Report No. 29118-BD Bangladesh Development Forum Economic Update May 26, 2004 Poverty Reduction and Economic Management Sector Unit South Asia Region Document of the World Bank GOVERNMENT FISCAL YEAR July 1-June 30 CURRENTCY EQUIVALENTS Currency Unit = Bangladeshi Taka (Tk.) US$1 =Tk. 59.6(April 14,2004) ABBREVIATIONS ADP Annual Development Program BB Bangladesh Bank BPC Bangladesh Petroleum Corporation CBOs Community-Based Organizations CIU Central Intelligence Unit CPI Consumer Price Index DESA Dhaka Electric Supply Authority DPR Development Policy Review EPZs Export Processing Zones EU European Union FDI Foreign Direct Investment FMW Financial Management Reform Programme GDP Gross Domestic Product GNI Gross National Income HDI Human Development Index HYV High Yielding Variety ICA Investment Climate Assessment IFS International Financial Statistics IMF International Monetary Fund I-PRSP Interim Poverty Reduction Strategy Paper L/C Letter of Credit LIC Low-Income Country LTU Large Taxpayers Unit MDGs Millennium Development Goals MFA Multi-Fiber Arrangement NBR National Board of Revenue NCBs Nationalized Commercial Banks NGO Nongovernmental Organization NSC National Saving Certificate PRSP Poverty Reduction Strategy Paper QR Quantitative Restrictions RMG Ready Made Garments ROSC Report and Observance of Standards and Codes SLR Statutory Liquidity Requirement SOE State-Owned Enterprise TFP Total Factor Productivity VAT Value Added Tax WB World Bank WDI World Development Indicators Country Director: Christine I. Wallich, SACBD SectorDirector: Sadiq Ahmed, SASPR SectorManager: Ijaz Nabi, SASPR TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................................................................................................... i I RECENTECONOMICDEVELOPMENTS . ....................................................................................... 1 Economicgrowth continuesto pick upsteam ................................................................................. 1 Helped by a strong global recoveryand a stable exchangemarket. exportsand remittance inflows continuetheir acceleration .MFA phaseout will be a test for external sustainability 2 ... FY04 budget implementation is behindtarget Additional revenue measureswill be neededto keep it on course during the rest of the year .................................................................................... . Following monetary tightening to support exchange rate float. monetary stance was eased Inflationhascrept mainly due to higher import prices .................................................................. ......34 5 I1 LONG-TERMGROWTHAND POVERTY TRENDS . 6 An Assessment of Growth Trends .................................................................................................... ..................................................................... 6 Growth HasBeen the Key Driver of IncomePoverty Reduction .................................................. 8 Non-incomePoverty ReductionHasBeen Impressive .................................................................... 8 111 THE DEVELOPMENTPOLICY AGENDA . ...................................................................................... Significant DevelopmentChallenges Remain. RecentAchievementNotwithstanding ................99 Government's Strategy: The OngoingPRSPProcessProvidesa Useful Opportunity ..............10 I V .MEDIUM-TERMMACROECONOMIC PROSPECTS ................................................................. 11 V THE LONG-RUNGROWTHAGENDA . Accounting for GDP Growth: primacy of factor productivity over factor accumulation ...................................................................................................16 16 -. ....................... ~ ~~ A CloserLook at the MainStructuralAreas Impacting GrowthinBangladesh 20 AssessingFutureGrowthPotential ................................................................................................ 24 V I .AGENDA FOR HUMANDEVELOPMENT .................................................................................... 26 Addressing Concernsabout the Quality of Education .................................................................. HealthSector . BuildingInstitutions. StrengtheningPublic-Private Partnerships 28 StrengthenSocialSafetyNets ......................................................................................................... ...................27 29 IncreaseDecentralization and Capacity Buildingat the LocalLevel .......................................... 30 Clarify the Roleof NongovernmentalOrganizationsthrough a SoundLegalFramework .......30 ANNEXES ................................................................................................................................................... 31 ACKNOWLEDGMENTS This report was prepared by a team comprising Sandeep Mahajan (task leader), Zahid Hussain, and Zaidi Sattar, all Senior Economists in the Poverty Reduction and Economic Management (PREM) unit of the World Bank's South Asia Region. The team i s grateful to the following World Bank staff for their contributions and comments: Amit Dar, Anthony Bottrill, Forhad Shilpi, Gajanand Pathmanathan, Ijaz Nabi, John Sinclair, and Kapil Kapoor. The report benefited enormously from overall guidance provided throughout the process by Sadiq Ahmed and Christine Wallich. Aneeka Rahman and Nermeen Shams Rouf preparedthe statistical annex. Oxana Bricha and Mehar Akhter Khan providedassistance in assemblingthe report. Brian Pinto was the peer reviewer orthe report. The team gratefully acknowledges the very useful feedback received from the Government and donors. Specific comments were received from H.E. Mr. Dietrich Andreas (Ambassador of the Federal Republic of Germany inBangladesh), Mr.Md. Reazul Islam(DFID), Ms.ShamimHamid(UNDP), andMr.ToruShibuichi(ADB). EXECUTIVE SUMMARY RecentEconomicDevelopments 1. Economic growth continues to pick up steam. Analysts are predicting a slight increase in GDP growth over last year's growth of 5.3 percent based on relatively strong grain harvests, evidence of a pick upin manufacturing sector investment, and robust construction activity. 2. Aided by global economic recovery, export growth remains strong, with woven garment and knitwear exports being the main drivers. Reflecting robust domestic economic activity and increased demand for garment exports, import growth has also been strong. Growth has been strong in most major import categories, including industrial raw materials and capital machinery, which bodes well for investment and growth prospects. Despite a widening of the merchandize trade deficit during the first eight months of this FY relative to the same period of last year, the current account balance was in surplus due to strong remittance inflows. This, reinforced by a smaller capital account deficit, has led to a further build-upinforeign exchange reserves; by mid- April, 2004, forex reservesstood at $2.7 billion, equivalent to animport cover of over 3 months. 3. The forex market has been stable since the taka was floated in end-May 2003. The effective nominal exchange rate has depreciated by 5 percent since the float. The premium on forex in informal markets is currently significantly lower than in the pre-float period despite an initial climb that perhapsreflected market uncertainty over the equilibriumexchange rate. 4. Thefiscal stancefor FY04 remains expansionary but within prudent limits and without strainingfiscal sustainability. The target deficit to GDP ratio of 4.8 percent for FY04 does not seem reachable, but last year's deficit of 3.5 percent of GDP i s likely to be exceeded. The lower deficit reflects primarily the difficulty with carrying out development spending caused by low eap&y a i d pefFdi*- I the Mi t?c"t. Tke-Fe-W concems that the overall FY04 revenue target cannot be met without stepping up the collection effort. The Government has proposeda number of steps to address these concems. 5. The monetary policy stance, tightened considerably last summer to facilitate exchange rate liberalization, is growing increasingly accommodative in recognition of the favorable macro-financial conditions. Despite this shift, banking sector interest rates remain sticky at high levels. A major contributing factor is the administered rates on the National Saving Certificates (NSCs) and postal saving schemes that are set higher than market-basedrates. 6. The inflation rate has crept up, mainly due to higher import prices and energy price adjustments. The target rate of 4.5 percent for the year does not seem attainable and has been revised up to 6 percent based on the current trend. Recent monetary expansion may have also exerted some pressure on inflation. Cognizant of this, the BangladeshBank (BB)i s appropriately intensifying its reverserep0 operations and treasury bills sales to mop upexcess liquidity. Long-TermGrowthandPovertyTrends 7. Per capita GDP growth has been on a rising trend since independence,increasing from an annual average of -0.7 percent duringthe 1970sto 1.1percent during the 1980sand further to 3.0 percent during the 1990s. Average growth during the 1990s compares well relative to other countries, low income countries in particular. In addition, growth has been remarkably steady; the volatility of growth over the last two decades has been among the lowest inthe world. .. 11 BANGLADESH: DEVELOPMENT FORUM ECONOMIC UPDATE 8. Higher growth in the 1990s also translated into sharper declines in income poverty. The poverty rate declined from 59 percent in 1991-92 to about 50 percent in 2000, following virtual stagnation in the mid-1980s. Trends in proxy indicators such as real wages and primary education enrollment rate suggest that the decline in poverty i s likely to have continued in more recent years as well. Equally, if not even more, impressive are Bangladesh's achievements inthe social and human dimensions of poverty: especially the successes in increasing life expectancy, lowering infant mortality and the birth rate, increasing the coverage of immunization, and significantly lowering the gender gap ineducation. Bangladeshachieved faster progress in social indicators than most countries at similar income levels. The Development Policy Agenda 9. Notwithstanding the impressive gains thus far, the magnitude of remaining development challenges is enormous. Poverty remains at unacceptably highlevels and the level of human development is very low (Bangladesh ranks 132 on the HDI index), particularly on account of shortcomings in education and health outcomes. The quality of education i s a major concern as is the lack of access to primary health facilities among the poor. Child malnutrition rates in Bangladeshare among the highest inthe world, while maternal mortality rates are among the highest outside of Sub-Saharan Africa. Despite progress on women empowerment, significant gender disparity persists. Only 44 percent of the rural population has access to reasonable sanitation facilities, and a major development success-the provision of safe water to 97 percent of the population-is facing new challenges in the form of unsafe arsenic levels in groundwater. Bangladesh faces the added challenge of creating remunerative jobs for nearly a million new entrantsjoining the labor force every year, about 80 percent of them inrural areas. 10. The preparation of the Government's Poverty Reduction Strategy Paper (PRSP) provides an unprecedented opportunity to review past performance, identify key obstacles, and prepare plans to overcome them. The interim PRSP (I-PRSP), completed last year, already makes an impressive start in that direction. Bangladesh needs to, and has the potential to, accelerate the pace of poverty reduction. Broadly, this requires the reform agenda to address three main challenges: (i) achieving higher and sustained GDP growth; (ii) consolidating past gains inhuman development; and (iii) addressinggovernancerelatedproblems. Medium-TermMacroeconomic Prospects 11. In June 2003, the Government adopted its first ever medium-term macroeconomic framework, which underpins its poverty reduction strategy and should contribute to high growth and fast-paced poverty reduction. The framework envisages an acceleration in GDP growth from 5.3 percent in FY03 to 6.0 percent in FY06. While feasible, this would need to be strongly supported by an acceleration in the pace of structural reforms to tackle supply-side bottlenecks and continuanceof a stable macroeconomic environment. 12. The path of the fiscal policy in the medium-term framework is consistent with Bangladesh's reform needs and public debt sustainability. Given the significant development spending needs, an extremely low revenue base, and the envisaged reductions in trade taxes, strengthening domestic tax mobilization i s at the core of the medium-term budget strategy. On the expenditure side, the Government proposesto scale up spending inpriority development areas -infrastructureandeducationinparticular. Thesemeasureswouldtemporarilyincreasethefiscal deficit which would be financed entirely by concessional donor support. 13. The monetary policy appears to be on aprudent course. The indicative program agreed with the IMF should allow the BB to rebuild international reserves while accommodating EXECUTIVE SUMMARY ... 111 / required private sector credit growth. To address the problem of high interest rates, the Government has begun reducing the NSC rates to yields on comparable government securities. It also intends to reduce rates on postal saving certificates to bring these in line with the reduced NSC rates. 14. Despite recent deterioration, the public debt stock appears sustainable. External debt obligations are mostly concessional and significantly lower than most comparator countries. The Government has initiated a process of fiscal correction which appears consistent with the requirements of debt sustainability. It is important however that the momentum on fiscal consolidation be maintained and SOE and NCB reforms be steppedup. 15. Bangladesh remains vulnerable to the scheduled phase out of MFA quotas from January 2005. The impact on net export earnings may be contained by the corresponding reduction in RMG related imports, but the overall adverse impact on output and employment could still be substantial because a large part of the manufacturing and service sectors is RMG dependent. RMG related jobs account for nearly half of the formal labor force and are held mainly by women. These risks underline the need for export diversification and improvement in the investment climate to boost domestic growth andproductivity. The Growth Agenda 16. The Government'sI-PRSP estimates that GDP growth rate of about 7percent would be needed if the stated poverty reduction objectives are to be achieved. While this appears to be a bit too ambitious for the medium term, attaining sustainedgrowth of around 6 percent should be feasible with sufficient progress in key structural areas. Growth rate of even 6 percent would require a higher investment rate and, more significantly, more efficient investment decisions, both at levels not yet witnessed in the history of independent Bangladesh. Also, urgent action is neededto mitigate the adverseimpact of the expectedMFAphaseoutin2005. ~~ ~~ 17. Analytical work suggests that higher growth is likely to come mainly from productivity increases. For this, policy and institutional measures would need to: (i) enhance global integration; (ii) accelerate human capital and infrastructure development; (iii) improve the quality of financial intermediation; (iv) improve economic governance - especially by strengthening the rule of law; and (v) and streamline the regulatory and administrative environment in order to reduce the cost of business. At the same time, it would be important to maintain macroeconomic stability. Productivity increases alone won't suffice and would need to be supplemented with higher investment levels; financing of which will prove to be a challenge and will require fiscal prudenceand substantial donor support. Agenda for HumanDevelopment 18. With good foundations already built, Bangladesh should now move swiftly with the second generation reforms needed to further improve human development. These entail complementing increased social spending with significant improvements in the institutional framework for service delivery. 