Report No. 7596B-D Bangladesh Recent Economic Developments andShort-Term Prospects March 13,1989 Asia Country Department I FOROFFICIALUSE ONLY S~~~~~~~~~~~~~~~~ Document of the World Bank This docum~erit has a restricted distribution andmaybe used by recipients only ini the performance of theirofficial duties. Its contents maynot otherwise bedisclosed vvith~out World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Bangladesh Recent Economic Developments and Short-Term ......Bangladesh Recent Economic Developments and Short-Term Prospects March 13,1989 Asia Country Department I FOR OFFICIAL USE
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CUHRRENCY EQUIVALENTS
The external value of the Bangladesh Taka (Tk) is fixed in relation to a basketof reference currencies, with the US Dollar serving as the intervention currency.The official exchange rate on January 1, 1989 waS Tk 32.27 per US Dollar.
US$ 1 - Tk 32.27'k 1 - US$0.031
In this report, US$ is sometimes abbreviated to $.
WEIGHTS AND MEASURES
I acre - 0.405 hectare (ha)1 mscf - 1 million standard cubic feetl tpy - 1 ton per year1 crore - 10 willion
FISCAL YEAR (FY)
July 1 - June 30
BANGLADESH
RECENT ECONOM1IC DEVELOPMENTS AND SHORT-TERM PROSPECTS
BBS - Bangladesh Bureau of StatisticsBJNC - Bangladesh Jute Mills CorporationBOI - Board of InvestmentBRAC - Bargladesh Rural Advancement CommitteeBRDB - Bangladesh Rural Development BoardBSCIB - Bangladesh Small and Cottage Industries BoardBTTB - Bangladesh Telephone and Telegraph Board
CDST - Customs D.lties and Sales Taxes,
DEDO - Duty Drawback and Exemption OfficeDFI - Development Finance Inastitution
EPZ - Export Processing Zone
ERD - External Resources Division
FFW - Food For Work
GDI - Gross Domestic InvestmentGDP - Gross Domestic ProductGOB - Government of Bangladesh
RES - Household Expenditure Survey
ILO - International Labor Organization
LLP - Low Lift Pump
NGO - Non-Government OrganizationNIP - New Industrial Policy
O&M - Oneration and Maintenance
PE - Public EnterprisePFDS - Public Food Distribution SystemPFP - Policy Framework PaperProshika - Rural Development Center
RIP - Revised Industrial PolicyRPP - Rural Poor Program
SABRE - System for Autonomous Bodies Reporting and EvaluationSTW Shallow TubewellSwarnivar - Self-reliance Movement
TA - Technical Assistance
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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UNDP - United Nations Development ProgramUSAID - United States Agency for International Development
VCD - Vulnexable Group Development
UFP - World Food Program
XP?S - Export Performance Benefit Scheme
TITLE: RECENT ECONOMIC DEVELOPMENTS AND SHORT-TERM PROSPECTS
COUNTRY: BANGLADESH
REGION: ASIA COUNTRY DEPARTMENT I
SECTOR: COUNTRY ECONOMIC
R8PORT TYPE CIASSIF MM/YY LANGUAGES7596-BD CEM Restricted 03 89 English
PUBDATE: 8903
ABSTRACT: In the mid-eighties, Bangladesh made good progress instabilizing its economy, achieving a reasonably goodrate of economic growth with some improvement in thepoverty situation, and initiating much needed policyreforms in many areas. Ir. the last two years, however,floods of unusual severity dealt a major setback to theeconomy. Although the Government handled the immediatecrisis caused by these disascers very well, the floods,as well as insufficient attention to short-term economicmanagement, contributed to a deceleration of economicgrowth, a slowdown in the policy reforms and an apparentreversal in the improving trend in the poverty situationobserved in the mid-eighties. Given widespread poverty,however, Bangladesh will need to reorient its economicpolicies from a preoccupation with stabilization toresuscitate the economy quickl3, to accele:ate economicgrowth to at least 5% per annum, and to take meaningfulsteps to alleviate poverty. Against this background,this report evaluates Bangladesh's recent economicperformance and short-term prospects; neededimprovements in economic management in the short-term;policy reforms required over the medium term to achieveeconomic growth and poverty alleviation objectives; andexternal aid requirements in FY90 to assist theseefforts.
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COUNTRY DATA - DANGLADESH
AME PCitnUCI0 (1985) DEPSITY (198S)
143,998 km2 100.6 million 699 per km2 of total areaRate of Growth: 2.4 1.062 per km2 of cultivable lISM
POPULATION HARACTERISTICS (1985) REALSH '.fCrude Birth Rate (per 000) 39.0 Population per physician: 5.900
Crude Death Rate (per '000) 15.0 Population per hospital bed: 3,600
Infant Mortality (per .000 live births) 125.0
INCOME DISTRIBUTION (1982) DISt.IBRUTION OF LAND OWNERSHIP (1978)
X of natlonal incom. ttSheet quinttle: 42 2 owned by top 102 of owners: 49
X of nAtional income, lowest quintile- I: owned by smallest 10S of owners: 2
ACCESS TO PIPED WATER (1980) ACCESS TO ELECTRICITY (1980)
X of population - urban: 26 2 of population - urban. 3.5
X of population - rural 40 2 of population - rural:
NIUTRISION (1983) EDUCATION
Calorie intake as 2 of requirements: 84 Adult literacy rate (2) (1980181) 292
Per capita protein intake (8ramas) 42 Primary school enrollment (X) (1985) 602
i. Introduction. In the mid-eighties, Bangladesh made good orogressin stabilizirg its economy, achieving a reasonably good rate of economicgrowth with some improvement in the poverty situation, and initiating muchneeded policy reforms in many areas. This advance, however, was rudelyinterrupted in the last two years, as floods of unusual severity in both 1987and 1988 (and a localized cyclone in December 1988) devastated the country.These disasters dealt a major setback to the economy by reducing economicgrowth in the short term; diverting the Government's attention, energies andresources from development to short-term crisis management; and slowing downthe reform process. Although the Government handled the immediate crisiscaused by these disasters very well, short-term economic management aimed atreviving economic growth and development activity has not received sufficientattention; unless quickly reversed progress achieved in the mid-eighties willbe undermined. As the economy stagnated, the modestly improvir.g trend in thepoverty situation observed in the mid-eighties appears to have been reversedover the past two years. This has increased the urgency to resuscitate theeconomy quickly, to accelerate economic growth to at least 5% per annium, andto take meaningful steps to alleviate poverty, especially among the landlessand assetless. Against this background, this report evaluates Bangladesh'srecent economic performance and short-term prospects; needed improvements ineconomic management in the short-term; policy reforms required over the mediumterm to achieve economic growth and poverty alleviation objectives; andexternal aid requirements in FY90 to assist these efforts.
ii. The Background - Economic Trends in the Eighties. In the earlyeighties, faced with a severe deterioration of its terms of trade and aprospective sharp reduction in external aid inflows on which it is heavil)dependent, Bangladesh embarked on a major stabilization program. Over thenext four years, demand management policies and broad-based reforms insectoral policies helped to restore macroeconomic viability, reducing externaland fiscal deficits from 10-12% of GDP in the early eighties to 6-7% of GDP byFY87. To reduce the budget deficit, public expenditures were scaled backsharply; the cuts fell primarily on the development budget which contractedfrom 13% of GDP in FY83 to only 9% in FY87, while current expenditures rosefrom 6.6% of GDP to 7.7% over the same period. Credit growth was restrictedfrom the mid-eighties, with efforts to improve cred't discipline. Thesemeasures, along with restraints or. imports, import substitution in energy andfertilizer, and rapid growth of non-traditional exports and remittances fromabroad, helped to reduce the external deficit. Eccnomic growth, though belowthe economy's potential, averaged 4% per annum over this period; while asubstantial redirection of Government food distribution programs and bettertargeting of food subsidies, together with a rising trend in real wages in therural sector, contributed to a modest improvement in the poverty situation.On the policy front, significant efforts were made to increase privateinvolvement in economic activity through deregulation of investment approvalprocedures and a major denationalization of public enterprises. The incentivesystem was improved through a substantial devaluation of the real effectiveexchange rate (in the second half of the eighties), strengthened exportincentives, reductions in subsidies, and market-oriented pricing policies foragricultural inputs and outputs and for energy products. A beginning was madein FY87 to reduce pervasive quota restrictions and import bans.
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iii. Although macroeconomic management during this period wascommendable, performance at the sector and subsector level was lesssatisfactory. The rate of growth in the productive sectors--agriculture andindustry--barely kept pace with population growth; which itself, at 2.5% p.a.was still high, despite some progress in strengthening programs in thepreceding decade. Ia agriculture, the momentum of the foodgrain productiondrive initiated in the early eighties appeared to have petered out by the mid-eighties. In industry, although export oriented new industries (such asgarments and shrimp-processing) did well; jute, the traditional leadingsubsector, as well as most industrial sub-groups producing for the domesticmarket, performed poorly. Similarly, despite the improving trend in thepoverty situation, the absolute numbers of the poor still kept increasing.
iv. Domestic resource mobilization remained weak, but perhaps moresignificant was the increase in current expenditures from 6.6% of the GDP inFY83 and FY84 to an estimated 8.1% in FY88. This rapid growth was only to asmall extent due to higher expenditures for natural calamities. At the sametime, development expenditures, which were above 10% of GDP at the beginningof the decade have come down to 6.7% in FY88. Moreover, this has happenedwhile net foreign financing increased rapidly. While total governmentrevenues and net foreign financing increased by about 73% (revenue: 86%;foreign: 59%), current government expenditures increased by 114%, whiledevelopment expenditures increased by only 35%. This situation has beenfurther exacerbated in FY89 when the development program has been again cutback sharply. While the floods contributed to this trend, it is a reflectionof a more fundamental macro-economic problem which needs to be addressedexpeditiously by the Government. This points to very serious problems for thesustainability of growth in the Bangladesh economy for the future. It alsohas implications for budgetary allocations and types of aid. This trendshould be reversed so that more funds are allocated to development activity.Thus, as discussed below, the case for more commodity aid to Bangladesh shouldbe considered In the context of whether or not the Government is providingmore local resources for the development budget and other high priority areassuch as O&N and current cost finanicing of social sector programs which are nowheavily underfunded. Commodity aid should provide additionality to, and helpexpand, development activity, rather than replace the Government'scontribution to financing the development budget. While there areimplementation bottlenecks which also need to be rectified; the "soft-budget"option of relying on foreign aid to finance the development program, when theGovernment's own resources are committed to low priority current expenditures,at the expense of investment, has to be corrected.
v. Economic Performance in FY88. Notwithstanding structuralproblems, at the beginning of FY88 Bangladesh, with success!ul economicstabilization behind it, seemed ready to take more purposeful steps toaccelerate economic development. However, floods in the summer of 1987--considered to be the worst in 40 years--seriously undermined theseexpectations. The 1987 floods destroyed $285 million in economicinfrastructure, caused extensive damage to the summer crop estimated at nearly1.6 million tons, and took 1,600 lives.
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vi. The Government responded to this crisis with an extensive programto assist farme_.s in replanting damaged crops, (it succeeded in replanting 90%of crop arsa), and intensify production of winter crops--boro rice and wheat.It also took steps to increase food availability by importing a record 2.9million tons of foodgrain, with emergency assistance from donors and largecommercial purchases from its own resources. A rehabilitation program torepair damaged infrastructure was also launched, with complementary efforts tomobilize additional revenues, restrain expenditures and re-prioritize thedevelopment program.
vii. These steps helped to recoup some of the losses of the summercrops; and along with a record winter rice crop, foodgrain production reached16.5 million tons, the same level as in the previous year. This, togetherwith record imports and increased foodgrain distribution from the PublicFoodgrain Distribution System (PFDS), helped to ensure food security andstabilize food prices from the second quarter of FY88. However, a buUld-up infood stocks (to 1.4 million tons) prevented sutfficient domestic procurement tosupport prices to farmers; which fell sharply in the final quarter of FY88,exacerbating income losses in agriculture. Despite the recovery inproduction, value-added in agriculture declined by over 1% in FY88. There wasalso no growth in the manufacturing sector (which had grown by 6.4% in FY87)due to weak domestic demand for most industries--textiles, tobacco, basicm*eals etc. Thus, overall GDP growth decelerated sharply to only 1.8% in FY88*rom 4.0% in the preceding year.
viii. As noted, inadequate resource mobilization, coupled with continuedgrowth of current expenditures and manifestly low priority accorded to thedevelopment program had led to a continued decline in development expendituressince the mid-eighties. In FY88, the disruptions caused by the floods andpolitical unrest further affected the implementation of the developmentbudget, as current expenditures and allocations for replanting andre'habilitation activities rose, at the expense of the planned developmentprogram. However, budgetary management exacerbated these difficulties. At atime when fiscal policy had to play a more positive role to offset thecontraction in the economy, the budget accumulated an unexpected cash surplus,depriving the development projects of local currency needed to utilizeavailable external project aid. Consequently, the development program (ADP)was cut back by IS% below the FY88 budget target and by 12% below FY87actuals, in nominal terms; and the project aid disbursement ratio fell to 19%from 21% in the previous year; while the overall budget deficit was reduced to7.5% of a (smaller) GDP from a planned 8.2%. On the other hand, the slowdownin the economy and tight budgetary management helped to strengthen the balanceof ga=ets position in FY88. A 1% decline in non-food imports, in realterms, and rapid growth of non-traditional exports (mainly garments) andremittances from abroad limited the current account deficit to 5.7% of GDPcompared to 5.5% in FY87, while gross foreign exchange reserves increased byUS$144 million to $896 million, the equivalent of 3.6 months' imports.
ix. Impact of the 1988 Floods. Before the economy could recover fromthe impact of the 1987 floods, Bangladesh was swamped by an even greater floodin the summer of 1988--regarded as the worst in living memory. It inundated84% of the land area, affecting 45 million people, with over 1,600 deaths
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directly attributed to it and another 735 deaths caused subsequently bydiarrheal diseases. Damage to summer rice crops is estimated at about 1.8million tons, with a more localized cyclone in December 1988 causing furthercrop losses of 0.2 million tons. Flood damage to physical and economicinfrastructure has been extensive: about 2,500 km of flood controlembankments, 23,500 units of minor irrigation equipment, 10,000 km of localroads, a substantial proportion of national roads, highways and railways,several hundred bridges, over 19,000 educational institutions, 1,468 healthstructures, and 3.7 million of (mainly low quality) housing units. Widespreaddamage was also reported to fish and shrimp hatcheries, and industrial units,both large and small scale. Preliminary estimates made by a joint task forceof the Gov3rnment and UN agencies in October placed total rehabilitation andreconstruction needs resulting from the floods (excluding housing, assessed bythe Government at $1.1 billion, and a recently initiated Dhaka floodprotection project which is estimated to cost another $100 million), atapproximately $1.1 billion over a threa-year period--the equivalent of nearly85% of this year's development program.
