State of the Bangladesh Economy - United...

State of the Bangladesh Economy Early Signals of FY2005

(First Reading)

A paper prepared under the programme Independent Review of Bangladesh’s Development (IRBD)

implemented by the Centre for Policy Dialogue (CPD)

January 15, 2005

B A N G L A D E S H CENTRE FOR POLICY DIALOGUE (CPD)

a c i v i l s o c i e t y t h i n k - t a n k House 40C, Road 11, Dhanmondi R/A, Dhaka-1209

Tel: 9141734, 9141703, 9145090; Fax: 8130951 E-mail: [email protected]; Website: www.cpd-bangladesh.org

CPD: IRBD FY05 (First Interim) ii

Credit

Dr. Debapriya Bhattacharya, Executive Director, Centre for Policy Dialogue (CPD) was in overall charge of preparing this report. Drafts on various sections were prepared by Professor Mustafizur Rahman, Research Director, CPD (External Sector and MFA Phase-out), Dr. Ananya Raihan, Research Fellow, CPD (Banking Sector and Exchange Rate), Dr. Uttam Kumar Deb, Research Fellow, CPD (Agriculture Situation; Food Security; and PRSP), Dr. Fahmida Khatun, Research Fellow, CPD (Assessment of Flood 2004), Dr. Khondaker Golam Moazzem, Research Fellow, CPD (Investment Scenario in the Private Sector), and Mr. M. Syeed Ahamed, Senior Research Associate, CPD (Macroeconomic Trends). Database development and analysis were carried out by Mr. Mabroor Mahmood, Senior Research Associate (Banking Sector), Mr. Noor Mohammad Wasi Uddin, Research Associate, CPD (Macroeconomic Trends), Mr. Wasel Bin Shadat, Research Associate, CPD (Flood Assessment), Mr. Kazi Mahmudur Rahman, Research Associate, CPD (Investment Scenario), Mr. Syed

Saifuddin Hossain, Research Associate, CPD (Flood Assessment), Mr. Md. Masum Billah, System Analyst, CPD (Agriculture Situation and Food Security), Mr. Asif Anwar, Programme Associate, CPD (Flood Assessment), Ms. Farhana Rahman, Programme Associate, CPD (Banking Sector and Exchange Rate), Mr. Narayan Chandra Das, Programme Associate, CPD (Agriculture Situation and Food Security), Mr. Shubhasish Barua, Programme Associate, CPD (Exchange Rate and Investment).

CPD: IRBD FY05 (First Interim) iii

Expert Group Meeting on

CPD-IRBD 2005 (Interim)

As part of the CPD-IRBD tradition, CPD organised an Expert Group Consultation Meetings on

January 12, 2005 at the CPD Dialogue Room. The First Interim Report on the State of the

Bangladesh Economy: Early Signals of FY2005 was shared at this in-house meeting with a

distinguished group of policymakers and professionals with direct exposure to macroeconomic

policy crafting in the country. Professor Rehman Sobhan, Chairman, CPD chaired the session.

CPD-IRBD Research Team acknowledges the participants for sharing their views and comments

on the draft report. However, CPD is solely responsible for the observations and analysis made in

this paper.

A list of the participants of the meeting is provided below in alphabetical order:

Dr Q K Ahmad President, Bangladesh Unnayan Parishad (BUP) Dr. Quazi Mesbahuddin Ahmed Member (GED), Planning Commission Professor Amirul Islam Chowdhury Former Vice Chancellor, Jahangirnagar University and Former Chairman, Sonali Bank Dr. Mirza Azizul Islam Chairman, Securities and Exchange Commission Mr. M. Hafizuddin Khan Former Finance Advisor to the Caretaker Government and

Chairman, Public Expenditure Review Commission Professor Wahiduddin Mahmud Former Finance Advisor to the Caretaker Government and Professor, Economics Department, University of Dhaka

Dr. A.K.M. Masihur Rahman Former Secretary, ERD, Ministry of Finance Mr. Mustafizur Rahman Former Chairman, Revenue Reform Commission and

Director, Far-East Finance and Investment Dr. Quazi Shahabuddin Director General, Bangladesh Institute of

Development Studies (BIDS)

Mr. M. Syeduzzaman Former Finance Minister and Chairman, Bank Asia

CPD: IRBD FY05 (First Interim) iv

Acronyms

ADB - Asian Development Bank

ADP - Annual Development Programme

BB - Bangladesh Bank

BBS - Bangladesh Bureau of Statistics

BOI - Board of Investment

BTTB - Bangladesh Telegraph and Telephone Board

CDBL - Central Depository Bangladesh Limited

CPI - Consumer Price Index

EPZ - Export Processing Zone

FCB - Foreign Commercial Bank

FDI - Foreign Direct Investment

FFW - Food for Work

Forex - Foreign Exchange

GDP - Gross Domestic Product

GNI - Gross National Income

GOB - Government of Bangladesh

GSP - Generalized System of Preferences

HYV - High Yielding Variety

ICMA - Institute of Cost and Management Accountants

IMF - International Monetary Fund

IPO - Initial Public Offering

IPRSP - Interim Poverty Reduction Strategy Paper

LC - Letter of Credit

MFA - Multi Fibre arrangement

MGD - Millennium Development Goal

MOFDM- Ministry of Food and Disaster Management

MTMF - Medium Term Macroeconomic Framework

NCB - Nationalized Commercial Bank

CPD: IRBD FY05 (First Interim) v

NER - Nominal Exchange Rate

NGO - Government of Bangladesh

NSD - National Savings Deposit

OMS - Open Market Sale

PCB - Private Commercial Bank

PRSP - Poverty Reduction Strategy Paper

REER - Real Effective Exchange Rate RTA - Regional Trading Agreement

SEC - Securities and Exchange Commission

SME - Small and Medium Enterprise

VAT - Value Added Tax

VGD - Vulnerable Group Development

VGF - Vulnerable Group Feeding

CPD: IRBD FY05 (First Interim) vi

Table of Content

I. INTRODUCTION 1

PART A II. GROWTH, SAVINGS AND INVESTMENT 3

2.1 Economic Growth Trend Decelerates? 3 2.2 Sources of Growth – Service Sector Dominated 5 2.3 Per-capita Income 6 2.4 Inadequate Savings-Investment to Accelerate Growth 7

III. STATE OF THE FISCAL SECTOR 12

3.1 Revenue Receipts 12 3.2 Public Expenditure 15

IV. STATE OF THE MONETARY SECTOR 19

4.1 Domestic Credit Expansion 19 4.2 Government Borrowing and Public Debt 21 4.3 Agricultural Credit 23 4.4 Industrial Credit 24 4.5 Price and Wage Inflation 26

V. STATE OF THE REAL SECTOR 32

5.1 Agricultural Production 32 5.2 Industrial Production 34 5.3 Foreign Investment 36 5.4 Capital Market 39

VI. STATE OF THE EXTERNAL SECTOR 43 6.1 Export Likely to Survive the Phasing out of MFA 43 6.2 Import Sees Robust Growth Especially in Investment Items 48 6.3 Opening and Settlement of Import LCs 50 6.4 Balance of Payments Regimented 53 6.5 Flow of Remittance Continuing Escalation 55 6.6 Forex Reserves Continues to Swell 57 6.7 Foreign Aid Failed to Supplement Growth Instruments 59

CPD: IRBD FY05 (First Interim) vii

PART B VII. ASSESSMENT OF FLOOD 2004 63

7.1 Background 63 7.2 Damage Assessment 64 7.3 Relief and Rehabilitation 66 7.4 CPD’s Recommendations and GOB Initiatives 67

VIII. MFA PHASE-OUT: EARLY INDICATIONS AND CHALLENGES AHEAD IN FY2005 73

8.1 So Far So Good! 73 8.2 Post-MFA Scenario Will be Different 75

8.3 Designing an Appropriate Strategy 77

IX. INVESTMENT SCENARIO IN THE PRIVATE SECTOR 80 9.1.1 Major Advances to a Limited Number of Large and

Medium Industries 80 9.1.2 Sluggish Trend of Investment in Capital Market 83

9.2 Slow Rise of Industrial Consumption of Energy 84 9.3 More Promises of FDIs 85 9.4 Investment in the Interim Period—Concentration in a Limited Number of Large and Medium Industries 86

X. NCBs REFORM: WHERE DOES IT STANDS 88 10.1 Reform Agenda 88 10.2 Reform Process 91 10.3 Consequences 95

XI. PRICES OF ESSENTIAL COMMODITIES, INCREASE IN DIESEL PRICE AND FOOD SECURITY 102 11.1 Price Surge of Essential Commodities 102 11.2 Trends in Import of Foodgrains 106 11.3 Monga in Northern Districts 108 11.4 Increase in Diesel Price 111 11.5 Implications for Food Security 112

XII. INFLUENCE OF EXCHANGE RATE MOVEMENTS ON EXPORT

PERFORMANCE OF BANGLADESH 113 12.1 Exchange Rate Behaviour: Is there Any Significant Change Since Floating Mechanism? 113 12.2 Export Performance of Bangladesh: Does Exchange Rate Matter? 116 XIII. PRSP AND IPRSP: A COMPARISON OF MEDIUM TERM

MACROECONOMIC FRAMEWORK 119 13.1 Targets for Economic Growth and Money Supply 119 13.2 Government Revenue and Public Expenditure 121 13.3 Balance of Payments 122 13.4 Conclusion 124

XIV. CONCLUDING BALANCE SHEET 124

CPD: IRBD FY05 (First Interim) viii

LIST OF TABLES

Table 1: Savings/Investment Scenario FY04-FY05

Table 2: Comparison of Inflation in India, Pakistan and Bangladesh

Table 3: Summary of CPD’s Damage Estimates

Table 4: Comparison of Preliminary Damage Estimates

Table 5: Comparison of CPD’s Recommendations and GOB Implementation

Table 6: Advances Classified by Economic Purposes (Major Manufacturing and Service Sectors)

Table 7: Capital Machinery and Industrial Raw Materials Imported for Manufacturing and Service Industries

Table 8: Initial Public Offering (IPO) for July-November, FY2004 and FY2005

Table 9: Industrial Consumption of GAS and Electricity

Table 10: Prospective FDIs in Bangladesh by Selected Countries

Table 11: State-Owned Bank Assets as a Percentage of Total Bank Assets

Table 12: Scenario of Manpower Restructuring, Data as of June, 2004

Table 13: Import of Rice (Aid/Commercial/Private) in Bangladesh, 2001/02-2004/05

Table 14: Targets for Economic Growth in IPRSP and PRSP

Table 15: Targets for Money Supply (Percent Change in Money and Credit) in IPRSP and PRSP

Table 16: Targets for Government Revenue and Public Expenditure as Percent of GDP in IPRSP and PRSP

Table 17: Targets for Balance of Payments in IPRSP and PRSP

Annex Table 1: State-Ownership vs. Banking Performance in Selected Countries

Annex Table 2: Comparatives Picture of Commercial Banks’ Performance

LIST OF FIGURES

Figure 1: Trend in GDP Growths

Figure 2: Periodic Linear Growth Rates of GDP

Figure 3: GDP Growth of Selected South Asian Countries

Figure 4: Incremental Growth of Sectors ofGDP: FY91-04

Figure 5: Savings as Percent of GDP during FY91-FY04

Figure 6: Investment as Percent of GDP during FY91-FY04

CPD: IRBD FY05 (First Interim) ix

Figure 7: Savings-Investment Gap as Percent of GDP

Figure 8: Revenue-GDP Ratio in Bangladesh

Figure 9: Revenue-GDp Ratio in Bangladesh (Linear and Average)

Figure 10: Revenue Earnings During FY91-FY05

Figure 11: VAT vs Income Tax During FY91-FY05

Figure 12: Taka Release and Expenditure of ADP During the 1st Quarter of FY02-FY05

Figure 13: Target ADP and Actual Implementation During FY02-FY05 (1st Quarter)

Figure 14: Performance of Major Ministries (in terms of ADP Allocation)

Figure 15: Domestic Credit Expansion During July-October FY01 to FY05

Figure 16: Growths in Domestic Credit During July-October FY01 to FY05

Figure 17: Private Sector Share in Domestic Credit During Jul-Oct FY01 to FY05

Figure 18: Growth of Net Government Borrowing During July-October FY05 (point-to-point)

Figure 19: Sale and Repayment of NSD Certificate

Figure 20: Growths in Agricultural Credit Expansion During July-October FY05

Figure 21: Term Loan for the FY04 and FY05

Figure 22: Working Capital for the FY04 and FY05

Figure 23: Inflation (moving Average)

Figure 24: Food Inflation (Point to Point)

Figure 25: Wage Inflation (Point to Point)

Figure 26: Comparison among India, Pakistan and Bangladesh

Figure 27: Inflation During the Flood Year 1998

Figure 28: Growths of Major Industries During July to October of FY04 and FY05

Figure 29: Quantum Index of Production during FY03-05 (1988-89=100)

Figure 30: Foreign Investment During FY00-FY04

Figure 31: Foreign Investment During July-September of FY04-05

Figure 32: FDI Flow: Survey and Banking Data

Figure 33: Sectoral Composition of Registered FDI in FY04

Figure 34: Entry of IPOs in the Capital Market (Monthly Statistics)

Figure 35: Structure of Exports during July-October FY04-05

CPD: IRBD FY05 (First Interim) x

Figure 36: Sectoral Growth of Exports during July-October FY05

Figure 37: Monthly Dynamics of Export Earnings During FY01-05 (Jul-Oct)

Figure 38: Decomposition of Export Growth for July-October FY05

Figure 39: Export and Import during FY91-FY04

Figure 40: Imports and Sectoral Growth during the First Quarter of FY01-05

Figure 41: Sectoral Growth of Imports during the First Quarter of FY05 Figure 42: Settlement of LCs during July to November of FY04 and FY05

Figure 43: Fresh Opening of LCs during July to November of FY04 and FY05

Figure 44: Growth Rates of Opening and Settlement of LCs FY05 over FY04 (July to November)

Figure 45: Balance of Payments FY97 to FY04

Figure 46: Balance of Payment Scenario During Jul-Sep in FY04-05

Figure 47: Flow of Remittances During Jul-Dec in FY01-FY05

Figure 48: Monthly Trend in the Flow of Remittances During FY04-FY05 Figure 49: Remittances and Foreign Exchanges Reserve: FY91 to FY04

Figure 50: Foreign Exchange Reserves and Equivalent Months of Import

Figure 51: Decomposition of Sources of Import Financing

Figure 52: Flow of Foreign Aid in Bangladesh During FY90-04

Figure 53: Flow of Foreign Aid During July to October of FY04-05

Figure 54: Declining Foreign Aid in the Context of Stagnated Domestic Savings

Figure 55: Global Export of Knit and Woven RMG and their Growth

Figure 56: Bangladesh’s Export of Apparels (Jul-Oct): FY05 vs FY04

Figure 57: Changes in Market Share (Assets) of Commercial Banks in Bangladesh

Figure 58: Incremental Share of Market by Commercial Banks, 1996:2004

Figure 59: Comparative Geographical Distribution of Branches of Commercial Banks

Figure 60: Average Wholesale Price of Coarse Rice in Bangladesh: FY01-FY05

Figure 61: Comparison of Domestic Prices of Rice with Import Partly Price: FY00-FY05

Figure 62: Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1999-2004 Figure 63: Distribution of Foodgrains through FFW and VGD: 1998/89-2004/05

Figure 64: Depreciation of Some Selected Currencies, Base Period June 2000

CPD: IRBD FY05 (First Interim) xi

Figure 65: Comparative Movement of Euro-USD Cross Rate in Bangladesh and Global Euro-USD Rates, Monthly Average

Figure 66: Movement of EURO-USD Global Exchange Rate and EURO-USD Cross Rate, November 2004 – January 10, 2005

Figure 67: Depreciation of Some Selected Currencies, Base Period June 2000 LIST OF BOXES Box 1: An Enquiry in Factors Influencing Inflation

Box 2: A Balance Sheet of Bangladesh Economy Box 3: Major Findings of the Thematic Issues

I. INTRODUCTION

The first reading of the Independent Review of Bangladesh’s Economy for 2004-05

(FY05) essentially covers the first six months (July-December 2004) of the fiscal year.

The review, drawing on official data, has been presented in two analytical components.

The first component (Part A) provides a macro-economic overview focussing on the

following four major areas.

(i) Growth, Saving and Investment (ii) Monetary Sector (iii) Real Economy (iv) External Sector

Recognising the relative stability prevailing in the macro-economic situation, the review

highlights some sources of its fragility. It raises the question whether the macro-

economic stability of Bangladesh has been rewarded with adequate growth payoff. The

review underscores the negative implications of the creeping rise in consumer price index

in the backdrop of perceptible credit expansion in both manufacturing and agricultural

sector. In the real economy, shortfall in foodgrain production remains the major concern,

while capital market has been attracting increased liquidity. The external sector balance is

experiencing consolidation, notwithstanding the total phase-out of the apparel quota.

The second component (Part B) of the review addresses a select set of issues which

would underpin the final outcomes of FY04. These issues are the following:

(i) Consequences of Flood 2004

(ii) Impact of MFA Phase-out

(iii) Trends in Industrial Investment

(iv) NCB Reforms

(v) Exchange Rate Movement

(vi) Price Rise of Essentials

(vii) Finalisation of PRSP

CPD: IRBD FY05 (First Interim) 1


PART A


II. GROWTH, SAVINGS AND INVESTMENT

2.1 Economic Growth Momentum Decelerates?

Following a decline of the GDP growth rate to 4.2 percent in FY02, the national economy

repositioned itself in a five percent plus growth trajectory during the subsequent two

years (FY03 and FY04). The economy posted a growth of 5.5 percent in FY04 in line

with the I-PRSP target; however such marginal improvement in economic growth rate

compares unfavourably with the record figure of 5.9 percent achieved in FY00.

The recently finalised national PRSP provides a set of growth targets which has revised

downward the figure for FY05 from 6.0 percent to 5.5 percent. PRSP has fixed the GDP

growth targets at 6.0 percent and 6.5 percent for FY06 and FY07 respectively.

Figure 1

Trend in GDP Growths

Source: Computed from Finance Division (2004c) and ERD (2003) Note: * PRSP Targets.

It is known that the Bangladesh economy has been experiencing five percent plus growth

rate during the past few years. However, when compared with the trend growth rates of

1990s, one can notice a deceleration of national growth rates. The GDP grew at faster

rate during the 1990s (4.6 percent linear growth) in comparison to 1980s (3.6 percent

linear growth). Within 1990s, the growth momentum was even higher during the second

half of the decade in comparison to the first half. The linear growth rate of GDP during


the period of FY91-95 was 3.95 percent, while during the next five year (FY96-00) it

grew at even a faster rate of 4.79 percent. However, taking into account the PRSP target

growth of FY05 (5.5 percent), the economy during the FY01-05 is programmed at a

linear growth rate of 4.88 percent, indicating a stagnation in its second derivative.

Figure 2 Periodic Linear Growth Rates of GDP

0

1

2

3

4

5

6

FY81-85 FY86-90 FY91-95 FY96-00 FY01-05*

perc

ent

Note: * GDP growth for FY05 is based on PRSP Target.

Figure 3 GDP Growth Rate of Selected South Asian Countries

1.8

6.5

4.4

5.8

4.0

8.1

-1.4

7

5.3

4.4

5.5 5.56.4 6.5

6.5

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

FY01 FY02 FY03 FY04 FY05

GD

P gr

owth

(per

cent

)

Pakistan

Sri Lanka

Bangladesh

India


At the same time, when compared with the major countries in the South Asia region, the

growth scenario looks moderate for Bangladesh. The GDP growth rates of India (8.1

percent), Pakistan (6.4 percent) and Sri Lanka (6.5 percent) have been higher in FY04

than that of Bangladesh (5.5 percent). The GDP growth target for FY05 also appears to

be restrained when compared with other South Asian countries as India, Pakistan and Sri

Lanka have targeted growth targets for FY05 at 6.5 percent, 6.5 percent and 7 percent

respectively. During the first quarter of FY05, India has already achieved a 7.4 percent

growth.

2.2 Sources of Growth – Service Sector Dominated

The contribution of the real economic sectors to incremental growth has declined to 32.97

percent in FY04 from 34.40 percent in FY03. The annual growth of the real economic

sector stagnated at 4.60 percent during the last two fiscal years (FY03-04). This is largely

because of decline in the incremental growth of agriculture sector, which went from

13.30 percent in FY03 to 11.00 percent in FY04. The incremental growth of the service

sector has increased to 51.02 percent in FY04 from 49.87 percent in FY03 (see figure 4).

Figure 4

Incremental Growth of Sectors of GDP: FY91-04

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

Agriculture Industry Service

Source: Computed from CPD (2004)


The on-going structural transformation of the Bangladesh economy is characterised by

falling share of the agriculture sector with marginal increase of the manufacturing in the

backdrop of increasing contribution of the service sector. The share of service sector has

increased to 61.27 percent in FY04 from 60.95 percent in FY03. The real economic

sector accounted for 39.00 percent of the GDP in FY03, which has decreased to 38.70

percent in FY04. A decade back, the said proportion was 42.00 percent. This suggests

that in spite of improved growth, the evolution of the Bangladesh economy remains

biased against modern, industrial transformation, having concomitant implications for

sustained growth and equitable income distribution.

2.3 Per-capita Income

The per capita GDP and GNI scenario are gradually improving after a decline in FY02. In

FY03 the per capita GDP and GNI was recorded to be US$389 and US$411 respectively.

In FY04 the corresponding figures are US$421 and US$444 respectively. The annual

growth is of 8.23 percent for per capita GDP and 8.03 percent for per capita GNI in terms

of US dollars. Once we adjust these figures by the extent of devaluation of US Dollar, the

per capita GDP growth comes down to 5.3 percent.

It is well known that poverty trends are influenced by the changes in inequality. Income

inequality at the national level has increased from 25.9 percent in 1991-92 to 30.6 percent

in 2000. During the same period, urban inequality was rising at a higher pace- from 30.7

percent in 1991-92 to 36.8 percent in 2000, than rural inequality- from 24.3 percent in

1991-92 to 27.1 percent in 2000 (BBS, 2003).

Between 1995-96 and 2000, national income attributable to the poorest 10 percent of the

population declined further from the miniscule proportion of 2.24 percent to 1.84 percent.

Conversely, the control on the national income by the richest 10 percent of the population

increased from 34.68 percent to 40.72 percent (ibid). In other words, the income

differential between the poorest and the richest increased from 35.7 times to 53.4 times

during the second half of 1990s. The sources of rising inequality are linked with the

uneven spread of economic and social opportunities, unequal distribution of assets


especially in respect of human capital and financial capital, growing disparity between

urban and rural areas as well as between developed and underdeveloped areas.

The IRBD2003 opined that the incremental growth does not automatically benefit the

poor in Bangladesh (Bhattacharya, 2004). In this context and also in connection with the

completion of the initial year of the I-PRSP, we have not been provided with any

assessment on the poverty situation. There is no evidence which suggests that this trend

has been reversed during the last couple of years. Absence of such an assessment also

fails us to benchmark our programmes regarding MDGs.

2.4 Inadequate Savings-Investment to Accelerate Growth

The deceleration of Bangladesh’s national growth can be substantiated by the stagnated

savings-investment scenario. Recent growth models1 predicts that higher savings and the

related increase in capital accumulation can result in a permanent increase in growth rates

as savings determine the national capacity to invest and thus to produce, which in turn

affect the economic growth potential. On the contrary, low saving rates have been cited

as one of the most serious constraints to sustainable economic growth.

In this context, Bangladesh’s savings-investment scenario is showing a rather stagnant

trend during last few years. Domestic savings has increased marginally to 18.27 percent

of the GDP in FY04 from 18.21 percent in FY03. The share of national savings to GDP

has also showed signs of stagnation in FY04 at 24.49 percent of GDP against 24.45

percent in FY03. Though the national savings rate projected in the I-PRSP document for

FY04 (23.3 percent) was achieved (thanks to our NRBs for their remittances), the

projected domestic savings rate for FY04 (19.0 percent) was not achieved (see table 1).

1 Notion supported by the empirical works of Romer (1986), Lucas (1988), Barro (1991), De Long and Summers (1991).


TABLE 1

SAVINGS/INVESTMENT SCENARIO FY04-FY05

FY04 IPRSP Actual

Deviation from IPRSP

I-PRSP FY05

Gross Domestic Savings 19.20 18.27 - 0.93 20.00 Gross National Savings 24.30 24.49 + 0.19 25.20 Gross Investment 25.40 23.58 - 1.82 27.00

(24.20 in PRSP)

Private 18.70 17.47 - 1.23 19.90 Public 6.70 6.12 -0.58 7.10

Source: Computed from Finance Division (2004c) and ERD (2003)

On the other hand, during the last five years (FY00-FY04), the gross investment ratio has

increased by only 0.50 percent of the GDP. For example, the ratio was 23.02 percent in

FY00; whilst it crawled only up to 23.58 percent in FY04. Increasing investment

continues to remain one of the core challenges of Bangladesh’s macro-economy. In

FY04, the country recorded the lowest public investment ratio of the last 14 years, 6.12

percent. The sectors left behind by public investment were not adequately picked up by

private investment. Private investment as a share of GDP increased marginally from

17.21 percent in FY03 to 17.47 percent in FY04. In this context, the new PRSP has

stepped back from forecasting any savings target for the next fiscal year. The only target

available is for gross investment which is set at 24.20 percent of GDP. This is far below

the target of IPRSP which was set at 27.0 percent and does not hold the aim to overcome

the existing investment stagnation soon.


0

5

10

15

20

25

30

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

*

FY06

*

as p

erce

nt o

f GDP

Gross National Savings

Gross Domestic Savings

0

5

10

15

20

25

30

35

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

*

FY06

*

FY07

*

as p

erce

nt o

f GDP

Public Investment

Private Investment

Gross Investment

Figure 5

Savings as percent of GDP during FY 91-FY04

Note: * Targets for FY05 and FY06 are based on I-PRSP

Figure 6 Investment as percent of GDP during FY 91-FY04

Note: * Gross Investment target for FY05-FY07 is based on PRSP.

The breakdown of investment target (private and public) for FY05-FY06 is based on I-PRSP.