19. The I-PRSP's targetsfor human developmentprovide a good reference point to anchor core reforms. The priority areas include strengthening the partnership between public and private sectors-including NGOs and CBOs-in the delivery of social services; enhancing the effectiveness of public service delivery with attention to quality improvements in health, family planning, and education; .promoting female empowerment; addressing arsenic poisoning and iv BANGLADESH:DEVELOPMENTFORUM ECONOMIC UPDATE environmental pollution; and further improving disaster management and social insurance to reduce the vulnerability of the poor. 20. Efforts need to be stepped up topromote decentralization, which is key to improving the quality of and the poor's access to public service delivery. Bangladeshi s highly centralized in its public administration structure. Successive governments have made electoral pledges of strong, elected local government structures without following through. More is needed to promote direct community participation in the management of certain facilities, such as schools, clinics, and water supply and sanitation services. For effective decentralization, lower tier service units must operate within a hard budget constraint, local administrative capacity must grow alongside the provision of greater autonomy, and clear accountability must be instituted. BANGLADESHDEVELOPMENTFORUM2004: ECONOMICUPDATE I. RECENTECONOMICDEVELOPMENTS Economic growth continues to pick upsteam 1. GDP growth has continued to gain momentum following its decline inFY02. From4.4 percent inFY02 (the lowest growth rate since 1996), GDP growth recovered to the FYOl level of 5.3 percent in FY03. Several recent positive trends have led analysts to predict a slight increase for this fiscal year: growth projections for FY04 are centeredaround the 5.5 percentmark. 2. Grain harvests, particularly rice production, have grown strongly in FY04 so far, benefiting from favorable weather conditions and continued expansion of HYV acreage. Based on early trends, net crop production for FY04 is projected to reach 25.3 million tons, about 4.1 percent higher than last year. 3. The optimism on growth also derives from evidence of acceleration in growth of private investment, which stagnated at around 16-17 percent of GDP during the last three years. According to official sources, domestic investment proposals (majority of which are typically implemented) in the large and medium scale manufacturing sector amounted to Tk 47.4 billion between July-November, compared with Tk 27.6 billion during the corresponding period of the previous year. Data on import payments also signal a possible pick-up in the domestic investment rate. Payments for capital goods imports grew by an average of 11.5 percent (on an year-on-year basis) duringthe first eight months of this FY compared with averagegrowth of -2.8 percent and -9.7 percent during this period in FY02 and FY03 respectively. Construction activities appear to have remained strong. _ _ _ _ _ --~ - ~ _ _ ~ _ ~ Fig. la: Quantum Index of Medium-& Large-Scaie Fig. lb: QuantumIndex of Small Scale Manufacturing ManufacturingInduotry (Waron-par % change) Industry 1200, (yearon-year% change) - Source: Bangladesh Bureau of Statistics 4. Manufacturingactivity is beginningto reflect the mentioned pick-up ininvestment. After a sluggish start over the July-October period of this FY, a significant recovery was seen in the quantum index of medium- and large- scale manufacturing industry during November-January. Overall, the index rose by a cumulative 6.2 percent during July-January FY04, compared with a 2.8 percent increase during the same period of the previous FY. The quantum index of small scale manufacturing grew by a cumulative 2.7 percent over the same period of this FY, a slight decrease over last year's performance. 2 BANGLADESH: DEVELOPMENT ECONOMIC FORUM UPDATE Helped by a strong global recovery and a stable exchange market, exports and remittance inflows continue their acceleration. MFA phase-out will be a test for external sustainability. 5. The rebound in export performance, which started inFebruary 2003, has continued. The average monthly (year-on-year) increase in export receipts during the July-February period of this FY was 14percent; the fastest growth inthis period since FYO1. This was driven by a 14percent average growth in export volumes; export prices, on average, declined by 0.02 percent duringthe same period. Export of both woven garments and knitwear, growing respectively at an average rate of 9 percent and 27 percent due to an increase in global demand and the consolidation process inthe industry, were the main drivers of export growth. Exports to EUmarkets increased by 30 percent while exports to the US declinedby 15 percent over this period. Fig.2a: Recent Export Performance (yearon-year% change in export receipts) Fig.2b: Import Payments (year-on-year % change) 100.00 50 00 80.00 30 00 60.00 40.00 1000 20.00 0.00 -1000 -20.00 I I -40.00 -finnn I I 1 Source: BangladeshBureau of Statistics 6. Total imports grew by an average 14.5 percent (year-on-year) during the first eight months of this FY; in comparison, the average growth of imports in the corresponding period in FY02 andFY03 was -10.8 percent and 6.3 percentrespectively. Growthhasbeenstrong inm s t major categories of imports. Fresh openings of import WCs during the July-February 2003 period were 18 percent higher than during the corresponding period of the previous year. This points to import performance remaining strong in the coming months. New L/C openings have been particularly healthy for industrial raw materials and capital machinery which bodes well for near-term investment and growth prospects. Fig.3: Growth in Remittances Flg.4: GrossForexReserves 3.000.00, I ~ (Net Inflows, year-on-year % change) Source: Bangladesh Bureau of Statistics 7. The merchandize trade balance recorded a deficit of $1,203 million in the first eight months of FY04; an increase of $283 million over the corresponding period inFY03. However, thanks to robust remittance growth, the current account showed a surplus of $628 million during RECENTECONOMIC DEVELOPMENTS 3 this period. Cumulative remittances in the first eight months of the current FY were 11percent higher than inthe corresponding period of the previous year. 8. The current account surplus was reinforced by a smaller capital account deficit relative to last year; the latter reflecting higher FDI inflows, lower loan and trade credit repayments, and lower unaccounted for outflows (errors and omissions). As a result, the overall balance of payments (BOP) during the first eight months of this N showed a surplus of $252 million. This allowed a further build-up in the stock of official foreign exchange (forex) reserves. By mid- April 2004, forex reservesstoodat $2.7 billion, equivalent to animport cover of over 3 months. 9. The forex market has been stable since the taka was floated in end-May 2003. The effective exchange rate has depreciated by 5 percent in nominal terms since the float. The premium on forex in informal markets rose a bit after the float, perhaps reflecting market expectations of currency depreciation as a result of the float, but that has reversed since November 2003, resultingina significant decline inthe premium relativeto the pre-float period. 1 Fig. 5: Foreign Exchange Market Indicators 60 7 59 6 58 5 57 4 3 - 5* 56 2 ; 55 54 1 % 0 53 1 52 -2 51 -3 - Source: Bangiadesh Bureau_of_ Statistics _ _ _ _ _ _ -. 10. External debt management has been prudent with only $8 million of nonconcessional debt being contracted inthe July-January period. At 36 percent of GDP, most of it concessional, Bangladesh's foreign debt is quite low compared to many low-income countries. FY04budget implementation is behind target. Additional revenue measureswill be needed to keep it on course during the rest of the year. 11. The fiscal stance for FY04 remains expansionary but within prudent limits and without straining fiscal sustainability. The budget deficit for the first eight months of the current FY i s estimated at 1.0percent of GDP, well below the 4.8 percent target for the year. The target deficit for FY04does not seemreachable, but last year's deficit of 3.5 percent is likely to be exceeded. 12. The lower deficit reflects primarily the difficulty with carrying out development spending: only 36 percent of the planned Annual Development Program (ADP) spending was utilized during the first eight months of the current FY. The slow pace of development spending is due to low implementation capacity and disbursement of the foreign aid component. About 42 percent of development works were camed out from local resources duringthe period, compared with only 30 percent utilization of project aid from development partners. Effective planning and expenditure management are required for ADP projects, especially for infrastructure and social sectors, taking into account spending capacity and disbursementsof external funds. 4 BANGLADESH: DEVELOPMENTFORUM ECONOMIC UPDATE 13. Given the pace of spending in the first half of FY04 and implementation constraints on externally financed projects, there may be a need to revisit the budget targets for the FY. It may be prudent to trim ADP spending in lower priority areas by about 0.7 percent of GDP relative to the target at beginning of the year. Accordingly, the revised deficit target can be reduced to 4.0 percent of GDP, domestic financing capped at 1.8 percent of GDP and borrowing from the bankingsystem limitedto no more than 0.3 percent of GDP. 14. Tax revenue collection by the National Board of Revenue (NBR) during the first nine months of the current FY increased by 9 percent relative to the corresponding period of the previous year. This i s 3.5 percentagepoints short of the target growth set for the period, and well short of the 15 percent target growth for the year. Trade-based tax collection grew by 8.9 percent and domestic activity-based indirect taxes grew by 11.7 percent, both about 3.5 percentagepoints below target growth. Growth in income tax collection was Ipercentage point below the target rate of 4.2 percent. There are now concerns that the overall FY04 revenue target cannot be met without stepping upthe revenue effort further. Fig.6: NBR Tax Collection (FY04, July March) - 1 I ~- ~ Source: BangladeshBureau of Statistics 15. The Government has indicated its intention to respond to these concerns. Proposedshort- term revenue measures include raising excise on cigarettes and, from May 2004 onward, requiring revenue stamps on soft drinks and soap. Over the longer haul, the authorities plan to register more taxpayers, strengthen tax assessment, and expedite making the Central Intelligence Unit (CKJ) fully operational. This is in addition to the recent measures of operationalizing the Large Taxpayers Unit (LTU) and revamping the bonded warehouse system. It remains to be seen whether these efforts would be sufficiently effective for meetingthe revenue targets. Followingmonetary tightening to support exchange rate float, monetary stance was eased 16. The monetary policy stance, tightened considerably last summer to facilitate exchange rate liberalization, i s growing increasingly accommodative in recognition of the favorable macro- financial conditions. Since the beginning of the current FY, reservemoney growth has picked up and interest rates have dropped. Five-year T-bill rates were cut by 3 percentage points (to 8 percent) during the first half of the FY while the statutory liquidity ratio was reduced from 20 percent to 16 percent. The Bangladesh Bank (BB) has mopped up excess liquidity arising from strong remittance inflows by issuing T-bills. Broad money growth in the 12 months ending February 2004 was 12.8 percent and growth of credit to the private sector duringthe same period was 12.4 percent. In keeping with the objective of reducing the public sector borrowing costs, banking sector credit to public sector has beenon a decliningtrend since February 2003. RECENT ECONOMICDEVELOPMENTS 5 Fig.7a: Monetary Indicators Fig.7b: Credit Growth (year-on-year% change) 1 -_-__ .?&change Resews nvney grow A 20.00 2000 - 16.00 1500 - 12.00 1000 - 5 0 0 - 8.00 4.00 Can m e v rate -500 4 kc.,,l/ Source: Bangladesh Bureau of Statistics 17. Despitethe relative loosening of the monetary stance, banking sector interest ratesremain sticky at highlevels. A major contributingfactor is the administered rates on the National Saving Certificates (NSCs) and postal saving schemes that are set higher than market-based rates and pushupthe deposit andlendingrates of commercial banks. Lackof adequate competitionamong commercialbanks and inefficiencies inthe sector also contribute to the highinterest rates. Inflation has crept mainly due to higher import prices 18. After reaching an all time low of 1.6 percent in FYOI, the CPI inflation rate rose to 2.8 percent in FY02 and 4.7 percent in FY03. Inflation rose further during the first half of FY04. The consumer price index by end-February was 5.8 percent higher than a year earlier, the highest increase during the period in five years. Inflation has increased in both urban (5.7 percent) and rural (5.8 percent) areas. Fig. %a:CPltnftation Fig.* ettHrrRatr'on ~ (year-on-year % change) (yearm-year % change) 1000 800 Foodinflah \ 600 4 0 0 200 OW Source: Bangladesh Bureau of Statistics 19. The increase in price levels is more visible for food items, which carry a weight of 65 percent in the general inflation index, than for non-food items. In the non-food category, the most significant rise inprices came from the Transport and Communicationcategory, which rose at an average rate of 11percent in FY03 and 8 percent during July-February inFY04, compared with 6 percent inFYOI and FY02. Energy prices -prices of diesel, kerosene, petrol, octane, gas and power - have increased in several stages in recent years. This has directly impacted overall inflation through higher cost of irrigation and fertilizer and indirectly through higher transport and communication costs. 6 BANGLADESH: DEVELOPMENT FORUM ECONOMICUPDATE 20. The target rate of 4.5 percent for the year does not seem attainable and has beenrevised up to 6 percent based on the current trend. It is important to note however that inflation in Bangladesh remains considerably lower than in majority of the developing world. Also, some of the underlying causes such as the recent adjustments in administered energy prices and higher import prices may have impacted the price levels rather than trend inflation rates. 21. Recent monetary expansion may have exerted some pressure on inflation as well. Cognizant of this, the BB i s appropriately intensifying its reverse rep0 operations and treasury bills sales to mop up excess liquidity. There is room for such tightening without putting undue pressureon interest rates and growth of credit to the private sector. 11. LONG-TERMGROWTHAND POVERTY TRENDS 22. Bangladesh has made significant progress since the early 1990s, achieving an average annual per-capita growth rate of 3 percent and reducing poverty rates by 9 percentage points during the 1990s - from 59 percent in 1991 to 50 percent in 2000. Equally, if not even more, impressive are the achievements in the social and human dimensions of poverty: especially the successes inincreasing life expectancy, lowering infant mortality and the birthrate, increasing the coverage of immunization, and significantly lowering the gender gap in education. Bangladesh achieved faster progressin social indicators than most countries at similar income levels (Box l), including the neighboring nations of India, Pakistan, Sri Lanka, and Nepal. Other recent achievements of note include significant increases in food production and improvements in food security, enhancement of the capacity to manage natural disasters, and establishment of the institution of democracy. AnAssessmentof GrowthTrends . 