x. The Government's ResRonse to the Crisis. The Government movedrapidly and decisively to deal with the crisis by launching: a massive reliefeffort to provide immediate assistance to flood victims; an internationalappeal for additional food aid together with substantial commercial purchasesfrom its own resources to ensure adequate food availability; an extensive cropreplanting and recovery program to recoup aman crop losses and enhance wintercrop production; steps to assess damage to infrastructure and housing andimplement a phased program of rehabilitation; and bilateral and internationalinitiatives to seek longer-term solutions to the flood problem.
xi. Given the magnitude of the disaster, the relief effort, involvinga major collaborative exercise by the Government, local NGOs and individualsand external donors, was handled efficiently and successfully. To ensureadequate food supplies, VGD, relief and Food-for-Work programs for the needywere expanded, and open market sales were increased; and imports of over 2.2million tons of foodgrain has been arranged. To mitigate price pressures, theGovernment postponed a ration price increase due in September. The croprehabilitation and intensification program aims at increasing production ofvegetaoles, pulses, and broadcast rice in the fall; and enhancing winter cropproduction--boro and wheat--by 730,000 tons by substantially increasingacreage under winter crops and the availability of inputs. Accordingly, freedistribution of seeds and fertilizer, repair and rehabilitation of over 25,000units of minor irrigation equipment and rental programs for low lift pumps(LLPs) have been arranged; while time limits for obtaining crop loans havebeen extended and repayments falling due postponed. These measures areexpected to increase the boro rice crop to about 5.3 million tons (up from 4.7million tons last year), and total foodgrain production to about 16.3 milliontons in FY89, still 1% below last year's level. The rehabilitation program isstill being firmed up through detailed assessments at the sector and sub-sector level. Up to now, programs for about Tk 4.4 billion (about $135million) have been included in this year's ADP, of which Tk 2.6 billion hasbeen carried over from last year's program, and Tk 1.8 billion represents newprojects, mainly for crop rehabilitation and Dhaka city flood prevention.
xii. A number of initiatives have been taken by the Government, withassistance from UNDP and bilateral donors to examine the causes of the floodsand ways of mitigating their effects. In addition to studies undertaken byGovernment itself, the UNDP is financing a Flood Policy Study being undertakenjointly by international and Bangladeshi experts; joint bilateral task forcesand study teams have been formed between Bangladesh and India, Nepal, Chinaand Bhutan; a team of engineers, financed by the (overnment of France isundertaking a feasibility study of flood control embankment proposals for theGanges and Brahmaputra Rivers; and USAID is sponsoring a study of watershedmanagement in the Ganges and Brahmaputra Basins in response to a request fromCongress. In addition to these activities Government, in cooperation withUNDP and IDA, is initiating a flood preparedness project designed tostrengthen procedures for early warning, enhance public awareness andinstitute other programs to mitigate the effects of floods. The Governmentwill wish to review the recommendations and proposals in these stAiescarefully, as a basis for formulating a coherent and well designed longer-termstrategy for addressing the flood problem.
xiii. Economic Prospects for FY89. The disruptions caused by the floodsand the cyclone, to a lesse- extent, will seriously affect economic growthagain this yesr. As noted, foodgrain production will be about 1% below lastyear's level; while jute, livestock, forestry and fisheries have also beenaffected by the floods. Income losses associated with these setbacks andreduction in gainful employment will have a depressing effect on demand (whichis unlikely to be offset by public expenditure policy), for manufactures,which have also been affected by closure of factories during the floods anddamage to equipment. These developments will exacerbate the structuralproblems of industries such as jute (hampered by weak external demand) andtextiles which suffer from overcapacity, excess labor and lack ofcompetitiveness. Accordingly, overall growth of the economy is expected to beabout 1-2% in FY89, even though reconstruction and rehabilitqtion activitieswill help to increase value-added in construction and services sectors.
xiv. The Government has so far handled the short-term food situationsuccessfully. Domestic food availability is excellent; and the situation isexpected to remain comfortable during the remainder of FY89. As noted, theGovernment has already arranged for imports of over 2.2 million tons, of which630,000 will be cash imports. Although this level of imports represents asubstantial reduction from earlier import plans, it may still prove to beexcessive. With planned domestic procurement of about 0.49 million tons andlikely PFDS distribution of 2.6 million tons, this would leave PFDS stocks atover 1.4 million tons by end of FY89, creating serious stock managementproblems, reducing the s.ope for domestic procurement and eroding incentivesto farmers. (The effective storage capacity in the country is around 1.4million tons.) Given the tight constraints on the budget and the need tosupport rural incomes and economic activity through an aggressive domesticprocurement policy, the wisdom of building up PFDS stocks, especially throughcash imports, should be reconsidered.
xv. The budgetary outcome for FY89 is likely to be adversely affectedby a number of factors. Revenues are now expected to be about Tk 2.0 billionless than original FY89 budget estimates, because of lower customs duty and
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sales tax receipts on imports and reduced exercise duty collections fromnatural gas and manufacturing production. On the other hand, currentexpenditures are expected to increase by about Tk 2.5 billion due to higherallowances and pension payments, increased losses of the railways, and largerallocations for O&M and relief payments (in cash) after the floods. Anadditional Tk 3.0 billion will be needed for food operations because -f higherimport prices and volume, a higher than planned level of stocks and thepostponement of an increase in ration prices due in September. A shortfall ofTk 2.2 billion in disbursements of commodity aid below the level of $500million planned in the FY89 budget is also anticipated. The cumulative impactof these developments would be to reduce the availability of local resourcesfor the developmert program (ADP) by about Tk 8-9 billion, or about 33-36%below the Ff89 budget estimates, in nominal terms. While this has created asevere shortage of counterpart funds for development projects, it has beenexacerbated by poor short-term economic management, as even the limitedavailable resources have not been fully used. (As of December 1988,government local currency expenditures were about Tk 6.0 billion belowpermissible expenditure ceilin- agreed with the IMF.) As a result,implementation of the ADP has be, adversely affected, with disbursements ofproject aid in the first half of FY89 lagging by about 20% in nominal termsbelow the level of a year ago. This in turn has meant that the stimulus thatcould have been provided to a flagging economy through public expenditurepolicy has not so far materialized. A continuation of this policy stance islikely to accentuate che current depressive trends in the economy, and raisesserious questions about short-term economic management under presentcircumstances (see below).
xvi. The floods have had an adverse impact on the balance of Daymentsby reducing exports and increasing imports. Due to flood reLatedinterruptions to production and shipments of garments, shrimp and leatherexports, total exports will be only about $70 million or 6% higher than inFY88, in nominal terms. But increased requirements of foodgrain, edible oiland construction materials, and a general rise in import prices are expectedto add about $163 million to the import bill. However, because of theexpected decline in investment and ger.erally weak import demand, the currentaccount deficit is expected to rise to only 6% of GDP in FY89 from 5.7% of GDPin FY88. Aid disbursements are oxpected to decline substantially below lastyear's level of $1,640 million to $1,470 million (in large part due to lowerproject aid disbursements). However, this level of aid disbursements togetherwith special emergency assistance of $95 million received earlier in thefiscal year from the International Monetary Fund, would help to fully financethe projected current account deficit (of $1,232 million); and increase grossexternal reserves to about $1.0 billion, the equivalent of 3.8 months ofimports.
xvii. While there are questions about the accuracy of current estimatesof poverty, (which indicate that 51% and 56% of rural and urban populationrespectively in FY86 were below the Roverty line), the general consensus isthat poverty still remains overwhelming, especially among women who accountfor a large share of the poor in both urban and rural areas. Some modestimprovement took place during FY81-FY86 as a result of economic growth in thatperiod, as well as an expansion in targeted government programs with
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complementary activities by NGOs. Nonetheless, in the last two years, themodest improvements in the early to mid-eighties seem to have been reversed asa result of two key developments: a slowdown in production and 'nvestment inthe dominant agriculture sector, resulting in a reduction of rural incomes andpossibly increased unemployment; and the direct impact of the floods of 1987and 1988 on the poor. Given that most of the rural poor are virtuallyassetless, especially women, and rely heavily on wage employment for theirlivelihood, the slowdown in agriculture in turn appears to have put downwardpressure on real wages, not only in agriculture but sectors related to it,such as the small-scale rural industry. The floods of 1987 and 1988compounded the situation as it caused extensive losses of assets and increasedtemporary unemployment, and led to an exacerbation in morbidity and childmortality.
xviii. In summary, in the early to mid-eighties, Bangladesh successfullystabilized its economy and achieved a reasonable ra;e of economic growth withsome improvements in the poverty situation. The past two years, however, havewitnessed a slowdov-n in many areas. Although macroeconomic managementremained tight, and the disruptions caused by recurring disasters wereeffectively handled, economic growth decelerated, the implementation ofdevelopment programs suffered and the earlier improving trend in the povertysituation appears to have been reversed. To some extent, these setbacks couldbe attributed to two major floods which disrupted economic actibity. However,deficiencies in economic management exacerbated these problems; while thereform process particularly with regard to weaknesses in the energy, financiale::d public enterprise sectors slowed down. Moreover, the disruptions causedby the floods have masked emerging problems of a longer-term nature relatingto resource mobilization and utilization noted earlier, which unless addressedeffectively, now threaten to undermine the success achieved over the mid-eighties. Although small and incremental progress continued to be made inmany areas, there were considerable delays in the preparation for andimplementation of needed reforms.
xix. The Government's reluctance to move forward more rapidly witheconomic reforms in an environment characterized by crises is understandable;and ri-htly under the circumstances, priority had to be given to crisismanagement, though short-term economic management still could have beenbetter. Nevertheless, the disruptions and setbacks and shortcomings ineconomic management last year and this year have heightened the urgency foraction, to permit the economy to grow more rapidly without underminingmacroeconomic stability. In the short term, more imaginative and forwardlooking policies will be needed to avoid further deepening the currentstagnation. Over the medium term, purposeful action will need to be taken irmany areas if substantial improvements in economic growth and povertyalleviation are to be realized.
xx. Economic Management in the Short Term. The immediate challenge toeconomic management in the short term is to ensure that public policy willhelp stimulate recovery rather than exacerbate the depressive trends in theeconomy. This means that budgetary policy should not aim at furtherstabilization, but facilitate more rapid implementation of the developmentprogram by providing local currency to the maximum possible extent, consistent
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with macroeconomic stability. At the same time, existing planning proceduresshould be used more effectively to assist project implementation and aidutilization; while food management should be more supportive of domesticprocurement and prices to farmers.
xxi. Fiscal management both last year and this year has beenovercautious. Last year, the budget generated a cash surplus, while this yearagain government expenditures through end December 1988 were well below theexpenditure ceilings agreed with the IMF, especially at a time when thedevelopment budget is being adversely affected by resource shortfalls. Tothat extent, the local currency shortage is self-created, exacerbating aproblem which could be alleviated by discretionary action. There is strongjustification in the short term for not only fully utilizing bank creditavailable within the credit ceilings, but also for additional governmentborrowing to support the development program and domestic foodgrainprocurement. If necessary, reallocations of credit should be made withinoverall credit ceilings for this purpose. This should help improve projectimplementation (leveraging disbursements from the large existing aidpipeline), increase incomes and imports, and, with some time lag, helpgenerate additional revenues for the budget. The external reserve position ispresently strong enough to accommodate some additional imports; and with aslowdown in inflation to an annual rate of 9% in recent nonths, the latter isnot a serious concern at the moment. Over the medium term, however, recourseto continued bank borrowing should be limited, since it will put pressure onreserves, or increase inflation; and the Government (as discussed below) musttake steps to mobilize more domestic resources.
xxii. Recognizing the seriousness of the situation, the Government hasinitiated some actions in early March aimed at mitigating the potentialdisruption to the development program caused by the floods and insufficientattention to short-term economic management. Steps have been taken toreprioritize the ADP and to provide local currency resources to the ADP to themaximum extent feasible within the agreed credit ceilings for the rest of thisfiscal year. It is expected that aided projects included in the approved coreprogram will be provided up to 95% of their original taka allocations for thisyear, with the objective of maximizing project aid disbursements in the secor.dhalf of t1,e year. Allocations for crop replanting, Dhaka flood protection andtekhnical assistance programs will also be fully funded. However, allocationsfor (.ther sectors and projects will be scaled back by an average of 36%, (withlarger cuts in industry), while block allocations for upazilas andmunicilalities will be reduced by about 40%. If available resources are fullyutilized in the remaining four months of the fiscal year, it should bepossible to achieve an ADP of around Tk 40 billion in nominal terms, includingproject aid disbursements of about $750 million--roughly 10% below last year'slevel of aid disbursements.
xxiii. Improvements in the Goveinment's planning and resource managementprocedures should help increase drvelopment spending both in the short and themedium term. The innovations intfoduced in the early eighties to improve ADPimplementation (by setting up a resource committee to periodically assessresource availabilities, a core program to insulate priority projects fromresource shortfalls and automatic release of local funds for approved projects
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in the first three quarters of the year) have become increasingly ineffectiveover the recent past. For example, this year, despite early evidence of majorresource shortfalls, and increased demands for rehabilitation andreconstruction, a realistic assessment of the resource situation was notfinalized till January. Similarly, the reprioritization of the ADP, includingfirming up of rehabilitation programs to be included in this year'sdevelopment program, was not completed until late February/early March. Asnoted, overcautious budget management and lack of coordination amonggovernment agencies responsible for the financing and revision of the ADP(Ministry of Finance, Bangladesh Bank and the Planning Commission) contributedto these delays and consequent slowdown in development activity. (While thereasons for these shortcomings--such as lack of effective monitoringcapability at the ministry level, concerns regardiug the quality of projects,and whether borrowed funds would be used productively, etc.--areunderstandable, these should be addressed through public expenditure reformsin the medium term). The core programming process, as it is now work,ng, alsodoes not ensure sufficient local resources for priority projects, because ofovercautious fiscal management, the inclusion of too many projects in the coreprogram and substantial taka allocations for lower priority projects. To helpimprove implementation of the development program in the future, earlycompletion of resource assessment, establishing priorities for the ADP andrehabilitation work, and providing sufficient local resources for priorityprojects is essential.
