initiatives Unit (SPSI), SPD Karma Yangzom, Principal Environment Specialist, SDSS, SDCC Hyun Joo Youn, Results Management and Aid Effectiveness

Division, Strategy and Policy and Partnerships Department Peer reviewers Junkyu Lee, Chief of Finance Sector Group, Finance Sector Group,

SDCC In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 3

A. Background and Development Constraints 3

B. Policy Reforms and ADB’s Value Addition 10

C. Impacts of the Program 12

D. Development Financing Needs and Budget Support 13

E. Implementation Arrangements 14

III. ATTACHED TECHNICAL ASSISTANCE 14

IV. DUE DILIGENCE 14

V. ASSURANCES 16

VI. RECOMMENDATION 17

APPENDIXES

1. Design and Monitoring Framework 18

2. List of Linked Documents 21

3. Development Policy Letter 22

4. Assessment of Compliance with Access Criteria for the Countercyclical Support Facility and COVID-19 Pandemic Response Option 24

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 27042020223456890080 Generated Date: 29-Apr-2020 13:54:50 PM

1. Basic Data Project Number: 54180-001Project Name COVID-19 Active Response and

Expenditure Support ProgramDepartment/Division SARD/SAPF

Country Bangladesh Executing Agency Ministry of FinanceBorrower Government of BangladeshCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=54180-001-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=54180-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 250.00

Social protection initiatives 250.00

Total 500.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

Climate Change impact on the Project

Low

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.aSDG 5.cSDG 8.1SDG 10.4SDG 17.3

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 500.00 Sovereign Countercyclical Support Facility Lending (Concessional Loan): Ordinary capital resources

250.00

Sovereign Countercyclical Support Facility Lending (Regular Loan): Ordinarycapital resources

250.00

Cofinancing 250.00 Asian Infrastructure Investment Bank - Countercyclical Support Facility Lending (Loan) (Not ADB Administered)

250.00

Counterpart 0.00 None 0.00

Total 750.00

Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-6) in the amount of

$1,000,000.

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the People’s Republic of Bangladesh for the COVID-19 Active Response and Expenditure Support (CARES) Program, under the countercyclical support facility (CSF) COVID-19 pandemic response option (CPRO).1 The report also describes the proposed technical assistance (TA) for Supporting COVID-19 Active Response and Expenditure Support Program, and if the Board approves the proposed loans, I, acting under the authority delegated to me by the Board, approve the TA. 2. Coronavirus disease 2019 (COVID-19) has had a devastating health, social, and economic impact on Bangladesh. As of 23 April 2020, there were 4,186 confirmed COVID-19 cases in Bangladesh, 127 related deaths, and a cumulative total of 168,350 people quarantined.2 Bangladesh is now moving to the fourth stage of infection (community transmission), with 59 of the country’s 64 districts affected. The pandemic has led to significant negative impact on the economy with the gross domestic product (GDP) growth rate projected to decline to 3.8% in fiscal year (FY) 2020 from 8.2% in FY2019.3 3. The economic downturn has seriously affected people’s livelihoods, especially of the poor and vulnerable. The Asian Development Bank (ADB) estimates that job losses could be as high as 3.7 million; many informal workers (85.1% of the workforce) lost their livelihoods instantly after the nationwide lockdown.4 The lack of social safety net coverage will lead to dire consequences for the more than 20% of the population who live below the poverty line and the many newly jobless who will join them. 4. The Government of Bangladesh acted quickly to mitigate the health, social, and economic impacts of the pandemic. It implemented aggressive containment measures and announced a countercyclical economic package amounting to $11.2 billion (3.3% of GDP, which includes urgent expenditure to expand the social safety net and stimulate the economy to protect jobs. The government’s program pursues a pro-poor, gender and socially inclusive approach by expanding and strengthening social safety nets addressing the needs faced by women and vulnerable groups. With rising expenditures and declining revenues, additional government financing requirements in FY2020 are estimated at $8.8 billion (14.2% of the FY2020 budget). Facing constraints on domestic borrowing, the government urgently needs external financing to support key pro-poor initiatives and to inject fresh liquidity into the economy to increase aggregate demand. 5. The proposed CARES program will provide financial support to the government to help mitigate the negative impacts of the COVID-19 pandemic. Bangladesh meets all the access criteria of the CPRO (Table 1). The program implementation support will be provided under the attached TA.

1 ADB. 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Policy Paper. Manila. 2 Government of Bangladesh, Ministry of Health and Family Welfare. 2020. Corona virus (Covid-19); and HEOC &

Control Room, IEDCR, DHIS2. 2020. Coronavirus COVID-19 Dashboard (accessed 23 April 2020). 3 International Monetary Fund. April 2020. World Economic Outlook. Washington, DC. 4 Bangladesh Bureau of Statistics (BBS). 2018. Labour Force Survey 2016–17. Dhaka.

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Table 1: Compliance with Access Criteria for CPRO

CPRO Access Criteria ADB Staff Assessment

1. Adverse impact of exogenous shocks

Given the density of the country’s population, sizable slum population, and underdeveloped medical system, Bangladesh faces significant challenges in containing the disease. Economic growth is projected to decline from 8.2% in FY2019 to 3.8% in FY2020. Up to 13 million people may fall into poverty, as per ADB estimates. With around 34 million people living below the poverty line, the pandemic threatens the livelihood of many people. The fiscal deficit may reach 7.5% of GDP.

2. Countercyclical development expenditures

The government has rolled out an $11.2 billion pro-poor countercyclical package with a focus on social protection for the poor and support for key industries to preserve jobs. The package will mostly benefit the vulnerable groups of the population and help industry workers stay employed and out of poverty.

3. Pre-shock record of generally sound macroeconomic management

Macroeconomic management was largely sound with high growth and benign inflation before the pandemic. The economy grew 7.4% annually during FY2015–FY2019. The public debt–GDP ratio was low at 34.9% in FY2019.a Inflation averaged 5.8% during FY2015–FY2019, and the budget deficit averaged 4.3% of GDP during the same period. The foreign exchange reserves were $32.7 billion at the end of 2019.

4. Structural reforms

The National Preparedness and Response Plan was adopted on 18 March 2020 to guide the nation’s health sector response. The COVID-19 Emergency Operation Center was set up at the Institute of Epidemiology Disease Control and Research under the Directorate General of Health Services to coordinate nationwide preparedness and response activities. Entry control and screening was enforced, and testing efforts were strengthened. The government also imposed social distancing measures, including the closure of public and private establishments and suspension of public transportation services. The countercyclical economic package is being implemented by various agencies to stabilize the financial market, provide a cash cushion for the poor, and protect employment by supporting key industries and SMEs.

5. Debt sustainability

Public debt in Bangladesh was $105 billion in FY2019, around 34.9% of GDP, and the external public and publicly guaranteed (PPG) debt ratio was 14.5% of GDP, both are low. The additional external debt of $2.9 billion, as government projected,

will increase both the external PPG debt–GDP ratio and public debt–GDP ratio by 0.9% in FY2020. Bangladesh remains at a low risk of debt distress.