23. GDP growth in Bangladesh has been on a risingtrend since independencein 1971. Per- capita growth increasedromSIannuaI average of -cent duiingme I97Os: toEIpercent during the 1980s, to 3.0 percent during the 1990s and 3.3 percent during 2001-03. As seen in Fig. 9, there appears to be a sharp structural break in the growth process in 1990. Annual per- capita growth averaged 1.5 percent during 1973-89 andjumped to 3 percent during 1990-2001. Fig. 9: Trends inGDP Per-Capita Level and Growth 10 180i? 170E 5 180-6s; - 0 150 0 .J 3 1403 a 5 130 -1 0 120d 0' i10 .15 -; 0 100 1975 1980 1985 1990 1995 2000 - I growth(lettaxis) Per-capita Average per-capita GDP (right axis) Source: World Bank staff calculations 24. Bangladesh has consistently improved its growth performance relative to the rest of the world. According to the WB's World Development Indicators (WDI) database, annual per-capita growth averaged 1.4 percent between 1972-00, which is short of the performance of the median country in the world but much higher than the median low-income country (LIC). Among the countries for which comparable data are available, 55 percent (71 out 130) of all countries grew AGENDAFORHUMAN DEVELOPMENT 7 at a pace faster than Bangladesh over this period. This percentage drops to 32 percent if one looks at the 1981-2000period and further to 21 percent if the 1991-2000 period is considered.' Bangladesh has outperformed the median country in the world by a considerable margin since the early 1980s. Among the group o f LICs, Bangladesh has consistently performed in the 80* percentile in terms of long-term growth. Within the South Asia region though Bangladesh was outperformed by all other countries during the 1972-90 period. Pakistan and Nepal lagged Bangladesh duringthe 1990swhile India and Sri Lanka did better. Box 1. Relatively Good ProgressinImproving Social Development Indicators The chart below ranks Bangladesh's performance along with nine low-income countries in eight dimensions of social development in 1972 (or the closest year for which data are available) and in 2000. Bangladeshranked sixth by per capita income measure in 1975 and retained the same rank in 2000. However, in seven out of the eight dimensions of social development, Bangladesh improved its rank over the period. The country's progress was particularlyimpressive inreducing infant mortality, decreasingthe birth rate and spreading immunization. F E R T l l l T Y R A T E I L I F E E X P E C T A H C Y R a n k I IWFAWT M O R T A L I T Y I I I I IM P RO VED WAT E R A C C E B B I R a n k 1982-85 - .* - A C C E B B T O B A N I T A T I O H -20011 'Only those countries are considered inthis comparison for which more than 20, 10, and 5 annual observations on per-capita growth are available for the 1972-2000, 1981-2000, and 1991-2000 periods. 8 BANGLADESH: DEVELOPMENT ECONOMICFORUM UPDATE Bangladesh Median Median India Nepal Pakistan Sri Lanka Bangladesh's Bangladesh's Country Low-Income Rank Rank in World Country(LIC) in World Among LlCs 1972-2000 1.4 1.7 0.3 2.8 1.9 2.3 3.3 72/130 9/39 1981-2000 2.1 1.o 0.2 3.6 2.5 2.5 3.5 54/168 14/58 1991-2000 3.0 1.5 -0.1 3.6 2.6 1.4 3.9 39/182 11162 25. Looking at the Summers-Heston cross-country data on per-capita income (which are expressed in constant 1996 US$ and adjusted for international purchasing power differences), Bangladesh ranks 91 among 102 countries in 1972, improving to 78 in 2000. Within the region, over this period India improvedits rank from 87 to 71, Pakistan from 89 to 74, Sri Lanka from 74 to 67, and Nepal from 94 to 82. China, Thailand and Korea saw the most impressive improvements in their ranks over the period: China improved from 93 to 60, Thailand from 71 to 41, and Korea from 54 to 26. It is worth noting that China and Nepal are the only non Sub- Saharan countries that ranked lower than Bangladesh in 1972. Also, all countries that were overtaken inranking by Bangladeshare Sub-Saharancountries. Growth Has Beenthe Key Driver of Income Poverty Reduction 26. The pace of poverty alleviationpickedup inthe 1990s, following virtual stagnation inthe mid-1980s. The poverty rate declined from 59 percent in 1991-92 to about 50 percent in 2000, while the percentage of population living in hard-core poverty declined from 43 percent to 34 percent. An acceleration ingrowth of GDP per capita contributed to this improvement (Fig. lo). The rural sector accounted for 78 percent of the decline in the national poverty incidence, the urban sector for 13 percent, and migration from rural to urban areas for the rest. Relatively broad-based growth inrural areas during the 1990s resulted in a greater decline in the depth and severity of poverty inthese areas relativeto urban areas. ~ Fig. 10: Poverty Trends inBangladesh:Growthhasbeenthe key driver 4 PercapitaGDPgowth,S. 3 yrmoungawage - 30- Naiional . h-. ......... g2 m a 25 20 - ......'A............ ".....' 1 15. Urban loJ 1983-84 1991-52 2000 0 Lower Poverty Line 198384 1991-92 199940 Source: Bangladesh Bureau of Statistics and World Bank Non-income Poverty ReductionHas Been Impressive 27. Bangladesh achieved a significant expansion ingross primary school enrollment, from 72 percent in 1980to 98 percent in2001. It has already achieved the MillenniumDevelopment Goal (MDG) of eliminating gender disparity, including among the poor, in primary and secondary education, and has made good progress toward achieving the goal of providing universal basic education. Good progress has also been made in improving the access of women to income- eaming opportunities. Women's participation in the labor force has increased and the wage AGENDAFORHUMANDEVELOPMENT 9 differential between females and males has narrowed over the last two decades. Women's access to credit has also improved. 28. The decline in infant mortality and child mortality rates in Bangladesh, from 140 and 95 respectively in 1972 to about 60 and 30 in 2000, was among the fastest in the developing world. Ifpresentprogresscontinues, BangladeshandMaldiveswill be the only South Asian countries to achieve their MDGs of reducing infant and child mortality.2 Likewise, children's nutritional status has improved considerably. With the fertility rate reduced from 6.3 children in 1975 to 3.3 inthe mid-l990s, the annual population growth rate has fallen to 1.5 percent a year, lower than 1.8 percent in India and 2.0 percent inPakistan. 29. Progress on food production and food security has also been impressive. By 2000, Bangladesh had managed to eliminate the "food gap" between net domestic production of foodgrains (rice and wheat) and the targeted availability of 454 grams per person per day. The capacity to both manage and cope with natural calamities has improved considerably. For example, the spread of defensive infrastructure, such as coastal and river embankments has helped containment of natural disasters, while improved ability to evacuate people from disaster zones and provide shelter, improved access to micro-finance, implementation of government- sponsoredemployment programs duringthe lean season, and liberalization of private rice imports have collectively helped mitigate the impact of disasters. 111. THEDEVELOPMENT POLICYAGENDA Significant Development ChallengesRemain, Recent Achievement Notwithstanding 30. Notwithstanding the impressive gains thus far, the magnitude of remaining development challenges is enormous. Poverty remains at unacceptably high levels and the level of human development is very low (Bangladesh ranks 132 on the HDI index), particularly on account of TTiortcomings in education and hearth outcomes. Bangladesh entered the new millennium wilh the same number of people living inpoverty (63 million) as in 1991-92. Child malnutritionrates in Bangladesh are among the highest inthe world, while maternal mortality rates are among the highest outside of Sub-Saharan Africa. Despite progress on women empowerment, significant gender disparity persists. Only 44 percent of the rural population has access to reasonable sanitation facilities, and a major development success-the provision of safe water to 97 percent of the population-is facing new challenges inthe form of unsafearsenic levels ingroundwater. 31. Child mortality i s much higher (95 percent) for the poorest quintile than the richest, although the equity gap inthis area inBangladesh i s still relatively low by internationalstandards. Further, data from the Household Income and Expenditure Survey 2000 show that even with an increase in coverage of the family planning program, the services do not reach many of the poor. The proportion of skilled attendance for child delivery i s below 1.5 percent for the poorest households, compared with 22 percent for the richest households; the equity gap in this area in Bangladesh is one of the highest in the world. There i s some evidence that the equity status for both moderate and severe malnutrition has deteriorated. In addition, the female disadvantage in child mortality (14 years) has persisted, while the female-male gap in acute malnutrition, observedthrough stunting and wasting, has increased. * The firstBangladeshMDGReport, beingpreparedcollaborativelyby the Government of Bangladeshand UNagencies, is dueto becompletedsoon. Itwill betterenabledonorsandthe Governmentto track progressinattainingMDGs, identify gaps, and address shortcomingsthrough, for example, the PRSP. 10 BANGLADESH: DEVELOPMENT FORUM ECONOMIC UPDATE 32. The quality of education is a major concern. Inprimary education, 33 percent of enrolled children do not complete the full cycle. The most recent Education Watch Report 2002 finds that one third of those who have completed five years of primary education are without literacy skills and that it takes 10 years of schooling to ensure that a population group is close to being fully literate. Large gender disparity continues to exist intechnical and higher education. 33. Income inequality increased in the 1990s, particularly in urban areas. The Gini coefficient based on private per capita expenditures increased from 0.26 in 1991-92 to 0.31 in 2000, reflecting in part increasedfragmentation and inequality of landholdings, as well as higher premiums on education and skill levels. Per capita real income of the bottom 20 percent of the population grew at an annual rate of about 1.5 percent and that of the top 20 percent grew at an annual rate of 2.5 percent. By contrast, those inthe 30-50" percentiles experiencedan annual per capita real income growth of only 1.1 percent. The level of income inequality in Bangladesh remains quite low by international standards however. 34. Bangladesh faces the formidable challenge of creating remunerative jobs for a labor force that is growing at an annual rate of 1.7 percent. Nearly a millionnew entrantsjoin the labor force every year, about 80 percent of them in rural areas. Agriculture's ability to absorb additional labor force has been exhausted due to a declining land base for cultivation. The rural non-farm sector will have to continue to absorbadditional labor force through productivity growth. Government's Strategy: The Ongoing PRSPProcess Provides a Useful Opportunity 35. The preparation of the Government's Poverty Reduction Strategy Paper (PRSP), provides the country with an unprecedentedopportunity to review its development progress, identify key obstacles, and prepare plans to overcome them. The interim PRSP (I-PRSP) rests on five main pillars: accelerating pro-poor growth; promoting good governance; investing in human capital; promoting women's advancement; and ensuring social protection. It lays out an ambitious set of ~ .__ poverty reduction targets and social development goals that are consistent with, and at times even exceed, the MDGs (Table 2). Table 2. DevelopmentGoals: I-PRSPTargets for 2015 Halve the incidenceof poverty fromcurrent levels Incomepoverty 59 50 25 Percentageof underweight children 67 51 26 Attain universalprimary educationfor all girls andboys of primary school age Net primary enrolment 75 100 Eliminategender disparityinprimary and secondary education Femaleenrolment as a percentage of male 100 100 Reduce infant and under-fivemortalityratesby 65 percent from current levels Infantmortalityrate 94 66 22 Under-fivemortality rate 108 94 31 Reduce maternalmortality Matemal mortalityrate 480 320 147 I-PRSPQualitativeTargets Ensureaccess of reproductive healthservices to all Reducesubstantially social violence againstthe poor anddisadvantaged Ensurecomprehensivedisasterriskmanagement, environmentsustainabilityandmainstreamingthese concerns into the national development process Source: Bangladesh, Ministry of Finance 2003. AGENDAFORHUMAN DEVELOPMENT 11 36. Building on the I-PRSP, the Government i s now inthe processof preparing a full fledged PRSP, which it is expecting to deliver by the end of 2004. A National Steering Committee, comprising senior Government officials, i s leading the effort under the oversight of the National Poverty Council, which i s chaired by the Prime Minister. Twelve thematic groups have been formed to bolster interministerial cooperation inthe preparation of the PRSP. Consultations with various stakeholders at the regional level have already begun. 37. Bangladesh has the potential to achieve its ambitious development goals. Achievements ineducation andhealthover the pasttwo decadeshave significantly augmentedthe humancapital base. Economic inequality, though increased in the past decade, i s modest by international standards. There is no evidence of any major social or class conflict. The land i s very fertile and the people are creative and persevering. Efforts at mainstreaming women in the context of a predominantly traditional society have been instrumental in bringing about major social and economic changes. Macroeconomic policiesreflect a prudent stance overall. 38. Despite these advantages, poverty reduction and economic growth have been far slower than in, for example, India, China, Malaysia, and South Korea. 39. The main challengesthat needto be addressedto acceleratethe development processare: Achieving higher and sustainedGDP growth 0 Consolidating past gains inhuman development 0 Addressing governancerelated problems Sections V. and VI. discuss the first two challenges in depth. The discussion on growth issues is based on new analytical work at the WB, while the discussion on the human development challenge draws from the Bangladesh Development Policy Review (DPR) recently prepared by the WB. The DPR also addresses indetail the governancerelatedchallengesfacing Bangladesh. ~~~ ~ ~~ ~~ IV. MEDIUM-TERMMACROECONOMIC PROSPECTS 40. In June 2003, the Government adopted its first ever medium-term macroeconomic framework, affuming a commitment to macroeconomic prudence that would be supported by deepening of structural reforms. The framework also underpins the Government's poverty reduction strategy. Overall, the framework appears sound and should contribute to an environment conducive to high growth and fast-pacedpoverty reduction. 41. The (updated) framework envisages an acceleration in GDP growth: from 5.3 percent in FY03 to 6.0 percent in FY06. While feasible, this would need to be strongly supported by an acceleration inthe pace of structural reforms to tackle supply-side bottlenecks and continuance of a stable macroeconomic environment. Special attention i s needed in the areas of infrastructure development (power and ports especially), financial sector reforms, human capital development, and economic governance. These optimistic growth projections also assume that sufficient action will be taken to mitigate the adverse impact of the expected MFA phaseout in 2005. Faster growth would require a higher level of investment rate and more efficient investment decisions, both at levels not yet witnessed inthe history of independent Bangladesh. 