xxiv. Food management could be improved (without jeopardizing foodsecurity) by more realistic assessment of PFDS offtake and providing greaterflexibility in import planning, particularly commercial purchases. As noted,PFDS stocks could again rise this year to unduly high levels, pre-emptingdomestic procurement and depressing domestic foodgrain prices. TheGovernment, therefore, should postpone some of the planned commercialpurchases (for example, scheduled to arrive in May and June); but if this isnot possible, at least delay some of the import (including aid-financed)arrivals, to make room for domestic procurement. However, if purchases havebeen made abroad already, additional financing to support domestic procurementwill be needed.
xxv. Economic Management in the Medium Term. In view of the currentstagnation of the economy, Bangladesh will need to revive and accelerateeconomic growth as soon as possible. Without it, it will be virtuallyimpossible for Bangladesh to make even modest strides in alleviatingwidespread poverty. Recognizing this need, the Government's most recent(third year) Policy Framework Paper (PFP), prepared in consultation with theIMF and the World Bank, articulates a macroeconomic framework and policyreforms required to achieve such a goal. The PFP reviews recent performanceand policy improvement in many areas; but also notes that policy reforms haveslowed down in a number of areas and need to be strengthened. It recognizesthat, to accelerate economic growth to at least 5% per annum, it will beessential to significantly improve economic performance in the key productivesectors--agriculture and industry--(to generate incomes, employment and exportearnings) which have been lagging in recent years. At the same time, it alsorecognizes that special efforts through targeted programs would be needed toimprove the conditions of the extremely poor who might not directly benefit
from the growth process. The PFP outlines broad directions of policy reformsand investment and resource needs (both domestic and external) over the nextthree years to achieve these objectives. In addition, significantimprovements in mobilization, management and utilization of limited resourcesby the Government will also be needed.
xxvi. To increase agricultural production to 3.5-4.0% p.a., theGovernment will need to address the problems which have caused stagnation inthe sector even before the recent floods. The Government accordinglyinitiated a study, with UNDP assistance, to review the constraints toproduction and identify solutions; this study is nearing completion. Anaction program to help improve agricultural growth should be formulated assoon as possIble with appropriate policies, drawing on the findings of thisstudy and others on the foodgrain sector.
xxvii. Given Bangladesh's continued dependence on foodgrain imports andits importance in the agriculture sector, continued priority to foodgrainproduction over the next few years is still appropriate, although over thelonger term, efforts must be made to diversify agricultural production. Toincrease foodgrain production, however, it is necessary to provide access toinputs (such as high quality seeds, fertilizer and credit) and ensuresufficient incentives to farmers, together with complementary investments inirrigation, research and extension services. Private sector participation ininput distribution will need to be increased, especially in fertilizerdistribution and supply of minor irrigation equipment. (For thrs purpose, theprivate sector should be allowed to import TSP and MP and to make wholesalepurchases of urea domestically at the factory level; to increase the privatesector's role in the supply and servicing of minor irrigation equipment,restrictions on the imports of engines should be eliminated, direct andindirect subsidies to BADC sales should be reduced and private operatorsshould be allowed to compete in the servicing of DTWs.) The role of publicsector institutions responsible for delivery of inputs and services should bestreamlined (along the lines of the recent report on reorganizing theBangladesh Agricultural Development Corporation), and their efficiencyimproved. Due regard should also be paid to the sustainability of chosenpolicies. For example, measures adopted in recent crash programs (such as,input subsidies, and postponement of credit recoveries), cannot be sustainedwithout substantially reducing resources available for other priorityinvestments, and reintroducing new distortions in the allocation of resources.If subsidies are required for particular groups or purposes, they should becarefully examined and targeted. Finally, it will be necessary to provideeffective support prices to farmers, through better foodstock management byphasing out import arrivals to ensure that the PFDS will have both physicalcapacity and financial resources to undertake substantial procurement.
xxviii. The problems of lute--the main cash crop--should receiveattention. A government task force set up to identify the issues in the jutesector and formulate policy reforms, finalized its report in December,building on the recommendations of a Bank report earlier on the jute sector.An action plan to assist the jute sector, as recommended by the task force, bystabilizing prices to producers through a buffer stocks scheme and exporttaxes, establishing programs to improve jute yields and to divert surplus
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acreage to alternative crops (mainly rice) and rationalizing capacity andproduction of jute manufactures should be given consideration.
xxix. Rapid growth of industry is needed to help absorb an expandinglabor force, diversify the economic structure and further expand exports. Forthis purpose, steps will be needed to improve efficiency, competitiveness, andexport-orientation of the industrial sector. Continued commitment to tradeliberalization (by rationalizing the tariff structure and eliminating quotarestrictions) to improve economic signals to investors and the allocation ofresources, and flexible exchange rate management to ensure incentives forexport production are essential in this regard. To promote furtherdiversification of non-traditional exports, improving incentives to attractforeign (and domestic) capital for export production and to ensure qualitystandards and access to markets, and increasing skills through specialvocational training programs will also be required. To promote investment inthe industrial sector, further improvements in the regulatory environment (byreducing the 'discouraged list" and restrictions and licensing requirements onimports for industrial users), improving access to essential infrastructure,such as power connections, and increasing availability of financing shouldreceive high priority. In the latter context, strengthening financialinstitutions, giving them operational freedom to set lending rates accordingto risks and costs of lending and implementing loan recovery programs will bemore important than providing low interest rates to borrowers. In thetraditional manufacturing sector, specific problems of major subsectors, suchas jute and textiles (which suffer from a variety of problems such asovercapacity, poor investment decisions, accumulated debt problems and lack ofcompetitiveness), will need to be addres-ed. Assistance programs should bedeveloped to rationalize and restructure the operations of those producers whocan become competitive in both jute and textiles manufacturing, withoutresorting to import bans (e.g., for textiles).
xxx. To improve the performance of public enterorises (PEs), clearerdefinition of their objectives and roles; separating commercial from sociallyoriented functions; increased autonomy of management, for example overpricing, employment and wage bargaining decisions; establishing clearlyunderstood criteria for performance; together with cost-control mechanisms;and accountability for management decisions and performance will be needed.Recent initiatives in these a.-eas should be expanded to cover the majorcorporations and implemented as early as possible. At the same time, stepsshould be taken to clean up the debt structure of enterprises, reduce intra-enterprise liabilities and hold them accountable for payment of their debtservice obligations. A clear policy framework is also required for thepartial divestment program.
xxxi. Bangladesh will need to increase overall investment from thecurrently depressed level of less than 12% of GDP to over 14% over the nextthree years. There is a need and room for both private and public investmentto rise. The latter, however, is expected to grow more rapidly over the nextthree years, because of the particularly low level of economic and socialinfrastructure in Bangladesh, rehabilitation and reconstruction requirementsas a consequence of the floods, and uncertainties surrounding the pace ofrecovery of private investment in the near term. An increase in oublic
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eggenditug can also play a catalytic role over the next year by helping tostimulate demand and the level of economic activity.
xxxii. However, the scope for increasing public expenditures isconstrained by the severe shortages of local currency and procedural andimplementation problems which inhibit effective absorption of aid. Thisproblem can be effectively handled only by making vigorous efforts to mobilizedomestic resources and to alleviate the implementation constraints; and bystreamlining and reprioritizing the expenditure program so that availableresources are utilized more efficiently. The need for reprioritizing the ADPhas become urgent because demands on public sector resources have increasedsubstantially; for example, in addition to the ongoing investment program andrehabilitation and reconstruction needs, potential large new projects areunder various stages of discussion. However, given the limited availabilityof local resources, the inclusion of too many projects will only exacerbateimplementation problems. There is, therefore, an urgent need to reassesspriorities in the public expenditure program, in particular to resistpressures to include too many new projects (unless they are fully externallyfunded), and to cut back unproductive recurrent expenditures. At the sametime, a re-examination of existing projects in the ADP is needed. Manyprograms are cost-effective and should be increased: for example, operationand maintenance of existing and new assets, water resource development andresearch and extension services in agriculture, transmission facilities in thepower sector; rural roads, urban development and water supply ininfrastructure and recurrent expenditures for health and education, andgenuine rehabilitation work. But, there are also expenditures which could becurtailed in other areas, such as power generation and industry, as well ascurrent expenditures in lower priority areas; while cost savings could be madeby transferring activities to the private sector (e.g., in fcrtilizerdistribution and road transport), withdrawing support from programs which havebeen proven inefficient or ineffective (e.g., agricultural cooperatives andcommercial fishing activities). A careful review should also be made of thebridge construction program in the transport sector (including the JamunaBridge) and other proposed large projects in the broader macroeconomiccontext. Such projects are large enough to have a significant macroeconomicimpact on the economy by absorbing scarce local currency resources and limitedmanagerial and administrative capacity and increasing the external debtservice. Therefore, the timing and phasing of such projects should beconsidered carefully.
xxxiii. While above measures can help to improve the efficiency andeffectiveness of public expenditures, steps will need to be taken to addressthe perennial problems which have slowed down project implementation and aidutilization in Bangladesh. Improving project preparation and planning;reducing delays with regard to procurement, technical ass!-tance, landacquisition and recruitment and staffing of project entities; acceleratingcommodity aid utilization; and improving the budgeting, monitoring andexpenditure control procedures, are some of the priority areas in this regard.Much greater commitment and a sense of urgency to find solutions to theseproblems are needed if progress is to be made in these difficult areas.
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xxxiv. The only way to alleviate the local currency constraint in themedium term, apart from modest possibilities for restraining currentexpenditures, is to significantly improve domestic resource mobilization. Atthe same time, efforts should be made to allocate such increases in domesticresources to the development program and other priority expenditures notedearlier. If this is done, increased public and private savings should helpincrease overall investment levels in the economy, with additional externalassistance supplementing these efforts. In the public sector, implementing aphased program of structural reforms to improve the revenue elasticity andequity of the tax system will help increase revenues over the medium term. Inthe near term, there is scope for increasing non-tax revenues by improvingpublic sector debt management, red-acing large subsidies to public enterprisesin the transport and communications sectors (railways, post office and theairlines), improving pablic enterprises' pricing policies and greater emphasison self-financing of investments by such enterprises.
xxxv. The implementation of reforms in the financial sector will becritical for mobilizing private savings, improving resource allocation andincreasing the flow of credit especially for investment. Proposals currentlyunder consideration by the Government include measures to strengthen financialinstitutions by restructuring their capital base and providing them greaterautonomy over decisions concerning their lending operations and risks; permitgreater flexibility of interest rates to reflect costs and risks of lending tovarious sectors and borrowers; reduce the scope of mandated lending at lowinterest rates; and co improve monetary management and supervision capabilityof the Central Bank. Sustained efforts to improve loan recoveries and creditdiscipline is an integral part of this reform process. Without such efforts,the viability of the financial institutions could be further endangere-, evenif other re.orm measures are implemented, with adverse consequences formacroeconomic stability and prospects for economic recovery.
xxxvi. A greater sense of urgency is needed for improving and expandingprograms aimed at the alleviation of widespread poverty, which is one of thehighest priorities in the Government's agenda. A resumption of a reasonablyhigh rate of economic growth would facilitate progress towards this objective;but, some of the urban and rural poor, particularly the landless, assetless,women and unskilled, may receive only modest benefits from such growth.Accordingly, the Government needs to strengthen its poverty alleviationprograms to increase their medium-to-long-term impact. For example, existingtargeted programs such as the FFW and VGD, which are mainly targeted at poorwomen, need to be refocused from their predominantly relief orientation toinclude activities such as literacy, family planning and health, credit andskills training. In view of the Government's limited financial resources andqualified staff, its efforts could be supplemented by encouraging greaterparticipation by NGOs, especially in the area of credit and the creation ofincome generating opportunities and services, such as training, health careand education to selected groups of poor people. The conventional humanresource development programs (family planning, health and education) wouldalso need strengthening to support the Government's poverty alleviationobjectives. Finally, in the medium-to-long-term, the only self-sustainingmeans to reduce poverty is employment generation. In the search forinnovative employment opportunities, special attention needs to be paid to
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rural employment generation, targeted at the assetless/landless who form thecore of the poor. Speedy formulation and implementation of poverty orientedprograms already under consideration is an important step in harnessingexternal support for governmert initiatives in this area.
xxxvii. The policy agenda to stimulate economic growth with more equitabledistribution of its benefits is well established, and recognized by theGovernment. However, its implementation has slowed down in the past twoyears, in part due to the floods and preoccupations of key policy makers withcrisis management, mobilizing more external assistance for perceived needs andseeking longer-term solutions aimed at flood prevention anu disastermanagement. Most of these initiatives are understandable and necessary; butsome clearly need closer scrutiny to ensure that they are worthy of support.At the same time, given the importance of resuscitating the economy andalleviating widespread poverty, the objectives of establishing a sound basisfor sustained development by implementing necessary economic reforms outlinedabove, and particularly mobilizing more domestic resources, refocusingexpenditure priorities and giving greater priority to the development program,improving project implementation and ensuring effective utilization ofexternal assistance potentially available to Bangladesh, should receive equalattention from the Government.