6. Coordination with the IMF

ADB coordinates closely with the IMF on macroeconomic monitoring and participation in Article IV missions. The IMF supports ADB’s response measures and has provided its assessment letter. The IMF is preparing to support Bangladesh with its rapid credit facility to address balance of payments issues.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, CPRO = COVID-19 pandemic response option, FY = fiscal year, GDP = gross domestic product, IMF = International Monetary Fund, SMEs = small and medium-sized enterprises. a IMF Assessment Letter and Press Release of IMF Executive Board Concludes Article IV consultation with Bangladesh

(Available from the list of linked documents in Appendix 2).

Source: ADB.

3

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

1. The COVID-19 Pandemic and Its Impact

6. The rapid spread of the pandemic in Bangladesh. Since the identification of the initial cases in Wuhan in Hubei province in the People’s Republic of China, the outbreak of COVID-19 has been spreading rapidly across the world with a significant public health and economic impact. In Bangladesh, the first case was reported on 8 March 2020 and since then, though initially slow, the increase in the number of cases has been significant. As of 23 April 2020, there were 4,186 confirmed COVID-19 cases in Bangladesh and 127 related deaths with a cumulative total of 168,350 people quarantined (footnote 2). The number of confirmed cases doubles every five days. A high population density,5 rapid urbanization, a large population of migrant workers, and a high share of the country’s urban population living in slums make Bangladesh vulnerable to infectious disease outbreaks. 7. Bangladesh faces significant health care challenges in combatting the pandemic. The health system in Bangladesh is underdeveloped and underfunded, with only 9.9 doctors, nurses and midwives6 and 8.8 hospital beds per 10,000 people, while current health expenditure is only 2.4% of GDP. Bangladesh’s COVID-19 testing capacity is at 219 tests processed per 1 million people.7 As of 21 April 2020, over 200 doctors and 150 healthcare workers including nurses have been infected.8 There are shortages of essential testing equipment and standard laboratories, personal protective equipment for medical staff, sanitized ambulances to transfer infected people, ventilators to support critical patients, and specialized wards and hospitals. Social distancing measures are also made less effective because of crowded living conditions in urban areas. 8. The pandemic has serious economic impacts. The pandemic has a significant impact on the economic outlook. The IMF projects that economic growth will weaken to 3.8% in FY2020, breaking a long streak of rapid growth9 (Figure 1). This would be the slowest growth rate since 2002, lower than the 5% growth at the height of the global financial crisis in 2009. The nationwide lockdown has resulted in simultaneous supply and demand shocks, with production, consumption, trade, and investment all at a standstill. By sector, industry is expected to decline by 2.0% (from 12.7% in FY2019) and services by 3.5% (from 6.8% in FY2019) (Figure 2). The traditional growth drivers of the economy—export-oriented industries, remittances, domestic consumptions, and SMEs—have all ground to a halt.

5 Dhaka has the highest population density in the world, estimated at 44,500 people per square kilometer. World

Economic Forum. 2017. These are the world’s most crowded cities. Geneva. 6 World Health Organization. Global Health Workforce Statistics 2018 (accessed 6 April 2020). 7 ADB estimates as of 18 April 2020. 8 The Daily Star. Number of infected doctors across the country crosses 200. 21 April 2020. (accessed 24 April 2020). 9 IMF Assessment Letter and Press Release of IMF Executive Board Concludes 2019 Article IV Consultation with

Bangladesh (accessible from the list of linked documents in Appendix 2).

4

Figure 1: Pandemic Impact on GDP Growth (%)

Figure 2: Pandemic Impact on Different Sectors (%)

FY = fiscal year, GDP = gross domestic product. Note: (f) = forecast. Source: ADB. 2020. Asian Development Outlook (ADO) 2020: What Drives Innovation in Asia? Manila; World Bank. 2020. Public Banks South Asia Economic Focus (April). Washington, DC (Doi:10.1596/978-1-); and IMF Assessment Letter and Press Release of IMF Executive Board Concludes 2019 Article IV Consultation with Bangladesh (accessible from the list of linked documents in Appendix 2).

9. Exports have declined sharply, and further reductions are expected. Exports have been one of the main drivers of economic and social development in Bangladesh. The growth rate was 10.9% in 2019 but a decline of 19.8% is expected in FY2020.10 The labor-intensive ready-made garment (RMG) industry exported goods valued at $34.1 billion in FY2019, accounting for 84.0% of the total merchandise exports and 11.3% of GDP.11 The industry employs about 4.1 million people, most of them women. However, lockdowns and social distancing measures across countries have disrupted global supply chains and dampened demand from overseas markets. The export volume in March 2020 dropped by 18.3% compared to March 2019. 12 With Europe and the United States (accounting for 73% of the country’s market, combined) in recession, about $3.2 billion of export orders had already been canceled or suspended as of 16 April 2020, affecting 2.3 million workers.13 10. Remittance inflows affected by the pandemic and oil shock. Remittances, amounting to $16.4 billion in FY2019 or 5.4% of GDP, have been a steady source of household incomes and help the country manage its balance of payments.14 After years of steady growth and registering a 20.0% growth rate in the first 8 months of FY2020, remittances decreased by 11.3% in March compared to last year. Most of Bangladesh’s migrant workers are based in the Gulf countries that are affected both by the pandemic and abrupt decline in oil prices.15 Total remittances are expected to stagnate in FY2020 and drop sharply in FY2021. The reduction in remittance inflow will impact consumption and put the livelihood of many migrant workers’ families at risk. 11. Contraction of domestic consumption. Domestic consumption accounts for 75% of the economy.16 The nationwide lockdown and social distancing measures have resulted in significant

10 Center for Global Workers’ Rights. 2020. Abandoned? The Impact of Covid-19 on Workers and Businesses at the

Bottom of Global Garment Supply Chains. 11 Export Promotion Bureau, Bangladesh. 2019. Monthly Summary Sheet July–June 2018–19. Dhaka; and Bangladesh

Bureau of Statistics. 2019. Gross Domestic Product of Bangladesh 2018–19 (F). Dhaka. 12 Export Promotion Bureau, Bangladesh. 2020. Monthly Summary Sheet 2019–2020 for the Month of July–March.

Dhaka. 13 Bangladesh Garment Manufacturers and Exporters Association. 2020. https://www.bgmea.com.bd/. 14 ADB. Unpublished. Bangladesh Economic Indicators Update. Dhaka. 15 The Brent crude oil price has dropped by more than half, falling from $71.18 on 15 April 2019 to $31.48 on 26 April

2020. 16 Bangladesh Bureau of Statistics (BBS). 2019. Gross Domestic Product (GDP) of Bangladesh 2018–19 (F). Dhaka.

7.1 7.37.9 8.2

3.8

FY2016 FY2017 FY2018 FY2019 FY 2020(F)

5

slowdown and stoppage of economic activities. The Google mobility report (Figure 3) provides indications of the cliff-like drop of domestic consumption which will severely impact retail, accommodation, restaurants, and transportation sectors of the economy. These are sectors with a high concentration of SMEs that employ large numbers of low-wage workers.

Figure 3. Indications of reduced domestic economic activities (COVID-19 Community Mobility Report)

Source: Google. April 2020. COVID-19 Community Mobility Report. Bangladesh.

