Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 33758-BD

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 138.1 MILLION

(US$200 MILLION EQUIVALENT)

TO

THE PEOPLE’S REPUBLIC OF BANGLADESH

FOR A

DEVELOPMENT SUPPORT CREDIT I11

November 1,2005

Poverty Reduction and Economic Management South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization

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GOVERNMENT FISCAL YEAR K J L Y l - K J I ' J E 3 0

CURRENT EQUIVALENTS

Currency Unit = Bangladeshi Taka (Tk.) US$1 = Tk. 65.65 (September 2005)

ADB ADP AL

A T C A U S A I D

B N P B P D B BPC B T R C

BTTB

C&AG

C A O C A S C E A C G A DSC EGBM

ERC F M R P FMRP GDP GFS HAPP I A S

ACRONYMS AND ABBREVIATIONS

Asian Development Bank Annual Development Program A w a m i League

Agreement on Textiles & Clothing Australian Agency for International Development Bangladesh Nationalist Party Bangladesh Power Development Board Bangladesh Petroleum Corporation Bangladesh Telecommunication Regulatory Commission Bangladesh Telegraph and Telephone Board

Comptroller and Auditor General

Chief Accounting Off icer Country Assistance Strategy Country Environmental Analysis Controller General o f Accounts Development Support Credit Enterprise Growth and Bank Modernization

Energy Regulatory Commission Financial Management Reform Program Financial Management Reform Program Gross Domestic Product Government Finance Statistics N I V / A I D S Prevention Project International Accounting Standards

IDA IMF PRSP

MDG M o F

NBR N C B NGO NNP

N T R C A

PEDP-I1

P F M PER PM PRGF REB SEDF

SOE SRO TA VAW V R S WTO

International Development Association International Monetary Fund Interim Poverty Reduction Strategy Paper Mi l lennium Development Goal Ministry o f Finance

National Board o f Revenue Nationalized Commercial Bank Non-Government Organization National Nutr i t ion Project

Registration and Certification Authority

Primary Education Development Project Public Financial Management Public Expenditure Review Particular Matter Poverty Reduction and Growth Faci l i ty Rural Electrification Board South Asia Enterprise Development Faci l i ty State Own Enterprise Special Regulatory Order Technical Assistance Violence Against Women Voluntary Retirement Scheme Wor ld Trade Organization

Vice President: Prafu l Patel, SARW

Sector Director: Sadiq Ahmed, SASPR Sector Manager: K a p i l Kapoor, SASPR

Country Director: Christ ine I. Wall ich, S A C B D

Task Team Leaders: Anthony Richard H o w e Bottrill and Sandeep Mahajan, SASPR

TABLE OF CONTENTS

CREDIT AND PROGRAM SUMMARY .................................................................................................................. i

I . I1 .

I11 . I V .

V .

VI . VI1 .

INTRODUCTION ............................................................................................................................................. 1

RECENT DEVELOPMENTS IN BANGLADESH ....................................................................................... 3 Recent Political Developments ..................................................................................................................... 3 Recent Economic Developments .................................................................................................................. 4

THE GOVERNMENT’S POVERTY REDUCTION STRATEGY .............................................................. 5

POLICY REFORMS SUPPORTED BY DEVELOPMENT SUPPORT CREDITS SERIES ................... 6 Pillar 1: Strengthening Core Governance ................................................................................................... 8 Pillar 2: Reducing Sectoral Governance Impediments to Improved Investment

Climate and Provision of Infrastructure ................................................................................... 14 Pillar 3: Empowering the Poor ................................................................................................................... 18

THE BANK’S COUNTRY ASSISTANCE STRATEGY ............................................................................ 22 Lending Activities ........................................................................................................................................ 22 Non-Lending Activities ............................................................................................................................... 23

PROGRESS OF DSC-I11 TRIGGERS AND PRIORITIES FOR THE NEXT PHASE ........................... 24

IMPLEMENTATION ARRANGEMENTS ................................................................................................. 29 Monitoring and Evaluation ........................................................................................................................ 29 Credit Administration. Disbursement and Auditing ................................................................................ 30 Environmental Issues .................................................................................................................................. 30

VI11 . BENEFITS AND R I S K S ................................................................................................................................ 31

ANNEXES

ANNEX 1 : Bangladesh: Medium-Term Structural Reform Policy Matrix FY03-FY06 .................................... 34 ANNEX 2 : Bangladesh at a Glance ......................................................................................................................... 47 ANNEX 3: Statistical Annexes ................................................................................................................................. 49 ANNEX 4: Bangladesh: Fund Relations ................................................................................................................. 54 ANNEX 5: Letter of Development Policy ............................................................................................................... 57 ANNEX 6: Statement o f Loans and Credits ........................................................................................................... 66

MAP

Task Team

The Proposed Development Support Credit I11 was prepared by an IBRD team consisting o f Anthony Richard Howe Bottrill. Sandeep Mahajan (Task Team Leaders). Shamsuddin Ahmad. Burhanuddin Ahmed. G . M . Khurshid Alam. Amit Dar. Raihan Elahi. Syed Mynuddin Hussain. Zahid Hussain. Md . Iqbal. Z a h l Islam, Alma Kanani. Esperanza Lasagabaster. Paul Jonathan Martin. S yed Nizamuddin. Zaidi Sattar. Kiatchai Sophastienphong. Alan F . Townsend. Kishor Uprety. Suraiya Zannath. Bala Bhaskar Naidu Kalimil i. Aneeka Rahman. Oxana Bricha. Joyce Mormita Das. Mehar Akhter Khan .

Peer Reviewers: Sanjay Pradhan (Sector Director); Dipak Dasgupta (Sector Manager); David Rosenblatt (Lead Economist and Sector Leader)

CREDIT AND PROGRAM SUMMARY

THE PEOPLE’S REPUBLIC OF BANGLADESH DEVELOPMENT SUPPORT CREDIT I11

Borrower: The People’s Republic o f Bangladesh

Amount: SDR 138.1 mi l l ion (US$200 mi l l ion equivalent)

Terms: Standard IDA terms; 40-year maturity and a 1 0-year grace period

Description: The proposed Credit i s the third in a planned series o f programmatic operations that, alongside the IMF-supported PRGF program, has supported the implementation o f the Government’s reform agenda. Governance-related reforms, at the macro and sector levels, are at the heart o f D S C 111. DSC III- supported reforms have sought to strengthen sectoral governance in banking, health, education, and SOEs, especially energy; and further strengthen core governance functions, with emphasis o n procurement, public financial management, tax administration, public administration, and checks and balances o n public entities.

Benefits: As in the case o f the DSCs I and 11, the reforms supported under the proposed program are l ikely to have a positive impact o n economic growth, exports and incentives for private sector investment, which should help accelerate poverty reduction. Over the longer term, progress in institutional reforms supported by the Credit i s expected to promote sustained macroeconomic stability, more effective government institutions, private sector development, including privatization, improved public service delivery, and enhanced transparency and good governance. These reforms will help reduce corruption and improve the prospects for private investment.

Risks and Mitigation Strategy:

Political risks: With the next round o f general elections scheduled for January 2007, the polit ical landscape for deeper structural reforms i s becoming increasingly difficult. A related risk i s o f growing resistance from vested interests. The Government, however, avows to continue with i t s reform agenda and i t s efforts to form polit ical and social consensus around the PRSP i s commendable. T o mitigate the impact o f polit ical r isks, the timing, scale, and scope o f future programmatic credits would be dictated by the commitment to Government’s reforms and, as in the case o f the previous DSCs, disbursements would be made ex-poste - upon implementation o f agreed reforms. Only those reforms that are strongly owned by the Government wil l be considered for support. IDA will also continue workmg closely with other donors to generate broader polit ical support for reforms.

Governance problems could potentially overwhelm, as corruption i s a major concern and the Government’s capacity i s weak. The Government’s efforts, supported by the DSCs, on several fronts would help address this. In economic

1

governance, a number o f recent sectoral reforms in banking, energy, SOEs, public administration, and the trade system should help. Reforms in procurement, financial management, and the setting up o f the independent Anti Corruption Commission wil l have long-term benefits once fully effective. However, these can only be viewed as incremental steps in what i s necessarily a long-term and complex process o f institutional building. Given the severe capacity constraints in the country, the Bank and the rest o f the donor community wi l l need to stay engaged over a long period.

Budgetary and fiduciary risks: Fungibility o f funds implies that budgetary resources risk being diverted or misused. The Government, however, has a good record o f allocating public spending to key development sectors, including social spending and infrastructure. To further mitigate the risk, auditing arrangements and financial management within ministnes are being strengthened. The new procurement regulations should reduce the scope for misuse o f budgetary funds in contracting. External oversight by the C&AG’s office i s also being strengthened. Further, tracking studies o f major spending on health and education should also curb leakages.

Implementation capacity risks: Implementation capacity i s a serious bottleneck partly due to the overly centralized nature o f public administration. Ongoing reforms in public administration to strengthen c iv i l service incentives, accountability and training wil l help. Bank and other donors are also providing technical assistance to strengthen capacities in a number o f core areas o f economic management including banking, taxation, the budgetary process, and the energy sector.

External risk: Bangladesh faces two major external risks. One arises f rom the removal o f the global quota system for garment exports earlier this year which has led to unprecedented competition for Bangladesh’s garment exports. To mitigate the medium and long-term impact o f this, authorities need to promote export diversification, further reduce anti-export bias, and improve the investment climate; measures being supported under the proposed operation. The more imminent external risk emanates f rom the continued increase in imported petroleum prices. To mitigate this, IDA will continue to press for implementation o f the agreed pr ic ing framework and supportive monetary and fiscal policies to contain inflationary pressures.

Estimated Disbursement: SDR 138.1 mi l l ion (US$200 mill ion) disbursed in a single tranche upon credit

effectiveness

PO90832 Project ID Number:

11

IDA PROGRAM DOCUMENT FOR A PROPOSED THIRD DEVELOPMENT SUPPORT CREDIT (DSC-111) TO THE PEOPLE'S REPUBLIC OF BANGLADESH

I INTRODUCTION

1. Faster economic growth has helped Bangladesh reduce the poverty rate by about 1 percentage point per year since 1990.' Independent for just 33 years, Bangladesh has achieved a positive development record in the face o f extremely weak init ial conditions, virulent and often times violent politics, fragile institutions and poor governance, frequent large-scale destruction by extreme weather conditions, and the negative global image generated by these. The advent o f democracy in the early 1990s was accompanied by a quickening in the pace o f economic r e f o m s with greater macroeconomic stability, a trend towards trade openness, and economic deregulation. Growth in GDP per head has increased from 1 percent during the 1980s to over 3 percent since the early 1990s: per capita growth has moved to an even higher trajectory o f 4 percent since FY03. Growth has also been remarkably stable: Bangladesh i s among the handful o f countnes that have sustained positive per-capita growth in each year since the early 1 9 9 0 ~ . ~

2. Progress on social measures has been encouraging. Primary enrollment for both genders i s near universal, and the secondary enrollment rate has more than doubled since independence. Bangladesh has already met the Millennium Development Goal (MDG) on gender parity in school enrollment at secondary and primary levels. The chi ld mortality rate has halved, and l i f e expectancy has increased by more than 15 years. The decline in infant and ch i ld mortality rates, f rom 140 and 95 respectively in 1972 to about 60 and 30 in 2000, was among the fastest in the developing world. If present trends continue, Bangladesh and Maldives wil l be the only South Asian countries to achieve their MDGs o f reducing infant and chi ld mortality. A decline in the total ferti l i ty rate from 6.3 children in 1975 to 3.3 reduced population growth to 1.5 percent a year by the mid-1990s.

3. Despite sustained progress, a formidable development agenda remains given the low starting base. Almost ha l f the population i s s t i l l under the poverty line, over h a l f the country i s functionally illiterate, child malnutrition rates are among the highest in the developing world, and maternal mortality rates, albeit lower than in India, Pahstan, and Nepal in the region, remain among the highest in the developing world outside o f Sub-Saharan Africa. The proportion o f births attended by a doctor or skilled midwife i s less than 1.5 percent for the poorest households, compared with 22 percent for the richest: this equity gap i s one o f the highest in the world. Despite expanded access to education, poor quality pervades the system and completion rates are very low: for instance, in primary education 33 percent o f enrolled children do not complete the full cycle, whi le less than 10 percent o f grade 1 pupils complete grade 12.

4. There i s n o denying that there are several positive features o f governance already in place that the country can build on. Bangladesh i s a new democracy with i t s fourth consecutive general elections due in early 2007. Voters have thnce voted out the incumbent party, making governments more responsive to the needs o f the electorate. An activist Supreme Court has played i t s role in promoting checks and balances. A vigorous and r i ch c i v i l society and a relatively free press have contributed to holding governments accountable. Nonetheless, in a number of

' The poverty rate in Bangladesh f e l l f r o m 59 percent in 1991 to 50 percent in 2000. The latest round o f the Household Income and Expenditure Survey (HIES) i s currently being carried out. Bangladesh last recorded negative growth in 1988; when devastating floods ravaged the economy and k i l l ed thousands.

important aspects of governance, Bangladesh continues to face huge challenges, which hamper development. In particular, the law and order situation i s weak and corruption i s a major concern. The Government’s capacity to deliver essential services i s further constrained by highly centralized political and administrative systems. Capturing this, recent cross-country governance indicators developed at the Bank show Bangladesh to be a poor performer on four important measures o f governance: control o f corruption, political stability, regulatory quality, and r u l e o f law.3 Perceptions o f a weak governance environment have adversely affected Bangladesh’s global image. It i s imperative that the Government address these issues if the country i s to improve i t s growth and development prospects.

5. The Government is beginning to implement a broad-based reform program to tackle governance issues, with donor support. Reforms in core governance areas such as public administration, tax administration, procurement, and financial management will have long-term benefits, as wil l the recently established Anti-Corruption Commission, once i t i s fully effective. Related sectoral reforms have sought to strengthen governance in banking, health, education, and state-owned enterprises (SOEs), and energy. The activities o f the public sector banks, previously a huge source o f mis-governance, have been curtailed through tighter MOUs. The culture o f non- payment to energy companies has been another root o f systemic corruption. Recent successful efforts to reduce the stock o f arrears to power companies and improved collection o f current bi l ls have addressed this partially. These are important incremental steps in what i s necessarily a long- term, complex, and a daunting agenda.

6. I n the area of economic management, the Government has maintained macroeconomic stability and pushed forward the structural reform agenda despite a difJicult political environment. Trade-related quantitative restrictions were virtually eliminated whi le holding the l ine on average tariff protection. Unification o f the capital and recurrent budgets was initiated and policy orientation of expenditure allocations strengthened on a p i lo t basis in four ministr ies. Public administration reforms were further deepened with increased emphasis on meri t in promotions, creation o f a Career Planning and Training Wing in the Establishment Ministry, and limiting new hiring in non-essential posts. The Central Bank’s oversight o f the banlung sector was strengthened, one nationalized commercial bank (NCB) was brought to the point o f sale, and management support teams hired for the other 3 NCBs. State-owned manufacturing enterprises reduced their losses by 10 percent in FY05, and power uti l i t ies substantially improved their financial positions.

7. These efforts have produced relatively favorable development outcomes. Per-capita GDP growth has averaged 4 percent over FY03-05, the highest 3-year average since independence. In FY05, GDP growth remained above 5 percent even though severe floods caused widespread damage earlier in the fiscal year, while monetary, fiscal, and external sector targets stayed within the medium-term macro framework agreed with the IMF despite severe exogenous pressures arising f rom the floods and sharp increases in global commodity prices. Although the latest poverty data are s t i l l being collected, proxy indicators suggest that good progress on poverty reduction and social development has continued in recent years.

8. Prospects of annual growth remaining around 5-6percent over the next 2-3 years are good as long as Bangladesh maintains macro stability and sustains past saving and investment rates and the current pace o f economic reforms. As suggested by a recent Wor ld Bank report: growth

External, perceptions-based indices, also rank Bangladesh quite l o w o n corruption comparisons. Mos t notably, Transparency International, the Ber l in based private corruption rat ing agency, has placed Bangladesh last in i ts cross-country corruption rankings f ive years in a row. “Bangladesh: Growth and Export Competitiveness.” 2005. W o r l d Bank, Washington, D.C.

2

could accelerate to perhaps 7-8 percent if the Government scales up i t s efforts to reduce regulatory costs, address infrastructure constraints (especially ports and power), deepen and improve the efficiency o f the financial sector, improve labor quality, and further lower trade bamers. Investment rates would need to rise substantially to a level unlikely to be covered by higher private savings alone: th i s wi l l require fiscal prudence (cutting budget deficits, lowering SOE losses etc.), continued donor support, and significant increases in foreign capital inflows.

9. The Government’s recently completed Poverty Reduction Strategy Paper (PRSP) recognizes these challenges and opportunities. I t lays out ambitious development goals and emphasizes the Government’s commitment to reforms. An Interim PRSP was presented to the Boards o f the IDA and the IMF in June 2003. The Boards agreed that i t provided a cohesive pol icy framework for implementing a pro-poor growth strategy. The Government has asked donors to support implementation o f the I-PRSP and PRSP. The IMF i s providing a three-year, SDR 347 m i l l i on PRGF program, due to end in December 2006: the 3rd PRGF review was approved by the IMF Board on June 29,2005 .5 The Bank has provided a series o f Development Support Credits, o f which the proposed credit i s the third, to back broad-based structural, governance-related reforms.6

11 RECENT DEVELOPMENTS IN BANGLADESH

Recent Pol i t ical Developments

10. The current Government - a coalition o f the Bangladesh Nationalist Party (BNP) and three small parties, the Jamaat-e-Islami, the Islami Oikyo Jote, and the Manpur faction o f the Jatiya Party - came topower in October 2001 with a majoriw of more than two-third BNP alone enjoys an outright majority in the Parliament. That marked the culmination o f the third consecutive democratic elections, overseen by a non-partisan caretaker government and deemed by observers to have been free and fair. I t also marked the second time in a r o w that the two dominant r iva l parties, the BNP and the Awami League (AL), traded control o f power. The strong Parliamentary majority was seen as a mandate for reforms to improve governance and strengthen economic management. The Government responded with the appointment o f a reform-oriented Finance Minister and a group o f like-minded senior officials, implementation o f some early structural and macro pol icy reform actions, and revival o f the previously moribund PRSP process.

1 1. The Government has pursued reforms opportunistically in the face of a difficult political environment, that has become increasingly so. Sharp antagonism and confrontational politics between the BNP and the AL have hindered the full functioning o f democracy. Lack o f agreement o n parliamentary procedures and violent street clashes have precluded any constructive debate and the emergence o f any political consensus o n reforms. The AL has ratcheted up street protests - hartals - in a campaign to oust the Government.’ The Government also faces opposition to economic reforms f rom a growing number o f vested interests. The approach o f the next round o f general elections, scheduled for January 2007, will further test the Government’s willingness to pursue broad-based reforms.

12. Political violence is on the rise, having claimed the lives of several key political figures in the past two years. An AL Member o f Parliament was k i l led in early-2004. A grenade attack at

The PRGF was supplemented in FY05 by a SDR 53.33 m i l l i on Trade Integration Mechanism facility. In addition, a US$lOO mi l l i on Programmatic Education Sector Program was disbursed earlier in FY05. When in opposition, both parties have used hartals, which the UNDP estimates cost the economy 3-4 percent o f GDP a year. The costs are b o r n disproportionately by daily wage earners who are typically among the poorest and most vulnerable.

