Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 40744-BD

INTERNATIONAL DEVELOPMENT ASSOCIATION

SUPPLEMENTAL FINANCING DOCUMENT

FOR

PROPOSED SUPPLEMENTAL FINANCING IN THE AMOUNT OF SDR 49 MILLION

(US75 MILLION EQUIVALENT)

TO

THE PEOPLE’S REPUBLIC OF BANGLADESH

FOR

THE FOURTH DEVELOPMENT SUPPORT CREDIT

September 12,2007

Poverty Reduction and Economic Management Bangladesh Country Management Unit South Asia Region

T h ~ s document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ACC ADP ATC BADC BWDB BB BSCIC CRR CPTU CIDA CTG DPs DFID DSC EC FY GNFS GDP GOB IDA IDB IMF IPP LGED

GOVERNMENT FISCAL YEAR

July 1 -June 30

CURRENCY EQUIVALENTS

Currency Unit = Bangladeshi Taka (Tk) US$1= Tk 68.90 (August 2007)

ACRONYMS AND ABBREVIATIONS

Anticorruption Commission Annual Development Program Agreement on Textiles and Clothing Bangladesh Agricultural Development Corpn. Bangladesh Water Development Board Bangladesh Bank Bangladesh Small & Cottage Industries Corpn. Cash Reserve Requirements Central Procurement Technical Unit Canadian International Development Agency Caretaker Government Development Partners Department for International Development Development Support Credit Election Commission Fiscal Year General Number Field Sieve Gross Domestic Product Government o f Bangladesh International Development Agency Islamic Development Bank International Monetary Fund Independent Power Producer Local Government Engineering Department

M W MDG NCB NGO OMS O&M PFM PRGF PRS PLC RBL SDR SOE SLR Tk TSC UN UNDP UNICEF UNFPA USAID VRS WEP WHO

Mega Watt Millennium Development Goal Nationalized Commercial Bank Non Governmental Organization Open Market Sale Operations & Maintenance Public Financial Management Poverty Reduction Grant Facility Poverty Reduction Strategy Public Limited Company Rupali Bank Limited Special Drawing Right State-Owned Enterprise Statutory Liquidity Requirements Bangladeshi Taka Transitional Support Credit United Nations United Nations Development Programme United Nations Children's Fund United Nations Population Fund United States Agency for Int'l Development Voluntary Retirement Scheme World Food Program World Health Organization

Vice President: Praful Patel, SARVP Country Director: Xian Zhu, SACBD

Sector Director: Sadiq Ahmed, SASPF Sector Manager: Ijaz Nabi, SASPF

Task T e a m Leaders: Zahid Hussain and Ambar Narayan, SASPR

i

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

I . BACKGROUND ........................................................................................................................................ 1 I1 . THE 2007 FLOODS: SOCIAL AND ECONOMIC IMPACT ............................................................. 3

A . IMPACT OF FLOOD 2007: THE SOCIAL AND HUMAN DIMENSIONS ..................................... 3 B . IMPACT OF FLOOD 2007: THE ECONOMIC DIMENSIONS ....................................................... 5

I11 . RESPONSE TO THE 2007 FLOODS ................................................................................................... 9 A . GOVERNMENT SPENDING ON FLOODS ................................................................................... 11 B . RESPONSE OF OTHER STAKEHOLDERS .................................................................................. 12

I V . BANK’S 2007 FLOOD ASSISTANCE STRATEGY ......................................................................... 13 V . THE REFORM PROGRAM SUPPORTED THROUGH DSC IV: A N UPDATE .......................... 14

A . ECONOMIC PERFORMANCE ...................................................................................................... 14 B . POVERTY AND SOCIAL IMPACT ANALYSIS .......................................................................... 16 C . REFORM PROGRESS SINCE THE APPROVAL OF DSC I V ..................................................... 17

V I . RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING ............................................... 20 VI1 . IMPLEMENTATION ARRANGEMENTS ...................................................................................... 21

A . TERMS OF THE SUPPLEMENTAL FINANCING ....................................................................... 21 B . FUNDS FLOW AND AUDITING REQUIREMENTS FOR THE SUPPLEMENTAL

FINANCING .................................................................................................................................. 22 C . ENVIRONMENTAL ISSUES ......................................................................................................... 22

VI11 . BENEFITS AND R I S K S ................................................................................................................... 22 A . BENEFITS ....................................................................................................................................... 22 B . R ISKS ............................................................................................................................................... 22

ANNEXES

ANNEX 1: LETTER REQUESTING BANK SUPPORT TO ADDRESS THE EMERGENCY ................ 24 ANNEX 2: PUBLIC INFORMATION NOTICE: IMF EXECUTIVE BOARD CONCLUDES 2007

ARTICLE I V CONSULTATION WITH BANGLADESH .................................................... 28 ANNEX 3: BANGLADESH AT A GLANCE ............................................................................................ 33

TABLES

TABLE 1 : IMPACT OF 2007 FLOOD BY REGION ................................................................................... 3

TABLE 3: GOVERNMENT EXPENDITURES ON THE 2007 FLOODS ................................................. 11 TABLE 4: FLOOD ASSISTANCE COMMITTED BY DEVELOPMENT PARTNERS AND OTHERS 12 TABLE 5: BANGLADESH: SELECTED ECONOMIC INDICATORS. FY03 TO FY07 ........................ 15

TABLE-2: KEY FLOOD STATISTICS: A HISTORIC PERSPECTIVE ..................................................... 4

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

.. 11

STATISTICAL ANNEX

TABLE 1 : FLOOD 2007 DAMAGE BY AFFECTED DISTRICTS ........................................................... 35 TABLE 2: BANGLADESH MACROECONOMIC INDICATORS ........................................................... 36 TABLE 3: SUMMARY MACROECONOMIC INDICATORS ................................................................. 37 TABLE 4: TOTAL EXPENDITURE BY FUNCTION/MINISTRY ........................................................... 38 TABLE 5 : GOVERNMENT OF BANGLADESH FISCAL TRENDS ....................................................... 3 9

TABLE 7: BANGLADESH SOCIAL INDICATORS ................................................................................ 41 TABLE 8: BANGLADESH: KEY EXPOSURE INDICATORS ................................................................ 42

TABLE 6: BANGLADESH - KEY ECONOMIC INDICATORS .............................................................. 40

TABLE 9: BANGLADESH - PROGRESS TOWARD MDGS ................................................................... 43

Task Team

T h i s document has been prepared by Zahid Hussain and Ambar Narayan, with contributions f rom Sakuntala Akmeemana, Zaidi Sattar, Raihan Elahi, Mohammed Iqbal, Zafi-ul Islam, Qaiser Khan, Sandeep Mahajan, Farria Naeem, Sanjana Zaman, Shah Nur Quayyum, Reefat Sultana, and Suraiya Zannath, and assistance fi-om Mehar Akhter Khan and Rita Soni.

Vinaya Swaroop (Lead Economist for Bangladesh) helped in the preparation o f this document and provided overall guidance to the Task Team.

h a n d Rajaram (Lead Economist, PRMPS) was the peer reviewer for this operation.

... 111

SUPPLEMENTAL FINANCING AND PROGRAM SUMMARY

THE PEOPLE’S REPUBLIC OF BANGLADESH SUPPLEMENTAL FINANCING

FOR THE FOURTH DEVELOPMENT SUPPORT CREDIT

Borrower: The People’s Republic o f Bangladesh

Implementing Agency: Ministry o f Finance

Beneficiaries: Ministry o f Finance

Amount: SDR 49 mi l l ion (US$75 mill ion)

Terms:

Disbursements:

Standard IDA terms; 40-year maturity, including a 1 0-year grace period

SDR 49 mi l l ion (US$75 mill ion) disbursed in a single tranche upon credit effectiveness.

Project ID: P108843

iv

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROPOSED SUPPLEMENTAL, FINANCING TO THE PEOPLE’S REPUBLIC OF BANGLADESH FOR THE

FOURTH DEVELOPMENT SUPPORT CREDIT

I. BACKGROUND

1. Bangladesh has made steady social and economic progress in the last several years. Poverty was reduced by an average o f nearly 2 percentage points annually; f rom 49 percent o f the population living in poverty in 2000 to 40 percent in 2005. If the current rate o f poverty reduction continues, Bangladesh will meet i ts Mi l lennium Development Goal (MDG) o f halving i t s poverty rate f rom 57 percent in 1990 to 29 percent by 2015. Rapid poverty reduction i s attributable mainly to strong and stable economic growth-annual Gross Domestic Product (GDP) growth has accelerated by 1 percentage point every decade, and i s n o w above 6 percent a year. Despite periodic natural disasters (particularly floods) and frequent polit ical turmoil, Bangladesh i s the only low-income country to have maintained stable positive GDP growth since the 1990s.

2. The private sector’s contribution to these developments in Bangladesh has been quite impressive. It i s reflected in the rapid growth in manufacturing, acceleration o f garment exports; rising remittances f rom Bangladeshis living abroad; and substantial investment in textiles, banking, and telecommunications. Improvements in broad development outcomes, including education, health, sanitation and gender parity indicators, are also partly attributable to a vibrant c iv i l society and nongovernmental organization (NGO) movement that has played an important role in expanding access to microfinance, and providing basic services and creating awareness on health, fertility and education. Notwithstanding this progress, Bangladesh remains a low-income country, with a per capita GDP o f about US$490 in 2007 and a poverty rate that i s s t i l l high. This indicates that the country s t i l l has a l o t to do to assure a basic minimum living standard for a l l i t s citizens.

3. T o further accelerate poverty reduction and economic growth, the Government o f Bangladesh (GOB) has launched an ambitious program o f pol icy reforms and institutional strengthening, articulated most recently in i t s 2005 Poverty Reduction Strategy entitled “Bangladesh: Unloclung the Potential.” Moreover, spurred by growing citizen demand for curbing corruption, the fight against weak governance and corruption has become the topmost priority for government policy. The Caretaker Government (CTG)-a nonpartisan Government established under Bangladesh’s Constitution to assist and oversee the conduct o f free, fair, and credible elections-has pursued this central mandate with vigor. I t has, in addition, pursued a far- reaching agenda o f institutional reform that i s broadly seen as necessary for democratic consolidation. These include reform o f the electoral process, polit ical parties, and campaign financing; separation o f the judiciary f rom the executive; and strengthening the independence and neutrality o f the Election Commission, Anti-Corruption Commission, and Public Service Commission. At the centre o f this drive to improve governance i s a robust anticorruption effort, which has strong popular support, although some concerns have been voiced about compliance with due process and about the ongoing state o f emergency.

’

4. The current CTG took office in January 2007 following the declaration o f a state o f emergency, after a protracted period o f polit ical unrest that had caused the parliamentary

1

elections to be postponed. The CTG i s being assisted by the country's defense forces in maintaining l a w and order and preparing for elections. Indicating the CTG's commitment to holding free and fair elections, the Election Commission (EC) released an electoral roadmap o n July 15 with the next parliamentary election scheduled for the end o f 2008, while local government elections are expected to begin in January 2008. This timetable has been recently reiterated publicly by the CTG, and the preparation o f a digitized voter l i s t has commenced. The EC has announced a schedule o f consultations on electoral reforms with 15 main polit ical parties starting September 12. T o facilitate t h s dialogue, the Chief Adviser in his address to the nation o n September 9 announced lifting o f ban on indoor politics with effect f rom September 10,2007.' Despite dissatisfaction with the undemocratic behavior o f the major polit ical parties in the past, there i s a broad consensus among citizens and the CTG about a future return to a system o f democratically elected government.

5. Policy and institutional reforms in Bangladesh have been supported by the Bank through a series o f budget support operations, known as Development Support Credits (DSCs). As part o f this series, four credits totaling US$900 mi l l ion have been provided to Bangladesh since 2003; the last credit, the Fourth Development Support Credit (DSC IV), was approved by the Board in M a y 2007. These credits have supported Bangladesh's reform efforts to (a) strengthen core governance functions with emphasis on reforms in public procurement, budget formulation and execution, tax administration, and public administration; and (b) improve the investment climate by maintaining macroeconomic stability, deepening domestic deregulation and trade liberalization, and strengthening performance o f the banking and energy sectors and o f state- owned enterprises. T o support the government's deepening o f reform efforts, the Bank has been working with the CTG on a pol icy and institutional reform program that can be financed by a Transitional Support Credit (TSC) as part o f i t s FY08 assistance program.'

6. As the Bank was moving forward with the implementation o f i ts FY08 assistance program, a devastating flood struck Bangladesh in the months o f July and August 2007. The C T G s flood rel ief efforts are placing severe pressure o n i ts FY08 budget, which in turn may affect i t s development spending priorities and also adversely affect the macroeconomic situation. Given that floods are not uncommon in this part o f the subcontinent, the government budget always has a provision o f resources for such emergencies. The amount budgeted for such unforeseen circumstances in the FY08 budget (Tk 8 billion, or 0.2 percent o f GDP), however, i s much smaller than the preliminary estimates o f the damage caused by the floods. The real impact o f floods wil l be known by end-September, when the monsoon season normally comes to an end. The flood waters have not yet fully receded, and a committee led by the Planning Secretary i s putting together a preliminary need assessment for restoration and rehabilitation. Meanwhile, the pressure on the budget related to immediate rel ief activities i s estimated to be in the neighborhood o f U S $ l 5 0 million, as reported by the Ministry o f Finance.

' Al l political activities (including indoor politics) were prohibited from March 8, 2007, following the proclamation o f the current state o f emergency on January 11 t h ~ s year to quell political confrontation over the January 22 abortive election. The World Bank Group's most recent Country Assistance Strategy, discussed by the Board in April 2006, aligns i t se l f wi th the country's Poverty Reduction Strategy and has envisaged that a series o f Poverty Reduction Support Credits would be initiated in FY08 afier the new elected government had come to power. Because o f the changed political situation and in view o f the new schedule for holding parliamentary elections, it was decided that the Bank would support the country's ongoing reform efforts during the almost two-year transition period through a one-off budget support to the CTG in the form o f a Transitional Support Credit.

*

2

7. The proposed Supplemental Financing envisages reducing the pressure o n the government's FYO8 budget arising f rom the unforeseen flood related spending, which in turn will

along with Myanmar, Nepal, Pakistan, and northern and northeastern parts o f India. In mid-July, when several districts in the country were experiencing an emergency situation because o f a severe monsoon, the major rivers started to swell f rom ra in and

Dhaka Rajshahi SYlhet Ckttagong U ~ U l n a Barisal

onrushing water from the upstream. In late July, catastrophic rain in the Brahmaputra

allow it to continue moving forward o n the pol icy and institutional reform agenda supported by DSCs.