12. Micro, small, and medium-sized enterprises experience severe challenges. Bangladesh has around 8 million micro, small and medium-sized enterprises (MSMEs). MSMEs contribute around 20%–25% of the GDP, and account for the majority of the total employment outside of agriculture and the public sector.17 Though growing steadily, MSMEs are still thinly resourced, with the majority being cottage and micro enterprises with fixed assets of Tk5 million or less. With limited collateral, they generally lack access to bank credits; the financing gap has been estimated at $2.8 billion (footnote 17). Since most MSMEs are concentrated in retail trading, transport, and light manufacturing, they have been badly affected by the lockdown and supply chain disruptions. The sharp decline of the RMG industry also negatively affects other SMEs in the same ecosystem. 13. The pandemic has a serious impact on poverty. The pandemic threatens to worsen the poverty situation in Bangladesh. In 2019, over 34 million people or 20.5% of Bangladesh’s population were poor and 17 million or 10.5% were extremely poor.18 The effects of the lockdowns and consequent economic disruptions have led to a spike in poverty. The International Food Policy Research Institute estimates that an additional 42 million people in South Asia could fall into extreme poverty in 2020 due to the pandemic. For Bangladesh, ADB estimates that the pandemic is expected to drive an additional 7.7% of the population or close to 13 million people into poverty. The lockdown deprives the poor and the vulnerable people of their livelihood sources. In addition, it is also difficult for them to receive timely and adequate government support as they are likely to be unbanked, have no tax records, and have no social insurance. 14. Four groups of workers are particularly vulnerable to the economic fallouts of the pandemic.

(i) The informal sector workers. About 85.1% (around 59.2 million workers) of the labor force is engaged in the informal sector, living hand-to-mouth on their daily incomes; 68.9% of them are women. With no sick leaves, no insurance and little savings, these daily laborers, rickshaw pullers, restaurant workers and micro businesses face daunting challenges to maintain their livelihood during the lockdowns and economic disruptions.

17 World Bank. 2019. Financing Solutions for Micro, Small and Medium Enterprises in Bangladesh. Washington, DC. 18 Bangladesh Bureau of Statistics (BBS). 2019. Poverty and Extreme Poverty Rate of Bangladesh 2018–19. Dhaka.

Retail & recreation Grocery & pharmacy Transit stations

6

(ii) RMG workers. More than 1 million of 4 million garment workers in Bangladesh have lost their jobs due to a fall in global demand (footnote 11). About 53.2% of these are female and 80.4% of them went home without their severance pay. Low-skilled female workers living in rural areas without pay remain exposed to difficulties of making daily livelihood.

(iii) Returnee migrant workers. More than 10 million Bangladesh nationals work overseas, mostly in Europe, Gulf countries, and Southeast Asian countries. Almost a million of these have returned due to the pandemic crisis in their host countries. These workers would likely remain unemployed and cannot return overseas soon.

(iv) Farm workers. About 25 million (40.6%) people are employed in the agriculture sector. They have low monthly income compared to other sectors (footnote 4). Lockdowns are going to disrupt transportation and with lack of storage facilities, the farmers may have to bear significant losses, especially on perishable foods. This can impede farmers’ access to markets, curb their income, and worsen poverty.

15. The pandemic has a significant impact on country’s fiscal position. Before the pandemic, the country’s economy was on track to grow by 7.8% in FY2020.19 The budget deficit was expected to return to the 5% range after a temporary jump to 5.5% in FY2019, due to elections. The tax revenue collection was expected to increase due to sustained economic growth and a newly implemented VAT scheme. Nearly 90% of the government revenue comes from tax collection, of which 65% are from indirect taxes including VAT and other duties. However, the pandemic and consequent stoppage of economic activities is expected to significantly reduce tax receipts. Nontax revenue will also be severely affected by the reduction of imports and other fee sources. A minimum revenue loss of 2% of GDP ($6.7 billion) is projected by the government. Expenditure is expected to increase sharply due to increased spending in health care, social protection and economic stimulus packages. Per ADB’s estimate, the fiscal deficit is likely to rise to 7.5% of GDP in FY2020. For FY2020 and FY2021, the IMF projected fiscal deficits of 6.9% and 6.5% of GDP respectively (footnote 9) while World Bank projected 7.7% and 9.8%.20 16. The government’s COVID-19 response. The government has mounted immediate and robust responses in the areas of public health, social protection and economic stimulation. On 18 March 2020, the government adopted the National Preparedness and Response Plan to contain the threat of the pandemic to public health. The Plan has seven components: (i) planning and coordination; (ii) strengthening surveillance, laboratory, and screening at the points of entry; (iii) contact tracing and quarantine; (iv) clinical case management; (v) infection prevention and control; (vi) risk communication and public awareness; and (vii) operational research.21 To protect the poor and to support the economy, the government has adopted a countercyclical expenditure plan with the following major strategic programs: (i) expanding social safety net programs to meet the basic needs of people living below the poverty line, day laborers, and those engaged in the informal sector, with emphasis on vulnerable women and groups; (ii) introducing a fiscal stimulus package to retain manufacturing workers; and (iii) increasing government spending with a target to create jobs and increase aggregate demand. The government plan comprises economic packages totaling $11.2 billion (3.3% of GDP). 17. The government’s health response. Social distancing measures were introduced, and all large gatherings were canceled. A nationwide lockdown was enforced starting 26 March 2020

19 ADB. 2020. Asian Development Outlook (ADO) 2020: What Drives Innovation in Asia? Manila. 20 World Bank. 2020.The cursed blessing of public banks. Washington, DC. 21 Government of the People’s Republic of Bangladesh. Ministry of Health and Family Welfare. 2020. National

Preparedness and Response Plan for COVID-19, Bangladesh Version 5. Dhaka.

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until 5 May 2020 with a likely further extension. Government agencies, led by the Ministry of Health and Family Welfare, with the support of development partners including ADB, are stepping up efforts to strengthen testing, isolation, tracking, and treatment efforts. Testing capacity was extended from one laboratory to 20, and a total of 36,090 tests have been conducted as of 24 April 2020 (or 219 tests per 1 million people). 18. Efforts to expand testing and provide treatment to COVID-19 patients are constrained by limitations of the health care system. An amount of Tk2.5 billion has been initially provided to the Health Services Division of the Ministry of Health and Family Welfare to fund the COVID-19 preparedness and response plan. The government has made investments to strengthen its health sector response with support from development partners, including emergency loans from ADB22 and the World Bank23 totaling $200 million.

2. The Government Countercyclical Expenditure Plan

19. Expanding social safety net programs for the poor and vulnerable. According to the expenditure plan, support will be provided to fulfil the basic needs of people living below or near the poverty line and people engaged in informal work. People risking their own safety fighting the pandemic, such as doctors, nurses, and health care workers, will also be aided. Women are specially targeted among most of the groups being supported. Some of the programs are (details are listed in Table 2):

(i) Special honorarium to government doctors, nurses, and medical workers (majority are females) engaged in treating COVID-19 patients. As of 21 April, over 350 doctors, nurses and health workers have been infected by COVID-19.

(ii) Special health insurance of Tk0.5 to Tk1 million and life insurance 5 times of health insurance coverage to physicians, nurses, other health workers, field-level administration officers, members of law enforcement agencies, and others directly involved in the fight against the pandemic.

(iii) The social protection such as the old age allowance and the allowance scheme for widowed and husband-deserted distressed women expanded to cover all eligible people in 100 most poverty-stricken upazilas (subdistrict). About 1 million new beneficiaries will be enrolled.