’

3

an AL ra l ly in August 2004 killed 23 people and injured the AL party president who i s also a former Prime Minister. Another grenade attack at a public meeting in February 2005 ki l led a former AL finance minister and some other party workers. The offices o f Grameen Bank, the renowned micro-finance enterprise, and BRAC, Bangladesh’s leading NGO, also came under bomb attacks in 2004. The Government has banned two militant Islamic organizations; Jamatul Muj ahideen and Jagrata Mus l im Janata Bangladesh in connection with the attacks o n Grameen and B R A C and has apprehended alleged lullers o f the former finance minister. More recently, in August 2005, several hundred small devices exploded almost simultaneously across the country, lulling two and injuring hundreds.

13. Operating in this difJicult political milieu, a small group of reformers, led by the Finance and Planning Minister, has sought to push forward a bold reform agenda. T o support these efforts and to strengthen the hands o f the reform champions, the GOB sought donors’ support. Recognizing this as an important opportunity to reengage the GOB on much needed structural and governance reforms, and after having operated under a l o w case in FYOl and F Y 0 2 in the absence o f a similar opening, the Bank’s response has been in the form o f a series o f single-tranche DSCs: a US$300 mi l l ion DSC 1 was approved by the Board in June 2003 followed by a US$200 mi l l ion DSC 2 in July 2004. This support complements the IMF’s PRGF program, and has been a major vehicle for helping the GOB in implementing a series o f critical reforms that are elaborated later in this paper.

Recent Economic Developments

14. Output has grown by about 5.4 percent in FY05 - despite severe floods during July- September 2004. The floods damaged the aman crop and also affected adversely the aus harvest.8 Output o f crops and vegetables declined by 3 percent for the year as a whole. Robust growth in the rest o f the economy, including good export performance, continued strength o f the services sector, growth o f non-crop agriculture and a bumper boro crop enabled the economy to maintain i t s overall growth.

15. The overall macro policy stance remained prudent during FY05 despite heightened exogenous pressures due to sharp global commodity price increases and the 2004 floods. Macroeconomic stability was maintained with fiscal, monetary, and external indicators remaining within the thresholds o f the macro fi-amework agreed with the IMF under the PRGF program. Recognizing this, the IMF’s Executive Board approved the 3‘d review o f the PRGF program in June 2005.

16. Fiscal discipline was maintained, with the deficit for FY05 estimated at 3.5 percent, up slightly from 3.2percent in FY04. The higher deficit in FY05 i s consistent with the revised target set with the IMF, takmg into account the higher (mostly donor funded) public spending to cope with the effects o f last year’s floods. Revenue rose by 13 percent in FY05, below the 19 percent growth target set in the budget last year. Lower actual spending than programmed in the revised budget allowed the deficit target to be met. One area o f concern that has emerged i s the growing losses o f the Bangladesh Petroleum Corporation (BPC) due to the sharp increases in international o i l prices (see para 39) that have been insufficiently passed through to domestic consumers.

17. Rising cost of oil and other commodity imports contributed to a sharp increase in imports, puttingpressure on the balance ofpayments. Oil imports are estimated to have exceeded forecast levels by about US$500 mi l l ion in FY05. Fueled also by sharp increases in demand for

W o r l d Bank and AsDB estimates put total losses to assets at about $2 bi l l ion, or 3% percent o f GDP.

4

intermediate goods and capital machinery due to increased domestic activity and higher rice and wheat imports to cover shortages caused by floods, imports grew by 21 percent in FY05. Export growth, too, has remained buoyant, although less so than import growth, with 14 percent growth in FY05. The current account slipped into a deficit equaling 0.9 percent o f GDP, compared with small surpluses in FY03 and FY04. Foreign concessional lending and other capital f lows broadly offset the current account deficit, leaving gross official reserves unchanged at around $3 billion, although import coverage slipped to less than three months at end-June 2005.

18. Monetary policy has tightened appropriately in response to emerging inflationary and exchange rate pressures. Rapid credit expansion, strong domestic demand, rising world commodity prices, and the effects o f the flood on food prices increased inflationary pressures in late-2004 and early-2005. Inflation in FY05 reached 6.5 percent, compared with 5.8 percent in FY04. Year-on-year inflation reached 7.9 percent in August 2005 - a six-year high. Bangladesh Bank was slow to tighten monetary policy initially, but has restricted conditions considerably since March 2005. Banks’ cash reserve requirement was raised from 4 percent to 4.5 percent in March, and again to 5 percent with effect f rom October 2005. One-month and three-month Treasury bill rates have risen by 2.6 percentage points. Credit and liquidity growth has eased but remains relatively strong.

19. Increasing imports and demand for foreign exchange put the taka under pressure in early-2005. Bangladesh Bank used i t s reserves to support the taka almost to the limit specified in the macroframework agreed with the IMF, but subsequently allowed the taka to depreciate and tightened monetary conditions to stem further pressures. The taka has fallen 10 percent against the dollar since July 2004 and 5 percent real in real terms.

20. The overall picture that emerges is that a buoyant economy along with rapidly rising oil prices is creatingpressure on imports and domestic credit. Prudent demand management will be necessary to ensure sustainability o f growth and continued macroeconomic stability. The flexible use of monetary and exchange rate policies will need to be maintained. At the same time, efforts to raise domestic revenues, including further increases in domestic o i l prices, will need to be strengthened.

I11 THE GOVERNMENT’S POVERTY REDUCTION STFUTEGY

21. The Government has recently drafted its Poverty Reduction Strategy Paper (PRSP), titled “Unlocking the Potential: National Strategy for Accelerated Poverty Reduction.” The PRSP has benefited f rom a comprehensive participatory process, including consultations at the regional levels with representations from a wide spectrum o f the society. The Government has ardently owned the PRSP process, welcoming the donors’ interest but managing and financing the process almost entirely o n i t s

22. The main national level development goals set by the PRSP are: (i) employment generation; (ii) nutrition; (ii) maternal health; (iv) quality education (at primary, secondary, and tertiary levels); (v) sanitation and safe water; (vi) criminal justice; (vii) local governance; and (viii) monitoring. In addition to the s t i l l daunting levels o f income poverty, the PRSP raises the profile on women’s advancement, rising inequality, and making governance work especially for the poor. In setting these goals, i t acknowledges Bangladesh’s encouraging development record but cautions

These are preliminary observations o f the DSC team. A systematic assessment o f the PRSP will be carried out in the Bank-Fund Joint Staff Advisory Note (JSAN) that wil l be shared with the Board at a later date.

5

against complacency and slippages in areas where progress has been good. Recognizing the growing significance o f the meso-level economy (rural market centers), i t advocates greater pol icy attention to i t for growth and employment generation. I t rightly emphasizes addressing implementation problems and capacity constraints within the Government: particularly by improving (i) the budgetary framework for development spending, (ii) the quality o f the c iv i l service, and (iii) the f low o f information.

23. Espousing a broad definition o f poverty, including human deprivations in income, food security, quality o f life, and vulnerability, the PRSP seeks to address it through a strategically prioritized pol icy framework that has pro-poor growth, human development, and governance as its main pillars. It aims to unlock the full potential o f the country through a sensible mix o f public action, private initiatives, and community mobilization. The priority policy areas identifled in the PRSP are: (i) macroeconomic stability; (ii) critical sectors for pro-poor growth, including rural, agricultural, informal and SMEs, rural electrification, roads, and telecommunications; (iii) safety nets for the poor and the vulnerable; (iv) human development o f the poor; (v) participation and empowerment o f the poor; (vi) good governance; (vii) improved delivery o f basic services; and (viii) environmental sustainability.

I V POLICY REFORMS SUPPORTED BY THE DEVELOPMENT SUPPORT CREDIT SERIES

24. Improving governance has been at the center-stage of the reform efforts supported by the DSCs. Consistent with the strong emphasis on governance-related reforms in the Government’s PRSP and with the governance-focused theme o f the ongoing CAS, the DSCs have supported: strengthening o f core governance functions, focusing o n public sector reforms, macroeconomic stability, economic deregulation, and checks and balances on public entities, and; reduction in sectoral governance impediments to improved investment climate and provision o f infrastructure.

25. Already, a number of key measures supported by the DSCs have had a positive impact in reducing opportunities for rent seeking and state capture (Table 1). Reforms in core governance areas such as public administration, tax administration, procurement, financial management wil l have long-term benefits, as will the Ant i -Compt ion Commission once it i s fully effective. Related sectoral reforms have sought to strengthen governance in banlung, health, education, and SOEs, especially energy. The activities o f the NCBs, previously a huge source o f mis-governance - through directed credit and inefficient lending practices, for instance - have been curtailed through tighter MOUs. The culture o f non-payment to energy companies has been another root o f systemic corruption. Recent successful efforts to reduce the stock o f arrears to power companies and improved collection o f current bills have addressed this partially. Nonetheless, a huge unful f i l led agenda remains and a comprehensive anti-corruption strategy backed by sustained polit ical commitment i s very much needed. Also, given that the underlying institution building process i s necessarily a long-term and complex one, realism i s warranted in setting expectations: local capacity i s weak and the Bank and the rest o f the donor community will need to stay engaged and provide support over a long period to see the process through.

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Table 1: Governance Focus o f Reforms

Regulatory Sharply cut back domestic investment regulations including Reforms number of clearances Telecom Establishment of Bangladesh Telecom Regulatory Commission

has imuroved regulation of telecom

Banking

Lower rent seeking opportunities for the officials

Greater competition has improved access and lowered rent seeking from public sector telephone authority

Power and Energy

Trade Virtual elimination of QRs

State Enterprises

Removed one important source of rent through discretionary granting and exemptions

Education

PAC i s functional and steps taken to introduce greater transparency in public accounting, tighten auditing, and strengthen the C&AG’s office. PAC recommendations are regularly communicated to the l ine Ministr ies Procurement regulations issued Annual procurement audit by independent consultant made

Provision for independent review mechanism introduced for mandatory

handling bidders’ protests

Social Safety

By December 2004, PAC had reduced the backlog of outstanding audit objections against ministries by 20 percent Audit committees setup in 22 ministr ies Better compliance of procurement procedures

(procurement planning, method, etc.) as indicated in the independent procurement review report Procurement processing time improved. E.g. % of contracts awarded after 12 months lowered from 40% to 10%

Sectnral

Modernization o f the National Board of Revenue initiated. Large taxpayers units for income tax and VAT and Central Intelligence Cell established Streamlining of customs procedures through the introduction of

the ASYCUDA++ system Mandatorv submission of income tax returns by Govt. emuloyees

Strengthened prudential regulations and banking supenision; enhanced competition; initiated privatization of NCBs.

Full implementation of tax administration reforms wil l help reduce corruption from this major source

Full compliance wil l help reduce corruption

Tightened billing and collection in the power sector

Anti Independent Anti-Corruption Commission established Corruption Legal and Case management information system being installed Judicial Alternative Dispute Resolution mechanisms adopted

Esiablished Energy Regulatory Comkssion Reduced power sector system losses through theft reduction and

better maintenance

Effective implementation wil l establish a major institution to monitor and prevent corruption An effective legal and judicial system i s critical to enforce contracts, settle disputes and create effective

Role of SOEs in manufacturing substantially curtailed, also reducing prospects for political patronage and business practices favoring vested interests

Expenditure tracking initiated Creation of National Teachers Registration and Certification Authority cleared. NTRCA should improve teacher quality and reduce scope for bribery during recruitment Textbook production at the secondary level i s being privatized Most of delivery o f secondary school education contracted out to

Social safety programs being monetized. private sector and NGOs

Anti-Money Laundering

Money Laundering Prevention Act, 2002, enacted

NPL ratio fel l from 27% to 18% in NCBs and from 16% to under 3% in private banks between FY98 and FY04 Reduction in NCB’s share of total bank assets - from 54% in FY98 to 40% in FY04 Between FY02 and FY04, systems loss in power sector fel l from 30% to 24%, collection efficiency improved from 84% to 99%, and collection to generation ratio from 59% to 74%.

equivalent in FY02 to 7 mths in FY04 and further to about 4.1 months in FY05 Number of manufacturing SOEs reduced from 121 in FYOl to 92 in FY04. 60% reduction in manufacturing SOE losses since 200 1 Reduced scope for rent seeking from these sources

Arrears to public utilities fel l from 9 months

Tighter control on flow of criminal fund

Surveys show this has reduced leakage

- Deregulation of wireless telephone Landline density has grown by 5090 since 2002 and

densitv of cellular coverage i s doubling each year.

Financial Management

Procurement

Tax Administration and Customs

Public Administration

7

Pillar 1: Strengthening Core Governance

26. Improving core governance remains a high priority and a critical challenge for Bangladesh. There are several core areas o f governance that the Bank i s actively engaging the GOB on, including: (i) improving public expenditure and financial management; (ii) strengthening revenue mobilization; (iii) maintaining macroeconomic stability; (iv) trade liberalization; (v) economic deregulation; (vi) reforming public administration; (vii) establishing an independent Anti-Corruption Commission; and (viii) reforming the c iv i l justice system. These are discussed, in turn, below.

27. Other, non-economic, core governance areas such as l aw and order and polit ical governance, n o doubt critical in ensuring sustainability and improved efficacy o f economic and social sector reforms, l i e outside o f the Bank’s mandate and expertise. For these important reform areas, the Bank i s relying on i t s bilateral partners to push forward the agenda. The ongoing jo in t CAS being prepared together with Dm, ADB, and Japan should help further cement the Bank’s partnership with other donors on these matters.

28. The donor community and other development partners have expressed concern about reported large-scale irregularities in election financing, suggesting that this could l ikely be a major source o f high levels o f corruption in Bangladesh, as has been the case in many other parts o f the world. Whi le Bangladeshi law and regulations require the declaration o f assets and liabilities by candidates standing for elected office, one particular concern i s reportedly the limited enforcement o f these laws and regulations and making such declarations public. Recognizing this, the Government has agreed to review the implementation o f the relevant legislation and policies, recommend necessary actions, and make the review public.

Improving Transparency and Efficiency of Public Expenditure and Financial Management

29. The Government is strengthening public expenditure planning within a medium-term budgetary framework, as well as essential financial management and accountability functions of accounting, auditing, expenditure tracking and procurement. I t has initiated institutional changes in budget planning by issuing new annual budget guidelines on a p i lo t basis that contain elements o f more strategic budgeting practices, better fiscal discipline and better coordination o f recurrent and capital budgets. They provide unified envelopes for recurrent and capital spending for three years ahead for four ministr ies in preparation o f the FY06 budget. Previously, in these four ministries, the revenue (recurrent spending) budget and the development (capital) budget, known as the Annual Development Program (ADP), were prepared sequentially for each year, with l i t t l e integration and largely in the absence o f a strategic medium-term framework or pol icy orientation. The Government plans to extend the new system to up to 6 more ministries for the FY07 budget, covering about 50 percent o f the total budget.

30. The Government has sought to improve the management of development spending and someprogress has been made. For instance, the estimated time needed to complete ADP projects at current funding levels has been reduced from almost 10 years in F Y 0 2 to around 7 years, although this i s s t i l l higher than the Planning Commission’s target o f f ive years. However, several challenges remain. Although the Government has streamlined preparation o f ADP projects, inadequate prioritization and weak appraisal have been reflected in approval o f an unduly large number o f projects. T h i s has been accompanied by under-funding, a fragmentation o f resources and a backlog of incomplete projects. ADP spending each year has typically fallen some 10 percent short o f the budget target. The number o f outstanding and new approved projects at 856 remains high, and the number o f unapproved projects was increased in the F Y 0 6 budget to 369,

8

compared to 330 in FY05. I t wi l l take some time for the new practices to be fully institutionalized and address the issues o f over-programming in development planning.

3 1. The landscape of procurement has been reshaped during the course of the last several years and the Government has put in place a uniform procurement policy in October 2003 for all public sector entities across the country, with provisions of substantially reduced layers in procurement approval process. Plus, a procurement tracking system through M I S has been established. The new regulations have increased awareness among the contracting/ business community and contributed significantly towards harmonizing donors’ and Government procurement procedures. The Bank and other key development partners have accepted the regulations for al l local procurement. However, there are s t i l l a number o f cross-cutting governance, institutional, and implementation issues including inadequate enforcement o f regulations, delays in award, allegations o f fraud and corruption, and polit ical interference. For further improvement, the following planned actions are notable: (i) a new draft procurement law, including provision o f concessional contracting, i s expected to be approved by the Cabinet shortly before being presented to the Parliament, and (ii) a second reform project with provisions o f e- procurement, compliance monitoring, and social accountability i s under preparation.

32. Fiscal accountability and transparency are being improved. Recent initiatives include: (a) computerization o f accounts and strengthening o f the Controller General o f Accounts (CGA) system with production o f meaningful monthly accounts disaggregated by administrative unit, economic code and function with a lag o f five weeks compared to the previous six months; (b) the production by the Finance Divis ion o f the Ministry o f Finance (MoF) o f monthly fiscal reports based on these monthly accounts; (c) the provision o f a Chief Accounting Officer (CAO) to each ministry and changes in the organization structure o f country-wide pay-points accounting offices under the CGA; (d) the improved reporting o f fiscal data with Bangladesh being included for the first time in the Government Finance Statistics (GFS) Year book; and (e) separation o f accounting from auditing by placing the C G A under the administrative control o f M o F instead o f the Comptroller and Auditor General (C&AG). Further, the backlog o f audit objections, identified by the Parliamentary Accounts Committee has been reduced. By December, 2004, outstanding audit objections against ministries had been reduced by 26 percent. Implementation o f the Report o n observance o f Standards and Codes (ROSC) - Accounting and Auditing recommendations i s also underway. Value for money audits (performance audits) are being introduced and audit committees have been setup in 22 ministries to resolve outstanding issues. In addition, current progress o f the policy actions agreed during DSC I1 i s shown in the matrix.

33. Tracking studies to better monitor expenditures. The Government has undertaken three expenditure tracking surveys, supported by the UK-DfID and the Netherlands. Interim results of the Secondary Education survey suggest that the public financial resources reached schools as intended, but there was evidence o f mismanagement in the authorization o f spending. Pupi l attendance, based on a headcount organized by the survey, was 41 percent, compared with 59 percent according to the registers. Teacher attendance, however, was not as l o w as some alternative recent estimates, although the observed quality o f teaching was poor even among extensively trained teachers. Inter im results o f the Health and Fami ly Planning survey suggest that DG Health outpatient services are wel l used and that service uti l ization i s pro-poor. The efficacy of drugs dispensed, however, was compromised by the poor storage as well as by the l o w proportion o f patients who received written instructions o n h o w to take their medications. The average level o f clinical knowledge o f key health workers was we l l below acceptable standards and varied between different individuals with the same designation. Building infrastructure was often poor, and the lack of medical equipment raised concern over h o w union health centers could

9

undertake essential diagnosis. Findings l ike these could be used to establish benchmarks against which to track the effectiveness o f service delivery over time by follow up surveys.

34. Looking ahead, the Government plans to address a number o f important gaps in the financial management area that were identified in a recent jo int review by the GOB, DfID, and the Bank. These include:

Strengthening o f the linkages between the PRSP and the MTBF. Enhancement or replacement o f the UNCTAD system in the external debt management section in ERD with the tools and processes being developed in the newly set up Resource and Debt Management Wing in Finance Department. A clear road map for adoption o f international public sector accounting standards with full cash basis and moving toward full accrual. This will also require putting in place an integrated financial management information system linking al l aspects o f PFM. Further strengthening o f the C&AG's office to enable i t to carry out financial and performance audits adhering to international standards. Preparation o f a detailed study o f the methodology, accounting treatment and probity o f government commercial accounts to meet international standards or equivalent. Improvement o f the financial management operations in Railways, Telephone & Telegraph, and Postal Accounts Simplification and improved transparency o f the public sector payroll rules and setting up o f an accurate staff register l inked to an appropriate human resource management system. Cleaning up o f the pension and provident funds records and putting in place a reliable accounting system facilitating easy access by the employees.