(sq km) Area (sq km) Area

31,119 14,503 46.6 34,5 13 8,842 25.6 12,596 6,362 50.5 33,771 4,479 13.3 22,274 2,096 9.4 13,297 712 5.4

Flooded

11. THE 2007 FLOODS: SOCIAL AND ECONOMIC IMPACT

8. Bangladesh i s one o f the countries in the wor ld most vulnerable to natural disasters including floods, droughts, and cyclones. Eighty percent o f the country consists o f floodplains created by more than 300 rivers and channels, including three major rivers: the Ganges, the Brahmaputra, and the Meghna. The floodplains in Bangladesh are home to a large rural and poor population whose l i fe i s intricately l inked to the flooding regime. Regular annual flooding has traditionally been beneficial to agriculture, the main source o f l ivelihood for the residents, but severe floods occurring less frequently have had adverse impacts o n residents and the economy. In the last two decades, major floods occurred in 1988, 1998, and 2004.

9. T h i s year an unusually severe Table 1: Impact of 2007 Flood by Region monsoon season has flooded Bangladesh Divisions 1 Total Area Flooded Percent

A. Impact of Flood 2007: The Social and Human Dimensions

10. Table 2 shows the extent o f flooding and associated damage so far in 2007 compared with three previous major floods. The 2007 flood damage to date i s less than that f rom the last three major floods in terms o f the number o f people affected, the proportion o f the area inundated, damage to housing and infrastructure, and l ike ly output losses, particularly in agriculture. But the human death to l l has been high relative to the extent and duration o f the floods. As o f September 9, 2007, over 830 deaths have been officially reported, which may be an underestimate. I t i s important to recognize that a l l estimates for 2007 are preliminary and may change as better information becomes available and the full impact o f the flood takes hold on the ground. Based on the information currently available, some o f the critical social and human costs o f the flood are described below:

Information on total area in each division from http://en.wikipedia.org/wiki/Banglapedia. Based on figures from UNOSAT's map o f flood water over Bangladesh as o f August 7, 2007, and figures o f divisional land areas provided in Banglapedia. Details on flood damages by affected districts are presented in Annex Table 1.

4

Percent o f total area inundated Number o f people affected (millions) Deaths Number o f homes damaged (millions) Crops damaged (million hectares) Number o f livestock lulled Roads damaged (kms)

1988 1998 2004 2007 60 68 38 18 45 31 36 10.6

2,300 1,100 747 83 1 7.2 5.0 4.0 1 .o 2.12 1.74 1.3 1.5

172,000 26,564 8,318 40,700 13,000 15.927 27,970 28,723

Rice production losses (million metric tons)

1.65 2.1 1 .o No t yet assessed

Health risks. Hunger and disease have become the order o f the day in the affected areas. There i s an outbreak o f diarrhea in almost a l l the affected districts. Filthy flood water spreading diseases across the flood-affected areas i s compounding the misery. About 65,000 people have been affected by diarrhea and other water-borne diseases, particularly respiratory problems, sk in diseases, and eye complications. There i s also a strong r i s k o f outbreak o f further ailments, as a result o f unsafe water and sanitary conditions created by the flood.

Impact on water and sanitation. Groundwater extracted by hand pumps i s the main source o f drinking water in both rural and urban areas. A majority o f hand pumps in the 39 severely flood affected districts have gone under water. On the sanitation fi-ont, a majority o f latrines in affected areas have reportedly been badly affected. The greatest worry i s the serious lack o f safe water supply, flooding o f latrines and the attendant spread o f pathogens in flood water, and a breakout o f water-borne disease.

0 Loss of livelihoods. The human to l l o f the floods goes wel l beyond the immediate health problems suffered by the victims. Several hundred thousand individuals have been displaced, and many thousands have lost their j o b or business. Although a l l f lood victims are facing traumatic losses, certain groups are more vulnerable than others. Areas severely affected by the flood included some that were already among the poorer areas in the affected divisions. These include districts l ike Sunamgonj and Hobigonj in the Sylhet division; Sirajgonj, Kur igram and Gaibandha districts in the Rajshahi division; and Jamalpur and Sherpur districts in the Dhaka division, a l l o f which suffered serious losses. Those who were poor and vulnerable before the floods will be the most adversely affected by the loss o f livestock and other household assets. Loss o f livestock can also adversely affect access to credit and repayment o f existing loans, since livestock i s the collateral for most microfinance loans. The poor, who rely o n labor as their primary asset, are also especially vulnerable to j o b losses in the self-employed, small, and micro enterprise sectors, which are in the informal sector with no j o b security or access to insurance. The vulnerability o f the poor has been exacerbated by the fact that inflation in the country, particularly food inflation, has reached a nine-year high (more o n this in the next subsection).

Loss of housing. The flood has washed away homes, and sometimes even the land the homes had been standing on as a result o f severe erosion. Many o f the affected people have taken shelter in

4

their relatives’ homes or in schools, religious institutions, or other community buildings and flood shelters. A majority o f the damaged homes meet minimal human needs and do not have in-house water and sanitation facilities. There i s uncertainty regarding the estimate o f the number o f heavily and partly damaged units, but the current estimate i s around 1 mi l l ion (see table 2). A major problem i s the impact of floods o n access to land for rebuilding homes. When land goes under water, families need a new place to (re)build their homes, and the problem i s compounded by the fact that many poor families have insecure tenure to the land o n which their home was built.

11. A major flood, particularly in a flood-prone country l ike Bangladesh, can have a large poverty impact in affected areas, some o f which were poorer than average even pr ior to the 2007 f lood (as seen above). Whi le these effects are especially strong in the immediate aftermath o f a major flood, they may also persist in the longer run-in terms o f higher poverty rate and greater depth o f poverty in flood-prone areas. The longer-term effects o n poverty occur because severe shocks often compel the economically vulnerable to cope with their immediate needs through measures l ike selling productive assets (e.g., livestock), accumulating high-interest loans, and removing children fkom school-that adversely affect their long-term economic potential. In Bangladesh, there i s evidence that while borrowing f rom informal sources protected the consumption o f many during the 1998 floods, it also lef t a large number o f the poor highly indebted, which negatively affected their abil ity t o access future loans for income generation.’ Effective social protection programs (like cash grants) that address the immediate needs o f the vulnerable are important to mitigate the l ikely long-term poverty impact o f the 2007 flood.

B. Impact o f Flood 2007: The Economic Dimensions

12. Past experience suggests that floods tend to: (a) reduce GDP growth, in particular by dampening growth in agnculture, construction, small-scale manufacturing, and transport and communication; (b) increase inflation, particularly by increasing food prices as a result o f supply shock and disruptions in transportation; (c) reduce export growth, increase remittances and imports (the latter resulting f rom the emergency need for food and items needed for reconstruction); and (d) increase fiscal deficits by depressing revenue growth and increasing unforeseen expenditures. Past experience also shows that these adverse effects are temporary. The Bangladesh economy has time and again proved i t s resilience in recovering f rom the effects o f natural disasters in reasonably quick time.

13. Before the 2007 floods, the Bangladesh economy was poised to grow in the range o f 6.5 to 7 percent in FY08, propelled by a recovery in agriculture after a weak performance last year, robust manufacturing growth, and services growing at the usual trend growth rate. Buoyant garment exports and remittance flows as wel l as the possibility o f higher aid and private flows were expected to sustain investment, including in power infrastructure. The year also began with a comfortable foreign exchange reserve position o f more than US$5 b i l l ion (equivalent to 3.2 months o f imports o f goods and nonfactor services). Amidst the positive economic environment and optimism about the immediate future, one concern was inflation, which had been aggravated by rising prices o f essential food items such as rice, wheat, edible oil, and fish. The fol lowing paragraphs summarize the movement o f key economic variables and how they have been affected by the ongoing floods and the pol icy stance adopted by the CTG to respond to the movements.

For recent evidence o n Bangladesh, see Dasgupta, A. (2007), “Floods and Poverty Traps: Evidence from Bangladesh.” Economic & Political Weekly, July 28.

5

14. Inflation. Increasing both in rural and urban areas, inflation has accelerated to 9.2 percent (annual point-to-point) in June, which i s a nine-year high. Food inflation, which accounts for 58.8 percent o f the Consumer Price Index in Bangladesh, surged to 9.8 percent and nonfood inflation to 8.3 percent. T h i s surge in inflation obviously preceded the onset o f the flood, and i s attributable mainly to international price increases and growth in domestic demand. There are signs that floods have made it worse with inflation soaring further to 10.1 percent in July-the last month for which data are a v a i l a b l e h v e n entirely by food inflation, which increased to 11.4 percent. Non-food inflation decreased slightly to 8.2 percent.

15. The damage to crops and transport infrastructure caused by the ongoing floods i s likely to exacerbate the situation by increasing supply-side inflationary pressures. Moreover, prices o f essential food items generally increase during the month o f Ramadan, which this year starts on September 14. Thus, in all likelihood, inflation could rise further in the next couple o f months.

16. In cases where monetary management i s prudent, inflation produced by a supply shock typically subsides after some lag. This was evident for the 1998 post flood inflation, which rose from 7 percent in July, 1998 to 13 percent in December 1998, declined to 8 percent by June 1999, and to 3 percent by December 1999. The 1998 inflation could be characterized as a pure supply- shock inflation that literally cured i tse l f as a result o f a bumper Boro harvest in Spring 1999. Inflationary pressures were kept in check by prudent monetary management during this period, with money supply growth averaging 9-1 0 percent during FY98-2000.

17. Defining high food prices as one o f the main economic problems facing the country that most affects the poor; the CTG has taken a number o f steps to tackle the problem. More specifically, i t has

Lowered import duty on essential items-rice, wheat, edible oil, and onion-to zero Established numerous fair price shops (in both rural and urban areas operated by Bangladesh Rifles) and toll-free markets; imported food through a number o f government agencies. Encouraged private commercial banks to lower Letter o f Credit margins for food imports Decided to impose zero duty on items in high demand during the month o f Ramadan Decided to supply seeds and fertilizer in the post flood period in a timely manner and in adequate quantity Decided to import 350,000 metric tons o f rice and 200,000 metric tons o f wheat on an emergency basis. Interest rate on import o f essential items lowered temporarily.

Monetary growth declined to 17 percent in June this year, compared to 22.3 percent in December 2006, reflecting primarily sharp declines in credit to the private sector and central government. Growth o f credit to the private sector declined from 19.4 percent in December 2006 to 14 percent in June 2007, while growth o f credit to the central government declined from 35.9 percent to 12.7 percent during the same period. This decline did not necessarily constitute a deliberate tightening o f monetary policy, but perhaps reflected a slowdown in economic activities in the f irst half o f 2007. Wh i le supply shocks, particularly international commodity price increases, have played an important role in the upsurge o f inflation, the persistently high rate o f monetary growth (hovering around 20 percent) since February 2006 accommodated the supply shocks, leading to their persistent impact on inflation. However, in its Monetary Policy

6

Statement released on July 12, 2007, Bangladesh Bank announced i t s commitment to a cautious monetary stance in the second half o f 2007, including review o f Cash Reserve Requirements (CRR), Statutory Liquidity Requirements (SLR), and policy interest rates.

19. Economic growth and employment. In the past couple o f months there have been some signs-mostly anecdotal-that private sector business confidence has suffered in the country,6 which in turn, may have some impact on the FY08 economic growth rate. The floods may aggravate this ~ i tua t ion .~ In the immediate aftermath o f the flood, i t s adverse impact i s likely to occur in the following sectors:

Agricultural production. Preliminary estimates by the Department o f Agricultural Extension suggest that crops worth between Tk 18 to 20 bil l ion (US$250 to 300 million) have been damaged by the ongoing floods. The damaged crops include rice, jute, vegetables, and spices on around 469,000 hectares o f land constituting about 26 percent o f the total cultivated crops in the affected areas. Aman has been the worst h i t 4 a m a g e to 250,000 hectares has caused a loss o f an estimated Tk 10 bi l l ion (roughly US$140 million).

Livestock andfisheries. This sub sector has suffered damage worth Tk 150 mil l ion (US$2.35 million). According to the initial estimates provided by the Ministry o f Fisheries and Livestock, some 32,620 metric tons o f fish, 583 metric tons o f shrimp, and 462.2 mil l ion fry were washed away as 186,307 ponds and large water bodies across the country were submerged by floodwaters. These figures, however, reflect losses in fisheries only and exclude losses in other types o f livestock (chicken, goats, among others, commonly owned by Bangladeshi households) that are likely to be considerable.

Flood control and irrigation infrastructure. Extensive damage has been caused to the flood embankment and regulators o f the Bangladesh Water Development Board (BWDB)-managed water schemes, and irrigation infrastructure managed by the BWDB, Bangladesh Agncultural Development Corporation (BADC) and Local Government Engineering Department (LGED) in most o f the 39 flood-affected districts. This may have indirect adverse effects on agncultural production.

Manufacturing. The small-scale manufacturing sector appears to be the most seriously hit, particularly the textile industry concentrated in the Sirajgonj and Pabna districts, causing losses o f more than Tk 1.5 bil l ion (about $22 million) and rendering more than 800,000 loom workers jobless. At least 40,000 handloom and powerloom units out o f more than 53,000 have been submerged, damaging looms, stock o f raw materials, and finished goods and disrupting production activities completely. About 50 to 70 thousand weavers have been directly affected, and all the 0.8 mil l ion weavers are financially vulnerable. Bangladesh Small and Cottage Industries Corporation (BSCIC) industrial estates in some areas are also likely to have been affected.

One possible reason for k s could b e the vigorous pursuit o f the anticorruption drive launched by the CTG. Many questions are being asked by tax officials and the banks in their dealings with the private sector. On its part, the CTG has publicly assured that it is taking steps to check any unnecessary harassment to the business community. Although experience has shown that the impact o f floods o n growth tends to be temporary and the economy’s normal growth momentum revives as the f lood recedes, re form efforts continue, and the investment climate improves.

7

7

Transport and Communication. Road transport infrastructure appears to have suffered extensive localized damage in most o f the 39 flood-affected districts. Damage has been caused to the primary roads network managed by the Roads and Highways Department and to the secondary roads network managed by the LGED. Damage i s particularly severe where incidents o f flash flooding led to wave action and the erosion o f embankments. Inland waterways and airports are only marginally affected, as i s typically the case.