Paradoxically, Bangladesh continues to remain an under-invested country, while its

national savings rate (24.49 percent) supposes its gross investment rate (23.58 percent).

After the late 1990s, when the savings and investment were almost equal, Bangladesh

experienced a net resource gap during FY01 (-0.77 percent) and FY02 (-0.72 percent).

Then the idle resource (i.e., excess savings as regard to investment as a ratio of GDP)

started climbing up.

Figure 7 Savings-Investment Gap as percent of GDP

-1

-0.5

0

0.5

1

1.5

2

2.5

3

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

The idle resource stood at 1.0 percent in FY03 and then with a marginal decline stood at

0.9 percent in FY04 as both investment and savings increased (or rather remained idle)

by the same factor. We are failing to convert all our savings into investment as we

continue to borrow from foreign sources.

Bangladesh needs to pay special attention to encourage savings and to create

opportunities for investment. In the context of low bank and NSD interest rates,

government needs to encourage savings by increasing variety of savings products, e.g.

promotion of other form of savings such as life insurance, provident funds, mutual funds,

investment in the stock market etc.


At the same time, opportunities to invest this savings also needed to be broadened.

Savings is not an unconditional panacea for growth. Coherent and consistent long-term

policy to encourage investment in a stable socio-political and economic environment is a

prerequisite for this growth and development. The absorptive capacity, which is in many

ways constrained by the institutional bottlenecks and lack of profitable investment

opportunities, is also important for a transitional economy like Bangladesh. Otherwise

this excess liquidity of savings will end up with obvious consumption or even flight of

capital!2

In this context it can be mentioned that Bangladesh has experienced a major shift in her

consumption pattern during the last four fiscal years. While in the private sector the

consumption as percent of GDP has decreased from 77.5 percent in FY01 to 76.3 percent

in FY04, the propensity to consume has increased in the public sector, from 4.5 percent in

FY01 to 5.4 percent in FY04 (as percent of GDP).

2 CPD-GCR survey reveals that overseas investment by the entrepreneur of this investment-starved country is increasingly becoming a reality, while NRBs are not investing in Bangladesh as much as we want them to.


0

2

4

6

8

10

12

14

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

*

FY06

*

FY07

*

Tax-

GDP

Rat

io (p

erce

nt)

III. STATE OF THE FISCAL SECTOR 3.1 Revenue Receipts Inefficient and inadequate revenue mobilisation has been a major weakness for

Bangladesh’s fiscal sector. The historically low revenue-GDP ratio of Bangladesh

experienced a marginal upsurge during the FY00-FY04, when the revenue-GDP ratio

increased from 9.0 percent in FY00 to 10.8 percent in FY04. The periodic average of

revenue-GDP ratio increased from 8.45 percent in FY91-95 to 10.20 percent in FY01-04

percent. According to the PRSP target the revenue-GDP ratio will decline to 10.7 percent

in FY05. The sluggish trend in revenue collection during the first four months of FY05

substantiates this decline in revenue-GDP ratio.

Figure 8

Revenue-GDP Ratio in Bangladesh

The PRSP has set a very defensive set of targets for revenue-GDP ratio for FY06 (11.2

percent) and FY07 (11.7 percent), which is still low when compared with other South

Asian countries. This low tax-to-GDP ratio indicates the inefficiency of Bangladesh’s tax

system in financing public services and redistributing income3.

3 Assuming that increases in a country's tax-to-GDP ratio often indicate a greater provision of tax-financed services and/or a greater redistributive role of the tax system.


0

2

4

6

8

10

12

FY91-95 FY96-00 FY01-04 FY05-07*

Reve

nue-

GDP

ratio

(per

cent

)

Revenue-GDP Ratio (linear)

Revenue-GDP Ratio (period average)

Figure 9 Revenue-GDP Ratio in Bangladesh (Linear and Average)

Note: * Figures for FY05-07 are based on PRSP target

Latest available figure shows a modest revenue growth by the National Board of Revenue

(NBR) as it registered a 9.52 percent growth during the first four months of FY05 over

the corresponding figure of the previous fiscal year. During this period (July-October)

tax as percent of GDP has increased slightly, from 2.24 percent in FY04 to 2.26 percent

in FY05. During the July-October period of FY05, total import related revenue has

increased by about 6.46 percent while total internal trade related revenue registered a

robust 12.06 percent growth. Though import related supplementary duty showed a

marginal negative growth (-0.17 percent), supplementary duty at the local level registered

a moderate 10.43 percent growth during the period under reporting. Among others, VAT

(local), VAT (import) and income tax increased by about 13.94 percent, 12.52 percent

and 16.72 percent respectively. The encouraging point to be noted that during this July-

October period, the share of direct tax (income tax) has increased from 14.24 percent in

FY04 to 15.17 percent in FY05. However this share of direct tax is still appallingly low

and there is an urgent need for a shift in the composition of revenues away from tax on

goods and services towards direct taxes on income and profit. It is to be noted that the

NBR component covers more then three quarter of the total revenue income and the


0

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10000

15000

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25000

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FY91

FY92

FY93

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*

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(cro

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25

Ann

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Non-Tax RevenueTax RevenueAnnual Growth

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2.5

3.0

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FY91

FY92

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FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

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*

perc

ent o

f GDP

VAT as percent of GDPTrend Line

overall growth observed in the revenue is mainly the contribution of this NBR part, while

other parts (non-NBR tax and non-tax) of revenue sources remains stagnant.

Figure 10

Revenue Earnings During FY91-FY05

Note: * Target for FY05

Figure 11 VAT vs Income Tax During FY91-FY05

Note: * Target for FY05


In the context of a declining trend in public investment and stagnated savings-investment

scenario at the national level, the major challenge remains for Bangladesh’s fiscal policy

is to strengthen the effort to mobilise domestic resources to generate a larger share of

resources for investment. Reformation of the tax management and providing right

incentives to stimulate domestic savings is essential to achieve this goal.

3.2 Public Expenditure

Annual Development Programme

The size of the Annual Development Programme (ADP) for FY05 has been fixed at Tk

22000 crores, which is 15.78 percent higher than that the revised ADP of FY04 and about

30.31 higher than the actual implemented ADP of FY04. While only 83 percent of the

original size of the ADP i.e. 89 percent of the revised size was implemented during the

FY04, questions were raised regarding rationale of fixing such an ambitious target.

However, CPD in its post-budget reflection pointed out that this so-called ambitious ADP

target needs to be seen from the perspective that Bangladesh remains an under invested

economy and as such a large ADP target is worth chasing for. Thus, implementation of a

fuller ADP became the major challenge, than targeting a bigger ADP. The second aspect,

which needs to be underscored in this respect, is that the issue of quality is no less

important than the question of size of the ADP.

The ADP for FY05 took some steps decrease the number of projects, which has been

slashed down from 1163 in FY04 to 869 in FY05 including about 150 new projects.


Figure 12

Taka Release and Expenditure of ADP During the 1st Quarter of FY02-05

0

10

20

30

40

50

60

70

FY02 FY03 FY04 FY05

perc

ent

Taka ReleaseExpenditure

Latest available figure indicates that during the first quarter of the FY05, only Tk 2212

crore were spent for ADP implementation, of which Tk 1493 crores (67.5%) were funded

from internal resources (Taka) and Tk 720 crores (32.5%) were underwritten by project

aid. This indicates only a 10 percent realization of the target ADP during the first three

months of FY05. While the performance of ADP implementation during the first quarter

of the current fiscal year remains comparable with the experience of previous years, it

also suggests that the much anticipated “big push” necessary to achieve the aggregate

target in general and augment the domestic demand in post flood situation was not

forthcoming. One interesting point to be noted is that the implementation of ADP in

FY04 as percentage of Taka release has increased significantly as the release of Taka

declined sharply, keeping the implementation situation same. To be precise, while about

46 percent, 53 percent and 60 percent of targeted domestic resources (Taka) for ADP

were released during the first quarters of FY02, FY03 and FY04 respectively, only about

Tk 2985 crore or 20 percent of the total allocation of domestic resources (Taka) target of

ADP were released during the first three months of FY05.


0

2

4

6

8

10

12

14

16

18

20

Pow er Division Education LocalGovernment

Communication Health and FamilyWelfare

perc

ent

Figure 13

Target ADP and Actual Implementation During FY02-05 (1st Quarter)

0

5000

10000

15000

20000

25000

FY02 FY03 FY04 FY05

cror

e Tk Actual During 1st Quarter (P.A.)

Actual During 1st Quarter (Taka)Target ADP for the Full Fiscal

A closer look at the ADP implementation reveals that among the ministries/divisions

which received the highest allocation in the target ADP, the Ministry of Health and

Family Welfare implemented the least spending, only 2 percent of its allocation during

the first quarter of the FY05. Others performed moderately during this period: Power

Division 15 percent, M/O Education 15 percent, Local Government Division 18 percent

and M/O Communication 10 percent.

Figure 14 Performance of Major Ministries (in terms of ADP Allocation)


It was perceived that the government will use the ADP resources for the post-flood

rehabilitation programme. CPD’s Rapid Flood Assessment 2004 pointed out that the

government could utilise Tk 1278.57 crore from its development budget which were kept

as sectoral and unallocated block allocation. CPD also mentioned that

ministries/divisions of some selected sectors,4 which can be closely involved in the post-

flood rehabilitation programme, have a block allocation of Tk 667.03 crores or 3.0% in

their ADP budget. Surprisingly many line ministries of this group showed very low ADP

realisation that involved Ministry of Industries (6 percent), Ministry of Agriculture (13

percent), Ministry of Fisheries and Livestock (9 percent) and Ministry of Water

Resources only (3 percent). More surprisingly, unallocated block allocation of Tk 295

crore and sector-wise block allocation of Tk 983.57 crore remained untouched during the

first three months of FY05. One needs to take a closer look at the financing of

government’s post-flood rehabilitation programme in the context of this low ADP

implementation and even lower foreign aid flow.

4 Sectors which CPD thought would be involved more directly in the post-flood rehabilitation programme are: Agriculture, Rural Development, Water Resources, Industry, Transport, Communication, Infrastructure & Water Supply and Health, Population & Family Planning.


IV. STATE OF THE MONETARY SECTOR 4.1 Domestic Credit Expansion

The outstanding amount of domestic credit at the end of October 2004 stood at Tk

129183.00 crore of which Tk 99057 crores was in the private sector and rest percent in

the public sector. Total domestic credit during the first four months of the current fiscal

year registered a perceptible 15 percent growth over its matching figure for FY04.

Government’s expansionary approach following the Flood 2004 was reflected by this

upward trend in domestic credit expansion.

But it needs to be pointed out that though borrowing in the public sector increased on a

point to point basis by 3486.50 crores (i.e. by 13.09 percent) in October 2004 against the

decline of Tk.1005.30 crores (i.e. (-) 3.64 percent) during the comparable period of the

preceding year (2002); the high growth rate largely resulted from an increase of Tk.

1140.30 crores (i.e. 14.87 percent) in credit to the “Other Public Sector”. Net credit

expansion to government sector was 12.37 percent more than that of the matching figure

of the previous year.

Figure 15 Domestic Credit Expansion During Jul-Oct FY01 to FY05

0

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2001 2002 2003 2004

Tk in

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The 15 percent growth of private sector during the first four months of FY05 seems quite

low, when compared with the growth rate of 22 percent during the same period of

previous year. It may be noted that the correlation of credit growths between public and

private sector often appears to be negative5. When government borrows excessively from

the banking sector, it usually squeezes banks’ private sector lending capacity. As shown

in figure 16, growth of credit expansion in the private sector increased from 14.80 percent

in October 2002 to 22.23 percent in October 2003, while the growth of credit expansion

in the government sector declined from 0.40 percent to (-) 6.70 percent during the same

period. As the economy observed a high growth in the public sector (government 12.37

percent, and other public 14.87 percent) in October 2004, the growth in the private sector

declined to 15 percent.

Figure 16 Growths in Domestic Credit During Jul-Oct FY01 to FY05

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2001 2002 2003 2004

perc

ent

Government Other Public Private Total

However, excess liquidity in the banks provides enough room for government sector

borrowing to expand without crowding out the share of private sector. As seen during the

first four months of FY05, credit to private sector increased both in terms of absolute

volume and in terms of share corroborating the expansionary approach of the government

after the post-flood situation. 5 For example, on a point-to-point basis, growths during the first four months of FY01 to FY04 indicate a negative correlation of -0.4 percent.


Figure 17

Private Sector Share in Domestic Credit During Jul-Oct FY01 to FY05

64.00

66.00

68.00

70.00

72.00

74.00

76.00

78.00

2001 2002 2003 2004

perc

ent

Share of private investment marginally increased from 76.29 percent during October

2003 to 76.68 percent during October 2004. This is quite high when compared to the

average share of 72 percent as was observed during the past five years.

4.2 Government Borrowing and Public Debt During the first four months of FY05, the government borrowing experienced a major

shift as regard to its source by way of moving away from non-bank sources to banking

sources. This process has been underpinned by a drastic fall in net the sale of National

Savings Deposits (NSD). Total public borrowing during the July-October period of FY05

stood at Tk 22150.77 crore registering a growth rate of about 7 percent over the

corresponding period of the previous fiscal year. Share of government borrowing from

the non-bank sources during this period decreased from 8.35 percent in FY04 to 3.77

percent in FY05. While net borrowing from the banking sector increased by about 12.37

percent, net borrowing of government from the non-bank sources decreased by (-) 51.72

percent during the period under report.


-60.00

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0.00

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Borrowing from Bank Borrowing from Non-Bank

Total GovernmentBorrowing

perc

ent

Figure 18 Growth of Net Government Borrowing During Jul-Oct FY05

(point-to-point)

Government borrowing through sale of NSD certificates during the first four months of

FY05 stood at Tk 3291.46 crore registering a (-) 6.50 percent negative growth, while the

repayment of principal increased by 37.15 percent, registering a (-) 51.72 percent

negative growth in the net sale. This decline in the sale of savings certificate is a response

to the government’s decision of lowering the interest rate of NSD certificates to reduce

the cost of borrowing and to encourage people to invest in the economy. The recent

upward movements in the capital market can be correlated with the declining trend of

NSD sale. Though the second aim of the government was somewhat achieved, the

lowering of interest rate however backfired with a sharp decline in NSD sale, putting the

government at a risk to face financing crisis to fulfil the budget deficit with borrowing. In

that case, the government will have to increase its borrowing from the banking sector,

which will then create a negative impact on the private sector investment by squeezing

the private sector’s share of borrowing from the bank.


0

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3000

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Jul-Oct FY04 Jul-Oct FY05

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Repayment

Figure 19 Sale and Repayment of NSD Certificate

In the context of this dilemma, recently the government has taken some decisions to

increase the sale of NSD certificates with the same lowered interest rate. The government

has increased the limit of investment in NSD certificates, for single owner from Tk 20

lakh to Tk 25 lakh and in dual name, from Tk 40 lakh to Tk 50 lakh, which is equally

applicable for re-investment. Besides one can also reinvest his/her interest with the

principal. The commission of banks and post-offices has also been increased from Tk 20

to 5 percent for each transaction to encourage their selling effort.

4.3 Agricultural Credit

It was expected that the post-flood rehabilitation programme of the government will be

reflected by an increase in the agricultural credit. However agricultural credit expansion

during the first four months of FY05 shows a mixed picture with improved disbursement

rate which remains low in terms of target achievement.

Credit disbursement to the agricultural sector stood at Tk 1154.78 crore at the end of

October 2004 which is about 58 percent higher than the disbursement of the matching

period of the previous year. However this extraordinarily high growth rate can be

explained by its lower benchmark during the previous year. During the first four months

of FY04 only Tk 729.53 core were disbursed as against Tk 850.60 crore of recovery. This

out-flowed an amount of Tk 121 crore from the rural economy.


-200.00

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rore

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Figure 20 Growths in Agricultural Credit Expansion During Jul-Oct FY05

In this context, a moderately high credit expansion during the agricultural sector could

take a breath following the devastating flood. However, notwithstanding the agricultural

credit growth of FY03, the post-flood disbursement of agricultural credit during the FY05

falls short of the target as only 20.85 percent of the total target (Tk 5537.9 crore) was

disbursed during the first four months of FY05. It may be recalled that CPD in its Flood

2004 report suggested for disbursement of Tk. 5000 crore as agricultural credit in FY05. 4.4 Industrial Credit

In the backdrop of the slowdown in growth of industrial term loans in the recent years

(since FY01), the disbursement record for FY04 was quite impressive – Tk. 6619.60

crores, i.e. 67.08 percent growth. After a recovery of Tk 4954.24 crores in FY04, the net

flow to the sector is Tk. 1304.97 crores which compares favourably with the outflow of

(-) Tk. 40.90 crores during the comparable period in FY03.

The expansionary trends in the disbursements of industrial term loan continued in the

first quarter of FY05 (61.5 per cent growth). But in the absence of the data on recovery of

the loans, it is hard to get a complete picture of the term loan situations.


However, one interesting feature is that loan disbursement by NCBs declined by 60

percent, though the loan sanctioned was 257 per cent higher than the first quarter of the

FY04. Loan disbursement from PCB (domestic) shows a growth rate of 154 per cent,

which has also emerged decisively as the largest contributor (almost 65 per cent) to total

industrial loan disbursement. Figure 21

Term Loan for the FY04 and FY05

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FY04 (July-Sep.) FY05 (July-Sep.)

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DFI

NCB

Figure 22

Working Capital for the FY04 and FY05

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FY04 (July-Sep.) FY05 (July-Sep.)

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NCB


The disbursement of working capital grew at 46 per cent in FY05 (July-Sept). Similar to

the term loan, PCB (domestic) has the largest share (almost 65 per cent) in total

disbursement of working capital.

4.5 Price and Wage Inflation 4.5.1 Trend in Inflation

The rising trend in inflation is another concerning issue of the last few months. The

general inflation in October 2004 rose to 7.92 on point-to-point basis while inflation in

October 2003 was 6.16 per cent. Three major features of the recent rise in the price level

is: (i) inflation is higher in the rural areas, (ii) food inflation is higher in both rural and

urban areas; and (iii) non-food inflation showing a declining trend since October 2002.

The 12-month moving average inflation rate also shows an increasing trend, reaching as

high as 6.21 per cent in October 2004. The major factor behind this trend is the increase

in food price, which increased to 7.57 per cent (10.46 per cent on point to point basis).

However, the weakening of Taka against dollar and the rising import prices also added

fuel to the rising trend of inflation.

Figure 23

Inflation (Moving Average)

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General Food Non Food


4.5.2 Trend in Food Inflation

The recent flood may be the most influencing factor in the rise in the food price, although

the upturn started back in January, 2003. The food inflation in FY04 was 6.64 per cent

(on point to point basis), the food inflation then started accelerating and on October 2004,

it reached 10.46 per cent (on point to point basis), a record high since FY99.

Figure 24

Food Inflation (Point to Point)

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National Rural Urban

4.5.3 Wage Inflation

The general wage index grew by 5.38 per cent in October 2004, on a point to point basis.

The general wage inflation in October 2002 and 2003 was 11.25 and 6.83 per cent,

respectively. The crucial point here was that CPI inflation is increasing on the one hand

while the wage index was falling on the other hand in FY04. However, wage inflation in

FY04 was 3.93 per cent and since then it started increasing. Agricultural wage index also

started increasing since July 2004, following a decreasing trend over the previous 12

months.


Figure 25

Wage Inflation (Point to Point)

0.00

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Per c

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General Manufacturing Construction Agriculture Fishery

4.5.4 Inflation Trend in South Asia

Inflation in India (on a point to point basis) in July 2004 was 6.16 per cent, which was

inclined by an increase of the oil price in the international market. WPI inflation reached

at 8.3 per cent in August 2004; and then gradually decreased to 7.1 per cent in October

2004. The CPI inflation in Pakistan was also quite high, but it shows a declining trend in

contrast to Bangladesh.

TABLE 2

COMPARISON OF INFLATION IN INDIA, PAKISTAN AND BANGLADESH

Bangladesh (CPI) India (WPI) Pakistan (CPI) Jul-04 5.6 6.2 9.3

Aug-04 5.5 8.3 9.2 Sep-04 7.4 7.8 9.0 Oct-04 7.9 7.1 8.7


Figure 26

Comparison among India, Pakistan & Bangladesh

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jul-04 Aug-04 Sep-04 Oct-04

Bangladesh (CPI) India (WPI) Pakistan (CPI)

4.5.5 Experience with 1998 Flood: (Base FY1986=100)

The post flood trends of the 1998 show that inflation rose to as high as 12 per cent in

December 1998, then decreased gradually. Experts are predicting similar trends in

inflation after the recent flood. Moreover, the increase in the price of oil, diesel and

kerosene in December 2004 may increase the rate of inflation further.


Figure 27

Inflation During the Flood Year 1998

0.00

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Moving Average Point to Point

4.5.6 Projection on Food Inflation

Preliminary estimates suggest that production of Aman rice in FY05 will be 10 per cent

less than the last year. Per unit production cost of Boro rice will go up due to increased

cost of diesel and there is apprehension that Boro production will be adversely affected

due to increase in diesel price (see section 11.4 for details). International price of

foodgrains is on the rise and is expected to increase further in the coming months due to

low production prospect of rice in Thailand, Vietnam and India caused by abnormal

dryness (see section 11.1 for details).

Therefore, it is most likely that inflation in food prices may continue until the harvest of

Boro rice in April-May.


Box 1 An Enquiry into Factors Influencing Inflation: Inflation, as measured by changes in CPI, increased sharply between FY98-99, but this trend was reversed in FY00. Inflation started climbing again on FY02 and in FY04 it reached 5.8 per cent, the highest since FY99. Data on some of the factors likely to have influenced the inflationary process in Bangladesh is reported below:

Factors Influencing Inflation

Inflation Rate (End of

Period)

Budget Deficit (as % of GDP)

Exchange Rate Depreciation (%)

Real GDP Growth (%)

Broad Money Growth

FY97 4.0 2.0 -4.4 5.4 10.8FY98 8.7 2.1 -5.7 5.2 10.2FY99 7.1 3.2 -4.5 4.9 12.8FY00 2.8 4.5 -4.9 5.9 18.6FY01 1.9 4.1 -10.5 5.3 16.6FY02 2.8 3.7 -1.6 4.4 13.1FY03 4.4 3.4 0.0 5.3 15.6FY04 5.8 3.4 na 5.5 13.8

The significant decline in the inflation rate since FY98 reflects the impacts of tight monetary policies and contractionary fiscal policies of the previous year, as the budget deficit as % of GDP was only 2.0 per cent in FY97. The government and the central bank pursued expansionary monetary and fiscal policies in the late 90s and early 2000s. As a result, the inflation started increasing but with lagged response. Moreover, a large depreciation of the exchange rate by 10.5 per cent in FY01 along with monetary and fiscal expansion contributed toward an upward trend in inflation, started in FY02. The budget deficit as per cent of GDP shows a declining trend since FY00, from 4.5 per cent in FY00 to 3.4 per cent in FY04. On the other hand, the growth rate of broad money supply averaged 15.5 per cent in the last 5 years. This indicates preference toward the monetary policies over the fiscal policies by the government. The correlation between inflation and budget deficit as % of GDP for the same period and one lagged period is -0.6 and -0.7, respectively. On the other hand, the correlation between inflation and budget deficit as % of GDP for 2 and 3 lagged periods is -0.2 and 0.1, respectively. However, the correlation between inflation and budget deficit as % of GDP for 4 and 5 lagged periods is 0.3 and 0.3, respectively. This implies that fiscal policies take at least 2 periods to affect inflation. The correlation between inflation and 3 and 4 period lagged money supply growth is 0.8 and 0.2, respectively. The correlation between inflation and the same, 1 and 2 period lagged money supply growth is negative, which contradicts the theory.


V. STATE OF THE REAL SECTOR 5.1 Agricultural Production Crop

Foodgrain production in FY04 recorded the highest production in the history of

Bangladesh since independence. According to the final estimates of the BBS, actual

foodgrain production in FY04 was 27.44 million metric tons (Aus: 1.83 million metric

tons, Aman: 11.52 million metric tons, Boro: 12.84 million metric tons, and wheat: 1.25

million metric tons) which was 2.80 percent higher than that of FY03. In FY04, total rice

production increased by 3.98 percent (compared to FY03), while wheat production

decreased by 16.85%. It may be mentioned here that wheat production has been gradually

decreasing since 1999/00. Thus, it appears that increase in total foodgrain production in

recent years is mainly due to the increase in rice production.

The operational target for foodgrain production in FY05 has been set at 30.0 million

metric tons which is 9.32 percent higher than actual production in FY04. Initial estimates

show that harvested area under Aus rice has declined from 1.2 million ha in FY04 to 1.0

million ha in FY05, while production of Aus rice has declined from 1.83 million tons to

1.45 million tons. Decrease in Aus production was mainly due to the damage caused by

July-August flood in 46 districts and also because of decrease in area under Aus rice.

Achieved area under transplanted Aman rice (after damage by July-August flood in 46

districts and excessive rain and flash flood in September in 24 districts) is 4.88 million ha

which was 3.44% less than last year. On the other hand, achieved area under broadcast

Aman was 0.42 million ha (33.15% less than FY04). According to the Directorate of

Agricultural Extension (DAE), 35.0 percent of the transplanted Aman area was under

local variety and 65.0 percent area was under HYVs. Most importantly, rice plants had

limited time for tillering and vegetative growth which might have effected plant densities

and thereby, number of plants per hectare in many districts. Though we had floods and

excessive rains in 2004 in most of the areas of Bangladesh but one district (Nilphamari)

experienced drought. It is well known that yield potential of local varieties is much lower

than that of HYVs.


Therefore, all these factors (decrease in Aman area, dominance of local varieties, lower

number of effective tillers per unit area in many districts and drought) would have a

negative effect on the production level. Harvesting of Aman rice is almost over.

However, the respective agencies would require some time to come up with the

production estimates of Aman. There is apprehension among experts that Aman

production in FY05 might be about 10 percent less than that of FY04. This implies that

the government must have to take extra efforts for increased production in Boro season

by ensuring delivery of seed, fertilizer and irrigation fuels.