42. Fiscal Policy: The path of the fiscal policy in the medium-termframework i s consistent with the reform needs and public debt sustainability. In light of the growing development spending needs, an extremely low revenue base (one of the lowest in the world), and the envisaged reductions in trade taxes, strengthening domestic tax mobilization is at the core of the medium-term budget strategy. The macroframework envisages an increase in tax collection by 12 BANGLADESH: DEVELOPMENTFORUM ECONOMIC UPDATE about 1 percent of GDP over three years. This increase i s premised upon continued improvements in tax administration. For this, the Government proposes to modernize the NBR and to set up a Central Intelligence Unit (CN) to expand the audit program. For modernizing the NBR, the Govemment is working out a medium-term strategy, with WB assistance. Other parallel efforts include extending the income tax and VAT nets and strengthening customs administration, including through the recently revamped bonded warehouse system. Furthermore, utility prices and administrative fees and charges need to be adjusted on a timely basis to protect non-tax revenues. Table 3: Summa 3utput and Prices I I I T . Rea GDP Growth 5.3 5.5 5.5 GDP Deflator 4.4 6.0 6.0 5.5 CPI Annual % change Imports (US$ million) 8,699 10,021 10,698 11,041 Annual % change 13.0 15.2 6.7 3.2 Current Account Balance (Yo of GDP) 0.6 0.0 -1 .o -1.4 Gross Official Reserves (US$ million) 2,471 2,870 3,312 3,322 In Months of GNFS imports 2.9 3.0 ' I I fli - 2.9 3.1 [*- ~ .I( Percentof GDP ~ Total Revenue 103 1 0 5 110 11 5 Total Expenditure 13.8 14.5 15.2 15.7 Overall Balance (excl. grants) Domestic Financing 1.3 Piihlic Debt _ _ - -.- Money and Credlt Domestic Credit Private Credit 12.6 11.1 13.0 13.5 Broadmoney (M2j -75.6 13.1 12.6 10.6 ~ ~ Money Velocity 2.6 2.6 2.6 Sources: Government of Bangladesh, IMF I imates and projections, and WB staff prolections Estimates for FY04 are provisional and therefore subject to change 43. On the expenditure side, the Government proposes to scale up spending in priority development areas - infrastructure and education in particular. ADP spending will be restructured, drawing on recommendations of the Public Expenditure Review Commission. Additionally, no new unapproved ADP projects will be added to the programas these undermine fiscal sustainability and the quality of ADP spending. The Government recently approved procurement guidelines that will enhance transparency and expedite release of funds. The Government i s also working to strengthen the system for monitoring and tracking public expenditure to ensure effectiveness of developmental spending. 44. Overall, these measures would temporarily increasethe public expenditure to GDP ratio and the fiscal deficit accordingly: expenditure as a share of GDP would increase to around 16 percent by FY06, mainly on account of the increaseinADP spending, and the deficit to 4 percent of GDP by FY04. Since the increase in deficit would be financed entirely by donor support and would be accompaniedby continued restraint indomestic public sector borrowing, an increase in inflation and crowding out of private investment are not expected. To contain debt servicing costs, the Government will limit domestic financing to under 2 percent of GDP. 45. The fiscal policy under the medium-term framework i s designed to enhance fiscal accountability and transparency and to improve efficiency and effectiveness of expenditure by linkingresourceallocation with policy objectives. Important reforms are envisaged to overhaul AGENDAFORHUMAN DEVELOPMENT 13 the budgetary process, including moving toward a more decentralized approachto budgeting and improving fiscal transparency and accountability in line with the recommendations of the recent IMF-WB Report on Observance of Standards and Codes (ROSC). Budgetary reforms will support phasedincreasesinthe spendingautonomy of line ministries, conditional on development of needed capacity and demonstration of high level of performance at the line ministry level. Broadly, the focus of the budgetary process will shift from project-based allocation decisions to a more programmatic approach. Government efforts to improve the efficiency and effectiveness of the budgetary process are being supported under a five-year Financial Management Reform Programme (FMRP), funded by DFIDand the Royal Netherlands Embassy. 46. Monetary and Exchange Rate Policies: Monetary prudence i s an essential complement to enhanced fiscal discipline for macroeconomic stability, low and stable inflation in particular. Consistency i s neededbetweenthe growth of broad money and the BangladeshBank's (BB's) net domestic assets, and further between money growth and the growth of nominal GDP. The current monetary policy stance appears consistent with these principles. Inthe indicativeprogramagreed with the IMF, the Government has committed to a banking system credit growth target of 12 percent and broad money growth of 13 percent for FY04. This would allow the BB to rebuild internationalreserves while accommodating requiredprivate sector credit growth. CPI inflation i s not expectedto exceed 6 percent over the medium-term. 47. To address the problem of high interest rates, the Government has begun reducing the NSCratesto yields on comparable government securities under an automatic formula agreed with the IMF. It also intends to reduce rates on postal saving certificates to bringthese in line with the reduced NSC rates. The recent successful experiences of India and Pakistan should offer useful guidance to Bangladeshi authorities in this regard. The Government plans to complement its move on interest rate adjustment with efforts to improve enforcement of the limit on access to NSCs by individuals, and will consider affordable safety nets for the most vulnerable groups. ~ ~ ~~ ~~ ____ ~~ 48. To strengthen efficiency of the banking sector, the BB has started to publicize market information, has developed a secondary market for government securities to better circulate surplus funds among banks, and is working to improve the functioning of the money market. Future actions to broaden and deepenthe government securities market will include phasing-in of volume-based auctions and introduction of long-term treasury bonds. The BB also reduced the Statutory Liquidity Requirement (SLR) ratio from 20 percent to 16percent. 49. Stable macroeconomic conditions enabled an orderly float of the Taka on May 31, 2003. The value of the taka has heldsteady since the float. The authorities are committed to intervening inthe exchangemarket only to counter disorderly conditions andto buildreserves. The exchange market was liberalized further in December 2003, with the removal of the remaining margin requirements for the opening of letters of credit on imports. Authorities are also exploring the possibility of removing the remaining exchange restrictions such as on transfer of funds from nonresident taka accounts and on advance payments for imports, but would like to first safeguard against illegal transactionsand potentialfor large capital outflows. 50. External Sector: External sector conditions for FY04 appear quite favorable. In response to improved extemal demand conditions, export earning are expected to increase by 10 percent. Import growth i s projected to increase to about 16 percent inFY04, largely inresponse to increased input requirements of the RMG sector and capital imports associated with higher investment and GDP growth. However, export and import growth would slowdown considerably from FY05 onward as the garments sector feels the impact of the MFA phaseout. Export growth would slow down to about 3 percent in FY05 and further to -2 percent in FY06, before 14 BANGLADESH: DEVELOPMENT ECONOMIC FORUM UPDATE recovering to a 4.5-5.0 percent range over the medium-term as benefits of structural reforms targeting domestic and external competitiveness becomevisible. 51. The current account i s expected to be more or less inbalance inFY04 and but would slip into a deficit in N O 5 and FY06 - on account of widening trade deficit and a slowdown in the growth of workers remittances from FY05 onward. This would not jeopardize external sustainability if the Government's reform orientation continues, as this would bring in offsetting official development flows and FDI. Moreover, at 36 percent of GDP, external debt obligations are at comfortable levels and largely on concessionalterms. Gross reservesare projected to reach $2.9 billion, around 3 months of import cover, by end-2004, and would remain at an import cover of 3 months over the medium-term. createda durable comparative advantagein RMG exports. At present, a third of all RMG exports comprise knitwear or knitted garments, the rest being woven garments. According to market experts, Bangladesh's RMG sector fairs poorly in terms of quality, delivery lead times, and market orientation. The industry is mainly organized on a CMT (cutting, making and trimming) basis where orders come through buying agents, with little direct link between producers in Bangladesh and their ultimate buyers. Majority of enterprises rely on buying agents for fabrics and other raw materials. The knitwear sub-sector gets nearly 80% of its raw materials and intermediates from local production, while woven garments still require 80% of their inputs to be sourced from outside. This despite the significant increase in domestic content in RMG production, from 36% in 1991 to 55% in 2002. Significant protection to the primary textiles sector (FTS) undercuts RMG profitability and competitiveness, although it is partly offset by the free trade enclave for -BMethroughbondedwarehonsesandback-to-%ackLCmechanism- ~ ~ ~ ~~ ~~ ~ ~~ By contrast, Sri Lanka, offers a completely free trade environment for the PTS, allowing duty-free imports of yam and fabrics. Sri Lanka also manages to attract significant FDIinto the RMG sector, while FDIis not allowed inBangladesh's domestic RMG sector (FDIin EPZ is allowed with limits). Consequently, benefiting from the inflow of superior technology and management and direct market access and links to US and EU buyers, Sri Lanka appears relatively well poised for the post-MFA era. Bangladesh, on the other hand, faces an uphill task to retain market share, even at the low end of the market, which has traditionally been an area of strength. Transforming the comparative advantage based on low labor cost into competitive advantage in a post-MFA world requires structural measures beyond trade and exchange liberalization. To reduce lead delivery times, the sector needs to improve infrastructure and ensure rapid port clearance of cargo. There is need to establish direct contacts with buyers and reduce dependenceon buying agents. FDIinto the sector should be vigorously courted ina bidto improve quality and productivity and to gain market access. Policies that bind the RMG sector to localsourcingof inputs mustbe avoided since they erode the sector's competitiveness. Instead, the RMG sector needs the freedom to source its fabric and yam competitively. To ensure such an environment, bans and restrictions on arange of textile products imposed by the existing QR regime and supportedby hightariffs need to be relaxed. There are political economy challenges facing such a policy stance in Bangladeshfor the simple reason that, unlike in Sri Lanka or Malaysia, the PTS in Bangladeshis quite large with a strong voice inthe business community: PTS is the largestindustrial sub-sector inBangladeshafter RMG. 52. Bangladeshremains vulnerable to the scheduled phase out of MTA quotas from January 2005 (Box 2). While reasonably competitive inthe low-end, high-volume woven garment market segments and knitwear, Bangladesh will face stiff competition in some other product categories when quotas are removed in the EU and the US. The impact on net export earnings may be contained by the corresponding reduction inRMGrelated imports, but the overall adverse impact on output and employment could still be substantial because a large part of the manufacturing and service sectors is RMGdependent. RMGrelatedjobs account for nearly half of the formal labor force and are held mainly by women. These risks underline the need for export diversification and improvement inthe investment climate to boost domestic growth and productivity. AGENDAFORHUMAN DEVELOPMENT 15 Box 3. Issues For A Medium-TermTrade Policy Agenda Deep and wide-ranging trade policy reforms were initiated in early 1990s, including substantial reduction and rationalization of tariffs, removal of quantitative restrictions (QRs), move to a flexible and unified exchange rate, and current account convertibility. The reform agenda remained incomplete however and stalled around the mid-1990s. Further liberalization since hasbeen sporadic at best, with some backtracking. Remaining issues in tariff adjustment: Bangladesh has the highest average tariffs in the region (see table below). Tariff dispersion, measured by the coefficient of variation, is close to 80% and unchanged over the past 3-4 years. Pressure from the business community led to lower rates on intermediates and raw materials, slowing the decline in effective rates of protection (ERP). ERPs at the firm level average over loo%, and exceed200% for many items; such as edible oils, bakery and chemicals. Othernormalprotective import taxes I 4.0 Generalmaximumof protective importduties 34 I 25 I 20 I 31 I28 Tariff protection is augmented by application of other import taxes; e.g., supplementaryduties (SD), infrastructure development surcharge, and value added tax, which are not applied on a trade-neutral basis. The para tariffs are typically invoked as extra protection to local industries which are already benefiting from the maximum general tariff protection rate of 34% The para tariffs, SDs in particular, are distinctly non-transparentand complex. The use of para tariffs has increasedsince N 9 8 (see Fig.). An additional complexity arises from the prevalenceof tariff concessionsor exemptions, provided mostly by end-use. Permits are requiredto avail of these, which gives rise to opportunities for rent-seekingat customs andpermit-granting agencies. The Government is reluctant to cut tanffs in part out of fear of losing an important revenue base import taxes compnse about 50% of tax revenue Part of h s fear may be msplaced Throughout the course of tanff reduchons from 1991 to 1996, imports grew sufficiently to compensate for the reduction in rates, yielding higher revenues It i s true though that import growth in this penod was partly facihtated by removal of QRs, and elimnation of prohibitive rates and water in the tariffs Such buoyancy of customsrevenues i s now dimnished but some scope for revenuegains remains, particularly at the hgher end of the tanff slabs - e g the top rate (30%) apphes mostly to final consumer goods, which typically have the hghest import elashcihes ' h s effect couldbe reinforcedif tanff cuts bnng some of the very substantial illegal smuggled trade back to legal, tax-paying channels All inall, there is scope for further reduchon of tanffs and, more importantly, intheir dispersion ' h s needs to be supplemented by rahonahzation of the tanff structure, which must involve the elimnahon of end-user concessions and using CDs for protection purposes It is cntlcal that any future strategy of trade reforms adhere to two cardinal principles. (a) timely pre-announcementof policy reforms, and (b) makmg it well known that any protechve measure will only be hme-bound Such transparency would ehmnate the element of p o k y surpnse and mnimze the scope for rent seeking, whde allowing time for firms to adjust Quanlitative Restrictions: Bangladeshis the only South Asian country to use tradihonal QRs for protection QRs cover about 10% of 4-diglt tanff headmgs trade-relatedQRs accountfor about 2% of tanffheadings (see table) The pnncipal beneficiary of QRs has been the textile sector which continues to lobby for them, even though decades of protechon has wiped out the sector's global competihveness The 2003-06 IPO proposes to slash by almost half the number of items covered by QRs However, by also addmg many procedural restnchons it leaves the state of trade restnctiveness largely unchanged EVOLLITION OF IMPORTRESTRICTIONS1991-2004 NO OFCONTROLLIST lTEMSAT THEHS 4-DIGlTLEVEL Source WTO Trade Policy Review, Bangladesh 2000, lPOs various years There is little jushfication for most trade-relatedQRs in place These should be removed andimport of the relevant items should be allowed subjectto autxounate tanffs Convertme.ORs to tanffs would also generate substanhalrevenuefor the Government 53. The trade liberalization agenda, after progressing impressively in the early 1990s, has 16 BANGLADESH: DEVELOPMENT ECONOMIC FORUM UPDATE largely stalled since the mid-1990s. A comparative assessment of trade policies in South Asia (Trade Policies in South Asia: An Overview, World Bank 2003), finds the Bangladesh trade regime to be still rather restrictive. Box 3 summarizes the remaining issues inthis area. 54. Public Debt Sustainability: Public debt sustainability in Bangladesh has come under increasing scrutiny in recent years, as slippages in the fiscal stance since the late 1990s and growing financial troubles of the major state-owned enterprises (SOEs) resulted in a rapid increase in the public sector's debt obligations. Of particular concern is performance of the energy sector SOEs; the Dhaka Electric Supply Authority (DESA) and the Bangladesh Petroleum Corporation (BPC) especially. The stock of DESA's arrears to other SOEs stands at 2 percent of GDP, 30 percent of which was accumulated over the last 18 months. Price adjustments on petroleum products under the automatic pricing formula agreed with the WB are overdue, as a result of which arrears continue to build up rapidly in BPC. Fiscal vulnerability is further heightened by the growing SOE defaults on Government loans and contingent liabilities arising from Government-guaranteedloans to SOEs. 55. Despite the recent deterioration, the current public debt stock (including SOE/NCB arrears, which amount to about 10 percent of GDP) appears sustainable over the medium-term. External debt obligations are mostly concessional and significantly lower than neighboring India, Pakistan, and Sri Lanka. The external debt-service ratio for FY04 is expected to remain in the 5.5-6.5 percent range over the mediumterm. A recent comprehensive debt sustainability analysis at the WB found that the sustainable level of the Government's primary deficit to be 2.7 percent of GDP, below the actual 3.5 percent inFYOOand FYO1. 