20. Balance ofPayments. The overall impact o f the floods o n balance o f payment (BOP) position i s l ikely to be marginal. Export growth in FY07 slowed to 15.7 percent, compared with 21.6 percent in FY06. Import growth was also fairly strong at 16.4 percent. Combined with a strong 24.5 percent remittance growth, the external current account balance in FY07 had a surplus equivalent to 0.5 percent o f GDP, the same as in FY06. Floods could affect exports somewhat, particularly exports o f frozen food. In addition to emergency food imports (including a recent decision by the government to import 350,000 tons o f rice and 200,000 tons o f wheat to add to i t s foodgrain stock), post f lood rel ief and rehabilitation i s l ike ly to require the import o f selected products, particularly some construction materials. Aided food imports are also l ikely to be higher than they otherwise would have been in the absence o f floods. On the other hand, a fa l l in real income growth could depress import demand. Historically, however, import growth in dollar terms has tended to increase in the aftermath o f floods. This, together with some adverse effects o n exports, may result in a bit larger narrowing o f the current account surplus than expected at the onset o f FYOX. Fortunately, this year Bangladesh has a foreign exchange reserve level o f over US$5 b i l l ion (equivalent to 3.4 months o f GNFS imports), compared to pre flood levels o f US$3.1 b i l l ion (2.8 months) in 2004 and US$1.8 b i l l ion (2.8 months) in 1998. This, together with the floating exchange rate regime, will help absorb the pressure arising from the deterioration in the trade balance resulting f rom emergency import o f food, agricultural inputs, and construction materials.

2 1. Fiscal Variables. The fiscal impact o f the floods i s l ikely to be significant. The rel ief effort, expansion in food-assisted safety nets, repairs to public property, and the impact o f the f lood on economic growth are l ikely to put pressure on both the revenue and expenditure sides o f the budget.

22. In the f i rs t ha l f o f 2007, the government had taken several initiatives to improve fiscal management. I t launched a dnve to collect taxes, which resulted in income tax collection exceeding the FY07 original budget target, and significantly cut back development spending to remain within the budgeted deficit. In April, i t made large adjustments in petroleum prices, which helped contain growing quasi fiscal losses. The floods may, however, reverse the positive impact o f these fiscal measures.

23. Past experience shows that current expenditures tend to rise significantly in the aftermath o f a flood. The FY08 target for food distribution through the Public Food Distribution System i s 1.67 mi l l ion metric tons, which may need to be revised upward to take into account additional f lood rel ief needs. The government will have to help the flood-affected farmers commence production. The most immediate need would be to replant r ice for the winter crops under the transplanted Aman rice cultivation program, for which the farmers will need seeds, fertilizer, farm machines, and fuel. The government will also need to ensure that adequate supplies o f seeds o f maize, pulses, wheat, vegetables, and Boro are available. The farmers will also need assistance with the health o f their cattle, since the surviving cattle in the affected areas are l ikely to suffer f rom malnutrition and diseases. Other costs l ikely to increase current expenditures include the need to provide assistance to the small-scale manufacturing sector for rehabilitation, grants to

8

dislocated people, and other increased operations and maintenance (O&M) expenditures to repair infrastructure damage.

24. Given these multidimensional needs, revenue expenditure may overshoot the original FY08 budget target despite the provisions that exist in the FY08 Revenue Budget and the Food Account. These include Tk 8 b i l l ion for unforeseen expenditures and Tk 6.2 b i l l ion for programs funded f rom the Revenue Budget. There i s also Tk 17.5 b i l l ion provision as VGF, GR and other rel ief activities in the Revenue Budget and Tk 4.1 b i l l ion for non-ADP FFW. However, the unforeseen flood expenditures can only be managed in part f rom these provisions as wel l as expenditure restructuring. Moreover, the immediate cash financing needs (for emergency food, seeds, and fertilizer imports) cannot be met entirely f rom own resources, since only a l imi ted amount o f resources can be freed up right away by restructuring other expenditures.

25. I t should be possible to redirect expenditures f rom the Annual Development Plan (ADP), which i s the capital expenditure budget, toward the repair o f damaged infrastructure. Floods tend to reduce ADP implementation shortfall by augmenting demand for fast-disbursing expenditures. Considering this, and assuming that the government will achieve significant reallocation o f ADP funds to finance nonfood imports and repair damage to public assets, i t i s reasonable to assume that the actual ADP expenditures can s t i l l be contained within the FYO8 budget target o f Tk 265 bil l ion. Implementation shortfall last year, an unusual year, was 17 percent, whereas normally i t tends to be within the 10-15 percent range relative to the original budget target. The CTG is taking measures to reduce the normal implementation shortfall, which, together with the impact o f floods, may bring it down to less than 10 percent. The Planning Commission i s currently in the process identifying potentials for pruning the FY08 ADP and this exercise i s expected to be completed by end-September.

26. Thus, the challenge o f containing the FY08 budget deficit within the original target has become a l l the more formidable. Historically, growth in revenue collection declines in the flood year in particular. Combined with expenditure increases, this could lead to the FY08 budget deficit overshooting the pre flood 3.6 percent projection.8 T h i s would be bearable if it i s accompanied by an increase in concessionary external financing. Otherwise, there would be pressure o n domestic financing, particularly financing f rom the bankmg system, and especially the Bangladesh Bank. The ongoing flood rel ief efforts o f the government have been mostly financed by borrowing from the banking system, which has significantly increased in July 2007. Concessionary external financing will also mitigate any worsening o f BOP position that may result f rom emergency import needs for rice and other items.

111. RESPONSE TO THE 2007 FLOODS

27. Bangladesh has in the past experienced natural disasters, including floods, and has built up a response system that has improved over time. The government budget includes disaster response lines items that include cash grants that are distributed through a combination o f local governments and community targeting. The effectiveness o f the flood response system in Bangladesh has been evaluated in several international studies and found to be e f f e ~ t i v e . ~

Table 3 in Section I11 below provides information on government spending that has already been incurred on the 2007 floods. See, for example, Dorosh, P., C. del Ninno and Quazi Shahabuddin Eds., 2004. The 1998 Floods and Beyond-Towards Comprehensive Food Security in Bangladesh. The University Press Limited, Dhaka and IFPRI, Washington DC.

9

28. Responding to the 2007 floods, the CTG has already taken measures to distribute rel ief materials and help the affected people. I t s f lood assistance strategy i s being implemented by the National Disaster Management Committee in close cooperation with the Inter-ministerial Coordination Committee.. Moreover, coordination committees have been formed at the district and upazila levels with representatives f rom the government, private organizations, and NGOs, and have n o w started functioning. K e y actions taken by the CTG to tackle the floods include:

Authorization to eight line ministries to c a r v out flood emergency work using their regular maintenance budget. The total amount authorized for f lood related work i s Tk 21 b i l l ion (roughly US$300 million). T h i s accounts for 81.8 percent o f the total FY08 nonwage O&M budget, which means that most o f the regular maintenance will have to be deferred to FY09 unless the amount reallocated f rom nonwage O&M is restored this year.

The decision to import 350,000 tons of rice and 200,000 tons of wheat to augment its food grain stock. In a meeting o n August 16, 2007, the Advisers Committee o n Purchase decided to procure another 100,000 tonnes o f rice f rom local importers to further supplement the government’s rice stock. The estimated cost o f both imports and local procurement i s Tk 1.23 b i l l ion (about US$18 million).

The decision to launch an open market sale (OMS) of rice from September 9, 2007, for one month in order to keep rice prices tolerable during the forthcoming Ramadan. Under this program, 118,000 tons o f r ice will be sanctioned to 15,440 dealers, each distributing 5 10 kg. The government also plans to import 650,000 tons o f urea this year, o f which 312,000 tons have already been imported.

Housing and livelihood support through direct cash transfers to flood victims. On August 25, 2007, the CTG allocated Tk. 320 mi l l ion (about $5 mill ion) f rom the Chief Adviser’s Relief and Welfare Fund for an immediate cash transfer to the f lood victims to help repair damaged homes. These will be distributed through the local administration after assessing actual damage or losses caused by the floods. Each family wil l get Tk 10,000 i f their house i s completely damaged and Tk 5,000 if partly damaged. The government i s also considering providing a one-time rel ief cash grant for l ivelihood support to flood victims, the details o f which-including the amount o f assistance, the institutional arrangements for delivery, and the criteria for eligibility-are yet to be decided. It i s important to recognize that, over time, Bangladesh has increasingly employed cash transfer programs as a means to assure food security+specially during periods o f natural disasters-and this pol icy has generally been successful. 10

Assuring availability of Aman seedlings in the affected areas. The government has initiated a Tk 650 mi l l ion (about $ 9.5 mill ion) post f lood program to rehabilitate about 700,000 small and marginal farmers in the affected districts and has already allocated Tk 300 mill ion. Late variety Aman rice seedlings and seeds for dry season crops are to be distributed among the farmers under this program.

29. The focus at the moment i s o n rel ief and the immediate rehabilitation needs o f f lood victims in areas where flood water has receded, which includes social protection to help displaced persons and other vulnerable groups return to productive lives as soon as possible. A full damage

lo A recent W o r l d Bank study o f the effectiveness o f cash transfer programs in Bangladesh found these to b e quite successful and cost-effective in reaching the needy. See Wor ld Bank, (2006) Safety Nets in Bangladesh.

10

assessment i s only possible after the flood waters recede completely. The possibility o f severe flooding for a second time has become very real in recent days as 23 districts have been inundated till September 9 with water levels in all major rivers rising and continuing to flow above danger mark. Once these exigencies and uncertainties are resolved the CTG will be in a position to prepare a medium- to long-term flood recovery program, which i s expected to include additional social programs, support to affected farmers and enterprises, and a medium-term reconstruction and disaster mitigation program. Meanwhile, the CTG has requested the World Bank's assistance to help meet these and other emergency flood-related expenditures.

Table 3: Government Expenditure on the 2007 Floods (Taka in million)

I. Restoration and Rehabilitation Expenditures

Ministry of Food and Disaster Management Cash for housing Food import Contingency

Ministry of Health and Family Welfare Local Government Division Chief Adviser's Office Ministry of Water Resources Ministry of Agriculture Ministry of Communication Ministry of Fishery and Livestock

11. Relief Expenditures

Cash Transfers Food Medicine

111. Total Expenditure In equivalent US$ million As percent of FY08 Budgeted Expenditure

20926.9 17,801.30

625.00 17,156.30

20.00 245.20

1,110.00 497.80 550.00 315.50 400.00

6.60

1,264.8 466.5 553.10 245.20

22191.7 324.0

2.8 Notes: These numbers are as of September 9,2007 and reflect the amounts released by the Ministry of Finance. Source: Finance Division, Ministry o f Finance

A. Government Spending on Floods

30. The government has so far incurred about Tk 22 bil l ion (roughly US$ 324 million, about one-fourth o f which will be covered by supplemental IDA funds) expenditures on account o f floods (see table 3). These expenditures have been financed from provisions for nonwage O&M and various block allocations in the revenue budget. The flood-related expenditure incurred to date constitutes 3.4 percent o f the total FY08 expenditure budget. Restoration and rehabilitation activities account for nearly 94 percent o f the total and re l ie f for the rest. Food import and budgetary support to agncultural credit account for the bulk o f the rehabilitation expenditures. Actual cash transfers for housing through the Ministry o f Food and Disaster Management amounted to Tk 625 mill ion (UStS9.l million). Food supplied through the various safety net

11

programs o f the Government (Vulnerable Group Feeding and Food for Works) constitutes the largest re l ie f expenditure. Emergency cash grants for relief amounted to Tk 466.5 mil l ion (US$6.8 million).

B. Response of Other Stakeholders

31. Some o f the NGOs have also started providing re l ie f support to the affected people. International organizations based in Dhaka are having similar coordination meetings facilitated by UNDP. As initial response, DFID, CIDA, USAID, Norway, Germany, UNICEF, WHO, WFP, UNFPA, and UNDP have already offered financial assistance and some have started to mobilize relief materials. A US$50 mil l ion emergency commodity grant from Saudi Arabia has started arriving. Wh i le the government did not directly appeal for foreign assistance in his address to the nation on August 5, 2007, the Chief Adviser mentioned that the government wil l “cordially accept spontaneous help and assistance from development partners at home and abroad.”

Table 4: Flood Assistance Committed by Development Partners and Others

Development Partner

Saudi Arabia India UN UK-DFID EU and International Red Cross China Aus AID Kuwai t IDB OPEC Fund Canada South Korea Turkey us WFP CIDA Germany Sweden Others (Canada, S r i Lanka, Netherlands)

Amount Committed (in US$ million)

50.0 10.0 6.0 4.0 3.4 1.3 1.28 1 .o

0.28 0.25 0.25 0.2 0.1 0.14 0.12 0.24 0.89 0.30 0.08

Total I 78.8 Source: Disaster Management Bureau, September 9,2007

32. DFID i s s t i l l focusing on the immediate re l ie f as well as considering the support requested by UNDP, which i s worhng on a short-term recovery and rehabilitation plan for UN interventions. UN Central Emergency Fund has allocated US$ 6 mill ion towards flood rel ief. At the same time, DFID i s looking at the opportunities within i t s programs for redirecting the already

12

committed resources for f lood purposes. ADB and Japan are exploring ways o f providing support.

IV. BANK’S 2007 FLOOD ASSISTANCE STRATEGY

33. The Bank i s regularly monitoring the f lood situation and conferring with the government, other development partners, and UN agencies about the emergency response. Since the onset o f floods this season, the Bank has been preparing a biweekly “Flood Situation Update” for i t s Senior Management. As a part o f the Bank’s role in coordinating development partners, the Bank‘s Country Director co-chaired (with the Secretary o f the Economic Relations Division, Ministry o f Finance) a Local Consultative Group Plenary o n August 19 to discuss the flood situation with government officials. At this meeting, the Finance Secretary indicated that the government would need US$150 mi l l ion o f additional budgetary support t o meet flood-related expenses based o n the flood situation at the present time.

34. The Bank has designed an interim flood assistance strategy to help the country cope with the situation, with the understanding that the floods are not yet over this year. Learning f rom i t s experience o f a similar f lood situation in 2OOLthough the magnitude o f damage was much higher then-the Bank‘s financial assistance strategy has the fol lowing two elements:

0 Budget Support: A quick-disbursing US$ 75 mi l l ion budget support operation to reduce (a) the fiscal pressure o n the government that i s arising out o f non-programmed flood-related spending; and (b) any unforeseen pressure o n the foreign exchange reserves that may be arising as a result o f emergency imports, particularly those related to food. This quick- disbursing fiscal support i s to be funded from the FY08 IDA allocation to Bangladesh. This component i s the proposed Supplemental Financing to the recently approved Fourth Development Support Credit. These resources, among other things, will restore a part o f the regular nonwage operation and maintenance budget o f several l ine ministries that i s being used for flood-related restoration and rehabilitation activities. Mos t o f the regular maintenance work programmed for this year will suffer i f this i s not done, with adverse developmental consequences particularly for the roads, public works, education, and health sectors.