Strengthening and Modernizing Revenue Mobil ization

35. The NBR has launched a medium-term modernization strategy to improve low revenue yields which are depriving the Government of resources needed for key social programs. Tax revenues account for only 8 percent o f GDP and Bangladesh relies unduly o n highly protective trade taxes. The Government undertook at the start o f the PRGF program with the IMF to increase revenue as a share o f GDP by 0.5 percent a year, but the out-turn for FY2005 at 8.3 percent o f GDP was litt le changed from FY2003. Poor taxpayer services, lack o f transparency in collection, inadequate audit and enforcement, and protracted taxpayer disputes have a l l hampered revenues. The NBR suffers f rom ineffective human resource policies and lack o f authority and autonomy to tackle those, and a weak compensation system and lack o f training. Renewal o f some tax exemptions in the FY06 budget i s l ikely to adversely affect the tax collection efforts.

36. Initial NBR reforms are already underway." In November 2003, the Large Taxpayer Unit (LTU) for income tax was restructured along functional lines (taxpayer services, revenue collection, accounting, audit, and enforcement). I t was also given responsibility for collecting withholding taxes. Steps were taken to strengthen filing and payment procedures, improve detection o f stop-filers, increase capacity for conducting audits, and introduce computerization o f certain LTU operations. In October 2004, the NBR established an LTU for value added tax (VAT) and i s in the process o f operationalizing it. A Joint Commissioner has been appointed but other staff are temporary or part-time, pending approval o f the LTU's organogram by the Ministry o f Establishment. T o improve enforcement and expedite the processing o f appeals, t w o special High Court tax benches have been established. In addition, t o discourage fraudulent appeal cases, the

lo The Bank's Economic Management Technical Assistance Project i s supporting the implementation o f ini t ial stages o f NBR's modernization plan.

10

Government has increased the amount that taxpayers will have to pay upfront f rom 15 percent to 50 percent o f the difference between the contested and admitted amount.

Ensuring Continued Macroeconomic Stability

37. The Government’s medium-term macroeconomic framework commits to fiscal and monetary prudence and deepening structural reforms. The framework envisages acceleration in GDP growth f rom 5.4 percent in FY05 to 6.5 percent in FY06 and 7.0 percent in FYO8 (Annex Table 1). Such faster growth would require a significantly higher level o f investment and more efficient investment decisions than in the past. Achievement o f these, in turn, assumes acceleration in the pace o f structural reforms to tackle supply-side bottlenecks.

38. Fiscal policy aims to finance social development and key public investment while containing the deficit and maintaining debt sustainability. The Government’s success in containing the central government deficit at around 3.5 percent o f GDP partly through curbs o n wasteful expenditures, coupled with greater reliance on concessional external financing, has improved the prospects for fiscal sustainability.” A relatively high 60 percent o f total expenditure i s on infrastructure, education, health, social safety nets and rural development (Annex Table 2). In contrast, defense expenditure remains lower than most o f the region. Interest payments o n government debt have stabilized at less than 2 percent o f GDP. The level o f public expenditure, however, at nearly 14 percent o f GDP, remains l o w by global standards, reflecting weak revenues and l o w implementation capacity.’* The quality o f expenditures at project level remains a concern.

39. Public debt is currently sustainable although concerns are emerging. Public sector debt, including contingent liabilities, i s manageable at about 60 percent o f GDP, more than ha l f o f which i s on concessional terms f rom external official creditors. Longer-term r isks to sustainability, however, arise mainly f rom weak revenues and escalating energy SOE losses. The recent increases in global o i l prices were only partially passed through to consumers in Bangladesh, resulting in losses to the BPC o f Tk 28 b i l l ion ($430 mill ion) equal to around 0.7 percent o f GDP in FY05. BPC’s mounting debt i s estimated at Tk 68 billion, and annual interest cost exceeds Tk 5 bi l l ion ($80 million). This i s not sustainable over the long run. Although external debt i s relatively l o w - at about 33 percent o f GDP and that too mostly on concessional terms - because o f modest export levels, the country faces some medium-term liquidity risks: the net present value o f future debt servicing obligations to current exports ratio stands at about 150 percent.

40. Monetary policy has broadly supported growth while doing a good job of containing inflation and managing exchange market transactions. Bangladesh Bank allowed interest rates to ease during 2004 to support credit growth to the private sector, in light o f ample liquidity and a reduction in administered interest rates, e.g. on National Savings Certificates. However, as noted in para 18, the latter part o f FY05 was a testing period for Bangladesh Bank partly due to pressures o n the BOP and increases in inflation. The authorities wi l l need to be vigilant and ready to counter any undue pressures promptly through action on interest rates and exchange rate flexibility, especially in the absence o f a significant foreign exchange reserve cushion.

‘’ A recent review by the National Pay Commission concluded with a recommendation o f an across-the- board 50 percent increase in public sector salaries. The full cost o f implementing this i s estimated at about Tk 59 bil l ion. A five-member committee headed by the Cabinet Secretary subsequently reviewed the proposal and concluded that i t s full implementation would jeopardize macroeconomic sustainability. The Government has accepted the committee’s recommendation o f a more modest increase o f about Tk 40 b i l l i on to be phased over three years. Total tax and revenue collection rates remain among the lowest in the wor ld at 8 and 10 percent o f GDP. l2

11

Reducing Opportunities for Corruption by Reducing and Streamlining Trade Restrictions

41. Trade liberalization has been advanced with a reduction in and rationalization of customs duties and near elimination of trade-related quantitative restrictions, although expanded use of para tarvfs offset this partly. The average rate o f customs duty was lowered from 21 percent in FYOl to 15.4 percent in the FY06 budget, and the top rate was lowered from 37.5 percent to 25 percent. The number o f non-zero customs tar i f f rates was reduced f rom four to three. This progress, however, was partly offset by an increase in the protective incidence o f para tariffs which now account for about 40 percent o f total protection, compared to only 12 percent in the mid-1990s. The net result has been a reduction in average nominal protection f rom 29.4 percent in F Y 0 2 to 26.5 percent in FY05. Substantial progress has been made with removing quantitative restrictions (QRs). The number o f items subject to QRs was reduced from 122 in FYOl to 15 in the FY06 budget, and al l but three trade-related QRs were eliminated.13 Removal o f longstanding ban on a wide range o f textile imports has been particularly important.

42. The remaining trade liberalization agenda is substantial - Despite significant trade liberalization in the 199Os, Bangladesh s t i l l has the highest level o f trade protection in South Asia and among the highest amongst developing countries as a whole. High tariffs and duties on imported inputs discourage export diversification and constrain growth. A cumbersome and inefficient duty drawback system for non-garment manufacturers seeking to reclaim duties paid o n imported inputs for export hinders their competitiveness. So, stronger efforts to accelerate liberalization of the economy are essential to achieve the Government’s growth goals set out in the PRSP. A pre-announced program o f reductions in customs duties and, especially, para-tariffs to bring Bangladesh in l ine with the developing country average within five years would give industry a clear signal and allow companies to plan their investments.

Streamlining and Reducing Scope for Discretion in the Regulatory Environment

43. A number of measures have been initiated to streamline the domestic regulatory environment and reduce the scope for corruption arising from it. Regulatory reforms have involved streamlining o f process related to customs and port clearance, investment facilitation, land registration, utility regulation, and the financial sector. Specifically:

Customs and port clearance: A noteworthy step has been the introduction o f the ASYCUDA++ system, involving electronic processing and traclung o f files. Further, a one-stop service was recently introduced at the Chittagong port t o facilitate port and customs related paperwork, thereby shortening the time taken for clearing and also improving the turn around time for ships.

Investment facilitation: The Board o f Investment has introduced e-government processes that allow on-line traclung o f various approval requests. Business registration process has been streamlined and further progress would come f rom automation at the Registrar o f Joint Stock Companies, work on which has already started with support f rom IFC’s South Asia Enterprise Development Facil ity (SEDF) and AusAID.

Land repistration. A Land Registration Ac t came into force f rom July 1, 2005. This will help reduce the scope for false and multiple registration o f land. A pi lo t project to computerize land records has been initiated in the Demra thana o f Dhaka district. This project aims at simplifying the tit le deed requirements, putting the title, the location o f the

0

0

0

l3 GOB received waivers o n poultry, eggs and salt f r o m WTO under Art icle XVIII.

12

land, and map on a single page with a11 other documents in a back-up data base. This fo l lows the completion o f the survey o f greater Dhaka by the Land Department.

Utility regulation. The Bangladesh Telecom Regulatory Commission (BTRC) has been set up, leading to rapid growth in the private telephone sector (see para 65). The Energy Regulatory Commission was recently been set up and has now starting to become functional (para 60).

0

Toward a M o r e Responsive and Efficient Public Administration

44. A number of public administration reforms have been initiated in recent years. Promotion pol icy has been improved for Class I officers and there i s enhanced emphasis on merit in performance evaluation and career development. An improved training pol icy has been issued and more importance i s being given to training, particularly in public sector management, for promotion. A Career Planning and Training Wing was created in the Ministry o f Establishment in September 2003 as a result o f which initiatives are underway to improve career planning and effective deployment o f Class I officers. Further, modalities are being determined to organize ministries around four clusters, based on t ypes o f functions. Deliberation and preparatory work that could lead to the development o f a senior c iv i l service or management pool are also underway.

45. The Government has contained employment in public administration at around 1 mill ion, including the central government and some staff in semi-autonomous bodies. I t has lef t more than 100,000 sanctioned posts unfilled, mainly among support staff at Class I11 and lV levels by limiting new post creation and controlling the filling o f vacancies. T h e previous practice o f permanently accommodating staff temporarily hired for projects has been streamlined a more rigorous process of review has been put in place. Various services are also being outsourced.

Establishing and Operationalizing an Independent Anti-Corruption Commission

46. An independent Anti Corruption Commission Act was passed by the Parliament in February 2004, providing the Commission with a mandate to prevent corrupt practices and investigate specific offenses. Three Commissioners o f the A C C were selected in November 2004, o f whom one was appointed Chairman. The Government has sanctioned creation o f an init ial 536 posts to help ACC recruit essential staff and start its work. Joint measures by the Government and the A C C itself are underway to strengthen and improve the integrity o f this interim recruitment process. The full organogram wil l be finalized with the help o f ADB consultants and adopted later in the fiscal year.

Reforming the Civil Justice System

47. Settlement of civil court cases quickens. Major reforms in the Civil Procedure Code were made in 2003, with the objective o f modernizing court processes, reducing case backlog, expediting dispute settlement, and facilitating access to justice. These reforms facilitated different forms o f case management, including introduction o f court annexed mediation and enforcement o f pretrial procedures in pi lot courts to weed out frivolous lawsuits. These efforts have resulted in an increased number of out-of-court settlements and in quicker disposal o f court cases.

48. The Money Loan Court Act 2003 provided money courts with exclusive jurisdiction over credit disputes and has vastly improved the loan recovery mechanism. Creditor institutions are n o w required to exercise self-help by selling collateral in public auction after giving due notice to the defaulting debtors. The A c t also provides for summary procedure and disposal o f cases solely

13

o n the basis o f written pleadings and documentary evidence. The maximum time for case disposal i s I 80 days, although most cases are settled wel l before that time. As a result, in the 12 months after the new l a w became effective, recovery increased by over 200 percent.

Pillar 2: Reducing Sectoral Governance Impediments to Improved Investment Climate and Provision o f Infrastructure

49. A good record of implementing first generation reforms - macro stability and domestic deregulation in particular - has enabled good economic growth. The Government recognizes the need to n o w deepen the structural reforms program for sustaining and accelerating growth performance; particularly, by continuing with trade liberalization and further strengthening the sectoral and cross-sectoral underpinnings o f the investment climate.

50. The need for these structural reforms to boost domestic and external competitiveness is all the more urgent afer the dismantling of the Agreement on Textiles & Clothing (ATC) from January, 2005, which exposes Bangladesh to competition from garment exporters previously restricted by quotas. This poses a considerable challenge for the economy, because the garment sector accounts for over three-quarter o f total exports, and directly employs about 2 mi l l ion workers, o f whom 90 percent are women. I t i s too early to assess the long-run impact, although a hopeful s ign i s that new investment and market orders continue to f l ow and export growth has remained fairly robust thus far. An important reason for this may be that Bangladesh i s competitive in the high-volume, low-margin segment o f the wor ld market and retains preferential access to the EU and Canadian markets due to i t s L D C status.

Improving Financial Sector Accountability, Transparency, and Performance

5 1. Improved governance of the financial sector, including continued restraints on lending, strengthened loan recovery efforts and tighter supervision have reduced the market share of NCBs and given a greater role to private banks. MOUs between Bangladesh Bank and the four NCBs have set a ceiling o f 5 percent o n annual growth in lending, put a limit o n single borrower exposure to 5 percent o f paid-up capital o f each bank, and set monitorable targets o n cash recoveries and cost reductions. The MOUs are to be extended beyond 2005 for Agrani and Janata and until divestment for Sonali. The net result has been a reduction in the NCBs’ share o f total bank assets f rom 54 percent in 1998 to 40 percent by FY04. Their non-performing loans, ne t o f provisions and collateral, fe l l f rom 27 percent in FY98 to 18 percent by end - FY04. Private banks have strengthened considerably their financial positions and are steadily increasing their share o f the market. N e t N P L s o f private banks f e l l f rom 16 percent in 1998 to less than 3 percent by end- FY04. The authorities’ reform program in the banking sector i s being supported by IDA’S Enterprise Growth and Bank Modernization (EGBM) project.

52. Bangladesh Bank’s regulatory powers have been further strengthened. Bangladesh Bank has continued to align i t s prudential norms more closely with international standards and enforce these more strictly. I t s capacity to cany out i t s regulatory authority i s being strengthened under the Bank’s Central Bank Strengthening project. NCBs and development banks were brought under Bangladesh Bank supervision in FY03. The minimum risk-weighted capital adequacy requirement for banks was increased from 8 percent t o 9 percent and the minimum capital requirement increased f rom Tk 400 mi l l ion to Tk 1 b i l l ion (US$17 mill ion). At the same time, limitations on dividend payout were tightened and special audits based o n I A S were conducted for a l l NCBs. In March 2005, Bangladesh Bank tightened loan classification with the introduction o f a “Special Mention” category for loans overdue by 90 days or more but less than 180 days, which was recently followed with the announcement o f the f i r s t phase o f provisioning against the Special

14

Mention accounts. Banks will not be allowed to accrue interest into their income on such loans. Further, the exposure limit for private banks for a single borrower has been reduced f i o m 50 percent o f a bank’s capital to 35 percent (5 percent in the case o f the NCBs).

53. Bangladesh Bank has also introduced measures to improve banks’ corporate governance. These include: (i) tightening “Fit and Proper” tests for bank CEOs and introducing these for bank directors; (ii) making i t mandatory for banks to have independent directors represent the interests o f depositors; (iii) limiting the maximum number o f directors for a bank to 13; (iv) limiting directorship o f banks to two consecutive terms o f three years each; (v) allowing only one director f rom each shareholding family; (vi) requiring the establishment o f an independent Audit Committee o f each bank’s board to assist in financial reporting, audit, and internal control; and (vii) requiring significantly enhanced annual financial disclosures including publication o f audited financial statements in newspapers and ensuring their availability for public v iew in bank branches. Risk management guidelines covering credit, market and operational r i sks have been introduced.

54. Bangladesh Bank has enforced its prudential regulations more strictly. Some 65 bank directors and chairmen have lost their directorships for loan default, insider lending and other violations. F ive managing directors o f banks have been removed since 2000 for allowing their banks to be engaged in irregular or illegal transactions. The guidelines o n early warning system and problem bank categories have been strengthened, followed by the institutionalization o f a Systems Audit of banks with a risk rating (viz., core risk areas) after completion o f an inspection. Bangladesh Bank has also initiated audit o f IT transactions and IT security for banks, and 25 banks have been audited so far.

55. The Government has further strengthened NCBs’ management with the aim of improving their operational performance, and preparing them for divestment. Management experts funded under EGBM are supporting the restructuring and corporatization o f three NCBs - Rupali, Agrani, and Janata - before they are divested. Rupali Bank has been brought to the point o f divestment. A key part o f the strategy for resolving NCBs i s that they should restructure their operations, including credit allocation, cost controls, branch closures and staff rationalization. Progress with these has been slow, despite the appointment o f consultants and needs to be accelerated.

56. The Government aims to strengthen the role and accountability of management and consultant teams in Agrani, Sonali and Janata. The Minister o f Finance will share the consultants’ reports with the NCBs’ boards to enable them to provide timely and constructive comments. The consultants will also need to be able to engage with the senior and middle managers o f NCBs to obtain buy-in for their recommendations, and be given a proactive rather than reactive role in the restructuring process. The high-powered Steering Committee should meet more frequently to oversee the entire process and take key decisions with regard to N C B restructuring and divestment. NCBs’ managements and consultant teams should be given specific and monitorable performance indicators against which their performance can be measured and evaluated. The relationship and interaction between the advisors and the managers in the NCBs need to be changed to ensure that the former’s recommendations are accepted and implemented. The Government has agreed that in future NCB managements, their consultants, the Finance Division, the Bangladesh Bank Governor and IDA will meet quarterly to review progress.

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Reducing State Role in State-owned Enterprises and Strengthening Their Financial Performance

57. Financial losses of manufacturing SOEs have continued to fall, and the Government has reduced its role further. The Government has focused on partial divestment and withdrawal o f direct and impl ic i t budgetary support. Manufacturing SOEs have cut their losses by 60 percent since 2001, including a further 10 percent fa l l in FY2005 (Figure 1). Despite the polit ically charged nature of the reform, the Government reduced the number o f manufacturing SOEs from 121 in FYOl to 92 in FY04 and the employment level in these from 134,000 to 83,000. Further progress o n privatization was made in FY05, with successful privatization o f six SOEs and approval o f the process for f ive others. Non-manufacturing SOEs, not including the BPC, recorded a prof i t for the third consecutive year.

Figure 1: Annual Losses of Manufacturing State-Owned Enterprises

Annual SOE Losses - - - __ - - -

0 5 1 -

1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Ministry of Finance.

58. In other measures, the Government has cut funding o f public sector jute mills, and consequently 12 previously loss-making ju te mills are virtually non-operational due to lack o f working capital. In FY05, about 10,000 SOE employees chose early retirement under the voluntary retirement scheme (VRS). The Government has put in place counseling and retraining programs for workers availing the VRS. These programs will be managed by BRAC, the largest local NGO. They are being funded under the Bank’s Enterprise Growth and Bank Modernization Project. The project will also track the retired workers.