Aid Recommendations for FY90
xxxviii. Despite continuing concerns with the pace of projectimplementation and aid utilization, the need for external assistance toBangladesh should not be a matter of debate. Given the structure of theeconomy and widespread poverty, Bangladesh will need to continue to depend onsuch assistance, even with significant efforts to mobilize domestic resources.This need, apart from necessary support for the public.exp4nditure program,can also be justified on balance of payments grounds. Although the balance ofpayments situation has strengthened considerably in the past two to tbreeyears, this trend is likely to be ephemeral. A revival in the economy willincrease import demand; while the growth of exports and remittances is likelyto slow down. Accordingly, the balance of payments current account deficit isexpected to widen to about 7% of GDP over the next three years. To financethis deficit and to maintain gross reserves at the modest level of theequivalent of three months' imports, the Government's Policy Framework Paperestimates that disbursements of external assistance will need to inclease byabout 5% per annum in the next three years over FY88 levels.
xxxix. Aid commitments for next fiscal year (FY90) should be guided notonly by the need to support growth and development over the medium term, butalso to help improve the implementation of the development program and aidutilization in the near term. Accordingly, the Government, on its part, willneed to take steps to provide more local currency support for the developmentprogram, and establish priorities within the ADP as soon as possible. TheGovernment has recently made some initiatives in this direction to minimizedisruptions to this year's ADP. These efforts should be continued next year,given the increased needs for rehabilitation and reconstruction and thelimited availability of taka resources and absorptive capacity constraints.Donors, on their part, will need to work closely with the Government in
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adapting their aid programs to the Government's revised priorities, sincereprioritization of the expenditure program will inevitably affect donor-financed projects also. In this regard, donors also have a responsibility inassisting Bangladesh to achieve its development goals by helping to ensurecorrect expenditure choices, particularly in the case of new projectcommitments at this juncture.
xl. The analysis contained in this report and the PER indicates that,given the limited availability of local resources, a significant amount of newproject aid commitments will adversely affect the implementation of theongoing program, unless efforts are made to mobilize more domestic resources,resources are reallocated tc high priority projects, and/or donors themselvesprovide more local currency resources for the development program. In thepresent circumstances, essential rehabilitation should receive high priority.Commitments for other new projects should therefore be limited to highpriority areas. Where commitments for new projects are made, donors shouldconsider financing a larger proportion of total costs (including local costs)to minimize the demands on local currency resources. Donors would also needto consider financing of incremental recurrent expenditures in the social
j sectors for programs in health, education and family planning, wheresubstantial real increases in recurrent expenditures would be needed over thenext ten years to achieve program objectives. While this would represent anew approach to most donors, it would directly support the poverty alleviationand social development goals. Given the implementation constraints noted
j above, new project aid commitments of about $1.1 billion are recommended (thisamount excludes possible financing for the proposed Jamuna Bridge, theeconomic justification of which is still under review); but, within thistotal, a substantial increase in donor funding of local costs should beconsidered. In parallel, however, the Government also must make every effortto mobilize more local resources, and to allocate such resources to highpriority development activities.
xli. The primary justification for commodity aid is to support thebalance of payments by providing quick disbursing funds needed to pay foressential imports. A secondary reason is that such aid generates counterpartfunds which are needed to implement the development program. Over the mediumto longer term Bangladesh must mobilize more domestic resources for thedevelopment program, so that its own contribution to financing the ADP canincrease over time, helping to reduce the presently high dependence oncommodity aid. In the meantime, however, there is still need andjustification for more commodity aid, particularly if the Government succeedsin reviving economic activity in the near term. Although the balance ofpayments situation has strengthened, over the next year imports (and the needfor financing such imports) are expected to increase, provided that theGovernment takes the necessary steps to ensure economic recovery byaccelerating the implementation of the development program. In addition, itwill be necessary to demonstrate that the Government attaches high priority tothe development program (by restraining less essential current expendituresand mobilizing more domestic resources for the ADP and high priority O&6expenditures), and that additional commodity aid will be fully committed tosupporting development activity. If this does not happen and the economycontinues to stagnate, the case for continued high levels of commodity aid
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will weaken. In the expectation that the Government will give priority tosignificantly stepping up development activity next year, it is necessary toplan for L-mmodity aid disbursements of at least $550 million in FY90. Thiswould mean that new commitmerts of about $600 million will be needed nextyear. To achieve this level of commitments exceptional efforts will be neededon the part of the Government to finalize prospective commitments frommultilateral institutions associated with plannued adjustrent programs in keyareas. Bilateral donors also will need to increase the proportion of quickdisbursing commodity assistance in their aid programs, to relax theprocurement, pricing and commodity restrictions attached to such programs, andto finalize the aid agreements as early as possible, so that disbursementsfrom such new commitments could be made more rapidly. In the case of foodaid, additional commitments of about $300 million (equivalent to about 1.6million tons of wheat at present prices) will be required to meet plannedimport needs and to provide some flexibility to the Government to meetunforeseen contingencies.
Recent Economic DeveloDments and Short-Term Prospects
A. Recent Developments - Macro Economic Performance
Introduction
1. In the early and mid-1980s, Bangladesh responded reasonably well to adeterioration in its external economic environment, which, together withnatural calamities (such as droughts and floods) damaged growth prospects andled to unsustainable macroeconomic imbalances. A major stabilization andadjustment effort was launched aimed at reducing external and fiscal deficits,limiting domestic inflation and achieving a satisfactory rate of economicgrowth. Cautious fiscal and monetary policies and flexible exchange ratepolicies were pursued, trade and industrial policies were significantlyliberalized, and efforts were initiated to reform the financial system. Atthe same time, the internal food distribution system was improved, and supportprograms for the poorer and vulnerable groups were expanded. These effortsyielded positive results through improving macroeconomic balances andsustaining a modest rate of economic growth of about 4% per annum. However,growth performance continued to be below the economy's potential, andinsufficient for achieving a significant alleviation in poverty, which,despite a marginal improvement in the first half of the decade, is stillextensive; and remains perhaps the most pressing development problem facingthe country.
2. The successful stabilization efforts of the mid-eighties had, itseemed, paved the way for Bangladesh to undertake more vigorous efforts tostimulate economic growth and alleviate poverty. However, a succession ofnatural disasters--devastating floods in 1987 and 1988 and a localized cyclonein late 1988--have undermined these expectations. These developments havereduced economic growth in the short term; and generally impeded theadjustment effort by diverting the Government's attention, energies andresources from development to short-term crisis management; exacerbating aslowdown in the reform process and deficiencies in short-term economicmanagement which have become evident over the last year. The Government,however, recognizes the need to sustain the momentum of efforts aimed ataccelerating economic growth and development; and has just recently initiatedsome actions to deal with these problems (para. 90). Nevertheless, much moreattention will need to be given to improving economic management; while asdiscussed below, some modifications in the Government's macroeconomic targetsand its medium-term development strategy, and significant improvements in themobilization and management of domestic resources will be required.
3. Against this background, the report evaluates Bangladesh's economicperformance over the past year (FY88) and near-term economic prospects for
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FY89.11 The analysis of recent performance takes account of significantpolicy changes and shortcomings in important areas and sectors of the economy.The report also focuses on the short-term economic management issues, whichneed to be addressed by the Government in the aftermath of the floods, andpolicy improvements required in the medium term to sustain the adjustmenteffort. The concluding section of the report reviews external assistanceneeds and recommendations for FY90. The implications of the floods for publicexpenditure policy in the medium term, as well as broader public expendituremanagement issues in the context of Bangladesh's medium-term developmentstrategy, are discussed comprehensively in a companion report--"Bangladesh:Public Expenditure Review.'
Progress in Macro-economic Adjustment
4. Bangladesh's key macro-economic performance indicators are summarized inTable 1.1. Despite the disastrous floods in the summer of 1987, the improvingtrends in the external and fiscal balances, which were achieved throughearlier stabilization efforts, were sustained in FY88. The external currentaccount deficit, which averaged over 10% of GDP in the early eighties, waslimited to 5.7% of GDP in FY88, only marginally higher than the 5.5% recordedin FY87. Continued growth of non-traditional exports and workers' remittancesfrom abroad and stagnation of non-foodgrain imports, (due to low incomegrowth, disruptions caused by the floods and cautious budgetary and monetarymanagement by the Government), contributed to this result. The overall budgetdeficit declined from 8.4% of GDP in FY87 to 7.5% in FY88, due to continuedrestraints on development spending, rather than to an improvement in revenuemobilization. Domestic credit, which increased by 9% in FY87, expandedsomewhat more rapidly by 13% in FY88 reflecting increased financing needs ofthe private sector following the floods; however, net credit to the Governmentactually declined by 3% below FY87 levels, compared to a planned increase of4%. Supply disruptions as a result of the floods generated pressure onprices, especially in the early part of FY88, leading to an estimated 11% risein consumer prices in FY88, compared to a 10% increase in FY87. The floods,and to a lesser extent the political disturbances in the first half of FY88,seriously hampered economic activity. GDP growth in FY88 is estimated at only1.8%--well, below the trend in economic growth achieved in recent years andthe rate of population growth. With repeated major flooding in the summer of1988 and a further reduction in prospective economic growth to only 1-2% inFY89, a significant decline in per capita incomes over the two-year (FY88-89)period now seems inevitable. As discussed below, although the Government hastaken a number of measures to provide relief and employment to the mostvulnerable and needy groups, it appears that the floods and economic setbacksover these two years have arrested the marginally improving trend in povertyalleviation that had beer- observed in the early and mid-eighties (para. 27).
I/ A detailed assessment of Bangladesh's economic performance over the FY81-87period was made in the Bank's economic report last year ("Bangladesh:Adjustment in the Eighties and Short-Term Prospects"; Report No. 7105-BD;March 10, 1988); and is therefore not repeated in this year's economic report.Similarly, medium-term development prospects for Bangladesi' and theirimplications for public expenditure policy are addressed in a companion reportentitled "Bangladesh - A Public Expenditure Review"; Report No. 7545-BD, 1989.
/a Based on movements in the urban middle class consumer price index.Lb Based on changes in the GDP deflator.
Source: Bangladesh Bureau of Statistics and staff estimates.
Macroeconomic Balances and Savings and Investment Trends
5. Reliability of data on consumption, savings and investment continues tobe a problem in Bangladesh. Subject to their limitations, available data(Table 1.2) show that the reduction in the current account deficit,(equivalent to the investment-savings gap), from 10% of GDP in FY81 to lessthan 6% of GDP in FY87, was achieved primarily through a reduction ininvestment, rather than through an appreciable improvement in the savingsrate. Given Bangladesh's low level of development, a higher investment rateand a higher investment-savings gap would be warranted, and would besustainable on the basis of existing and projected aid inflows; but, asdiscussed elsewhere in this report and in the Public Expenditure Review, thiswould need to be complemented by greater efforts to mobilize domestic savings,particularly public savings, to provide for local cost financing ofdevelopment projects. However, the domestic savings rate has been virtuallystagnant since FY81; although there has been a slow but perceptible rise inthe national savings rate, due to sustained inflows of factor incomes fromBangladeshi workers abroad.
6. Preliminary estimates indicate that aggregate investment continued todecline in FY88, with a substantial reduction in public investment.Reallocation of funds for relief, and increases in current expendituresfollowing the 1987 floods adversely affected the implementation of thedevelopment program, which declined by 12%, in current prices, below its FY87level. But, this cutback was larger than necessary, since the Governmentbudget unexpectedly accumulated a surplus in its end-year cash position(para. 45). At the same time, private investment also declined; althoughprivate investment in housing reconstruction after the floods and in
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agriculture, particularly in minor irrigation equipment to support a majorexpansion in winter crops, increased somewhat, it was offset by a reduction inprivate investment in other areas of the economy, especially in industry. Onthe other hand, overall consumption appears to have increased slightly, as theGovernment significantly expanded the Food for Work (FFW) and Vulnerable GroupDevelopment (VGD) programs to provide food and employment for the poor; and arecord level of foodgrain imports together with a bumper boro crop helped toincrease food availability and reduce food prices in the cecond half of theyear. Correspondingly, the domestic savings rate declined from 3.5% of GDP inFY87 to an estimated 2.6% in FY88; while the national savings rate also fellfrom 6.9% of GDP to 6.0% of GDP over the same period.
Table 1.2: MACROECONOMIC BALANCES, FY81-FY88(as percent of GDP in current prices)
Za Substantial part of the increase reflects wage increases to governmentemployees which would add to private incomes and consumption.
ii Equals current account balance./Lc Ratio of foreign savings to domestic investment.
Source: Bangladesh Bureau of Statistics and staff estimates.
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The Incentive Framework
7. In recent years Bangladesh has roade significant efforts to improve pricesignals and incentives for domestic production and exports. In FY88 furtherprogress was made in this direction (Table 1.3). In accordance with theGovernment's flexible exchange rate policy, the official exchange rate (whichis pegged, within margins, to a basket of currencies of major tradingpartners) was depreciated by 2%, in nominal terms, in FY88 vis-a-vis the USdollar; and by a further 2.4% against the US dollar so far in FY89. GivenBangladesh's somewhat higher inflation rate compared to its trading partners,this was only sufficient to maintain the real effective exchange rate (whichhad depreciated by about 23% between FY85 and FY87',a' at the FY87 level.Further progress was also made towards unifying the dual exchange rate system.As noted, the official exchange rate, in nominal terms, was depreciated, whilethe exchange rate in the secondary market appreciated slightly by 0.3%, innominal terms, over its FY87 level; in effect, the premium in the secondarymarket iver the official exchange rate was reduced from 6.5% in FY87 to 4.5%at the end of June 1988, and to 2.0% in November 1988--a level which theGovernment considers necessary to encourage exports and the repatriation ofearnings of Bangladeshi workers through the secondary market. Simultaneously,the list of imports and exports transacted through the secondary market wasexpanded, thereby providing easier access to foreign exchange for the privatesector.11 This shift was facilitated by increased workers' remittances fromabroad, continued provision of foreign exchange by Bangladesh Bank from itsreserves to meet anticipated demand in the secondary market, and thechanneling of commodity aid (provided under IDA's Industrial Sector Credit)for the first time through the secondary market.
8. Domestic deRosit rates have remained largely unchanged from the levelsset in the early eighties; and with a pick up in domestic inflation in recentyears, real interest rates on short-term deposits (i.e., three months fixeddeposits with commercial banks), have been gradually eroded, so that they arenow barely positive. However, real interest rates on medium to longer-termdeposits are substantially higher--about 4-5% p.a. for 3-year deposits withbanks and over 8-10% p.a. for 6-year savings certificates. In addition, thereare a number of fiscal incentives to encourage savings and investment.
2/ However, the real effective exchange rate (REER) appreciated by 13% betweenFY81 and FY85; so that over the FY81 87 period as a whole it depreciated byonly 13%. In contrast, REER depreciated by 27% in India, and 23% in Thailand(and by 61% in China), over the same period.
2/ Under the Export Performance Benefit (XPB) scheme, the list of commoditiesentitled to the exchange rate premium in the secondary market and the rates ofentitlement have been progressively raised, so that in FY88 earnings from allexports other than raw jute and wet blue leather could be converted at orclose to the secondary market rate. The share of imports channeled throughthe secondary market was also increased from 23% of all imports in FY85 (and34% in FY87) to about 40% in FY88. Since aid disbursements finance 50-60% oftotal imports, the proportion of non-aid imports channeled through thesecondary market is very high--85 to 90%.