0 Restoration and Rehabilitation: A l i s t o f restoration and rehabilitation activities associated with the floods i s planned to be financed from reallocating resources f rom the existing Bank projects that face imminent cancellations and/or have disaster management components built into their design. Immediate post f lood rehabilitation o f infiastructure will address some urgent connectivity needs that will need to be carried out over a longer period o f time. Existing project funds will be redirected to provide support in agriculture, health, communications, and water and sanitation. T h i s part o f the strategy wil l be based o n a post- f lood assessment that will be undertaken after September, once the floods are over. A separate program to support these activities will be designed once a needs assessment has been put together. In the event this requires formal project restructurings, or a new credit, Board approval will be sought. As mentioned earlier, the Ministry o f Planning i s engaged in a needs assessment exercise and i ts report i s likely to be available by end-September.

The ongoing multi donor Health Nutrit ion Population Sector Program, which i s supported by a large group o f donors some o f who have pooled their resources in a multi donor t rust fund managed by the Bank, has a component for financing emergencies and disasters-roughly US$10 mi l l ion over f ive years. Priority health supplies and operations related to the floods

13

including drugs, water purification tablets, and costs for mobil izing rel ief teams, are being financed through this program. The Wor ld Bank received a request f rom the Health Ministry to approve emergency supplies worth US$l.57 mill ion, which has been already approved. The Bank has also allowed for national /international shopping to speed up delivery o f the commodities.

35. Th is strategy has been discussed with the CTG and has i t s endorsement. The strategy was also discussed with key development partners and f i t s into the overall plan for external assistance for f lood recovery.

v. THE REFORM PROGRAM SUPPORTED THROUGH DSC Iv: AN UPDATE

36. The Development Support Credit (DSC) series” has supported Bangladesh’s reform efforts along two pillars: (a) strengthening core governance functions, with emphasis o n reforms in public procurement, budget formulation and budget execution, tax administration, and public administration; and (b) improving the investment climate, by maintaining macroeconomic stability, deepening domestic deregulation and trade liberalization, and strengthening performance o f the banking and energy sectors and o f state-owned enterprises.

37. The DSC IV program was closely aligned with the reform pillars outlined in the GOB’S Poverty Reduction Strategy (PRS) that was presented to the boards o f the International Development Agency (IDA) and the International Monetary Fund (IMF) in early 2006. The PRS stresses the links among investment growth, j o b creation, and poverty reduction. It identifies key areas where reforms are needed, public investments are required, and public policies meri t improvement. To generate broad-based growth and reduce poverty, the PRS focuses on employment generation, nutrition, maternal health, quality o f education, safe water and sanitation, the criminal justice system, and local governance. It acknowledges that progress in these areas requires creating an open and competitive environment conducive to private sector development. Other priority areas outlined in the PRS include: improving the abil ity o f poor people to participate fully in the growth process through access to nutrition, better quality education, health, water, and sanitation; and ensuring that governance issues are addressed by, among others, tackling corruption, enhancing access to justice for the poor, and improving security and public order.

38. A description o f the reform efforts-past, ongoing and needed in the future-that underpin the country’s development vision i s provided in the DSC IV document.12 The fol lowing paragraphs provide a briefing o f the country’s economic and social performances as wel l as an update on the reforms since the approval o f DSC IV by the Board in M a y 2007.

A. Economic Performance

39. Bangladesh’s economic performance has been fairly impressive in recent years. The economy grew by 6.6 percent in FY06, the highest rate in over two decades, and despite prolonged polit ical turmoil growth was 6.5 percent in FY07, the fourth consecutive year o f at least 6 percent growth (table 5). Growth has been broad-based, cutting across a l l major economic

The DSCs have complemented a parallel Special Drawing Right (SDR) 347 million Poverty Reduction Grant Facility (PRGF) program o f the IMF, which ended in June 2007. Discussions are starting on a new PRGF arrangement. World Bank, 2007, Program Document for the Fourth Development Support Credit to the People’s Republic of Bangladesh, Report No. 39595-BD, Washington, DC.