(iv) Cash transfer to low-income people engaged in the informal sector, including day laborers, hawkers, rickshaw and van pullers, transport workers, and hotel workers who have lost their income because of the lockdown. Through this program, two million low-income earners (mostly women) will receive cash during the period of lockdown and Ramadan.

(v) Food distribution free of charge to low-income people (rice 500,000 tons, wheat 100,000 tons) to ensure food safety for the poorest people.

20. Protect jobs in export industries, industrial and services sectors and SMEs. Job losses are mounting, and businesses are struggling. The government has made funds available through subsidized zero-cost credit to support factory worker salary payments. The primary beneficiaries are the RMG sector workers on the verge of being furloughed or dismissed. Low-cost loans will be provided to the factories to preserve employment, support SMEs, and maintain the competitive edge of Bangladesh’s export industries. Some of the programs are (details are listed in Table 2):

22 ADB. 2020. People’s Republic of Bangladesh: COVID-19 Response Emergency Assistance Project. Manila. 23 World Bank. 2020. COVID-19 Emergency Pandemic Preparedness and Response Project, Bangladesh.

Washington, DC.

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(i) Interest-free loans through commercial banks to export-oriented businesses to pay workers’ salaries. The fund will be available to export-oriented industries which export a minimum of 80% of its total production (almost all RMG factories). It will be used for payment of salaries and allowances of workers and employees for April, May and June based on historical average of salaries and allowances. The primary beneficiaries of the program are RMG factory workers (most are low-skilled women workers). It is estimated that 1.5 million workers could benefit from this program.

(ii) Subsidized loans through commercial banks to affected SMEs. The government will provide an annual interest rate subsidy of 5%, effectively reducing rates from 9% to 4%. SMEs in the retail, service and transportation sectors were all seriously impacted. Lacking resources and with poor access to finance, these SMEs will receive some relief from this program to stay in business and keep their workers.

Table 2: Countercyclical Expenditure Package

(as of 26 April 2020)

Item Amount

(Tk billion) Amount ($ million)

Key Beneficiaries

Social Protection

Special honorarium to government doctors, nurses, and medical workers engaged in treating COVID-19 patients

1.0 12 Health workers (majority female)

Special health and life insurance will be provided to physicians, nurses, other health workers, field-level administration officers, members of law enforcement agencies, Armed Forces, and others directly involved in the fight against the pandemic at the risk of their personal safety

7.5 88 Health workers and engaged officials

Expanding the social protection such as the old age allowance and the allowance scheme for widowed and husband-deserted distressed women to cover all eligible people of the 100 most poverty-stricken upazilas (subdistrict)

8.2 96 Elderly people, widowed and husband-deserted distressed women

Cash transfers directly to low-income people in the informal sector

7.6 89 Low-income groups

Food distribution free of charge to low-income people (rice 500,000 tons, wheat 100,000 tons) to ensure food safety

25.0 293 Low-income groups

Open market sale of rice at Tk10 per kilogram to low-income people (74,000 tons for 3 months)

2.5 29 Low-income groups

Expedited house construction for homeless people

21.3 250 Homeless people

Support industries to protect jobs

Interest-free loans through commercial banks to export-oriented businesses to pay workers’ salaries.

50.0 586 Factory workers (mostly women)

Subsidized loans by commercial banks to affected SMEs with annual interest rate of 9% (5% government subsidy).

200.0 2,345 SMEs and their employees

Subsidized loans by commercial banks to affected businesses in industry and service sectors with an annual interest rate of 9.0% (4.5% government subsidy)

300.0 3,518 Industry and service sector firms and their employees

Expansion of EDF from $3.5 billion to $5.0 billion with reduced interest rate to 2.00% from 2.73% to facilitate the import of raw materials under the letter of credit

127.5 1,495 Export industries

9

Item Amount

(Tk billion) Amount ($ million)

Key Beneficiaries

A new pre-shipment refinancing scheme for exporters with 7% interest rate

50.0 586 Export industries

Establishment of a new refinance scheme to supply working capital in the agriculture sector, at 4%

50.0 586 Farmers

Procurement of additional 200,000 tons of rice and wheat to ensure fair price

8.6 101 Farmers

Support for mechanization of harvesting 2.0 23 Farmers Distribution of seed and sampling to affected farmers, and fertilizer subsidy

95.0 1,114 Farmers

Total 956.2 11,211 ADB = Asian Development Bank, COVID-19 = coronavirus disease, EDF = Expansion of Export Development Fund, SMEs = small and medium-sized enterprises. Source: Finance Division, Ministry of Finance.

21. Coordinated monetary policy responses to ease financial market stress. The Bangladesh Bank, the central bank, took steps to keep credit from freezing. Before the crisis, the total capital adequacy ratio for the banking industry was 10.5%, but the capital buffer is likely to have been eroded during the lockdown period (footnote 20). Regulatory forbearance was exercised to support the banking industry which is likely to experience growing nonperforming loan (NPL) issues after the pandemic. Bangladesh Bank issued circulars to delay NPL classification and extend the tenures of trade instruments, the submission of import bill entries to the bank, the issuance period of back-to-back letters of credit, and the repayment tenure of loans from the Export Development Fund. To boost liquidity in the system, the Bangladesh Bank announced that it will buy treasury bonds and bills from banks. Effective from 15 April 2020, the central bank fixed the cash reserve ratio at 3.5% on a daily-basis requirement and 4.0% on a bi-weekly average basis.

3. Macroeconomic Management and Debt Sustainability

22. Sound macroeconomic management before the pandemic. The economy had been growing at 7.4% and inflation kept at 5.8% during FY2015–FY2019. The public debt to GDP ratio is at 34.9% and external public debt to GDP ratio is at 14.5% in FY2019,24 both are low. Despite a low revenue–GDP ratio (9.9% in FY2019), the average fiscal deficit was 4.3% of GDP during FY2015–FY2019, still within the budget target of 5.0%. However, the fiscal deficit rose to 5.5% of GDP in FY2019 because of increased spending during national elections and was expected to decline to 5.0% before the onset of the pandemic. Concentrated public investment in physical and social infrastructure (59% of the FY2020 budget) was a key contributing factor to the rapid GDP growth. The foreign exchange reserves, which were $32.7 billion at the end of 2019, cover 5.9 months of imports (footnote 19). 23. IMF Article IV consultation concluded in September 2019 confirmed that “Bangladesh continues to achieve impressive economic growth and social development.” The Joint World Bank–IMF Debt Sustainability Analysis in September 2019 confirmed that Bangladesh remained at a low risk of debt distress, with all external and domestic debt indicators below their respective thresholds under the baseline and stress test scenarios.25

24 IMF Assessment Letter and Press Release of IMF Executive Board Concludes Article IV consultation with

Bangladesh (Available from the list of linked documents in Appendix 2). 25 World Bank–IMF. 2019. Joint World Bank–IMF Debt Sustainability Analysis. Washington, DC.

