Abstract
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.
Highlights
Fiscal risks are factors, often outside a government’s control, that can lead to fiscal aggregates differing from forecasts
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 quantify the fiscal risks facing Bangladesh and help authorities hedge against those risks, and set the tone for other South Asian economies facing similar risks
The relatively small effect is the reflection of two factors: (i) a small tax base as tax revenue collections in Bangladesh are among the lowest in the world at around 9% of gross domestic product (GDP); and (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 small
Summary
Often outside a government’s control, that can lead to fiscal aggregates differing from forecasts. 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 It evaluates the impact of specific sources of fiscal risks such as those originating from contingent liabilities and the pension system. The fiscal balance is sensitive to shocks to macroeconomic variables such as commodity prices and the exchange rate Specific factors, such as calls on government guarantees or the recapitalization of state-owned banks, could negatively impact fiscal aggregates. 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.
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