56. The Government has initiated a process of fiscal correction, which enabled it to lower the primary deficit to 2.9 percent of GDP in FY02 and further to 1.7 percent in FY03. The primary balance over the medium-term is projected to remain in the range of 2.0-2.5 percent of GDP, - asistent with the requirements of debt sustainability. At the same time, pressures on fiscal sustainability will persist due to slow progress on SOE reforms. It appears important therefore that momentumon fiscal consolidation be maintained and SOE andNCB reformsbe steppedup. V. THELONG-RUN GROWTH AGENDA 57. The Government's I-PRSP estimates that GDP growth rate of about 7 percent would be needed if the stated poverty reduction objectives are to be achieved. The I-PRSP envisages growth acceleration to be primarily private-sector led andunderpinned by a conducive investment climate supported by: continued macroeconomic stability; implementation of long overdue structural reforms in the banking and energy sectors, along with restructuring of SOEs; and increasedand more effective investment in human development. 58. While the Government's overall development strategy, as laid out in the I-PRSP, appears broadly consistent with achievement of improved growth performance, it does not derive from a systematic understanding of the determinants of growth in Bangladesh: something yet to be developed, by the Government or by the donors. Recent analytical work at the Bank has sought to narrow this gap. The remainingpart of this section summarizes its main messages. Accounting for GDP Growth: Primacy of Factor Productivity Over Factor Accumulation 59. I s it factor accumulation or technology growth and more efficient resource allocation that fundamentally explains growth in Bangladesh? The answer to this has important implicationsfor policy formulation - should the focus of the policymakers be on accumulation of capital (saving and investment) or on technology infusion via R&D, FDI, and higher quality labor force? AGENDAFORHUMAN DEVELOPMENT 17 60. Fig. 11presents estimates of the contribution of capital, effective labor, and total factor productivity (TFP) to GDP growth in Banglade~h.~TFP growth remained negative during most of the 1980s, and then stabilized a bit around the zero mean during the 1990s. Capital stock growth has been robust and on an increasing trend. Effective labor, which reflects a combination of the labor force and human capital, has been growing steadily since the mid-1970s, although its growth rate dropped a bit duringthe 1980s due to a slowdown inhuman capital g r ~ w t h . ~ 1 10.0 , Fig. 11:Factor and TFP Growth Rates I 8 0 6 0 L5 4 0 g 2 0 00 -2 0 1 -cGDPgrowM -- Ca StockGrowth --cEffedveLaborGrowth -TFF orowth Source: World Bank staff calculations 61. The TFP analysis illustratedin Fig. 11strongly suggests the primacy of TFP (technology growth and efficiency of resource allocation) over factor accumulation inexplaining GDP growth in Bangladesh. Specifically, an assessment of the impact of TFP on GDP growth -in a way that incorporates the fact that physical and human capital respond to technological progress - shows that TFP growth explains 85 percent of GDP growth between 1975-2000.5This is consistent with similar calculations for other countries and with cross-country studies that show that most of the cross country differences inGDP growth can be explained by differences inTFP growth. __ .~ .-..--. AssessingBangladesh's Growth Performance ina Cross-Country Framework 62. Analytical work (see background WB working paper for details) assessing Bangladesh's growth performance ina cross-country framework shows that: 0 GDP growth has been much higher in Bangladeshthan would be suggestedby its rate of (physical and human) capital accumulation relative to other countries. 0 Factors impacting the efficiency of capital utilization play a major role in explaining GDP growth inBangladesh. The main structural areas identified inthis regard are: 1. The efficiency with which the financial sector allocates capital across competing projects 2. The level of global integration and the capacity to benefit from it. For the latter, the skill level of the labor force and the level of physical infrastructure development matter 3. The quality of economic governance The accountingframework usedinderivingthese estimates is explainedinthe backgroundpaper "Sources of GrowthandProductivity:the Case of Bangladesh." World Bankmimeo, 2004. Humancapital hereis relatedto the educationlevel of the average worker. This is calculatedas the covariancebetweenTFP growth and GDP growthdividedby the varianceof GDP growth. 18 BANGLADESH: DEVELOPMENT FORUM ECONOMIC UPDATE 4. The level of macroeconomic stability 5. Cost of doing business, including the cost involved for firms to start and close a business 63. Fig. 12 benchmarks Bangladesh's performance against a group of comparator countries in the structural areas mentioned above. By choice, the comparator group comprises better performing countries than Bangladesh, except for Niger which is included to understand how Bangladesh was able to avoid the fate of most of the Sub-Saharan Africa. These cross-country comparisons show that: 0 Bangladesh had the lowest initial real per-capita GDP among the group which, ceteris paribus, should have resulted in higher GDP growth. Clearly, given that Bangladesh's growth performances relative to rest of the group has been relatively slow, other factors outweighed any advantage given to it by having a lower initial income level. 0 A partial explanation is provided by the rate of capital accumulation in Bangladesh which is slower vis-a-vis the better performers and faster than in Niger. 0 Population growth rates across the group provide a (small) part of the puzzle. Population growth inBangladeshwas higher than in all comparators except Malaysia and Niger. 0 Bangladesh appears to have been a mediocre performer on banking sector, although analysis suggests that the growth impact of banking sector weaknesses may have been more adversefor Bangladeshdue to its low development level. 0 Bangladesh has done well in achieving macro stab%Ey whi& appears to bczt major reasonwhy its growth rate has been far superior to that of most LICs'. 0 Relative inability to attract FDI and to benefit from its spillover effects has been a major area of deficiency for Bangladesh. Even Niger outperforms Bangladesh on this measure. 0 Quality of economic governance has been quite weak in Bangladesh and appears to be an important cause of its relatively weak position within the group. 0 Cost of starting a business in Bangladesh i s quite high - exceeded by only Niger - and consistent with its relative ranking inthe group. AGENDAFORHUMANDEVELOPMENT 19 Fig. 12: Determinantsof Growth: Cross Country Comparisons Average GDP per capita Growth Real PPP GDP Per Capita in 1980 (1981-2oOO) 6000 00 ____-.___ ~ O M .___ _I"- 500000 700 - g 400000 500 - ;3.w- 8. l o o - 2 200000 -100 - 100000 .?ML- . ......... Average Annual PopulationGrowth Gross Domedic lnvedment Rate (Average 1981-00) (1981-2000) (%GDP) Standard Deviationof Inflation, 1981-2000 Volatilityof Termsof Trade Growth, 1981-2000 1 (NaturalLogof) 8.00 3.w 6.W 4.00 2 00 0.W I 20.00 , FM Spillover Variable Qualityof Economic Governance I ~ Cost of Starting a Business,(% percapita GNI) Concentration Ratio in Banking Sector (naturallog of) 20 BANGLADESH: DEVELOPMENT ECONOMICUPDATE FORUM A Closer Look at the Main Structural Areas Impacting Growth inBangladesh 64. This sub-section takes a closer look at some of the structural areas identified as being important to explaining Bangladesh's growth performance in a cross-country setup. Broadly, the areas of relative weakness in Bangladesh are: policies and institutions to enhance and benefit from global integration; quality of financial intermediation; quality of economic governance; and regulatory and administrative burdens that directly impact cost of business. Relative weaknesses inthese offset to some extent the advantages offered by lower initial income and relatively good performance on macroeconomic stability. Financial Sector Performance: 65. Bangladesh has a relatively shallow financial sector. In 2002, bank credit to private sector was just 29 percent of GDP and broad money was 37 percent of GDP. Not only that, deep- rooted institutional weaknesses drastically restrict the efficacy of the banking sector. Due to weak management, constant political interference, and problems of corruption and directed lending, the four Nationalized Commercialized Banks (NCBs), holding almost half of the industry's net assets, are technically insolvent, with the ratio of their non-performing loans to total loans estimated at 34 percent. The court system cannot be relied upon to protect creditor rights which further vitiates lender incentives and contributes to misallocationof credit. 66. It is hardly surprising then that instead of contributing to economic growth the banking sector i s dragging growth down and poses serious systemic risks to financial stability. Recognizing this, a 1998 World Bank report commented that "The three institutional pillars of banking-a strong regulatory system, well-managed banks, and an effective court system-have crumbled to such a point that banking institutions cannot be relied on to ensure the safety of deposits and efficiently allocate credit, their two most important functions. In a more difficult , economic environment, the banking system could become Bangladesh's Achilles heel." That broad assessment remains true, although some positive developments have been seen since. In particular, the condition of private banks has improved markedly in response to improved banking supervision and governance. Performance of the NCBs continues to worsen however. Tjble 4: Fin2 Bank Stock market Lending rate Real 'rivate Concentration caDitalization minus deDOSit interest rat1 MWGDP ZreditIGDP Ratio GDP I(%.) 37.02 29.07 I 0.43 Ito 0.02 Irate7.34 I 12.95 Chile 44.73 66.41 0.23 0.75 5.70 5.03 China 167.58 139.67 0.52 0.50 3.60 6.55 India 57.99 31.74 0.48 0.21 7.61 Indonesia 53.68 22.28 0.53 0.08 3.07 10.99 Malaysia 100.27 145.23 0.30 1.32 3.29 2.59 Niger 9.02 5.01 1.oo Sri Lanka 36.76 28.25 0.52 0.05 8.38 5.51 Thailand 98.54 102.92 0.31 0.26 4.71 6.09 Vietnam 49.90 43.10 0.71 4.12 5.56 67. Banking sector inefficiencies along with administered interest rates on some government saving instruments such as National Saving Certificates and postal saving schemes have kept the real lending rates quite high, leading to (more or less ad hoc) rationing of credit to private businesses andhurtingthe efficiency of private investment. The average lending rate in 2003, as per the IMF's InternationalFinancial Statistics (IFS) data, was 16 percent, which implies that the average real lending rate was over 10percent (CPI inflation in 2003 was about 5 percent). Also, reflecting the lack of adequate competition in the banking sector and inefficiencies in bank AGENDA FOR HUMAN DEVELOPMENT 21 operations, the spreadbetween bank lending and borrowingrates i s quite high: the average spread was about 8 percentagepoints in 2003 according to IFS data. 68. Other elements of the financial sector are fairly underdeveloped as well. Microfinance institutions serve about 13 million households and have played an important role in poverty alleviation. However, their total asset base is still quite small (about 1.4 percent of GDP) and many of the NGOs involved in microfinance are multipurpose organizations that need to depend on grants and soft loans for existence. There is no regulatory and supervisory framework for microfinance, except for the Grameen Bank which is covered by a special ordinance issued in 1983. In addition, the microfinance institutions, despite their impressive coverage, are able to cater only to the poorest segments of the population (for small and very short-term loans) and are not accessibleto micro and small enterprises. The size of the capital market i s also very small- market capitalization equals only about 2.4 percent of GDP. There are no derivative or over-the- counter markets in Bangladesh. Insurance company assets equal only about 1.3 percent of GDP and those of finance companies another 0.7 percent of GDP. GlobalIntegrationand Capacity to Reap its Benefits: 69. Bangladesh's economic integration with the global economy i s very low, by most measures. The 2004 Globalization Index prepared by the consulting firm A.T. Kearney and the Foreign Policy magazine ranks Bangladesh at 56 out of 62 countries. Bangladesh ranks last in the area of economic integration, and within that category, last on investment income, second to last on FDI,thirdto last on portfolio flows, and fifth from last on trade openness. Politlcal Engagement ~ 40 45 49 45 45 53 52 70. Among the 141 countries for which there are comparable data in the WDI database, Bangladesh ranks 137 in terms of the average gross FDIinflows to GDP ratio during the 1990s. Only Nepal, Iran, Republic of Congo and Samoa rank lower. This is despite the fact that Bangladesh has a relatively liberal FDI regime. Clearly, foreign investors are deterred by the licensingrequirements for private activity in the energy and the telecom sectors, as well as other investment climate problems identified in the recent Investment Climate Assessment (ICA) report for Bangladesh. The perception of widespread corruption also likely dampens FDIinflows, as has been shown for other countries. Looking ahead, another major challenge i s to address the issue of trade union rights in EPZs, reflecting the concerns of Bangladesh's largest export markets (US andEU),while retainingthe attractiveness of the EPZs as FDIdestinations. 