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Domestic real lending rates for a variety of purposes, such as loans forcommerce, urban housing and agriculture, are also positive at about 5-6% p.a.However, real lending rates on a substantial part of bank lending (over 30% ofthe banks' portfolio) which is heavily subsidized, are close to zero ornegative. While rising inflation has generally reduced the real cost ofborrowing, a current review of interest rates by the Government aimed atrationalizing the interest rate structure is expected to lead to a moreflexible and realistic interest rate policy, which is essential for improvingsavings mobilization and efficient allocation of investible funds.
9. In recent years, foodgrain pricing policies have been flexibly managedto ensure remunerative prices to producers and stable prices to consumerswhich more fully reflect economic costs. Both procurement prices for farmersand offtake prices for foodgrain issued to consumers through the PublicFoodgrain Distribution System (PFDS) have been reviewed and increased eachyear, while international prices for foodgrains generally declined. As aresult, in recent years domestic prices to farmers for both rice and wheat,adjusted for quality differences, have been comparable to internationalprices. However, in FY88, domestic prices as a proportion of internationalprices (calculated as three-year moving averages), fell somewhat, asinternational foodgrain prices rose sharply. In addition, as the level ofdomestic procurement remained low (although procurement increased in FY88, itstill accounted for less than 4% of the marketed supply), its effectiveness asa price support mechanism to farmers has been limited, particularly at timesof bumper crops (para. 25). On the other hand, public foodgrain distributionwhich. accounts for about 27% of the marketable supply, has had a considerable
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impact on stabilizing prices to domestic consumers (para. 24). Annual upwardadjustments in ration prices to consumers and the steady decline ininternational grain prices over the past few years have helped toprogressively reduce the food subsidy until FY88. However, a sharp increasein international prices, together with the postponement of a ration priceincrease due last September is expected to substantially increase the foodsubsidy in FY89.
10. Pricing of iute, the main cash crop, remains problematic. As theprincipal supplier of jute in the world market, Bangladesh's domestic pricesto farmers closely reflect international prices. However, domestic (andinternational) prices have fluctuated widely, leading to instability of rawjute supply from year to year (Table 1.3). An effective buffer stockmechanism for stabilizing raw jute prices and supply needs to be developed.
11. Over the past few years Bangladesh has taken important steps to improvethe investment climate for private investment, to liberalize investmentapproval procedures, to reduce quantitative restrictions on internationaltrade and reform tariff policies and to improve pricing policies of publicsector enterprises and agencies. Although much more needs to be done in theseareas, the progress achieved in FY87 and FY88 (as discussed in paras. 36-38),represent a continuing effort to reduce distortions in the policy frameworkand improve signals for economic decision making in Bangladesh.
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B. Production Trends and Short-Term Economic Management
Growth and Composition of Production
12. Economic growth, which averaged 4% per annum in the early and mideighties, faltered in the last two years, in large part due to adverseexternal events (Table 1.4). After reaching a high point of 4.7% in FY86, therate of growth of GDP decelerated to 4.0% in FY87, reflecting a sharp (22%)decline in raw jute production in response to a collapse in world jute prices.GDP slipped further to 1.8% in FY88, and to an expected 1-2% in FY89(para. 74), mainly as a consequence of unprecedented flooding in 1987 and1988.
13. In FY87, substantial increases in value-added in the manufacturing,construction, utilities and services sectors helped to achieve a GDP growth of4.0%. Sustained external demand for non-traditional exports, improvedavailability of raw macerials and revival in domestic demand for textiles dueto certain special factors helped to increase manufacturing production. Arecovery in public investment--public sector capital expenditures ondevelopment projects rose by 27%, in nominal terms, in FY87--contributedsignificantly to higher levels of construction activity. Energy output alsorose sharply, with further expansion of natural gas production and electricitygeneration capacity. However, value added in the dominant agriculture sectorremained virtually unchanged, as a modest increase in grain production wasoffset by the setback to raw jute production.
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Table 1.4: GDP GROWTH BY SECTORS, FY73-FY88
(percent growth per annum, constant FY73 prices)La
Construction &Utilities 7.4 9.8 3.0 8.6 14.3 4.3 6.6
Services 7.6 5.1 6.6 7.4 3.7 36.4 40.2
GDP at MarketPrices 5.8 4.0 4,7 4.O 1.8 10.Q 10Q.O
La A consistent series of natioaal accounts data covering the present decade
is available only on the basis of FY73 prices. The Government has just
issued a preliminary set of national accounts data, based on FY85 prices,
for the FY85-88 period. However, this series needs to be extended back to
early eighties and the quality of some of the estimates improved, before
it can be used as a basis of comparison of growth performar.ce over the
entire decade.i~ XPreliminary estimates.Ic At constant prices.
Source: Bangladesh Bureau of Statistics; staff estimates.
14. Preliminary estimates indicate that the slowdown in GDP growth to 1.8%
in FY88 was principally due to continued stagnation in the agriculture sector.
Floods in the summer of 1987 had a disastrous impact on aman--the main rice
crop. Although government programs to encourage replanting and increase
production of winter crsps (see below) eventually helped crop production to
reach the same level as in FY87, value added in the agriculture sector as a
whole fell by over 1%, as persistently low domestic prices led to a further
30% decline in raw jute production. In addition, output in the livestock sub-
sector was also adversely affected by flood damage, while value-added in
forestry rose by only about 1%. As discussed below, the continued poor
perfotinance of the agriculture sector is a matter of serious concern.
Manufacturing production also declined due to weak domestic demand (as a
consequence of the stagnation in rural incomes), and effects of the floods and
political unrest and strikes which hampered production, especially in the
first half of the year. As in FY87, the principal sources of growth in FY88
were the construction and utilities and services sectors. Although public
sector construction through the ADP was less than in the preceding year, pos:
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flood rehabilitation of infrastructure and housing, especially by the privatesector, led to an increase in total construction activity. In the utilitiessub-sector, rapid growth of natural gas and electricity production andcommencement of sales of liquified natural gas increased value addzd by 27%.
15. In recent years significant changes have taken place in the structure ofmanufacturing in Bangladesh. Since the early eighties, ready made garmentsand shrimp processing by the private sector, and natural gas based fertilizerproduction in the public sector have expanded rapidly, while the tradicionalmanufacturing sector dominated by the jute, textiles and light consumer goodshas been afflicted by a number of problems, particularly weak domf.stic andexternal demand. However, official data (based on the FY73 index) does notadequately reflect the rapid growth of these new industries, and seriouslyunderstate the extent of value added in the manufacturing sector.
16. The slowdown in manufacturing growth in FY88, as measured by officialdata, was due to a combination of weak external and domestic demand,compounded by unfavorable domestic developments. In the jute sub-sector,(which has a weight of 24% in the official manufacturing index), fallingexport prices and weak external demand led to cutbacks in production,exacerbating problems of overcapacity, over-manning, and low productivity.Falling jute prices and the effects of the floods which dampened agriculturalgrowth and income generation affected domestic demand for a wide range ofindustries producing for the domestic market, such as tobacco, sugar, basicmetals, beverages, paper, matches, paints and varnishes, etc. Other factorshampering manufacturing growth included industrial disputes and frequent workstoppages, interruptions in the flow of raw material imports caused by thehigh priority given to offloading food imports at the ports and limited accessto bank credit ior the private sector. The Government's trade liberalizationpolicy also co,ntributed to a measure of industrial rationalization and some 50medium and large scale industries, mostly in jute, have had to shut down. Inthe textile industry, recent census data show that about 40% of the installedhandlooms have remained idle because of dearth of yarn and dyes, lack ofinstitutional credit and marketing difficulties linked to competition frommill-made and imported cloth. The Government has now introduced severalmeasures to assist the textile industry, including easier access to loom loansand other inputs, and regulating competing imports. On the other hand,fertilizer production increased sharply because of a major expansion ofcapacity and substantially increased demand for fertilizer due to cropintensification and rehabilitation programs (noted below). Export orientedindustries such as ready-made garments and shrimp processing also expandedrapidly.
Agriculture
17. In agriculture, the Government responded to the 1987 flood disaster bylaunching a three-pronged program to rehabilitate crop production. First, anextensive recovery program for aman, which was severely damaged by the floods,was introduced. The program included free distribution of inputs, such asseeds and fertilizer and provision of new crop loans; agricultural loansfalling due in FY88 were rescheduled for 6 to 12 months. Second, a cropintensification program aimed at maximizing winter crop production (boro rice
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and wheat) provided for additional seeds, pesticides, and repair of damagedand installation of new irrigation equipment, distribution of power tillers,increased credit allocations for agriculture, and temporary reintroduction ofrental programs on low lift-pumps (LLP). Third, to rehabilitate damagedinfrastructure, the Government also initiated a short to medium-term programwith assistance from external donors, to repair roads, bridges, and floodcontrol and irrigation structures. To provide funds for these programs on apriority basis, new revenue measures were introduced, current expenditureswere curtailed and reallocations of funds were made from the ADP.
Table 1.5: TRENDS IN AGRICULTURAL PRODUCTION AND VALUE ADDED, FY81-FY89
hEa Estimate.Lk Total includes other cereals.Ic Beginning with FY84 data have been revised. Comparable figures for prior years not currently available.
Sources: Bangladesh Bureau of Statistics; Ministry of Agriculture; WorldFood Programme, Dhaka, and staff estimates.
18. These measures, as well as efforts by farmers to recove; flood-relatedlosses, had a positive impact on input use and agricultural production.Fertilizer consumption increased by 14%, the highest rate of annual increaseachieved in the eighties. High yielding seeds distributed by BADC alsoincreased by 40%. Gross disbursements of credit to farmers nearly reached theFY87 level; but because of extensive rescheduling noted earlier, net creditdisbursements to farmers incre.ased substantially by Tk 0.6 billion in FY88, ascompared with net repayments to banks of Tk 4.4 billion in the preceding year.However, the recovery rate of crop loans fell significantly to 24% from 40% inFY87. (It is, therefore, essential that while rescheduling is undertaken only
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under exceptional circumstances, as in the case of recent major floods, theloan recovery program should ba reinstated as quickly as possible.) Sales ofminor irrigation equipment which have been declining since FY84, improved by60% largely because shallow tubewell (STW) sales almost quadrupled.Significant price reductions for some of STWs and simplified sales procedures(such as permitting bulk purchases by private traders and withdrawal ofprevailing regulations which required prior &pproval by Upazila IrrigationCommittees before sinking STWs) by BADC helped to increase STW sales. Thereintroduction of the rental program for LLPs also helped to increase LLPrentals by 7300 urtits in FY88, but had a depressing effect on LLP sales whichfell by 34%.
19. As a result of these efforts, 90% of the affected aman area wasreplanted. Aman production reached 7.7 million tons, 7% less than FY87production level, but substantially higher than the early post-floodestimates. The crop intensification program also had a szlutary effect on theboro crop which reached 4.7 million tons, or 18% above the previous record of4.0 million tons achieved in FY87. This increase in .'oro production wasalmost exclusively due to an expansion in acreage by 18%, made possible byincreased irrigation; boro yields stagnated at about 2.4 tons per hectare.However, wheat production declined by 3.9% because of the early onset of warmweather which adversely affected yields. Nevertheless, total foodgrainproduction reached 16.5 million tons in FY88, almost the same level ofproduction achieved in the preceding year.
20. The success achieved by the Government through its crash programs torehabilitate crops in both FY88 and FY89 (see below) contrasts markedly withthe poor performance of agriculture in the preceding two to three years. Therecent experience demonstrates the potential for growth in the agriculturalsector, especially for winter crops, with effective programs in minorirrigation and support services. However, a number of measures adopted duringthe recent crises to increase production (such as heavy subsidization ofinputs and extensive rescheduling of loans) cannot be duplicated during normaltimes on a sustainable basis to promote agricultural growth (para. 109).
21. Jute remained a major source of instability in Bangladeshi agriculture,because of sharp fluctuations in Jute prices and production. GivenBangladesh's dominant position in the international Jute market, and in thetbsence of an effective stabilization scheme, fluctuations in Jute productionin Bangladesh lead to major swings in external and domestic jute prices;these, in turn, induce changes in production in the opposite direction, oftenleading to costly market disruptions. Because Jute is the main source of cashincomes for farmers, disruptions in Jute production seriously affect theirpurchasing power which is transmitted to the rest of the economy throughreduced demand for agricultural inputs and consumer goods. FY88 witnessedanother example of this instability. Continued fall in international pricesin FY87 reduced Jute acreage from 772,000 ha in FY87 to 512,000 ha in FY88,and raw jute production (which declined by 22% in FY87) fell by a further 30%in FY88. However, the solutions to these problems are complex. A governmenttask force, set up in 1987 to identify the issues in the jute sector andformulate recommendations for policy reform, finalized its report in December1988, building on the recommendations of a Bank report earlier on the Jute
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sector. These recommendations are now being reviewed by the Governmentz and
it is hoped that this review will provide the basis for an action plan for the
jute sector.
Foodgrain Management
22. Prolonged flooding from July to September 1987, combined with a low
level of stocks (of about 750,000 tons) in the public foodgrain distribution
system (PFDS) created considerable apprehensions about a possible food
shortage in early FY88. The Government made commendable efforts to avoid a
major crisis by (a) arranging for additional food imports promptly,
(b) expanding PFDS operations to increase grain supplies in the market, and
(c) as discussed above, initiating programs to recoup crop losses and maximize
winter crop production.
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Table 1.6: SUMMARY OF THE FOODORAIN SITUATION, FYS8-FY89
la Gross production minus 102 for feed and waste.lb Adjusted for crop cycle overlap with fiscal year. Overlap: boro 27X, wheat 16.Ic Includes market operations.Id Includes export sales of 20,000 M.T.Ie Includes private imports of 80,000 M.T.If Estimate.
Scurces: World Food Program.a USAtD: Ministry of Food and staff estimates.