Addressing Governance Constraints to Infrastructure: Power, Energy, and Transport

59. The Government has made further gradual progress in addressing key infrastructure issues in energy, transport and communications. In the energy sector, it has adjusted prices for petroleum products, gas and power partially in l ine with the framework adopted in FY03 which l inked these key prices to international prices and cost recovery. The Government has begun unbundling the gas sector and developing a gas strategy. I t has also started restructuring the power sector, improving i t s operational performance and seeking to enhance supply. I t has made progress after some delays in operationalizing the Energy Regulatory Commission (ERC), which will oversee the energy sector as a whole. The Government, however, has not developed an overall energy strategy. This has become more urgent in v iew o f interest f rom both foreign and domestic investors wishing to take advantage o f not only Bangladesh’s gas but also coal resources. In

16

transport, the Government has adopted new shipping and land transport policies. telecommunications, in turn, are developing rapidly - despite lagging reforms to BTTB.

Cellular

60. An independent ERC was established in FY04. I t s coming into operation was delayed until a chairman was appointed in April 2005, but the chairman and the two other commissioners so far appointed held their f irst hearings o f licensing regulation in July 2005. The Government expects to fill the two remaining commissioner posts during FY06 and also approve the ERC’s draft organogram and budget to enable staffing o f the commission. The Commission should play a key role across the energy sector as a whole, setting tariffs, issuing licenses and providing regulatory oversight.

The Energy Regulatory Commission has started work.

61. Between FY2002 and FY2005, during which period international o i l prices more than doubled, domestic petrol prices increased by about 50 percent, and the prices of kerosene and diesel increased by almost 70 percent, including 35 percent during FY05. As noted in para 37, insufficient price adjustments have resulted in considerable financial losses for BPC and are a major source o f macroeconomic risk. The Government, however, fe l t that a full pass-through o f international price increases in line with the agreed pricing formula was polit ically not feasible and risked adding to cost inflation. Domestic gas price adjustments, likewise, have lagged behind the formula with a modest total increase o f 5.8 percent - all during FY05. A further increase o f around 20 percent would be required to align them with the formula. Power tariffs were last adjusted in September 2003 and the required adjustment in September 2004 was not camed out.

62. Power utilities have improved operating efficiency and reduced arrears. System losses fell f rom 28 percent in FY2002 to less than 24 percent in FY2004. (See Table 2.) Collection efficiency also rose slightly, so that collection increased f rom 70 percent o f generation to 75 percent. Arrears to major power utilities companies have been reduced, f rom an equivalent o f 8 months in FY03 to 4 months in FY05. This reflects a major drive by the Government to ensure that public entities pay their electricity bills, coupled with uti l i t ies’ more aggressive efforts to collect bills owed by private customers. The Government has decided to write-off the arrears o f the closed SOEs but hopes to recover at least part o f these arrears f i o m future sales proceeds. The Government has employed consultants to draft a financial recovery plan for the power sector which should provide the basis for further action.

Table 2: Bangladesh Power Sector Performance Indicators

FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 Dec-04 Jun-05 System Loss 30.3% 29.0% 28.4% 28.1% 25.4% 23.6% Collection Efficiency 84.3% 90.6% 93.0% 97.8% 97.2% 98.6%

Ratio Coil. Generation 58.8% 64.3% 66.5% 70.3% 72.5% 75.4%

Arrear (in Mill Tk) 20,715 23,736 26,231 28,257 30,045 30,061 20,813 19,913 h e a r (in Eqv, 9.34 9.48 9.16 8.86 8.07 6.95 4.48 4.1 Months)

Source: Government of Bangladesh

63. The transfer of lines from BPDB to the better managed Rural Electrification Board has recently speeded, which should further reduce system loss. The Government agreed in FY2002 that 9,047 km o f lines would be transferred from B P D B to REB in three phases. The process stalled during the second phase, however, after about 7,000 k m s had been transferred due to opposition f rom BPDB labor unions and various litigations. More recently, the l ine transfers have restarted after the courts vacated most o f the injunctions against them. An additional 1,500 k m s o f

17

lines have been transferred since June 2005. The Government expects to complete in FY06 the agreed line transfers that are not facing litigation.

64. The Government has initiated measures to improve power supplies and reduce present and prospective shortages. Demand for power i s growing at about 8 percent a year but increases in generation capacity remain largely stalled. Several previous attempts to install power plants both in the publ ic and private sector did not succeed. As a partial measure to address the supply constraints, the Government i s developing a policy to enable private companies to supply power to the gnd from captive power plants. I t i s also considering engaging the private sector in small power generation schemes and i s accordingly revising i t s small power generation policy. The Government i s f inalizing a least cost generation expansion plan with support f rom the ADB which i s expected to be finalized by November 2005. It seeks to effectively fo l low the Public Procurement Regulations (2003), Private Power Generation Policy (1 996), and Private Sector Infrastructure Guidelines (2004) to allow competition and transparency whi le acquiring this generation capacity. The Bank wil l support the power sector through financial assistance for the Siddhirganj pealung power plant (120 MW simple cycle turbine) that will complement an ADB investment in a further two turbines. The Government wi l l contract out the O&M o f this power plant to secure proper operations, maintenance and management o f the asset, and full development o f the generation financing strategy. The preparation o f generation financing strategy would be funded by the Bank supported Power Sector Development Technical Assistance Project.

65. The Government is also moving ahead with reforms in key infrastructure areas such as transport and telecommunication. In transport, the Government endorsed the National Shipping Policy and National Land Transport Policy, an Integrated Mult imodal Transport Policy, and established a Transport Sector Coordination Wing. I t also liberalized the domestic c iv i l aviation market to al low private competition against the national airline, Biman. The construction o f a new container terminal inside the Chittagong port has started and i t s operations will be concessioned to the private sector. In telecommunications, improved sector outcomes have resulted f rom important initiatives by the Bangladesh Telecommunication Regulatory Commission (BTRC) and other sectoral reforms. For instance, landline teledensity has grown by over 50 percent since 2002 and the cellular teledensity i s more than doubling each year. Besides the five cellular phone licenses, B T R C has issued licenses to 10 fixed l ine operators. An interconnection regime i s in place and B R T C i s n o w worlung on spectrum management and other regulatory issues including tariffs, Progress would have been even more remarkable but for the delays in the restructuring o f the government-owned Bangladesh Telegraph and Telephone Board (BTTB). BTTB lacks financial and operational autonomy and i s unable to meet demand and provide quality services. The BTRC, too, faces important institutional challenges despite i t s relative effectiveness so far.

Pillar 3: Empowering the Poor

Improving Governance of Social Service Delivery

66. Delivery of essential social service delivery continues to be strengthened with the adoption o f programmatic approaches in health and education, sustained emphasis to the sector in the budget, and continued NGO-Government partnerships that have proved effective in the past. There i s a common understanding that the next generation o f reforms would need to focus on strengthening the institutional framework for service delivery along with increased social sector spending.

67. In the education sector, the Government has launched several reforms - that the development partners, including the Bank, are actively supporting - to address the problems o f

18

poor quality and weak accountability. A t the primary education level, a multi-donor group that includes the B a n k i s supporting the Ministry o f Primary and Mass Education’s efforts to implement the Primary Education Development Project I1 (PEDP 11) which aims to strengthen access, and improve quality and eff iciency o f primary education. At the secondary level, the Ministry o f Education has finalized a medium-term framework that includes targets related to quality improvements, strengthening o f governance, financing, and enhanced use o f ICT, and pol icy measures and actions to achieve these. Similarly, in the area o f vocational education and training and higher education the Government i s developing options aimed at enhancing the relevance, quality and cost-effectiveness, as wel l as developing greater linkages with the private sector. Furthermore collaboration between Gob and NGOs in the education sector i s increasing - GOB has recently begun piloting a project which aims to help out o f school children receive primary education, with NGOs being key facilitators. This collaboration will enhance Bangladesh’s chances o f achieving the MDGs in the education sector.

68. education system. Major steps include:

The Government has undertaken a number o f measures to improve the governance o f the

At the secondary level, school subsidies have been linked to performance criteria and schools not meeting these have had their subsidies suspended. At the same time, a p i lo t program i s setting up secondary schools in 60 o f the most disadvantaged and underserved areas to ensure that these do not suffer because o f the stricter criteria;

The process o f registration o f schools and their eligibil i ty to receive public subsidies i s being contracted to competitively selected private institutions who have the capacity to undertake this task;

Community participation in school management i s being enhanced with the inclusion o f more community representatives in school management committees;

T o improve the information and M&E systems, pi lot surveys to track performance and expenditures have been completed and plans are being developed to mainstream these;

Information on examination outcomes and school performance are being disseminated widely to stakeholders;

Another major step has been the clearance o f the establishment o f a National Teacher Registration and Certification Authority (NTRCA). The N T R C A wil l screen and certify a pool o f individuals eligible to be hired as teachers in secondary and higher secondary schools and al l recognized schools wil l need to choose f rom this pool. This would help strengthen the transparency o f the hiring process;

The National Curriculum and Textbook Board, responsible for curriculum development and textbook production both at primary and secondary levels, has been restructured with clear demarcation in the functions o f the curriculum and textbook wings. Textbook production at the secondary level i s also being privatized, leading to a significant reduction in scope for rent-seeking and improvements in the quality.

Furthermore, a means-tested stipend program i s being piloted to attract poor girls into secondary schools. Similar measures are also being taken at the primary level: Fo r instance PEDP I1 aims to increase access in underserved areas through enhanced collaboration with N G O s and provide stipends to 40 percent o f students f rom the poorest families to attract them into primary education. At both the primary and secondary levels, greater attention i s also being paid to teacher training.

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70. The health sector has seen some impressive achievements, mainly as a result o f the effective partnership among the Government, NGOs, and donors. Still, the sector remains beset with weak governance, including lack o f accountability o f service providers and inequitable public sector interventions which hinder access, especially by the poor. Policymakers have paid l i t t le attention to non-public sector providers despite the fact that they deliver 60-70 percent o f health care services, particularly curative care. With some exceptions, service quality, especially in the public sector, has deteriorated significantly and the share o f public sector spending to deliver primary health care has declined during the last few years.

7 1. The Government i s addressing these issues in the next phase o f the sector-wide approach under the HNPSP program umbrella. The HNPSP will include accountability instruments and seek to improve targeting. I t wi l l seek a better partnership with non-public providers v ia a Management Support Agency and Performance Monitoring Agency while simultaneously aiming to strengthen i t s stewardship role to ensure quality services under HNPSP at all levels o f the system. A Management Information System for producing credible statistical, personnel and procurement reporting i s a pr ior i ty issue for the HNPSP.

72. Both the National Nutr i t ion Project (NNP) and H IV /A IDS Prevention Project (HAPP) were designed and implemented as two separate projects, parallel to HPSP because the SWAP HPSP was not wel l equipped to deal with such multisectoral interventions and also provide a special focus on these priority issues. However, results have been mixed. For instance, contracting of NGOs took much longer than expected, and their performance o f service delivery s t i l l remains to be determined. With the recent decision to integrate NNP into HNPSP, adequate consideration of planning and formulation o f programs, human resources management, and budget and reporting relationships i s required, especially to avoid interruption o f services. A more detailed program report i s currently under preparation.

73. Social safety nets, especially for the poor, are accorded high priority in the PRSP, although an integrated approach to administering safety net programs i s s t i l l not in place. Evaluation studies indicate that non cash-based social safety programs in Bangladesh are plagued by large leakages. The Government i s n o w monetizing some o f i t s larger programs in the hope o f curbing corruption and containing transaction costs. The Food for Education program that had been plagued by high leakages was replaced by an expanded Primary Education Stipend Program. An estimated 7 mi l l ion children benefit from the program. Other in-kind programs such as the Food-for-Work program and Food Aid are also being monetized. But cash-transfer programs are not in themselves a panacea. I t i s important that monitoring systems be strengthened and adequate checks and safeguards be put in place.

74. Bangladesh’s constitution provides for gender and social equality in al l public spheres. Reducing gender gaps and promoting women’s advancement i s also one o f the goals o f PRSP. The pol icy prioritization o f gender equality in Bangladesh i s manifest in the attainment o f the MDG on gender equality in primary and secondary enrollment. Further, Bangladesh has ratif ied the Convention on the Elimination o f All forms o f Discrimination against Women, with a few reservations though (pertaining to marriage, divorce, and inheritance). Special clauses have been included in family laws to give women the right to divorce and the power to stop practice o f polygamy by husbands. Tougher laws for preventing violence against women (VAW), e.g., throwing acid on women and trafficlung o f women and children, were enacted in 2003 and special arrangements - such as interministerial task force and VAW cells in the Ministry o f Home and in police stations - t o enforce these were established in 2004. Quick trial courts under these acts were established in 2004 for punishing the perpetrators.

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Ensuring Sustainability o f Natural Resources and Strengthening Institutions for Environment Management

75. The draft Country Environmental Analysis (CEA), jo int ly produced by the Ministry o f Environment and Forest (MoEF) and Wor ld Bank, was discussed at a workshop help in July, 2005. The C E A focuses on improving the health o f the poor, ensuring the sustainability o f the natural resources on wh ich they depend, and strengthening institutions for environmental management. The C E A also examines the actions necessary to strengthen environmental management, and identifies building the capacity o f the Department o f Environment (DOE) as essential to better control o f the rapidly escalating urban and industrial environmental challenges. Higher priority needs to be given to implementation o f the DoE’s Strategic Plan, which focuses both on improving governance through increased transparency in environmental decision-making, and o n providing resources to expand DoE’s capacity once i t s quality has improved.

76. Environmental health priorities include (i) acute respiratory infections, due largely to exposure to smoke from biomass fuels, (ii) diarrheal disease caused by poor sanitation, and (iii) the threat o f arsenicosis. Estimates in the C E A indicate that environmental factors cause about 20% o f death and disease in Bangladesh, and the economic benefit o f reducing exposure to environmental health r isks i s equivalent to approximately 3.5% o f national income. Whi le important efforts merit ing continued support are underway to achieve the Government’s Total Sanitation goal and provide arsenic-safe, biologically clean water, new initiatives are required to focus attention and resources on the reduction o f exposure to indoor air pollution.

77. Natural resource issues o f gravest concern to the poor include depletion o f open-water capture fisheries. Although fish provide 65% o f animal protein in the national diet, o f which some two-thirds are f rom capture fisheries, most open-water fisheries are in decline and fish consumption o f the poorest has declined 38% in the last ten years. Recovery and sustainable use o f this resource will require the effective implementation o f the Government’s Inland Capture Fisheries Strategy, including measures to ensure minimum dry season flows, preserve key habitats, and better manage access to this critical resource.

78. Whi le current environmental priorities for poverty reduction are largely rural, this will change as Bangladesh’s population becomes increasingly urban, and industrial production contributes an ever-growing share o f the economy. Already Dhaka suffers significant contamination o f air, land and water. With 80% o f sewage untreated, and some 60,000 m’ o f untreated industrial effluent discharged annually, pollution o f Dhaka’s rivers exceeds standards by more than five times, and the economic cost o f poor water quality and drainage i s estimated at about $670 m i l l i on per year. In addition to significant investment targeted at the most cost- effective solutions, leadership i s required to agree o n institutional roles in mitigating this damage.

79. Air quality in Dhaka improved significantly with the removal o f 2-stroke 3-wheelers in December 2002, but the benefits are being lost due to an influx o f diesel commercial vehicles, many o f which are gross emitters o f particulate matter (PM). Annual average PM levels in 2003 were more than double the proposed health-based Bangladesh air quality standards, although other pollutants are within the proposed standards. A Special Regulatory Order (SRO 88) introduced by the Ministry o f Environment and Forest in March, 2002, requiring the compulsory installation o f catalytic converters or diesel particulate filters o n al l vehicles, would not be effective, however, in reducing P M emissions. Such measures would cost in excess o f U S $ l O O m i l l i on countrywide, without corresponding environmental or health benefits. A moratorium should be placed o n the implementation o f this SRO, which was issued non-transparently and without adequate consultation, and an independent technical review o f i ts efficacy should be conducted. T o better

21

address the pressing matter o f P M pollution, a time-bound action plan based on consultations with a l l stakeholders should be announced to address emissions from grossly polluting diesel vehicles, which are known to contribute disproportionately to PM pollution in Dhaka.

V THE BANK’S COUNTRY ASSISTANCE STRATEGY

80. The new Country Assistance Strategy (CAS) for FYO6-09, currently under preparation, aims to align i tsel f with the country’s aspirations as la id out in the PRSP do~ument . ’~ The CAS wil l focus on the key issue o f governance as a cross-cutting theme for the two main pillars/objectives o f the strategy: improving the investment climate and empowering the poor. With the objective o f better leveraging i t s programs, the Bank wil l prepare the new CAS joint ly with the ADB, DflD and Japan. The four development partners together deliver between U S $ l - $1.5 b i l l ion in aid to Bangladesh annually, which i s well over 80 percent o f the total development assistance to Bangladesh. The jo int CAS implies a common assessment o f the PRSP, agreement on a common set o f CAS outcomes, and a common understanding o f the strategies needed to deliver these outcomes. The jo int CAS approach, however, maintains individual business plans and projecUAAA pipelines for each institution, and each institution wil l have i t s own documentation, consistent with existing requirements.

Lending Activities

81. The Bank i s currently supporting projects in key sectors such as social and human development, rural development, energy and infrastructure, private sector development, finance, and environment. As o f June 2005, the Bank’s active portfolio included 26 projects, representing US$2.3 b i l l ion in net commitments and US$1.5 b i l l ion in undisbursed funds. During FY04, the Bank approved three IDA credits totaling US$407 mi l l ion and four IDA grants totaling US$119 mi l l ion: this brought new commitments for F Y 0 4 to US$527 mi l l ion and disbursements to US$230 mi l l ion. In FY05, two adjustment credits and one investment credit were approved. The former included the Development Support Credit I1 (US$200 mill ion) and the Programmatic Education Sector Adjustment Credit (US$lOO million). The $300 mi l l ion Health, Nutr i t ion and Population Sector Program I1 credit was developed within a sector-wide approach (SWAP) framework supported by many development partners. Further, the Bank also reallocated US$200 m i l l i on f rom existing IDA credits to support the Government’s rehabilitation and reconstruction efforts after the devastating floods o f last year. Commitments for F Y 0 6 are expected to add up to about US$600 mi l l ion subject to the Board’s approval o f the proposed DSC 111.

82. The Bank Group also continues to be involved in providing technical and advisory assistance to the Government in a number o f areas, including banking, energy, privatization, taxation, tar i f f and trade policy, poverty monitoring and analysis, and financial management. With IDA financing, the Government i s implementing a program to strengthen Bangladesh Bank. The Enterprise Growth and Bank Modernization Project i s supporting restructuring and eventual divestment o f the NCBs. As part o f the Economic Management Technical Assistance Program, a TA project for the NBR will assist in i t s capacity building, focusing on organizational restructuring, human resource management, development o f ICT capacity, and strengthening customs, VAT and income tax administration, and training and research and statistics. In the critical area o f infrastructure the Bank i s helping to prepare a power sector strategy, and i s supporting a Power Sector Development TA which includes a project preparation facility. In

l4 The last CAS was discussed by the Board o n December 12, 2000, and a CAS Progress Report o n June 19, 2003; both endorsed four ma in thrusts for Bank assistance: institutional development and governance strengthening, human development, rural development, and private-sector led growth.

22

addition, the Bank i s providing technical assistance to the Government for improving i t s procurement systems.

