Development Support Credit II

closed

The review suggests that overall progress with development support credit (DSC II) triggers has been positive. The macroeconomic framework is on track, banking and state own enterprise (SOE) reforms have proceeded with some minor variations and broad governance reforms have moved ahead. In the energy sector several structural reforms have moved ahead, although progress on the privatization front has been inadequate. The other area where there has been significant shortfall is regarding implementation of energy price agreements under DSC I. This is largely due to unanticipated surge in world oil prices and the Government considers a full pass through of these increases to consumers as politically impossible. It has nevertheless made some minimum adjustments in gas, kerosene and petrol prices and has also reduced the taxes on petroleum products. While all energy product prices excluding domestic taxes exceed international prices, including tax (weighted average rate of about 30%) the domestic prices fall short for kerosene and diesel. Since these products account for some 75% of total oil consumption, the Bangladesh Petroleum Corporation is incurring losses. The resultant adverse impact o f higher petroleum costs on BPC's finances has been offset by the lower central Government deficit. Importantly, the Government has taken new measures relating to tax revenues and trade tariff reductions in the FY05 budget that strengthen the overall reform program and demonstrate the Government's resolve to stay the course on reforms.