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23. To improve the immediate supply situation, the Government contractedcommercial imports of 1.1 million tons from its own cash resources and throughdeferred paymer.ts, and launched a special request for emergency food aid tomembers of the Bangladesh Aid Group. Donors responded positively to thisrequest and 1.8 million tons of aid-financed foodgrain imports were arranged,resulting in record level of imports of 2.9 million tons. Given the limitedport and transportation capacity in the country, highest priority was given tohandling foodgrain imports at the ports and to movement of foodgrain todeficit areas, especially in the first half of the fiscal year. At the sametime, foodgrain distribution through the PFDS was stepped up considerably (by18% over FY87 level) to 2.5 million tons--the second highest level on record--accompanied by improved targeting of distribution to the needy. Thus, theshare of non-monetized distribution outlets (FFW, VGD and relief) which servemainly the rural poor and unemployed, increased from 34% of total PFDSdistribution in FY87 to 45% in FY88 (Table 1.6); while other channels (such asstatutory rationing and priority groups) which serve relatively well-offpublic employees and personnel of armed forces were corresponding curtailed.
24. Initially in the wake of the floods, domestic foodgrain prices rosesharply by 10-20% during July-September 1987 over the corresponding period inthe preceding year. But, when it became clear that the Government wasmanaging the food situation competently, price pressures began to subside.Increased distribution from PFDS stocks, especially through open market salesand a Government decision to postpone an increase in ration prices, which wasscheduled to take effect in September 1987 also helped this process. (TheGovernment subsequently raised ration prices for rice and wheat by 8% and 3%respectively in January 1988 when the supply situation improved and by 2% and3% respectively again in June 1988; these adjustments, together with a declinein import prices, helped to eliminate the food subsidy for FY88.) In thesecond half of FY88, as harvesting of better than expected aman and recordboro crops commenced, foodgrain prices declined significantly below previousyear's levels. For the year as a whole, wholesale prices for rice rose byonly 4% and retail prices by 8% over FY87 levels, although the sharp increasein food grain prices in the first half of the year did contribute to anacceleration in the inflation rate in FY88.
25. While government policy was remarkably successful in ensuring foodsecurity and stabilizing food prices, the management of procurement policy toensure incentives to producers was less than satisfactory. In view of thecritical food situation early in the year, the Government correctly accordedhigh priority to ensuring food availability; but overestimation of crop lossesand expected rFDS offtake led to large scale imports of foodgrain whichsubstantially exceeded eventual requirements. As the crop situation improved,offtake from public (PFDS) stocks declined from a planned 3.1 million tons to2.5 million tons; and although the Government rescheduled some plannedfoodgrain import arrivals, PFDS stocks increased sharply (from 0.75 milliontons in early FY88) to over 1.4 million tons by end of the year, therebyseverely limiting the scope for domestic procurement. Thus, boro procurementhad to be suspended because of the lack of storage capacity; and market pricesfell by as much as 25% below the procurement price, adversely affectingincentives to farmers. This situation, however, was predictable; and could
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have been avoided with more realistic planning of imports without endangeringthe food security objective. As discussed below, a similar situation isexpected to arise again this year; and this calls for more effectivecoordination of food stock management and procurement if the Government'sobjectives of accelerating foodgrain production and income growth are to berealized.
Poverty Alleviation
26. With a per capita income of $170 per annum, Bangladesh is one of thepoorest countries in the world. Its limited resource base, large population,and vulnerability to frequent natural disasters have all contributed towidespread poverty. Current estimates based on the FY86 Household ExpenditureSurvey (HES), conducted by the Bangladesh Bureau of Statistics (BBS),41indicate that 44.2 million rural and 7 million urban people representing 51%and 56% of rural and urban population, respectively, were below the povertyl'ne (defined as 2,122 calories/day/person). While there are questions aboutthe accuracy of these estimates, the general consensus is that poverty stillremains overwhelming,51 especially among women who account for a large shareof the poor, in both urban and rural areas. In the FY81-FY86 period, somemodest improvement in the poverty situation evidently took place, due tosustained economic growth in this period, increased provision of health andsocia'l services, as well as an expansion in targeted government programs, withcomplementary activities by NGOs. As discussed in the Bank's economic report
i/ Report of the Bangladesh Household Expenditure Survey, 1985-86, BangladeshBureau of Statistics, Dhaka, October, 1988.
,j The FY86 HES estimates show a substantial decline in poverty from the FY82HES estimates which indicated that 60.9 million rural (74% of population) and6.4 million urban (66% of population) were below the poverty line. However,as pointed out in last year's .-.conomic rer,ort, the two surveys are notstrictly comparable because of: (a) differences in sample coverage (thesample size was reduced from 9,563 households--out of about 17 millionhouseholds for the country--to 3,840 households); (b) modifications in thestructure of questionnaires and response periods; and (c) definitional andmeasurement differences, for example, in the imputation of rental values ofowner-occupied and rent-free accommodations.
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last year, improving trerds in real wages and employment and underemploymentdata also supported this conclusion.f1
27. However, even this modest improvement in the early eighties seems tohave been reversed during the last two years- -FY87 and FY88. Two keydevelopments account for this deterioration: (a) a slowdown in agriculturalproduction and investment and an associated decline in real wages and anincrease in unemployment; and (b) the direct impact of the floods of 1987 and1988 on the poor.
28. As discussed in para. 12, the overall rate of economic growthdecelerated sharply since FY86, while value-added in the dominant agriculturesector, (which accounts for nearly 60% of employment), stagnated in FY87 anddeclined in FY88. The floods also led to substantial losses in seasonalemployment in rural areas. Although the Government attempted to offset theselosses through an intensified crop replanting and rehabilitation program and asubstantial expansion of Food for Work (FFW) and Vulnerable Group Development(VGD) programs (both directed largely at poor women), public investment(through the Annual Development Program) was cut back sharply, providinglittle stimulus to a depressed economy (para. 45). The net effect of thesedevelopments were to reduce rural incomes and possibly increase unemployment.Given that th3 large majority of the rural poor are virtually assetless,especially women, and rely heavily on wage employment for their livelihood,these developments in turn appear to have put dowmward pressure on real wages(Table 1.7).
j/ GDP grew by an average of 4% per annum, in real terms, during FY81-FY86,with agriculture growing by 2.9% per annum--both ahead of population growth.Employment and underemployment improved somewhat during the period, despitegrowth in the labor force, in part due to growth in non-traditional exportsand traditional industrial and services sectors, where productivity improved.Thus real wages for unskilled workers increased. Although per capitafoodgrain availability and per capita cereal consumption did not showsubstantial improvements, the available evidence suggest that total per capitafood consumption probably increased because of some substitution in the foodbasket between cereal and non-cereal consumption (see Atiq Rahman & TrinaHaque, 'Poverty and Inequality in Bangladesh in the Eighties: An Analysis ofSome Recent Evidence," April 1988). Finally, the Government, as well as anumber of NGOs (with donor support), strengthened and implemented a number oftargeted poverty alleviation programs (such as the FFW and VGD) whichcontributed toward ameliorating poverty. The allocations from the PFDS forvulnerable group programs (FFW, VGD and relief operations) increased from 26%in FY81 to 44% in FY86; these allocations amounted to nearly 1% of GDP inFY86. See World Bank Report No. 7105-BD 'Bangladesh: Adjustment in theEighties and Short-Term Prospects," March 10, 1987.
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Table 1.7: TRENDS IN REAL WAGES FOR UNSKILLED LABOR, FY80-FY88
Indices of Wages in Terms of WageGoods for Unskilled Rural Labor /b
Wage good (wheat) .. 100 115 156 149 142 (p)Wage good (rice) 100 113 125 171 154 150 (p)
La Based on Statistical Appendix Table 9.7.ab Appendix 4 and 5 of WFP (1988) op.cit.(p) Projected.
Source: Bangladesh Bureau of Statistics, World Food Program, andstaff estimates.
29. Wage and Employment DeveloDments. Table 1.7 summarizes trends in realwages in terms of monetary payments as well as wage goods (wheat and rice) forunskilled labor in agriculture and selected industries. The data indicatethat real wages in agriculture peaked in FY86 and have been declining since,although they are still above the levels attained in FY80. The information onthe trends in real daily wages for unskilled labor in other sectors- on theother hand, shows mixed results. Real wages fell in jute textiles,engineering and small scale rural industries, but registered substantial gainsin other sectors, especially in construction. Since the bulk of the poor areemployed as unskilled labor in those sectors where real wages declined, thedata suggest that, on average, the purchasing power of the poor has fallensince FY86, especially in FY88. This conclusion is supported by an analysis
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conducted by the World Food Program (WFP)21 which reports that between FY82and FY86, there was a 56% increase in the quar.tity of wheat purchasable withthe prevailing daily wage rate for rural unskilled labor. However, realwages, in terms of wheat, after peaking in FY86, declined by about 4% p.a. inboth FY87 and FY88. A similar conclusion can be drawn from the analysis ofthe purchasing power of the prevailing agricultural wage with regard to rice.
30. Preliminary data on employment generation in the past three years alsopoints to a continuing high level of unemployment and underemployment. On thebasis of a benchmark employment figure of 19.3 million person-years and acivilian labor force of 31.1 million persons in FY85, the unemployment ratewas estimated at 38% in mid-1985. Recent estimates by the Planning Commissionsuggest that employment of 21.6 million person years was created by mid-1988.Assuming that the labor force increased at the rate of 2.5% per annum and thelabor force participation rate remained unchanged, this would suggest that theunemployment rate improved marginally to 36% in FY88. It is, however, morelikely that the unemployment rate is higher than this estimate, especially inview of the fact that more women are now entering the labor force (asmanifested by the expansion in the Food-for-Work program); and both the laborforce participation rate and the growth rate of the labor force are higherthan assumed by the Planning Commission (for example, as shown by BBSestimates). When allowance is made for these factors, it appears that theunemployment rate may have even increased somewhat in FY88.
31. The combined effect of declining growth in the critical agriculturalsector, the weakening of real wages and stagnating unemployment points to anincrease in poverty over the last two yedrs. This has been probablycompounded by the negative direct effects of recent floods on the poor.
32. Impact of floods on the poor. The short-term effects of repeated floodsin 1987 and 1988 on the poor included extensive losses of assets, increasedtemporary unemployment noted earlier, and an exacerbation in morbidity andchild mortality. The floods in 1987 displaced 30 million people and led toover 1,800 deaths; the floods of 1988 displaced an estimated 45 million people(or 40% of the population) and led to an equal number of deaths. Losses ofassets, including housing, personal effects, agricultural stock and livestock(which form an important source of income generation for poor women) weresevere. BBS estimates, on a basis of a sample survey, indicated that over 3million rural housing structures were damaged in the 1988 floods, most ofwhich belonged to the poor. The floods also extensively damaged more than 2million hectares of crops in 1988. Although the swift response of theGovernment and farmers in both 1987 aiid 1988 in replanting crops avertedsubstantial declines in production, the impact of losses of poultry andlivestock on small and marginal farmers and poor women by reducing theirincome-earning opportunities could be significant.
1/ WFP, "Analysis of Rural Wage Rate Movements Over Time in Bangladesh,"Dhaka, February 1988 (mimeo). The analysis covered the period December-Mayeach year when the FFW program is in operation.
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33. Intensified crop replanting and rehabilitation efforts by the Governmentfollowing both the 1987 and 1988 floods helped to recoup employment losses inagriculture. However, corresponding recovery of lost employment opportunitiesis unlikely in the industrial sector, which continues to be hampered by weakdomestic demand. The Government estimated that in the industrial sector,about 88% of industrial assets, including plant, machinery, raw materials andinventory, for the small and medium-scale enterprises in the flood affectedareas was damaged to some extent, leading directly to about half a millionperson-years of employment loss. Flood damage to infrastructure (especiallyrural roads, embankments, bridges and culverts) was also heavy, reducingeconomic activity. The combined effect of losses of homesteads, agriculturalcrops and livestock, and the damage to rural and urban economic infrastructurethus probably seriously reduced employment and incomes, further aggravatingwidespread impoverishment.
34. The displacement of a large number of people into flood-relief camps andthe disruption of normal social services directly contributed to an increasein the incidence of morbidity and child mortality. Although available data inthis area are inadequate, preliminary indicators show that the cumulativeeffect of floods and other disasters increased infant mortality from 111.9deaths/thousand in 1985 to 116.6/thousand in 1986 with a slight decline to112.7/thousand in 1987. The situation was worse in the rural areas where theinfant mortality rate increased from 114.2/thousand in 1985 to 122.0/thousandin 1986, declining only marginally to 120.3/thousand in 1987. Apart fromreported deaths directly attributable to the floods of 1988, health effectsincluded a sharp increase in diarrheal diseases, which peaked at around 80,000reported cases a day in September 1988, compared to an average of 30,000/dayreported in normal circ-umstances.
Industry and Trade Policy Reforms
35. Recognizing the need to increase foreign exchange earnings and employ-ment opportunities outside agriculture, the Government has initiated reformsin industrial and trade policies since the early eighties. These reformswhich are closely interrelated, have included a major denationalization of(once dominant) public enterprises; deregulation of government controls andprocedures and gradual liberalization of the import regime to encourageprivate sector participation in manufacturing and to improve economic signals;improving export policies and exchange rate management to encourage exportproduction, especially by the private sector; and efforts to increase theefficiency of enterprises that have been retained in the public sector. InFY88, steps were taken to extend the reform process, although progress was notuniform in all areas.
36. Under the New Industrial Policy (NIP) of 1982, Bangladesh carried outone of the largest denationalizations undertaken in developing countries.Over 650 public enterprises were transferred to the private sector, leavingonly 160 in public hands, and reducing public sector share of fixed industrialassets from 85% in FY81 to 40% in FY86. (This exercise, however, has hadmixed results: a number of privatized enterprises were closed down, andseveral others have faced continuing problems, in part due to the weak demandfor jute and textiles, and accumulated liabilities and debt servicing
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problems). The Revised Industrial Policy (RIP) of 1986 continued thisprocess, by shifting the emphasis from divestiture to the formation of mixedpublic/private corporations, by selling 49% of shares of selected publicenterprises to the private sector. Sixteen such enterprises have beenidentified for partial sale, of which six were successfully marketed in FY87and FY88. The program, however, is being implemented slowly because of theneed to strengthen the financial position of earmarked enterprises beforemarket placements are made. Efforts are also needed to identify otherpotential candidates for partial or full divestment (which could benefit frominfusion of private capital and managerial skills); and a Bank study currentlyunderway is expected to assist the Government in this area.
37. The NIP and the RIP have opened for private investment 125 out of 144industrial subsectors.!' Moreover, investment approval vrocesses wereliberalized and approval limits were progressively raised to facilitate speedyprocessing.2' Private sector's access to foreign exchange was alsosubstantially improved by simplifying licensing procedures for importing rawmaterials and machinery (by specifying broad categories of eligible imports ofraw materials and spare parts and requiring a passbook for record purposes),and by expanding the secondary market for those who want to make such importsat the (premium) secondary market exchange rate (para. 7). As a result, thebulk of private investment and (raw material and capital goods) imports forthe private seator have been substantially freed from official regulationwhich was widespread earlier. However, further simplification is stillfeasible and needed in these areas.