11

l2

14

sectors and benefiting from robust demand in both domestic and export markets. The manufacturing sector grew at an impressive 11.4 percent in FY07, i t s strongest performance in over a decade. Garment exports, which account for about 75 percent o f manufacturing exports, grew by 1 1.6 percent (in nominal dollar terms) in FY07. T h i s was despite enhanced competition from other low-cost producers after the dismantling o f the Agreement on Textiles and Clothing (ATC) on January 1, 2005, and disruption o f normal economic l i fe for more than two months because o f intense political turmoil. Construction, fueled by strong manufacturing growth as well as large amounts o f remittance inflows, grew by an estimated 7.1 percent, maintaining i ts 7-8 percent growth record since FY94. Remittances through formal channels were recorded at nearly US$6 billion, which i s about 9 percent o f GDP and half o f merchandize exports (gross), compared with US$l.9 bil l ion in FYO 1.

~~~~

Real GDP growth ( percent change)

40. Macroeconomic stability has been broadly maintained (table 5). The fiscal, monetary, and external indicators have remained mostly within the thresholds o f the macroeconomic framework agreed with the IMF under the PRGF program, although there have been some temporary deviations. One key indicator-revenue mobilization-has persistently fallen short o f i t s targets. In FY08, the government borrowed Tk 5.33 (net) bil l ion from the banlung system till August 16, 2007, against the FY08 target o f Tk 79.8 billion. The government i s also planning to take some austerity measures, including cutting entertainment allowance and transportation costs and delaying implementation o f low-priority ADP projects. As mentioned earlier, inflation continues to be a problem with prices showing an upward trend. Wh i le part o f this i s due to rising food prices (which has been aggravated by the floods), non-food inflation has also been rising. In the past several months, the Bangladesh Bank has not effectively used the monetary policy instrument to tackle the non-food or structural part o f inflation.

~

2002103 2003104 2004105 2005106 2006107 5.3 6.3 6.0 6.6 6.5

Table 5: Bangladesh: Selected Economic Indicators, FY03-07 (in percent of GDP, unless otherwise indicated)

Per capita GDP Atlas method (US$)

Consumer prices (percent change, 12 month average)

395.1 418.0 446.4 469.1 487.7

4.4 5.8 6.5 7.2 7.2

Revenues (incl. grants) Tax revenues Expenditures Current account (excluding off icial transfers)

Gross reserves in US$ mil l ions (in months o f imports)

Overall Budget balance (before grants)

Overall Budget balance (after grants)

11.3 10.7 10.8 11.1 11.0 8.3 8.2 8.5 8.5 8.4 13.7 13.3 13.8 13.9 14.1 0.1 0.2 -1 .o 0.8 0.7

2,471.0 2,714.0 2,930.0 3,471.0 5,001.0 (2.9) (2.8) (2.5) (2.7) (3.2)

-3.4 -3.1 -3.3 -3.2 -3.6

-2.4 -2.6 -3.0 -2.8 -3.1

15

B. Poverty and Social Impact Analysis

41. As mentioned earlier, Bangladesh has made remarkable progress in reducing poverty over the last 15 years. In early 199Os, close to 60 percent o f the population was living in poverty, which declined to 49 percent in 2000 and 40 percent by 2005. The 1.8 percentage point annual decline in the poverty rate f rom 2000 to 2005 was a significant improvement over the 1 percentage point annual decline during the 1990s. The fa l l in poverty rate was in fact large enough to significantly reduce the number o f people in poverty (with a growing population) by nearly 6 mi l l ion people between 2000 and 2005. The reduction in poverty i s attributable mainly to a 3.3 percent annual average growth in real GDP per capita during 2000-05, which translated into significant poverty reduction because o f almost no increase in inequality-the Gini index o f consumption remained stable at around 0.3 1 since 1996. Between 2000 and 2005, consumption growth was equitable across the distribution, and in fact slightly higher than the national average for the bottom 30 percent o f the population. Improvements in quality of l i f e between 2000 and 2005 were not l imi ted to consumption, but were also seen for a variety o f indicators, including housing conditions, access to electricity, sanitation, and telephone connections.

42. If the current trends in growth and inequality were to continue, Bangladesh will meet i ts MDG o f reducing the poverty rate by hal f f rom 1990 to 2015, that is, 29 percent by 2015. Progress has also been good toward several other MDGs. Bangladesh i s o n track to meet i t s MDG o n gender parity, having already achieved the goal in primary and secondary schooling. Significant gains have also been achieved in reducing child mortality. The under-five mortality rate has fallen f rom 136 deaths per 1,000 l ive births in 1990 to 66 today. This rate i s considerably lower than in neighboring India, even though Bangladesh’s per capita GDP i s about ha l f the size o f India’s. Attaining the M D G s relating to child malnutrition and those in education relating to universal net primary enrollment and primary completion remains challenging but within reach. Bangladesh had also nearly achieved the safe water MDG, with 97 percent o f i ts population having access to pathogen-free water, before arsenic contamination posed a new round o f challenge^.'^

43. Analysis o f poverty reduction suggests that a lo t of the economic gains during 2000-05 among households took place as a result o f improving returns to their endowments, in other words as a result o f higher incomes generated from available assets and occupations, which in turn indicate the beneficial impact o f economic growth. Poverty reduction i s l inked to wage and productivity increase in the industry sector, along with substantial employment growth in the service sector; increased in f low o f remittances i s also l ikely to have played an important role.

44. Substantial challenges, however, s t i l l remain. Around 56 mi l l ion Bangladeshis remained in poverty in 2005. Disaggregated poverty trends show that regions in the west and southwest (Rajshahi, Barisal, and Khulna divisions) have fallen significantly behind the east (Dhaka, Chittagong, and Sylhet divisions). Dhaka and Chittagong contributed nearly 80 percent o f national poverty reduction between 2000 and 2005, with just over ha l f the population, while Khulna and Barisal had n o contribution, with about one-fifth o f the population. Lack o f economic growth in the lagging regions i s related to a number o f factors, including poor connectivity t o the main growth centers o f the country (most importantly, Dhaka), inadequate

l3 For more information on MDG progress, see Government o f the People’s Republic o f Bangladesh and United Nations, 2005, “Millennium Development Goals: Bangladesh Progress Report,” Dhaka; and World Bank, 2007, “To the MDGs and Beyond: Accountability and Institutional Innovation in Bangladesh,” Washington, D.C.

16

infrastructure, and lower in f low o f remittances. Closing this regional economic divide would be an important area o f focus for public policy, as the CTG has recently indicated publicly o n repeated occasions.

45. Poverty estimates since 2005 are not available and must await the next Household Income and Expenditure Survey (2008-09). Whi le economic growth has been strong during the last two years and i s l ikely to have reduced poverty further below the 2005 level, there i s some cause for concern with regard to the recent spike in inflation (see Section 1I) that may have had an adverse short-term impact o n poverty. As mentioned earlier, not only i s the flood l ikely to exacerbate the poverty situation in the short term in the affected areas, these effects can also persist to some extent in the longer run-in terms o f higher poverty rate and greater depth o f poverty in flood prone areas.

C. Reform Progress since the Approval of DSC I V

46. The progress made as part o f the D S C N-supported initiatives in strengthening the banking sector, liberalizing the trade regime, strengthening o f tax administration, and reforms to improve the functioning o f core governance institutions has been encouraging. Appropriately under the current conditions, and also consistent with the emphasis in the poverty reduction strategy, the CTG has accorded its highest priority to maintaining essential l aw and order conditions and strengthening key institutions o f accountability. The CTG also remains committed to deepening reforms in public expenditure and financial management, public procurement, tax administration, economic deregulation, public administration, state-owned enterprises, banlung, trade, and power.

47. The following paragraphs provide updates o n reform progress by specific areas:

(i) Macroeconomic Stability

With the implementation o f economic reforms envisaged in the PRS, growth i s expected to be sustained at around 6.5 to 7 percent over the medium term, with the industrial sector continuing to be the main driver. Whi le the impact o f the flood o n economic sectors, as discussed in Section 11, i s l ikely to reduce current year growth (by possibly 0.2 to 0.3 percentage point relative to the pre flood projection o f 7 percent), the growth in subsequent years i s l ikely to be minimally affected, as similar natural disasters in Bangladesh and other countries have shown. The strength o f the external sector should sustain double-digit export growth, with firming growth prospects in the key European market in FY08. High and rising inflation i s the main concern on the macro front, particularly in view o f the continued unfavorable international price developments. The flood i s l ikely to increase the inflationary pressure, particularly because o f i t s disruption to food production and transportation, but these effects are l ikely to be temporary with prudent monetary management. With the corrective measures taken by the government to smooth the f l ow o f food supply and the commitment by the Bangladesh Bank to take a cautious monetary stance in the second ha l f o f 2007, the pressure o n consumer prices should ease somewhat after the flood induced shocks peter out. Of course this depends upon n o further sharp and continued rise in global commodity prices, o i l in particular, and n o reversal o f the decline in monetary growth since December 2006.

17

(ii) Banking: Corporatizatioflrivatization of National Commercial Banks (NCBs)

0 The three new banlung companies have already been formed and given commercial banking licenses by the Bangladesh Bank. The technical part o f the corporatization process has been completed and the Vendor’s Agreements to transfeddivest the entire assets, liabilities and capital o f the NCBs to the new banks i s expected to be signed soon. The new banlung companies will start operating as soon as the Finance Divis ion issues a Gazette Notification. The government has already issued a Letter o f Intent (LOI) and formally invited the preferred bidder to take over the 93 percent stake of the largely state-owned Rupali Bank Limi ted (RBL) for US$458 mill ion. I t has also taken al l necessary initiatives to resolve the major disputes hindering the formal sale/transfer o f RBL. However, i t sti l l awaits a concrete positive response from the prospective buyer for signing o f the Sales and Purchase Agreement (SPA).

(iii) State-Owned Enterprises: Restructuring

BIMAN Bangladesh Airlines became a Public Limited Company o n July 23,2007, as part o f the government’s effort to rescue the loss-making national carrier. An international operator will be appointed through public tender bidding to run the new airline. The government will retain 100 percent share for the time being, gradually offloading up to 49 percent o f the shares o f the airline to the private sector. The f i rs t board o f directors o f the company has been formed with six government officials headed by the Cabinet secretary and the present BIMAN Managing Director as i t s Chief Executive Officer. The airline has recently released 1876 personnel through a Voluntary Retirement Scheme (VRS), reducing i ts workforce by about 44 percent. BIMAN has also undertaken a number o f short-term reform actions such as closing down some loss-malung international and domestic routes. The government has closed four loss-malung jute mills in J u l y - o n e in Khulna, one in Sirajgonj, and two in Chittagong. I t has also started clearing arrear payments to the retrenched jute mill workers as part o f the Social Protection Package for Retrenched SOE workers.

0

(iv) Power Sector

The least-cost generation development plan has been adopted though i t s implementation continues to lag behind. W o r k i s also underway o n a generation financing strategy, which i s designed to integrate least-cost selection o f projects within an overall public and private financing framework. This plan i s expected to be finalized by November 2007. The government has appointed Transaction Advisors for three large base-load power plants. The Transaction Advisor for Bibyana 450 MW Independent Power producer (IPP) has held road shows in Dhaka, Dubai, and Singapore. Prequalification documents for this IPP are expected to be issued in September 2007. Six sponsors have been selected, through a transparent and competitive process, t o install about 200 MW o f small power plants, which range between l O M W and 30 MW. The government has adopted the Financial Restructuring Plan, in principle, and has further agreed to start restructure the balance sheets o f a l l power utilities. Implementation Consultants to restructure the balance sheets will be appointed by October 2007. Provision o f Tk 6 bi l l ion has been made in the FY08 budget to provide financial support to the power

18

sector as its current tar i f f i s below cost. Arrears f rom government and private sector consumers have been reduced. Notwithstanding the desirability o f adjustment, i t i s unlikely that electricity tar i f f could be increased in the next couple o f months, particularly in v iew o f the existing inflation situation in the country. A small upward revision in the tar i f f rates was implemented by the CTG in March 2007.

(v) Trade and Tax Administration

Average nominal protection was reduced by 2.4 percentage points in the FY08 budget, f rom 24.3 percent t o 21.9 percent. The tariff structure was simplified by collapsing one para-tariff (Infrastructural Development Surcharge), with customs duty, eliminating most zero tariffs, and recasting tar i f f slabs. The government has initiated the separation o f tax pol icy work and f rom tax administration work, and has agreed to review the VAT and Income Tax legislations as part o f simplifying i t s tax system. The government i s consolidating the key functions o f Human Resources, ICT, and Audit under a single member or Chairman o f the National Board o f Revenue.

(vi) Public Financial Management and Procurement

The government and six development partners have agreed to a public financial management (PFM) reform program in consultation with the government. An Identification Mission Report has been prepared as a basis for designing the next steps o f the PFM reform program, which i s to be effective n o later than October 2008. An appropriate legal framework providing the C&AG more financial and administrative authority i s being initiated. The Public Accounts Committee (PAC) strengthening project was approved and became effective f rom July 2007. The government has initiated establishing an Ad-hoc PAC while P A C i s in abeyance, as an interim mechanism to continue the work o f the defunct PAC. The government has formed four independent procurement review panels, as per the provisions o f the public procurement regulations; the panels are functioning reasonably well. The panels, as o f July 2007, handled 15 cases, and the government acted in conformity with the views and decisions o f the panels in al l but three cases. Transparency o f the system i s improving further with the beginning o f posting procurement performance data in the Web site o f Central Procurement Technical Unit (CPTU). The Rural Electrification Board and LGED were selected for this purpose. Fo r these two organizations an init ial annual report for FY06, instead o f quarterly as planned, has been posted in CPTU’s website for contracts valued at Tk. 10 mi l l ion and above. Based o n the newly passed Procurement Act, the government has finalized the rules, and after endorsement o f the Finance Adviser, i t i s now waiting for placement to the Ministry o f L a w for final approval. The act will become effective as soon as the rules are gazetted after Ministry o f Law’s approval. The process has been delayed by a few months, but the reform agenda i s on track.

19

(vii) Governance and Anticorruption

All o f the legal processes for separating the judiciary f rom the executive have been completed. The related administrative requirements, including the creation o f and appointments to new posts, and the provision o f infrastructure, are on track. The Public Service Commission has a new chairman, and a set o f new members, and has commenced with internal reforms. The Chief Advisor has convened a committee o n c i v i l service reform, including a number o f Cabinet members and secretaries. The government has announced that i t i s planning to promulgate freedom o f information legislation. Corruption cases against a number o f former politicians and businessmen have been proceeding. The Anticorruption Commission's jurisdiction has been amended through amendments to the A C C Act. A new organogram o f 1,281 staff has been approved by the National Implementation Committee o n Administrative Reform. Prosecutions rules have been promulgated and have come into operation.

VI. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING

48. The magnitude and devastation o f the flood and the required response f rom the government are creating pressure o n the government's FY08 budget. Whi le the budget has a small provision for handling such uncertainties, the havoc created by worse-than-usual monsoons requires additional resources. The government has already redirected some o f i t s budgetary resources for f lood relief. Grants or concessionary financing f rom development partners to finance at least a portion o f the additional resource requirement i s perhaps the best economic option for the country. In this context, the Wor ld Bank i s wel l placed to provide budget support quickly in this hour o f need. For i t s part, the government remains committed to the implementation o f the reform program supported under the D S C series.

49. A formal damage and needs assessment i s expected after the flood waters recede completely, which will provide an estimated measure o f total economic losses. F rom available information, i t i s already clear that the human, social, and economic impacts are sizeable. Preliminary and incomplete figures indicate an estimated 11 mi l l ion people affected (with nearly 600 deaths so far), and damages to 1 mi l l ion homes, 1.1 mi l l ion hectares o f crop, and more than 23,000 hlometers o f road (see table 2, Section 11). The impact o n growth and employment in the short run i s l ikely to occur as a result o f setbacks in agncultural production; losses in fisheries and livestock assets; loss o f production in the small-scale manufacturing sector; and damage to irrigation infrastructure, transport, and communication (see Section 19. Rel ief and reconstruction costs are l ikely to be high. Early estimates suggest that the reconstruction costs o f the lost and damaged infrastructure are l ikely to be at least ha l f that o f the 2004 floods, implying more than US$ 1 bil l ion. Emergency import needs, particularly in rice and other food items, and inputs for agriculture and construction can adversely impact the BOP position.

50. The proposed Supplemental Financing would help finance part o f the FY08 resource gap incurred as a result o f the floods. The activities for which the emergency expenditures have been incurred and will continue to be incurred in the short run include food relief, assistance to farmers o n apcu l tu ra l inputs, cash grants to the affected population, assistance to the small-scale manufacturing sector for rehabilitation, and increased O&M expenditures to repair infrastructure damage. Financing the resource gap arising out o f these emergency needs (by the proposed Supplementary Financing) will allow the government to continue implementation o f the D S C IV- supported macroeconomic and budget framework. In the absence o f the proposed financing,

20

government would need to cut further into i ts existing O&M budget, reduce planned capital spending allocations (ADP), or support t o recurrent expenditure activities will have to be significantly scaled down; alternatively the government will have to take recourse to domestic borrowing, which i s three times more expensive relative to concessionary external financing, or use monetary financing, which will fuel already high and rising inflation.

51. The proposed operation i s consistent with Bank pol icy as reflected in OP 8.60. According to this policy, supplemental financing may be provided for a development policy operation for which an anticipated gap in financing jeopardizes a reform program that i s otherwise proceeding o n schedule and in compliance with the agreed-on pol icy agenda. More specifically, the proposed Supplemental Financing, meets requirement for Supplemental Financing under OP 8.60 as follows:

(a) The program is being implemented in compliance with provisions of the Credit Agreement. Bangladesh i s currently implementing a reform program supported by the D S C series in compliance with a l l covenants.

(b) The borrower is unable to obtain suf$cient funds from other lenders on reasonable terms or in a reasonable time. Under government leadership, the Bank and other development partners are coordinating the flood rel ief efforts. The proposed operation would be the second significant financing package from external sources to help the government face immediate needs.I4 Other development partners have pledged additional resources, which, along with the Supplemental Financing, would contribute to closing the financing needs o f the government for urgent rehabilitation, social support programs, and critical reconstruction investments in the flood- affected areas. T o this date the pledges have totaled only US$78.8 mill ion; they also typically take more time to come through and often lack flexibil i ty in terms o f their use. The proposed operation will therefore fulfill financing needs that are unlikely to be met by other donorsAenders.

(c) The time available is too short to process a further freestanding Bank credit. The use o f a Supplemental Financing option can enable the Bank to deliver program support in a timely manner to respond to the urgent financial needs o f the country resulting f rom the floods. Even a regular emergency project requires a comprehensive needs assessment, which i s not possible right n o w because the floods are not over yet. Timely response f rom the Bank will help the people o f the affected areas rebuild their lives. Another planned budget support operation-the Transitional Support Credit (TSC), a development pol icy credit as a follow-up to the DSC series-is currently under preparation and i s expected to be presented to the Board in early 2008.

(d) The borrower is committed to the program and the implementing agencies have demonstrated competence in carrying it out. The government has consistently shown commitment to pursuing prudent macroeconomic policies over the medium and long term and implementing needed structural reforms in line with i ts Poverty Reduction Strategy.

VII. IMPLEMENTATION ARRANGEMENTS

A. Terms of the Supplemental Financing

52. Besides a legal opinion, there are n o other requirements to this proposed Supplemental Financing. There will, however, be an overall requirement that the government continue to maintain a satisfactory macroeconomic pol icy framework as was required under the D S C series.

A s mentioned earlier, Saudi Arabia has provided a grant o f US$50 mil l ion. 14

21

Continued close engagement with the IMF will help the country in this effort. The closing date for the Supplemental Financing i s March 3 1,2008.

B. Funds Flow and Auditing Requirements for the Supplemental Financing

53. Supplemental Financing proceeds will be disbursed in a single tranche and will be deposited into a designated account maintained by the Bangladesh Bank. The taka equivalent o f the financing proceeds from this account will then be credited into the Consolidated Fund o f the GOB. Transactions and balances o f the government account will be fully incorporated in the government’s accounting records and financial statements. Disbursements f rom the Consolidated Fund by the government shall not be l inked to any specific purchases, and n o special procurement requirement i s needed. Whi le IDA disbursements will not be l inked to specific expenditures, the proceeds o f the Supplemental Financing shall not be used for excluded expenditures as set out in the legal agreement.

54. A review o f the institutional arrangements for public expenditure, financial management, and procurement (followed by the PEFA assessment) concludes that the country system in place does provide reasonable safeguards for reliance on government financial accountability to ensure that funds are used for the purposes intended.

C. Environmental Issues

55. significant negative effects on the environment, natural resources, or forests.

Policies supported by the proposed Supplemental Financing are not expected to have any

VIII. BENEFITS AND R I S K S

A. Benefits

56. Timely program support will contribute to assisting the GOB in covering immediate needs for relief, l ivelihood support, and reconstruction by accessing financial assistance necessary to mitigate the impact o f the floods. The proposed Supplemental Financing (SF) will be an important source o f resources for the government, as it will provide financing at a time when the full impact o f the disaster on government revenues i s unknown, and there i s an urgent need for additional government expenditures. Donor pledges to date have been roughly US$72 mill ion. Pledges typically have a longer gestation lag than desired and so flexible financing o f the type being proposed i s necessary to speed up the rehabilitation process. The proposed SF i s quick disbursing and would contribute to timely provision o f support to affected populations. It will also complement the support for medium- and long-term rehabilitation that i s being planned through restructuring and reprogramming o f ongoing operations in the Bank’s portfolio.

57. Finally, the Supplemental Financing will contribute to minimizing the r isks to the overall reform program that i s being supported through the DSC series, and maintain the integrity o f the transition to a Transitional Support Credit planned for 2008.

B. Risks

58. Based on experience from other countries, there are risks involved with this type o f assistance, relating primarily to the government’s l imited administrative capacity to implement rel ief and reconstruction operations. T h i s r i s k in Bangladesh is, however, partly mitigated by recent evidence that indicates the country has a growing capacity for managing natural disasters. The response so far to the 2007 flood emergency reflects these improvements, in particular taking into consideration the difficulties o f reaching remote communities when communications are

22

interrupted and means are limited. The macroeconomic and social impact o f natural disasters has been greatly reduced, and the resilience o f the poor has increased. The factors contributing to this improvement include greater nonfarm incomes, policies that have reduced leakages in food distribution and allowed private sector imports, the highly effective and well-targeted Vulnerable Group Feeding program, the construction o f cyclone shelters, and the establishment o f early warning systems. Recent experiences also indicate that Bangladesh has been increasingly successful over time in providing assistance through cash grants in emergency situations, distributed through a combination o f local governments and community targeting. The response capability o f c i v i l administrations has markedly improved, and government campaigns to educate households o n food and water safety precautions during floods and cyclones have proved effective. In addition, the state has made space for and forged partnerships with NGOs to deliver public services, and these organizations play a major role in disaster prevention, recovery, and relief, enabling governments to respond promptly to disasters.

59. Bangladesh i s inherently vulnerable to flooding in the wet season, which i s far f rom over. There i s the r i s k o f repeated flooding in 2007-as was the case in 1954 and 1955 and again in 1987 and 1988--even i f there i s n o further heavy rainfall. Floodwaters could come f rom heavy rains in Nepal and India. Monsoon i s s t i l l active over the Ganges-Brahmaputra-Meghna basins (both the Indian part and Bangladesh). The Brahmaputra-Jamuna has started rising rapidly afresh. Meteorological Departments o f Bangladesh and India forecast heavy to very heavy rainfall over the country and sub-Himalayan areas in the coming weeks, and that rainfall ultimately drains through Bangladesh. Whi le the proposed Credit does not address these risks, the multipronged strategy o f which it i s a part will a im at assisting the long-term mitigation o f f lood damage. In addition, the Wor ld Bank, ADB, W A C , other specialized UN agencies, and several donor countries are also providing more medium term support to further strengthen the government’s capacity to respond and mitigate future flood damage.15

60. The polit ical situation continues to remain fluid in the country. In late August, an incident at Dhaka University (which started over a trivial incident at a soccer match) triggered protests at a number o f universities throughout Bangladesh and spilled into the streets in some locations. These protests were seen as the most serious threat yet to polit ical stability since the current CTG took office, with calls f rom some for an end to the emergency rule. Whi le the CTG controlled the l a w and order situation quickly by imposing a curfew in several cities, there continues to be a risk o f such outbursts. Any prolonged period o f protests may change government priorities quickly and as a result the economic reform program may suffer. The proposed operation i s assisting the country to manage the economic and social problems created by the ongoing floods.

The proposed Water Management Improvement Project o f the World Bank has a component for medium t e r m water management and early warning that would further contribute to government’s technical capacity for reducing flood damages.

15

23

Annex 1

ME R O W 3. Zoelfick President International Devcfqment Associakion Washington DC 20433 WSA

Dear MT. Zoellick,

Please allow rnc to congmulau: you on pur assumption of the high o f k c of the President of the WorM Bank. I trust that under your able loridership the World Bank will k able to reach new threeholds of czKtperation between the Bank and its tncmbcr countries, I mst Banglad& will continue to got active su;upport and coopmiion from the Bank in years to come.

Since January 2003, B w a h ftas gone through several difficult phascs. She latest king the floods which hit Bangladesh in July-August causing serious damages 10 fives. livelihood and propr&y. With help and cooperation of all sections o f sscicty, wt‘ are dealing with this problem in m earnest manner. I am very pleased to know that tho Warld Bank, one o f our most important development partners, has also decided 10 contribute to this effort in t i i s how of need.

Bangladesh has made consistent p r o p 5 5 in its social indicators, including thosu on education, health and gender parity, and the percentage of Bangladesh’s population living in poverty has fallen by 9 pmcmtage points between 2000 and 2005. In this contcxt, Xct me reaffirm the CaretakErt Gcivemmcnt’s (CTG) ongoing commitment la the Povaty Reduction Strategy, “Bangladwh: Wnloccking the Potential”.

Core Governance Refmns

The CTC is alsv committed to cansalidatling the policy and inatirutionol wfurnir in Bangladesh that have been supported by the World Bank with a view lo improving the govcmancc. The Election Commission. Anti-Conuption Comission and Public Sew icc Commission itre operating under ~IEW leadership in a neutral and indcpcndmt rnanncl-. The legal s t q s for the separation of thc judiciary fmrn thc executive have bcon completed, and thc proem ofrrxmiting new judicial officers is undcr way,

On July 15, the Election Cornmissjon (EC) released an clcction road map, aiith uary 2W8 and the nalional local government elections scheduled to commence in

24

Annex I

parliamentary eiectiod scheduled before the end of 2008. Thc pmcms of preparing thc digitized voter list commmd st month ago and is pmgxssing at P satisfactory pice dwpitc the floods. The EC has also sdxduled a series of consultations on clectcrral reforms with the main politid parties Irom S q t e m k r 12,2007. The CTG is dacrmind to lend unqrralified support to the Election Cornmid its efforts to hold the e l e c h s Bs schaduiad.

Maemcmomic Stability

Floods fhis year far excemhd normal Flooding both in tcms of h e extent of inundation and duration. I t has claimed mom thm 600 lives and forced the cvacuarion ul" millions of popfe. The Ministry of Pfanning i s cumtfy working on a comprehensive dmage and need aswssmtnt, which i s expected to be compietod by end-September. We do not mvisage any long-term impact atl growth and macroeconomic stabilily. In fact, we stili expect economic growth to be at least the m e as in FWT, which was 6.5 perccnt. However, with the high pre-flbdd inflation, the inflationary pressurut may increw further, albeit tmpoSarily, which would expose rtrc extreme poor to more hardships. Tbrc may also be some pressure on Ihe bdance vf payments duc to flood induced imports and fiscal deficit is Ikely to increase well-above our initial projccmns for FYO8.

The mwt immediate conccm is inflation, which increucd to I O , ] percent In July, driven entirely by continued increast: in food prices, dce and wheat in particular. Stabilizing rice and wheat prices will contribute significsntly lo taming inflation, The governeat has taken several steps to msum adequate supply of these two items keeping in mind the rise in demand during the fortfhcoming Ramadan, These include cmcrgmcy import to increase the stock o f fwd gains in the Pubfic Food Distribution System (PFJXj, mcouraging private import of Food grains and ensuring adequate supply of agricultural inputs for &e late h a n and subsequent Born crops. The government has also a u ~ r n ~ ~ ~ cash transfers through various safety net programs to help the poor cope with she floods and inflation. k t but not the least, B ~ ~ l ~ d ~ h Bank's monetary policy will m a i n cautious and restrained in ordcr to cower inflationary pressures.

t i s beginning to yield rcsults

As part of our strategy to cape with the floods, we we using our regular operdtton and maintenance budget to meet tRc immediate relief and r ~ ~ ~ b i ~ i ~ ~ i ~ n tiwds. Replmishments of funds diverted from the Operation & Maintenance (O&M) budget would be critical for ensuring that the programmed rcgu?ular operation and maintenance work in mads, public wotkq agriculture, education and health in F Y O 8 do not get derailed-which will have cansequenccs for service delivery while at the Sanie timc

Page 2 of Q

25

Annex 1