Non-Lending Activities

83. T h e Public Expenditure Review (2003) and the Poverty Assessment (2003) - both prepared jo int ly with the Asian Development Bank - proved valuable as inputs into the Government’s I-PRSP. In addition, an Investment Climate Assessment (jointly with the Bangladesh Enterprise Institute), a report on Private Provision of Infrastructure in Bangladesh, the Development Policy Review, and Bangladesh: Review of Public Enterprise Performance and Strategy were completed in FY03. More recently, the Bank completed a review o f trade policies in South Asia, the Bangladesh Development Forum Economic Update, and Promoting the Rural Non-Farm Sector in Bangladesh. The Wor ld Bank study Attaining the Millennium Development Goals in Bangladesh: How Likely and What Will it Take? was launched recently and a dialogue was held with economists, academics and key policy makers.

The Bank has completed a number o f economic and sector reports.

84. On-going work includes the Economics and Governance of Non-Governmental Organizations in Bangladesh - in recognition o f the increasing trend in contracting NGOs for service delivery - which focuses on the implementation o f NGO activities, Government-NGO relations, NGO impact on development outcomes, and their long-term financial sustainability. Policy notes relating to Government compensation and employment policies, senior c iv i l service, transfer o f project personnel to the revenue budget, and tax administration have been completed. The study on Strategy for Growth and Employment, planned for delivery in FY06, will assess the longer-tern growth challenges facing Bangladesh. As part o f the Bank’s regular public expenditure work, a set o f pol icy notes are also being initiated, which will f o rm the basis for the Public Expenditure Review in FY06.

85. The Bank also provides, o n a regular basis, trade-related pol icy advice that i s underpinned by systematic analytical work. A report was also completed last year on trade pol icy regmes in South Asia and an ongoing piece studies the patterns and issues arising f rom trade between Bangladesh and India. The recently-completed Bangladesh Growth and Export Competitiveness Study examined key macro- and microeconomic factors affecting Bangladesh’s competitiveness and provided specific recommendations on priority pol icy and institutional actions. Further, the upcoming Bank study o n the Challenges and Opportunities in a Post-MFA World: Strategic Options for Sustained Export Growth analyzes the key issues facing the Bangladesh RMG sector as it faces a changing wor ld scenario without quotas.

86. The Bank has engaged the Government in an active dialogue in the area o f strengthening accountability and transparency. The Bank and donors who are keen to support the GOB in further strengthening public financial management are in dialogue to agree o n a j o in t GOB-donor integrated P F M improvement plan covering the entire PFM cycle. Analytical work by the Bank in this area includes Report o n Observance of Standards and Codes- Accounting and Auditing, an Institutional and Governance Review, a County Financial Accountability Assessment, a County Procurement Assessment, and Review o f the Institutional Arrangements for Public Expenditure, Financial Management and Procurement, user surveys o n the quality o f service delivery and on- going study on assessment o f Public Sector Accounting and Auditing against international standards. The Bank i s currently preparing a series o f pol icy notes o n aspects o f public administration and governance.

23

PROGRESS ON DSC 111 TRIGGERS AND PRIORITIES FOR THE NEXT PHASE

87. During the negotiations for DSC 11, key areas were identified where i t was agreed that Government would pursue further reforms during FY05, in addition to maintaining progress under reforms supported by DSC I and 11. A number o f indicative triggers for DSC I11 were specified in the DSC I1 Memorandum o f the President, approved by the Board in July 2004. The emphasis was on outcome oriented and monitorable triggers, although three process-related triggers were included to benefit f rom the additional leverage o f the DSC. These included preparation o f a Financial Reporting Act, a power sector financial restructuring plan, and a captive power policy. The status progress against the indicative triggers i s as follows:

i.

ii.

iii.

iv.

V.

Satisfactory implementation of the agreed macroeconomic framework under the PRGF: Done. The IMF’s PRGF remains on broadly on track, and the 3rd PRGF review was completed by the IMF Board on June 29,2005.

Bring Rupali Bank to the Point of Divestment by December 2004: Done. The trigger was met with issuance in M a y 2005 o f Information Memorandum requesting Expressions o f Interest f rom potential strategic investors. The announcement was published in daily newspapers in Bangladesh, Gulf News in Dubai and The Economist. Bangladesh Bank, thereafter, issued a regulation in July 2005 setting out i t s “fit-and-proper” criteria for potential buyers o f NCBs, which will form the basis for the Privatization Commission’s decision on eligible buyers.

Implement agreed strategy for resolution of other NCBs: Done. MOUs are in place with the NCBs covering restrictions on credit growth and lending to single large borrowers, although measures to reduce operational costs, including staffing reductions and branch closures, are yet to be taken. Management teams/ consultants have been appointed to further strengthen the implementation arrangements to achieve desired outcomes.

Present to Parliament by June 2005 Financial Reporting Act, including provision for independent oversight Financial Reporting Council. Ongoing. Consultants have been selected to draft a Financial Reporting Act.

Reduce losses of state-owned enterprises in manufacturing by at least 10 percent: Done. Provisional data for FY05 show that manufacturing SOE losses fel l by 10 percent. B C I C (a chemicals producer) and BJMC (a jute producer) are the two largest loss makers, accounting for over 90 percent o f manufacturing SOE losses. BCIC losses increased by about 14 percent during FY05 while BJMC losses declined by 12 percent and that o f BSFIC (a producer o f sugar and food products) by 58 percent.

Maintain Government arrears to the power sector at no more than 3 months of receivables. Reduce receivables from autonomous bodies and private customers to no more than 6 months’ bills by December 2004 and 3 months by June 2005. Substantivelv met. Latest estimates for June-2005 show arrears to the major power utilities at 4.1 months o f receivable, down f rom 7 months in June 2004. Government ministries’ and private customers’ arrears stood at 3.7 and 3.2 months o f receivables respectively, while semi- autonomous bodies’ were 18 months equivalent, with the main arrears f rom ci ty corporations, municipalities, Dhaka W A S A and jute mills. The Government has reported reaching an agreement with the Ministry o f LGRD that a l l c i ty corporations, municipalities, and Dhaka W A S A would pay o f f their arrears in excess o f 3 months equivalent o f receivables over a period o f one year, in agreed phases. Fail ing this, the

24

vi.

vii.

viii.

ix.

X.

xi.

Government wi l l deduct equivalent amounts at source from the grants allocated to these entities and make concomitant adjustments to the debt servicing liabilities (DSL) o f the utilities. To address the arrears o f the jute mi l ls belonging to BJMC, the Government wil l offer a loan to B J M C to enable them to clear their arrears, and, as in the case o f the Municipalities, the Government wi l l make concomitant adjustments to the D S L payable to itself by these utilities. The Government will provide supporting data on this to the Bank o n a quarterly basis.

Announce timebound plan for power sector Jinancial restructuring. Ongoing. Consultants have been appointed to draft the power sector financial restructuring plan, and the drafting of the plan i s underway.

Announce policy for sale of captive private power to the grid. Ongoing. Consultants have been appointed to draft a pol icy for captive power sales to the grid, and the drafting o f the pol icy i s underway.

Remove all quantitative restrictions, except those on grounds of health, national security, religion, and environmental protection: Done. All protective QRs, except those covered by WTO waivers, have been removed. The number o f QRs, as a whole has been reduced from 60 in FY05 to 15 in the FY06 budget. Significantly, a l l the QRs on textiles were removed in January 2005.

Initiate implementation of modernization of the National Board of Revenue, including strengthening the functions of the Board, especially audit and information technology, through appropriate legislation and other administrative changes: Done. The NBR i s strengthening i t s management team to help implement the modernization strategy recently approved by the Finance Minister. The new management team will include local and international change coordinators, an IT advisor, an audit advisor, and a human resource advisor. The relevant positions were advertised in June 2005. The NBR also plans to appoint shortly a new legal advisor. The related TAPP under the Bank’s Economic Management Technical Assistance grant, which will support the strategy over the next three years, was recently approved by the Government.

Implement first phase of new budget process for FY06 budget, including allocation of resources for programs integrating recurrent and capital spending in call notices medium-term expenditure plans, in selected ministries in line with PRSP priorities: Done. The Finance Divis ion in December 2004 sent out jo in t call notices in preparation for the FY06 Budget, combining revenue and development spending, to the Ministries o f Education, Social welfare, Women and Children Affairs, and Agriculture. These four ministries together accounted for about 12 percent o f the FY06 total revenue and development budgets. The jo in t call notice specified a combined expenditure ceiling for each o f the four ministries for FY06 and probable expenditure ceilings for FY07-08. The ministries prepared both current and capital expenditure plans within the PRSP medium- term macro framework. They also listed their strategic medium-term objectives, based o n the PRSP, and the policies and programs adopted to attain them.

Present to Parliament a procurement law including provision for concession contracting: Substantively met. A draft procurement l a w has been prepared and a Cabinet has approved the draft l aw in principle. The draft l a w has been sent for the L a w Ministry’s review, after which i t will be placed before the Cabinet for i t s f inal approval and as the final step pr ior to presenting it to the Parliament.

25

xii. Implement new personnel management system, including extended merit-based promotions, transfers within clusters, revised compensation system and enhanced training: Done. The Government has improved the criteria for promotion o f Class 1 officials to give greater weight to merit. Consequently, some o f the younger but more capable officers have been promoted, and increasingly more officials have been promoted to Deputy Secretary and higher levels. The Government has decided to group ministr ies in clusters to enable greater staff specialization, and a Government committee i s workmg o n the modalities o f implementing the new system. The recently announced phased compensation increases for c i v i l servants should help narrow partly the gap with private sector counterparts, and new reporting requirements for income tax will make c iv i l servants’ non-official income more transparent. The Government i s considering monetizing at least some in-kind benefits for senior officials. A new public administration training policy was adopted in M a y 2003. During the last three years 390 officials participated in the courses for Deputy Secretaries and Joint Secretaries organized by the BPATC. Participation in these training courses i s taken into account in promotion decisions. Around 100 officials were trained under MATT I training program, supported by DFID, while some 1800 more officials wil l be trained under MATT I1 program over the next 7 years.

xiii. Anti-Corruption Commission fully staffed and operational: Substantively met. The viabil ity and long-term success o f the A C C - the spirit o f this trigger - i s a complex and necessarily a long-term agenda, requiring a series o f credible measures by the Government. The Government on i t s part has taken a number o f actions over the past year toward this objective. After init ial delays in getting the process moving, the Government has taken significant steps to operationalize the A C C and begin i t s staffing process. Three Commissioners, including a chairman, were appointed to the ACC in November 2004, fo l lowing passage o f the independent Anti-Corruption Commission A c t by Parliament in February 2004. The Government has sanctioned creation o f an in i t ia l 536 posts. I t has also agreed with the Commission that a Placement Committee o f 3 persons, including the Secretary o f the Commission, a senior official f rom the Cabinet Div is ion (not below the rank o f Joint Secretary), and a representative o f an independent body wil l review a l l ACC- screened former B A C staff to determine their suitability for placement with the new commission. The Government has agreed with the Commission o n a more rigorous screening process going forward, including adoption o f a three common l is t system, i.e. requiring concurrence o f a l l three Commissioners. The Commission will submit to the Government for i t s approval a reconciled draft organogram, together with i t s draft personnel and operational rules. In the s ta f f s assessment, this set o f actions by the Government serves to meet in substance i t s commitment o n the ACC.

Pr ior i t ies for t h e N e x t Phase o f R e f o r m s

88. The Government will focus o n pr ior i ty measures to strengthen core governance functions, with emphasis on public financial management, procurement, tax administration, trade liberalization, maintaining macroeconomic stability, public administration, and checks and balances on public entities. It will further strengthen sectoral governance in order to improve the investment climate and social service delivery. Given the significant unfinished reform agenda and the need for flexible financing, the GOB has requested continued engagement with a D P L type instrument. Further progress with key structural reforms would open the way for a move to a PRSC in support o f the PRSP after the January 2007 election. The fol lowing Indicative Triggers for the next adjustment operation are proposed.

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Strengthening C o r e Governance

Improving publ ic financial management and procurement systems and institutions

0 Develop and initiate implementation o f an agreed Public Financial Management Improvement Plan (PFMIP), satisfactory to IDA, with measures and timetable to address gaps, including those identified in the recently developed Public Financial Management (PFM) indicators. Among others, actions will include Government proposing to the Parliament Secretariat for approval: (i) steps to improve media access to the P A C proceedings; (ii) establishment o f a technical support unit for PAC. Operationalize and make functional the complaints mechanism for procurement, including the establishment o f independent review panels, meeting the standard stipulated in the procurement regulations. Publish quarterly procurement M I S results on CPTU’s website with performance indicators for key implementing agencies in the infrastructure and power sector (REB, LGED, RHD, and BWDB).

0

Strengthen transparency and accountability in the Public Services

0 Take appropriate steps to strengthen the Anti-Corruption Commission and i t s management.

Improving efficiency and accountability o f the National Board o f Revenue

0 Strengthen the effectiveness and accountability o f the National Board o f Revenue by moving i t toward a more functional organization structure, consistent with the NBR Strategic Development Plan. Toward this, create and approve a new Board and senior management structure, consistent with NBR’s Strategic Development Plan. NBR will have hiring flexibil i ty t o recruit f rom the private sector, if necessary. Initiate the process o f filling each identified position.

Lowering and streamlining trade restrictions to reduce opportunities for corruption and strengthen economic efficiency

0 Deepen trade liberalization by phasing out supplementary duties to reduce average nominal protection by at least 2 percentage points subject to revenue neutrality o f the proposed action, to be confirmed by a proposed jo int study by the Bank and the Government.

Maintaining macroeconomic stability

0 Satisfactory implementation o f the agreed macroeconomic framework under the PRGF.

Strengthening Sectoral Governance

Improving the governance and efficiency o f the financial system

0

0

Develop and agree specific Terms o f Reference for the Managing Directors o f the NCBs, and specify a fixed tenure for them, keeping in view their prospective corporatization. Implement an NCB restructuring action plan, acceptable to IDA and in accordance with the timeline agreed with IDA.

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Improving access, efficiency, and governance o f the energy sector

0

0

0

0

89.

Formulate and adopt a least cost generation development plan for generation investments in the power sector and ensure that all proposed generation investments, extant and in the future, are consistent with this plan. T o complement this plan, also formulate and adopt a Generation Financing Plan which will define the Government’s financing strategy for generation investments including, inter alia, the proportion o f generating capacity and the specific generation investments to be procured under private and public financing and ownership, respectively. All procurement o f generation capacity will be in line with the Public Procurement Regulations and, as applicable, the Private Power Generation Policy and the Private Sector Infrastructure Guidelines. In the event o f any deviation IDA will be informed.

Issue a bid package to pre- qualified private investors for at least one new, base load power plant, consistent with the above referenced regulations and policies.

For the Small Power Plant program (to mitigate load shedding in the interim to bringing supply and demand o f generating capacity into balance) make al l procurement o f power o n the basis of transparent and competitive procedures including the issue o f model security packages (PPA, FSA) and licensing agreements and selection criteria based on technical competence, financial capabilities and tariffs offered by competing bidders, with relative weights consistent with international good practices.

Initiate implementation o f the Power Sector Financial Restructuring Plan (covering specific actions o n asset re-valuation, debt restructuring, pension liabilities, tariffs, arrears).

These key measures will need to be reinforced by vigorous implementation of reforms already begun and also supported by the Government’s wider agenda, as spelt out in its PRSP. Macroeconomic stability and public debt sustainability require that the Government steps up i ts revenue generation efforts, as wel l as curbs BPC’s losses and improves the financial performance o f other energy utilities. The trade agenda needs not only reduced protection levels with special emphasis o n reducing para tariffs but also speedier customs procedures, automation o f duty- drawback, regional cumulation for value-added in exports and enhanced phytosanitary, environmental and labor standards.

90. The Government remains committed to further strengthening the core governance functions. It envisages a time bound jo int GOB-donor integrated public financial management improvement plan which among other things, will cover the gaps indicated in para 39. The Government also aims to support i t s planned improved budget procedures with enhanced accounting, procurement and administrative processes. The new budget preparation procedure consolidating current and capital spending plans by key ministries should improve the effectiveness o f public spending in support o f the PRSP. The new procurement law, which i s due to be presented to the Parliament soon, will need to be accompanied by updated regulations, ensuring compliance with the updated regulations, introduction o f e-procurement, strengthening complaint review mechanism, and strengthening compliance and monitoring. K e y to the effectiveness o f government will be the performance o f the senior c i v i l service, where improved recruitment, promotion procedures, training and deployment will be essential.

91. Sectoral governance would need to be strengthened to improve the investment climate and delivery of essential social services. Continued strengthening o f the financial sector will

28

require not on ly resolving NCBs but also tightening prudential requirements for a l l banks as wel l as enhancing Bangladesh Bank’s capacity and streamlining i t s human resources. T h e energy sector wil l need the Energy Regulatory Commission to play its full role in licensing and tariff-setting. Further adjustments o f tariffs for petroleum products, gas and power will be needed to move them closer to better reflect global prices increases. The Government also needs to adopt a new gas strategy, develop a coal strategy and put these within an overall energy strategy. Public sector involvement in manufacturing activities will need to be further curtailed with continued phasing out o f manufacturing SOEs.

92. Strengthened interventions in health, education and social protection will be essential to achieving the PRSP goals. The Government has shown its commitment to devote a large share o f overall public spending to social programs. I t already has ambitious programs in place for primary and secondary education. It now plans to ensure that poorer districts get an increased share o f resources. I t has also set up a task force to develop a strategy for tertiary education. In health, the Government aims to improve sector management, cut absenteeism, rely on autonomous contracting to deliver more services, work closely with the private sector in tertiary care, and pi lot cash transfers to give poor women access to services. The Government also needs to formulate a comprehensive social protection strategy, begin implementing i t across ministries, and improve the targeting o f the existing schemes. NGOs already play a key role in delivering services, and this could be enhanced with an improved regulatory environment.

93. An ambitious environmental reform agenda has been developed, but it needs to be implemented with a renewed sense of urgency. Particularly, urgency i s warranted o n the Department o f Environment’s Strategic Plan, the action plan to phase-out grossly polluting vehicles, and the Inland Capture Fisheries Strategy. The Government plans to begin implementing i t s national water management plan, including greater access for the poor to fisheries. In agriculture, i t aims to rationalize research institutions to enhance their role in improving productivity. It also aims to promote agribusiness.

VI1 IMPLEMENTATION ARRANGEMENTS

Monitoring and Evaluation

94. Improving the quality and effectiveness of economic and social policies will require more timely and reliable information for policy analysis and assessing outcomes. The PRSP outlines a monitoring framework, which includes monitoring indicators, data sources, and institutional arrangements for monitoring and providing feedback to policymakers. Sources include existing data as wel l as planned annual surveys for tracking intermediate indicators related to access, usage, and satisfaction with public services. The ongoing Household and Income Expenditure Survey will provide an important basis for updated poverty monitoring and analysis. GOB i s actively considering adopting the Public Financial Management Performance Indicators developed by the Public Expenditure and Financial Accountability (PEFA) group. This will also provide a useful tool to monitor performance in public financial management.

95. Successful monitoring depends crit ically on institutional arrangements and their capacity. A National Poverty Focal Point has been created in the General Economics Div is ion (GED) o f the Planning Commission to monitor poverty and track progress in implementing the national strategy for economic growth and poverty reduction. The NPFP i s expected to grow and function as an institutionally effective and technically competent Poverty Monitor ing Unit with strong inter- ministerial linkages and interactions with various stakeholders outside the Government. M o v i n g ahead, the poverty diagnostics, drawing on quantitative and qualitative information, should be used

29

to set medium and long-term outcome-oriented targets. These should be l inked to macroeconomic, structural and social policies. The Poverty Monitoring Unit should also consult c iv i l society regularly on PRSP progress. The Bangladesh Bureau o f Statistics (BBS) and the Ministry o f Planning plan to develop a National Databank to provide an integrated database accessible to al l government departments and BBS.