38. In the early eighties Bangladesh had a very restrictive import regimechacacterized by extensive quota restrictions and bans and a positive listwhich narrowly defined eliylble imports (in addition to limited access toforeign exchange through the tightly controlled official market). In FY86,the import policy was relaxed by replacing the positive list by negative andrestricted lists of imports; while the tariff structure was simplified byreducing the number of tariff rates from 24 to 11, with a view to establishinga more uniform structure of protection among industries and improving export
I/ The 1986 revision of industrial policy restricted public investment todefense; electric power (excluding standby generation); mechanized forestextraction; telecommunications, air transport (excluding cargo) and railways;atomic energy; and currency printing and minting. (However, if privateinvestment is not forthcoming in the free sectors, public sector agencies mayset up industries, either by themselves or jointly with the private sector,for eventual privatization.) A supplementary "discouraged list" of industriessuffering from underutilization of capacity also exists.
2/ Thus, official approval is no longer necessary for self-financed projectsand for those which have an import content of raw materials of less than 50%.Projects which need approval can be sanctioned by development financeinstitutions (DFIs) up to Tk 60 million, by Director General of Industries andcommercial banks up to Tk 30 million, and Bangladesh Small and CottageIndustries Board (BSCIB) up to Tk 15 million, without referral to the mainregulating body --- the Investment Board.
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orientation and resource allocation. Over the next two years, the list ofbanned items has been progressively reduced from 39% of import categories atthe four-digit SITC level at the end of FY86 to 28% at the end of FY88; andthe restricted list was reduced from 28% to 24% over the same period.(Additional items liberalized included agricultural and food preparations andselected finished manufactured goods). At the same time, as a part of athree-year program to rationalize the tariff structure, in FY88 the maximumnominal tariffs for final goods in the textile, steel and engineering,chemicals and electronics sectors were reduced from over 200% to 125%; whilecommensurate adjustments were also made to rates for raw materials andintermediate imports in these sectors. As noted in para. 51, in order tostrengthen export incentives, access of exporters to banned or restrictedimports for export production was improved. Despite these improvements,however, banned and restricted imports (about half of the four-digit SITCcategories) are still substantial; and need to be reduced in accordance withthe Government's three-year phased program.
39. These, together with measures to promote exports (discussed inpara. 51), helped to increase grivate investment in manufacturing,particularly in ready-made garments, textiles and food processing. Thepattern of foreign exchange financing of capital goods also changeddramatically; about 80% of foreign exchange for such imports are now obtainedthrough the secondary market, compared to only about 20% in FY81. However,private investment in manufacturing has stagnated in the last three years, inpart due to rapid expansion of capacity in the mid-eighties in ready madegarments and weak domestic demand for most manufacturing subsectors.Inadequate availability of credit resulting from necessary enforcement ofcredit discipline (including intensified efforts to collect overdues anddenial of credit to those with poor repayment records), unwillingness of banksto provide term loans at low interest rates which do not fully reflect thecosts and risks of such lending, and institutional problems particularly amongthe development financing institutions, also contributed to this decline ininvestment for production for the domestic market in both FY87 and FY88.
40. Along with the scaling back of public enterprises (PEs) throughdivestiture, the Government has endeavoured to improve the performance ofremaining units through financial and physical rehabilitation, and variousmeasures designed to improve management autonomy, pricing policies andperformance monitoring. Thus, the capital and debt structure of a number ofenterprises have been improved by conversion of debt to equity and substantialinfusions of additional equity. Under the Public Enterprise (Management andCoordination) Ordinance of 1986, substantial autonomy to adjust prices havebeen granted to public enterprises, except for those producing a small numberof "monopoly and sensitive" items. Significant pricing adjustments were madein a few cases, notably public enterprises in natural gas and electricityproduction, where rates have been increased by 50% and 15% p.a. respectivelyover the last three years. However, in a large number of cases, thisflexibility has not been utilized and price adjustments have been insufficientto offset increases in input costs. To improve budgetary control andmonitoring, a system for autonomous bodies reporting and evaluation (SABRE)was introduced in ten enterprises in FY87 and another ten enterprises in FY88;a new performance evaluation system (designed with UNDP assistance)
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identifying monitorable performance targets and action programs at the plantlevel, was introduced on a pilot basis in two enterprises in FY87, andextended to three more in FY88. The implementation of these programs,however, has been slow, and more needs to be done before these systems canbecome widely operational.
41. Despite these efforts, the financial performance of public enterprises(PEs) remains poor, with total losses increasing to Tk 1.4 billion in FY88from Tk 1.1 billion in FY87. The losses of Bangladesh Jute Mills Corporation(BJMC), which increased from Tk 0.4 billion in FY87 to Tk 1.04 billion inFY88, accounted for the larger share of these losses; but most of the otherPEs also fared badly. The Petroleum Corporation, however, benefitted fromhigh domestic output prices relative to import costs, and its profits helpedto partly offset losses of other corporations. While BJMC's problems havebeen largely due to external market fluctuations and commitments to provideprice support to Jute farmers, a number of reasons have contributed to thecontinuing poor performance of others: multiplicity of corporate objectives;insufficient commercial orientation and inadequate pass-through of input costincreases; over-employment; a centralized wage determination process unrelatedto productivity, worker incentives and the financial position of PEs; lack ofmanagerial autonomy, accountability and incentives for cost control; and weakfinancial structure of PEs. As discussed in para. 115, the Government willneed to consider further measures in these areas in order to improve theperformance of PEs and to sustain the implementation of ongoing reforms.
Budgetarv Developments
42. Fiscal policy since the early eighties has been largely oriented towardsmeeting the stabilization objective and the overall budget deficit wasprogressively reduced from 11% of GDP in FY83 to about 8% in FY87. Thisreduction in the deficit was achieved principally through restraints ondevelopment (capital) spending, and to a lesser extent through a marginalimprovement in revenues. Thus, total government expenditures, as a proportionof GDP, were reduced from nearly 20% in FY83 to 17% in FY87. The developmentbudget took the brunt of this cutback, falling sharply from 13% of GDP to 8.6%over the same period, while current expenditures increased from 6.6% of GDP inFY83 to 7.7% in FY87--not a healthy trend for building future capacity of theeconomy. Recognizing the need to increase public spending (which became moreapparent subsequently with the devastation and economic stagnation caused bythe floods), the Government sought to increase total expenditures in the FY88budget by 12% over FY87 levels, including a 9% increase in the developmentbudget (ADP).10Y To help finance increased expenditures, new taxes of Tk 3.8billion, equivalent to 0.6% of GDP or 8% of total revenues, were announced,
JQ/ In FY87, the ADP turned out to be unexpectedly large (Tk 46 billion)because of the early completion of a large project (Chittagong Urea) whichadded about Tk 6 billion to the ADP and project aid disbursements. When thedisbursements on the urea plant is subtracted from FY87 ADP, the planned FY88ADP represented a substantial real increase.
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Table 1.8: INCOME AND EXPENDITURE OF THE CENTRAL GOVERNMENT, FYB1-FY89
.la Comprises non-ADP project expenditure, the Food for Work program, miscellaneous investment (non-development) end notloans and advances. A major part of gross lending by the Government is included within the ADP.
/b Including foreign grants.
Sourcesi Bangladesh authorities, end staff estimates.
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while a substantial (12%) increase in external aid receipts was alsoenvisaged.
43. The budget outcome, however, deviated substantially from initialexpectations due to a number of factors which increased current expendituresand reduced revenues. Current exoenditures increased particularly sharply bya further 8% from a budgeted Tk 45 billion to Tk 49 billion. The floodsnecessitated additional expenditures for VGD and relief operations (Tk 1.8billion, financed by food aid); but, current expenditures also increased inother areas: post-budget increases in festival and other allowances to publicsector employees (Tk 1.0 billion), maintenance of law and order (Tk 0.2billion) in a period characterized by frequent strikes and political unrestand conducting of parliamentary elections (Tk 0.2 billion). In addition, thedeficit on food operations rose sharply from a budgeted Tk 3.5 billion tonearly Tk 6.0 billion, primarily because of a build up of PFDS food stocks (byan additional 700,00 tons) noted earlier. The food subsidy of Tk 0.5 billion,included in current expenditures, was eliminated due to a combination ofhigher issue prices and falling import prices. However, as noted earlier, thefood subsidy has re-emerged in FY89 due to a reversal of international pricetrends and lagging offtake prices this year.
44. To mobilize additional revenues to finance post-flood expenditures, theGovernment in September 1987 announced supplementary fiscal measures amountingto Tk 1.1 billion or 0.2% of GDP. These, together with earlier tax increases(of 0.6% of GDP) announced in the budget, represented a major effort toenhance revenues in a single year. Nevertheless, total revenues in FY88 fellby Tk 1.2 billion or 2% below budget estimates. As a result, the revenue/GDPratio declined from a budgeted 9.0% of GDP (and 9.2% of GDP in FY86) to 8.8%in FY88. While continued weak domestic demand and sluggish imports, andreductions in tariffs as a part of trade liberalization (para. 38) contributedto this revenue shortfall, the latter highlights the persistent problem of theinelasticity of the tax system and persistent problems of improving financialperformance of enterprises and enforcing cost recovery and debt servicingobligations. Resulting shortages of local currency have been a majorconstraint to improving project implementation and effective utilization ofexternal aid. As discussed below, high priority needs to be given toimproving the revenue effort through structural reform of the tax system andefforts to increase collections of non-tax revenues.
45. The shortfall in revenues and increases in current expenditures whichwere mainly in local currency (except for VGD and relief expenditures whichwere largely externally funded) significantly reduced resources fordevelopment spending. Accordingly, the ADP was cut back by 19% below the FY88budget target and 12% below FY87 actuals, in nominal terms. This cutback,however (as discussed below), was larger than warranted by the circumstances.Admittedly, the disruptions associated with the floods and political unrestcontributed to delays in project implementation. Following the floods, theGovernment, in order to mobilize local currency resources for rehabilitationand reconstruction work, suspended disbursements on development projectsbriefly, pending an internal review of the ADP. This process initially sloweddown disbursements; however, its impact on the implementation of externallyfunded projects over the year as a whole (by redefining priorities and
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ensuring early reallocation of resources to priority projects), was positive.Project aid disbursements which were sluggish in the first half of FY88,recovered somewhat in the second half of the year, so that the ratio ofdisbursements (to opening project aid pipeline) reached 19.2% although it wasstill lower than the 20.9% rate achieved in FY87. Thus, while the localcurrency shortages associated with the floods contributed to the decline inthe ADP, it was, however, exacerbated by overcautious budgetary management.The Government accumulated an unanticipated cash surplus of Tk 0.7 billionwith the banking system (as against a planned bank borrowing target of Tk 1.0billion) especially at a time when projects were starved of local currencyresources'll and a depressed economy needed some stimulus from publicexpenditure policy. Thus, the development budget was cut back more thannecessary; and led to an unexpectedly large reduction in the overall budgetdeficit to 7.5% of GDP from 8.2% planned in the FY88 budget and 8.4% in FY87.
46. The experience in FY88 serves to illustrate the more longer termproblems of implementing the development program which have become moreserious in the last two years. As noted earlier, over the past few years theADF has been given relatively low priority and squeezed of resources, evenwhen government revenues, in current prices, increased substantially. Thus,in the FY84-88 period, although total revenues rose by nearly Tk 26 billion,this increase was fully absorbed by increases in current expenditures. (Therapid growth in current expenditures was due mainly to increases in pensions,retirement benefits and salaries, administration, defense, local governmentand debt service payments and relief. However, essential current expendituresfor operations and maintenance and for the social sectors have beenunderfunded. Thus, as discussed in the Public Expenditure Review,restructuring of current expenditures, with tight restraints in lessproductive areas combined with increased allocations to more productive areaswill be needed in the future.) As a result the Government's local currencycontribution (revenue surplus) towards financing the ADP has fallen steadilyover time. The Government simultaneously reduced domestic borrowing for thebudget, even achieving a cash surplus, as noted, in FY88. This in turnexacerbated the local resource shortage and implementation difficulties of thedevelopment budget, which was also constrained by other procedural problems(see Public Expenditure Review). In effect, the development budget was fullyexternalized, with external aid inflows financing the entire ADP as well asthe deficit of Tk 3.4 billion in the Government's current operations. As aresult, development expenditures continued to decline from 13.3 of GDP in FY83to 8.6% in FY87 and to 6.7% in FY88, while current expenditures increasedsteadily from 6.6% in FY83 to 7.7% in FY87 and to 8.1% in FY88.
47. These developments raise important concerns regarding the manifestly lowpriority accorded to the development program and the need to refocus currentexpenditures and to restrain its growth in low priority areas, to provide moreresources for priority expenditure programs. They also indicate the
11/ A recent review by Implementation, Monitoring, and Evaluation Division(IMED) of the Planning Commission indicated that in FY88 local currencyshortages accounted for over half of project implementation delays - faroutweighing all other contributory factors combined.
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desirability of better coordination of programming of development expenditureand budget management, and developing an improved system of reporting andmonitoring expenditure data in the Finance Ministry. More importantly, asdiscussed (in para. 143) below, they raise fundamental questions regarding therole of external donors in Bangladesh--whether they should continue to fullyfinance the development program through additional commodity and project aid,unless there is tangible evidence of an increased commitment on the part ofthe Government to provide more domestic resources for the development budget.
Balance of Payments
48. The external sector constitutes a relatively small though important partof the Bangladesh economy, with exports and imports representing 7% and 16% ofGDP respectively. Since the early eighties the balance of payments hasundergone significant structural improvements and strengthened considerably.Dampening of import demand associated with the adjustment effort andrelatively slow growth of the economy, together with rapid and morediversified growth of exports and workers' remittances helped to reduce theexternal current account deficit from 11% of GDP in FY81 and FY8z to less than6% in both FY87 and FY88. Merchandise exports and remittances now cover 68%of the import bill, compared with only 43% in FY81. However, externalassistance continues to be a critical element of balance of payments (andbudgetary) support; and rising levels of aid disbursements, along withstructural improvements noted above, have helped to generate overall balanceof payments surpluses since FY86. Consequently, the (gross) external reserveposition strengthened steadily to nearly $900 million, equivalent to 3.6months imports at the end of FY88, compared to barely 1 month's imports inFY81, providing some much needed cushion to a highly disaster-prone economy.