~~~~~n~ a prudent budgetmy framework, The Government would thwcfon: highly appreciate I quick disbursing budget support for urgent post-flood rehabilitarion. This will hclp avoid rccortrse to m m w s that would uradmine fiscal ility and exacerbate infli\tio~lary prr?ssures,

The b n o m k Reform Prqgnrm

Notwithstanding severel external and intmal Bh&sr the CTG has moved ahead with implementing major structud md institutional refoms to support vibrant private sector growth and poverty reduction. Theso reforms cover, among others, taxihon and public cxpmditun; trade; the financial sector; the energy smtor; state owncd mtelprisics; and telccommunications.

The following lists some key wfonn %dons by sectors that are in the process of k i n g implmented:

a a a *

Further review of exigtiaY nominal protection rate. A detailed review of tax le@lat5on, with assistance from the Fund. Combining the two Large Taxpayers' Unit. Separation of tax policy fram tax adminimtion.

* Time-bound and phased implementstion of the Public Financial Manapael~t Improvement Plan, Piloting e-Cavemmmr procuremmnt system at Central Procurement 'Tcehnical Unit ( CP'J'U) and m e key agenciw such a Local Government Enginctying Department (LGED), Raads & Highways Department I RHIS). Rural Etcctrificafion &rard (REB), Bangladesh Watw Developrncnt Board (BWDB).

0 Privatization of Agrani Bank . Kevamp~~g the boards o f the corporatized NCBs based strictly on the "fit and proper" criteria of Bangladesh Bank.

26

Annex 1

Corporatization of Bangldesh Binam. Refom of SOE o om in tho jute sector.

* Enhancing effrcimy of sea porn by involving privatd stxtor in various &ag~s a€ opmation.

0 Completion of Gmaatian Finaxhg Strategy. Enabling priwrte investmeat in powcr gencltarion through a fair, transparent. and competitive bidding p m s , adhering to least cost principles. Review of administered prices of power, gas and pvolelun sector pnxlucls for making the mtevmt SOEs financially viabb.

Despitu domestic constraint$ and the unfavarablt impact of high and rising global commodity prices, Bangladesh is moving ahcd with the impkmcntation of a broad range of poficies to enhance growth and reduce poverty. Support frani our devdopment pmcm including &he World Bank, has facilitated this process, Floorls have crealcd both financial and ~ ~ i n i ~ t j v ~ pressure on the Gavcmmenl. hut It is not going to dent the CTG’s d&ermina&ion to putsue reforms for the benefit of all our people. We are working with the Wortd Bank on a Transitional Support edit alhich, we believe, will erahanstnec our ability to spccdify move the rcfom agenda furward before handing over power to m elected Government before the cnd of 2OO8

Page 4 of4

27

Annex 2

IMF Executive Board Concludes 2007 Article IV Consultation with Bangladesh

Public Information Notice (PIN) No. 07/75 June 29,2007

On June 22,2007, the Executive Board o f the International Monetary Fund (IMF) concluded the Article N consultation with Bangladesh.16

Background Bangladesh's growth outlook and external position remain robust, but inflation has picked up. The economy continued to grow at over 6% percent in the fiscal year ending June 2006 (FY06) spurred by strong exports and investment. GDP growth i s expected to continue at around 6% percent in FY07 despite some supply-related disruptions, with lower agricultural growth offset by strong manufacturing and service activities. Inflation has recently picked up to over 7 percent reflecting increases in both food and nonfood prices.

The exchange rate has been relatively stable and international reserves have increased throughout the period o f polit ical upheaval. Reserves have reached beyond US$4 bi l l ion (approaching three months o f imports) on the back o f continued strong remittances and exports, which are growing at 25 and 21 percent, respectively.

Overall macroeconomic stability has been maintained, but fiscal performance continues to suffer f rom structural weaknesses. Revenue performance has consistently been below budget targets. In addition, spending accelerated early in FY07 causing a surge in domestic financing o f the government whi le delays in external disbursements further aggravated the situation. T h i s forced expenditure cuts later in the year to contain the overall deficit and domestic financing. As a result, development expenditure was significantly underexecuted.

The growth in monetary and credit aggregates increased considerably in FY07. Broad money growth reached a high o f 22 percent in December and private credit growth has been close to 20 percent for much o f the year. Reflecting better control o f government finances since January

~~

l6 Under Art icle IV o f the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views o f Executive Directors, and th is summary i s transmitted to the country's authorities.

28

Annex 2

2007, the growth in monetary aggregates has declined somewhat, but s t i l l remains above targeted levels. With ample liquidity, bank lending and deposit interest rates have seen only modest increases.

Petroleum prices have not kept pace with international prices leading to a deterioration o f finances o f state-owned enterprises. After the April fuel price adjustments, domestic prices o f diesel and kerosene are around 80percent o f their breakeven level and below prices in neighboring countries. The losses accumulated in the past have been financed through loans from the nationalized commercial banks, and about two-thirds o f these loans are overdue contributing to the weak financial health o f these banks.

The Bangladesh Bank has further advanced reforms aimed at deepening financial markets. The regulatory framework has been strengthened, off-site and on-site supervision has been enhanced and steps taken to restructure, corporatize, and privatize the large nationalized commercial banks. These reforms have contributed to reducing the share o f the large nationalized banks and strengthening the banking system. However, interest rate spreads are high and point to inefficiencies in the domestic banking system that detract fi-om efficient financial intermediation.

The current transitional government has moved to address several areas where reforms had stalled. These include adjustments in fuel and electricity prices, introduction o f a Financial Intelligence Unit, reconstituting the Anti-Corruption Commission, and separating the judiciary f rom the executive branch.

Executive Board Assessment Executive Directors welcomed that macroeconomic stability with strong growth has been maintained for several years, and that most o f the objectives o f the Poverty Reduction and Growth Facility-supported program were achieved. Inflation was largely contained, poverty has been reduced, and good progress has been made toward achieving the Mi l lennium Development Goals. The shift to a flexible exchange rate strengthened the external sector, helping to support double-digit growth in exports and remittances and a significant improvement in international reserves. Although fiscal discipline was maintained, revenues fel l short. Looking forward, growth i s expected to remain healthy, underpinned by buoyant exports, strong remittance flows, and continued reform efforts. At the same time, weak revenue collections, poor infrastructure, l o w s k i l l levels, and governance issues remain important impediments to sustained growth and further poverty reduction.

Directors observed that revenue collections are insufficient to meet development needs or to support the desired reductions in.tariffs and supplementary duties. They called for a fundamental reform o f the tax system by broadening the tax base, separating the responsibility for tax pol icy and collection, simplifying VAT and income tax legislation, and consolidating and strengthening the institutional structure o f tax administration. Directors welcomed the recent steps to consolidate import taxes, but observed that the rate o f effective protection remains high.

Directors welcomed the planned reforms in the area o f public financial management and the adoption by major ministries o f the medium-term budget framework, but drew attention to the underexecution o f development spending. They hoped that the adoption o f a regulatory framework for the Public Procurement A c t would raise the efficiency o f project implementation.

29

Annex 2

Directors supported the authorities' efforts to stem state-owned enterprise losses and ease infrastructure bottlenecks. They welcomed the fuel price adjustments by the state-owned petroleum company, but called for more timely adjustments through an automatic pricing formula. Directors recommended adjusting the price o f domestically produced natural gas to encourage efficient gas usage and raise government revenue.

Directors commended the authorities for their progress in strengthening central bank operations and improving the institutional fkamework for monetary policy, and the steps taken to develop a secondary market for government securities. They recommended further monetary tightening in the face o f strong inflows and higher inflation, and with money and credit aggregates above targeted levels. The recent pickup in inflation could become entrenched in the absence o f corrective policies.

Directors considered that the flexible exchange rate regime has helped maintain competitiveness, and remains appropriate. With reserves n o w at a more comfortable level, exchange market intervention should be confined to alleviating disorderly conditions, and thus allowing greater f lexibil i ty in the nominal rate to support stabilization objectives. Directors urged the authorities to remove the remaining exchange restriction o n the transferability o f funds in nonresident taka accounts.

Directors commended the authorities for improving financial sector surveillance, and recommended that they build o n recent financial sector reforms. They welcomed the corporatization o f the remaining state-owned banks, hoped for a successful privatization o f Rupali Bank, and encouraged the authorities to prepare the other state banks for eventual divestment. Directors called on the authorities to bring banking sector prudential guidelines more in l ine with international standards and strengthen monitoring, particularly in the context o f rapid credit growth. Directors commended the authorities for implementing many o f the recommendations o f the 2003 Financial Sector Assessment Program (FSAP), and welcomed the authorities' request for an FSAP update.

Directors supported the recent reforms to promote transparency, good governance in public administration, fair elections, and the prevention o f money laundering and terrorist financing. These reforms, i f sustained, wil l improve overall efficiency and boost the investment climate.

Directors noted that data are broadly adequate for surveillance purposes, but called for continued efforts to improve data quality, including banking soundness indicators, and national accounts, fiscal and debt statistics.

Directors looked forward to continued close cooperation and dialogue between the authorities and the s ta f f in support o f Bangladesh's reform objectives, possibly in the context o f a Fund- supported program.

IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772

30

Annex 2

Bangladesh: Key Economic Indicators, FY03-07 1/

National income and prices (percent change) Real GDP GDP deflator CPI inflation (annual average) 2/

Central government operations (percent o f GDP) Total revenue Tax Nontax

Total expenditure Current expenditure Ofwhich: Interest payments Of which: Subsidies Annual Development Program Other expenditures 31

Overall balance (excluding grants) 4/ Primary balance 4/ Financing (net) Domestic 4/ 5/ External

Total central government debt (percent o f GDP)

Money and credit (end o f fiscal year; percent change) Net domestic assets Credit to private sector Broad money (M2)

Balance o f payments (in billions o f US. dollars) 6/ Exports, f.0.b. (Annual percent change) Imports, f.0.b. (Annual percent change) Current account (Percent o f GDP)

Gross official reserves (in billions o f U.S. dollars) In months o f imports o f goods and nonfactor services

FY03

5.3 4.5 4.4

10.3 8.3 2.0

13.7 8.1 1.9 2.3 5.4 0.1

-3.4 -1.5 3.4 1.2 2.1

51.1

12.2 12.6 15.6

6.5 9.5

-8.7 13.1 0.2 0.3

2.5 2.9

FY04

6.3 4.2 5.8

10.2 8.2 1.9

13.3 7.8 1.6 2.4 5.0 0.5

-3.1 -1.4 3.1 1.8 1.3

51.0

13.5 17.5 13.8

7.5 15.9 -9.8 13.0 0.2 0.3

2.7 2.8

Memorandum item: Nominal GDP (in billions o f taka) 3,006 3,330

FY05

6.0 5.1 6.5

10.5 8.5 2.0

13.8 8.4 1.7 2.8 5.0 0.4

-3.3 -1.7 3.3 1.7 1.6

50.1

17.1 17.0 16.7

8.6 14.0

-1 1.9 20.6 -0.6 -0.9

2.9 2.5

3,707

FY06

6.6 5.2 7.2

10.7 8.5 2.2

13.9 8.4 1.8 2.6 4.7 0.8

-3.2 -1.4 3.2 2.1 1.2

49.3

19.6 18.3 19.3

10.4 21.6

-13.3 12.1 0.6 0.9

3.5 2.7

FY07 Proj .

6.7 6.3 7.2

10.4 8.3 2.1

14.0 9.0 1.9 3.0 4.3 0.7

-3.5 -1.6 3.5 2.3 1.2

46.9

13.4 15.1 17.5

12.5 19.9

-16.0 20.0 0.5 0.8

5.0 3.2

4,157 4,715

Sources: Data provided by the Bangladesh authorities; and Fund staff estimates and projections. I/ Fiscal year begins July 1. 2/ CPI uses FY96 weights. 3/ Consists o f other capital, net lending, food account balances, check float and discrepancy. 4/ Includes assumption o f BPC liabilities o f 1.6 percent o f GDP in FY08. 5/ Includes estimated privatization receipts o f 0.5 percent o f GDP in FY07. 6/ Balance o f payments i s presented on the basis o f BPMS.

31

Annex 3

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure Generat gov't final consumption expenditure Imports of goods and services

Manufactunng

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufactunng

1986 1996 2005 2006

31 9 257 20 z 19 5

140 154 16 5 17 2 465 495 526 524

858 a32 764 76 1 4 3 4 4 5 5 5 6

122 187 230 244

21 5 249 272 2a i

1986-96 199606 2005 2006

2 3 3 6 2 2 4 5 6 5 7 0 8 3 9 6 6 7 6 3 8 2 104 3 8 5 5 6 4 6 5

3 2 3 6 5 1 6 0 4 0 8 3 7 8 7 9 6 7 8 6 10 7 8 0 7 5 5 8 19 1 14 1

1 Growth of capital and GDP (%) 115 T

1 i10

' Growth of exports and imports (%)

BOO~~S -Ol l rngor ts

Note 2006 data are preliminary estimates Group data are €or 2005

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

32

Annex 3

Bangladesh

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer pnces Implicit GDP deflator

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

TRADE

(US$ mdhonsj Total exports (fob)

Raw lute Leather and leather products Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100j Terms of trade (2000=100j

BALANCE of PAYMENTS

(US$ mdhonsj Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold /US$ milhonsj Conversion rate (DK, loca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millionsj Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments

1986

8.0

9.5 4.1

-3.1

1986

81 9 124 61

486 2,364

356 342

1,003

46 48 96

1986

1,043 2,587

-1,544

-1 26 586

-1,084

1,212 -1 28

29.9

1986

8,062 61

2,450

448 5

28

553 843 55 2 0

383 337

8 330 25

1996

6.7 4.2

9.0 2.2

-4.5

1996

3,884 91

241 3,205 6,947

570 274

1,918

85 79

108

1996

4,437 7,604

-3,167

55 1,821

-1,291

274 1,017

1,878 40 9

1996

15,341 46

5,713

672 8

92

596 548 -30 14

-117

168 279 54

225 45

2005

6.5 5.1

10 5 2 1

-3 8

2005

8,573 96

22 1 7,819

11,870 1,607 1,602 1,794

119 134 89

2005

9,750 13,917 4,167

-680 4,290

-557

624 -67

2,929 61 8

2004

20,129 0

8,895

671 8

208

822 557 -1 6 449

4

707 61 5 148 467

68

2006

7.0 5.2

10.7 2.2

-3.3

2006

10,422 117 269

9,506 13,301 1,801 1,795 2,010

122 141 87

2006

11,718 15,707 -3,989

-786 5,347

572

-207 -365

3,488 67.2

2005

18,935 0

8,688

791 0

223

671 339

-9 802

1

500 547 153 394 70

Export and import levels (US$ mill.) E

6 OW 4 000

l o

i 00 01 02 03 04 05

€2 Exports S Imports I

~ Current account balance to GDP (x)

I’T ~ Current account balance to GDP (x)

1 Composition of 2005 debt (US$ mill.)

i I F 528

B 8,688

c 308

A - IBRD B . IDA D - Other mullilateral F ~ Private

E - Bilateral

G - Short-term j C - IMF

Net transfers 305 180 399 325

33

Statistical Annex

~ ~ 0 ~ y 0 0 0 ~ y 0 0 0 " 0 0 0 0 " 0 0 w 0 0 r 4 0 0 0 0 0 0 0 0 0 0 0 0 ~ z 8 0 * 0 N 0 0 0 0 - 0 m 0 m m 0 0 0 - 0 0 w 0 0 e m 0 0 0 0 0 0 0 0 0 m 0 oltl

t < f

I f

<

i

t

z I <

c

c

e 3

P

e

.r m

E a

e .- E a -

Table 2: Bang1 Description

Growth Rates (YO) GDP Growth GDP Growth Per Capita Per Capita GDP Atlas Method (US$ ) Per Capita GDP Growth Atlas Method (US$ )

Saving & Investment (YO o f GDP) Gross Domestic Saving Gross National Saving Private Investment Public Investment

Central Govt. Budget (YO of GDP) Total Revenue Total Expenditure Overall Budget Deficit

Balance of Payments (YO of GDP) Trade Exports (f.0.b.) Imports (f.0.b.) Services & Income (net) Current Transfers Current Account Balance ( including transfers)

External Indicators External Debt (US$ bill) Ext. Debt as YO of GDP BB Gross Reserves (US$ bill) (end of period) BB Gross Reserves (in months o f imports) External Debt Service Ratio (YO of total foreign exchange earnings)*

Money and Credit M 2 Growth (%, year on year) Net Domestic Asset Growth (%, year on year) Ratio of Private Sector Credit to GDP (%)

Exchange Rate Nominal Period Average (TKLJSS) Nominal End of Period (TKiUS$) Real Effective Exchange Rate Index

Rate of Inflation (YO) (year on year)** Total Public Debt (YO of GDP)

Memorandum Items GDP at Current. Prices (Taka bill) GDP at Current. Prices Atlas Method (US$ bill) Population (mill.) Population growth Rate Source: Bangladesh Economic Review 2005 b. 296): i~

4.4 2.5

386.9 4.3

18.2 23.4 16.8 6.4

10.1 14.8 4.7

33.3 14.3 19.0 -1.7 6.0 0.3

16.3 34.4 1.6 2.1

6.3

13.1 11.9 24.7

57.4 57.9 101.5

2.8 52.9

2732.0 51.1 131.6 1.9

istry of F:

conomic FY03

5.3 4.0

395.1 2.1

18.6 24.9 17.2 6.2

10.3 13.7 3.4

34.2 14.2 20.0 -2.2 6.5 0.3

17.4 31.9 2.5 2.9

5.8

15.6 12.2 25.8

57.9 58.5 97.0

4.4 51.1

3005.8 53.0 133.4

1.4 nce.

dicators FY04

6.3 4.9

418.0 5.8

19.5 25.4 17.8 6.2

10.2 13.3 3.1

36.3 15.5 20.8 -2.2 6.6 0.3

18.5 29.5 2.7 2.8

4.9

13.8 13.5 28.4

58.9 60.4 93.4

5.8 51.0

3329.7 56.9 135.2 1.3

N O 5

6.0 4.6

446.4 6.8

20.0 25.8 18.3 6.2

10.5 13.8 3.3

39.7 16.6 23.1 -2.4 7.0 -0.9

18.8 29.3 2.9 2.5

4.5

16.7 17.1 29.9

61.5 63.7 91.7

6.5 50.1

3707.1 61.7 137.0 1.3

FY06

6.7 5.4

469.1 5.1

20.2 27.7 18.7 6.0

10.7 13.9 3.2

36.1 15.8 20.2 -2.6 8.3 1.3

19.4 28.6 3.5 2.7

4.1

19.3 19.6 31.5

66.5 69.7 86.9

7.2 49.3

4161.5 65.8 138.8 1.3

N O 7 (P)

6.5 5.2

487.7 4.0

20.5 29.2 18.7 5.6

10.5 14.1 3.6

39.7 17.4 22.4 -3.1 9.4 1.4

19.8 29.0 5.0 3.2

3.7

17.0 12.6 32.3

69.1 68.8 84.6

7.2 46.9

4675.0 69.4 140.6 1.3

L

Note: * Total foreign exchange earnings include commodity earnings, workers' remittances, and invisible receipts. ** CPI was rebased from FY98 using FY96 weights. P = Provisional. The Atlas Method was not used for calculating average per capita GDP and GDP at current market prices in the 1980s, in FY04 and FY05.

36

Output and Prices Real GDP Growth CPI

External Outlook Exports (f.0.b) (billion $)

Annual % Change Imports (c.i.0 (billion $)

Annual % Change Current Account Balance

Gross Official Reserves

In months o f GNFS

(% o f GDP)

(billion $)

imports Public Finance

Total Revenue Total Expenditures Overall Balance

(excluding grants) Domestic Financing" Public Debt

Money and Credit Net Domestic Assets Private Sector

Broad Money (M2) Source: IMF & GOB.

Actual N O 2 I FY03 I FY04 I FY05 I FY06

Provisional Projections N O 7 N O 8 I FY09 I FYlO

4.4 2.8 - 5.9 -7.6 7.7 -8.7 0.3

1.6

2.1

5.3 6.3 6.0 6.6 6.5 6.7 7.0 7.0 4.4 5.8 6.5 7.2 7.2 6.5 5.0 4.0

6.5 9.5 8.7 13.1 0.3

2.5

2.9

10.1 14.8 -4.7

2.5 52.9

7.5 15.9 9.8 13.0 0.3

2.7

2.8

10.3 10.2 10.5 10.7 10.5 10.7 11.1 11.5 13.7 13.3 13.8 13.9 14.1 15.9 14.3 14.8 -3.4 -3.1 -3.3 -3.2 -3.6 -5.2

-3.3 -3.3 3.7 1.7 1.6 1.2 1.8 1.7 2.1 2.3

51.1 51.0 50.1 49.3 46.9 46.4 44.6 43.1

8.6 14.0 11.9 20.6 -0.9

2.9

2.5

11.9 13.9 13.1

10.4 21.5 13.3 12.1 1.3

3.5

2.7

12.2 13.5 17.1 19.6 12.6 14.2 16.0 14.2 12.6 17.5 17.0 18.3 15.1 14.5 14.3 13.5 15.6 13.8 16.7 19.3 17.0 15.0 17.7 15.7

12.1 15.8 15.5 16.6 1.4

5.0

3.2

Percent o f GDP

15.0 24.5 19.3 24.4 0.3

5.7

3.0

17.1 14.0 21.8 13.0

-0.2

6.9

3.2

19.5 14.0 24.4 11.9

-0.5

8.1

3.4

a. includes estimated privatization receipts o f 0.5 percent o f GDP in FY07.

37

Table 4: Total Expenditure by FunctionMinistry (percentage of GDP)

FYO8 Ministryrnivision FY02 FY03 FY04 FY05 FY06 FY07@ (B)

General Administration General Public Services (GPS) Defense Public Order and Safety (POS)

Social Services Education Health Social Security and Welfare (SSW) Recreation, Culture, and Religious Affairs

( R C W

Economic Services Agriculture, Fisheries, and Livestock

Mining, Manufacturing, and Construction

Rural Development & Cooperative

Ministry o f Chittagong Hill Tracts Affairs

Ministry o f Commerce, Labour &

(ML)

(MMC)

Division (RDC)

(CHTs)

Employment (CLE)

Infrastructure Services Ministry o f Science & Technology (ST) Fuel and Energy (FE) Transport and Communication (TC) Housing and Community Services (HCS)

In terest

3.3 1.4 1.2 0.7

3.9 2.2 1 .o 0.6

0.2

1.2

1 .o

0.1

0.1

0.1

0.1

4.2 0.0 0.9 1.9 1.4 0.0 1.7

3.3 1.5 1.1 0.7

3.9 2.2 0.9 0.6

0.2

1.1

0.9

0.1

0.1

0.1

0.1

4.1 0.1 1 .o 1.8 1.3 0.0 1.9

3.4 1.5 1.1 0.7

3.8 2.0 1 .o 0.6

0.2

2.5

0.9

0.1

1.4

0.1

0.0

3.1 0.0 1.2 1.7 0.2 0.0 1.8

3.5 1.6 1.1 0.8

3.6 1.9 0.9 0.7

0.2

2.9

1.2

0.1

1.4

0.1

0.0

3.2 0.0 1.2 1.8 0.2 0.0 1.8

3.3 1.3 1.1 0.8

4.1 2.2 1 .o 0.7

0.2

2.8

1.1

0.1

1.5

0.1

0.1

2.6 0.0 0.9 1.5 0.2 0.0 1.8

3.4 1.3 1.2 0.9

4.1 2.3 1.1 0.6

0.2

2.8

1.1

0.0

1.5

0.1

0.1

2.1 0.0 0.6 1.3 0.1 0.0 2.0

3.7 1.8 1 .o 0.9

4.2 2.3 1 .o 0.7

0.2

2.8

1.3

0.1

1.3

0.1

0.1

2.3 0.0 0.9 1.3 0.1 0.0 2.0

Total 14.4 14.3 14.5 15.0 14.5 14.4 15.1 Source: Ministry of Finance.

R-evised; B= budgeted.