96. These efforts to strengthen monitoring and evaluation systems provide an excellent opportunity to evaluate the various reforms supported under DSC-111. If implemented successfully, they should further improve the quality o f information and analysis for decision-making and inculcate a stronger results orientation within the Government.

Credit Administration, Disbursement and Auditing

97. Borrower, Credit Amount, Terms and Tranching: The borrower i s the People’s Republic o f Bangladesh. A single tranche Credit o f about SDR 138.1 mi l l ion (US$200 mi l l i on equivalent) would be made available upon credit effectiveness, anticipated for December 2005. The closing date o f the Credit i s June 30, 2006.

98. Disbursement: Proceeds o f the Credit wil l be disbursed to a specific deposit account o f the Ministry o f Finance established at Bangladesh Bank for this purpose; the deposit account i s part o f the country’s official foreign exchange reserves. An amount equivalent to the Credit proceeds will then be credited to an account o f the Government to finance budgeted expenditures. Transactions and balances o f the Government account will be fully incorporated into the Government’s accounting records and financial statements. Disbursement will not be linked to any specific purchases and no procurement requirements will be needed. If any portion o f the Credit proceeds i s used for ineligible purposes as defined by the Development Credit Agreement, the International Development Association (IDA) will require the Borrower either to return that amount to the deposit account or refund the amount directly to IDA.

99. Fiduciani Risk and Audit: The IMF Safeguard Assessment conducted in September 2002 concluded that financial management in the Bangladesh Bank was weak. T o enhance the safeguards framework, the Bangladesh Bank has started strengthening i t s financial management with IMF support and the IDA-financed Central Bank Strengthening Project. A time table has been set for the adoption by the Bangladesh Bank o f International Accounting Standards as i t s accounting framework. Starting f rom FY03, the Bangladesh Bank has i t s financial statements audited by international affiliated audit firm in full compliance with international standards on auditing. The entries of the Deposit account will, upon request f rom the Association, be audited by independent auditors acceptable to IDA under terms o f reference in accordance with international standards on auditing. The various diagnostics conducted by the Bank and other donors also acknowledge that fiduciary risk in public spending in Bangladesh i s high. GOB has taken several steps to address the weaknesses. As outlined in para 30, significant progress has been made over the last f ive years to strengthen financial management and reduce fiduciary risks. The GOB has continued i t s P F M reform plans, as evidenced by the ongoing DFID funded Financial Management reform Program (FMRP) which started in 2003, and implementation o f other aspects o f the reform program described in this Program Document. As a part o f the review o f Institutional Arrangements for public expenditure, financial management and procurement, Bangladesh’s P F M system was rated against internationally accepted indicators (PFM indicators). This provides a usefu l framework to track progress towards improved P F M performance.

30

Environmental Issues

100. Many of the reforms contained in this policy agenda may be expected to deliver environmental benefits through the more efficient use of resources. Policies to address issues of environmental l iabi l i ty for past contamination and continuing pollution by SOEs undergoing privatization have been agreed with the Government, although greater attention to their application i s warranted. While this development policy lending operation does not have any direct environmental implications, Bangladesh has serious environmental issues that pose substantial social and economic concerns, with the economic benefit o f reducing exposure to environmental health r isks alone estimated to be about 3.5% o f national income. Drawing o n the draft Country Environmental Analysis discussed with the Government in July, 2005, a number of the most critical issues regarding environmental health, natural resource productivity, and urban and industrial pol lut ion were presented in paragraphs 73-77. These measures to strengthen environmental management, and in particular to build the capacity o f the Department of Environment through implementation o f i t s Strategic Plan, wil l form a critical element of the Bank’s dialogue and assistance strategy in Bangladesh.

VI11 BENEFITS AND R I S K S

101. Benefits. The Government’s development record in the period covered by the DSCs I and I1 has been fair ly impressive. Per capita growth has been at historically high levels and sustained progress in human development has been achieved. As indicated by past experience in Bangladesh and elsewhere, these have positive implications for poverty reduction. Over the longer term, progress with institutional reforms supported by the credits would lead to more effective government which, in turn, would improve public service delivery, reduce corruption and improve the investment climate for private investment. These are crit ical for achieving sustained higher growth and lower poverty in Bangladesh.

102. Political risks: With the next round o f general elections scheduled for January 2007, the polit ical landscape for deeper structural reforms i s becoming increasingly diff icult and, with it, the window o f opportunity to keep the reform momentum going risks s lowly shutting. Already, increased instance o f polit ical violence and growing polit ical heat f rom the opposition, especially in the form o f hurtuls, i s beginning to constrain Government’s reform efforts. A related risk i s o f growing resistance from vested interests, as campaign contributions gain more currency. The Government, however, avows to continue with i t s reform agenda and i t s efforts to form polit ical and social consensus around the PRSP i s commendable. The Bank, o n i t s part, remains committed to supporting the Government’s reforms efforts. T o mitigate the impact o f polit ical risks, the timing, scale, and scope of future programmatic credits wou ld be dictated by the commitment to Government’s reforms and, as in the case o f the previous DSCs, disbursements would be made ex- poste - upon implementation of agreed reforms. Only those reforms that are strongly owned by the Government and are championed by a counterpart f rom within will be considered for support, IDA will also continue working closely with other donors to generate broader polit ical support for reforms.

103. Governance problems could overwhelm, as corruption remains a major concern, the law and order situation i s weak, and the bureaucracy has limited capacity. As indicated by the experience with reforms in this area supported under DSCs, institutional improvements needed to mitigate this are necessarily slow-moving and wil l have to be inherently indigenous. The Government, supported by the donor community including under the DSCs, has already made impressive inroads on several fronts to address this. In the area o f economic governance, a number of recent sectoral reforms in banking, SOEs, public administration, and the trade system should

3 1

narrow the scope for corruption, as well as improving the efficiency o f the economy and the quality o f service delivery. In addition, reforms in procurement, financial management, and anti- corruption wil l have long-term benefits in lowering corruption once these are fully effective. However, these can only be viewed as incremental steps in what i s necessarily a long-term and complex process o f institutional building. Governance related reforms will continue to be at the core o f future adjustment operations as well, although realism in setting goals would be warranted. Given the severe capacity constraints in the country, the Bank and the rest o f the donor community will need to stay engaged and provide support over a long period.

104. Budgetary and fiduciary risks: Fungibility o f funds implies that budgetary resources may be diverted or misused, which poses a particular risk to operations, such as DSC 111. The Government, however, has a good record o f allocating public spending to key development sectors, including social spending and infrastructure. To further mitigate the risk, auditing arrangements and financial management within government ministries are being strengthened with Dff D's assistance. The new procurement regulations should reduce the scope for misuse o f budgetary funds in contracting. External oversight by the Comptroller and Auditor General's office i s also being strengthened. Further, tracking studies of major spending on health and education should also curb leakages. These measures should mitigate budgetary risks, but their effectiveness wil l depend crucially on the swift resolution o f serious financial irregularities, identified by the C&AG, and o n readiness by the Finance Ministry to impose financial sanctions o n errant agencies and programs. T o enhance safeguard framework, Bangladesh Bank has started strengthening i t s financial management with the support f rom IMF and the IDA-financed Central Bank Strengthening Project. A timetable has been set for the adoption by Bangladesh Bank o f International Accounting Standards as i t s accounting framework.

105. Implementation capacity risks: Implementation capacity i s a serious bottleneck. This partly reflects the overly centralized nature o f public administration. Decentralization o f responsibilities to local'governments could help, but unfortunately, there i s n o polit ical ownership. At the central level, capacity i s constrained by the weakness o f c iv i l service. Ongoing reforms in public administration to strengthen c iv i l service incentives, accountability and training wil l help. Bank and other donors are also providing technical assistance to strengthen capacities in a number of core areas of economic management including banking, taxation, the budgetary process, and the energy sector. Technical work and broad engagement with a range o f interested parties o n the decentralization agenda i s also planned to build a stronger constituency on this key reform.

106. External risk: Bangladesh faces two major external risks. One arises f rom the removal o f the global quota system for garment exports earlier this year. This has led to unprecedented competition for Bangladesh's garment exports. However, as discussed in para 48 the net impact o f this change i s yet to be fe l t in Bangladesh, although the situation i s s t i l l unfolding. T o mitigate the medium and long-term impact o f this, authorities need to promote export diversification, further reduce anti-export bias, and improve the investment climate. Continued engagement with IMF and the Wor ld Bank o n macroeconomic and structural reforms wi l l help achieve these objectives and reduce external vulnerability. The more imminent external risk emanates f rom the continued increase in imported petroleum prices. To mitigate this, IDA will continue to press for implementation o f the agreed pricing framework and supportive monetary and fiscal policies to contain any resulting inflationary pressures.

32

Annex Table

Interest General Public Services Defenseandpubl icorderand Safety Education Health Social Security and Welfare AgricultureiRural DevelopmentIHousing Fuel and Energy Transport and Communication Total Expenditure

Output and Prices Real GDP Growth C P I

External Outlook Exports (bi l l ion $)

Annual % change Imports (bi l l ion $)

Annual % change Current account balance (% o f

GDP) Gross of f ic ia l reserves (bi l l ion $1

In months o f GNFS imports Public Finance

Total Revenue Total Expenditures Overall balance (excluding

Domestic financing Public debt

Money and Credit Domestic credit Private sector Broad money (M2)

grants)

(r) (b) 1.2 1.3 1.5 1.6 1.7 1.5 1.8 1.8 1.7 1.5 1.4 1.5 1.7 1.4 1.7 1.5 1.6 2.0 2.0 2.0 2.1 2.0 1.9 1.8 1.9 1.9 1.8

2.1 2.2 2.2 2.3 2.2 2.2 2.1 1.9 2.3 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 1.0 0.8 1.0 1.0 0.7 0.6 0.6 0.6 0.7 0.7 2.2 2.5 2.7 2.8 2.4 2.3 2.4 2.8 2.7

0.9 0.9 1.1 1.0 0.9 1.0 1.2 1.2 1.0 1.4 1.5 1.5 1.8 1.9 1.9 1.7 1.8 1.6

13.4 14.0 15.0 15.3 14.4 14.5 14.8 15.1 15.4

; Summary Macroeconomic Indicators Actual Prel. Projections

FY02 FY03 FY04 FY05 FY06 FY07 :

5.2 2.5

6.0 4.6 7.9 2.5 -0.8

1.5

1.8

9.2 14.1 -5.0

2.8 50.5

15.3

Ann ua 1 percentage changes 5.3 6.3 5.4 6.5 4.4 5.8 6.5 6.0

6.5 7.5 8.7 9.9 9.5 15.8 13.9 14.0 8.7 9.8 11.9 13.2 13.0 13.0 20.6 11.0 0.1 0.3 -0.9 -0.4

2.5 2.7 3.0 3.7

2.9 2.8 2.6 2.5

10.3 10.1 10.3 11.0 13.7 13.3 13.8 15.5

Percent of GDP

-3.4 -3.2 -3.5 -4.5

1.3 2.1 1.9 2.0 51.0 48.3 47.9 48.4

6.8 5.0

11.2 13.0 14.7 10.0 -0.3

4.4

2.6

11.5 15.9 -4.4

1.9 47.9

End ofyear; percentage change 8.0 11.9 17.3 13.2

FY08

7.0 4.5

12.6 12.0 16.2 10.1 0.2

4.7

2.8

12.0 16.4 -4.4

1.8 47.1

13.6 12.6 12.0 17.0 14.0 ' 13.0 12.5 16.1 15.6 13.8 16.9 13.0 13.0 12.0

Source: GOB estimates and projections

Annex Table 2: Total Expenditure by FunctiodMinistry

(percent o f GDP) I I FY98 FY99 FYOO FYOl FY02 FY03 FY04 FY05 FY06

33

3

e

t- m

z . r .I, I. ....... ' . . . I

Y

0 d

3

d

-c

M E E PI

c', 7

4

M c E' T

I

W d

Annex 2

32.3 25.6 21.8 20.4 21.2 24.3 26.3 26.5 14.3 15.3 15.8 15.9 46.6 50.0 52.0 53.1

Bangladesh at a Glance

‘’ 10

POVERTY and SOCIAL Bangladesh

89.6 81.6 77.1 77.7 4.2 4.9 5.3 5.4

2004 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNi (Atlas method, US$ billions)

Average annual growth, 1998-04

Population I%) Labor force (%J

Most recent estimate (latest year available, 1998-04)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth Wears) Infant mortality (per 1,000 live births) Chiid malnutrition (% of children under 5) Access to an improved water source (% of population) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1984

GDP (US$ billions) 19.7 Gross domestic investment/GDP 15.9

3.3 Gross domestic savingslGDP 6.2 Gross national savings/GDP 16.2

Current account balancelGDP -1.1 Interest payments/GDP 0.4 Total debt/GDP 28.7 Total debt service/exports 17.7 Present value of debt/GDP Present value of debWexports

Exports of goods and services/GDP

1984-94 1994-04 (average annual growth) GDP 3.9 5.2 GDP per capita 1.6 3.3 Exports of goods and services 8.7 9.9

I 99 00 01 02 03 04

----GO1 a G D P

140.5 430 60.9

1.7 2.2

50 27 62 46 52 75 59 96 94 98

1994

33.8 18.4 9.0

13.5 18.8

-0.3 0.5

46.3 12.9

2003

5.3 3.4 6.9

South Asia

1,448 590 860

1.7 2.1

28 63 66 48 84 41 97

105 92

2003

51.9 23.4 14.2 17.6 24.5

0.1 0.3

36.2 6.4

24.7 122.0

2004

5.5 3.7 6.5

Low- income

2,338 51 0

1,184

1 .E 2.1

30 58 79 44 75 39 94

101 88

2004

56.8 23.4 13.9 16.9 24.3

0.3 0.3

35.2 8.0

2004-08

5.9 4.1 3.0

Development diamond*

Life

T

1

GNI Gross per primary

enrollment capita

I

Access to improved water source

- Bangladesh Low-income w o w

Economic ratios’

Trade

T Domestic savings - Investment

Indebtedness

- Bangladesh Low-income arom

STRUCTURE of the ECONOMY

I% of GDPJ Agricuiture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic Investment Imports of goods and services

Manufacturing

I 2003 2004 /Growth of Investment and GDP (%) 1.-

1984-94 1994-04 2003 2004 [Growth of exports and imports (“h) 1 2.7 2o 2.2 3.7 3.1

6.0 6.8 7.3 7.7 10 5.9 6.0 6.7 7.4

5.7 3.7 5.1 5.4

3.1 3.1 4.0 4.6

O

-10

3.7 6.3 13.2 6.1 9.0 7.9 3.9 6.0 7.4

Note: 2004 data are preliminary estimates.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

47

Annex 2

PRICES and GOVERNMENT FINANCE

Domestic wices (% change) Consumer prices implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall sumluddeficit

TRADE

(US$ millions) Total exports (fob)

Raw iute Leather and leather products Manufactures

Total imports (cifl Food Fuel and enemy Capital goods

Export price index (1995=100) Import price index (1995=100J Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and sewices Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

iBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Podfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1984

14.0

6.2 1.1

-7.3

1984

823 117 85

389 2,353

485 355 616

28 52 53

1984

1,033 2,543

-1,510

-64 1.361

-213

568 -355

24.9

1984

5,654 50

1,677

286 3

16

595 489

-1 0

339 249

3 246

16 230

1994

3.3 3.8

9.3 2.5

-4.5

1994

2,524 57

192 2,026 4,191

151 168

1,299

96 105 91

1994

3,057 4,693

-1.636

-31 1.578

-89

881 -792

2,746 40.1

1994

15,622 58

5,378

556 7

71

379 705

16 53

597 405 36

389 42

327

2003

3 5 4.5

10.3 2.2

-3.4

2003

6,549 82

191 6,086 8,707

581 950

3,439

130 162 80

2003

7,379 10,285 -2,906

-458 3,440

76

811 -887

2,471 57.9

2003

18,778 7

8,062

672 7

180

428 461 -18 376

2

554 519 130 388

56 332

2004

4.3 5.5

10.1 2.4

-3.2

2004

6,959

6,529 9,871

1,077 3,865

133 172 77

2004

8,445 11,638 -3,193

-374 3,743

176

59 -235

2,714 58.8

2004

20,019 0

8,895

945 8

208

319 557 -16 385

6

827 615 148 467 68

399

99 00 01 02 03 04

-GDP deflator *CPI I Export and import levels (US$ mill.)

l2 500 T 10 000

7 500

5 000

2 500

0

I 98 99 00 01 02 03 04

Exports rn Imports

Current account balance to GDP (%)

' T

1 Composition of 2004 debt (us$ mill.)

C 231

A - IBRD B - IDA D - Other multilateral F - Private C-IMF G - Short-term

E - Bilateral

Development Economics 8/1/05

48

Annex 3

1.5

-12.7 -7.2 -0.3 -4.1

STATISTICAL ANNEXES

Government of Bangladesh Fiscal Trends

1.7

-13.5 -7.5 0.0 -5.4

(Billion Takas)

rota1 Revenue T U Non-Tax

Fotal Expenditure Current expenditure Food Account Surplus Annual Development Program Non-ADP & Net Lending Structural Adjustment Expenditures

Residual

Dverall budget deficit *

Vet foreign financing

Vet domestic financing Banking system Other domestic

Privitazation Receipts

rota1 Debt (Outstanding & Disbursed)

GDP at current market prices

rota1 Revenue Tax Non-Tax

rota1 Expenditure Current expenditure Food Account Surplus Annual Development Program Non-ADP &Net Lending Structural Adjustment Expenditures

Residual

Overall budget deficit

Vet foreign financing

Net domestic financing Banking system Other domestic

Privitazation Receipts

0

1998-99 11999-2000 I 2000-01 I 2001-02 I 2002-03 I 2003-04

185.0 153.0 32.0

-280.0 -158.0

-7.0 -90.0 -1.0 I..

-24.0

-95.0

56.0

39.0 21 .o 18.0

0.0

1004.0

2197.0 -

198.0 158.0 40.0

-320.0 -178.0

0.0 -127.0

-9.0 ...

-6.0

-122.0

57.0

65.0 32.0 33.0

0.0

1135.7

2371.0 -

229.0 193.0 36.0

-358.0 -194.0 -2.0

-166.0 -12.0

...

16.0

-129.0

50.0

79.0 37.0 43.0

0.0

1287.8

2535.0 -

0.0 ...

-1.1

-4.3

2.5

1.8 1 .o 0.8

276.8 210.3 66.5

-403.6 -218.2

-2.1 -152.3 -17.2 0.0

-13.8

-126.8

58.1

68.1 21.7 46.4

0.6

1448.0

2732.0 - (As percent of GDP)

-0.4 ...

-0.3

-5.1

2.4

2.7 1.3 1.4

4:: I :.:

9.0 7.6 1.4

-14.1 -7.7 -0.1 -6.5 -0.5 ...

0.6

-5.1

2.0

3.2 1.5 1.7

0.0

50.8 Total Debt (Outstanding & Disbursed)

10.1 7.1 2.4

-14.8 -8.0 -0.1 -5.6 -0.6 . . .