10

24. Public debt remains sustainable. Public debt in Bangladesh was $105 billion in FY2019 (around 34.9% of GDP) and external PPG debt was $44 billion (around 14.5% of GDP) (footnote 24). Without COVID-19, in FY2020, the public debt is projected to increase to 35.5% of GDP and the external PPG debt to 14.6% of GDP. The debt sustainability analysis confirmed the debt sustainability of Bangladesh even under the impacts of the pandemic and after factoring in the additional borrowings. With the additional $2.9 billion of external borrowings and $5.9 billion of domestic financing, the external PPG debt–GDP ratio will increase to 16.0%, and the public debt–GDP ratio will increase to 39.6% in FY2020. Both the external debt ratio and public debt ratio will remain stable over the medium term, with all external debt and public debt indicators well below the threshold levels for debt burden indicators, even under various stress scenarios.26 25. Financial sector. One of the pre-existing vulnerabilities in Bangladesh’s economy is the weakness in the financial sector. At the onset of the pandemic, the NPL ratio stood at 9.3% as of the end of 2019. Most of the NPLs are in the state-owned commercial banks, with an NPL ratio of 23.9% at the end of 2019. Even before the crisis, private sector businesses, especially SMEs, had serious challenges accessing bank credit. Because of the lack of funds available for borrowing, bank credit to the private sector grew only 9.9% in 2019, which is the slowest growth rate since 2008. Most banks have undiversified portfolios with concentrated exposures to corporate loans. The pandemic threatens to further increase the stress in the banking system. 26. Capital markets. Both the stock and bond markets are underdeveloped, presenting a challenging domestic funding environment for both the private sector and the government. Total stock market capitalization was only 16.4% of GDP in 2018. 27 The development of the government securities market is hampered by the rapid increase of national saving certificate (NSC) sales, which has now been capped. NSCs are a government-issued saving instrument carrying risk-free returns of up to more than 11%,28 which makes them very popular for investors but very costly in terms of the public finance. Overall, the government securities are thinly traded, and the main investors are commercial banks, which were facing liquidity issues even before the pandemic. In conclusion, the domestic funding sources are limited and costly. 27. Regional cooperation. The government has pledged $1.5 million to the South Asian Association for Regional Cooperation (SAARC) Corona Emergency Fund. The fund has been used to deliver medical supplies and machines to SAARC member countries. Potential areas for regional collaboration include closer collaboration between the national health emergency agencies and creation of a central repository to disseminate information. Information sharing, supply deliveries and policy dialogues have already started under the support of the fund. B. Policy Reforms and ADB’s Value Addition

28. The program will support the Government to mitigate the severe social and economic impact of the COVID-19 pandemic. Specifically, the program will support government to implement its pro-poor, gender and socially inclusive COVID-19 response plan which expands and strengthens social safety nets to address the needs of poor and vulnerable groups. The Government program will also protect employment in the key industries, such as the labor-intensive RMG sector where the majority of the workers are vulnerable low-skilled female workers. The proposed program is aligned with ADB’s Strategy 2030, including operational priorities on

26 Debt Sustainability Analysis (accessible from the list of linked documents in Appendix 2). 27 The Dhaka Stock Exchange hit a 7-year low in March before trading was suspended from 26 March 2020. Economic

concerns dragged down the share value of textile companies and banks. 28 In comparison, the yield of 5-year treasury bonds is only 8.05% in March 2020, based on CEIC data.

11

addressing remaining poverty and reducing inequalities, accelerating progress in gender equality, and strengthening governance and institutional capacity.29 29. ADB’s value addition. ADB’s continuous policy dialogues with the government contributed to the development of the government’s response strategy and development financing plan. ADB has supported and worked closely with the government in preparing the national health response plan and in formulating the economic stimulus packages. Discussions have been held at various levels including with technical staff and the highest level of government, including the Prime Minister’s office, the finance secretary, and the health secretary. In close coordination with other development partners, ADB brought to the table its regional experience in disaster preparedness, health management, and implementation of pro-poor, gender-responsive policy actions. 30. ADB’s financial assistance encompasses several important areas. First, through a regional TA (Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of Other Communicable Diseases), ADB provided a $350,000 emergency grant in March 2020 to support the procurement of health safety materials to effectively support and protect those on the front line and medical staff.30 Second, ADB has approved the COVID-19 Emergency Assistance Response Project of $100 million on 30 April 2020 to aid the procurement of equipment and supplies; the upgrading of health and testing facilities; and the building of system and community capacities for surveillance, prevention, and response to the pandemic. Third, through the proposed CARES program, ADB will fund government expenditures in critical areas such as the expansion of social safety nets for vulnerable women and other groups and support critical labor-intensive industries, and SMEs, in order to preserve jobs. During program implementation, ADB will support the effective targeting of the poor especially vulnerable women to maximize the pro-poor and gender impact of its COVID-19 response. 31. ADB, through its private sector window, is also working to provide the private sector with liquidity support and trade finance. The pipeline includes transactions in the infrastructure, financial institutions, agribusiness and social sectors, for existing clients and new. All these coordinated efforts aim to provide short-term social protection as well as have a medium- to long-term impact through sustaining aggregate demand and protecting the industrial base, which are considered vital to Bangladesh’s economic recovery and continued growth momentum. 32. ADB has been a partner with the government in many areas of structural reforms, including capital market development and support for good governance.31 Prior to the pandemic, ADB had been in close engagement with the government in the areas of banking industry reform, strengthening income tax collection, and disaster risk finance. As part of ADB’s plan for medium-term interventions, these efforts will continue and may take on increased urgency as the pandemic has revealed the strong need for continued structural reforms in these areas. To speed up the recovery and stimulate aggregate demand, government spending needs to be increased. ADB’s ongoing and planned support for infrastructure development will be strengthened to facilitate these efforts. Private sector will play an important role in the recovery. ADB’ ongoing interventions

29 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 30 ADB. 2020. Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of

Other Communicable Diseases. Manila. 31 ADB. 2015. Third Capital Market Development Program. Manila; ADB. 2007. Good Governance Program. Manila.

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in SME development and micro-enterprise development will be strengthened and accelerated with a new focus on COVID-19 response.32 C. Impacts of the Program

33. ADB’s support to Bangladesh’s economic response to the pandemic. The program will provide the government with budget support to mitigate the severe social and economic impact of COVID-19. The government programs will expand and strengthen social safety nets for the most vulnerable groups of the population during the pandemic. Cash and in-kind payments will be delivered to these populations through existing agencies for expedited implementation. Aside from funding support, ADB will provide capacity development and support through the attached TA. The government programs will assist the worst-hit industries such as the RMG and service industries. Many low-wage earners who work in these labor-intensive industries are ill-equipped to withstand any work suspensions, let alone job losses. These programs will keep the workers employed and preserve critical industry sectors and their corresponding business infrastructure, which will be important for the economy to return to its pre-pandemic growth trajectory. 34. The program will be aligned with the following overarching development objectives of the country: inequality and unemployment reduced and adverse social and economic impact of COVID-19 pandemic mitigated. The reforms undertaken under the program will have the following effect: adverse socioeconomic impact to vulnerable groups reduced. The program loans will support the following reform areas: social safety net to vulnerable groups expanded, and employment opportunities protected. Under the attached TA, program implementation will be supported, and further reform areas will be identified. 35. Coordination with the International Monetary Fund and other development partners. ADB maintains close coordination with the IMF, and the IMF has also provided ADB with an assessment letter which confirmed the debt sustainability of Bangladesh with increased external financing. The country preparedness and response plan (CPRP) was developed jointly by the government and development partners including ADB to coordinate support efforts by the international communities. The government allocates specific elements of its response plan to each development partner, in line with the country’s needs and volume of assistance provided. The IMF is requested by the government to provide SDR500 million for a rapid credit facility to address balance of payments issues. Through close coordination, complementarity between two projects in the health sector, one for World Bank and one for ADB, was ensured. The World Bank’s $100 million loan project will support information- and technology-based approaches to disease surveillance and provide training and equipment for facilities and geographic areas as identified by the government. ADB’s $100 million emergency assistance health package will support the procurement of equipment and supplies, the upgrading of health and testing facilities, and the building of systems and community capacities. For countercyclical economic support, ADB will provide $500 million through this proposed program while the Asian Infrastructure Investment Bank (AIIB) will provide a $250 million loan with ADB as the cofinancing partner. 36. To support the Rohingya people, the government has a separate program to avoid the breakout of COVID-19 in the camps and mitigate any impact thereof. This includes establishing isolation units and providing health facilities. Currently, the World Bank has two ongoing grant projects ($185 million) for the health sector which are being used to manage and mitigate the

32 ADB. 2015. Second Small and Medium-Sized Enterprise Development Project; ADB. 2019. Microenterprise

Development Project. Manila.

