The World Bank has granted $250 million in financing to Bangladesh in the form of budget support after the country decided to introduce fiscal and financial reforms to strengthen policies aimed at supporting growth and improving resilience to shocks future.

On Friday, the Washington-based lender approved the loan, the first in a series of two credits under the second phase of the Development Credit Policy. It will provide an additional $250 million in the next fiscal year to implement several other conditions.

In a press release, Bernard Haven, senior economist at the World Bank, said the funding would help Bangladesh harness digital technologies to deliver green and resilient growth.

“Fiscal and financial sector policies will help support growth, while improving the coverage and effectiveness of social protection programs will protect the poor and vulnerable during economic shocks and natural disasters.”

The government has taken steps to bring reforms in various areas, including preparing a bank stimulus plan, allowing non-resident foreign digital service companies to submit VAT returns, canceling 10 power plants coal and the development of the national tariff policy.

Last month, Bangladesh Bank required all banks to draw up a loan recovery plan so that they can take timely measures to address downside risks arising from bad debts, liquidity crunch and other factors.

According to the instructions, each bank will have to submit the plan to the central bank in January of each year. The first strategy, however, must be submitted by June 30 this year.

The World Bank financing came at a time when the country is facing major challenges, caused by the lingering coronavirus pandemic, the outbreak of the Russian-Ukrainian war and commodity price shocks.

“Bangladesh’s macro-financial risks are high due to existing vulnerabilities in the financial sector, including deviations from international standards of regulation and supervision, weak corporate governance and lack of a modern regulatory framework. resolution of banking problems,” the lender said in a document.

The interest rate cap, introduced in April 2020, is an ongoing challenge, which distorts credit to the private sector and affects bank profitability.

The National Board of Revenue issued a regulatory order (SRO) to allow non-resident VAT registration, while the BB ordered national banks to report non-resident VAT withholdings.

The move will allow foreign businesses such as search engines, social media and cloud-based services to remit VAT payments on digital services they provide in Bangladesh.

Following the release of the SRO, the world’s largest digital service providers registered with the NBR.

“This prior action and trigger will together help strengthen VAT and income tax revenues to reduce reliance on trade-based taxes,” the WB added.

Despite rapid economic growth and success in poverty reduction in recent years, Bangladesh has struggled to strengthen its domestic resource mobilization. The challenges were highlighted in several policy documents, but revenue generation continued to disappoint.

“Bangladesh’s aspiration to become an upper-middle-income country by 2031 is critically dependent on improving its revenue mobilization,” the WB said.

The Development Credit Policy Program will also support the development of the National Tariff Policy, which will help modernize trade taxes.

The Commerce Ministry has already approved the policy, a ministry official said. The policy will have to receive the green light from the cabinet to obtain the second tranche of the loan.

Similarly, the Ministry of Finance should roll out an improved withholding tax system and the automated challan system nationwide and strengthen income tax collection.

The government has already canceled its planned investment in 10 coal-fired power generation projects with a combined generation capacity of 8,451 megawatts of electricity.

“This credit will further accelerate the government’s efforts to strengthen its policies and regulatory framework to pave the way for a green, resilient and inclusive recovery and low-carbon growth,” said Mercy Tembon, Country Director of the World Bank for Bangladesh.