-0.5

-4.6

2.1

2.5 0.8 1.7

0.0

53.0

309.7 248.2 61.5

-411.5 -244.5

2.7

-6.6 -163.0

-12.3

12.2

-101.8

64.2

37.5 -10.7 48.2

0.0

1,532.6

3,005.0 -

337.4 272.7 64.7

-443.8 -258.6

-3.5 -167.9 -16.0 -7.8

10.0

-106.4

37.4

69.0 23.0 46.0

0.0

1,615.6

3,330.0 -

2.0

-13.7 -8.1 0.1 -5.4 -0.2 ...

0.4

-3.4

2.1

1.2 -0.4 1.6

1.9

-13.3 -7.8 -0.1 -5.0 -0.5 ...

0.3

-3.2

1.1

2.1 0.7 1.4

- 2004-05 3stimate

380.5 305.4 75.1

-508.3 -308.9

-1.6 -182.7 -19.6 -1.9

6.4

-127.8

56.3

71.6 42.4 29.2

0.0

1,787.1

3,685.0 - -

10.3 8.3 2.0

-13.8 -8.4 0.0 -5.0 -0.5 . . .

0.2

-3.5

1.5

1.9 1.2 0.8

0.0

47.9 -

2005-06 I 2006-07 Proiections

457.2 373.1 84.1

-633.5 -351.4

-3.5 -238.9 -32.2 -7.5

0.0

-176.3

93.0

83.3 36.3 47.0

0.0

2,018.8

4,171.0 - 11.0 8.9 2.0

-15.2 -8.4 -0.1 -5.7 -0.8 ...

0.0

-4.2

2.2

2.0 0.9 1.1

0.0

48.4 -

517.5 424.9 92.6

-707.3 -397.9

-3.5 -263.3 -32.6 -10.0

0.0

-189.8

101.6

88.2 37.0 51.2

0.0

2,221.1

4,637.0 - -

11.2 9.2 2.0

-15.3 -8.6 -0.1 -5.7 -0.7 . . .

0.0

-4.1

2.2

1.9 0.8 1.1

0.0

47.9 -

49

Annex 3

Bangladesh - K e y E c o n o m i c I n d i c a t o r s

I n d i c a t o r

S a t i o n a l A c c o u n t s (as % of GDP)

Gross Domest ic Producta A g r i c u l m r e Indust ry Services

Tota l Consumpt ion Gross Domest ic F i x e d Investment

Government Investment Private Investment

~ x p o r t (GNFS)~ Impor ts (GNFS)

Gross Domest ic Savings

Gross Nat ional Savings

Memorandum Ztenw Gross Domest ic Product (US$ m i l l i o n at current prices) GDP p e r capita (US$, At las Method)

R e a l Annual G r o w t h Rates (%) GDP at constant market prices Gross Nat ional Income at market pr ice

B a l a n c e of P a y m e n t s (US$ mil l ions)

Expor ts (GNFS) MerchandrseJo. b.

Impor ts (GNFS) Merchandise c. i . j

Resource Balance N e t Current Transfers Current A c c o u n t Balance N e t Private Fore ign D i r e c t Investment L o n g T e r m Loans

Of f ic ia l Private

Other Capital'

Change in Reserves

Memorandum Items: Resource Balance ( Y o of G D P ) Real A n n u a l G r o w t h Rates

Merchandise Expor ts (f.0.b.)

Merchandise Impor ts ( c i f . ) Manufactures

I n d i c a t o r

P u b l i c F i n a n c e (as % of GDP at mkt prices) T o t a l Revenues Current Expenditure Overa l l Budget Deficit Capital Expenditure N e t Fore ign F inancing

8.4 -7.5 -5.1 6.5 2.4

31.5 18.6 10.5 13.7

M o n e t a r y I n d i c a t o r s M 2 / G D P G r o w t h o f M2 ( Y o ) Private Sector Credit G r o w t h Tota l Domestic Credit Growthe

Pr ices I n d i c e s (FY96 = 100) Merchandise Expor t Price Index Merchandise I m p o r t Price Index Merchandise Terms o f Trade Index

N o m i n a l Exchange Rate ( U S S L C U ) d

Consumer Price Index ("4 change) G D P Def la tor (% change)

9.0 -7.7 -5.1 6.5 2.0

34.4 16.6 16.3 17.7

1998 =

100.0 24.5 24.8 50.7

82.6 21.7 6.4 15.3

13.3 18.3

17.4

21.8

44,096

350.7

5.2 5.24

5,810 5,103

8,049 6,772

-2,239 1,876 -463 249 560 607 -47 -395

151

-5.1

15.3 19.7 -5.4

1998

9.3 -7.1 -4.0 5.6 2.5

27.9 10.4 12.6 13.3

110.6 114.6 101.7

45.4

7.0 5.3

117.5 126.6 92.8

1999

100.0 25.3 24.3 50.4

82.3 22.2 6.7 15.5

13.2 18.7

17.7

22.3

45,697

354.1

4.9 5.06

5,990 5,283

8,527 7,217

-2,537 2,195 -477 198 787 828 -4 1

-965

-278

-5.6

3.5 5.0 6.6

1999

8.4 -7.2 -4.3 5.6 2.5

28.7 12.8 13.8 13.1

117.5 125.5 93.6

48.1

8.9 4.7

120.3 136.2 88.4

2000 - 100.0 24.6 24.4 51.0

82.1 23.0 7.4 15.6

14.0 19.2

17.9

23.1

47,101

367.3

5.9 6.19

6,550 5,701

9,060 7,566

-2,510 2,394 -337 194 698 571 127

-640

98

-5.3

7.9 8.0 4.8

2001 =

100.0 24.1 25.9 50.0

82.0 23.1 7.2 15.8

15.3 21.5

18.0

22.4

46,998

371.1

5.3 5.08

7,178 6,419

10,103 8,430

-2,925 2,171 -1,018

174 729 742 -13

-242

-384

-6.2

12.6 13.2 11.4

2002

100.0 22.7 26.4 50.9

81.8 23.2 6.4 16.8

14.4 19.0

18.2

23.4

47,303

361.0

4.4 5.5

6,793 5,929

9,061 7,697

-2,268 2,826 237 65

92 1 963 -42 -514

-329

-4.8

-7.6 5.5 -8.7

2002

10.1 -8.0 -4.6 6.2 2.1

36.1 13.1 13.9 13.2

123.2 146.4 84.1

57.4

2.8 2.7

2003

100.0 21.8 26.3 52.0

81.4 23.4 6.2 17.2

14.2 20.0

18.6

24.9

5 1,744

389.0

5.3 6.2

7,379 6,492

10,285 8,707

-2,906 3,440

76 376 614 634 -20

-482

-811

-5.6

9.5 11.8 13.1

2003 - 10.3 -8.1 -3.4 5.6 2.1

37.9 15.6 12.6 9.5

126.2 157.8 80.0

57.9

4.4 4.4

2004 ____

100.0 21.0 26.6 52.4

80.5 24.0 6.2 17.8

15.5 20.8

19.5

25.4

56,842

418.0

6.3 6.0

8,445 7,521

11,638 9,840

-3,193 3,743 176 385 201 242 -4 1 -433

243

-5.6

15.9 12.4 13.0

2004

10.1 -7.8 -3.2 5.5 1.1

38.8 13.8 14.2 20.7

135.2 164.2 82.4

58.9

5.8 4.2

E s t i m a t e 2005 - 100.0 20.0 27.3 52.7

79.8 24.4 5.9 18.5

15.4 22.6

20.2

26.5

60,706

445.0

5.4 5.8

9,750 8,573

13,917 11,870

-4,167 4,245 -562 540 705 75 1 -46 -289

-5

-6.9

14.0 13.2 20.6

E s t i m a t e 200s

10.3 -8.4 -4.4 6.2 2.4

41.1 16.9 16.8 17.3

137.9 167.6 82.3

60.2

6.5 5.0

50

Annex 3

Total population end o f the year (millions)

Urban population (% ofpopulation)

Poverty (Lower poverty line) (% ofpopulation) National Headcount Index

Urban Headcount Index

Growth rate (% annual average for period)

Total fertility rate (births per woman)

113.3 122.1 128.1 133.4 135.2 1,425 2,312 2.1 1.8 1.4 1.4 1.3 1.8 1.9 18.0 19.0 25.0 27.0 28.0 30.0 4.2 3.4 3.1 2.9 3.1 3.7

42.7 34.4 33.7 . . . . . . ... 23.3 13.7 19.1 . . . ... ...

a/ Some data correspond to 2000-01 and 2001-02 b/ T h e CPI has been rebased using FY96 weights c/ The immunization rates in 2003104 are for children 12-23 months old.

Total Male Female

Mortality Infant (per thousand live births) Under 5 (per thousand live births)

Male (per 1000population) Female (per IOOO population)

Maternal (per I O O O live births)

Adult (15-69)

Births attended by skilled health staff (%)

51

56.3 58.9 62 62 63 59 55 57 61 ... 62 58 56 59 62 . . . 63 60

88 71 ... 67 65 14 17 ... 112 . . . 85 88 99 116

... ... 278 262 . . . ...

... ... 272 252 ... ... 4.1 4.4 ... 3 3 . . . ... 1.0 ... 14 12 13 ... ...

Annex 3

Bangladesh: K e y Exposure Indicators (in U S $ mi l l ion unless otherwise stated)

Actual Estimate Projection 2001 2002 2003 2004 2005 2006 2007

Total debt outstanding and disbursed (TDO)

N e t disbursements

Total debt service (TDS)a

Debt and debt service indicators (%>

TDOIXGS~ TDO/GDP TDS/XGS Concessional/TDO

IBRD exposure indicators (%)

IBRD D S P u b l i c D S Preferred creditor DSIPublic

IBRD D S i X G S IBRD T D O ~ (US$mill) Share o f IBRD port fo l io IDA T D O ~ (VSSmi11)

DSc

I F C Loans Equity and quasi-equitye

MIGA

15,255

557

676

166.6 32.5 7.4 93.4

1 .o 51.9

0.1 17 0.0

6,439

91 13

17,061

217

727

182.6 35.9 7.8 92.8

0.9

55.2

0.1 13 0.0

7,063

88 13

18,778

337

672

178.8 36.2 6.4 93.2

1.1

63.9

0.1 7

0.0 8,062

94 13

19,32 1

543

958

162.6 34.0 8.1 ...

0.8

39.5

0.1 0

0.0 8,208

116 12

20,364

1,010

1,018

160.9 33.5 8.0 ...

0.0

41.7

0.0 0

0.0 8,805

98 12

21,379

1,015

1,039

161.1 34.0 7.8 ...

0.0

45.0

0.0 0.0 0.0

9,480

...

...

22,354

975

1,107

158.9 33.3 7.9 ...

0.0

48.6

0.0 0.0 0.0

10,099

...

...

a/ Includes public and publicly-guaranteed debt, private non-guaranteed, use o f IMF credits and net short-term capiti b / "XGS" denotes exports of goods and services, including workers' remittances c/ Preferred creditors are defined as IBRD, IDA, the regional multi lateral development banks, the IMF, and the Bank for International Settlements d/ Includes present value o f guarantees e l Includes equity and quasi-equity types o f both loan and equity instruments

52

Annex 3

Crude Death R

a/ Some data are for 1999 b/ Based on the progress rate o f 1990-02 c/ The poverty headcount rate refers to the upper poverty l ine

53

Annex 4

Type-

BANGLADESH: FUND RELATIONS (As o f August 3 1,2005)

Approval Expiration Amount approved Amount drawn Date Date (SDR mill ion) (SDR mill ion)

I. Membership Status: Joined August 17, 1972; accepted the obligations under Article VIII, Sections 2,3, and 4 on April 11, 1994.

Principal Chargedinterest

11. General Resources Account: Quota Fund holding o f currency Reserve position in Fund

0.00 0.00 0.00 4.95 14.85 0.85 2.35 2.35 2.35 2.30

111. SDR Department: N e t cumulative allocation Holdings

SDR mi l l ion Percent Ouota 533.30 100.00 533.10 99.96

0.21 0.04

SDR mil l ion Percent Allocation 47.12 100.00

0.10 0.22

IV. Outstanding Purchases and Loans: SDR mi l l ion Percent Ouota PRGF arrangements 215.78 40.46

V. Financial Arrangements:

VI. Projected Payments to Fund (SDR mill ion; based on existing use o f resources and present holdings o f SDRs):

I I 2005 I 2006 I 2007 I 2008 I 2009 1

I Total I 0.60 I 2.35 I 2.35 I 7.30 1 14.15 1

VII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Bangladesh Bank i s subject to a safeguards assessment with respect to an augmentation o f access under the PRGF Arrangement approved on July 28, 2004. The assessment was completed on January 24, 2005 and concluded that safeguards in place at the BB require further improvement. Weaknesses were identified in the legal, financial reporting, internal audit and internal control areas, and the safeguards assessment recommended measures to address them.

VIII. Exchange Arrangement

Exchange regime. The exchange regime i s characterized as a managed float with n o preannounced path for the exchange rate. Until M a y 31, 2003, the taka was fixed to the U.S. dollar, but was periodically adjusted. I t was devalued on three occasions during 2000-02, when the trading band for BB’s transactions was correspondingly widened or raised. From January 2002 until M a y 30, 2003, the official band for the taka remained unchanged at Tk 57.4-58.4 per U.S. dollar. Authorized dealer (AD) banks set their own buying and

54

Annex 4

selling rates for the U.S. dollar and other currencies generally within the band until October 2002. From November 2002, however, AD banks have set rates outside the band. Effective M a y 31, 2003, BB n o longer announced a trading band for i t s foreign exchange transactions.

Restrictions on advance payments for imports were removed effective December 2004. At the last Article IV consultation (June 2005), the Executive Board approved the maintenance o f restrictions on the convertibility and transferability o f proceeds o f current international transactions in nonresident taka accounts. T h i s restriction i s expected to be removed by end-June 2006.

IX. Article I V Consultation

The next Article N consultation will be held subject to the provisions o f the decision on consultation cycles approved on July 15, 2002. The last A r t i c l e I V consultation was held in March-April 2005, and was concluded on June 7,2005 (IMF Country Report No . 05/85).

X. Technical Assistance During 2003-05

2003

January and May:

March-Sept.:

May:

August:

August-Sept.:

November:

2004

January-February :

February-May :

February-Oc t :

MFD missions advised on preparations for moving to a flexible exchange rate regime.

MFD resident adviser assisted BB with liquidity forecasting and monetary and exchange operations.

MFD mission assisted BB with nationalized commercial bank (NCB) reforms; a peripatetic advisor assisted BB with producing i t s FY03 accounts in accordance with I A S .

MFD mission provided recommendations for reducing interest rates.

FAD mission provided recommendations o n tax administration.

MFD mission provided recommendations to prepare resolution strategies for the NCBs and on the functioning o f treasury bill markets.

LEG/MFD mission on revising Bangladesh’s foreign exchange regulations.

S T A mission provided recommendations to improve monetary and financial statistics.

STA mission provided recommendations in the area o f Government Finance Statistics.

An MFD expert assisted the Fund mission in monitoring and expanding memoranda o f understanding for the nationalized commercial banks.

A peripatetic advisor assisted BB with improving accounting standards in accordance with U S .

55

Annex 4

March-Apri l :

April-Oct:

2005

February-March:

March:

M a y :

February-Sept:

March-Sept:

S T A mission provided recommendations to improve balance o f payment statistics, part icularly in the areas o f foreign direct investment, private sector external debt, and related income items.

An MFD expert provided periodic assistance in the area o f foreign exchange operations.

S T A mission conducted the data ROSC.

A peripatetic advisor assisted BB with improving accounting standards in accordance with I A S .

An MFD expert provided periodic assistance in the area o f foreign exchange operations.

An MFD expert provided assistance in the area o f bank restructuring.

An MFD expert provided assistance in the area o f bond market development.

XI. Resident Representative

The resident representative office was established in 1972. The current Resident Representative, Mr. Jonathon Dunn, took up the post in August 2004.

56

Annex 5

Ministry of Finance and

Ministry of Planning

M. Saifur Rahman Minister

Government of the People’s Republic of Bangladesh

Ortoher 24. 200.5

Mr. Paul Wolfowitz, President , International Development Association, Washington DC 20433, USA

Letter of Development Policy

1. Introduction

1 .I The Government has made further progress during the past year with the wide- ranging reform program on which i t embarked when i t took office in October 2001. Economic growth was sustained in FY2005 - despite severe floods in the early part o f the year. Domestic demand and investment Iiavc remained buoyant. Exports, too, I i w e grown strongly although rapid import growth has contributed to a modest deficit in the current balance o f payments. Monetary and fiscal policies have responded prudently to periodic volatility in the taka’s exchange rate and to inflationary pressures. We have taken further steps to strengthen the structure o f the econoniy and to improve economic govelnance. The steady and determined pursuit of reforms - sometimes in difficult domestic and external circumstances - i s laying the basis for our longer-tenti god o f accelerating ecoiiotiiic growth to reduce poverty more rapidly and improve the social conditions o f the poorest members o f our society, especially in rural areas where most o f the population lives, and especially for women.

1.2 In the past 18 months, we have consiilteci a l l sectors o f society across the wholc country, as we have prepared the Government’s National Strategy for Accelerated Poverty Reduction, (NSAPFUPRSP) - “Unlocking the Potential” - which was approved by National Economic Council on October 16, 2005. This Letter o f Development Policy lays out what the Government has done in the past year and the further refomis planned in the years ahead, and seek continuing budgetary financial support from the Wor ld Bank. Our program will emphasize prudent macroeconomic policies and steady structural reforms to improve the climate for private investment to create jobs, raise incomes and speed growth and poverty reduction. The Government’s own spending will be based on a-three-year investment program, designed to translate the priorities o f the NSAPWPRSP into iiiiproved infrastructure provision and better seivices for the poor.

57

Annex 5

2. Maintaining Macroeconomic StabSlIty

2.1 Economic activity grew by 5.4 percent in FY2005, despite the exceptionally hcavy floods in July-September 2004 which caused widespread damage to crops and property. Agricultural output rebounded in the latter part o f the year but for the year as a whole was 3 percent lower than in FY2004. Strong domestic and external demand, however, encouraged rapid expansion in industry, construction, services and exports, Demand pressures, gradual depreciation o f the taka, rising prices o f imported food and the pass-through o f higher world petroleum prices contributed to an increase in inflation during the latter ha l f o f 2005 and early-2006. On point-to-point basis, inflation stood at 7.7 percent in July 2005, which i s I .2 percentage point higher than a year earlier. The strong rise in domestic demand, coupled wi th the sharp rise in the international cost o f oil, led to an increase o f more than 20 percent in the value o f imports. This more than offset a healthy rise o f I 4 percent in the value of exports - despite the phase out at the end o f 2004 of the Multi-Fiber Arrangement - and widened the trade deficit to $3.3 bil l ion. Further strong growth in migrants’ remittances, however, helped contain the current deficit to S0.G bil l ion, compared to a surplus o f $0.2 b i l l ion in FY2004. Capital inflows, in turn, offset the deficit to leave reserves broadly unchanged.

2.2 The Government has responded to demand and inflation pressures with tightcr monetary and fiscal policies. Bangladesh Bank has restricted monetary conditions considerably since spring 2005. Banks’ cash reserve requirements were increased from 4 percent to 4S percent in March and 5 percent wi th effect from October. Short-term Treasury bill rates trave risen from 4 percent to 6.6 percent. Year-on-year credit growth has slowed from 21 percent in June 2004 to 17 percent in June 2005. The taka, which eased against the dollar in early-2005 and again in late-summer, depreciated by 10 percent in nominal ternis and by 5 percent in real terms between July 2004 and September 2005 before stabilizing. Tighter monetary conditions have been accompanied by prudent fiscal inanagcment. Spending was switched early in FY2005 to flood relief but the Government trimmed ADP spending relative to the FY2005 budget plan, so that total spending was contained at 13-9 percent of GDP instead o f the targeted 14.7 percent, Revenues, in turn, edged tip to 10.4 percent of GDP, and the overall central government deficit was contained at 3.5 percent o f GDP compared to the targeted 4.2 percent. Domestic financing o f the deficit was limited to 1.9 percent o f GDP.