13

COVID-19 impact in the camp areas. ADB is exploring additional grant funds to complement the World Bank support. D. Development Financing Needs and Budget Support 37. The government has requested loans of $250 million from ADB’s ordinary capital resources and $250 million from ADB’s concessional ordinary capital resources through the CPRO under the CSF. The government has also requested a loan of $250 million from the AIIB under its COVID-19 response package. The pandemic is expected to result in a decline in revenues, estimated at 2% of GDP, as well as an increase in countercyclical expenditures. The program will finance the anticipated fiscal deficits. The government’s initial estimates indicate additional financing needs of $8.8 billion (14.2% of the annual budget of $61.6 billion). About $2.9 billion of the deficits will be financed through external sources and $5.9 billion from the domestic market. The capital market in the country is underdeveloped. Historically, the principal domestic financiers of the government have been the commercial banks. The external borrowing amount has been fixed after considering sufficient liquidity in the domestic market and to avoid crowding out the private sector during the last quarter of the fiscal year (Table 3).

Table 3: Government Additional Financing Requirement because of COVID-19 ($ million)

Item

2020 Pre-COVID-19

2020 COVID-19 Adjusteda

Additional Financing Needs

Total financing requirement 17,025 25,835 8,810 Gross domestic financing 10,914 16,835 5,921 Gross foreign financing 6,111 9,000 2,889 Source of fundsb

Asian Development Bankc 600 Asian Infrastructure Investment Bankd 250 World Bank 100 International Monetary Funde 700 Other sourcesf 1,239

Total commitments 2,889 a Preliminary estimates. b Includes approved and proposed. c Includes this proposed program and $100 million COVID-19 Response Emergency Assistance Project. d Asian Infrastructure Investment Bank financing will be cofinanced with the Asian Development Bank. e International Monetary Fund facility provides balance of payments support of SDR500 million. f The government has reached out to other multilateral or bi-lateral partners for additional funds. Source: Asian Development Bank estimates.

38. ADB has confirmed that this requested CSF meets the access criteria for the CPRO as detailed in Appendix 4. ADB financing comprises (i) a loan of $250 million from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility plus 50 basis points, for a term of 15 years, including a grace period of 3 years; and (ii) a loan of $250 million from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 2% per year during the grace period and thereafter, for a term of 25 years, including a grace period of 5 years.33 AIIB is expected to provide $250 million support in parallel co-financing. The total loan size is based on Bangladesh’s financing needs and development spending arising from the development expenditure programs.

33 The $250 million concessional ordinary capital lending will be from the existing country allocation following

reprogramming, and savings freed up from ongoing projects.

14

E. Implementation Arrangements 39. The Finance Division of the Ministry of Finance (MOF) will be the executing agency. The government, through the MOF, will monitor budget execution and flow of funds for the countercyclical measures. The government through the MOF will submit to ADB monthly reports in the first three months and quarterly reports thereafter on activities, expenditures from the state budget to support the countercyclical measures, and on the beneficiaries. The program will be under the oversight of the Cabinet Committee on Social Security Program,34 and ADB’s TA resources will be provided to the Committee to enhance monitoring and to support policy development, medium-term planning, and regional cooperation. The program implementation period is from May 2020 to December 2021. The loan proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and ADB’s arrangements with the Finance Division of the MOF.

III. ATTACHED TECHNICAL ASSISTANCE

40. A TA will be attached to the program to help the government improve its institutional capacity and program implementation. The MOF will be the executing agency, and the Department of Social Services under the Ministry of Social Welfare, the Department of Women Affairs under the Ministry of Women and Children Affairs, and the Department of Disaster Management under the Ministry of Disaster Management and Relief will be the implementing agencies. The TA will (i) support the program implementation by providing capacity support and development; (ii) provide direct support for the delivery of services through the existing social safety net; (iii) introduce new tools and solutions to improve poverty and gender targeting and service delivery, including digital financial services and banking channels; (iv) develop a gender-responsive plan to improve the social safety net in the country; and (v) improve the monitoring and evaluation capacity and data collection. 41. The TA is estimated to cost $1 million, which will be financed on a grant basis from the Technical Assistance Special Fund (TASF-6). The government will provide counterpart support in the form of counterpart staff; office, administrative, and logistics support; and other in-kind contributions. TA funds will be disbursed in accordance with the Technical Assistance Disbursement Handbook (2010, as amended from time to time). All consultants shall be recruited in accordance with the ADB Procurement Policy (2017, as amended from time to time) and associated project administration instructions and/or technical assistance staff instructions.

IV. DUE DILIGENCE

42. Governance. The institutional framework of public financial management (PFM) in Bangladesh is under transition and several improvements have been made or are being attempted. To date, three public expenditure and financial accountability (PEFA) assessments have been undertaken on Bangladesh—in 2006, 2010, and 2016. The 2016 PEFA assessment notes that, overall, there has been a renewed focus on PFM activities and a continued emphasis on improving PFM processes and procedures. In addition, Bangladesh has made positive strides in developing its PFM systems since the 2010 PEFA assessment. However, improvements are needed in areas such as internal and external audit and annual financial reports. 43. The dominant role of the MOF in budget management has contributed to the country’s strong record of fiscal discipline. Bangladesh performed well with respect to comprehensiveness