This year farmers have taken extra effort to increase vegetable production by observing

high prices of vegetables during August-October. Increased effort of farmers had

increased production and supply of vegetables since November which helped to reduce

price. However, farmers’ success in increased vegetables production has been penalizing

them in a very harsh way. In many areas farmers are not able to sell their vegetables even

at their cost of marketing.

Livestock

Production of eggs in FY04 was 4.780 billions which was slightly higher than FY03

(4.777 billion). Total meat production increased from 0.83 million tons in FY03 to 0.91

million tons in FY04 (9.64 percent increase). Milk production has increased from 1.82

million tons in FY03 to 1.99 million tons in FY04 (9.34 percent increase). July-August

flood and excessive rain in September has severely affected the livestock sector. A total

of 293,301 poultry birds, 1649 cattles, and 4546 goats and sheep were killed by the flood.

After the natural disaster of this enormous scale it was a great concern of outbreak

diseases of poultry and cattle. No epidemic of diseases has so far been reported. Hence,

it is expected that this year’s production of different livestock products would be good.


Fisheries

Total fisheries production has increased from 2004 thousand metric tons in FY03 to 2126

thousand tonnes in FY04 (6.09 percent increase). Contribution of inland open water

(capture), inland open water (culture) and marine fisheries was 36.41, 41.63 and 21.97

percent, respectively. Flood 2004 had devastating impact on fish farms. According to the

Ministry of Livestock and Fisheries, flood has damaged shrimp, fish and fingerlings in 43

districts of Bangladesh amounting Tk. 9907.4 million. The government has taken

initiatives to rehabilitate farmers with a total budget of Tk 206.86 million.

We may conclude by saying that production prospect of foodgrains in FY05 is bleak. It is

widely speculated that aman production would be around 10 percent less than that of last

year (FY04) while aus production was 0.38 million tonnes less (21% less) than last year’s

production. Therefore, extra efforts need to be taken for increased production of Boro

rice. Crop sector may have slow growth in this year, but livestock and fisheries sub-

sectors may register medium growth.

5.2 Industrial Production The country observed a moderate recovery in the industrial sector during the first four

months of the FY05 after the devastating flood that the economy experienced at the

beginning of the FY05. The weighted growth of major industries which accounts for

about 68.18 percent of the whole manufacturing sector experienced a moderate 3.87

percent growth during the July-October period of FY05 over the corresponding figure of

the previous fiscal year. Yarn, cloth and garments showed 18.44 percent, 26.75 percent

and 17.37 percent growth supporting the high growth performance in the export in this

sectors. Among others, sector which showed modest to high growth during this period

includes: fertilizer (13.97 percent), MS rod (5.93 percent), cement (12.27 percent) and

drugs and pharmaceuticals (10.19 percent). However, jute textile, paper and petroleum

products showed negative growths during this period registering (-) 8.12 percent, (-)19.53

percent and (-) 4.91 percent negative growth respectively.


-30

-20

-10

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40

50

Jute

Tex

tile

Gar

men

ts

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lizer

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ent

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rette

s

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s &

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eutic

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terg

entG

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th (p

erce

nt)

FY04 (Jul-Oct)FY05 (Jul-Oct)

0

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300

350

July

Aug Sep

Oct

Nov

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June

2002-032003-042004-05

Figure 28

Growths of Major Industries During July to October of FY04 and FY05

Figure 29

Quantum Index of Production during FY03-05 (1988-89=100)

The quantum index of production shows a robust 8.58 percent growth during the first

four months of the FY05 when compared with the 3.52 percent of growth during the

FY04 over the corresponding period f the previous fiscal year. This growth is even more

encouraging keeping in mind that the economy started with a flood during the FY05.


5.3 Foreign Investment

Bangladesh received a net amount of US$ 505.45 million as foreign investment6 during

the FY04 registering a marginal 5 percent annual growth over the previous year. After the

decline in FY02, the flow of foreign investment is gradually picking up, but it is yet to

recapture the recent peak of FY01, when the country received almost US$ 600 million as

foreign investment.

Figure 30 Foreign Investment During FY00-FY04

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300

400

500

600

700


Foreign Investment in EPZsPortfolio InvestmentForeign Direct Investment*

Note: * FDI flows are on the basis of enterprise survey

Latest available figures show that during the first quarter of FY05 the country received a

net amount of US$ 121.64 million as foreign investment, of which US$ 102 (83.85%)

million came as foreign direct investment (FDI) and another US$ 19.64 million (16.14%)

came in the Export Processing Zones. There was no new portfolio investment during this

period. The total flow of foreign investment is 9.47 percent higher in FY05 (July-

September) than the corresponding figure of the previous year (FY04).

6 CPD accounts foreign investment by combining the foreign direct investment, foreign portfolio investment and foreign investment in EPZs.


Figure 31 Foreign Investment During July-September of FY04-05

0

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40

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80

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120

140

FY04 (Jul-Sep) FY05 (Jul-Sep)

Foreign Investment inEPZs

Portfolio Investment

Foreign DirectInvestment*

Note: * FDI flows are on the basis of enterprise survey

However, following detection of the huge discrepancy between the Bangladesh Bank and

BOI’s foreign investment data, recently the Bangladesh Bank, with the support of IMF,

has taken the initiative to incorporate survey data (instead of banking data) to account the

foreign investment flow. Since the banking data gives only a very partial coverage as

reinvested earnings are excluded altogether, intra-company loans are under-reported and

non-cash equity flow (e.g. equity contribution in the form of machinery and equipments)

are not identified from the trade returns and it remains substantially under-covered.

Following figure shows the difference between survey data and banking data during the

previous five years. Still there are remain some divergence between the FDI survey data

of Bangladesh Bank and BOI.


Figure 32

FDI Flow: Survey and Banking Data

0

100

200

300

400

500

600


FDI: Survey Data

FDI: Banking Data

Source: Bangladesh Bank

In terms of investment registration statistics of BOI, number of registered companies

during the first three months of FY05 was 414, of which 28 (only 6.76 percent) are

foreign investment proposals and the rest locals. Total foreign investment proposed

during this period amounted to US$89 million, which has proposed to generate

employment opportunities for about 86 thousand people. It is to be noted that BOI has

targeted foreign investment to grow from US$ 400 million in 2003 to US$ 1 billion by

2006. BOI is yet to take any stocktaking for the calendar year 2004 (January-December),

for which the target figure was set at US$ 600 million. However, Bangladesh Bank’s

projection on the basis of survey data shows that this target for foreign investment has

fallen short by about US$ 200 million. In this backdrop, a major driving force will be

required to achieve the US$ 800 million target in 2005.


Figure 33

Sectoral Composition of Registered FDI in FY04

Textile16%

Services62%

Chemical7%

Agro-based6%

Misc0%

Engineering1%

Food and allied3%

Leather and rubber

3%

Printing and publication

2%

Source: Board of Investment.

The sectoral decomposition of FDI flow of FY04 revels that the majority of the FDI in

Bangladesh comes to the services sector which accumulates about 62 percent of the total

FDI flow, which is followed by the textile (16 percent), chemical (7 percent) and agro-

based industries (6 percent) sector. However sectors like infrastructure, engineering and

leather remains under-invested.

5.4 Capital Market The dynamics of capital market in Bangladesh is such that it does not reflect the real

macroeconomic performance of the country. However certain aspects of investment

scenario can be observed from the movements in the capital market. Since the 1996

incident, the capital market experienced a deliberately slow but steady recovery that

continued throughout the FY04. Several new IPOs came into the market and a bullish

trend was observed from the mid-November of FY04, which gathered momentum in the

early part of December recording a 1015.97 general index for the first time after 1996.


0

1

2

3

4

5

During the first half of FY05 a spectacular upsurge in all share price index was observed

both in Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The

general index of DSE increased from 967.88 in December 2003 to 1971.31 in December

2004 registering a thousand-point increase in one year. This was however contributed

mostly by the category-A companies as DSE 20 index also registered a 930.46 point

increase during the same period (from 1228.20 in December 2003 to 2158.66 in

December 2004). CSE also followed the suit as the CSE general and CSE 30 index went

up to as high as 3597.70 and 3463.76 at the end of December 2004.

Figure 34 Entry of IPOs in the Capital Market (Monthly Statistics)

On the contrary, the issuance of IPO has gone down dramatically since no new IPO

entered into the market in between November 2003 and July 2004 (see figure 34). This is

a worrying concern as following the simple law of demand-supply theory; the rate of over

subscription has gone up.

There is a substantial amount of liquid money in the hands of common people and at the

household level, other than that of in the banking system of Bangladesh. In view of the

fact that the income potentials from sources like bank and NSD certificates have gone

down due to lowering of the interest rates, a number of small and medium investors are

now coming into the capital markets with their investible surplus. Following the boom

and burst of the Capital Balloon in 1996, several initiatives taken by the Securities and


Exchange Commission7 (SEC) also contributed to this over subscription of IPOs.

However, very recently some new IPOs have entered into the market8 and several others

are on the pipeline9.

IPOs these days are mainly coming from the banking and financial sectors and not from

the real sector (after the Lafarge Surma Cement in November 2003). No IPOs from

telecommunication services was observed. A number of non-bank financial institutions

have applied and are coming to the market soon. In general, banking financial institutions

performed better in security market, out of 29 enlisted banking and non-banking financial

institutions, 21 are of ‘A’ category, whose price earning ratios are mostly near about 10.

It seems that private commercial banks have performed well under prudent laws and

regulations and better supervision of Bangladesh Bank, introducing new products with

traditional one, such as government treasury bills, prize bonds, shares of public limited

companies, treasury dealings both in local and foreign currency, automation tools such as

ATM, SWIFT, extended consumer credit scheme, merchant banking, credit card

operation and Islamic banking.

However IPOs from the real sectors also needed to be encouraged. Major reason for

profit making companies for not entering in the capital market can be the absence of

managerial expertise to expand their business further. Some also fears to loose their

family ownership from the company if they go to the share market. Besides it also induce

them to have more accountability and transparency in terms of profit making.

This scarcity of IPOs can also be linked with the ever increasing all share price index.

Since the buying of new IPOs is becoming increasingly expensive (for higher price) and

difficult (for lower IPO entry); investors are now trying to make profit from selling and

buying second-hand shares. Besides, the dividend and profit they are provided for these

7 Such initiatives includes abolition of curb market, introduction of Automated Trading System, Central Depository System (CDS), and overall technological changes. 8 Exim Bank Ltd, Mercantile Insurance Company Ltd and ICB AMCL Islamic Mutual Fund entered int o the market during the October-December 2004 period. 9 Agrani Insurance Company Ltd, Global Insurance Ltd and Premier Bank Ltd are scheduled to come in to the capital market during the January-February 2005 period.


hard earned shares are not adequate and thus everyone is buying and offloading their

shares at a higher price to make profit, which is resulting this phoney increase in share

price index. It does not relate to the performance of the share offering companies nor

does it shows the overall macroeconomic trend of the country.10

As a consequence, if new IPOs do not come in the market to absorb this high demand and

necessary market corrections in this regard are not seen, this spurious surge in the capital

market will soon fall down. The capital market during the first two weeks of 2005 has

already shown some indications to it. The DSE General Index took a massive 133.13-

point drop on January 11, 2005 while the CSE All Share Price Index registered a 206.24-

point fall on the same day. Though the stocks revived on the next day, these ups and

downs are likely to persist for the next couple of weeks. Though some investors claimed

it as the result of SEC’s decision to suspend credit-extending facility by brokers to their

clients to control excess liquidity in the market, it is also true that only buying and selling

of share certificate cannot sustain this bullish trend. Along with the telecommunication

and other private sector companies, government blue chips should also be encouraged to

come into the market.

10 However, since the new IPOs are coming from the CDBL system and there is no curb market, at least this increase is not coming from any fake share certificates as it was observed in 1996. Besides, the major upraise in share price index are seen mainly on high value companies (DSE20 and CSE 30) who are giving 10 percent dividend to their share holders.


VI. STATE OF THE EXTERNAL SECTOR

Bangladesh’s external sector experienced some degree of resurgence during FY2003 and

FY2004 following the dismal performance experienced in FY2001 when a decline in

export (-7.4 percent) coupled with low remittances flow resulted in low forex reserves

and unstable balance of payments that in the end also restrained growth of import. The

good performance of the external sector visible in FY2004, when exports posted a growth

of 16.1 percent, has now been sustained in the first few months of FY2005. As a matter

of fact, both exports and imports are showing robust growth as FY2005 crosses its half

way mark while the balance of payments appears to be comfortable. Increased surplus in

the current account balance is also observed, thanks to high growth of remittances which

has also boosted the foreign exchange reserves which has crossed the US$ 3 billion mark

in December 2004 for the first time since 1995.

6.1 Export Likely to Survive the Phasing out of MFA

Export sector’s robust performance in FY2005 is all the more remarkable since this

particular year coincides with the full and final phase-out of the MFA quotas. Although

quota was phased out on January 1, 2005 the order for the winter-spring season had

started to come in early FY2005 (September – November, 2004) and it does credit to

Bangladesh’s producers that the country has continued to remain on the radar screen of

buyers. Exports show a highly encouraging growth of 19.04 percent over the first four

months of FY05 when compared to the matching figure of FY04. Thus, export earnings

during the July-October period of FY2004 increased from $2415.35 million compared to

$2875.31 million over the corresponding period of FY05. As shown in figure 35, export

earnings from woven garments has increased by 14.7 percent, from US$ 1119.31 million

to US$ 1283.86 million during the first four months of FY05, whilst knitwear showed a

phenomenal growth of 40.4 percent. Export of knitwear increased from US$ 696.21

million to US$ 977.45 million during this period. All the more remarkable since knitwear

exports had increased by 29.9 percent in FY2004, and the sector suffered some damage,

particularly in Narayanganj area, because of the Floods in July-August, 2004. Export

earnings from other manufactured goods such as leather (6.1 percent), chemical products


(15.0 percent) and handicrafts (15.8 percent) also experienced modest to high growth

rates. Jute’s downward spiral could not be halted, with export of jute goods remaining

stagnant with only a 0.2 percent growth. However other than tea which posted a modest

4.5 percent growth, export earnings from all other principal primary commodities

including raw jute and frozen foods have declined sharply by (-) 45.9 percent and (-) 32.0

percent during the period under analysis. This does not augur good as far as export

diversification is concerned.

Figure 35

Structure of Exports during July-October FY04-05

0

200

400

600

800

1000

1200

1400

Raw

Jut

e

Tea

Leat

her

Froz

enFo

ods

Jute

goo

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Han

dicr

afts

Wov

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ear

Kni

twea

r

Che

mic

al

Oth

ers

mln

US$

Export Jul-Oct FY04 Export Jul-Oct FY05

Thus, although there has been a negative growth of (-) 20.4 percent for export of primary

commodities during the first four months of FY05, manufactured commodities registered

a high growth of 22.6 percent.


-60.00

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-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

Raw

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goo

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Han

dicr

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ear

Kni

twea

r

Che

mic

al

Oth

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Figure 36 Sectoral Growths of Exports during July-October FY05

Monthly dynamics of export earnings reveals that there was positive growth in each

month during the first four months of FY05 when July, August, September and October

export registered 28.0 percent, 24.6 percent, 11.4 percent and 9.2 percent growth rates

respectively on a point to point basis over the previous fiscal year. However, the growth

rates have declined secularly over which has been captured in Figure 36. It is too early to

make projection on these early declining trends. As Figure 37 shows, growth of export

earnings generally tends to slow down from their peak in July-August. However, there

appears to be a need to closely monitor the movement of the curves over the coming

months of FY2005.


Figure 37 Monthly Dynamics of Export Earnings During FY01-05 (Jul-Oct)

FY01

FY02

FY04FY05

FY03

0

100

200

300

400

500

600

700

800

900

1000

July August September October

However, a decomposition of export growth presents a mixed picture. Most of the growth

in export earnings has been sustained through increase in volume. On the other hand, the

export price index shows no significant rise in the average prices of Bangladesh’s export

goods in the global market. As figure 38 shows, during the July-October months of FY05

about 81 percent of the export growth was accounted for by a rise in export volume as

against only 19 percent that was accounted for by rise in the average prices: export

quantum index has risen by 15.5 percent whilst export price index has posted a rise of

only 3.6 percent. As would be expected this trend is mostly explained by movements of

volumes and prices of manufactured commodities which accounts for more than 90

percent of Bangladesh’s total export. However, as can be seen from Figure 39 price of

primary commodities has shown some sign of moving up during the first four months,

although export volumes have gone down significantly.


Figure 38

Decomposition of Export Growth for July-October FY05

-40

-30

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-10

0

10

20

30

Tota

l Exp

ort

Prim

ary

Com

mod

ities

Mfg

.C

omm

oditi

es

perc

ent

Export (Price Index) Export (Volume Index)

Volume index of manufactured goods rose by 19.6 percent while the price index rose

only by 3 percent during the period under analysis, however primary commodities

experienced a rise of 13.7 percent in its price index, though the overall growth was

negative (-20.4 percent) since volume index declined by about (-) 34.2 percent.

The above trend once again reinforces the need for Bangladesh to put special emphasis

on local value addition and export diversification if she wants to confront the

deteriorating terms of trade emanating from the global market place.


Figure 39 Export and Import during FY91-FY04

0

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4000

6000

8000

10000

12000

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

mill

ion

US

$

Total Export

Total Imports

6.2. Import Sees Robust Growth Especially in Investment Items Bangladesh has been experiencing a steady growth in its import since the time of market

deregulation in the 1990s. Though there was a negative growth of import in FY02, the

economy experienced remarkable recovery in the subsequent fiscal years. The early

signal of FY05 also shows a continuation of that restoration process (see figure 40).

Figure 40 Imports and Sectoral Growth during the First Quarter of FY01-05

0

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3000

3500

FY01 FY02 FY03 FY04 FY05-10

-5

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25

30

35 Oil Seeds

Others Incl EPZ

Capital Goods

Iron and Steel

Textile andArticles ThereofEdible Oil

Milk and DairyProductsFood Grain

Growth


Imports to Bangladesh during the first quarter of FY05 registered a significant growth of

about 25.2 percent compared to the corresponding period of FY04. When imports by

EPZs are included, growth of import stands insignificantly higher at 25.5 percent. It is to

be noted that import growth was mostly accounted for by growth of imports of non-food

items while imports of food grains declined by (-) 39.5 percent during this period.

Consequently, the share of food grains in total import also declined from about 6 percent

in FY04 to less than 3 percent during the first quarter of FY05. If imports of rice and

wheat are excluded, the growth rate of import during this period stands at 29.7 percent.

Figure 41 provides the sector-wise imports and growth of some selected commodities

during the first quarter of FY04 and FY05.

Figure 41

Sectoral Growth of Imports during the First Quarter of 05

-60.00

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20.00

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80.00

100.00

Food

Gra

ins

Milk

& C

ream

Oil S

eeds

Edi

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Oil

Cru

de P

etro

leum

Che

mic

als

Fer

tilize

r

Raw

Cot

ton

Yar

n

Tex

tile a

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rticl

es T

here

of

Iro

n an

d st

eel

Cap

ital G

oods

Impo

rts o

f EPZ

Oth

ers

perc

ent

Import of textile and garments related inputs such as raw cotton (30.6 percent), yarn (12.6

percent) and textile and related articles (27.9 percent) registered an impressive growth

during the period under analysis, supporting the high export performance of knitwear and

woven garments in recent months.


Whilst pharmaceuticals showed a negative import growth of (-) 27.3 percent, all major

commodities other than food grains experienced modest to high growth rates during the

first three months of FY05. Among others, iron and steel, capital goods and imports by

EPZ registered notable growth rates of 31.1 percent, 28.1 percent and 29.9 percent

respectively.

Notwithstanding some concern that Bangladesh’s development growth is largely

dominated by the service sector, and the contribution of the real sector is declining, the

high growth in imports of raw materials and capital machineries is a positive

development which is expected to have favourable impact on investment and growth in

real economy.

6.3 Opening and Settlement of Import LCs

Growth of import during the early months of FY05 is also substantiated by the data on

fresh opening and settlements of import letter of credits (LCs). During the July to

November period of FY05, LCs worth about US$ 4944.41 million were settled,

registering a growth of 15.6 percent during the first five months of FY05 over the

corresponding period of the previous fiscal year. In line with the actual import data,

import of food grains in terms of settlement of LCs also declined by about (-) 4.6 percent

during the period under reporting. LC settlement on account of imports of consumer

goods however increased by 19.0 percent. When imports of food grains are excluded,

settlement of import LCs shows a 15.3 percent rise during the period under reporting.


Figure 42

Settlement of LCs during July to November of FY04 and FY05

0

500

1000

1500

2000

2500

Con

sum

ergo

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Inte

rmed

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Cap

ital

mac

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Oth

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achi

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Oth

ers

July-November FY04July-November FY05

LC settlement figures for major production related imports registered significant growth

with industrial raw materials showing a growth of 7.7 percent and capital machinery

registering a robust growth of 60.7 percent during the first five months of FY05.

Intermediate goods also showed a significant growth of 70.5 percent, however, import of

machineries of miscellaneous industries declined by (-) 7.9 percent in terms of LCs

settlements.

Figure 43

Fresh Opening of LCs during July to November of FY04 and FY05

0

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1000

1500

2000

2500

Con

sum

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Oth

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ers

July-November FY04July-November FY05


The observed growing trend in import is likely to persist in the subsequent months as LCs

worth US$ 5764.53 million has been opened by the importers during the first five months

of FY05, registering an impressive 26.5 percent growth over the corresponding period of

the previous fiscal year. After a negative trend in growth, both in terms of actual import

and LC settlement, import of food grains has registered a significant positive growth of

83.9 percent in terms of LC opening; which has contributed to the considerable growth of

45.7 percent for consumer goods imports during the same period. Evidently, the impact

of flood 2004 has caught on with Bangladesh’s import figures.

Figure 44

Growth Rates of Opening and Settlement of LCs FY05 over FY04 (July to November)

-20

0

20

40

60

80

100

Consumergoods

Intermediategoods

Industrial rawmaterials

Petroleum Capitalmachinery

OtherMachinary

Others

perc

ent

Grow th of Opening of L/CsGrow th of Settlement of L/Cs

Import of industrial items such as industrial raw materials (7.6 percent), petroleum and

petroleum products (59.8 percent), capital machinery (56.5 percent) and machinery of

miscellaneous industries (27.4) have also demonstrated impressive growth in terms of LC

opening during the July-November period of FY05.


Import of capital machineries and industrial raw materials also corroborates the

expansion of RMG sector, particularly supply side expansion as demonstrated by rise in

volume.

6.4. Balance of Payments regimented

Bangladesh’s balance of payment has been in a restrained mood since FY02 when the

current account balance started to register surplus balance, and overall balance remained

positive. However, with further deterioration in the trade balance, the overall balance

took a sharp decline in FY04 (Figure 45).

Figure 45

Balance of Payments FY97 to FY04

Trade Balance

Current account balance

Overall Balance

-2500

-2000

-1500

-1000

-500

0

500

1000

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

milli

on U

S$

NB: Revised under the IMF Multi-sector Statistics Mission’s advice.

The balance of payment during the first three months of FY05 remained steady in the

context of robust growths both in imports (22.70 percent), exports (21.85 percent) and

remittances (13.74 percent). Current account balance registered a surplus of US$ 284

million in the first quarter of the FY05, which is 25.1 per cent higher than the first quarter

of FY04, thanks to a large extent to the continued growth in remittances (US$ 836

million) from the expatriate Bangladeshis working abroad. Though growth in export has

contributed to the surplus in the current account, remittances is now becoming a key

factor in stabilizing Bangladesh’s balance of payment scenario. If remittance is excluded


(which is about 37 percent of the total export earnings) the current account balance

during this period would decline to a deficit figure of (-) US$ 552 million.

Figure 46

Balance of Payment Scenario During Jul-Sep in FY04-05

-600

-400

-200

0

200

400

600

800

1000

1200

TradeBalance

Services(net)

Income (net) Currentt ransfers

Currentaccountbalance

Capitalaccount (net)

Financialaccount

Error andommissions

OverallBalance

ReserveAssets

FY04 (Jul-Sep)FY05 (Jul-Sep)

Deficit in the trade balance increased by about 27.9 percent during the first quarter of

FY05 compared to the corresponding figure of pervious year. However, there was some

decrease in the deficit of trade in services. The net service balance during the July-

September period stood at (-) US$ 158 million in FY05, which is about 18 percent less

than the service deficit of FY04 (US$ -192 million). The surplus of the current account

balance was diluted somewhat by a fall (by about 13.62 percent) in the net earnings. The

current transfers registered a robust growth of about 15 percent, contributing to the above

mentioned current account surplus.

Balance of the financial account during the first quarter of the fiscal year showed

encouraging signs rising from US$49 million in FY04 to US$ 268 million. Though

foreign direct investment showed a marginal 6.3 percent growth, a nagging concern is

that a substantial part of this came in the form of medium and long term loans and not in

the form of investment.


6.5 Flow of Remittance Continuing Escalation

As was mentioned earlier, the flow of worker’s remittance sent by the expatriate

Bangladeshis has now become a significant contributor to the total forex earnings and

current account balance of the country. During the first half of FY05, remittance has

registered a robust 14.2 percent growth compared to the 8.0 percent growth posted during

the same period of FY04 over the corresponding period of the previous fiscal year. An

amount of US$ 1801.36 million was remitted through the official channel during the

July-December period of FY05, as against US$ 1578.06 million during the corresponding

period of FY04.

Figure 47

Flow of Remittances During Jul-December in FY01-FY05

0

200

400

600

800

1000

1200

1400

1600

1800

2000


milli

on U

S$

0

5

10

15

20

25

30

35

perc

ent

Remittances (July-December) Growth (Point-to-Point)


Figure 48

Monthly Trend in the Flow of Remittances During FY04-FY05

0

50

100

150

200

250

300

350

400

Jul

Aug

Sep Oct

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Dec

milli

on U

S$

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perc

ent

FY04 FY05 Growth (point-to-point)

Remittance observed growth in every month during the first half of FY05 and in

December the monthly growth (on a point to point basis) reached up to 31 percent. The

growth of remittance was slightly higher during the second quarter of FY05 (14.4

percent) than the first quarter (13.8 percent) of the same year.