3. Structural a n d inst i tu t ional reforms

3.1 The Government has contjnued to press ahead w i th the structural and institutional reforms needed to lay the basis for vibrant private sector growth and for poverty reduction. These re foms have included the financial sector, state-owned enterpdses, the energy sector, telecommunications, the government’s o w n fiscal operations, renewed trade liberalization. and broad-based governance measures.

0

j

Financial sector - Our objective i s to strengthen the banking sector so that finance can be mobil ized and intermediated efficiently to creditworthy borrowers, and thc country’s savings can be used for productive investmenl. in particular. we have

58

Annex 5

continued the process o f reforming natio1:alized commercial banks (NCBs). We also issued an Information memorandum in May 2005 seeking expressions of interest froin potential strategic purchasers o f Rupali Bank. Progress has been stayed by a court case, but the Government i s seeking to have this lifted. Management support has been provided to Agrani, Janata, and Sonali Banks, Efforts will continue lo maximize benefits from this process. To ensure that the NCBs undergo needcd operational and financial restructuring, the Government plans to implement an agreed action plan (with IDA) involving bath interim and long-term measures. In order to improve the incentives for prudent management o f banks more generally, Bangladesh Bank has taken a further step towards aligning i:s prudential giiidelincs with intcrnationaI standards by requiring banks to put loans between 90 days and 180 days overdue into Special Mention Accounts. I t bas also issried a Circular requiring banks from Octolxr 2005 to make provisions of 5 percent against loans to borrowers with loans in this category. The Government i s also preparing a new Financial Reporting Act, which wi l l improve the transparency of company accoc~~its, helping investors and lenders identify enterprises with good per fo manc e. State-owned enternrises - We have contiuued to reduce the losses o f state-owned enterprises in manufacturing through a mixture of closures, downsizing aud cost savings. Losses o f state enterprises in manufacturing Fell by 10 percent between FY2004 and FY2005, bringing the tota! reduction in their losses since FY2001 io more than 40 percent. Four more enterprises were privatized in FY2005, bringing the total to 17 since FY2001, and shares were sold in two more. Letters o f Intent have been issued to buyers o f a further eight enterprises. Energy - Restructuring the energy sector remains a high priority for the Government. The Energy Regulatory Commission, established by the Government in 2004, has begun work with its first public hearings o f license and tariff applications in July 2005 under i ts newly appointed chairman, The Coinmission i s intended to play a key role in creating an environment, where the energy sector can contribute fully to oiir growth objectives. Power - Adequate and reliable electric pc-wer is essential Tor economic growth. Wc have made further efforts to improve the efficiency and finances of the major electricity utilities. System losses fell from 28 percent in FY2001 to 24 percent in FY2004. Collection eficiency rose from 33 percent to 99 percent. The collection to generation ratio rose from 67 percent to 75 percent. During FY2006, further efforts were made to collect arrears to the major electricity suppliers, and arrears fell from the equivalent o f seven months accounts in FY2004 to less than four months by the end o f FY 2005. We are actively seeking to ensure that remaining arrears kont cities, municipalities, water supply authorities and state enterprises, especially j itte mills, arc cleared during the corning months. We remain committed tokensure that electricity tariffs cover costs in l i n e with the formula agreed with IDA in May 2003, and we are preparing a financial recovery plan for the power sector. In addition, the process of handing 9,000 k m s lines from BPDB to REB has continued with a further 1400 lines transferred in the past year. We are preparing a financial recovery plan for the sector. We are also seeking ways in which private power might be sold to the grid to alleviate the looming shortage o f power in the next few years,

*

e

59

Annex 5

Petroleum - The increase in world oi l prices and hence the cost o f our imports bas posed a heavy unanticipated extra burden on Bangladesh and the finances o f the Bangladesh Petroleum Corporation (BPC). We have increased diesel and kerosene prices by 50 percent since May 2004, and we have raised petrol and octane prices by 27-28 percent over the same period. These increases have prevented a further rise in BPC’s losses, but these are still substantial, and we aim to reduce them further in FY2006. In this context, we remain committed to ensuring that doniestic petroleum prices reflect the full cost of imports in l ine with the formula agreed with IDA. - Gas - Our natural gas resources need to be developed and used efficiently. We therefore, increased gas prices by 2.3 percent in January 1, 2005. We remain committed to ensuring that domestic gas prices are linked to international lirices o f competing fuels in line wit the formula agreed wilh IDA. We arc also preparing ii 31s

master plan. Transport and telecommunications - The Government lias endorsed new shippitig and land transport policics to promote better communication within the coiintry and with the outside world. A new container terminal i s being built in Chittagong Port. We have also alfowed private competition with the national airline, Biman. The Bangladesh Telecommunications Regulatory Commission has issued licenses to five cellular operators and ten landline operators, Cellular telephone density i s doubling each year, and landline density has increased by 50 percent since FY2002. Trade liberalization - We have removed all quantitative restrictions on imports, except those on grounds of health, national security and environmental protection, or items for which the World Trade Organization has given a waiver. The number o f restrictjotis was reduced from 60 to 15 in the FY2006 Budget. We intend to reduce the average level o f protection by a further 2 percent in the year ahead, as part o f a long-term aim to bring protection in Bangladesh in line with the average in other developing countries. Economic management - The Government has made further efforts to strengthen economic management through improvements in the budget process, public expenditure planning, procurement, rnonitoritlg and accounting. It i s also scckiiig to enhance revenue mobilization and the performance of the National Board of Revenue. Public soending - The Government took an important initiative to iniprove public expenditure planning within a medium-tern1 framework in preparation o f the FYOG budget. Four ministries were given spending envelopes for the next three years which unified capital and recurrent spending. We intend to extend this system to a fi irt l ier s ix ministries in the preparation o f the FY07 budget. About half of all spending will be covered. This innovation should allow ministries to plan their programs more effectively and to integrate their investment decisions with future recurrent spending needed to maintain and service such investments, I t also allo,ws ministries to design programs linked to achievement o f the Ionger-term goals o f the NSAPR. Monitorhe: - We have done tracking studies of public spending on health and education with donors (UK-DFID and the Netherlands) to try to ensure that spending reaches the intended recipients. These studies showed that while most spending \vas reaching the poor, there was some evidence of leakages and mismanagernent. Wc are acting to correct these.

e

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Procurement - The Government adopted a uniform procurement process in October 2003, with greater transparency and substantially fewer approval processes. This has increased awareness of the necd for transparency. I t has also helped donors’ efforts to harmonize their procurement processes. Government has taken initiative to enact a procurement law. The draft law i s awaiting approval o f the cabinet prior to presenting i t before the parliament. A management information system has been put in place to track the stages o f procurement. The Government i s now preparing a law to reinforce these regulations. Accounting and auditing - The Governrneiit has strengthened public fi i iancial accounting with computerization of monthly accounts, strengthening o f the Coiltroller General o f Accounts (CGA), appointmelit o f Chief Accounting Officers to cacii ministry and the separation o f accounting and auditing by placing the CGA under the Finance Ministry, instead o f the Controller and Auditor General (CikAG). Outstanding audit objections have been reduced. In the year ahead, we wil l begin implementing our Public Financial Accountability Improvement Plan. We wil l also publish quarterly procurement Managehent Infomiation System results with performance indicators for key agencies in power and infrastructure, Revenue - We have continued our efforts to strengthen revenue collection. Revenue i s estimated to have risen from 10.2 percen) o f CDP in FY2004 to 10.4 percent in FY2005. The Budget aims to increase revenues further to 11 percent o f CDP in FY2006. The Government established Large Taxpayer Unit for VAT in October 2004 to complement the LTU for Income Tax. The National Board o f Revenue (NBR) has strengthened its filing, payment and auditing capacity. f t is also computerizing more o f i ts work. The Government has endorsed a far-reaching modernization strategy for the NBR to reorganize it along functional lines. The NBR has already advertised for key staff to strengthen i t s senior management team. Public administration - The Government itself has a key role in improving the performance o f public officials. We have, therefore, given greater weight lo merit iii the promotion o f senior officials. We have extended the training o f officials. Wc arc also creating clusters of ministries with similar areas o f interest and expertise, i n order to encourage professional specialization of key staff rotated between these ministries. Governance - Bangladesh has achieved remarkable progress in cconornic growth and poverty reduction. The Government, however, recognizes the need to improve governance across the board through wide and specific measures. Reforms in the banking sector and in state enterprises should reduce the misuse o f funds. Our proposed introduction o f a new Financia1 Reporting Act, coupled with oversight of the accountancy profession, should improve corporate accounting. The new puklic procurement regulations should improve the transparency and accountability o f public contracts and reduce the scope for corruption. Tighter auditing oFpubiic spending and the strengthening o f the Comptroller and Auditor General’s Department, coupled with heightened oversight by the Public Accounts Committee, should improve thc performance o f government departments themselves. The new tracking studies of spending on education and health should help curb the leakage o f fitnds. The modernization o f the NBR should curb tax evasion. Anti-Corruption Cominission - In addition to sectoral nwasures to combat corruption, the Government has also created an iridependent Anti-Corruption Coiiiiiiissioti.

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Members of the Commission were appointed in November 2004. They have started the complex process of zstablishing the Commission. Progress has not been as rapid as anticipated, partly due to the need to design a new organogram, devise rules o f procedure for the new Commission and’ screen carefully staff o f the fanner Bureau against Corruption. The Commission, however, i s now working closely with the Asian Development Bank on these issues. The Government has sanctioned 500 posts. A draft organogram and rules have been prepared. A start has been made in screening former BAC staff and agreeing the procedure by which they niay be fitted to posts in the new Commission. The Government has recently cornpletcu a Country Environmental Assessment with

the World Bank. This focuses o:i impro,t:ng the health o f tlie poor throtigh tackling a i r pollution, industriai was:c, poor sanitation and arsenicosis, as well as yrotccting tlic livelihoods o f the poor through preservz (ion o f fisheries and other iiati iral rcsottrccs. The Government aims to increase its capci ty in these areas and iniprove transparency.

3.2 In the year ahead, the Government intends to pursue its reform program vigorously while maintaining a prudent macroeconomic framework. I t wi l l emphasize, in particular, improvements in public financia! management and implementation o f tlie new procurement regulations adopted in 2003. It will s t r e n g t h the Anti-Corruption Commission and its management. It will move the National Board o f Revenue towards a morc ftinctioiiai structure consistent with the NBR’s Strategic Development Plan. It wi l l deepen tl-adc liberalization. I t will implement further the restructuring plan for NCBs with a morc cicarly defined role for their Managing Directors. The power sector remains crucial to our growth objectives. We intend to formulate a least cost generation plan, supported by a fiiiancing strategy from both public and private sources. !ti particular, we will seck private scctor bids for at least one new base load ?Dwer plant. We wil l implement a program to procure pcwer from small plants transparently and competitiveiy. We wi l l also begin the l inai icial restructuring o f the sector.

4. Poverty Reduction Strategy

4.1 The Government has approved a National Strategy for Accelerated Poverty Reduction - “Unlocking the PoteRtial”. We have consulted widely with different sectors o f society in every Division across the country, as well as with stakeholder groups including Members o f Parliament from both major parties, the business community, NCOs and academics as we have prepared the strategy.

4.2 Bangladesh i s broadly “on track” in relation to a number o f the Milletinitmi Development Goals (MDGs). Infant mortality has been falling m q e rapidly that the trend rate required to meet the MDCs by 201 5. Child mortality has been falling at close to the required rate. Enrolment in primary and secondary scliools has been increasing more qtiickly than the required trend. The gender gap in prixpiy and secondary school enrolment has bccn virtually eliminated. As a mark of environmental progress, tree cover has increased ft-aiii 7 percent of the country in 1990 tc 11 percent i r i 2000.

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4.3 Income poverty feI1 from 59 percent in 1991 to 50 percent in 2000 - an annual decline o f about 1.5 percent. I t has probably fallen further since then in view o f the steady economic growth of the last five years, but faster trend reduction o f 2 percent a ycar would be needed to halve poverty by 201 5 . Attainment o f the goal, therefore, now requires that the growth o f income per head accelerates to 4-5 percent a year, coupled with a ftirther slowdown in population growth. This requires that GDP growth should accelerate to around 7 percent a year and that total fertility falls further. The recent progress towards the MDGs has been shared across almost all regions and household types. However, reduction of the gap between the poorest and the rest o f society remains a challenge. These inequalities and the weak position of the poorest could cause divergence in meeting the MDGs. These are substantial challenges and we shall seek the help o f our development partners in meeting them.

4.4 The main priorities o f the NSAPWPRSP are (i) employment, (ii) nwtritiori, (iii) quality education, (iv) local govcrnance, (v) maternal health, (vi} sanitation and safe water. (vii) criminal justice and (viii) monitoring.

4.5 The NSAPR identifies four major Strategic Blocks to achieve these goals.

e Strategic Block 1 - Pro-aoor growth - Growth depends importantly on the rate of growth of the capital stock, This reqaires raising the rate o f investment. The Government i s detennined to create a climate that i s friendly to private investment. These include fiscal incentives, improved tax administration, making land available, facilitating women’s entrepreneurship and the upgrading o f technology, enhancing quality control, improving labor standards and supportive credit policies. The Government i s also committed to remove obstacles, such as lack o f reliable powcr and gas, poor transport, inadequate telecommunications facilities, poor port facilities. delays and corruption, the law and order situation and frequent political agitation. Raising t he investment rate wil l have to be accompanied by higher savings by both the private and public sectors. Investment prospects should also be improved through maintaining prudent macroeconomic policies, including raising tax revenues, improving the quality and effectiveness v f public spending and opening the economy through trade liberalization and reducing average protection to not more than the average protection level o f developing countries. Reforms of banking, state enterprises and energy should be completed. The regulatory environment, too, needs to continue to develop. Strategic Block 21 - Critical Sectors for Pro-Poor Economic Growth - (i) Agriculture and niral development must be the top priorities for rapid poverty reduction, because three-quarters o f the population l i ve in rural areas and 85 percent of the poor earn their living there. The Government aims to create an &ironment in which production o f major crops is intensified while other high value crops, such as vegetables, fruits and horticulture are ewouraged. We also intend to cncout-agc the emerging fisheries, poultry and livestock industries. Likewise we aim to encourage the forestry industry to increase timber supplies and preserve biodiversity. (ii) ‘Thc Government has adopted a National Water P o k y to ensure that the country’s walcr is nianaged effectively. Flood control i s a priority, together with irrigation. drainagc

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and the provision o f clean water. (iii) Smal l and medium enterprises play a key role in employment generation, and we intend to encourage their developmcnt through a simplified regulatory framework, improved market information, a hassle-free tax system and appropriate credit facilities. (iv) The informal sector, too, offers the prospect o f rapid employment creation and needs to be helped through adequate training, access to infrastructure and development services. NGOs niay have a key role to play here. (VI Good infrastructure i s cntciai for fast economic growth. We intend to complete ongoing reforms in the power sector, prepare an action plan to address the financial problems of the major power utilities, prioritize public investment in power and purchase power cost effectively from independent powcr producers. Gas is a valuable resource, and we aim to improve the performance o f this sector by unbundling i t s parts, extending the national grid and improving its finances. (vi) We intcnd to improve the transport system, including a focus on maintaining existing roads better, refomling the railways, and encouraging private participation in ports. (vii) Tourism offers employment opportunities, centered on Bangladesh’s beaches, cultural spots and eco-sites, especially the Sundarbans. (vi i i ) The Government recognizes that telecctiitiiunications and infomation technology are likely to be important future growth areas. I t i s encouraging private participation in telecommunications, the availability o f internet facilities in rural areas and the creation o f a high-tech park. Stratepic Block III - Social Safety Nets : The NSAPR aims to build on the country’s already robust portfolio o f social safety net programs which transfcr resources in cash or kind directly to the poor. These programs target vulnerable gruups, iticluding the poor; women, disadvantaged groups and old people, They also aim to help keep children in school, promote girls’ education in rural areas, cushion the poor against the effects o f natural disasters and provide shelter to the homeless. We intend to improve the targeting and widen the coverage o f these programs while stetmiiins leakages.

encouraging the provision o f high quality education, improved heal tlicare, bctker nutrition and clean water and sanitation. We aim to encourage early cducstion, especially in rural areas, in cooperation with NGOs. We aim to ensure that a l l children have access to primary schools and complete their priniary education. We are focused on improving the quality o f secondary education atid the provision o f vocational training. The governance, access and facilities o f tertiary education need to be improved with greater focus on professional degrees. In health, the Government intends to expand the provision o f essential services, improve women’s and maternal healthcare, strengthen meastires to combat communicable diseases and raise awareness o f measures that people can take to redpee the risk o f non- communicable diseases. The Government aims to continue and enhance its nutrition programs. It is also developing a strategy for clean water and sanitation within its overall water strategy.

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Strategic Block IV - Human Develooment - We intend to invest in people through

4.6 The NSAPWPRSP set out a challenging agenda, which is conitncnsurate with the country’s needs. Our subsequent consultations and discussions have reinforced maiiy of ihc messages, notably thc need to cnsure that thc poorcst, especially thc hungry, pttrticipatc in

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development. We are also concerned that growth i s unevenly distributed, and that the poor need to be linked to the sources o f growth. Inequality itself may retard growth, especially i f the human capacity of the poor i s not developed. We recognize the need to tackle inequality between genders in social progress.

5. PRSP Monitoring and Implementation

5.1 Monitoring i s projected as one o f the strategic agendas o f the NSAPR, because realization o f our poverty goals and measuring the effectiveness o f our policies wil l require careful monitoring o f both processes and outcomes. In addition to the normal data soiirces for tracking social progress, we intend to conduct special surveys with the express purpose of benchmarking progress towards the MDGs. Monitoring and evaluation o f the NSAPR wil i require a vigilant institutional mechanism. The National Steering Committee, therefore, has been transformed into an Implementation Review Committee, which wil l cotiduct a review annually, possibly ahead o f a meeting with donors. A Technical Committee under the Principal Secretary will monitor the consistency of programs chosen under the Three-year Investment Program (TYIP). The Household Income and Expenditure Survey (HIES) module under Bangladesh Bureau o f Statistics (BBS) wil l be supplemented by an MDG attainment module. Independent research institutes and civil society can monitor progress towards the MDGs and give credibility to the exercise.

6, Conclusion

6.1 Bangladesh has made good progress in the past three year in implementing the broad range o f policies to improve growth and reduce poverty - despite domestic pressures and thc unfavorable impact of high global commodity prices, especially oil. We have benefited from the support o f our development partners, inclliding the World Bank. We have laid out a challenging agenda for the medium-term, and the Government i s keenly aware o f the hcavy responsibility that it bears for pursuing refomis determinedly for the benefit of a l l our people. Further adjustment lending from the International Development Association under Development Support Credit I11 will play a crucial role. We believe that this will eiiliance our ability to meet our poverty goais and encourage the private sector growth which i s crucial to creating employment and raising inconies o f the poor,

Sincerely,

(M. Saifur Rahrnan)

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