34 A cabinet committee headed by the Finance Minister to provide oversight on country’s social protection programs.

15

of budget documentation and public access to key fiscal information. The integrity of financial data is sound since access and changes to integrated budgeting and accounting system records are restricted and recorded. Strengthening Bangladesh’s PFM through TA and policy-based loans is part of ADB’s country partnership strategy. Currently, ADB is providing capacity building support to the Office of Comptroller and Auditor General of Bangladesh through TA35 for the development of an audit manual for foreign-aided projects and for the provision of training to audit staff. 44. To ensure a robust mechanism for timely and transparent identification of beneficiaries of the government’s countercyclical expenditure program as well as an effective performance monitoring and evaluation system, programs funds will go through the existing budgetary channels under overall monitoring by the MOF. Most of these channels (Bangladesh Bank, Department of Social Services, Ministry of Social Welfare) have been supported by various development partners including ADB, which makes it conducive for effective monitoring and evaluation. A government accounting software package (IBAS++) will be used to record the transactions and the attached TA will support project implementation and aid in devising a plan for developing a long-term social safety net. 45. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the MOF. 46. Poverty and social. The substantial progress made by Bangladesh in poverty reduction and social development in recent years is at risk from the pandemic. Despite the progress made, Bangladesh still has 34 million people living in poverty. Moreover, almost half of Bangladesh’s population lives marginally above the poverty line and risks falling back into poverty because of the pandemic. 47. The pandemic has resulted in severe disruptions to domestic economic activities, which are expected to increase unemployment and incidences of poverty. It is estimated that 1.4 million–3.7 million workers may lose their jobs and 13 million people may fall back into poverty, many of them informal sector workers. The government’s countercyclical social protection expenditures include a number of programs designed to provide direct and immediate relief for the poor. The poor and vulnerable groups will receive cash payments and food supply and this support is extended to the informal workers, who are not currently covered by the social safety net. Overall, more than 15 million people can benefit from the government programs already announced. Furthermore, the government programs also aim to protect jobs in the labor-intensive export industries and SMEs, with salary support or low interest rate loans for businesses. These programs will help the workers to maintain their living standard while keeping the industries in business. By preserving the industrial base of the country, these government programs will help lay the ground for a faster economic recovery and sustained poverty reductions going forward. 48. Gender. Bangladesh has been ranked the top South Asian country for gender and 50th on the World Economic Forum’s Global Gender Gap Index.36 Despite the improvements made, gender inequality persists in Bangladesh. Women still own only 13% of agricultural land37 and have lower levels of literacy (56.87%, as against 61.28% for men).38 They have a lower labor market participation rate, particularly in the formal economy (36.3% for women and 80.5% for men). Households headed by women accounted for 12.5% of all households in 2014 and are

35 ADB. 2018. Technical Assistance for Capacity Building for Improving Portfolio Performance. Manila. 36 Daily Star. 2019. Bangladesh top gender-neutral country in South Asia Report. 1 December. 37 World Bank. 2019. To gain economic empowerment, Bangladeshi women need equal property rights. Washington,

DC (May). 38 Bangladesh Bureau of Statistics (BBS). 2019. Women and Men in Bangladesh Facts and Figures 2018. Dhaka.

16

generally poorer and socially excluded. While over-represented in the health care industry, female doctors, nurses, and health workers are leading the fight against the pandemic, very often risking their own health. 49. The program is categorized effective gender mainstreaming at entry. Many of the government programs have significant gender and social inclusion elements. Specifically, strengthening of social safety nets will benefit many women and households headed by women that make up most of the poor, vulnerable households, and informal workers. Health insurance and cash honorariums provided to doctors, nurses, and other health workers will also particularly benefit women. Support in key areas such as the RMG and services industries will help to keep the majority of female workers employed and out of poverty. ADB’s program has gender targets for most key performance indicators and requests sex-disaggregated monitoring and reporting, with the assistance of ADB TA resources. 50. Safeguards. Following an assessment of outputs, the program is not expected to have adverse environmental or social safeguards impacts and will not trigger ADB’s safeguards policies. It is categorized C for environment, involuntary resettlement, and indigenous peoples. No category A or B activities are expected. 51. Summary of risk assessment and risk management plan. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.39

Table 4: Summary of Risks and Mitigating Measures

Key Risks Mitigation Measures

Delayed implementation of the economic stimulus or inadequate size may reduce effectiveness of program.

The government spending needs to be frontloaded and delivered to the people who need them the most – poor, women and informal workers.

Significant escalation of the pandemic may lead to severe disruptions in government work that may hamper program implementation.

The programs are direct support, and delivered through existing channels, many of which have been supported by other development partners. This will reduce cost, improve efficiency and reduce risks.

Insufficient internal control may lead to reduced efficiency, fairness, and transparency of the government support programs.

Quarterly monitoring report from the Ministry of Finance and technical assistance capacity building and support will be provided to strengthen monitoring and evaluation.

The government’s plan to fund a significant portion of expenditures from domestic sources may not succeed if the pandemic situation deteriorates.

The government has been prudent in raising external debts, with a low external debt–gross domestic product ratio of 15%. Tapping different funding channels should be considered and ADB will continue to engage the government to evaluate various strategic options.

Source: Asian Development Bank.

V. ASSURANCES

52. The government has assured ADB that the implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan documents.

39 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

17

VI. RECOMMENDATION

53. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $250,000,000, to the People’s Republic of Bangladesh for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the loan of $250,000,000, to the People’s Republic of Bangladesh for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 2% per year during the grace period and thereafter; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President

30 April 2020

18 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Country’s Overarching Development Objective

Inequality and unemployment reduced (Bangladesh’s Seventh Five Year Plan FY2016–FY2020)a Adverse economic impact of the COVID-19 pandemic mitigated (ADB’s Comprehensive Response to the COVID-19 Pandemic 2020)b

Results Chain

Performance Indicators with Targets and Baselines

Data Sources and Reporting Risks

Effect of the reform Adverse socioeconomic impact to vulnerable groups reduced

a. By June 2022, national poverty incidence maintained at the 2019 level of 20.5% (Baseline: 20.5% in 2019)

b. By March 2021, 15 million poor and vulnerable people (of whom at least 40% are women) benefitted from at least one economic assistance program under the government’s coronavirus disease (COVID-19) response plan (May 2020 baseline: 0)

c. By September 2020, at least 1.5 million workers (of whom at least 50% are women) in export-oriented industries benefitted from extended salary support through the program (May 2020 baseline: 0)

a. Bangladesh Bureau of Statistics b–c. Ministry of Finance (MOF) annual budget report, MOF progress reports

The escalation of the pandemic beyond the projected time frame requires more resources.

Reform areas

1. Social safety net to vulnerable groups expanded

1a. By June 2020, at least 2,000 government doctors, nurses, and medical workers engaged in treating COVID-19 patients provided with special honorarium (May 2020 baseline: 0) 1b. By March 2021, At least 750,000 senior citizens newly enrolled in the National Old Age Program with monetary benefit of Tk500 per month provided (of whom 40% are women) (May 2020 baseline: 0) 1c. By March 2021, at least 250,000 eligible women newly enrolled in the National Allowance Scheme for Widowed and Husband-deserted Distressed Women provided with monetary benefit of Tk500 per month (May 2020 baseline: 0) 1d. By July 2020, Tk2,000 transferred to at least 2 million poor families across the country with a collection and reporting of beneficiary data disaggregated by sex (of whom 20% are families are headed by women) (May 2020 baseline: 0)

1a–e. MOF annual budget report, MOF progress reports

Insufficient internal control may lead to reduced efficiency and transparency of the government support programs.