71. Another indicator of economic integration is trade openness, a commonly used measure of which is the ratio of total trade (exports+ imports) GDP. to By this measure, among the 182 countries for which comparable WDI data are available, Bangladesh ranks 175 for the 1990s. 22 BANGLADESH: DEVELOPMENT ECONOMIC FORUM UPDATE The ratio has increasedconsiderably in Bangladeshinrecent years: from 20 percent in 1990to 34 percent in 2002. This reflects significant reductions in trade tariffs and inquantitative restrictions and considerable progress on exchange liberalization. However, trade liberalization was a commonphenomenon across the globe during the 1990s. As aresult, despite the large increasein trade openness, Bangladesh's rank in the world improved only marginally over the 1990s. Electricity Generating Telephone Internet Total R o a d Roads, Zapacity (Kw per Mainlines (per users (per Network (per p a v e d (X :apita) 1,000 people) 1,000 p o p ) sq. k m area) total roads 0.03 8.3 1.9 1.6 9.53 Chile 0.63 574.8 201.4 0.1 18.9 China 0.25 247.7 26.5 0.1 22.4 India 0.1 1 43.8 6.8 1.1 45.7 Indonesia 0.10 65.7 19.1 0.2 46.3 Malaysia 0.58 509.9 273.1 0.2 75.8 Niger 2 . 1 1.1 0.0 7.9 Sri Lanka 0.09 79.9 8.0 1.5 95.0 Thailand 0.34 221.9 57.8 0.1 97.5 0.06 I 53.0 I 12.7 I 0.3 I 25.1 Yource: World Bank's WDI database and US. Energy Information Agency 72. Not only are the levels of F D I into Bangladesh quite low, its absorptive capacity to benefit from these is also weak due to low levels of human and physical capital. Infrastructure bottlenecks related to power, ports, gas, and telecommunications are severe. Inadequate access to electricity was the most frequent complaint among firms surveyedfor the Bangladesh ICA. Only 31percent of the population-80 percent in the urban areas and 19percent inrural-has accessto power at present. 73. As seen in Table 7, despite significant improvements since independence, Bangladesh still lags comparator countries on most human development indicators. The human development agenda i s discussedingreater detail in Section VI. of this report. ~ ~~ r Maternal Mortality Prevalence of Child I Average Yrs of Edu (2000) 1975 2000 1975 2000 1975 2000 1990-1998' 1993-2001 ' Bangladest 1.3 2.6 IIILife Expectancy II Rate (per 100,000 Malnutrition (% of children Fertility Rate Illve births) lunder 5), Weight for Age 46.0 61.2 I 6.6 3.1 II 440 II 48 Chile 5.6 7.6 65.7 75.6 3.2 2.2 20 1 China 4.4 6.4 64.7 70.3 3.4 1.9 55 10 India 2.7 5.1 51.8 62.8 5.4 3.1 410 53 Indonesia 3.0 5.0 51.3 66.0 5.0 2.5 450 25 Malaysia 4.4 6.8 64.4 72.5 4.6 3.0 39 20 Niger 0.5 1.o 39.9 45.7 8.0 7.2 590 40 Sri Lanka 4.8 6.9 66.2 73.0 3.9 2.1 60 33 Thailand 4.0 8.5 60.6 68.8 4.6 1.8 44 18 lvietnam 55.9 69.1 5.7 2.2 160 34 1/ Data are Economic Governance: 74. The quality of economic governance is quite weak in Bangladesh and is a major part of why it underperformed its comparators. Bangladesh has received a lot of negative attention lately due to perceptions of widespread corruption in public-private dealings. Most prominently, TransparencyInternational, the Berlin based private rating agency, has placed Bangladesh last on its cross-country corruption ratings. While such a blanket indictment of Bangladesh could be viewed as unjustified since it reflects subjective perceptions that may not be meaningful in a cross-country setup, the problem of endemic corruption in Bangladesh i s undeniable. In a recent survey, about 60 percent of the 1,001 firms surveyed in Dhaka and Chittagong areas viewed AGENDAFORHUMAN DEVELOPMENT 23 corruption as a major constraint to business operation and growth; lack of access to electricity was the only other constraint which was viewed as a major constraint by a higher number of the surveyed firms. In addition, extortions and other criminal activities, feeding on an environment of widespread corruption in police and lower courts, are a major governance problem. This has seriously hurt public confidence in enforcement of the rule of law and impartial protection of property rights, vitiating the business environment and harming long-run growth. Cost of Doing Business: 75. According the World Bank's Doing Business 2003 database, on average, 7 proceduresare involved in starting a business in Bangladesh. This compares favorably relative to other benchmark countries. On average, it takes about 30 days to clear these proceduresinBangladesh, which again i s relatively good: only Niger and Chile among the comparator countries have a shorter duration. However, the cost of even these relatively few procedures is quite high in Bangladesh. Despite having fewer procedures, the cost of starting a business (in US dollars) i s higher in Bangladesh than in China, India, Indonesia, Sri Lanka, Thailand, and Vietnam. As a share of per-capita GNI, cost of starting a business is higher in Bangladesh than in any other country except Niger in the comparator group. As seen in Fig. 13 below, the most costly procedures, in terms of both time and money spent, are filing documents with the registrar of Joint Stock Companies andregistering the company with the tax authorities. Fig. 13: Proceduresinvolvedwith starting a new businessinBangladesh Bangladesh 1. BuyNon-Judicialstamps 2. Verify the companyname 35 1 80 3. A lawyer verifies the 70 MemorandumandArticles of 30 Association eo 2 25 a 4. Pay the registrationfee ; 50 2 5. File documentswith theReglstrar 20 D of Joint Stock Companies 40 - E8 1s 6. Make a company seal 30 7. Registerwith the tax authority 10 20 :.8 5 10 0 0 Source: WorldBank's Doing Business Database Starting a Business Enforcing Contracts Number of Duration cost Cost (% of Number of Duration cost cost (% Procedures (days) (US$) GNI per capita) Procedures (days) (US$) GNI per capita, BanQladeSh 7 30 272 75.5 15 270 973 270.3 Chile 10 28 494 11.6 21 200 626 14.7 China 11 46 134 14.3 20 180 301 32 India 10 88 239 49.8 11 365 456 95 Indonesia 11 168 103 14.5 0 225 1910 269 Malaysia 8 31 959 27.1 22 270 687 19.4 Niger 11 27 759 446.6 29 365 97 57.1 Sri Lanka 8 58 154 18.3 17 440 64 7.6 Thailand 9 42 144 7.3 19 210 586 29.6 Vietnam 11 63 129 29.9 28 120 37 8.5 10 45 541 24.3 21 225 352 12 76. Similarly, while the number of procedures involved in getting a business contract enforced is relatively low in Bangladesh, the cost of clearing these i s quite high: the average cost 24 BANGLADESH: DEVELOPMENT FORUM ECONOMIC UPDATE of enforcing a contract in Bangladesh i s almost three times its per-capita GNI, the highest such ratio among the comparator group (Table 8). MacroeconomicStability: 77. Impressive performance on macroeconomic stability has been the cornerstone of economic performance in Bangladesh. CPI inflation has not touched the 2-digit mark since the mid-l980s, and has been more stable than in any other low-income (or even lower-middle- income) country, as measured by its standard deviation over the 1980s and 1990s. Exposure to external shocks has also been limited, mainly due to a low trade base though. Partly due to the low exposure to domestic macro and external shocks, GDP growth has been remarkably stable: over the previous two decades, the volatility of GDP growth in Bangladesh has been among the lowest inthe world. 78. To be sure, the economy remains vulnerable to weather related shocks (floods and cyclones inparticular) that frequent Bangladeshdue to its unique topography. However, as noted in Section II., capacity to both manage and cope with natural calamities has improved the tremendously. AssessingFutureGrowth Potential Growthpotential based on currentpolicy performance 79. Fig. 14 below shows growth potential in Bangladesh based on the most recent performance measurements in key structural areas. Overall, current policy and institutional performance in Bangladeshappears to be consistent with annual per-capita growth of 3.7 percent; about the same as the actual growth performance over the last few years. It appears therefore that the current policy stance should be able to sustainGDP growth inthe 5.0-5.5 percentrange. ~ ~~~ ~ ~~~~ ~ ~~~ ~ 1 Fig 14: FutureGrowth Dividendsfrom Key Areas I Reductionin 4w 0 FDISpilbers 3 50 -g3 00 0 increasein 2 5 0 200 hveslmnt Ra 150 100 0 50 000 - Note: Each colored box bar shows incrementally the amount of additional growth that can be obtained due to improved performance in 2002 (or latestdata)vis-2-vis the 1981-2000average. Source: World Bank staff calculations Growththat can be .....reform areas that hold mostpromisefor growth 80. Fig. 15 below shows the growth dividends if growth-orientedpolicies and institutions in Bangladesh were to equal those of the comparator countries. The highest pay-off areas in terms of improving growth appear to be: attracting more FDIand increasing the economy's capacity to benefit from its spillovers; financial sector reforms; improving economic governance - especially by strengthening the rule of law; and streamlining the regulatory and administrative environment inorder to reducethe cost of starting (anddoing) business inBangladesh. AGENDA FOR HUMAN DEVELOPMENT 25 Fig. 15: Growth That Can Be 1. Governance 600 4w 1 0 cost of starting E 200 Business ow 0 FDISpillover: -200 GDI Note: Eachcolored box bar shows incrementallythe changein future per-capita growth if Bangladesh'sperformance in 2000 equaled that of abenchmark country Source: World Bank staff calculations Implications in terms of needed rates of saving, investment, and TFPgrowth 81. Scenario 1: Assume that the annual rate of growth of human capital i s about 0.5 percent (it was 0.37 percent per year duringthe 1990s). Assume also that investment grows at an annual rate of 9 percent (investment grew at about 8 percent duringthe 1990s), that the GDP growth path reaches a steady-state 7 percent, and labor force grows at 3.1 percent (the same as in the 1990s). Then, the implied growth path of TFP i s as shown under Scenario 1in Table 9. Note that under this scenario annual TFP growth would need to average 0.9 percent during 2003-10 and 1.4 percent during2006-10. Incomparison, the highest 5-yr averageTFP growth rate since the 1980s was 0.1 percent during 1996-2000. Note also that under the given assumptions the investment rate will increase from 24 percent in 2002 to 29 percent by 2010. A tall order therefore to get GDPgrowthof upto 7 percent. - __ ___ _ _ ~ - ____ GDP Growth 4.8 5.3 5.5 6.0 6.5 7.0 7.0 7.0 7.0 Growth Rate of Investment 7.2 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 Investment Rate 24 24.8 25.7 26.4 27.0 27.5 28.0 28.6 29.1 Capital Stock Growth 7.9 7.8 7.9 8.0 8.2 8.2 8.3 8.4 8.5 Human Capital Growth 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 TFP Growth -0.5 0.0 0.1 0.6 1.0 1.5 1.5 1.4 1.4 GDP Growth 4.8 5.3 5.5 6.0 6.5 7.0 7.0 7.0 7.0 Growth Rate of Investment 7.2 9.0 10.0 11.0 12.0 12.0 12.0 12.0 12.0 Investment Rate 24.0 24.8 25.9 27.1 28.5 29.9 31.3 32.7 34.2 Capital Stock Growth 7.9 7.8 7.9 8.2 8.5 8.9 9.3 9.6 9.9 Human Capital Growth 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 TFP Growth -0.5 0.0 0.1 0.5 0.9 1.2 1.1 0.9 0.8 GDP Growth 4.8 5.3 5.5 5.8 5.8 5.8 5.8 5.8 5.8 Growth Rate of Investment 7.2 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 Investment Rate 24.0 24.8 25.7 26.4 27.2 28.1 28.9 29.8 30.7 Capital Stock Growth 7.9 7.8 7.9 8.0 8.2 8.2 8.3 8.4 8.5 Human Capital Growth 3.6 3.6 3.6 3.7 3.7 3.7 3.7 3.7 3.7 TFP Growth -0.5 0.0 0.1 0.4 0.3 0.3 0.3 0.2 0.2 82. Scenario 2 below presents an alternate set of assumptions, where the GDP growth path is the same as in Scenario 1but investment growth reaches 12 percent p.a. This scenario has two main implications. One, the investment rate would jump to 30 percent by 2007 and to 34 percent 26 BANGLADESH: DEVELOPMENT ECONOMICUPDATE FORUM by 2010, implying the needfor additional savings/extemal financing of 6 percent of GDP by 2007 and of 10percent by 2010. Two, the impliedaverage TFP growth rate for 2006-10 is still about 1 percent p.a., about 8 times higher than seen in any 5-year phase duringthe 1980sand 1990s. 83. Scenario 3 seems the most plausible. A GDP growth path of 5.8 percent from 2005 on and investment growth of 9 percent would imply an average annual TFP growth of 0.23 percent during 2003-10 and 0.26 percent during 2006-10 (double the average TFP growth during 1996- 2000). Note that the investment rate with this GDP growth path would reach 30.7 percent by 2010, implying that additional savingdextemal financing of almost 7 percent of GDP would be neededby that time. Ambitious, but perhaps afeasible reform scenario. 84. Bottom line: Ambitious growth in both investment and its productivity is needed to achieve a growth target of close to 6 percent p.a. Even then, performances on both fronts would need to be far superior than what has been seen so far. This of course also assumes that if the garment sector is adversely affected as a result of the expected MFA phase-out in 2005 then capital and labor from that sector would be shifted efficiently and costlessly to other equally or more productive sectors. A net write-off of capital stock and loss of employment due to this transition would of coursepushgrowth lower. 85. Overall, given the substantial demands on investment and its efficiency, major improvements are needed in the investment climate. For productivity gains of the magnitude needed, structural measures are necessary in the areas identified above - improving financial intermediation (to improve the allocative efficiency of investment), increasing FDI inflows, accelerating human capital and infrastructure development, increasing private participation (private investment has been far more productive in Bangladesh than public sector investment), improving economic governance, and reducing regulatory and administrative burdens that increasecost of business. At the same time, continued macroeconomic stability, lower barriers to - entry for new firms, and improvedaccess to finance are critical in stimulating investment growth. Even then, financing of higher investment levels will remain a challenge and will require fiscal prudence (cutting budget deficits, lowering SOE losses etc.) and substantial donor support. 86. A growth target of 7 percent appears extremely difficult in terms of its requirements on the pace at which investment and productivity need to increase and the amount of additional savings that needto be generated. VI. AGENDAFORHUMAN DEVELOPMENT 87. While the past gains in human development are commendable, formidable challenges remain (Section III.), which are well recognized in the I-PRSP. With good foundations already built, Bangladesh should now move swiftly with the secondgeneration reforms neededto further improve human development. These entail complementing increased social spending with significant improvements in the institutional framework for service delivery. As recommended in the latest World Development Report, the emphasis should always be on placing the poor at the center of service provision: by enabling them to monitor and discipline service providers; by amplifying their voice inpolicymaking; and by strengthening the incentives for providers to serve the poor. The relativeweights that policymakers needto placeon these three mechanismsdepend on characteristics specific to the target group and to the country in general: for example, whether the Government is deemed to have a pro-poor orientation, whether the target group comprises a homogenouspopulation, and whether service delivery performance i s easy to monitor. AGENDA FORHUMAN DEVELOPMENT 27 Addressing Concernsabout the Quality of Education 88. The Government has shown strong commitment to enhancing access to education, particularly, primary education, reflecting growing concerns about quality. Both the I-PRSP and the National Plan of Action for Education for All (2003-15) emphasize the importance of achieving the Education for All goals by ensuring quality in basic education. The I-PRSP identifies two critical areas requiring major improvements: the widening "quality divide" in education between the rich and the poor, and enhanced access to education for the poor, especially girls. The steps that appear to have the highest potential pay-off inthis regard are: i. Strengthening management and accountability: Weak management, worsened by the lack of a specialized education cadre, severely limits the ability of the system to provide quality education. There i s also limitedtransparency in the use and allocation of resources, and little accountability-for example, of teachers to students and guardians and of school management committees to the Government. In addition, education management i s highly centralized and