38

Privatization Receipts

Total Central Government Debt

39

0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.0

52.9 51.1 51.0 50.1 49.3 46.9 46.4 44.6 43.1

Table 7: Bangladesh Social Indicators Same RegiodIncome

Latest Single Year Group I

South Low- 2003-04 2004-05 Asia Income 1991-92 1995-96 1999-2000 2002-03 a

Population Total population end o f the year (millions) 113.3 122.1 129.8 133.4 135.2 137.0 1425.0 2312.0

Growth rate (% annual average for period) 2.1 1.8 1.4 1.4 1.3 1.3 1.8 1.9 Urban population (% ofpopulation) 18.0 19.0 25.0 27.0 ... 28.0 30.0 Total fertility rate (births per woman) 4.2 3.4 3.1 2.9 3.0 3.1 3.7

(99 ofpopulation) National headcount index 42.7 34.4 33.7 ... 25.1 ... ...

Urban headcount index 23.3 13.7 19.1 ... 14.6 ... ... Rural headcount index 46.0 38.5 37.4 ... 28.6 ... ...

GNI per capita (uS$)at constant prices 283.0 343.5 381.0 400.0 420.0 440.0 510.0 440.0 Consumer price index (1995/96=100) 100.0 124.3 136.0 143.9 153.2 136.0 142.0 Food price index (1 995/96=100) 100.0 128.5 137.0 146.5 158.1 ... ... IncomeKonsumption Distribution Gini co-efficient 0.4 0.4 0.5 ... 0.5 ... ... Lowest quintile (% of income or

Highest quintile (% of income or

Public Expenditures

consumption) 6.5 5.7 6.2 ... 5.3 ... ... consumption) 44.8 50.1 52.0 ... 52.7 ... ...

Health (9A of GDP) 0.6 0.7 1 .o 1 .o 1 .o 1.9 0.9 1.2 Education (99 of GDP) 1.7 2.1 2.2 2.2 2.1 0.9 3.1 3.3

GDP) ... ... 1.0 0.6 0.6 0.7 ... ... Social security and welfare (% of

Gross Primary School Enrollment

(% of age group) Total 76.0 95.0 96.6 97.3 97.0 97.0 95.0

Male ... 97.0 97.0 97.0 97.0 108.0 103.0 Female 70.0 93.0 97.0 98.0 98.0 89.0 87.0

Access to an ImDroved Water

(% ofpopulation) Total

Urban ... ...

97.0 97.0 ... ...

97.0 84.0 76.0 I ... 92.0 88.0

(% under 12 months)’ Measles 68.0 69.0 71.0 76.0 75.7 77.0 63.0 64.0 DPT ... 77.0 ... 83.0 87.0 75.0 70.0

Child malnutrition (% of under 5

Life Expectancy at Birth (years) Total 56.3 58.9 61.5 62.1 65.1 63.0 59.0

Male 55.0 57.0 61.0 ... 64.4 62.0 58.0 Female 56.0 59.0 62.0 ... 65.7 63.0 60.0

years) 73.0 66.0 49.1 48.0 47.5 47.0 ...

Mortality Infant (per I, 000 live births) 88.0 77.0 ... 66.7 65.0 56.0 74.0 77.0 Under 5 (per 1,000 live births) ... 112.0 ... 84.6 88.0 77.0 99.0 116.0

Male (per 1,000population) ... ... 278.0 262.0 ... ... Female (per 1 OOOpopulation) ... ... 272.0 252.0 ... ... Maternal (per 100,000 live births) 4.7 4.4 ... 3.2 3.2 300.0 ... ...

Adult (15-69)

Births attended by skilled health staff 7.0 ... 14.0 11.6 13.0 13.0 ... ...

Source: Unlocking the Potential-Poverty Reduction Strategy Paper (GOB) ,Bangladesh Bureau o f Statistics and World Bank. a. Some data correspond to 2000-01 and 2001-02. b. The immunization rates in 2003/04 are for children 12-23 months old.

. 41

Table 8: Bangladesh: Key Exposure Indicators fin U S $ mil l ion unless ot

rota1 Debt Outstanding and lisbursed (TDO)

Vet Disbursements

rota1 Debt Service (TDS)a

Debt and Debt Service Indicators (?!)

TDO/GDP TDS/XGS ConcessionaYTDO

TDO/XGS~

IBRD Exposure Indicators (%)

IBRD DSPublic DS Preferred Creditor

IBRD DS/XGS IBRD TDOd (USJmill) Share o f IBRD portfolio

DSPublic DSC

IDA T D O ~ (us$miii)

IFC Loans Equity and Quasi-equitye

MIGA MIGA Guarantees

a. Includes Dublic and oubliclv auaranti

Ac 2002

17,061.0 - 217.0

727.0

182.6 35.9 7.8 92.8

0.9

55.2

0.1 13.0 0.0

7,063.0

88.0 13.0

64.0 debt, Driva

al 2003

18,778.0

337.0

672.0

178.8 36.2 6.4 93.2

1.1

63.9

0.1 7.0 0.0

8,062.0

94.0 13.0

61.0 ionauaranti

m i s e stated) Esti

2004

19,321.0

543.0

958.0

162.6 34.0 8.1 ...

0.8

39.5

0.1 0.0 0.0

8,208.0

116.0 12.0

46.0 , use of IM

b. “XGS” denotes exports of goods and services,.including workers’ remittances.

ate 2005

20,364.0

1,010.0

1,018.0

160.9 33.5 8.0 ...

0.0

41.7

0.0 0.0 0.0

8,805.0

98.0 12.0

...

Pro1 2006

21,379.0

1,0 15.0

1,039.0

161.1 34.0 7.8 ...

0.0

45.0

0.0 0.0 0.0

9,480.0

...

...

... redits and net short-term c

tion 2007

22,354.0

975.0

1,107.0

158.9 33.3 7.9 ...

0.0

48.6

0.0 0.0 0.0

10,099 .o

... 1 . .

... tal.

c. Preferred creditors-are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

42

Table 9: Bangladesh - Progress Toward MDGs

1980 1990 2000' 2002 2004-05d 2015

PRSP MDG targetb target

Poverty Headcount Ratec ... 58.8 49.8 ... 40.8 25.0 29.4 Fertility Rate (children per woman) 5.0 4.3 3 .O 3.0 3 .O Infant Mortality (per 1,000 live births) 101.4 94.0 66.3 53.0 56.0 18.0 31.0

33.4 32.8 19.9 20.1 20.8

10.2 11.3 4.8 5.1 5.7

Crude Birth Rate (per 1,000 population) Crude Death Rate (per 1,000 population) _ .

Life Expectancy (years) 56.9 56.0 60.6 62.0 63.5 73.0 73.0

Gross Secondary Enrollment (%) 18.0 19.0 42.0 52.8 44.0 95.0

Source: Unlocking the Potential-Poverty Reduction Strategy Paper (GOB) ,Bangladesh Bureau o f Statistics. a. Some data are for 1999. b. Based on the progress rate o f 1990-02. c. The poverty headcount rate refers to the upper poverty line. d. 2004 Crude birth rate and crude death rate figures.

Gross Primary Enrollment (%) 61.0 72.0 96.6 86.7 97.0 100.0 100.0

Adult Illiteracy (%) 71.0 65.0 55.0 50.4 41.1 10.0

43

R A J S H A H IR A J S H A H I

D H A K AD H A K A

S Y L H E TS Y L H E T

K H U L N AK H U L N A

B A R I S A LB A R I S A L

C H I T TC H I T T A G O N GA G O N G

PPANCHAGARANCHAGAR

THAKURGAONTHAKURGAONNILPHAMARINILPHAMARI

LALMONIRHA

LALMONIRHATT

DINAJPURDINAJPUR

RANGPURRANGPURKURIGRAMKURIGRAM

GAIBANDHAGAIBANDHA

JOYPURHAJOYPURHATT

NAOGAONNAOGAON

NOWNOWABGANJABGANJ

RAJSHAHIRAJSHAHI

NANATORETORE

BOGRABOGRA

JAMALPURJAMALPUR

SERPURSERPUR

NETROKONANETROKONA

MYMENSINGHMYMENSINGH

TTANGAILANGAILSERAJGANJSERAJGANJ

PPABNAABNA

KUSHTIAKUSHTIA

MEHERPURMEHERPUR

CHUADANGACHUADANGA

JHENAIDAHJHENAIDAH MAGURAMAGURA

RAJBARIRAJBARI

FFARIDPURARIDPUR

MANIKGANJMANIKGANJ

DHAKADHAKA

GAZIPURGAZIPUR

KISHORGANJKISHORGANJHABIGANJHABIGANJ

SUNAMGANJSUNAMGANJ

SYLHETSYLHET

MOULMOULVI BAZARVI BAZAR

BRAHMANBRAHMANBARIABARIA

NARSINGDINARSINGDI

NARANARAYNGANJYNGANJ

MUNSHIGANJMUNSHIGANJ

SARIASARIATPURTPUR CHANDPURCHANDPUR

COMILLACOMILLA

MADARIPURMADARIPURGOPGOPALGANJALGANJ

NARAILNARAILJESSOREJESSORE

SASATKHIRATKHIRA

KHULNAKHULNA

BAGERHABAGERHATT

PEROJPURPEROJPUR

BARISALBARISAL

JHALUKAJHALUKATHITHI

PPAATUAKHALITUAKHALIBHOLABHOLA

BARGUNABARGUNA

LUXMIPURLUXMIPUR

NOAKHALINOAKHALI FENIFENI

KHA

GRA

CH

HA

RI

KHA

GRA

CH

HA

RI

RANGAMARANGAMATITI

CHITTCHITTAGONGAGONG

BANDARBANBANDARBAN

COXCOX’’SSBAZARBAZAR

RangpurRangpur

GaibandhaGaibandha

DinajpurDinajpur

BograBogra

SerajganjSerajganjNatoreNatore

JoypurhatJoypurhat

NaogaonNaogaon

NowabganjNowabganj

JamalpurJamalpurSerpurSerpur

NetrokonaNetrokona

SunamganjSunamganj

PabnaPabna

KushtiaKushtia

RajbariRajbariMeherpurMeherpur

ChuadangaChuadanga

JhenaidahJhenaidahMaguraMagura

NarailNarail

SatkhiraSatkhira

BagerhatBagerhat

PerojpurPerojpur

JhalukathiJhalukathi

GopalganjGopalganj

MadaripurMadaripurSariatpurSariatpur

FaridpurFaridpur

JessoreJessore

NoakhaliNoakhali

KhagrachhariKhagrachhari

PatuakhaliPatuakhali

BholaBhola

BargunaBarguna

ComillaComilla

Moulvi BazarMoulvi Bazar

MymensinghMymensingh

TTangailangail

ManikanjManikanj

RangamatiRangamati

BandarbanBandarban

Cox's BazarCox's Bazar

ThakurgaonThakurgaon

NilphamariNilphamari LalmonirhatLalmonirhat

KurigramKurigram

PanchagarPanchagar

FeniFeni

GazipurGazipurNarsingdiNarsingdi

NaraynganjNaraynganj

MunshiganjMunshiganj

ChandpurChandpur

LuxmipurLuxmipur

BrahmanbariaBrahmanbaria

HabiganjHabiganj

KishorganjKishorganj

RajshahiRajshahi

KhulnaKhulna

SylhetSylhet

BarisalBarisal

ChittagongChittagong

DHAKADHAKA

JJaammuunnaa

GGaannggeess

GGaannggeess

MMeegg

hhnnaa

KarKarnalinaliReserReservoirvoir

GG aa nn gg ee ss DD ee ll tt aa

SS uu nn dd aa rr bb aa nn ss

R A J S H A H I

D H A K A

S Y L H E T

K H U L N A

B A R I S A L

C H I T T A G O N G

PANCHAGAR

THAKURGAONNILPHAMARI

LALMONIRHAT

DINAJPUR

RANGPURKURIGRAM

GAIBANDHA

JOYPURHAT

NAOGAON

NOWABGANJ

RAJSHAHI

NATORE

BOGRA

JAMALPUR

SERPUR

NETROKONA

MYMENSINGH

TANGAILSERAJGANJ

PABNA

KUSHTIA

MEHERPUR

CHUADANGA

JHENAIDAH MAGURA

RAJBARI

FARIDPUR

MANIKGANJ

DHAKA

GAZIPUR

KISHORGANJHABIGANJ

SUNAMGANJ

SYLHET

MOULVI BAZAR

BRAHMANBARIA

NARSINGDI

NARAYNGANJ

MUNSHIGANJ

SARIATPUR CHANDPUR

COMILLA

MADARIPURGOPALGANJ

NARAILJESSORE

SATKHIRA

KHULNA

BAGERHAT

PEROJPUR

BARISAL

JHALUKATHI

PATUAKHALIBHOLA

BARGUNA

LUXMIPUR

NOAKHALI FENI

KHA

GRA

CH

HA

RI

RANGAMATI

CHITTAGONG

BANDARBAN

COX’SBAZAR

Rangpur

Gaibandha

Dinajpur

Bogra

SerajganjNatore

Joypurhat

Naogaon

Nowabganj

JamalpurSerpur

Netrokona

Sunamganj

Pabna

Kushtia

RajbariMeherpur

Chuadanga

JhenaidahMagura

Narail

Satkhira

Bagerhat

Perojpur

Jhalukathi

Gopalganj

MadaripurSariatpur

Faridpur

Jessore

Noakhali

Khagrachhari

Patuakhali

Bhola

Barguna

Comilla

Moulvi Bazar

Mymensingh

Tangail

Manikanj

Rangamati

Bandarban

Cox's Bazar

Thakurgaon

Nilphamari Lalmonirhat

Kurigram

Panchagar

Feni

GazipurNarsingdi

Naraynganj

Munshiganj

Chandpur

Luxmipur

Brahmanbaria

Habiganj

Kishorganj

Rajshahi

Khulna

Sylhet

Barisal

Chittagong

DHAKA

I N D I A

I N D I A

I N D I A

MYANMAR

BHUTAN

Jamuna

Ganges

Ganges

Meg

hna

KarnaliReservoir

B a y o f B e n g a l

M o u t h s o f t h e G a n g e s

To Dispur

To Dispur

To Dispur

To Silchar

To Goalpara

To Patna

To Katihar

To Katihar

To Gangtok

To Sittwe

To Calcutta

To Calcutta

G a n g e s D e l t a

S u n d a r b a n sMt. Mowdok

(957 m)

26°N

25°N

24°N

23°N

22°N

21°N

25°N

24°N

23°N

22°N

21°N

88°E 89°E 90°E 91°E

89°E 90°E 91°E 92°E

92°E

BANGLADESH

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 10 20 30 40

0 10 20 30 40 50 Miles

50 Kilometers

IBRD 33368

SEPTEMBER 2004

BANGLADESHDISTRICT CAPITALS

DIVISION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

DISTRICT BOUNDARIES

DIVISION BOUNDARIES

INTERNATIONAL BOUNDARIES