Appendix 1 19

Results Chain

Performance Indicators with Targets and Baselines

Data Sources and Reporting Risks

1e. By December 2020, at least 1 million poor and vulnerable families provided with food support of 20 kilograms per month during the pandemic emergency period (May 2020 baseline: 0)

2. Employment opportunities protected

2a. By September 2020, at least Tk30 billion provided as wage subsidies to workers in export-oriented industries (of whom at least 50% are women) (May 2020 baseline: 0)

2a–b. MOF annual budget report, MOF progress reports

2b. By December 2021, at least Tk170 billion in loans with subsidized interest provided to the affected industries and sectors and micro, small, and medium-sized enterprises. (May 2020 baseline: 0)

3. Program implementation supported, and critical structural reforms identified

3a. By December 2020, 150 staff from relevant agenciesc with improved knowledge and skills in delivery and better targeting of social protection services and welfare programs to poor and vulnerable population (May 2020 baseline: 0)

3a–d. ADB technical assistance consultant report

3b. By June 2021, new tools and solutions to improve poverty targeting and service delivery, including digital financial services and banking channels piloted (May 2020 baseline: not applicable)

3c. By June 2021, guidance note on inclusive and gender-responsive social protection and welfare services developed, and endorsed by the government (May 2020 baseline: not developed or used)

3d. By September 2020, monitoring and evaluation (M&E) capacity gaps for the government’s program identified and M&E systems strengthened in all delivery channels to provide timely and accurate sex-disaggregated M&E reports (May 2020 baseline: not applicable)

Budget Support Loans Asian Development Bank (ADB) concessionary ordinary capital resources (up to): $250 million (concessional loan) ADB ordinary capital resources (up to): $250 million (regular loan)

20 Appendix 1

Grant ADB Technical Assistance Special Fund: $1,000,000 Assumptions for Partner Financing Asian Infrastructure Investment Bank: $250 million (loan) The government has requested loans from the Asian Infrastructure Investment Bank and potentially other partners.

ADB = Asian Development Bank. Note: Due to uncertainties in how the outbreak will unfold, its economic effects, the need for government responses to be flexible as the situation evolves, and because new data collection and reporting systems to monitor the crisis are being developed and evolving, it is not yet possible to set more specific and realistic effect of the program targets than those presented in the DMF. Additional indicators to measure the effects will be identified at a later stage and used to report on the program’s effectiveness as comprehensively as possible in the project completion report. a Government of Bangladesh. 2015. Seventh Five Year Plan FY2016-FY2020: Accelerating Growth, Empowering

Citizens. Dhaka. b ADB. April 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. c Staff are from the Ministry of Social Welfare, Ministry of Women and Children Affairs, and Ministry of Disaster

Management and Relief. Source: ADB.

Appendix 2 21

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54180-001-3

1. Loan Agreement: Ordinary Operations

2. Loan Agreement: Special Operations

3. Development Coordination

4. Country Economic Indicators

5. IMF Assessment Letter and Press Release of IMF Executive Board Concludes 2019

Article IV Consultation with Bangladesh

6. Summary Poverty Reduction and Social Strategy

7. Risk Assessment and Risk Management Plan

8. List of Ineligible Items

9. Attached Technical Assistance Report

10. Debt Sustainability Analysis

Supplementary Documents

11. Summary of National Preparedness and Response Plan for COVID-19

12. Summary of Social and Economic Responses by the Government of Bangladesh for

COVID-19

13. COVID-19 and the Ready-Made Garments Industry in Bangladesh

22 Appendix 3

DEVELOPMENT POLICY LETTER

Appendix 2 23

24 Appendix 4

ASSESSMENT OF COMPLIANCE WITH ACCESS CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY AND COVID-19 PANDEMIC RESPONSE

OPTION

Access Criteria ADB Staff Assessment

1. Adverse impact of exogenous shocks

The pandemic has severe negative health and economic impacts on Bangladesh. Health impact. Given the density of the country’s population, sizable slum population, and its underdeveloped medical system, Bangladesh faces significant challenges in containing the disease and providing treatment to infected people. Impact on the economy. The economy was hit by the pandemic and the subsequent lockdown. The gross domestic product (GDP) growth in fiscal year FY2020 will drop to 3.8% by IMF estimate. The economy will be also be affected by the spillover effects of the global recession, as already evidenced in the decline of export and remittances. Impact on the vulnerable population. With 20.5% of the population still living below the poverty line, 10.5% of the population living in extreme poverty, and almost half of the population marginally above the poverty line, the population is extremely vulnerable to external shocks. The livelihood of many workers in the informal sector is at risk because of the nationwide lockdown and the ensuing economic recession. By potentially putting 13 million people below the national poverty line, the pandemic threatens to reverse decades of progress made in poverty reduction in Bangladesh. Impact on the fiscal position of the country. Revenue will be reduced because of slow economy and trade, and expenditures will escalate to fund the economic stimulus. Overall, the budget deficit is expected to rise to 7.5% from 5.0% projected before the pandemic.

2. Countercyclical development expenditures

The government has rolled out countercyclical measures to combat the pandemic. The government’s priority is to provide funding to strengthen the health care services and infrastructure. An additional Tk2.5 billion has been provided to the Health Services Division of the Ministry of Health and Family Welfare to fund a coronavirus disease (COVID-19) preparedness and response plan. On 5 April 2020, a countercyclical expenditure plan was announced to shore up the social safety net to protect the vulnerable groups and stimulate the economy. The announced countercyclical package totals $11 billion. (i) Increasing public expenditure. Generating employment will be given

priority in public expenditure. (ii) Introducing a stimulus package through banks. Some low-interest

credit facilities will be launched through the banking system, mainly to rejuvenate economic activities.

(iii) Widening social safety net coverage. Coverage of the existing social safety net will be further widened to fulfill the basic needs of people living below the poverty line such as day laborers and people engaged in nonformal work.

The Bangladesh Bank has already reduced the cash reserve ratio and repossess rate to boost monetary supply and exercised regulatory forbearance to keep the credit flowing.

3. Preshock record of generally sound

Macroeconomic management was largely sound with high growth and benign inflation before the pandemic. The economy grew 7.4% annually

Appendix 4 25

Access Criteria ADB Staff Assessment

macroeconomic management

during FY2015–FY2019. The public debt–GDP ratio was low at 34.9% in FY2019. Inflation averaged 5.8% during FY2015–FY2019, and the budget deficit averaged 4.3% during the same period. The foreign exchange reserves were $32.7 billion at the end of 2019. IMF Article IV consultation concluded in September 2019 confirmed that “Bangladesh continues to achieve impressive economic growth and social development.”

4. Structural reforms The National Preparedness and Response Plan was adopted on 18 March 2020 to guide the nation’s health sector response. The COVID-19 Emergency Operation Center was set up at the Institute of Epidemiology Disease Control and Research under the Directorate General of Health Services to coordinate nationwide preparedness and response activities. Entry control and screening was enforced, and testing was strengthened. The government also imposed effective social distancing measures, including the closure of public and private establishments and suspension of public transportation services. The countercyclical economic package is being implemented by various agencies to stabilize the private sector and the financial market, provide a cash cushion for the poor, and protect employment by supporting key industries and small and medium-sized enterprises.

5. Debt sustainability Public debt in Bangladesh was $105 billion in FY2019, around 34.9% of GDP, and the external public and publicly guaranteed (PPG) debt ratio was 14.5% of GDP, both low. The additional external debt of $2.9 billion, as government

projected, will increase both the external PPG debt–GDP ratio and public debt–GDP ratio by 0.9% in FY2020. Bangladesh remains at low risk of debt distress.

6. Coordination with International Monetary Fund (IMF)

ADB coordinates closely with the IMF on macroeconomic monitoring and participation in Article IV missions. The IMF supports ADB’s response measures and has provided an assessment letter confirming that Bangladesh’s sustainable debt dynamics allow the authorities to increase external borrowings in response to the pandemic and Bangladesh remains at low risk of debt distress as assessed.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, FY = fiscal year, GDP = gross domestic product, IMF = International Monetary Fund. Source: Asian Development Bank.