inhibitslocal level initiatives to provide quality education. ii. Improving the quality of teachers: The general quality of teachers i s poor. The absence of an incentive structure prevents attracting and retaining qualified, high-performing teachers. The quality of teacher training i s also poor. Given the limited capacity of the educational administration of the central government and overall financing constraints, innovative approaches are neededto solve the problem of poor quality teaching. For example, in BRAC schools nongovernment teachers hired locally by the community at lower wages than in government schools have achieved much better teacher attendanceand educational outcomes. Similar experiments have worked well in Madhya Pradesh (India). These are worth emulating on a wider scale, with refinements suited to specific circumstances. iii. Attaining better coordination between primary and secondary education: The ~~ ~ administration of primary and secondary systems of education by two separate ministries with little coordination between them has led to many problems. Even in areas where the same institutions are used-as inthe case of the NationalCurriculumandTextbook Boardfor curriculum and textbook development and for assessment of learning achievement-there is large potential for synergies. Steps toward rationalization of the two set of bifurcated institutions i s neededto address this systemic problem in the sector. iv. Improving the composition of education expenditures: The General Education Program, which expanded basic school infrastructure at the primary level in the first half of the 1990s, significantly enhanced primary enrollments. This was followed by the Primary Education Development Program, which also invested significantly in infrastructure development. The priority now i s to allocate adequate resources to institutions for investing in training to improve the quality of teachers and principals, maintenance of physical facilities, good teaching-learning materials, and safe water and clean sanitation facilities. v. Improving service delivery: Effective steps must be taken to check corruption in education. In the publicly funded education sector, particularly in primary education, there is strong perception of corruption and leakage of funds. A major weakness of the system relates to the delivery of the textbooks to students, particularly in primary schools and in rural areas. In a survey conductedby the WB in 2002,67 percent of householdsreported difficulties ingetting textbooks. The main problems cited were delayed supply (39 percent), extra payments (40 percent), and the need to buy textbooks instead of getting them free of charge (17 percent); textbooks are supposed to be given free of charge at the primary level to all children. Effective steps must be taken to check corruption in education. 28 BANGLADESH: DEVELOPMENT ECONOMIC FORUM UPDATE vi. Promoting access of the poor and disadvantaged: Despite the relatively high enrollment rates, a large number of children either do not attend school at all or drop out quickly, mainly because of poverty. Sparsely populated rural areas, out of reach of the nearest primary school, also pose a challenge, especially for young girls. To improve access to primary education, the Government has recently instituted a stipend program that targets the poorest 40 percent of the enrolled students. Approximately 5.5 million children attending rural primary schools and Madrassasare being targeted annually under this program, for which the Government has budgeted approximately $600 million over 2002-07. The sustainability of the program has not been assessed, however, and the design criteria may need revisiting to ensurethat the stipends actually reachthe intended beneficiaries. vii. Forging partnership with civil society: A stronger partnership between the state and NGOs i s needed to meet the goals of access and quality. The Government provides financial support to NGOs for establishing schools in underserved areas and contracts out management of nonperforming schools to reputed NGOs. About 1.2 million children (about 7 percent of all children at the primary level), mostly from poor families, are enrolled in NGO-run schools. Till recently, there has been some reluctance to recognize NGO established schools on the grounds that these do not provide a "'full five-year cycle of primary education." This runs counter to the Education for All objective, especially since NGO-run schools are effective in reaching the disadvantaged and "hard to reach" target groups. The historical divide is beginning to narrow as students from NGO run institutions increasingly transfer to public primary schools or secondary schools, and GOBi s also supporting NGOs to establish Early Childhood Development Centers on public school campuses. Furthermore, recognizing the importance of NGO run institutions at the primary level, the GOBi s now committed to putting in place strategies to increase enrollments and improve the quality of education in these institutions. Sector Buildin?Institutions,StrengtheningPublic-PrivatePartnerships - 89. The impressive long-term achievements in health outcomes are a result of effective partnership among the Government, NGOs, and donors. NGOs, mainly under contract from the Government, have been particularly effective in the area of family planning and immunization services. The public sector's family planning and health services have been less effective, with the performance of family planning perhaps marginally better than health services. Moreover, the two, despite apparent complementarities, have not operated in an integrated framework and attemptsto unify the two services have not worked inthe past. 90. A broad sector-wide approach to addressing the problems of health and family planning was first initiated in the early 1990s; it was then carried to the next level in 1998 under a donor- supportedHealth and Population Sector Program (HPSP). The current phaseof the HPSP ends in 2003 and the Government and the consortium of donors are currently discussing an action plan for the next phase. Going forward, important institutional issues, neglected under the HPSP, will need to be addressed, as will some important demand-side issues and the role of the private sector, which provides 60-70 percent of health services. 91. Improving the access of the poor to curative care, control of communicable diseases, and reduction in high maternal and child mortality have been given high priority in the I-PRSP. Noting that noncommunicable diseases such as cardiovascular disease, diabetes, mental illness, and cancer are gaining significance, the strategy proposes to address them through low-cost preventive measures. The emerging challenges of arsenic, dengue, and HIV/AIDS will also AGENDA FOR HUMAN DEVELOPMENT 29 receive high priority. The Government intends to approach these challenges through continuing the sectorwide programmatic approach, including bothnutrition and urban health services. 92. The I-PRSP health agenda has three elements: spending more by broadening and deepening the resource base, spending better by improving the efficiency of the public sector delivery, and spending on the right groups by improving targeting. Operationalizing this will require attention on three broad approaches: i. Cross-cutting approach to attaining priority health outcomes: Increased public expenditures are neededfor the expansion of pre- and postnatal care, with a view to reducing maternal and infant mortality and arresting the increasing fertility. These objectives cannot be achieved through health sector measures alone, however. They require broad educational efforts to change behavior (contraception, hygiene, assisted delivery), access to tertiary facilities, and improved birth attendance at the household level by trained personnel, among other things. Spending on, and the coverage of, the community-based nutrition program should increase as well. This should be accompanied by the expansion of community-based activities to modify behavior-including addressing mothers' nutrition and health care knowledge and practices and improving access to safe water and sanitation. ii. Selectivity in the servicesfinanced and delivered by the Government: If the top priority, as specified inthe I-PRSP, is to provide basic services to the poor, the Government should target resources to financing these services effectively and efficiently. The Government should concentrate on financing such public goods as immunization, communicable disease control programs (tuberculosis, leprosy, malaria, HIV/AIDS), public health information, essential services, and catastrophic illness care. The most efficient mode of delivery of such government-financed services should be used. Hence, nonpublic providers may be better placed to deliver essential services, HIV/AIDS, tuberculosis, leprosy, and community nutrition services; nonpublic providers may also be better placed to assume responsibility for managing hospitals. The private sector may have more experience in using the media to provide effective health information to the public and it may be better placed to undertake procurement of goods and services. More effective incentive systems are also needed to improve public sector service delivery. A survey of primary health facilities found the absenteerate among doctors to be 74 percent. iii. Defining the Government's role: The Government should take on the policy development and regulatory role. It should develop and update health, nutrition, and population policies, and national drug policies, and formulate policy instruments (for example, micro-insurance and other programs) to improve overall financing of the sector, as well as the effectiveness and efficiency of health expenditure, public and private. In addition, the it should update the national essential drugs list and provide and enforce service quality and health facility accreditation standardsfor public, NGO, and private sector providers. It should also establish systems for disease surveillance to facilitate regular updating of public health priorities for the country. Given the importance of private and own-financing of health care (even among the poor, some 80 percent of health expenditures come from family reserves), private providers could be attracted to establish and run high quality curative care facilities. The Government could maintain responsibility for establishing the regulatory framework to ensure the quality of suchprivately financed and provided services. Strengthen Social Safety Nets 93. Ensuring social protection, especially for the poor, i s accorded high priority in the I- PRSP. A number of evaluation studies indicate that the social safety programs inBangladesh that 30 BANGLADESH: DEVELOPMENTFORUM ECONOMIC UPDATE are not cash-based are plagued by large leakages. Cash-based programs, such as Bangladesh's Rural Maintenance Program, are generally credited with having low leakage. The Government i s inthe process of monetizing some of its larger programs -such as the Food-for-Work program and food aid - inthe hope of curbing corruption and containing transaction costs. This appears to be a move in the right direction. But cash-transfer programs are not in themselves a panacea for the problem of leakage. It is important that monitoring systems be strengthened and adequate checks and safeguardsbe put inplace. Increase Decentralization and Capacity Building at the LocalLevel 94. Bangladesh has initiated only modest reform of local government. Successive governments have made electoral pledges of strong, elected local government structures, without following through. The most important development has been the institution of Union Parishad elections, which has been complemented by direct election of women Union Parishad members. Nevertheless, an effective system of local government with clearly defined responsibilities, financial autonomy, and accountability has yet to emerge. 95. Decentralization is key to improving accountability of public service delivery. It allows the intended beneficiaries of local public services to better influence the management of these services. The growth inliteracy is creating a more aware and self-confident population, making it increasingly possible for the poor to hold public agencies accountable. More i s needed to promote direct community participation in the management of certain facilities, such as schools, clinics, and water supply and sanitation services. For effective decentralization, lower tier service units must operate within a hard budget constraint, local administrative capacity must grow alongside the provisionof greater autonomy, and clear accountability mustbe instituted. Clarify the Role of Nongovernmental Organizations through a Sound LegalFramework 96. Many of the NGOs and community-based organizations (CBOs) in Bangladesh have proven to be world leaders in their innovative ideas and operational methods. By effectively channeling remarkable energy at the grassroots level, they have reached out to many previously excluded from public services: offering substitute services-for example, primary education, primary health care, agricultural services, and micro-finance-and enhancing the voice of the poor through advocacy. The NGO movement has now come of age and needs to be strengthened. The question i s how to define the rules of the game. 97. As they place themselves between the state and its citizens potential governance issues relating to NGOs arise and need to be addressed. Because of the voluntary nature of the NGOs, the public has no recourse to challenging service deficiencies; beneficiaries are in a dependency relationship with NGO providers and have no "rights" as they do with public services. The accountability link between the service provider and the citizen i s therefore weak. In addition, NGOs' involvement in profit-making commercial activities can easily interfere with their incentives for giving priority to delivering social services. 