It is to be noted that in recent years the role of remittance in the payments of import and

in restocking the foreign exchange reserve has increased significantly. However,

remittance as percentage of export has decreased from 43.2 percent during July-October

period FY04 to 39.3 percent during the corresponding period of FY05, in the face of

relatively higher growth of export of goods (19.1 percent). Nonetheless, after the

moderate growth rates visible in the 1990s, remittance experienced robust growth rates

from FY02 and during the July-December period of FY03, this growth rate was as high

as 31 percent. Thus, the relatively moderate growth of remittance during the first six

months of FY05 is not a surprise taking into account the high benchmark during the

previous years.


Figure 49

Remittances and Foreign Exchange Reserve: FY91 to FY04

0

500

1000

1500

2000

2500

3000

3500

4000

FY91

FY92

FY93

FY94

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FY03

FY04

mill

ion

US

$

Forex ReserveRemittance

6.6 Forex Reserves Continues to Swell

After the pinnacle in FY95 when the foreign exchange reserve reached US$ 3070 million,

the country experienced a continued decline in the forex reserve till FY01 when it stood

at US$ 1307 million. Since then, the forex reserves started to move up and in FY04 it

stood at US$ 2704 million. Since FY95, the forex reserve again crossed the US$ 3 billion

mark at the beginning of FY05.

Figure 50

Foreign Exchange Reserves and Equivalent Months of Import

0

500

1000

1500

2000

2500

3000

3500

Dec

-FY

00

Dec

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Dec

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-FY

05

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0

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1

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2

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3

4

equi

vale

nt m

onth

s

Reserve (Dec)Equivalent Month of Import


Forex reserve at the end of December 2004 stood at US$ 3222.57 million, which is about

23 percent higher than the corresponding figure of previous year. So Bangladesh has

started the new calendar year 2005 with a forex reserves that is equivalent to slightly

higher than three months of import. Both remittance and export played significant role in

achieving this target. However, an equally higher growth of import (25.5 percent) during

this period has kept the reserve at a modest level in terms of the equivalent months of

import. In spite of the recent upturn in the reserves, given that imports are rising, the

current growth momentum in reserves may not be sustained in the coming months.

Figure 51

Decomposition of Sources of Import Financing+

0%

20%

40%

60%

80%

100%

FY00 FY01 FY02 FY03 FY04 FY04 (Jul-Sep)

FY05 (Jul-Sep)

Worker'sRemittances Export Earnings Services Other*

Note: + Assuming the share of different sources of forex reserves equal to the share of

import financing.

* Others include current transfers other than remittances, foreign capital and

income from abroad)


A decomposition of import financing11 shows that the share of export earnings in import

payment is increasing, while the share of remittance is showing a negative growth during

last couple of years. Share of export has increased from around 59 percent in FY03 to

around 66 percent during the first quarter of FY05. Conversely, the share of remittances

has decreased from around 28 percent in FY03 to around 24 percent during the first three

months of FY05. Bangladesh will need to put special emphasis to increase its foreign

reserve from multiple sources.

6.7 Foreign Aid Failed to Supplement Growth Instruments

The declining trend of foreign aid disbursement deteriorated further in FY04 when it

came down to US$ 954 million from that of US$ 1577 million in FY03; registering a (-)

39.5 percent negative growth. Paradoxically, in the context of weak capacity to utilise

this lowering trend of aid commitment, Bangladesh is experiencing a ballooning aid

pipeline (approaching US$ 7.0 billion). During FY04, only 82 percent of the total project

aid was utilized in the ADP, while for the first quarter of FY05, this ratio is only 10

percent. Besides, the discrepancy between the commitment and disbursement is

increasing systematically.

Figure 52

Flow of Foreign Aid in Bangladesh During FY90-04

0

500

1000

1500

2000

2500

3000

FY90

FY91

FY92

FY93

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FY96

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FY98

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FY00

FY01

FY02

FY03

FY04

milli

on U

S$

Commitment Disbursement Linear (Disbursement)

11 Assuming the share of different sources of forex reserves equal to the share of import financing.


Latest available statistics for the first four months of FY05 shows that the flow of foreign

aid has increased both in terms of commitment and disbursement. Commitment of

foreign aid during the July-October period of FY05 stood at US$ 354.0 million, when the

corresponding figure for FY04 was US$ 136.6 million. Disbursement of foreign aid was

even higher that stood at US$ 575.0 million during this period, while the matching figure

for the previous fiscal year was US$ 209.2 million. Though the disbursement of foreign

aid was about 2.7 fold when compared to the corresponding figure of the previous fiscal

year, this was largely due to the lower benchmark of FY04.

However the dynamics of aid disbursement during the first four months of FY05 is rather

disturbing, as there is no food and commodity aid during this period and in the total

volume of project aid, the ever increasing share of loan is even higher this time, more

than 98.3 percent: foreign loan US$ 565.0 million and foreign grant US$ 10.0 million.

Figure 53

Flow of Foreign Aid During July to October of FY04-05

0

100

200

300

400

500

600

700

FY04 (Jul-Oct) FY05 (Jul-Oct)

milli

on U

S$

Commitment Disbursement

In the context of the scarcity of savings and investment, foreign aid plays a very

insignificant role to stimulate growth in Bangladesh as it does not adequately supplement

to the savings and investment. It is argued that to achieve a given growth rate, adequate

savings for investment and sufficient foreign exchange to buy the capital goods necessary

for development is essential. According to some theoretical models, if a country is

deficient in either area, then foreign aid can fill the gap either by providing foreign saving


to supplement inadequate domestic saving or by providing the necessary foreign

exchange to buy the goods and services in the international market that the country

requires for development but cannot produce on its own.12

Figure 54

Declining Foreign Aid in the Context of Stagnated Domestic Savings

0

5

10

15

20

25

30

perc

ent

DomesticSavings aspercent ofGDP

ODA aspercent ofGDP

NationalSavings aspercent ofGDP

However, as shown by the above figure, when the domestic savings of the country

declined or stagnated, the flow of foreign aid also declined and remained as a marginal

proportion of GDP. Since foreign aid does not add significantly to total national saving

and rather shows a diminishing trend, it is not likely to promote growth in Bangladesh

(on the contrary, several studies have established a negative relationship between the

domestic savings and foreign aid in Bangladesh13). Even the possibility is; this limited

amount of foreign aid also goes to consumption and not to investment14.

12 H.B. Chenery and A.M. Strout, "Foreign Assistance and Economic Development," American Economic Review, vol. 56 (September 1966), pp. 679-733. 13 Supported by the pioneering works of Sobhan and Islam (1988), Rahman and Rahman (1982) and also by the recent study of Razzaque and Ahmed (2000). Studies have found that by making resource relatively easily available, external flows allowed for a relaxation in saving effort by the governments and encouraged an increase in consumption. Consequently, external flows may particularly impede public saving, and also, private savings (Ahmed and Ahmed, 2002). Griffin and Enos (1970) termed this relationship as the ‘fungibility of aid’. 14 However this is a common scenario in many of the developing countries as was found in the works of Peter Boone (.1996. "Politics and the Effectiveness of Foreign Aid," European Economic Review, vol. 40, pp. 289-329).


PART B


VII. ASSESSMENT OF FLOOD 2004

7.1 Background

Flood 2004 has been one of the most severe floods in the recent history of Bangladesh

since the last major flood in 1998. In view of the severity of Flood 2004, and its possible

impact on the economy and implications for policies to be pursued in terms of post flood

rehabilitation, CPD undertook a study in July-August 2004 on Rapid Assessment of Flood

2004 under its IRBD programme.

As the flood continued through August and there was heavy rainfall in early September

some of the areas of the country CPD continued to work on updating the findings of the

study including the damage estimates, and also has put under scrutiny developments as

regards implementation of the government’s rehabilitation programme.

In order to carry out the study, CPD has adopted the following methodology: i. Generation of information from primary sources; ii. Collection of information from secondary and unpublished sources; and iii. Validation of the information and study findings through dialogues with policy

makers, experts and knowledgeable persons.

Primary information was collated from field surveys. Secondary sources of information

included: (i) media (both print and electronic); (ii) government ministries and agencies;

and (iii) private sectors and trade bodies.

In order to generate primary information from flood affected areas, CPD sent three teams,

each consisting of two CPD researchers, to a number of flood-hit areas. CPD teams

visited eleven Upazillas in nine districts of the country.

To discuss and validate an earlier draft of the findings, CPD held an in-house dialogue on

9 August 2004 with a number of high level policymakers working with the government,

top level former bureaucrats, NGO leaders, experts and academics. CPD received

important insights and information from this dialogue. The report was also shared with

the print and electronic media through a press briefing on 12 August 2004 in order to

disseminate the findings of CPD’s rapid assessment and recommendations which


emerged from the study and dialogues with stakeholders. CPD also shared the findings

and recommendations of the flood assessment study with the government.

In the second phase CPD members made reconnaissance field level visits in some of the

areas which were visited by CPD members in August 2004 during the flood. In order to

understand the coping mechanism of the flood victims and post-flood rehabilitation

activities CPD sent a team of two members to two districts in November 2004.

Secondary information on updated damage estimates and post flood rehabilitation

programmes were collected from government ministries and agencies. Information were

also collected on damages caused to various sectors of the economy due to torrential rain

in August.

On the basis of the updated information collected from various official sources CPD has

estimated the damages due to Flood 2004 and damages due to heavy rain. The second

phase of the study also compares CPD’s policy recommendations provided in CPD’s

initial Rapid Assessment of Flood 2004 with the GOB implementation policies.

7.2 Damage Assessment

Updated Damage Estimates: CPD’s preliminary (up to 4 August 2004) estimates of

damage due to Flood 2004 was to the tune of Tk. 11,418.6 crore or US$ 1.93 bln with an

anticipation of ranging to Tk. 15,000 (US$2.5 billion) after the final assessment. The

CPD study on assessment of Flood 2004 covers five major affected sectors for estimating

the total damage caused by the flood. These broad sectors are: (1) Agriculture, (2)

Infrastructure, (3) Industry, (4) Education, and (5) Health. Table 3 presents both the

preliminary and updated damage estimates which show that CPD’s updated damage

estimate due to Flood 2004 stands at about Tk. 11,760 crore (US$ 1.99 bln). This is about

Tk 341 crore more than CPD’s earlier estimate. Ten districts were affected due to heavy

rainfall that followed Flood 2004. If the impact of heavy rainfall is accounted for, the

damage for the agricultural sector (crop and fisheries) stands at Tk. 1733.8 crore (US$

0.29 bln). Consequently, CPD’s final damage estimates due to flood and rain increases to


about Tk.13,493.8 crore or US 2.29 bln. This is about 4.05 percent of total GDP for the

FY2004. In formation on the impact of rainfall on other sections was not available. Apart

from the infrastructure and residential sectors all estimates of damage due to flood has

remained unchanged in CPD’s reestimate.

TABLE 3 SUMMARY OF CPD’S DAMAGE ESTIMATES

Preliminary Damage Estimate Updated Damage Estimate

Amount (Tk. Crore)

Share (%) of Total Damage

Amount (Tk. Crore)

Share (%) of Total

Damage

Damage from Heavy Rainfall

(Tk.Crore)

Sector

1 2 3 4 5

Total Damage due to Flood and Rain (Tk.

Crore)

Agriculture 2920.0 25.6 2920.0 24.8 1733.8 Infrastructure 3867.0 33.9 4017.6 34.2 Residential 3706.0 32.5 3896.8 33.1 Industry 531.7 4.7 531.7 4.5 Education 345.4 3.0 345.4 2.9 Health 48.5 0.4 48.5 0.4 Aggregate 11418.6

(US$1.93 bln) 100.0 11760.0

(US$1.99 bln) 100.0 1733.8

(US$0.29 bln) 13,493.8

(US$2.29 bln) Public Sector 4303.0 37.7 4453.6 37.9 Private Sector 7115.6 62.3 7306.4 62.1 GDP (2003-04) 332567.0 332567.0 Damage as % of GDP

3.4 3.5 4.05

Note: 1. Agriculture sector includes crops, fisheries and livestock. Infrastructure sector includes roads, bridges

and culverts, railways, embankments, irrigation canals. 2. Income loss due to flood is not considered. Private sector Industry data is partial. 3. Damage in agriculture sector due to heavy rainfall includes the crop and fisheries sectors. Memo: 1. Estimated Damage of 1998 flood was 4.7% of the GDP of 1998-99 (Chowdhury, Islam and

Bhattacharya 1998) 2. The upper bound of the initial CPD damage estimates was predicted to be Tk. 15,000 crore (4.5% of

GDP) Comparison of Damage Estimates: CPD’s preliminary assessment was the first one of its

kind to come up with a damage estimate of Flood 2004 with the application of a scientific

methodology. Following CPD’s study a number of attempts have been made by other

organisations to estimate the damages incurred due to flood such as the joint assessment

by the Asian Development Bank and World Bank and the Institute of Cost Management

Accountant (ICMA). The UN mission in Bangladesh and the GOB had also quoted some

damage estimates. Except the ADB-World Bank assessment all the other estimates are


much higher than the CPD estimates and the methodology of these are either unclear or

unscientific.

TABLE 4

COMPARISON OF PRELIMINARY DAMAGE ESTIMATES

Organisations

Total Damage(Tk. crore) Total Damage(US$ billion)

Centre for Policy Dialogue (CPD) Source: Report on Rapid Assessment of Flood 2004

(a) 11,418.6 (till 4 August 2004) (b) 13,493.8 (Updated, includes rain)

1.93

2.29 Asian Development Bank-World Bank Source: Report on Damage and Nees Assessment

13,450 2.28

United Nations Source: Quoted in the newspaper

40,000 6.6

Government of Bangladesh Source: Quoted in the newspaper

42,000 7.0

Institute of Cost Management Accountant Source: Study Report on Damages Caused by Flood 2004

49,864 8.0

7.3 Relief and Rehabilitation

Relief: All types of relief distributed among the flood victims in cash and kind by the

Ministry of Food and Disaster Management (MOFDM) was converted in to monetary

value. Relief distributed by the Prime Minister’s Office and by the private sectors could

not be included due to unavailability of data. The monetary value of relief distributed to

the flood victims by the MOFDM was Tk. 192.5 crore. It is observed that the national

average of per capita relief distribution has been higher (Tk. 51.15) in the updated

estimation compared to the earlier estimation (Tk. 19.97). The monetary value of relief

distributed in the rain affected districts is Tk 6.7 crore and the per capita availability of

relief is Tk 14.57.

Rehabilitation Programmes: In an effort to rehabilitate the affected people and

reconstruct the flood affected economy the GOB has recently approved a two-year

massive flood rehabilitation programme for Tk.1,429 crore of which ADB will provide a

loan of Tk. 1,045 crore (US$180 million). The rest will be provided by the GOB. ADB’s

programme will start in January 2005 and will be allocated for the improvement of five

sectors such as rural infrastructure, city, roads, railway and water development. Among

the other major donors the World Bank is planning for a loan of about US$ 200 mln of


which US$ 40 mln is new assistance and US$ 160 mln is old money which remained

unutilised and will be cancelled if not utilised. The UN flash appeal for US$ 210 mln to

help the flood victims for six months could generate about US$ 42 mln till October 2004

Insights from the Filed on Rehabilitation: CPD team visited Dhunat and Sirajganj Sadar

upazillas of Bogra and Sirajganj districts respectively during the second round of

information collection. The team found that the reconstruction of road and bridges has

not started as yet though the preparation to call for tenders is almost complete. The

schools and colleges which have started to operate after the flood also need to be

renovated. Small dams have been reconstructed by the local people. The rehabilitation

programme for the agriculture sector which included distribution of seed for ropa aman,

boro, wheat, maize, lintels, mustard, chilli, fingerlings for fisheries and cash to buy goat

and poultry has been appreciated by the people. NGOs undertook similar programmes. In

Dhunat upazilla 16,000 VGF cards were distributed till date for an amount of 160 metric

tonnes of rice. A few houses were built with the support of the government and NGOs.

About 80-100 houses were built in Dhunat with the help of a non-resident Bangladeshi.

The presence of NGOs in Sirajganj is less compared to Dhunat.

7.4 CPD’s Recommendations and GOB Initiatives

In its preliminary report CPD presented a policy package for addressing the post flood

situation during the fiscal year 2004-05 which was derived from revisiting the experience

of the earlier flood, taking note of the macroeconomic parameters and performance of the

real economy, and reviewing the emerging trend of the global economic environment.

This policy package included both short-term measures (August-October 2004, i.e. till

aman is harvested) to deal with relief activities and medium-term measures August 2004-

June 2005 i.e. till end of the fiscal year) to address rehabilitation and reconstruction

programmes. CPD’s policy package were related to macroeconomic framework, public

finance, credit expansion and inflation, external sector, real economy (agriculture,

industry, infrastructure), safety net, government micro-credit and utilisation of foreign

aid. During the last few months GOB has undertaken various programmes for relief and

rehabilitation many of which are in line with CPD’s recommendations. However, many

more are yet to be undertaken to address the flood affected people and areas.


CPD recommended for an expansionary macroeconomic framework which essentially

include increased public expenditure (investment) and greater flow of credit (both

industrial and agricultural) to the private sector. CPD recommended that at least Tk.

5,000 crore has to be disbursed as agricultural credit and recovery may be suspended till

harvesting of aman crop while a special programme for boro crop has to be undertaken as

well. The government has decided to disburse Tk. 5,537.91 crore during FY2004-05

through nationalised commercial banks and specialised banks. NCBs and specialised

banks disbursed Tk. 1,154.78 crore during July-October 2004, which was 58 per cent

higher than that of the same period during the last fiscal year.

CPD’s report clearly stated that domestic resources can, by and large, finance the

reconstruction work. Available information suggests that the government mostly relied

on its own budgetary resources. CPD also recommended that within the public

expenditure portfolio, activities and projects related to rehabilitation and reconstruction

should get priority. The government has taken the decision to reallocate 10 percent of the

ADP for rehabilitation and reconstruction activities, which is about Tk. 2,200 crore.

Though it is too early to make any assessment as regards the utilisation of the block

allocations kept in the ADP, such allocations remained unutilised till September 2004.

CPD recommended that there should be a plan beyond aman season and provision for

seed, fertiliser and irrigation during aman and boro seasons at free of cost to the marginal

farmers. CPD report added that in view of the rise in global price of oil and upward

revision of domestic prices of gas and electricity, the government should consider an

adhoc relief for farmers using diesel operated irrigation. The government has decided to

provide seeds free of cost and fertiliser at reduced rates to the farmers through a

scheduled subsidy amounting to Tk. 271 crore. However, the government has not

considered the suggestion regarding the price of diesel for irrigation. Instead, it has

increased the price of diesel from Tk. 20 to Tk. 23 per litre since December 2004. The

decision to hike the price of diesel will have adverse impact on boro production since

boro relies heavily on irrigation and 83 percent irrigation is done through diesel operated

engines in Bangladesh. This will, in turn, raise the price of rice and have a negative


impact on the availability of food. It may be noted that the total import of food grains

(rice and wheat) by the government and the private sector during July-December 2004

was 1,550 thousand mt compared to 1,851 thousand mt during the same period in the

previous year (FY04). In other words, the total food import in FY05 is 16.3 per cent less

than that of the last fiscal year (FY04). The decrease in import can be attributed mainly to

higher and rising international prices of food grains which are expected to increase

further in the coming months. This is due to lower production prospect of rice in

Thailand, Vietnam and India as a result of abnormal drought. The government should

review the decision of increase in diesel price to ensure food security.

CPD’s policy package suggested the following measures for export oriented industries:

(i) provision of cash compensation scheme and expeditious steps towards timely release

of funds under CCS initiative; (ii) support air cargo shipment of exportables including

RMG, charter cargo planes, if needed; and (iii) advise banks for deferment of loan

recovery for 3-6 months from export-oriented units which have been affected. The

government has increased the CCS support to agricultural and agro-processing goods

from 25 percent to 30 per cent, and has taken an initiative to release Tk. 150 crore for the

knit sector from the CCS fund. The government has also decided for deferment of bank

loan recovery from the affected export oriented units.

In order to ensure food availability and food security of marginal families, repair,

reconstruction and maintenance of flood damaged rural roads through FFW programme

have always been useful. CPD recommended that the amount of food grains to be

distributed through non-priced channels such as VGD, VGF, FFW, TR and GR should be

increased from the planned level of 744 thousand tonnes. The short-term rehabilitation

programmes of the government of Bangladesh included creation of a Disaster Risk

Mitigation Fund of Tk. 75 crore (US$ 12.7 mln) for families with a monthly income of

less than Tk. 3,500, allocation of Tk. 170 crore (US$ 28.5 mln) and 195 thousand mt of

food grains for FFW, and operation of TR programme for repairing and reconstruction of

schools and basic infrastructures. The government also declared that it would feed 40 mln

people till December 2004 under the VGF programme. An analysis of the distribution of

food grains through public food grains distribution system (PFDS) reveals that the


distribution of food grains through FFW and VGD was lower in July-December 2004

(101 thousand mt) than that of July–December 1998 (366 thousand mt) following Flood

1998. This needs to be corrected. The amount of food grains distributed through non-

priced channels during July-December 2004 was 511 thousand mt and the government

has a plan to distribute another 353 thousand mt during January-June 2005. Total

distribution of the priced and non-priced food grains through the PFDS during July-

December 2004 was 637 thousand mt against 631 thousand mt in July-December 1998.

As regards foreign aid, CPD’s policy package stated that the government should take

initiative to receive food aid as much as possible for keeping the safety net programmes

including VGD and VGF. CPD report added that although the government has recently

received a budgetary support of about US$200 mln from the World Bank under the

Development Support Credit II, it will be worthwhile to negotiate expeditiously for a

quick-disbursing budgetary-cum-BOP support of another US$200 mln. The CPD report

suggested that project aid, with its low off-take record, can only be entertained for

dealing with medium to long-term problems related to flood. In an effort to rehabilitate

the affected people and reconstruct the flood affected economy, the government has

recently approved a two-year massive flood rehabilitation programme of Tk.1,429 crore

of which ADB is expected to provide a loan of Tk. 1,045 crore (US$ 180 mln). The rest

will be provided by the government of Bangladesh. ADB’s programme is scheduled to

start in January 2005 and will allocate money for the improvement of five sectors

including rural infrastructure, city, roads, railways and water development. Among the

other major donors the World Bank is planning to provide a loan of about US$ 200 mln

out of which US$ 40 mln will come as new assistance and US$ 160 mln from earlier

earmarked assistance which remained unutilised and would have otherwise been

cancelled. The UN Flash Appeal for US$ 210 mln to help the flood victims for six

months could generate about US$ 42 mln till October 2004.

The following Table presents a comparison of CPD’s recommendations and GOB

initiatives and implementation policy as regards addressing the post-flood economic

situation.


TABLE 5

COMPARISON OF CPD’S RECOMMENDATIONS AND GOB IMPLEMENTATION Areas of Intervention

CPD’s Recommendations GOB Initiative and Implementation Policy Timeline of Implementation

Reconstruction and Rehabilitation

* Activities and projects for rehabilitation and reconstruction should get priority * Domestic resource can, by and large, finance the reconstruction work

* GOB will reallocate 10 percent of ADP (Tk. 2,200 crore) for rehabilitation and reconstruction.

* Block allocation in the ADP unutilised till September 2004

ADP Implementation * Implementation of foreign aided projects should not be disturbed * A moratorium should be imposed on all domestically financed new projects for FY 2005 which are yet to incur expenditures * Projects for implementation of PRSP should be protected * Size of ADP may be revised if non-debt creating resources are available

* Implementation of low-priority development projects will be staggered and may even be carried over to the next fiscal year to make funds available for rehabilitation and reconstruction

Revenue and Fiscal Deficit

* GOB may negotiate with IMF and WB regarding relaxation of the cap on domestic borrowing if there is shortfall in the revenue collection and fiscal deficit

Inflation * Monitor the rise of inflation carefully, resort to Open Market Sale (OMS), if necessary

* Rising food prices due to poor harvest of aman results in high inflation * OMS to be started soon

* Towards the end of January 2005

Exports * Support for air cargo shipment of exportables * Timely release of funds under Cash Compensation Scheme (CCS) * Deferment of bank loan recovery for 3-6 months from affected export oriented units

* Allocation of Tk. 150 crore from Cash Compensation Scheme (CCS) * Bank loan recovery for the affected export oriented units deferred

Imports * Imports of CI sheet and cement may be facilitated * Import of food grains needs to be facilitated

* During October foodgrain imports were 108 thousand metric tonnes higher than that of the same period in 2003

Agriculture * Seed, fertilizer and irrigation for aman and boro crop at * Government provided farmers with seed free of cost


free of cost to the marginal farmers * At least Tk.5,000 crore has to be disbursed and recovery may be suspended till harvesting of aman crop and a special programme for boro crop * Funds to the SMEs, particularly those without fixed assets as collateral * Increase flow of funds to NGOs through PKSF, NGO Foundation and commercial banks

and fertiliser at reduced rates * Agriculture sector will get Tk 271 crores as subsidy * Nationalised commercial banks and specialized banks disbursed Tk. 1,154.78 crore during July-October 2004 . This is 58% higher than during the same period in last fiscal year * GOB targets to disburse Tk. 5,537.91 crore during FY 2004-05 through NCBs and specialised banks

* 20% of the targeted loans disbursed during July-October 2004

Industry * No new financing facility but improve the efficiency of the existing units * Financial support to SMEs * Cash incentives to export oriented industries

Infrastructure * Prioritise rehabilitation over reconstruction * Reallocation of ADP for repairing and reconstruction * Loans at low interest rate for purchasing house building materials

* Rehabilitation and reconstruction have started * Operation of TR programme for repairing and reconstruction of schools and basic infrastructures

* Being implemented

Safety Net * Increase the amount of food grains in VGD, VGF, FFW and TR, and monitor properly * Full utilization of special funds * Expansion of micro-credit though the NGOs

* Creation of a disaster mitigation fund of Tk. 75 crore * Allocation of Tk. 170 crore and 195,000 mt of food for FFW * 40 mln people will be fed till December under VGF programme

Being implemented

Foreign Aid * GOB may receive food aid as much as possible for safety net programmes * Negotiate for quick disbursement of budgetary-cum-BOP support from the WB

* Received from ADB and World Bank ADB’s programme scheduled to start in January 2005

CPD: IRBD FY05 (First Interim)

73

VIII. MFA PHASE-OUT: EARLY INDICATIONS AND CHALLENGES AHEAD IN FY2005

8.1 So Far So Good! CPD was one of the earliest proponents of looking at quota derestriction under the

ATC first as an opportunity, and then as a challenge. CPD pointed out the need for

building on Bangladesh’s track record in the export sector and energetically explore

opportunities to increase Bangladesh’s export by taking advantage of the MFA phase-

out. In the March 18, 2004 dialogue on Bangladesh’s Export Potentials in the US

Market CPD pointed out that there were quota categories where Bangladesh had a

distinct competitive edge and Bangladesh should at the least aim at retaining current

global market share in apparels. This could mean an exports of (since global market is

expected to expand significantly) up to $10.0 billion by 2010. CPD urged for a

national consensus to attain this target.