98. A sound legal framework must be developed to define NGOs' status vis-8-vis advocacy groups, commercial enterprises, the financial sector, and the Government and to provide an internal accountability framework that i s based on transparency and a system of checks and balances, bothfor their finances and performance. ANNEXES I TABLEOFCONTENTS 1. MACRGECONOMICINDICATORS Table-1:MacroeconomicIndicators Table-2: Investment Climate Table-3: MilleniumDevelopmentGoal Indicators 11. NATIONALACCOUNTS Table-4: Sectoral Sharesof GDP by IndustrialSector at CurrentPrices Tabled: GDP Growthof Bangladeshby IndustrialSectorat Constant Prices Table-6: Gross Domestic Expenditurein Current Prices 111. FISCAL Table-7: Revenueand Expenditureof the Central Government Table-8: Compositionof NBRTax Revenues Table-9: ADP and RevenueExpenditureby Ministry/Division IlV. MONETARY SURVEY Table-10: MonetarySurvey Table-11:Trends in Deposits& Interest Rates V. BOPANDTRADE Table-12:BangladeshBalanceof Payments(IMF) Table-13: Exportsby Countryof Destination Table-14:Commodity-wiseExports Table-15:Commodity-wiseImports Table-16: Remittance VIII. POVERTYAND INCOMEDISTRIBUTION Table-17:Trends in CBNPovertyMeasures Table-18: IncomeDistribution Table-19:Various Indicatorsof Malnutrition X. PRICE Ta7e-20:Consumer Price Index Table-21: GDP Deflator - Industry XI. UCTERNALDEBTAND AID Table-22: ExternalDebt Table-23: ExternalForeignFinancialAssistance: Commitments& Disbursements XII. LABOR Table-24: Realand NominalWage Indices Table-25: Labor Market Statistics 34 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE Table 1: Bangladesh Macroeconomic Indicators == == - == -- ~ Description ----- ---- FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 woo F Y O l FY02 GrowthRates(%) GDP Growth 5 0 4 6 41 4 9 4 6 5 4 5 2 4 9 5 9 5 3 4 4 5 3 GDP Growth Per Capita 3 0 2 6 2 2 3 1 2 8 3 6 3 5 3 6 4 9 3 7 2 9 4 0 Per Capita GOP Atlas Method(US$) 298 0 297 8 298 1 3133 332 8 3479 3507 354 1 3673 371 1 372 0 389 0 Saving & Investment(% of GDP) Gross Domestic Saving 141 140 145 127 122 146 174 177 179 180 182 182 Gross Natmai Saving 169 172 18 1 163 160 186 21 8 22 3 23 1 224 23 4 23 7 PrN& lhYeStment 103 115 11 8 124 136 137 153 15 5 156 158 168 165 Pubic Investment 7 0 65 6 6 6 7 6 4 7 0 6 4 6 7 7 4 7 3 6 4 6 7 Central GO* Budget (%01 GDP) TotalRevenue 83 9 1 9 3 9 3 9 0 9 2 9 3 9 0 8 5 9 0 10 2 103 Total Expenditure 127 133 138 146 134 135 133 138 147 14 1 148 138 Overall BudgetBaiance 4 5 4 4 4 5 5 2 4 5 -43 -41 -4 8 -6 2 -5 1 -47 -3 5 Balance 01 Payments 1% 01 GDP) Exports 6 4 7 4 7 5 9 2 9 5 105 117 11 6 122 136 125 12 5 imports -11 3 -12 7 -12 4 -154 -17 1 -169 -17 1 -175 -178 -174 -163 -15 9 sewices a income (net) 6 1 0 0 00 -03 -0 1 0 1 0 2 01 -01 -2 5 -1 7 -1 7 CurrentTransfers 4 6 4 5 4 7 4 8 4 5 5 1 4 6 4 9 5 7 4 6 6 0 6 6 CurrentAmunt Balance (including trsnsfem) 6 4 -0 8 -03 -1 8 -32 -1 3 -06 -09 0 0 -2 2 0 5 06 External Indicators EaemslDebt (US$ b ) 133 136 154 16 8 152 150 140 148 I 6 2 151 173 17 0 Ext. Debt as % of GOP 39 5 39 6 43 8 446 37 3 347 316 32 7 340 30 8 36 5 32 8 BB Gross Resewes (US5b.) (endof period) 1 6 2 1 2 8 3 1 2 0 1 7 1 8 1 5 1 6 1 3 1 6 2 5 BB Gmss Resmes (inmonthsof Imports) 5 5 6 3 7 9 6 3 3 5 2 9 2 8 2 3 2 3 1 7 2 1 2 9 Eaernai Debt ServiceRatio (%of Export Earning) 158 136 12 9 115 107 9 6 7 9 8 4 8 0 6 4 6 1 5 5 Exchange Rate NominalPemd Average (TWUSS) 38 2 39 1 40 0 40 2 40 8 427 455 48 1 50 3 540 57 8 58 1 NominalEndof Period(TWUSS) 39 0 39 8 40 3 40 1 41 8 437 463 48 5 51 0 570 57 9 58 4 Real E f f ~ t(1990=100) ~ e 95 4 91 5 92 3 90 9 934 935 1019 1044 1026 1012 Rate of Inflation (%) (year on year) 4.6 2.7 3.3 8.8 6.8 2.5 7.0 8.9 3.9 1.6 2.4 5.2 Total Public Debt ('a of GDP) NA 45.2 50.9 51.9 45.7 43.8 41.5 43.8 46.9 50.8 53.0 51.2 Memorandum Items __ ~ ~ -GDP at Current Prices (Taka-bill.) 11954 12537 13% 1 15252 16632 18070 20018 21970 23701 2535 C 27320 3005 ( GDP at Current PiicesAtlas Method (US$ 47 7 bili) 338 344 35 1 37 6 40 6 432 444 45 4 48 9 49 5 Population (mill.) ----- ----- 1130 1149 1169 1188 1208 1226 1245 1263 1281 1299 1316 1334 Populationgrowth Rate 1 7 1 7 1 6 1 7 1 5 1 5 1 4 1 4 1 4 1 3 1 3 source vanom pvbl#=at#wo t k Woild Sa*, ADS 01 and Bangladesh8unau oi SLa(lSt8fs ANNEXES 35 I Table 2: BangladeshInvestmentClimate Income Year 3angladesh Group Regional ligh-Income Average Average Average PrivateInvestmentEnvironment PrivateInvestment/Gross Domestic FixedInvestment rw 1997-1999 68.8 54.6 70.8 79.2 Domestic Creditto PrivateSector (stock,% GDP) 2000 21.3 23.9 28.7 136.3 Real Lending Rate 2000 13.4 6.72 5.0 HighestMarginalCorporateTax Rate ("YO) 2000 35.0 22 33.3 EuromoneyCredit Rating Sep-01 36.5 26.5 35.5 90.2 ICRGCompositeRisk Rating ' Dec-01 60.5 59.8 58.8 83.7 Institutional Investor Risk Rating Sep-01 26.4 16.2 27.0 85.3 Governance ICRGCorruption Rating(1-6, badto good) JuI-02 1 .... 1.a 3.8 ICRG BureaucraticQuality Rating(1-4) JuI-02 2 .... 2.3 3.9 ICRG Law andorder (1-6) JuI-02 1.5 .... 2.9 5.4 Openness Trade (imports+exports)/GDP("YO) 2000 29.6 38.7 23.0 44.0 FDIinflows (net, % GDP) 2000 0.4 0.9 0.5 2.9 WTO member? Y Unweighted MeanTariff ("A) 2000 21.o 30.0 5.0 HeritageTrade Policy Index(1-5, goodto badf 2002 5 4.2 2 - . -. ~- ~ Paved Roads,%of total 1995-2000 9.5 16.5 36.9 92.9 MotorVehicles (pei' 1000 persons) 2000 1 10 8 610 Cost of callsto US(US$per 3 min) 2000 4.1 .... 3.6 1.8 InternetUsers(thousands) 2000 100 9,337 5413 269821 ElectricityConsumptionper Capita (kilowatt-hours) 1999 89 350 371 8,431 GDP per unit energy use (PPP$ per kgoil equivalent) 1999 10.8 3.6 4.6 4.8 I Source WDI, WDR, HDR.Performanceof the BangladeshiLaborMarket Dunngthe Nineties Feb 15.2002 1, Composite1ntemation;rl Country RiskGuide (ICRG)risk ratingis an overall index, rangingfrom 0to 100,basedon 22 componentsof risk. 2. InstitutionalInvestorcredit rating ranks,from0to 100,the chances of a country`sdefault. 3. The trade policy scoreis basedon a country`saveragetariff rate-the higherthe rate,the worse (or higher)the score.However,if non-tariffbarriersexist insufficientquantityand if there is ample evidenceof corruption withinthe customs sewice, a countr,`s score basedsolely on tariffrates receivesan additionalpointon the w r e (representinglowereconomicfreedom).The table belowshowsthe criteriafor the trade policy score. 95b2 Averagetariff rate>4% Moderate 14% 2 Averagetariff rate> 9% High 19%2Averagetariff rate2 14% Very High Average tariff rate> 19% 36 BANGLADESH:DEVELOPMENTFORUM ECONOMIC UPDATE 1991-92 2000 2015 Target Upper PovertyLine 58.8 49.8 29.4 Lower Poverty Line 42.7 33.7 21.4 SquaredPovertyGap: UpperPoverty Line 6.8 4.6 3.4 Lower PovertyLine 3.9 2.3 2.0 1990 I 2000 I 2015 Gross PrimaryEnrollmentRate("7'0) 77 97 100 1991 2000 2015 PrimaryCompletionRate (%) 40.7 67 100 1991 2000 2015 FemalePrimaryEnrollmentRate 66 97 100 1990 2000 2015 FemaleLiteracyRate 25.5 40.1 100 1990-91 2000 2015 Under-5 MortalityRate 151 110 50 (per 1000live births) 1990-91 1997-98 2015 Infant MortalityRate 92 57 31 er 10DO live births) - ~ ~~ - -~ MDG5: Improvematemalhealth2015target = reduce1990maternalmortalityby three-fourths 1990-91 I 1997-98 2015 MaternalMortalityRate t 4.7 I 3.0 II 1.2 1990 2000 2015 ContraceptivePrevalenceRate 30.8 53.8 100 (%of womenages 15-49) 1990-91 2000 2015 Forest Area as Percentageof Total Area 13 10.2 15 Source.BBS, HIES 2000 PMED, PrimaryEducabOnStatistics in Bangladesh2W1 PMED, PrimaryEducationStatisticsin Bangladeshand BBS, 1991 PopuiationCensusand HouseholdExpenditureSurvey,2000 BBS, healthand DemographicSurvey 1999-2000 UNICEF,ProgotirPathay BBS. StatisticalYear Book andWorld Bank The UNeGreenDataBook,2001 BDHS, BangladeshDemographicand HealthSurvey, 199900 ANNEXES 37 BANGLADESH:DEVELOPMENTFORUM ECONOMIC UPDATE 38 ANNEXES 39 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE 40 ANNEXES 41 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE 42 ANNEXES 43 I Table 10: Monetary Survey (In e lions of Taka :End I Period) I ?E!!!Jo: Net Net Other Foreign Domestic Domestic Public Other Broad Asset - - Assets Govt. Sector tems Net Money 1992l93 48.9 268.9 282.6 22.7 60.3 199.6 -13.7 317.8 1993194 91.5 274.1 308.2 46.8 44.6 215.5 -34.5 362.4 1994195 104.6 321.8 360.9 46.1 49.1 265.7 -43.4 422.1 1995196 67.4 389.8 434.5 63.1 54.8 316.6 -44.7 456.8 1996197 65.5 442.1 494.0 80.2 57.4 356.4 -51.9 506.3 1997/98 66.8 490.5 556.4 92.7 62.5 401.2 -65.9 558.7 1998199 62.1 568.2 629.1 112.5 60.2 456.4 -60.9 630.3 1999100 82.4 665.2 714.9 147.7 61.7 505.4 -49.7 747.6 2000101 68.7 797.5 841.1 176.8 73.6 590.7 -38.1 871.7 2001/02 95.9 889.8 949.3 201.2 75.0 673.1 -59.6 985.7 2002l03 124.0 985.0 1059.0 202.0 61.O 797.0 Annuz 36 Change 1992/93 1993194 87% 2% 9% 107% -26% 8% 151Oh 14% 1994195 14% 17% 17% -1% 10% 23% 26% 16% 1995/96 -36% 21% 20% 37% 12% 19% 3% 8% 1996197 -3% 13% 14% 27% 5% 13% 16% 11% 1997198 2% 11% 13% 16% 9% 13% 27% 10% 1998199 -7% 16% 13% 21% -4% 14% -8% 13% 1999100 33% 17% 14% 31% 3% 11% -18% 19% 2000/01 -17% 20% 7 8% 20% 19% 17% -23% 17% 2001102 40% 12% 13% 14% 2% 14% 57% 13% 2002/03 29% --- 11% 12% 0% -19% I 18% 24% 13% Source StatisticsDepartment,BangladeshBank 44 BANGLADESH:DEVELOPMENT FORUM ECONOMICUPDATE I Table11:TrendsinDeposits& InterestRates I ~ ~~ DemandDeposits Time Deposits Commercial DepositRate(%) (inmillionTakas) (inm'llionTakas) LendingRate(%) (Threemonthsto less thansix months) FY98 77,352 399,805 13.0 8.9 FY99 85,628 457,773 13.1 9.5 FYOO 97,053 548,811 13.0 8.6 FYOl 108,691 648,268 12.6 8.9 FYo2 116,204 744,549 13.0 9.1 FYo3 Jul 109,102 754,203 12.2 8.0 Aug 106,844 767,127 12.2 7.9 Sep 107,003 780,466 12.6 7.9 oct 108,713 783,491 12.3 7.6 Nov 109,600 791,095 12.2 7.5 Dec 120,704 814,259 12.9 7.3 Jan 109,990 815.230 12.4 7.5 ~ .E ANNEXES 45 I Table 12: Bangladesh Balance of Payments (in millia US$) Items --- - 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 ( P W Trade Balance -2113 -1669 -1934 -1865 -2011 -1768 -2207 Exports f.0.b. (includingEPZ) I/ 4334 5103 5283 5701 6419 5929 6492 Importsc.1.f. (includingEPZ) 2/ -6447 -6772 -7217 -7566 -8430 -7697 -8699 Services(net) -552 -570 -603 -645 -914 -500 -688 Receipt 657 707 707 849 759 864 887 Payments 31 -1209 -1277 -1310 -1494 -1673 -1364 -1575 Income (net) -107 -100 -135 -221 -264 -321 -195 Receipt 89 91 91 97 97 50 70 Payments -196 -191 -226 -318 -361 -371 -265 Current Transfers 1907 1876 2195 2394 2171 2826 3311 Official4/ 137 126 220 165 72 69 60 Private 1770 1750 1975 2229 2099 2757 3358 of which: Workers' remittances 1475 1525 1706 1949 1882 2501 3062 Current Account Balance -865 -463 -477 -337 -1018 237 328 CapitalAccount 598 445 387 561 432 410 392 Capitaltransfers 5/ 598 445 387 561 432 410 392 FinancialAccount -110 237 -395 -185 249 35 185 - Direct Investment 16 249 198 194 174 65 92 PortfolioInvestment -132 3 -6 0 0 -6 2 Other Investment 6 -15 -587 -379 374 541 634 MLT loans 6/ 734 706 821 806 790 963 1070 MLTamortization payments -316 -308 -341 -396 -416 -422 -436 Other long term loans (net) 57 -47 -41 127 -13 -42 -20 Other short termtoam*&) -r--- T ~ *8 - 168 - -- Other assets -69 -41 -58 -55 -68 -52 -81 Trade credit (net) -365 -522 -829 -641 -260 -482 -656 Commercial bank (net) 23 29 -61 -276 -44 -9 71 Errorsand Omissions 180 -88 267 125 -47 -354 -94 OVERALL BALANCE -197 131 -218 164 -384 329 811 Reserve Assets 197 -131 218 -164 384 -329 -811 Bangladesh Bank 197 -131 218 -164 384 -329 -811 Assets 325 -14 205 -79 302 -276 -871 Liabilities - ----- -128 -117 13 -85 82 -53 60 Source IMF li 1mludes.a)Gwds procuredin ports;b) Repairson goods, c) Internalsales of bondedcommodibes.Excludes Localsale 21 Includes:a) Goods procuredinports;b) Repairson Qwds.Excludes:Freight.% insurancecharges 31 Includes. Freightand Insurancecharges 41 Excludes JDR grants Y Includes JDRgrants 61 Excludes Supplier'scredit 46 BANGLADESH:DEVELOPMENT FORUM ECONOMIC UPDATE I I ANNEXES 47 48 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE - fn ANNEXES 49 )looo or rdndmd7oq q q o o , 0 0 0 c u d d d d I 0 0 0 C J ) O N t n m - O ~ O O ~ - d d d o o o o o o I 50 BANGLADESH:DEVELOPMENT FORUM ECONOMICUPDATE I Table 17: Trends in CBN Poverty Measures U er Povert Line Lower overt Line ~ ~ HEADCOUNT RATE: National 58.8 51.O 49.8 42.7 34.4 33.7 Urban 44.9 29.4 36.6 23.3 13.7 19.1 Rural 61.2 55.2 53.0 46.0 38.5 37.4 POVERTY GAP: National 17.2 13.3 12.9 10.7 7.6 7.3 Urban 12 7.2 9.5 4.9 2.6 3.8 Rural 18.1 14.5 13.8 11.7 8.6 8.2 SQUARED POVERTY GAP: National 6.8 4.8 4.6 3.9 2.5 2.3 Urban 4.4 2.5 3.4 1.5 0.7 1.2 Rural 7.2 5.3 4.9 4.3 2.8 2.6 Source: Poverty in Bangladesh: Bui ANNEXES 51 ____ Table 18: PercentageDistributionof IncomeAccruingto Householdsin Groups(Deciles)and Gini Co-efficients HouseholdIncome Groups (Deciles)& 1988-89 1991-92 1995-96 2000 Gini Co-efficients ~~ 'otal National 100.0 100.0 100.0 100.0 Lowest5% 1.1 1.o 0.9 0.9 Decile-1 2.6 2.6 2.2 2.4 Decile-2 4.0 3.9 3.5 3.8 Decile-3 5.0 5.0 4.5 4.5 Decile-4 5.9 5.9 5.4 5.2 Decile-5 7.0 7.1 6.4 6.1 Decile-6 8.1 8.5 7.5 7.1 Decile-7 9.6 10.1 9.2 8.4 Decile-8 11.6 12.1 11.4 10.4 Decile-9 15.2 15.6 15.4 13.9 Decile-10 31.O 29.2 34.7 38.1 Top 5% 20.5 18.9 23.6 28.7 3ni Co-efficient 0.4 0.4 0.4 0.4 'otal Rural 100.0 100.0 100.0 100.0 Lowest 5% 1.1 1.1 1.o 1.1 Decile-1 2.7 2.7 2.6 2.8 Decile-2 4.1 4.1 3.9 4.3 Decile-3 5.1 5.1 5.0 5.2 Decile-4 6.1 6.1 e o * . .. Deciled 7.2 7.2 7.0 6.8 Decile-6 8.3 8.6 8.2 7.9 Decile-7 9.7 10.3 9.8 9.1 Decile-8 11.7 12.3 11.9 10.9 Decile-9 15.1 15.7 15.6 14.1 Decile-10 30.1 28.0 30.2 33.0 Top 5% 19.8 17.8 19.7 24.1 3ni Co-efficient 0.4 0.4 0.4 0.4 rota1Urban 100.0 100.0 100.0 100.0 Lowest 5% 1.1 1.1 0.7 0.8 Decile-1 2.8 2.6 1.9 2.0 Decile-2 4.1 4.1 3.2 3.1 Decile-3 4.9 5.0 4.1 3.8 Decile-4 5.8 5.9 5.0 4.7 Decile-5 6.8 6.8 7.0 5.6 Decile-6 7.9 8.1 7.2 6.7 Decile-7 9.4 9.7 9.0 8.2 Decile-8 11.6 11.8 11.4 10.4 Decile-9 15.6 15.6 16.3 13.9 Decile-10 31.2 30.4 36.1 41.6 Top 5% 20.0 19.4 24.3 32.4 3ni co-efficient 0.4 0.4 0.4 0.5 iource: PreliminaryReport HouseholdIncome & Expenc ire Survey- 10; Dec.2001 12;Table-7) 52 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE I Table 19: Trends in Various Indicators of Malnutrition Nutrition Status Indicator -- - -- -- BBS Child NutritionSurveys BanqladeshDHS (%Chi ("%a 0-5s Aonths) 1985-86 1989-90 2000 1996-97 199940 Stunting (height-for-age) % below2 std. deviations 69 66 64 51 49 55 45 Yobelow3 std. deviations 33 24 19 28 18 Wasting(weight-for-height) Yobelow2 std. deviations 15 15 17 17 12 18 10 % below3 std. deviations 1 4 1 Underweight(weight-for- age) 2 / 3 Yobelow 2 std. deviations 72 67 51 56 48 Yobelow 3 std. deviations - 13 21 13 Source: Poverty in Bangladesh: Building in Progress. June, 2002 (p.10; Table 1.5) 53 54 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE l r r I- ANNEXES 55 d AI M b 56 BANGLADESH:DEVELOPMENTFORUM ECONOMIC UPDATE Table 23: External Foreign Financial Assistance: C o m m i t m e n t & D i s b u r s e m e n t ( U S $ Mllllor s b u r s e m e i Grant Total G r a n t L o a n T o t a l I971172 5 1 3 61 1 245 26 2 7 1 I972173 483 395 878 486 65 5 5 1 I973174 107 448 555 218 2 4 3 46 1 I974175 345 92 1 1266 375 526 9 0 1 I975176 380 578 958 234 567 8 0 1 I976177 400 326 726 2 5 6 279 535 I977178 433 714 1147 393 441 834 I978179 936 824 1760 502 5 2 8 1030 I979180 485 668 1153 6 5 0 573 1223 I980181 550 1009 1559 593 553 1146 1981182 805 1117 1922 6 5 4 586 1240 I982183 837 685 1522 587 5 9 0 1177 I983184 859 836 1695 7 3 3 535 1268 I984185 875 1105 1 9 8 0 703 566 1269 I985186 874 787 1661 546 760 1306 I986187 894 709 1603 6 6 1 934 1595 I987188 881 648 1529 823 81 7 1640 I988189 66 1 1212 1873 6 7 3 995 1668 1989190 885 1290 2 1 7 5 766 1044 1810 1990191 485 885 1370 8 3 1 901 1732 1991192 1140 775 1915 817 794 1611 1992193 7 3 4 540 1274 818 857 1675 1993194 464 1946 2 4 1 0 7 1 0 849 1559 1994195 881 75 1 1612 8 9 0 849 1739 1995196 864 41 6 1280 6 7 7 766 1443 1996197 842 81 9 1 6 6 1 736 745 1481 1997198 5 8 5 1206 1791 503 748 1251 1998199 862 1787 2649 669 867 1536 1999100 619 856 1475 726 862 1588 200010 1 938 1115 2 0 5 3 5 0 4 865 1369 2001102 402 477 879 479 963 1442 T o t a l 20999 25943 46942 1 8 4 5 8 20694 3 9 15 2 I P e r c e n t o f 1 I P 1972L73_ ~ 6 .O _ 4 . 3 AL0__-- 0.8 -6.8 ~L~~~ ~~ ~ ~ ~ _ L_ ~ 1973174 0.9 3.6 4.5 1.7 2 .o 3.7 1974175 1.8 4.7 6.5 1.9 2.7 4.6 1975176 3.8 5.7 9.5 2.3 5.6 7.9 1976177 4.2 3.4 7.5 2.7 2.9 5.6 1977178 3.3 5.4 8.6 3 .O 3.3 6.3 1978179 6 .O 5.3 11.3 3.2 3.4 6.6 1979180 2.8 3.8 6.6 3.7 3.3 7 .O 1980l81 2.8 5.2 8 .O 3 .O 2.8 5.9 1981182 4.5 6.3 10.9 3.7 3.3 7 .O 1982183 5 .O 4.1 9.1 3.5 3.5 7 .O 1983184 4.5 4.4 8.8 3.8 2.8 6.6 1984185 4.1 5.2 9.3 3.3 2.7 6 .O 1985186 4.1 3.7 7.9 2.6 3.6 6.2 1986187 3.8 3 .O 6.8 2.8 3.9 6.7 1987188 3.4 2.5 5.9 3.2 3.1 6.3 1988189 2.4 4.3 6.7 2.4 3.6 6 .O 1984190 2.9 4.2 7.1 2.5 3.4 5.9 1990191 1.6 2.9 4.4 2.7 2.9 5.6 1991192 3.6 2.5 6.1 2.6 2.5 5 .1 1992193 2.3 1.7 4 .O 2.6 2.7 5.2 1993194 1.4 5.7 7.1 2.1 2.5 4.6 1994195 2.3 2 .o 4.2 2.3 2.2 4.6 1995196 2.1 1.o 3.1 1.7 1.9 3.5 1996197 2 .o 1.9 3.9 1.7 1.8 3.5 1997198 1.3 2.7 4.1 1.1 1.7 2.8 1998199 1.9 3.9 5 .8 1.5 1.9 3.4 1999100 1.3 1.8 3.1 1.5 1.8 3.4 200010 1 2 .o 2.4 4.4 1 .1 1.8 2.9 2001102 0.8 1 .o 1.9 2 .o 3.0 Source Ban( desh Aurthonc k S h a m i k k h a : 13 (p.207) ANNEXES 57 r . 58 BANGLADESH:DEVELOPMENTFORUMECONOMICUPDATE I Table 25: Bangladesh Labor Market Statistics I 199Ol91 1995196 1999100 Total Labor force (in million) 51 56 58 Male 31 35 36 Female 20 21 22 Types of Employment (Yo) 100.0 100.0 100.0 Formal 11.7 12.4 13.1 Non-formal 87.9 87.6 86.9 Family-based 47.2 40.1 37.0 Daily basis 13.9 17.9 17.6 Self-employment 26.8 29.6 32.3 Employment by Sector ("YO) 100.0 100.0 100.0 Agriculture, forest, fisheries 66.4 63.2 62.5 Mining and quarrying ... ... 0.5 Manufacturing 11.8 7.5 7.6 Electricity, gas and water 0.1 0.2 0.2 Construction 1.o 1.8 2.1 Trade services 8.5 11.2 12.0 Transport and communication 3.2 4.2 4.6 Finance and business service 0.6 0.4 0.5 Community and personal service 3.8 9.3 10.0 Others 4.5 2.2 10.0 -.-~- ~~ - ___._ Unemployment Rate (Standard) (YO) 1.9 2.5 3.6 Unemployed persons ('000')' 8,354 7,812 4,402 Total unemployed persons ('000') 9,350 9,229 6,602 Underemployed persons ('OOO')* 21,545 18,903 20,534 Underemployed rate (%) 43.0 34.6 35.3 1. Unpaid workers c 15 hours per week Source: Performance of the Bangladeshi Labor market Duringthe Nineties. Feb 15, 2002 (p.22; Table IB 1) IMF IndicatorsApril 15, 2002 (p.61; Table 12)