Export trends show that over the recent years knit has demonstrated very high growth,

with the result that its share in total RMG has gone up from about 20 per cent in

FY2000 to about 40 per cent in FY2004. Bangladesh had a very strong global

presence in basic items and enjoyed competitive advantage in a number of quota

categories both in knit and woven. As a result in all likelihood Bangladesh is expected

to figure in the short list of countries (from the 50 odd current sources) with which

buyers were likely to do business in terms of quota categories where Bangladesh had

distinctive competitive advantage. In the aforesaid dialogue, CPD had pointed out that

appropriate strategies should be designed to realise the potential opportunities of the

MFA phase-out in those categories and that it was possible to enhance Bangladesh’s

export of those items once the quota was derestricted. The CPD presentation

identified a number of such categories. Indeed this was a time when IMF, WB and

WTO studies were presenting a gloomy picture about a drastic fall in Bangladesh’s

exports once the phase-out was over by January, 2005. Most of these studies were

making projections based on export performance of quota categories which were

derestricted under the first three phase-outs under the ATC. BoP support and support

under the Trade Integration Mechanism (TIM) were mooted to enable Bangladesh to

face the eventualities.


74

Figure 55: Global Export of Knit and Woven RMG and their Growth

0

500

1000

1500

2000

2500

3000

3500

FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Fiscal Year

Mill

ion

USD

-10

0

10

20

30

40

50

60

70

Gro

wth

Woven KnitGrowth (Woven) Growth (Knit)

In the end, it is still to be seen how things will evolve in the coming few months.

However, early signals are encouraging. Bangladesh continues to remain on the radar

screen of major buyers as one of the top five sources of apparels for a number of basic

items such as sweaters, T-shirts, man’s and boy’s trousers, shirts, and women’s wear.

Orders for the winter and early spring seasons appear to be robust, and this trend is

likely to define the export performance over the next few months of the FY2005.

Figure 56: Bangladesh's Export of Apparels (Jul-Oct): FY2005 vs FY2004

0

50

100

150

200

250

300

350

400

450

Jul Aug Sep OctMonths

Mill

ion

USD

Knit (FY2004)

Knit (FY2005)

Woven (FY2005)

Woven (FY2004)


75

Recent trends show that exports during July-October period of FY2005 was 24.6 per

cent higher compared to the matched period of FY2004, with knit demonstrating a

phenomenal growth of 40.4 per cent and woven a robust growth of 14.7 per cent.

What is of interest is that although export of apparels to the US market has gone down

by 25.9 per cent over the last three years (between FY2001 and FY2004), according

to OTEXA data export from Bangladesh has indeed gone up by 11.9 per cent during

the first four months of FY2005 compared to FY2004. However, an indepth analysis

of the recent performance in the US market shows that export of particular items has

varied – CPD analysis reveals that export of some items have increased between 35 –

400 per cent whilst export of some others decreased by 5–15 per cent. It is important

to identify the winners, and take measures to increase their market share.

8.2 Post-MFA Scenario Will be Different CPD has earlier pointed out that quota phase-out was only one of several factors

which is likely to have an impact on performance of Bangladesh’s e-o RMG sector.

Future global trade in apparels will also depend on other important factors including

China’s accession to the WTO, reduced lead time, erosion of quota-premium

following the quota phase-out, implication of various RTAs and market access

initiatives involving major buying countries, further lowering of MFN tariffs with

consequent erosion of preferential margins, and increasing use of e-commerce in

apparels trade and business. Bangladesh will need to take due note of these emerging

factors.

The challenge of the quota phase-out should be taken with due importance.

Bangladesh’s export of quota categories derestricted in the US market under second

and third phases has come down from $372.10 million in 2001 to $225.49 million in

2003, a fall of 39.40 per cent. In the EU Bangladesh’s exports of derestricted items

over the three phases have come down from $201.85 million to $124.26 million

between 2000 and 2003, a fall of 42.5 per cent. However, it will not be wise to

extrapolate these trends to make simplistic projections, particularly in view of the fact

that quota phase-out was back loaded and under the first three phases only 18.23 per

cent (2001) and 8.18 per cent (2000) of Bangladesh’s respective exports to the US and


76

EU markets were derestricted. A number of scenarios may be possible depending on

the type of homework Bangladesh is able to do.

Any major shift in global sourcing of apparels will call for large-scale restructuring

and capacity building in countries which will potentially stand to win. Major

competitors such as China, India and Pakistan, with strong backward linkage in

textiles, will require some time to complete their restructuring. Already there are signs

of major investments in the textile/apparels sectors in these countries. These ongoing

restructuring will take some time to make its impact visible in the market place.

Besides much will depend on the ability of Bangladesh’s entrepreneurs to offer lower

prices, in the face of stiff competition from the competing countries. In the recent

past, these entrepreneurs have been able to sustain this pressure, perhaps at the cost of

lower profits, since average price of apparels has gone down by about 15 per cent

over the last few years. There is a need to capture the ongoing restructuring in the

RMG sector and also the ongoing strengthening of the backward linkage industry in

order to fully understand the capacity of Bangladesh’s RMG sector to continue to

show robust performance in the post-MFA apparels market.

No doubt, many of the smaller RMG units in Bangladesh, which have mainly relied

on subcontracts, do not have the capacity to ensure compliance with the various

norms and standards required by the buyers and are not being able to make

productivity gains, will have difficulty to compete in the emerging market. Many of

the smaller firms are likely to face closure and the workers to face layoffs. On the

other hand, many of the larger firms are looking at the quota-free regime as an

opportunity to expand their market presence in the EU, and also in the USA. Thus,

there may be a situation where Bangladesh expands (or at least retains it market share)

but with fewer firms operating in the sector, and with a reduced workforce.

Production of larger volumes by bigger firms may not be able to offset the number of

workers who will lose their jobs; majority of those are likely to be women. In view of

this probable scenario, Bangladesh needs to design appropriate measures for these

workers. CPD has argued for a contingency fund for retraining and redeployment of

such worker’s. Any large scale unemployment in the sector will have serious

consequences in terms of income, poverty and employment. The GOB employers and


77

other stakeholders should get together to design appropriate measures to address this

possibility.

It also needs to be appreciated that Bangladeshi entrepreneurs will need to pay

increasingly more attention to such issues as minimum wage, working hours, safety

and other indicators of decent labour in their factories. Tomorrow’s apparels market

is likely to become more sensitive to these issues and any negligence on these

accounts will be penalised in terms of market access. The GOB should also setup and

implement strict guidelines with respect to worker’s rights and claim to decent

livelihood in the apparel sector.

It is true that product specific safeguard measures (till 2008) and textile safeguard

measures (till 2013) in China’s accession protocol could offer some relief to

competitors such as Bangladesh. USA has already applied sanctions on Chinese

exports to USA by limiting export of four categories of textiles/apparels (by imposing

cap of 7 per cent on growth). Requests have been made for another 10 categories,

which incidentally include a number of important export items from Bangladesh. EU

has also recently excluded China from the GSP beneficiary list on account of China’s

exceeding the threshold limit of 12 per cent of market share. However, it will not be

wise to overplay the importance of these developments. It may be noted here that

major retailers and importers in the USA have started to question the sanctions, and

has filed law suits challenging such measures by the US Department of Commerce.

8.3 Designing an Appropriate Strategy The Post-MFA Implementation Team set up by the GOB has identified six core areas

for training and skills upgradation: (i) Productivity Management, (ii) Quality

Management, (iii) Compliance Norms, (iv) Merchandising, (v) Marketing, and (vi)

Inventory Management. GOB estimates show that these activities will require an

amount equivalent to $40.0 million. However, till now availability of funds to carry

out such activities have been rather low. There is an urgent need to mobilise domestic

resources and also trade related technical assistance (TRTA) from development

partners in support of these programmes.


78

The GOB has recently taken a number of steps to address the concerns of the e-o

RMG industry of the country. These include reduced number of steps in terms of

clearance at Chittagong Customs from 56 to 12, and from 48 to 6 at Dhaka Container

Port, change in insurance charges, revised schedule of down payment for loan by

RMG entrepreneurs, and elimination of VAT on selected items of expenditure.

However, a proactive policy, both at global and domestic levels will be required if

opportunities are to be realised, and challenges are to be addressed adequately.

At the Global Level Bangladesh should continue to press for zero-tariff access to the

US market (about $306.0 mln worth of tariff is imposed in USA annually on import of

apparels from Bangladesh). A CPD modelling exercise indicates that such a zero-

tariff access is likely to substantively enhance Bangladesh’s competitive strength in

US market and increase exports by about $1.0 billion or 50 per cent. It is to be noted

in this context that zero-tariff access to the Canadian market in 2001 has helped

Bangladesh to increase her apparels export from $97.9 mln in 2002 to $256.4 mln in

2004, a growth of about 161.9 per cent in two years.

Bangladesh will also need to focus on getting on with the required homework in terms

of reducing the lead time, moving up the value chain ensuring standards-compliance,

investing in technological upgradation and productivity improvement in the RMG

production, and putting in place product and process modification capacities and

markets.

In view of this, there is a need to take some concrete steps to address the emerging

challenges. Some of these, based on CPD analyses, are:

Identify the items that are demonstrating competitive strength and go for

capacity building in those particular areas;

Create a Textile-RMG technology upgradation fund to help process and

product upgradation and modification;

Invest in skill development through public-private partnership. In this regard

Vocational Training Institutes could be linked to the needs of the RMG sector;


79

It appears that it will be a good idea to put on hold the earlier planned phase-

out of the support under the cash compensation scheme (currently at 10 per

cent);

There is a need to reduce import duties/taxes on textile/RMG spares, dyes,

chemicals and sizing materials;

There is a need to address the request of RMG entrepreneurs to allow import

of fabrics on duty-free basis, particularly and on priority basis for fabrics

(synthetic) that are not produced in Bangladesh (the textile sector’s interest

could be safeguarded through joint monitoring of the facility);

Support the RMG units in putting in place initiatives to ensure decent wage

and worker’s rights, and meet health and safety concerns;

Help introduce a “Compliance Sticker” (ISO-9000, ISO-14000);

Help develop clusters and provide common facilities to RMG units through

policy support (water affluent facilities, training, R&D, Fashion and Design);

Make funds available to the RMG/textile producers at globally competitive

price, particularly in view of increasing buyer pressure on producers to

manage the production chain;

Facilitate establishment of forward linkage activities through B to B web

portals, direct marketing channels (till now the buyers have come to the

doorsteps of Bangladesh’s producers; in the markets of future Bangladesh’s

producers will have to increasingly reach out to the buyers);

Give priority to promotion of investment (both local and FDI) in products with

emerging opportunities (athletic wear, synthetic fibre, 100 per cent polyester).

Prepare a contingency plan in view of exit of firms to help workers retain and

search for jobs (GOB-BGMEA partnership should be developed to this end).


80

IX. INVESTMENT SCENARIO IN THE PRIVATE SECTOR

9.1.1 Major Advances to a Limited Number of Large and Medium Industries

There has been a significant rise observed in sanction and disbursement of term loan in the first quarter of FY2005 as compared with that of FY2004 (about 115.53% and 61.57% respectively), as well as in working capital financing (64% and 46% respectively). Based on the latest quarterly update (30 June 2004) on sectoral composition of term loan and working capital financing, as shown in Table 6, it is found that large and medium scale manufacturing industries have accounted one-third of total advances, and have been gradually accumulated especially by cotton, and textile industries such as in spinning, weaving, dyeing, printing etc. and also to some extent by iron and steel, drugs and pharmaceuticals, cement and asbestos, plastic and plastic products. Most of these industries have potentials to be globally competitive under the changing scenario of world trade including MFA phase out, duty-free access to some developed countries, and special concession for LDCs etc. Nonetheless, lending rate for industrial credit is still very high, which increases the overall cost and would reduce the competitiveness of these industries. It is found that even local market based industries will be gradually limited to some large scale manufacturing units, which have competitive advantage both with local small scale producers as well as imported products. As a result, less competitive industries and less efficient manufacturing units will be sufferer, unless they can develop their competitive edge in terms of local and/or global markets.

Investment in service sector has mainly concentrated in large scale activities such as

construction, transport and communications, storage, trade etc. targeting the rising

demand for various services especially housing, transport, medical treatment &

consumer goods by a section of urban people who earned relatively more through

engaged in operational activities in industrial and service sectors. Country’s growing

telecommunication industry, which has gradually expanded in semi-urban areas as

well, has received very insignificant amount of advances from local banks; instead

this industry is developed through FDIs, sometimes under joint-venture.

However, a much needed investment required for the improvement of infrastructure

especially power and fuel industries in order to meet the growing demand for energy

in industrial and commercial activities is not met up either by local or foreign


81

investments so far. Public investment on power sector is very poor and government is

not so conducive to support private initiatives, especially by foreign investors.

TABLE 6

ADVANCES CLASSIFIED BY ECONOMIC PURPOSES (MAJOR MANUFACTURING AND SERVICE SECTORS)

(in Crore Taka) (in Million US$)

As of 30 June, 2004

As of 30 March, 2004

% Change

As of 30 June, 2004

As of 30 March, 2004 % Change Note

1. Large and Medium Industries Other Than Working Capital Financing

16752.82 ( 17.6)

16757.33 (18.5) -0.03 2765.86 2839.74 -2.60

Food stuff 2054.99 1954.35 5.15 339.28 331.19 2.44

Beverage & Tobacco 451.25 418.62 7.79 74.50 70.94 5.02 Jute, Cotton and Wearing Apparel 8249.8 8207.8 0.51 1362.03 1390.92 -2.08

Cotton textiles accounted 60% and showed increasing trend

Leather & Leather Products 634.47 647.29 -1.98 104.75 109.69 -4.51

Paper and Paper Products 608.38 589.68 3.17 100.44 99.93 0.51

Chemical & Chemical Products 1518.24 1644.72 -7.69 250.66 278.72 -10.07

Drugs and pharma. accounted more than 1/3 and showed increasing

trend

Non-Metallic Products 1005.61 1145.25 -12.19 166.02 194.08 -14.45 Engineering, Basic Metal & Metal Products 1904.34 1778.62 7.07 314.40 301.41 4.31

Iron & steel accounted 63% and showed increasing trend

Power and Fuel Industries 122.23 142.09 16.24 20.18 24.08 -16.19

Working Capital Financing 16085.36

(16.9) 15770.29

(17.4) 2.00 2655.66 2672.48 -0.63 2. Service Industries (Major Industries) Other Than Working Capital Financing

Construction 6426.28

(6.8) 6259.12

(6.9) 2.67 1060.97 1060.69 0.03

Transport & Communications 1164.62 (1.22)

1118.41 (1.23) 4.13 192.28 189.53 1.45

Storage 843.81 (0.89)

859.3 (0.95) -1.80 139.31 145.62 -4.33

Trade 32026.1 (33.67)

29174.25 (32.13) 9.78 5287.45 4943.95 6.95

Wholesale and retail trading showed increasing trend

Hospital, Clinic and Pathological Centre 215.6 173.41 24.33 35.60 29.39 21.13

Working Capital Financing 126.82 (0.13)

158.12 (0.17) -19.79 20.94 26.80 -21.86

3. Small Scale & Cottage Industries Other Than Working Capital Financing

944.34 (0.99)

651.96 (0.72) 44.84 155.91 110.48 41.12

Working Capital Financing 1283.85 (1.35)

1124.24 (1.24) 14.19 211.96 190.52 11.26

4. Others 8902.48 (9.36)

8455.14 (9.31) 5.29 1469.78 1432.83 2.58

Source: Bangladesh Bank.


82

Small and cottage industries have accounted a minimal share of total advances (about

2%), although that is at an incremental level, and increased at a very slow pace, which

need to be accelerated in order to ensure more employment opportunity for country’s

huge labour force. The new SME policy, which is at the stage of formulation,

although emphasized on the access to credit to small entrepreneurs, but found not

compatible with the current scenario where fund has been concentrated to some large

and medium industries.

Import of capital and other machineries in an increasing amount in the interim period

of FY2005 for industrial units largely to support growing investments in textile,

garments, pharmaceuticals and electric industries, as shown both in actual import in

the first quarter of FY2005 and in opening and settlement of L/C (36% and 21%

respectively) for most of these commodities (Table 7). Import of electronic

machineries has substantially increased (1700 percent), mainly for importing capital

TABLE 7

CAPITAL MACHINERY AND INDUSTRIAL RAW MATERIALS IMPORTED FOR MANUFACTURING AND SERVICE INDUSTRIES (US$ MILLION)

July 2004 to September, 2004 July 2003 to September, 2003 % Changes

Name of Commodities L/C Opening

L/C Settlement

L/C Opening L/C Settlement

L/C Opening L/C Settlement

Capital Machinery 302.68 212.65 221.78 175.44 36.48 21.21

Textile Machinery 68.9 61.64 67.04 55.02 2.77 12.03

Garment Industry 40.22 27.4 27.11 27.99 48.33 -2.1

Pharmaceutical 11.94 4.58 9.96 2.17 19.93 111.36

Electronic Industry 10.14 1.06 0.56 1.35 1706.06 -21.54

Packing industry 0.96 3.37 0.87 3.07 10.45 10.01

Others 170.52 114.6 116.24 85.84 46.70 33.5

Industrial Raw Materials/ Machineries

Textile 812.85 929.77 808.62 861.06 0.52 7.98

Pharmaceuticals and Medical

114.86 102.53 86.11 84.22 33.39 21.74

Other Transport Engine 2.87 0.56 0.90 0.34 217.17 61.58

Chemicals and Chemical Products

314.58 195.65 192.11 152.6 63.75 28.21

Others 54.31 26.73 42.74 24.03 27.05 11.22

Source: Bangladesh Bank.


83

machineries for telecommunication industries; a large part of it is used for importing

mobile sets.15 Besides import of large amount of industrial raw materials such as raw

cotton, synthetic and mixed yarn, cotton yarn, textiles fabrics, chemical and chemical

products etc. are largely attributed to the expanding textile, and fertilizer industries,

while intermediate goods such as clinker, lime stone, C.I. Sheet, B.P. Sheet, scrap

vessels, iron & steel scrap are also targeted for other large and medium industries.

9.1.2 Sluggish Trend of Investment in Capital Market

The huge investment required for country’s fast growth in industrial sector is rather

failed to achieve through equity financing as number of new companies floating

capital is very low, and even deteriorated in the current fiscal year as compared with

the previous year. While in FY 2004, a total of 10 IPOs were launched in July-

October, 2003, with a total issued capital of Tk.10 billion and public offering of Tk. 2

billion, the corresponding figures in the FY 2005 is very poor with having only 4 new

IPOs, issued capital of Tk. 0.87 billion and public offering of Tk. 0.473 billion, which

shows a decline of more than 90% in the current year. Major share of these new and

existing equity financing are attributed with bank and non-bank financial institutions,

which earned huge profit and provide dividend as well, through applying high lending

rate and low deposit rate of interest. The total amount of oversubscription during the

stated period of FY 2004 was 2100%, which sharply doubled during the

corresponding period of FY2005 to about 4332%, implying less opportunity in the

equity market for small investors, who did not find depositing in the banks lucrative

any more. TABLE 8

INITIAL PUBLIC OFFERING (IPO) FOR JULY-NOVEMBER, FY2004 AND FY2005 Months

(July-November) Issued

Capital (Tk.) Public

Offer (Tk.) Public

Subs (Tk.) Public Subs.

Over/Under(Tk.)

IPO-2003 10,616,907,500 2,082,920,000 30,707,892,185 29,196,367,185

IPO-2004 877,750,000 (777,750,000)

473,875,000 (403,875,000)

- (5,662,377,000)

- (5,258,502,000)

% change -91.75 -77.25 - - Note: Figures in parentheses show data of all IPOs except one which has some data unavailable. Source: DSE

15 According to Mobile Phone Importers’ Association, about 80% of the mobile telephone set has been imported through smuggling, which could otherwise rise existing figure of import content of electronic items.


84

However, SEC’s various measures such as introduction of Central Depository System

(CDS) from January, 2004, as well as government’s supportive measures of reduction

of advance income tax on profits of government bonds to 20% (earlier 25-45%),

reduction of income tax of textile and jute industries to 15% (earlier 20-37.5%),

reduction of duty on most raw materials, essential machinery, spare parts, reduction of

capital gain tax of stocks and shares of foreign/joint ventures companies to 10%,

increasing income tax exempt from Tk.90,000 to Tk.1,00,000 could not encourage

new companies to invest through capital market. SEC may alternatively encourage

large FDIs or prospective new FDIs to float at least a part of their share in the equity

market to expand the base as well as create confidence to other companies. It seems

that various measures would not encourage private owned companies to participate in

equity market due to the fear of loosing the control over the company in case it

becomes a public limited nature instead companies enjoy almost all those supports

through debt market participation.

9.2 Slow Rise in Industrial Consumption of Energy

It is found that Industrial sector as a whole consumed 11-12% of total gas supply,

while power generation plants and fertilizer factories consumed two-thirds of total

supply (46% and 20% respectively). According to Table 9, in July, 2004 consumption

of gas used for industrial purposes including fertilizer production has increased about

2% (335.81 MMCM) as compared with the corresponding period of 2003 (326.293

MMCM) and further increased by 13% in August, 2004. However, gradual increase in

demand for gas for industrial units could not be accommodated through existing

production and supply of gas. Moreover, proposed FDIs have been attracted mainly

on gas based industries, such as power, steel, fertilizer, ceramic etc., which may not

receive the required amount of gas supply unless gas production is not

TABLE 9 INDUSTRIAL CONSUMPTION OF GAS AND ELECTRICITY

2004 2003 Change

Industrial

Consumption July August July August July August

Gross 335.81 376.027 326.293 332.9 2.92 12.95

Gas Fertilizer

only 218.038 233.752 222.989 225.764 -2.22 3.54

Electricity Gross 181.98 195.78 185.88 182.85 -2.1 7.07

Source: BPDB and Petro Bangla


85

increased immediately. Besides, a rising demand of gas for CNG-conversion of

transports (2MMCM in July-August, FY 2004to 6-8 MMCM in the corresponding

period of FY 2005) although at a small scale at present (less than 10 MMCM) but

may increase substantially in future, and therefore requires much gas supply.

On the other hand, a rise in consumption of electricity observed in August, 2004 (7%)

might increase further more if sufficient electricity supply could be ensured, which

currently suffers for outdated power plants, poor gas supply and need much

investment for improvement of power infrastructure either through public or private,

other wise many prospective investments both from local as well as from abroad

would be in vein due to lack of developed infrastructure.

9.3 More Promises of FDIs

A moderate increase in actual FDIs in the interim period of FY 2005 and large rise of

registration of FDIs in different manufacturing and service related industries indicates

country’s growing competitiveness in a number of large and medium industries.

According to Table 10, recent FDIs are targeting country’s prospective opportunities

in energy and textile industries, along with chemical and fertilizer, pharmaceuticals,

infrastructure, financial sector and telecommunication, which may partially meet the

required investments in some demanding sectors where local investors are not ready

to invest.

India’s Tata group expressed a formal interest to invest a total of US$2 billion in steel

industry (2.4 million ton), 1,000-megawatt power generation project and in a fertilizer

TABLE 10 PROSPECTIVE FDIs IN BANGLADESH BY SELECTED COUNTRIES

Country Chemical

and fertilizer

Pharma- ceutical Steel Finan-

cial Energy Infras-tructure RMG Tex-

tile Lea-ther

Cera- mics ICT

Agro- proce-ssing

Others

India √ √ √

Taiwan √ √

France √ √ √ √ √ √

Pakistan √ √ √

Turkey √ √ √ √

UAE √ √

Malaysia √ √ √ √ √ √ √ √ √ √ √

Note: Others include sectors in which only one country promises to invest, these are telecom, jute, tea, transport and hotel and tourism. Source: BOI, various issues of daily newspapers.


86

factory. Such an investment mainly targets local and foreign markets accessed under

various provisions of WTO for LDCs. Requiring a gas supply of about 200 MMCF

per day in the initial stage and 350 MMCF at the time of full operation, country’s

existing production of gas will not be sufficient to meet such a huge demand unless

further exploration and improvement of distribution system are ensured. Using coal of

Boropukuria may suffice for this private sector based power plant, but may hamper

government’s own power plant project based on the same source. Fixing price for gas

at an acceptable level to both parties would be another important point of departure,

where there is no uniform price level currently used for supplying gas to different

industries.

Lafarge Surma Limited, an associated company of Lafarge of France, invested in

producing cement with a total of US$240 million ($10 million collected from local

capital market) for a plant of dry process cement, mainly to supply high quality

cement in local market as well as in neighbouring states of India and China. As like

Lafarge Surma, India’s Tata group may collect a part of the huge capital (US$2

billion) required for power, fertilizer or steel mill plants from the local equity market,

which may increase not only capitalization, increase confidence of the market to other

local or foreign investors as well.

Orascom Telecom Holding, an Egyptian based Company, recently has taken over

Sheba Telecom at a cost of US$50 million dollars in cash and US$10 million in

financial debt and intends to further invest US$250 million to widen its coverage.

Besides, Teletalk, a public venture of BTTB, invested US$120 billion started its

mobile telecommunication providing subscription of US$0.50 million. However, the

growing telecom sector in Bangladesh as well as in neighbouring countries may open

new opportunities for manufacturing/assembling mobile phone sets, instead of

importing as it now occurs both in legal and illegal process at a huge cost.

9.4 Investment in the Interim Period—Concentration in a Limited Number of Large and Medium Industries

As discussed earlier, gross domestic capital formation is rather stagnated about 23%

for last four years, and performance private sector is not improved so much. In the

interim period of FY2005, investment in manufacturing and service sectors have


87

shown some mixed signals, in one hand debt financing in the industrial sector has

increased significantly; on the other hand equity financing has suffered a lot. Actual

FDIs are not so much, although lots of promises observed from various countries.

It is observed that investment in manufacturing and service sectors through debt financing has been concentrated in a limited number of large and medium scale industries, especially in textile and garments, iron and steel, drugs and pharmaceuticals, cement and asbestos. The same trend observed in case of FDIs, including telecommunication, energy and gas etc. It seems that formal launching of MFA phase out has been created opportunities especially in textile sector through improving country’s competitive advantage, while country’s duty free access in European and Canadian market has opened opportunities not only in textile but in other products, especially pharmaceuticals, ceramics, agro-processing etc. Nonetheless, country’s special access in developed and developing countries especially under S&DT has widened the horizon of export potentials, which has been tried to exploit by new FDIs, mainly in fertilizer, steel, ceramics etc. Implementation of these FDIs from trade surplus countries (in respect of Bangladesh) and to re-export to the home country may help to improve country’s BOP position.

However, concentration in a limited number of industrial activities (both of labour and capital intensive) would in other way reduce the scope of investment in small and cottage industries upon which a large number of labourers are lived on and may have long term negative impact on income and employment as well. More threatening is that a large part of investment has been diverted to import of consumer goods, mainly of food stuffs, for which local substitutes produced by small industries has lost their market share and ultimately these industries will close down.

It was earlier thought that consecutive floods in 2004 from late July to early September, which caused loss of assets to many industrial units (about Tk. 531.7 crore as per CPD estimate), especially garment industries would affect investment in the interim period of FY 2005. Since loss of capital machineries and raw materials were not so huge in amount, it implies that new increasing investment through debt financing in the current fiscal year is not for compensating capital losses, but for extending capital assets further instead, which would ultimately increase country’s industrial production and export as well. But this amount of investment will not sufficient enough to hammer the growth potential that drives the economy towards out of poverty in near future.


88

X. NCBs REFORM: WHERE DOES IT STANDS

The improvement of the health of the financial sector of Bangladesh is a matter of

continuous concern of all stakeholders in Bangladesh. The prevailing dysfunctional

financial system which is inhibiting investment growth in the country has prompted

the government to put the financial sector at the top of the economic reform agenda.

Thus, reforms in the financial sector are attempted in three major areas: (i)

strengthening oversight functions of the central bank, (ii) improving corporate

governance in the private sector, and (iii) restructuring of the Nationalised

Commercial Banks (NCBs). During the last couple of years, some progress has been

made in the first two areas, while reforms in the NCBs currently stand at a crossroads.

It is anticipated that before the next national election only NCBs reform will come out

with some concrete outcome.

10.1 Reform Agenda

The reform of NCBs is being addressed under the World Bank’s Enterprise Growth

and Bank Modernisation project of the World Bank and PRGF of the IMF. The

second objective of the World Bank’s Enterprise growth and Bank Modernisation

project is to help Bangladesh implement its banking sector reform programme aimed

at achieving a competitive private banking system by a staged withdrawal through

corporatisation leading to divestment of a substantial shareholding in Rupali, Agrani

and Janata, and to divestment of a minority shareholding in Sonali. The total cost of

the World Bank project is $ 480 million. Of this, the government will provide $142

million, the British Department for International Development $88 million, and the

World Bank's International Development Association $250 million as interest-free

loan. The credit carries a 0.75 percent service charge and has 40 years to maturity

with a 10-year grace period. The loan was approved in June 2004.

Initially, Rupali Bank has been set for divestment which will take place in 2005. For

other three banks, an aggressive reform agenda will be implemented within January

2007, targeted towards stopping imprudent lending and overall improvement of

operational efficiency. The fate of these three banks as regards divestment will be

decided subsequently, although in the reform documents it has been clearly mentioned


89

about the final resolution of Sonali, Agrani and Janata Bank, which one can interpret

as divestment. As a whole, the divestment process of Rupali Bank will be a test case

of other three NCBs.

In this context, while many agree with the rationale for reforms in the NCBs, but a

huge dose of scepticism pervade the process, outcome and consequences of the

envisaged reforms.

Outcome of the Reform

The outcome of the reform will vary depending on the process of the NCBs reform.

There would be three possible outcome related to different process:

Process Outcome 1 Improve the financial health of

the bank with new style of management and manpower restructuring, introducing IT for back office and front office, cleaning up the loan portfolio with proper injection of capital and keep the bank in the hand of the government

The priority sector lending and access to banking services across the countries will not be jeopardised

The haemorrhaging of financial resources will be stopped

Investment climate will be improved

2 Improve financial health of the bank with the above mentioned reform measures and transfer a part of the equity to investors through IPOs

The priority sector lending and access to banking services across the countries will not be jeopardised

Operational efficiency will be relatively better than in the first outcome

The private sector absorption capacity will be tackled through a gradual process of off-loading the share


Investment climate will be improved 3 Improve financial health of the

bank with the above mentioned reform measures and auction out the bank

The operational efficiency might be improved but the access to banking services will be reduced

It is not clear whether the private sector will be capable to absorb huge volume of business within a short period of time

The dominance of large private sector banks may induce collusive behaviour in the market which is anti-competitive and against the philosophy of the reform


Investment climate will be improved In all the three scenarios the reform measures will facilitate the main goals of the

reform, i.e., stooping the financial haemorrhage of the NCBs, improving the

operational efficiency, and improving the investment climate. Thus, the choice of

process would be important. As the first two phases of reforms in Agrani, Janat and

Sonali do not include the plan for ultimate resolution through divestment, it is


90

expected that no pre-conceived decision on privatisation will not taken during this

reform period.

Is Public Ownership Bad?

The basic premise of the NCB reform is that the government ownership is bad and

due to the government ownership the NCBs cannot function well. This is the basic

point of discomfort to the stakeholders. The global regional experience shows that the

implications of ownership do not have clear cut reflection on the performance.

Till date more than 40 per cent of the population live in countries where sate-owned

banks hold the majority of the assets of the banking system. From the global data one

can also identify that the government ownership tends to be greater in poorer

countries and that is quite natural [see Table 11]16. In India, where both public and

private sector co-exist, a large chunk of it is owned by the former. In poor countries

the government has to play a role which ensures addressing the market failure

problems and channelling the scare resources to the priority sectors. As the country

moves up along the poverty spiral the dependence on the government proliferation

decreases. The process of proliferation of the private sector takes place through

market mechanism which is operationalised through the provision of operations of

privately owned commercial banks. TABLE 11

STATE-OWNED BANK ASSETS AS A PERCENTAGE OF TOTAL BANK ASSETS

Country 1980 1990 2000 India 91 91 801 Indonesia … 55 572 Korea 25 21 30 Philippines 37 7 12 Thailand Na 13 31 Argentina Na 363 30 Brazil 33 64 432 Chile 23 19 12 Colombia 27 45 132 Mexico 0 100 0 Peru 65 55 3 Hungary … 81 92 Czech Republic … 873 28 Poland … 804 23 Israel … … 452 South Africa … 53 21 Source: Asian Banking: Emerging developments in growth, Structure and Efficiency, p. 4.

16 However, there are a number of countries there is no state-ownership in the banking sector. A few such countries are Hong Kong, Singapore, Malaysia, and Saudi Arabia.


91

State Ownership and Banking Performance The empirical analysis does not show any strong evidence of better performance by

private sector dominant banking sectors [see Annex Table 1]. Although state

ownership is high in India, Indonesia and Korea performance in these countries in the

terms of return on asset (ROA) is no less than in the USA, Canada, Japan and the UK,

where state dominance is nil or minimum. In the Philippines the share of state owned

banks’ asset is only 12 per cent of total assets the ROA was in a range of 0.4-0.7.

According to Moody’s Ranking on Financial Strength India’s ranking (27.5) is high

compared to Indonesia (5.4), Philippines (20.4), and Japan (12.9). The ranking also

shows that there is no secular trend in state ownership and financial strength. In case

of NPA, the empirical evidence also does not give a clear picture from which one can

conclude that state-ownership was the reason for higher NPA. It is to be mentioned

that in general the NPA is low in developed countries.

10.2. Reform Process Market Force and Market Share Battle As the main objective of the reform is to reduce the dominance of the NCBs in the

market and bring more competition in the sector it is always better if it happens in a

gradual manner. Looking into the market share of NCBs in Bangladesh one can find

that the dominance of the NCBs has been reducing throughout the last one decade

[see Figure 56]. The figure shows that over the last 8 years the market share of NCBs

came down to 40.50 per cent (2004) from 56 per cent (1996). The market share of

PCBs has been equalised with the share of NCBs by 2004. The reduction of market

share took place in a natural way, by expansion of banking market and relatively rapid

growth of private banking. The banking market grew to Tk. 1636.96 billion in terms

of assts in 200417 from Tk. 591.59 billion (1996). As the size of the market is

increasing, the majority volume of the incremental market of Tk. 1045.38 billion (Tk.

641.62 billion) is being captured by private banks. PCBs and FCBs have together

taken under control 61.38 per cent of the incremental market, whereas NCBs received

only 31.73 per cent [see Figure 57]. This is a sign of vibrant growth of private sector

banking. In this scenario it is not understandable why a forceful resolution of NCBs

17 Provisional figure up to June 2004.


92

has become the priority. The reform for improving the financial health would be the

initial target.

Figure 57. Changes in Market Share (Assets) of Commercial Banks in Bangladesh

56.0054.21 53.52

50.9248.47

46.50 45.14

41.72 40.50

591.59666.47

739.71

950.96

1105.83

1280.31

1441.941513.96

1636.97

0

10

20

30

40

50

60

1996 1997 1998 1999 2000 2001 2002 2003 2004June(p)Period

Per c

ent

0

200

400

600

800

1000

1200

1400

1600

1800

Taka

, Bill

ion

All NCBs All PCBs All FCBs All SBs All Banks (Tk. B illion)

Data Source: Bangladesh Bank.

Time Frame

Figure 58. Incremental Share of Market by Commercial Banks, 1996:2004 (Tk. Billion)

All NCBs, 331.66

All PCBs, 512.90

All FCBs, 128.71

All SBs, 72.10

All NCBs All PCBs All FCBs All SBs


93

In case of Agrani, Janata and Sonali Bank three external management teams are to be

appointed. According to the original schedule the management team for the Agrani

Bank ought to start work in January of 2004 and submit the implementation plan for a

31-month second phase within end-June 2004. However, the team started their

activities only in October, 2004. According to the work plan, a report on asset and

liabilities was to be produced within December 2004, but the report is yet to be

completed.

For Janata Bank the activities under the interim memorandum of understanding were

to be completed by end-September 2004 without an output of new memorandum of

understanding for implementation of comprehensive reform agenda in the bank.

Similar is true of Sonali Bank.

As a whole, the activities which are entrusted to the consultants are mammoth and the

time frame is not realistic. Given the possible resistance from the internal

management and staffs it would be further difficult for them to work. As a result the

reform process will be definitely delayed.

Changing the Head and Keeping the Body The CEO and the team of advisors are entrusted to cover the following functional

areas: credit, risk management, human resources and training, MIS and IT,

accounting, internal audit, treasury, branch management. The idea of changing the

head without dealing with the body is bound to fail. All the functional areas

mentioned above are the resultant of functioning of the bank at the branch level. Other

than treasury, all the functional components need comprehensive overhauling. In the

diagnostics it was mentioned that human resource issues include low morale, poor pay

scales, weak skills and counter productive union oriented activities. If this is the case

the change only at the top management will not produce desired result.

Surgery only at Head Office level? It has been designed that a local accounting team will assist the NCBs to carry out the

improvements of the accounting capability of banks. It is not clear whether such

assistance will confine only to the head office level or to the branch office level.


94

Without streamlining of the accounting procedure at the branch level the surgery at

the head office level will not be effective.

Mandate and Accountability Mismatch It is also provisioned that the advisors and the accounting team do not have any

executive authority within the NCBs, but the CEO will give effect to their

recommendations through his executive authority. This provision has a two-fold

problem. One, the advice without accountability will not bring desirable result, when

action with accountability (by the employees) could not do so. The problem of

asymmetric information will make the recommendations made by the consultants

ineffective. On the other hand, bringing consultants into the core management is not

possible due to the structural limitations. It was probably the only case of involvement

of management team in a financial institution by the World Bank and the IMF. So far

the World Bank is also critical of the external management team and questioned its

effectiveness in many developing countries’ SOE reform programme. Non-

cooperation from the employees and moral hazard created by distorted compensation

package for the external management teams would create more problems.

Transfer of Knowledge: Is It Feasible? In the terms of references it is mentioned that the management team will desirably

take steps to transfer their knowledge to NCBs, so that on completion of the

engagement, the local management of NCBs is in a better position to manage its

business without needing to seek additional external expertise. The experience of

FSRP shows that such transfer is not efficient for not believing the underlying

philosophy of changes by the bank management at all levels.

Human Resources: Bone of Contention It is quite obvious that whether the NCBs will be denationalized or not, restructuring

of human resources is an essential element of reform. The detailed activities of the

advisory teams contain two key components in this regard. During the first five

months the following activities inter alia, are included for implementation by the

advisory body:

a. Develop understanding on union issues


95

b. Assess mechanisms for retrenchment and severance support.

The longer term management plan includes activities like review of staff levels,

development of retrenchment plan and severance scheme. However, it is not clear

whether the human resource restructuring plan includes issues of fresh recruitment.

Under the reform programme a revised organization structure will be devised.

Although it is a very sensitive task in the current political context, without

restructuring the human resources it would not be possible to improve the financial

health of the NCBs. Thus, the design of retrenchment plan and severance scheme

should take care of livelihood issues of the retrenched employees.

According to the current schedule the developed retrenchment plan will be

implemented during the tenure of new government in 2007. On the one hand, this

timing bears lesser political risk as the newly elected government will face fewer

difficulties. On the other hand, pre-election pledge might jeopardize the

implementation of this plan.

10.3. Consequences Ownership vs. Financial Crisis Any sort of forceful reduction of presence of the government results in further

jeopardy in the banking sector as well as in the real sector. The experience of

privatisation in Mexico (early 1990s) and in Chile (late 1970s) shows that abrupt and

premature privatisation can be dangerous, so too can be strategy of hanging on to state

ownership. In some Asian economies such as Korea and Thailand, state ownership

declined in the early 1980s, but owing to serious problems in the banking sector in the

aftermath of the economic crises in the late 1990s, the share of state owned banking

once again surged. In Latin America wide swings are evident, between high to low

state ownership, owing to the vast changes in the state of the economy and banks and

the degree of state intervention required to overcome crisis [Asian Banking, 2004].

Manpower Restructuring One of the major objectives of the NCBs reform is to rationalise the manpower of the

banks. This is undoubtedly a necessary but sensitive task. In developing a

retrenchment plan it is important to differentiate the existing manpower according to


96

the criteria of learning potential, likewise the split of bad bank and good bank in terms

of quality of asset.

The issue of over-staffing of the NCBs can be interpreted differently. Four scenarios

can be designed. According to one, where we take average staff size is the criterion

for retrenchment (which is 17.35 per branch), for Rupali and Agrani the average

number of staffs per branch is lower than the sector average (10.98 and 14.18

respectively). For other two NCBs the average is higher than the sector average but

lower than the average of PCBs and FCBs. Considering the sector average the

manpower in Sonali Bank and Janata Bank, thus, should be reduced by 3987 and 1574

respectively. On the other hand, Rupali Bank and Agrani Bank will require additional

manpower. This assumption is valid if the number of branches will not be reduced

under the reform. In case of reduction of number of branches the manpower curtail

size will increase. According to the second scenario (considering the number of

employees per branch for the PCBs as ideal), all NCBs have shortage of manpower.

In that case, if the number of branches is not reduced, additional 13790 staffs will be

required.

One can argue that the size of the employees should be considered in line with the

volume of business. Thus, the third scenario (according to the criteria of volume of

business [total of deposit and asset]) hints that total 18105 will be required to retrench

in the NCBs to achieve the level of business volume at the level of sector average. On

the other hand, if we consider the average business volume of the PCBs (fourth

scenario), then the total number of retrenched number of staffs will be increased to

25458, which is 43.48 per cent of total number of current staffs at the NCBs ( see

Table 12). One should take note that, these are all linear estimation. In reality, one

should consider case by case. But it is clear that manpower retrenchment is a real

issue, with or without divestment of the NCBs. The government will have to have

strong political will to go for such tough decision.

Access to Banking Services and Reduction of Size of banking System Among the rural branches 90 per cent of them are run by NCBs or SBs. Only 10 per

cent share belongs to the PCBs (se Figure 58). Further more, this 10 per cent is a

result of flexible definition of the rural branch. As the resource flow takes place from


97

rural to urban areas, reduction of access to banking services due to the

denationalisation will have severe implications for the overall function of the banking

sector.

Figure 59: Comparative Geographical Distribution of Branches of Commercial Banks

12431104

34150

2145

384

0

1168

3388

1488

34

1318

0

500

1000

1500

2000

2500

3000

3500

4000

NCBs PCBs FCBs SBsTypes of Banks

Num

ber o

f Bra

nch

Urban Rural Total

Primarily, it will affect the rural economic activities. Secondly, the reduced flow of

financial resources will create pressure on the liquidity of the banking sector. Finally,

the size of the banking sector might be reduced in the short run. As the bank branch

rationalisation will be a necessary step, the change in definition might act as a remedy

to the problem. The ratio of urban-rural branches for the private banks may also be

changed so that more rural branches can be opened by the private banks.


98

TABLE 12 SCENARIO OF MANPOWER RESTRUCTURING, DATA AS OF JUNE 2004

Number of branch

Branch Share in the

sector Number of

staffs Staff

Share in the Sector

Staff per branch

Reduction requirement

(Sector average) Scenario 1

Reduction requirement

(PCB standard) Scenario 2

Total business

(Tk. Crore)

Volume of business per

Staff

Reduction Requirement (volume of

business Sector average criteria)

Scenario 3

percentage of reduction

(VOB Sector Average)

reduction of manpower (volume of

business, PCB standard)

Scenario 4

percentage of reduction (VOB PCB Standard)

Sonali 1185 19 24547 23 20.7 -3987 708.46 51913 2.1 7363.3 30.0 10488 42.7

Rupali 493 7.9 5412 5 11 3142 5095.1 12875 2.4 1150.2 21.3 1925 35.6

Janata 845 14 16235 15 19.2 -1574 1774.2 30732 1.9 6062.5 37.3 7912 48.7

Agrani 871 14 12350 11 14.2 2762 6213.3 26650 2.2 3528.5 28.6 5133 41.6

All SBs 1318 21 16420 15 12.5 6448 11670 21836 1.3 9192.1 56.0 10506 64.0

All PCBs 1497 24 31905 29 21.3 -5931 0 117808 3.7 -7091 -22.2 0 0.0

All FCBs 32 0.5 1502 1.4 46.9 -947 -820 25575 17 -6964 -463.6 -5424 -361.1

All NCBs 3395 54 58544 54 17.2 361 13812 122169 2.1 18105 30.9 25458 43.5

All NCBs+SBs 4713 75 74964 69 15.9 6809 25482 80909 1.1 27297 36.4 35964 48.0

All Banks 6246 100 108371 100 17.4 0 24748 327394 3 0 19705 18.2


99

Why NCBs? Although NCBs have become target of the reform, one can question why to target NCBs only?

Because, the situation in specialised banks is no way better than NCBs, rather worse than NCBs

in many areas [see Annex Table 2]. As NCBs have broader mandate which is difficult to replace

by the private commercial banks, the reform process, particularly the privatisation or liquidation

could be started with in the SBs.

New Licenses and Strategy of Unbundling

There is no doubt that some new banks will emerge within next two year in the private sector. As

a strategy for channelling fresh investment into the banking sector it may be thought whether it is

possible to divide the big NCBs into smaller parts and divested. The option of strategic

partnership with foreign financial institution may be also on the table for consideration.

The final Question: Is the Ownership Main Problem? The collusion between business and politics, interference of the government into the NCBs

operations, corruption are the main reasons which have bred inefficiencies in the banking sector.

Until we can stop these problems, no reform will be effective. Rather the half-hearted reform

will send wrong signal to the market and players which will increase burden of bad quality

assets.

The conditionality-based reform, which is also against the philosophy of PRSP and PRGF, has

little chance to succeed. Rather we need indigenous reform in the financial sector. Although the

Banking Reform Committee (BRC) proposed many pragmatic policy options, those were

sidelined and the current reform programmes have been taken over by the government. As the

reform process will touch many sensitive areas, the success of this reform will need strong

government will. A transparent process is needed to be designed so that speculations can not

jeopardise it. There is also need for designing a set of monitorable landmarks which would be

useful for making progress. In conclusion, there is no doubt that reforms in the banking sector is

necessary, but the process and outcome should be designed in a sequential manner and without

prejudice to new ownership form.


100

ANNEX TABLE 1 STATE-OWNERSHIP VS. BANKING PERFORMANCE IN SELECTED COUNTRIES

State Ownership ROA NPA Banking crises

Country 1980 1990 2000 2000 2001 2002 2000 2001 2002 -

India 91 91 80 0.7 0.6 0.8 12.8 11.4 10.4 -

Indonesia … 55 57 0.1 0.8 1.8 18.8 12.1 10.6 1997-

Korea 25 21 30 -0.6 0.8 0.8 8.1 4.9 3.8 1997-

Philippines 37 7 12 0.4 0.4 0.7 15.1 17.3 16.4 1998-

Thailand Na 13 31 -1.6 -0.2 0.7 17.7 10.5 10.4 1997-

USA … … … 0.9 0.6 0.7 1.2 1.5 1.6 1984-91

Canada … … … 0.7 0.6 0.5 1.2 1.5 1.6 -

Japan … … … 0.2 0 -0.4 6.6 7.4 8.9 -

United Kingdom … … … 0.9 0.6 0.7 2.5 2.5 … -

Argentina Na 363 30 … … … … … … 1995

Brazil 33 64 43 … … … … … … 1995-

Chile 23 19 12 … … … … … … 1978-83

Colombia 27 45 13 … … … … … … -

Mexico 0 100 0 … … … … … … 1995-1997

Peru 65 55 3 … … … … … … -

Hungary … 81 92 … … … … … … -

Czech Republic … 87 28 … … … … … … -

Poland … 80 23 … … … … … … -

Israel … … 45 … … … … … … -

South Africa … 53 21 … … … … … … -

Sources:

IMF, World Economic Outlook, May 1998; JP Morgan, Asian Financial Markets, 28 April 2000; World Bank, Economic Prospect and Developing Countries, table 3.6. Asian Banking, January 2004.


101

ANNEX TABLE 2 COMPARATIVE PICTURE OF COMMERCIAL & SPECIALISED BANKS' PERFORMANCE

Banks Classified Advances (%) ROE ROA Net Profit (Tk. Crore)

All Banks 21.51% 10.74% 0.79% 582.56 All NCBs 29.81% 4.34% 0.11% 74.14

Sonali 35.65% -3.38% -0.08% -22.18

Rupali 20.83% 2.46% 0.09% 6.21

Janata 23.41% 17.53% 0.50% 82.11

Agrani 20.83% 2.42% 0.05% 8.01

All PCBs 11.26% 22.39% 1.41% 352.45

All FCBs 0.01 20.58% 1.93% 199.28

All SBs 47.24% -4.36% -0.31% -43.31

RAKUB 47.61% 2.27%* 0.16%* 8.51

BASIC 2.99% 17.64%* 1.43%* 32.08

BSRS 64.34%* 3.17%** 0.56%** 8.62

BSB 65.57% 10.47% 0.70% 8.62

BKB 48.39% -13.39% -0.59% -139.21

*Data of 2003 **Data of 2002


102

XI. PRICES OF ESSENTIAL COMMODITIES, INCREASE IN DIESEL PRICE AND FOOD SECURITY

11.1 Price Surge of Essential Commodities

Rice: Wholesale Price Usually in July, the Aus crop is harvested. Thereafter, the price of rice generally declines in

August and September, and then again increases to some extent in October and November prior

to the harvest of Aman rice. This period of potential scarcity is traditionally known as Mora

Kartik. After the harvest of the Aman crop, rice prices generally decline and continue to be low

up to March and then again rise slightly before the harvest of Boro rice in April-May. At the

beginning of FY2004/05 (i.e., July 2004) the price of coarse rice was slightly higher than the

previous year's price. In July 2004, the national average wholesale price of coarse rice was Tk.

13,440 per tonne, compared to Tk. 12,980 per tonne in July 2003 (Figure 60). Instead of the

traditional pattern of decline, price of rice increased further in August 2004 mainly due to flood.

Consistent rise in price of rice was observed in subsequent months. In first week of January

2005, the price of rice increased all time high (i.e., Tk. 17,500 per tonne). This consistent

increase was due to expectation of a poor harvest of Aman rice due to flood of end-July to mid-

August and excessive rainfall in September. The increase in domestic price of rice has occurred

in a time when rice price has been showing an upward trend in the international market from

beginning of the 2004.

For import purposes one needs to compare average wholesale price of Bangladesh with the

import parity price of the exporting countries such as Thailand, India, and Vietnam. Import

parity price is obtained after adding transportation and insurance cost with that of the wholesale

price in the originating countries. A comparison of Bangladesh’s (Dhaka) monthly wholesale

price with the import parity price of New Delhi (India), and Bangkok (Thailand) is presented in

Figure 60. It is clearly evident from Figure 61 that generally Bangladesh’s price is higher than

the import parity price of India and Thailand. Therefore, Bangladesh's private sector in the past

has imported rice even when Bangladesh had produced sufficient quantities. However,

Bangladesh’s wholesale price of rice during April-August 2004 was lower than import parity

price of both India and Thailand. In this case we have compared the price of 5 percent broken

parboiled coarse rice. Bangladesh’s rice price is higher than the import parity price of India but is


103

still less than that of Thailand (See Figure 61). Therefore, getting rice from international market

at a cheaper rate will be difficult.

Figure 60 Average Wholesale Price of Coarse Rice in Bangladesh: FY01-FY05

1344013740

14690

15260

15940

16850

17500

11000

12000

13000

14000

15000

16000

17000

18000

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Pric

e (T

k/to

n)

2000/01 2002/03 2003/04 2004/05


104

Figure 61

Comparison of Domestic Prices of rice with Import Parity Price: FY00-FY05

180.00

200.00

220.00

240.00

260.00

280.00

300.00

320.00

Jul'99

Dec'99

May'00

Oct'00

Mar'01

Aug'01

Jan'0

2

June

'02

Nov'02

Apr'03

Sep'03

Feb'0

4

July'0

4

Dec'04

(3wk)

Import Parity (ex:Bangkok) Import parity (ex: Delhi) Bangladesh: Wholesale Price

An analysis of private sector import with import parity price of rice with Bangkok and Delhi

revealed that whenever domestic price in Bangladesh is more than the import parity price then

the private import of rice increases (Figure 62). It may be noted that currently there is no

restriction on import and export of rice by private sector of Bangladesh. Traders are free to

import or export rice. Their actions are driven by the profit concerns (difference between

international and domestic price). According to the US Department of Agriculture, export prices

for most grades of Thailand’s milled white rice have increased by $22-$27 per tonne since early

November, as a result of higher prices for Thailand’s intervention purchases, abnormal dryness

in the region, and generally tight exportable supplies across much of Asia. Vietnam’s prices have

increased over the past months as well due to a lack of supplies until after the harvest of its

winter-spring crop in February and March. It is also clearly evident from Figure 61 that getting

the same quality rice (5 percent broken parboiled) traditionally imported by Bangladesh from

Thailand would be difficult.

Production forecasts indicate that rice production would be much less than that of last year due to

abnormal dryness. India also experienced drought in many sates of the country implying a poor

production prospect of monsoon rice. Therefore, international price of rice may go further up in


105

the coming months. Policy makers must have to take this real world reality for designing policies

which effect production and rice trade. Considering the global situation, Bangladesh must have

to ensure increased production of Boro at a lower cost to ensure food security and arrest the

rising food prices.

Figure 62. Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1999-2004

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

Pric

e ($

/ton)

0

50000

100000

150000

200000

250000

300000

Impo

rts (m

etric

tons

)

Import Parity (ex:Bangkok) Import parity (ex: Delhi)Bangladesh: Wholesale Price Private Sector Imports (Rice)

Sugar Price: Wholesale price of sugar has increased from Tk 27.50 per kilo (US$0.47) in

July’03 to Tk 30.89 in July’04. Comparison of the wholesale price of sugar in India (Delhi) and

Bangladesh (Dhaka) indicates that wholesale price of sugar in Bangladesh (Tk 30.89 per kg or

US$ 0.51) during July ’04 was much higher than that of India (Rs 15.59 per kg or US$ 0.35). It

may be noted that per kg wholesale price of sugar in Dhaka in November ’04 was Tk. 31.27


106

(US$0.52) while it was Rs. 16.10 (US$ 0.36) in Delhi. An analysis of price difference between

Dhaka and Delhi remained more or less stable in FY05 (July-November) while it had shown a

fluctuating trend in FY04. It may be recalled that the government in FY05 budget had reduced

supplementary duty (SD) from 40 percent to 15 percent and eliminated VAT at manufacturing

stage. However, there was no decrease in sugar price in the market. Thus, it appears that

consumers could not receive the benefits from decrease in SD for sugar import.

Soyabean Oil Price: Bangladesh imports crude soyabean oil and the refined oil is marketed by

the domestic companies. Price of soyabean oil is consistently increasing. The wholesale price of

soyabean oil in Bangladesh increased from Tk 39.90 per litre in July 2003 to Tk 49.20 per litre in

July 2004 which has decreased to Tk 45.90 per litre in December 2004. An analysis of

differences between the crude oil price of soyabean in the international market and refined oil

price in the domestic market indicates that the gap is increasing. In other words, the price of

soyabean oil in Bangladesh has been increasing at a faster rate than in international market.

Vegetable Prices: This year farmers have taken extra effort to increase vegetable production by

observing high prices of vegetables during August-October. Increased effort of farmers had

increased production and supply of vegetables since November which helped to reduce price.

However, farmers’ success in increased vegetables production has been penalizing them in a

very harsh way. In many areas farmers are not able to sell their vegetables even at their cost of

marketing.

11.2 Trends in Import of Foodgrains

Imports of foodgrains into Bangladesh are sustained from two sources: food aid and commercial

imports. The food aid is given by developed countries to assist Bangladesh in improving its food

security. In 2003/04, only 4 thousand tonnes of rice was received by the government as food aid

(Table 13). All the commercial imports of rice since 1999/00 came through private sector

acquisition. Highest level of rice import (3.06 million tonnes) was in 1998/99 (worst flood

affected year). Second highest import (1.56 million tonnes) was in 2002/03 (a normal production

year). Very high amount of rice import in 2002/03 was mainly due to low tariff rate in

Bangladesh and also because of high export subsidy provided by the Indian government during


107

that time. India was exporting rice at half of their economic cost. Increase in administered price

of rice in India in October 2003 and a good harvest of rice (all time high) in 2003/04 has resulted

decrease in total rice import to 0.8 million tonnes.

During July-December 2004, private sector imported 507 thousand tonnes of rice against an

import of 525 thousand tonnes during the comparable months of FY2003/04. Imports were from

India, Myanmar and Thailand. After the excessive rain of September, production prospect of

Aman rice is lower than last year and rice price showed an increasing trend in the market. In

response to that there has been an increase in import of rice by private sector since October ’04.

Rice import (as food aid) by the government during July-December ’04 was 13 thousand metric

tonnes. Government did not make any commercial import of rice during this period.

In case of wheat, total import in FY04 (1998 thousand metric tonnes) was 17.15 percent higher

than that of FY03. As mentioned earlier, wheat production has been gradually declining since

1999/00 and wheat production in FY04 decreased by 16.85 percent, compared to the previous

year’s production. During July-December ’04, private sector imported 835 thousand metric

tonnes of wheat against 1070 thousand metric tonnes in the previous year. During July-

December ’04, the government imported 195 thousand metric tonnes of wheat (185 thousand

metric tonnes as food aid and 10 thousand metric tonnes as commercial import). It may be noted

that government wheat import during the comparable months of the last fiscal year (FY2003/04)

was 256 thousand metric tonnes (228 thousand metric tonnes as food aid and 28 thousand metric

tonnes as commercial import). Thus, total import of foodgrains (rice and wheat) by government

and private sector during July-December ’04 was 1550 thousand metric tonnes against 1851

thousand metric tonnes in comparable months of the previous year (FY2003/04). In other words,

total food import in FY2004/05 is 16.3 percent less than last fiscal year (FY2003/04).

TABLE 13 IMPORT OF RICE (AID/COMMERCIAL/PRIVATE) IN BANGLADESH, 2001/02-2004/05

(in ’000 metric tonnes)


108

Year Rice Wheat Govt.

(Aid/ Grant)

Govt. (Comme

rcial)

Private (Comme

rcial)

Total Govt. (Aid/

Grant)

Govt. (Comme

rcial)

Private (Comme

rcial)

Total

2001/02 9 0 118 127 0 501 1171 1672 2002/03 4 0 1553 1557 0 238 1414 1652 2003/04 4 0 797 801 29 285 1684 1998 2003/04 (Jul-Dec)

0 0 525 525 228 28 1070 1326

2004/05 (Jul-Dec)

13 0 507 520 185 10 835 1030

11.3 Monga in Northern Districts Poor prospect of Aman rice production in FY05 was accompanied by Monga in the northern

districts of Bangladesh. Monga is a local term used to indicate acute deprivation caused due to

the erosion of purchasing power from lack of gainful employment opportunities. Although this

happens every year during September-November (Aswin and Kartik) in the northern districts,

this year the situation was more severe than in the recent past. Severe flood in July-August and

heavy rains in September damaged crops, livestock and fisheries and thus, worsened the

agricultural production situation and reduced the employment opportunity. Last year Monga

occurred in five districts of Rangpur region. This year Monga occurred in all these districts and

also prevailed in two more districts (Naogaon and Joypurhat). Three types of causes were

responsible for this year’s Monga.

General reasons

• Monga affected districts have larger proportion of agricultural labour households and

tenant farmers. According to the Bangladesh Census of Agriculture 1996, 60-65 percent

of the rural households in these five districts (Gaibandha, Kurigram, Lalmonirhat,

Nilphamari and Rangpur) are agricultural labour households or tenant households. It may

be noted that only 31 percent of the total households in Comilla are agricultural labour

households and tenant farmers.

• Lack of industries in these districts also limits scope for employment. Except Tobacco

and Bidi industries in Rangpur and some cold storages in other districts, there is no

employment opportunity in the manufacturing sector.

• Monga affected localities have lack of infrastructure and transport facilities. Worst

affected localities are also the victims of river bank erosion


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Incremental reasons

• Three times floods damaged a part of the Aman rice and Rabi crops.

• Due to the borrowing from local money lenders (Mahajans) money at high interest rates

(140 to 180 percent) a larger part of the harvest go to the repayment of loan.

• In some areas NGOs realized loan installments ignoring the hardships of the people

Accentuating reasons

• Relief activities of the government covered only a tiny part of the population in these

areas.

• One way of creating employment and increasing access of poor people to foodgrains is

through non-priced distribution of food. Food for works (FFW) and vulnerable group

development (VGD) are two major programmes which are expected to cater this need.

Many experts believe that distribution of food through such programmes increases

availability of food in rural areas and better access of poor people to food. An analysis of

distribution of foodgrains through PFDS revealed that distribution of foodgrain through

FFW and VGD was lower in FY04 and FY05 than that of FY99 and FY01 (Figure 63).

Coping with Monga

• Government disbursed VGF cards among the poor and introduced Open Market Sale

(OMS). Rajshahi Krishi Unnayan Bank (RAKUB) has lunched collateral free loan under

the ‘Zero Poverty Loan Scheme’ with 6 percent interest rate for day laboures and landless

people. However disbursement of relief was better this year due to the inclusion of Army

in management of disbursement.

• Forward sale of their labour at reduced wages—Tk 20-25 per day with food or Tk 35-40

per day without food. This may be compared with the potential wage rate of Tk 35-40

with food and Tk 55-60 without food during the crop harvest and planting season

• Temporary migration of labourers during the pre-harvest lean period. Labourers go to the

districts like Dhaka, Chittagong and Sylhet for seasonal employment opportunity

• In some areas farmers sold their harvests in advance at lower price about 175 to 200 per

mound.

• Many families sell their livestock at lower price to cope with Monga situation


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• Eating of banana thors and kachu-ghechu which is not naturally eaten even by poor

people during the normal period.

Figure 63. Distribution of Foodgrains through FFW and VGD: 1998/99-2004/05

0

50000

100000

150000

200000

250000

July August September October November December January February March April May June

Months

tons

1998/99 2000/01 2003/04 2004/05

Efforts to help the Monga victims

Many organisations and individuals tried to help the victims of Monga this year. It may be

recalled that during the last year’s (2003) Monga, NGOs and civil society organisations were

hesitant to participate probably due to the denial of the government at the initial days.

Monga is definitely an unhealthy sign for the rural community in Bangladesh. Very little has so

far been done to help the people in extreme distress in northern districts. Solution of the Monga

problem lies in creation of employment opportunities in these districts. Some opportunities for

employment creation may be through crop diversification, embroidery and other non-farm

works, food for works, special programmes for the development of char area. A recent

publication (The Food Security Atlas of Bangladesh 2004) by the United Nations World Food

Programme and the Government of Bangladesh has successfully delineated union level poverty

map (probability of high level of extreme poverty). This map may be used for efficient use and

targeting of safety net programmes such as food for work, food for education, vulnerable group

feeding (VGF), vulnerable group development (VGD), etc. Unions experiencing higher intensity


111

of poverty should be targetted for greater intensity of efforts. Another implication is that

strengthening special and targeted employment programmes for the vulnerable poor should get

priority in the unions with high incidence of poverty.

11.4 Increase in Diesel Price

In December 2004, Government has increased price of diesel from Tk. 20 to Tk. 23. Diesel is an

essential commodity for irrigation and operation of power tiller (for land preparation) and for

transport services. Total amount of diesel sold in FY04 was 2.00 million metric tonnes against

1.82 million metric tonnes in FY03. That is, use of diesel has increased by 10.43 percent in

FY04. Usually, more than 60 percent of the diesel is sold during the Rabi season (December-

May). Potential demand for diesel during December’04-April’05 has been estimated as 1.1

million metric tonnes. Thus, the government decision will generate about Tk 600 crore in FY05

and about Tk 330 crore during the Rabi season from selling of diesel. However, this decision

might have serious negative impact on the Bangladesh economy particularly on the rising price

level due to unavoidable increase in transportation cost, and increased irrigation and land

preparation costs for Boro rice cultivation.

Boro rice is an irrigated crop and without irrigation one cannot grow Boro rice. According to the

Census of Minor Irrigation 2000, 83 percent of the total irrigated area in Bangladesh is irrigated

through electricity operated engines while 17 percent of the total irrigated area is irrigated

through electricity operated engines (MoA, 2002). Currently, power tillers are used to a large

extent for land preparation which is also dependent on diesel. Thus, production activity and Boro

production depend largely on availability and price of diesel. This is the necessary condition

since Boro rice can not be grown without irrigation. Sufficient condition for Boro rice production

is availability of fertilizer and quality seed at affordable prices. It is well known that Bangladesh

has experienced a structural shift in food production at the end of the 20th century. Rice

production has shifted from a largely weather influenced Aman crop to an irrigated Boro crop,

which is much more sensitive to the quality of public policy and governance than the vagaries of

nature. In recent years, wheat production has been consistently declining. In 2003/04, wheat

production was 16.85 percent less than previous year’s production. Therefore, food production


112

largely depends on the production of Boro rice. Policy makers in no way can be reluctant in

taking appropriate policy actions.

11.5 Implications for Food Security Price of essential commodities particularly rice is very high in FY05, compared to other years.

Domestic prices of foodgrains (rice and wheat) are consistently increasing in subsequent months

of FY05. International prices of rice are also increasing and expected to increase further in the

coming months due to lower production prospect of rice in Thailand, Vietnam and India as a

result of abnormal dryness this year. An analysis of Bangladesh’s wholesale price with the

import parity price of rice from Thailand, Vietnam and India revealed that Bangladesh’s price is

lower than that of Thailand and Vietnam and slightly higher than import parity price of India.

Therefore, large import of quality rice from the world market at a cheaper price may not be

possible. Total import of foodgarins during July-December 2004 was lower than the

corresponding months of the previous year (FY04). Production of Aus and Aman rice in

Bangladesh in FY05 is much lower than last year due to end-July to mid-August flood and

excessive rainfall in September.

Considering these realities, the government must have to encourage increased production of

Boro rice to ensure food production and food security in the country. In this context, government

decision of increasing diesel price from Tk 20 to Tk 23 in December 2004 will adversely affect

Boro rice production and, thereby, food security of the country. It may be noted that Boro rice

contributes about 50 percent of the total rice production in the country and Boro rice cannot be

grown without irrigation. Currently, 83 percent of the irrigation is done through the diesel

operated irrigation engines. Farmers also depend on diesel operated power tillers for land

preparation for Boro rice cultivation. Therefore, government must review the decision of

increase in diesel price. To minimize the loss of the Bangladesh Petroleum Corporation (BPC)

and maintain low price of petroleum products particularly of diesel the government may consider

reduction of import tariffs for such products.

XII. EXCHANGE RATE SITUATION


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12.1. Exchange Rate Behaviour: Is there Any Significant Change Since Floating Mechanism?

In May 2003 the government announced the full free floating of exchange rate in Bangladesh. It

was a historic move towards application of market mechanism in macroeconomic management.

It was anticipated that the shift from a managed floating system to free floating will have an

impact on the foreign exchange market and market distortion prevailed in the exchange rate

would be corrected.. Earlier Bangladesh Bank calculated regularly real effective exchange rate

(REER) using a basket pegging formula with USD as a lead currency. Based on the REER and

other macroeconomic considerations Bangladesh Bank announced a buying and selling rate for

the foreign exchange dealers. The lower and higher limits of buying and selling rates were

mandatory for the dealers. Since the announcement of switching to the free floating system there

is no limit in buying and selling rates to be practiced by the foreign exchange dealers. However,

Bangladesh Bank continues to calculate the REER to monitor the market trends for necessary

intervention.

The exchange rate data analysis does not show any evidence of market correction which ought to

take place after May 2003. In figure 63 nominal effective exchange of USD and EURO does not

show any sign of market correction. Furthermore, the movement of exchange rate of Taka

against USD and EURO are almost in perfect tandem with the movement of EURO and USD in

the international market [Figure 65]. The estimation of NEER and REER based on the monthly

average exchange rate data in Bangladesh and Reuters system and CPI data from the IFS shows

that Taka is still appreciated. The real effective exchange rate of Taka against USD and Euro are

both above 100 and both are still appreciated by 11.06 per cent and 14.69 per cent respectively

[see Figure 64].

The appreciation of major currencies is difficult to explain. One possible explanation may be the

overwhelming control of the market is in the hands of four NCBs. Other PCBs also generally

follow the rate announced by the NCBs. As the USD was weak in the international market even

before the floating exchange rate system, the correction was not forced by the market. It is also

thought that improvement in foreign exchange reserve also facilitated the stable situation. The

demand for foreign currencies in Bangladesh is generally inelastic, which is caused by the


114

secular trend in import payments and under-developed foreign exchange market. The

determinant factor is the Euro-Dollar rate in the international inter-bank market. Sometimes

temporary surge in demand creates temporary deviation. As a result since May 2003 the rate of

USD was stable except for some temporary surge and Taka fell against Euro according to the

global movement of these two currencies.

Figure 64

Movement of NER and REER for USD and EURO

55

60

65

70

75

80

Jul.

2002

Au

g. 2

002

Se

p. 2

002

O

ct. 2

002

N

ov. 2

002

D

ec. 2

002

Ja

n. 2

003

Fe

b. 2

003

M

ar. 2

003

Ap

r. 20

03

May

. 200

3

Jun.

200

3

Jul.

2003

Au

g. 2

003

Se

p. 2

003

O

ct. 2

003

N

ov. 2

003

D

ec. 2

003

Ja

n. 2

004

Fe

b. 2

004

M

ar. 2

004

Ap

r. 20

04

May

. 200

4

Jun.

200

4

Jul.2

004

Aug.

2004

Sep.

2004

period

NE

R, U

SD

and

EU

RO

100

102

104

106

108

110

112

114

116

RE

ER

, US

D a

nd E

UR

O

NER USD NER EURO REER USD REER EURO


115

Figure 65 Comparative Movement of Euro-USD Cross Rate in Bangladesh and Global Euro-USD Rates,

Monthly Average

0.800

0.850

0.900

0.950

1.000

1.050

1.100

1.150

1.200

1.250

1.300

Jul.

2000

Oct

. 200

0

Jan.

200

1

Apr

. 200

1

Jul.

2001

Oct

. 200

1

Jan.

200

2

Apr

. 200

2

Jul.

2002

Oct

. 200

2

Jan.

200

3

Apr

. 200

3

Jul.

2003

Oct

. 200

3

Jan.

200

4

Apr

. 200

4

Jul.2

004

Peiord

US

d pe

r Eur

o

EURO-USD Global Euro-Usd cross rate

The hypothesis of dominance of NCBs during first two weeks of January 2005 became explicit

when PCBs traded USD at a rate which was Taka 2-3 higher than the rate offered by the NCBs.

Only the PCBs responded this time to the turn around of USD in the international market and to

temporary surge of demand for USD. On the other hand the response of the NCBs was slow

which causes such peculiar situation. Figure 65 also shows that the recent rise in the price of

USD was caused by the turn around of the USD in the international market and impact of

temporary surge in demand is also obvious. It might happen that this time the market will absorb

the rise in the USD price and a partial correction of appreciation may sustain.

As the market is yet to respond to the free floating system the true test of managing a floating

exchange rate system is still ahead. According to the Commerzbank Research (2004) the Euro-

Dollar rate will start to reverse in May-June 2005 and will reach 1.28 or less. Having a positive

forecast of the economic growth in the Europe the rate might be improved in favour of USD

further. It would be interesting to observe whether the impact of such exchange rate behavour in

the global market could be ignored by Bangladeshi inter-bank market.


116

Bangladesh Bank may exercise some market intervention to cause devaluation of USD against

Taka which might create some positive impact on the export of Bangladeshi products to the US

market. This exercise could be useful during the first two quarters of FY2005. Although it would

not be required by the Bangladesh Bank if a market shift takes place in the upcoming period as a

result correction of expectation in China by the buyers.

Figure 66. Movement of EURO-USD Global Exchnage Rate and EURO-USD Cross Rate, November 2004 - Janaury 10, 2005

1.2200

1.2400

1.2600

1.2800

1.3000

1.3200

1.3400

1.3600

1.3800

11/1

/200

4

11/8

/200

4

11/1

5/20

04

11/2

2/20

04

11/2

9/20

04

12/6

/200

4

12/1

3/20

04

12/2

0/20

04

12/2

7/20

04

1/3/

2005

1/10

/200

5

Date

USD

per

EU

RO

EURO-USD Global Rate

EURO-USD Cross Rate

12.2 Export Performance of Bangladesh: Does Exchange Rate Matter? During the last three years Bangladesh’s export to EU has increased at a faster pace compared to

the previous period (22.38 per cent in FY 2004). On the other hand, the export in the US market

was on the decline (-4.56 per cent in FY 2004). The relatively open market policy of the EU for

the LDCs under the GSP schemes and the EU-EBA and greater demand for knitwear products in

which Bangladeshi producers are more competitive were perceived as major reasons for export

growth in the EU. On the other hand, the exclusion of Bangladesh from US preferential


117

treatment for LDCs was perceived as the main reason for the decline of export from Bangladesh.

Many also argue that export growth in the EU market was because of improvement in

productivity and lead-time. However, productivity and lead-time arguments and preferential

market access can not fully explain such phenomenon. Economists argue that exchange rate

movement has also played an important role in this context.

As regards the implications of exchange rate movement there are two opinions. According to

one, a conscious government policy of significant devaluation of Taka against EURO has made

Bangladeshi exports more competitive in the Euro-denominated market. On the other hand, USD

was kept in line more or less with linear devaluation; as a result export to US market has not

benefited much and was left to the market mechanism considering other implications. One can

also substantiate this argument by comparing the devaluation of Taka against Euro and

devaluation of Taka against USD. Since July 2000 Taka was depreciated against Euro by 68.4

per cent. On the other hand Taka against USD was depreciated only by 29.2 per cent [see Figure

67]18.

The second opinion suggests that it was not the policy of conscious deeper devaluation of Taka

against Euro, rather global devaluation of USD has added extra premium in the competitiveness

of Bangladeshi products to the EU market. The movement of cross rate of Euro-USD (the rate

derived from the exchange rate of Taka against USD and Taka against EURO in the Bangladesh

inter-bank FOREX market) and inter-bank exchange rate of EURO against USD in the global

market [see Figure 65] shows that since July 2000 the cross rate of EURO-USD was moving

along the global EURO-USD inter-bank exchange rate, with a few exceptions. Figure 65 shows

no significant difference between these two rates which confirms that Bangladesh Bank’s

intervention, if any, did not impact on ‘apparently deeper depreciation’ of Taka against Euro. An

econometric exercise was performed at the CPD to capture the impact of exchange rate change

and volatility on export performance of Bangladesh. The model was run through unit-root test of

the variables, co-integration and error correction process (Raihan 2005). The exercise shows that

devaluation of Taka against EURO played a clear positive role in terms of export gain in the EU 18 The period July 2000 as taken as the base period for several reasons. Firstly, it is two years before of reverse relationship of USD against Euro. Thus, the period before the reverse relationship and after the reverse relationship are more or equal. The July 2000 period is also before the Bangladesh government’s official announcement of shifting the exchange rate mechanism from managed floating (basket-pegging) to free floating.


118

market. During the period in question, one percent devaluation generated 1.25 per cent growth in

export in the EU market.

One may question how Bangladesh’s export in the US market has increased in recent months

despite the abovementioned EURO-USD exchange rate trend. This turn around of Bangladeshi

export to the US may have taken place for other reasons like sanctions on China, correction of

earlier pessimism etc.

Figure 67. Depreciation of Some Selected Currencies, Base Period June 2000

-20

-10

0

10

20

30

40

50

60

70

80

Jul.

2000

Sep

. 200

0

Nov

. 200

0

Jan.

200

1

Mar

. 200

1

May

. 200

1

Jul.

2001

Sep

. 200

1

Nov

. 200

1

Jan.

200

2

Mar

. 200

2

May

. 200

2

Jul.

2002

Sep

. 200

2

Nov

. 200

2

Jan.

200

3

Mar

. 200

3

May

. 200

3

Jul.

2003

Sep

. 200

3

Nov

. 200

3

Jan.

200

4

Mar

. 200

4

May

. 200

4

Jul.2

004

Sep

.200

4

Period, Month

Perc

ent c

hang

e

EURO-USD USD-Tk EURO-Tk

In conclusion, two important trends have been identified. Firstly, Bangladeshi taka is still

appreciated against major currencies despite the official announcement of adopting free floating

exchanger ate mechanism. Secondly, Bangladeshi exports in EU market received extra exchange

rate premium and exports to EU increased due to interalia, this exchange rate premium. The

extra exchange rate premium was received due to secular fall of USD against the EURO in the

global inter-bank foreign exchange market.


119

XIII. PRSP AND IPRSP: A COMPARISON OF MEDIUM TERM MACROECONOMIC FRAMEWORK

The PRSP has specified a Medium Term Macroeconomic Framework (MTMF) to facilitate the

implementation of the poverty reduction strategy. Here, we have compared the MTMF adopted

in the Interim PRSP (IPRSP) and PRSP.

13.1 Targets for Economic Growth and Money Supply In the IPRSP, real GDP growth was targeted as 6.0 percent in FY05, 6.5 percent in FY06 and 6.5

percent in FY07 (Table 14). In PRSP, targeted GDP growth is 5.5 percent in FY05, 6.0 percent

in FY06 and 6.5 percent in FY07. It may be noted that economists argue that for faster poverty

reduction in Bangladesh, we must aim for double digit growth. Thus, it seems that GDP targets

are much below the need of the country and have further been lowered down than the PRSP

targets.

Targets for mobilising domestic investment are not sufficiently ambitious enough. In case of CPI

inflation targets have been raised. IPRSP targeted that inflation would be within the range of 4

percent per annum but the PRSP targeted for 6.5 percent inflation in FY05, 5.5 percent in FY06

and 5.0 percent in FY07. Actual inflation in the benchmark year (FY03) was 4.4 percent.

Available information suggests that during the early months of FY05 (July – October) CPI

inflation rate was 6.61 percent which is much higher than the actual in the beginning of this

century (1.94 percent in FY01) and even higher than already very high target (6.5 percent) in

FY05. Increase in general price level effects the real income by eroding purchasing power of the

individual and negatively effects the poverty situation. Therefore, setting the higher inflation

target is surely a negative signal to the poverty reduction commitment revealed through the

PRSP.

Targets for private sector credit and broad money (M2) supply has been set upward in the PRSP

than in the IPRSP (Table 15).


120

TABLE 14 TARGETS FOR ECONOMIC GROWTH IN IPRSP AND PRSP

Indicator Year IPRSP PRSP Real GDP Growth (%) FY03 (Actual) 5.3 FY04 (Estimate) 5.5 FY05 6.0 5.5 FY06 6.5 6.0 FY07 6.5 6.5 Gross Domestic Investment (percent of GDP)

FY03 (Actual) 23.43

FY04 (Estimate) 24.20 FY05 24.20 FY06 26.40 FY07 28.60 Nominal GDP (in Billion Taka) FY03 (Actual) 3005.8 FY04 (Estimate) 3245.0 FY05 3636 3628.9 FY06 4023 4038.9 FY07 4450 4495.9 CPI Inflation (annual average) FY03 (Actual) 4.4 FY04 (Estimate) 5.8 FY05 4.0 6.5 FY06 4.0 5.5 FY07 4.0 5.0

TABLE 15 TARGETS FOR MONEY SUPPLY (PERCENT CHANGE IN MONEY

AND CREDIT) IN IPRSP AND PRSP Indicator Year IPRSP PRSP Private Sector Credit FY03 (Actual) 12.6 FY04 (Estimate) 12.0 FY05 11.8 14.5 FY06 11.6 15.0 FY07 11.7 15.2 Broad Money (M2) FY03 (Actual) 15.6 FY04 (Estimate) 14.1 FY05 12.8 14.0 FY06 11.9 13.8 FY07 11.8 13.5


121

13.2 Government Revenue and Public Expenditure Targets for revenue collection as well as for public expenditure have been lowered down. In

IPRSP, targets for total revenue collection in FY05, FY06 and FY07 were set as 11.3, 11.9 and

12.2 percent of the GDP (Table 16). On the other hand, in the PRSP, targets for total revenue

collection in FY05, FY06 and FY07 were set as 10.7, 11.2 and 11.7 percent of the GDP. In case

of total public expenditure, IPRSP projected a target of 16.1, 16.4 and 16.4 percent of GDP in

FY04, FY05 and FY06, respectively. In PRSP, corresponding figures are 15.4, 15.8 and 16.2

percent only.

TABLE 16 TARGETS FOR GOVERNMENT REVENUE AND PUBLIC EXPENDITURE

AS PERCENT OF GDP IN IPRSP AND PRSP Indicator Year IPRSP PRSP TOTAL REVENUE FY03 (Actual) 10.3 FY04 (Estimate) 10.2 FY05 11.3 10.7 FY06 11.9 11.2 FY07 12.2 11.7 Tax FY03 (Actual) 8.3 FY04 (Estimate) 8.2 FY05 9.2 8.7 FY06 9.7 9.1 FY07 10.0 9.6 Non-Tax FY03 (Actual) 2.0 FY04 (Estimate) 2.0 FY05 2.1 2.0 FY06 2.1 2.1 FY07 2.2 2.1 TOTAL EXPENDITURE FY03 (Actual) 13.7 FY04 (Estimate) 13.4 FY05 16.1 15.4 FY06 16.4 15.8 FY07 16.4 16.2 Current Expenditure FY03 (Actual) 8.1 FY04 (Estimate) 8.0 FY05 8.4 8.2 FY06 8.4 8.4 FY07 8.5 8.7 Of which: Interest Payments FY03 (Actual) 1.9 FY04 (Estimate) 1.7 FY05 2.0 1.8 FY06 2.0 1.7 FY07 2.0 1.7 Annual Development Programme FY03 (Actual) 5.4


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Indicator Year IPRSP PRSP FY04 (Estimate) 5.2 FY05 6.5 6.2 FY06 6.9 6.4 FY07 7.0 6.7 Others FY03 (Actual) 0.2 FY04 (Estimate) 0.2 FY05 0.6 1.0 FY06 0.6 1.0 FY07 0.6 0.8 OVERALL BALANCE FY03 (Actual) -3.4 FY04 (Estimate) -3.2 FY05 -4.7 -4.7 FY06 -4.5 -4.6 FY07 -4.2 -4.5 FINANCING (NET) Domestic Borrowing FY03 (Actual) 1.3 FY04 (Estimate) 2.1 FY05 1.9 1.9 FY06 1.9 1.9 FY07 1.9 1.9 External Loans and Grants FY03 (Actual) 2.1 FY04 (Estimate) 1.1 FY05 2.8 2.8 FY06 2.6 2.7 FY07 2.3 2.6 TOTAL GOVERNMENT DEBT FY03 (Actual) 51.0 FY04 (Estimate) 48.3 FY05 48.4 47.9 FY06 47.6 46.3 FY07 46.5 45.3 13.3 Balance of Payments A comparison of projected Balance of Payments in IPRSP and PRSP revealed a lower export

growth and higher import growth is projected in the PRSP. IPRSP projected export growth by

9.0 percent in FY05, 9.0 percent in FY06, and 9.1 percent in FY07 (Table 17). However, the

PRSP projected export growth in FY05, FY06 and FY07 is 8.0, 6.0 and 7.0 percent, respectively.

In case of imports, IPRSP projected a growth rate of 6.3, 6.4 and 5.2 percent in FY05, FY06 and

FY07, respectively. On the other hand, PRSP projected an import growth of 14.5, 9.0 and 9.5

percent in FY05, FY06 and FY07, respectively.


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IPRSP aimed for gross official reserve to meet up the import demands of 3.0 months in FY05,

3.2 months in FY06 and 3.3 months in FY07, respectively. The PRSP aimed for a gross official

reserve which can meet up the demands for 2.9 months only.

TABLE 17

TARGETS FOR BALANCE OF PAYMENTS IN IPRSP AND PRSP Indicator Year IPRSP PRSP Exports, f.o.b. (millions of US Dollar) FY03 (Actual) 6492.0 FY04 (Estimate) 7521.0 FY05 7217 8122.0 FY06 7869 8609.0 FY07 8587 9212.0 Exports (percent change) FY03 (Actual) 9.5 FY04 (Estimate) 15.8 FY05 9.0 8.0 FY06 9.0 6.0 FY07 9.1 7.0 Imports, c.i.f. (millions of US Dollar) FY03 (Actual) 8707.0 FY04 (Estimate) 9898.0 FY05 11267.0 FY06 12281.0 FY07 13447.0 Imports (percent change) FY03 (Actual) 8.7 FY04 (Estimate) 9.9 FY05 6.3 14.5 FY06 6.4 9.0 FY07 5.2 9.5 Remittances FY03 (Actual) 3062.0 FY04 (Estimate) 3371.0 FY05 3621.0 FY06 3782.0 FY07 3936.0 CURRENT ACCOUNT BALANCE FY03 (Actual) 328 FY04 (Estimate) -25 FY05 -622 FY06 -835 FY07 -779 Gross Official Reserve (million US dollar) FY03 (Actual) 2471.0 FY04 (Estimate) 2714.0 FY05 2937 3200.0 FY06 3314 3450.0 FY07 3587 3750.0 Gross Official Reserve in Months of Imports FY03 (Actual) 2471.0 FY04 (Estimate) 2714.0 FY05 3.0 2.9 FY06 3.2 2.9 FY07 3.3 2.9


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13.4 Conclusion Our comparative analysis of the Medium Term Macroeconomic Framework (MTMF) mentioned

in the IPRSP and PRSP clearly revealed that PRSP is less ambitious than the IPRSP in almost all

respect. Neither the IPRSP nor the PRSP aimed high enough to cater the need of the country’s

demand in terms of volume of economic growth, export growth and to increase the real income

level. In brief, the PRSP is neither commensurate with our realities nor reflect our aspiration.

XIV. CONCLUDING BALANCE SHEET

The foregoing analysis of the major macro-economic trends and development in the real

economy suggest that the overall state of the Bangladesh economy remained steady during the

first half of the fiscal year 2004-05. During the first half of FY05, the economy was positioned

between the twin shocks of Floods 2004 and total phase-out of the MFA. As of date the economy

has recovered reasonably well from the flood related devastations though any adverse

consequences of full quota removal is yet to show up.

The economy may very well achieve the scaled downed GDP growth target of 5.5 percent.

However, Bangladesh’s current growth performance needs to be viewed in a comparative

framework. There are signals that the growth momentum has slowed down during the last five

years (FY00-04). It is currently lagging behind among its South Asian neighbours in terms of

GDP growth performance.

This implies that, notwithstanding the macro-economic stability has improved during the last

couple of years, the growth payoff had not been adequate. It is now well established that macro-

economic stability is a necessary condition, but not a sufficient condition for better economic

growth. Admittedly, complementary reforms to improve the micro-conditions for economic

growth acquire critical importance in this respect. Thus, it is suggested that the apparent macro-

economic stability suffers from both fragility and credibility gap.

The major source of the fragility emanates from the stagnating investment scenario of the

country. As has been mentioned that the apparently buoyant proxy indictors of investment (e.g.


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term loan disbursement and import of capital machinery) take a new meaning when we observe

the stagnating national investment rate. It is now being further contended that the failure to

deliver an augmented package of public investment projects remains as the root cause of the

aggregate investment stagnation. The private investment rate continues to remain subdued as it is

deprived of the crowding in effect of a vigorous investment programme.

Systematic inability to implement an enlarged ADP is the primary cause of the prevailing

investment deficit. One may identify a range of issue to explain the low implementation rate of

ADP, but it seems that the major problem is contracting these usually lumpy projects to suitable

companies. This process has often been afflicted by uncertainty leading to long gestation period

as well as characterised by inadequate transparency resulting in cost escalation. One may cite a

long list of big projects which did not get materialised during the recent past in this regard.

The lack of predictability and inadequate transparency in economic transactions in the public

sector have had concomitant negative impact on the private sector investment.

The second source of weakness underlying the growth payoff situation comes from the

credibility gap emanating slow progress in market facilitating reforms. These basically relate to

the improvement of governance in public infrastructural facilities and utilities, regulatory

framework for capital and debt market, contract enforcement through judicial process,

transparency in public expenditure etc.

Apart from the issues of slowdown of the growth momentum, the other aspect of the growth

scenario relates to its inequitable distribution. It is held that some of the current sources of

growth are supposed to be pro-poor, e.g. crop sector and export-oriented manufacturing.

However, some other sources of the current growth are more dominant and income inequaliser –

foreign remittances and rural non-farm activities.

Although poverty data are not available for recent years, all proxy indicators suggest that income

disparity is accentuating in the country. Such a situation is underwritten not only by the structure

and nature of GDP growth, but also other macro-economic trends — e.g. food price rise,


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shortfall in public investment, faster growth of VAT in comparison to direct taxes, inadequate

credit flow to rural areas.

What is disturbing is that the mid-term macro-economic framework has settled for a less

ambitious targets admitting these realities and not positioning itself for addressing the national

aspirations. The MTMF remains seriously flawed as it followed the IMF projection of export

collapse in Bangladesh following the MFA phase-out.

During the first half of the FY05, major strength was observed in domestic credit, industrial

credit, capital market, export, import, remittance and forex reserve. On the other hand, major

weakness was witnessed by domestic savings, public investment, agricultural credit, price

inflation (food), agricultural output and foreign aid. In between, areas that remained indifferent

include growth, revenue receipts, fiscal deficit, government borrowing, industrial product, FDI

and BoP. However five major concerns for the economy during the next six months would be the

food price inflation, Boro production, ADP implementation, utilisation of foreign aid and IPOs in

capital market.


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CPD-IRBD 2005 (First Reading)

January 12, 2005

Box 2 A Balance Sheet of Bangladesh Economy

Indicator Fiscal Year 2000-2003 Fiscal Year 2004 Early Signal of Fiscal Year 2005 GDP growth Hovering around 5.5% mark, 4.4% in FY02 5.5%, in line with the IPRSP target but

slowdown in the growth momentum; compares unfavourably with the record figure of 5.9% in FY00; moderate compared to South Asian countries

Revised downwards from 6.0% to 5.5% in national PRSP

Savings-Investment Scenario

Stagnating savings-investment scenario Failed to achieve the IPRSP target; major concern is domestic savings and public investment

Targets to be hardly achieved; investment deficit syndrome

Revenue Receipts Revenue receipt in line of the target, increased to 10.4% of GDP in FY03 from 8.5% of FY00

14% higher than last year, still failed to achieve target; low tax-GDP; Inefficient tax system in financing public services and redistribution of income

16.6% targeted growth over the revised budget of last year; 9.5% growth in NBR tax collection in July-Oct FY05 over the matching months of last year

Public Expenditure Around 14%-15% of GDP throughout the period 12.3% growth over last year Attempts to budget restructuring a. Revenue

Expenditure b. ADP

Revenue expenditure in line with target, even exceeded in some cases ADP implementation never achieved target

Only 89% of the revised and 83% of the original target of ADP was actually implemented

15.8% higher than revised ADP of FY04 and 30.3% higher than the actual implementation of FY04; 10% realisation of the target ADP in the first quarter: implementation is a major challenges of this year’s ambitious target

Fiscal Deficit Fiscal deficit as % of GDP is decreasing; foreign financing is also decreasing

Deficit as % of GDP increased to 4.2 per cent, from 3.5 per cent of FY03; share of foreign resources in deficit financing decreased further

Targeted fiscal deficit is 4.3% of GDP; foreign financing is expected to increase. Fiscal deficit may fall due to ADP shortfall

Domestic Credit Expansion

Slow down in domestic credit expansion, Fiscal consolidation

Private sector credit grew faster at 16.2 per cent; overall growth is 15 per cent

15% growth in October 2004, on point to point basis; increasing trend in growth since August 2004, share of private growth is 15.6%

Government Borrowings & Public Debt

Government borrowing both from banking and non-bank sector increased with the exception of FY03; Debt outstanding as % of GDP crossed the 50 per cent mark

Government borrowing from the banking sector increased while non-bank borrowing decreased; debt outstanding as % of GDP came down to 48.2 per cent

The lowering of interest rate backfired with a drastic fall in sale if NSD certificate; shift from non-bank resources to borrowing from banking sector during July-October FY05

Agricultural Credit Actual disbursement is lower than the targeted figure; recovery shows an increasing trend

Disbursement fell short of target by 8%; recovery performance which was improving since FY01, suddenly declined in FY04

Post-flood disbursement of agricultural credit falls short of the target as only 20.85% of the total target was disbursed


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Indicator Fiscal Year 2000-2003 Fiscal Year 2004 Early Signal of Fiscal Year 2005 during the first four months of FY05

Industrial Credit Slowdown in growth of industrial loans since FY01 Term loan disbursement shows an impressive growth of 67%; net flow to the sector is 1.3 billion taka

Expansionary trend in term loan disbursement continued in the first quarter of FY05; no recovery data available; PCB (L) consolidate as the major supplier.

Loan classification Loan default situation shows no improvement; classified loan as % of total shows an increasing trend

Classified loan as % of total outstanding decreased to 21.5 per cent; 82% of the classified loan is categorised as bad/loss

No data available

Price & Wage Inflation

Appreciably low inflation rate, higher rural inflation Still moderate, but upward trend Increased food price coupled with weakening of Taka against Dollar and rising import price led to high inflation rate in October 2004. Low production of Aman and increase of diesel price will tend to raise inflation until the harvest of Boro production in April-May.

Agricultural output Agricultural sector demonstrated varying performance; food grain production was highest in FY01 (until that time) but declined in FY02 for the first time since FY96. Food grain production increased in FY03.

Foodgrain production recorded highest production (27.4 million metric tons) since independence; rice production increased by almost 4% but wheat production decreased by 16.8%. Thus, increase in Aman and Boro rice production was behind the record production of foodgrains

Target set at 30 million metric tons which is 9.3% higher than actual production of last year; Aus production failed to achieve target; decrease in Aman area, dominance of local varieties and drought would have a negative effect on Aman production; Food import decreased by 16% during July-December of FY05 over the matching figure of FY04

Industrial Production Expanded at a slightly lower than average rate (6.0 percent). Growth deceleration observed in FY02 that marginally recovered in FY03.

Restrained expansion continued. However still a lacklustre growth as it rests on a very narrow base.

Moderate recovery during the first four months of the FY05 after the devastating flood. However production of export related items shows higher growths.

Foreign Investment Systematic decline observed that ended up with a (-) 26.24% negative growth in FY02. Investment in FY03 stagnated with a marginal growth (8.98%).

Inadequate recovery effort with only 2.4 percent growth in FDI and 5.0 percent growth in total foreign investment. Portfolio investment increased on a faster pace.

During the first quarter, FDI observes marginal growth (6.25 percent) on a moderate benchmark. Growth in EZP (29.89%) attributed to the overall 9.5 percent growth as no portfolio investment came during this time.

Capital Market Capital market experienced a slow but steady recovery since the 1996 incident

Resurgence continues. New IPOs came into the market. Bullish trend observed from mid-November which gathered momentum in the early part of December recording a 1015.97 general index for the first time after 1996

Spectacular upsurge in all share price index and in over subscription of IPOs. However this is mostly due to the absence of new IPO and loss of income potentials emanating from lowering interest rates. If new IPOs do not come, this will drop down quickly.

Export Recovery in FY2003 following previous year’s deceleration

Continuing upward trend but uncertainty as regards MFA phase out.

Phenomenal growth of knit, robust growth of woven; withstands pressure emerging


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Indicator Fiscal Year 2000-2003 Fiscal Year 2004 Early Signal of Fiscal Year 2005 from quota derestriction.

Import Following negative growth in FY2002 import picked up in FY2003

Import momentum has continued in FY2004. Import of Capital goods and textile related articles pick up with respective share of 25% and 21%.

25% increase in imports, L/C openings promise high growth in FY2005. Food grain import decreases by almost 40 per cent, production related imports pick-up; oil price hike also causes rise in import.

Remittances After some deceleration in FY2001, remittance started to rise sharply in FY2002 and continued to rise in FY2003. Emerges as a major forex source.

Growth rate slowed but still high at 10.1%; government policies start to give dividend.

14.2% growth in first six months; if trend continues flow will cross $ 3.5 billion mark in FY2005.

Foreign Aid After a decline over three years, foreign aid disbursement picked up in FY2003, to reach $1577 million.

Aid disbursement falls sharply to reach $954 million (a drop of 40%); problems with project aid disbursement continue.

Aid disbursement situation worsening. Increasing gap between commitment and disbursement; only 10% aid disbursed in the first quarter.

Foreign Exchange Reserve

Forex reserves started to rise thanks mainly to higher export and remittance

Reserves at the end of the year stood at 2.7 billion US$. Record high since FY95

On January 04, reserves stood at $3.26 billion, crossing the 1995 high mark ($3.07 billion), providing a cushion for about 3 months of imports.

Balance of Payments After a negative overall balance in FY2001 (-281 million US$), the balance was positive in FY2002 ($408 million) and further improved in FY2003 to reach $815 million.

Trade balance deteriorated, but current account balance improved due to high growth of remittances.

Higher imports led to increase in deficit in trade balance; however, higher current transfers contributed to a rise in current account balance by about 25% in the first quarter ($284 millions).


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Box 3

Major Findings of the Thematic Issues ASSESSMENT OF FLOOD 2004

• CPD’s preliminary (up to 4 August 2004) estimate of damage due to Flood 2004 was to the tune of Tk. 11,418.6 crore or US$ 1.93 billion with an anticipation of ranging to Tk. 15,000 (US$2.54 billion) after the final assessment.

• CPD’s updated damage estimate due to Flood 2004 stands at about Tk. 11,760 or US$ 1.99 billion - about Tk 341 crore more than CPD’s preliminary estimate

• Damage due to heavy rainfall stands at Tk. 1733.8 crore or US$ 0.29 billion for the agricultural sector (crop and fisheries).

• CPD’s final damage estimates due to Flood and Rain is Tk.13,493.8 crore or US$ 2.29 billion.

• Domestic resources can, by and large, finance the reconstruction work. • Block allocation in the ADP till September 2004 unutilised. • GOB has approved a two-year massive flood rehabilitation programme for in

collaboration with ADB. • Field visits by CPD Team in November 2004 show that reconstruction of roads

and bridges has not started as yet; the preparation to call for tenders is almost complete.

• GOB programmes are in line with CPD recommended policy package. Many remain to be implemented.

• Rising food prices due to poor harvest of aman crop following the flood has resulted in high inflation.

• MFA PHASE-OUT

• Recent trends show that exports during July-October period of FY2005 was 24.6 per cent higher compared to the matched period of FY2004, with knit demonstrating a phenomenal growth of 40.4 per cent.

• Major challenges are related with China’s accession to the WTO, reduced lead time, erosion of quota-premium following the quota phase-out, implication of various RTAs and market access initiatives involving major buying countries, further lowering of MFN tariffs with consequent erosion of preferential margins, and increasing use of e-commerce in apparels trade and business.

• The ongoing restructuring (especially sourcing) will take some time to make its impact visible in the market place.

• There may be a situation where Bangladesh expands but with fewer firms operating in the sector, and with a reduced workforce.

• Some positive developments (related to China and Safeguard measures), may play favourably, but will not be wise for Bangladesh to overplay.

• The GOB has recently taken a number of steps including reduced number of steps in customs clearance, revised schedule of down payment for repayment of loan and elimination of VAT on selected items of expenditure.

• In view of this, following steps need to be taken: a) identify the competitive items and go for capacity building; b) create a Textile-RMG technology


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upgradation fund; c) invest in skill development through public-private partnership; d) reduce import duties/taxes on textile/RMG related machineries and raw materials; e) allow import of fabrics on duty-free basis, f) facilitate establishment of forward linkage activities through B to B web portals; g) need appropriate measures for redundant workers, many of them are women.

INVESTMENT SCENARIO IN THE PRIVATE SECTOR

• Investment in manufacturing and service sectors through debt financing increased to some extent, but has been concentrated only in a limited number of large and medium scale industries. Sluggish trend of investment in capital market.

• Major investment goes to textile and garments, iron and steel, drugs and pharmaceuticals, cement and asbestos.

• Country’s growing competitive advantage in the world market through MFA phase out, duty free access, special concession under SD&T makes it a better place for local and foreign investment.

• Increasing concentration would in other way reduce the scope of investment in small and cottage industries which will affect income and employment in the long run.

NCBs REFORM

• NCBs reform is necessary but the process, outcome and consequences should be further analysed. For three NCBs, the possible form of future ownership should be also open at this juncture.

• The success of the NCBs reform will depend on strong political will of the government. Because the problem of NCBs did not stem only from poor management of assets and liabilities, rather is associated with interference of the government into their operations and collusion of politics and business.

• As the financial deepening is taking place and financial market is expanding the dominance of state-owned banks is decreasing, which took place in a natural way. Thus, forceful divestment may not be required.

• The time frame for reform is very ambitious-- the initial schedule is already in jeopardy and the second phase of the reform will be more difficult.

• Since, all the functional areas under reform are the resultant of functioning of the bank at the branch level, the change only at the top management will not produce desired result.

• Restructuring the human resource including retrenchment is of urgent necessity, which would not be possible unless government have strong political will.

• Any reform of branch restructuring will reduce the access to banking services to the rural people as well as reduce resource mobilization through banking channel and investment from rural areas.

• It is really doubtful that private banks will be able to absorb the assets and liabilities of the NCBs with reduced branch networks

PRICES OF ESSENTIAL COMMODITIES AND FOOD SECURITY

• Price of essential commodities particularly rice is very high in FY05, compared to other years.

• Due to increasing rice prices in international market, large import of quality rice from world market at a cheaper price may not be possible. Total import of food grains during July-December 2004 was 16 percent lower than the corresponding months of the previous year (FY04).

• Production of Aus and Aman rice in Bangladesh in FY05 is much lower than last


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year due to end-July to mid-August flood and excessive rainfall in September. • Government must have to encourage increased production of Boro rice to ensure

food production and food security in the country. But the decision of increasing diesel price will adversely affect Boro rice production and, thereby, food security of the country.

EXCHANGE RATE MOVEMENTS

• The floating exchange rate mechanism could not remove market distortion yet in Bangladesh.

• The estimation of NER and REER shows that Taka is still appreciated by 11.06 per cent and 14.69 per cent against USD and EURO respectively.

• The possible factors are: a) overwhelming control of the market in the hands of four NCBs, b) weak USD in the international market; c) Inelastic demand for foreign currencies due to secular demand for import payments, d) improvement in foreign exchange reserve.

During the last three years Bangladesh’s export to EU has increased at a faster pace compared to the previous period, where devaluation of Taka against EURO and global devaluation of USD impacted positively.

PRSP AND IPRSP: A COMPARISON

• Although double digit growth of GDP is required, targets in IPRSP are much below and have further been lowered down in the PRSP.

• Targets for mobilizing domestic investment are not sufficiently ambitious enough. Therefore, setting the higher inflation target is surely a negative signal to the poverty reduction commitment revealed through the PRSP.

• Targets for revenue collection as well as for public expenditure have been lowered down.

• Projected Balance of Payments shows a lower export growth and higher import growth.

• Neither the IPRSP nor the PRSP aimed high enough to cater the need of the country’s demand in terms of volume of economic growth, export growth and to increase the real income level.

• The PRSP neither commensurate with our realities nor reflects our aspiration.

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