Current Account Deficitas X of GDP -10.0 -8.4 -6.7 -8.2 -7.0 -5.5 -5.7 -6.0
Terms of Trade Index (FY81-100) 100.0 96.5 112.1 140.4 107.3 114.6 119.7 114.5Teoms of Trade Annual Change (2) -14.9 13.4 16.1 25.2 -23.6 6.8 4.4 -4.3Debt Service Ratiolc 19.7 16.8 16.3 24.5 28.2 27.8 22.6 23.5
la Estimate.lb Commercial borrowings on account of food imports incurred by GOB.la Debt Se.;vice as a percentage of expo.t of goods and serviees and private transfers.
Sources: Bangladesh Bank, Bangladesh Bureau of Statistics and staff estimates.
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49. In FY88, exports increased by $157 million, or 15% in nominal terms,principally due to continued expansion of garments exports, while remittancesfrom abroad increased by another $57 million. However, the import bill alsorose by $367 million, or by 14%, in nominal terms, largely due to additionalfood imports necessitated by the floods; and the current account deficit rosemarginally to $1.1 billion or 5.7% of GDP from 5.5% in the previous year. Arising level of net aid inflows, equivalent to 8% of GDP, fully financed thisdeficit and helped to improve gross external reserves by $144 million.
50. The growth of export earnings in FY88 stemmed principally from a 45%increase in exports of ready-made garments (additional $123 m'llion) and to alesser extent from increased earnings from urea fertilizer (additional $20million) and shrimp (additional $9 million). Consequently, the value ofBangladesh's non-traditional exports exceeded that of traditional exports forthe first time, with garments easily surpassing jute and jute goods as thelargest single category of merchandise exports (Table 1.10). The volume ofgarments exports increased by about 30%, as Bangladesh continued to enjoyfavorable access to the US market; and available quotas were fully utilizedfor several product lines. Currently efforts are being directed towardsdiversifying export markets through increased sales to both western andeastern European markets and moving into higher value product lines. Recentexpansion of domestic production capacity also enabled Bangladesh to exportsubstantial quantities of urea, valupc at $25 million. Prospects for furtherexport growth in this area are promising in view of planned additions tocapacity and availability of low-cost natural gas. Considerable potential forexpanding production for export also exists in frozen food, especially shrimp,where productivity is currently low,/1 but could be significantly increased.In FY88, however, shrimp exports increased by only 6% due to flood damage tohatcheries in the summer of 1987. In contrast, earnings from traditionalexports stagnated, because of continued decline in export prices and volume ofraw jute and jute goods. The latter, which averaged over $500 million a year,ec ivalent to 70% of Bangladesh's export earnings in FY80 and FY81, providedonly $380 million or 30% of export earnings in FY88. Falling export pricesover the past few years and high production costs due to overcapacity, excesslabor, poor management and an accumulated debt overhang have reduced thecompetitiveness of the jute industry and led to large financial losses.
JV/ Per hectare yield in Bangladesh is only 150 kg, compared to 1,200 kg inMalaysia and 2,000 kg in Korea.
Sourcet Planning Commission, Bangladesh Bank and staff estimates.
51. The growth of non-traditional exports in recent years has beenfacilitated by improvements in government policies and facilities provided toexporters. Apart from a flexibly managed exchange rate policy and incentivesprovided through the export performance benefit (XPB) scheme, exporters alsobenefit from export credit guarantees, and various arrangements designed toensure exporters access to imported inputs duty-free or at low duty rates.U'A Duty Exemption/Drawback Office (DEDO) within the National Board of Revenuewas established in December 1987 to rationalize and improve the duty exemption
f/ For example, there are bonded warehouse facilities for duty-free import ofraw materials, concessional import duty rates on machinery and spare parts,duty drawbacks on imported raw materials, refunds of excise duty on packingmaterials, and selected income tax rebates. An inland back-to-back letter ofcredit system established in April 1987, under which firms with export ordersmay pass on to their domestic suppliers the benefits of duty-free imports andexport credits. Imports of certain previously banned and restricted items byexporters' suppliers were permitted in the Import Policy Order 1987/88;previously imports were allowed only on a case-by-case basis.
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and duty drawback schemes. Also, in December 1987, the working capital of theExport Guarantee Scheme was increased significantly to expand exportfinancing. Tc further promote garment exports, an Export Monitoring Unit wasestablished within the Export Promotion Bureau with the task of monitoringgarment exports to countries with quota limitations in order to ensure fullutilization of such quotas; and this has helped considerably in fillingavailable quotas and guiding export production into higher value productlines.
52. Record foodgrain imports to meet anticipated crop losses and toreplenish PFDS stocks, exceeding the previous year's level by 70% in volumeand by $216 million in value, accounted for nearly three fifths of theincrease ($367 million) in the total import bill in FY88. Import paymentsalso rose by $21 million for fertilizer (TSP) to provide for the requirementsof the crop rehabilitation program; and for edible oil (by $22 million), crudepetroleum and petroleum products (by $42 million) and raw cotton (by $38million) due to significantly higher import prices. Residual imports.axcluding capital goods) also increased substantially in value terms; but thebulk of this increase is believed to be imports for garment production forexport. Thus, non-food imports for the domestic market, affected by acombination of factors such as weak domestic demand, interruptions inindustrial activity caused by strikes, and priority given to unloading of foodimports etc., showed little increase. On the other hand, capital goodsimports declined sharply by 23% in value terms, due partly to the substantialreduction in public investment (ADP) noted earlier. Thus, although totalimports, in constant (FY81) prices, rose by 12% in FY88 (this increase mainlyreflected higher food imports), non-food imports declined by about 1%,reflecting the stagnation in the economy.
a Estimate.1b Consumer and other intermediate goods not separately shown.
Source; Planning Commission. Bangladesh Bank and staff estimate.
53. Private transfers, predominantly workers' remittances have increasedsteadily in recent years; and in FY88 rose by another 8% to $788 million. Thenumber of Bangladeshi workers going abroad has averaged about 70,000 annuallyin recent years. Aithough reliable data on returning immigrants are notavailable, it is likely that the total stock of Bangladesh workers abroad isstill increasing slowly. In response to changing demand pattern for immigrantlabor in the Middle East, the Government has also initiated programs in recentyears, with assistance from the International Labor Organization (ILO), toimprove skills of, and provide limited vocational training to, an increasingnumber of migrant workers; and this has contributed to the improving trend inaverage remi..tances per worker. The Government's flexible management ofexchange rate policy and the secondary market has also helped to channel anincreasing share of workers' remittances through official channels. However,in view of the changing preference for skilled workers and pressure on wage
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rates in the Middle East and the limited scope for sustaining the number ofworkers gaining employment abroad, it is necessary to substantially expandexisting skill development programs and to continue to manage the exchangerate policy flexibly in order to maintain the inflow of remittances at highlevels.
54. In the capital account, ai.d disbursem~nts rose by only 3%, in nominalterms, over FY87 level to $1641 million in FY88. However, the composition ofaid changed significantly, with an acceleration of food and commodity aiddisbursements reflecting the special needs created by the floods, and a 14%decline in project aid. (These c:rends are discussed in more detail inparas. 135-136).
55. With net capital inflows exceeding the current account deficit, thebalance of payments recorded an overall surplus in FY88, and gross reservesclimbed to $896 million, equivalent to 3.6 months' imports--a comfortablethough not an excessive reserve level in view of the disaster-proneness andextreme volatility of the Bangladesh economy.
56. Bangladesh's external debt at the end of FY88 stood at $8.96 billion,equivalent to 47% of GDP. Nearly all of it is over 10 years maturity, bearingconcessional rates of interest. In FY88, Bangladesh repaid substantialamounts ($115 million) of short-term debt incurred earlier and $40 million offoreign exchange deposits which Kuwait provided in the early eighties tobolster Bangladesh's meager foreign exchange reserves at that time.Nevertheless, debt service payments in FY88 as a ratio of export of goods andservices and private transfers declined to 22.7% from 27.9% in the precedingyear. This fall in the debt service ratio was due to increased exportearnings and remittances and lower IMF repurchases in FY88, and a bunching ofrepayments of food credits and other short-term debt and substantialrepurchases from the IMF which raised the debt service ratio to unusually highlevels in FY87.
57. Summary. The preceding discussion pointed out that Bangladeshsuccessfully stabilized its economy in the early to mid-eighties, reducingunsustainable fiscal and external balances to manageable levels and achievinga reasonable rate of economic growth with some improvements in the povertysituation, through a combination of careful macroeconomic management,expansion of targeted programs for the poor and broad-based economic reforms.The past two years, however, have witnessed a slowdown in this momentum inmany areas. Although macro-economic management remained tight, and thedisruptions caused by recurring disasters were effectively handled,(particularly lay ensuring food security and mitigating the hardships for thedisadvantaged groups), economic growth decelerated, the implementation ofdevelopment programs suffered and the earlier improving trend in the povertysituation appears to have been reversed. To a considerable extent, thesesetbacks could be attributed to two major floods (and political uncertainties)which disrupted economic activity and created considerable damage. However,deficiencies in economic management also contributed to the recent economicstagnation. The necessary transition of perceptions from managingstabilization to a more active role of promoting faster growth and developmenthas been difficult to achieve; and fiscal management remained overcautious,
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food management at crucial times failed to provide price support to farmers(reinforcing the economic stagnation), while the reform process generallyslowed down. Moreover, as discussed in the Public Expenditure Review, thedisruptions caused by the floods have masked emerging problems of a longerterm nature with regard to resource mobilization and management, which unlesseffectively addressed, now threaten to undermine the successes achieved overthe mid eighties. No doubt, in the more recent past, small and incrementalprogress continued to be made in many areas; but there were also considerabledelays in the preparation for and implementation of needed reforms.
58. The Government's reluctance to move forward more rapidly with economicreforms in an environment characterized by crises is understandable; andrightly under the circumstances, priority had to be given to crisismanagement, though short-term economic management still could have beenbetter. Nevertheless, the disruptions and setbacks of the last year and thisyear have heightened the urgency for action, to build on the successes of themid-eighties, without allowing the economy to stagnate. There is an urgentneed to strengthen the reform process in key areas and to start newinitiatives to permit the economy to grow more rapidly without underminingmacroeconomic stability. The prospects for the economy during the currentfiscal year, as discussed in the following section, are not bright; and moreimaginative and forward looking policies can help overcome problems which loomahead and avoid further deepening the current stagnation. Over the mediumterm, as discussed below, purposeful action will need to be taken in manyareas if the objectives of achieving substantial improvements in growthperformance and poverty alleviation are to be realized.
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C. Short-Term Prospects
Introduction
59. Before it could recover from the impact of the 1987 floods (consideredto be the worst in the preceding 40 years), Bangladesh was swamped by an evengreater disaster. Floods in late August and September 1988, generallyregarded as the worst in living memory, inundated 84% of the land area,inflicting extensive damage on life, property and infrastructure. Soon afterthe floods receded, Bangladesh was again hit by a more localized cyclone inlate November. These calamities have had a severely disruptive impact on theeconomy in the current fiscal year--FY89--and on economic growth prospects forthe near to medium term. Against this background, the rest of this reportdiscusses the impact of these adversities on the economy, the Government'sresponse to the crises, short-term prospects for economic growth anddevelopment, key economic management issues facing the Government in the nearto medium term, and Bangladesh's external assistance needs for the next fiscalyear (FY90).
The ImRact of the Floods
60. An unusual concurrence of events is believed to have caused floods ofunprecedented magnitude in late August and September 1988. A storm systemclose to the northern border of Bangladesh which led to a rapid rise in waterlevel of the Brahmaputra coincided with heavy flooding in the other majorriver systems (Ganges and Meghna) which drain through Bangladesh. At the sametime, spring tides in the Bay of Bengal delayed recession of flood waters fromthe lower reaches of the rivers, contributing to prolonged inundation of thedelta for over a month.)4
61. The duration and extent of flooding and the magnitude of the damagecaused by the 1988 floods were much greater than the consequences of the 1987floods. In 1988, 122,000 square kilometers or 84% of the country's land areawas submerged, directly affecting 45 million people, with over 1,600 deathsdirectly attributable to floods, and another 735 deaths caused subsequently bydiarrheal diseases. (In contrast, the 1987 floods affected 35% of the landarea and 30 million people, and resulted in over 1,800 deaths.) The damage tocrops and livestock has been correspondingly larger. Aman--the main rice cropplanted in the summer-suffered most from the floods, as 22% of the area underaman was affected. The cyclone in early December again damaged about 20% ofthe total planted/replanted aman area, although the crop loss on this accountalone is estimated at only 0.2 million tons. Together with losses (of about0.15 million tons) in the aus crop (harvested in July/August) which wasdamaged by localized flooding earlier, total crop losses due to the floods andthe cyclone are now estimated at about 2.0 million tons, or 17% below the FY89target for the aman and aus crops; or about 0.8 million tons or 18% below lastyear's (flood damaged) actual production. While this estimated loss is not as
Xi/ A UN mission visited Bangladesh in November to ascertain the causes of thefloods and appropriate actions Bangladesh will need to take domestically todeal with future recurrences. Its report is expected shortly.
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high as the Government's early estimates in October (which suggested a2.5-3.0 million crop loss) it is still a major setback. Although a Governmentinitiative to increase winter crop production is expected to yield record boroand wheat harvests, total foodgrain production for FY89 is presently estimatedat about 16.35 million tons, or about 1% below last year's actual production,and nearly 7% below the original FY89 production target. Damage to othercrops and livestock was also severe. Ten percent of the jute harvest isestimated to have been damaged; and in the forestry sector, both private andpublic nurseries suffered extensively. Livestock losses are estimated to beclose to 200,000 large and small ruminants and 420,000 poultry; with shortagesof animal feed adding to malnutrition and weakening of draught animals.
62. Flood damage to physical and economic infrastructure is estimated to befar greater than last year. About 2,500 km of flood control embankments,23,500 units of minor irrigation equipment, 10,000 km of local roads, asignificant proportion of national roads and highways and railways, severalhundred bridges, over 19,000 educational institutions, 1,468 healthstructures, and 3.7 million of (mainly low quality) housing units wereaffected. Widespread damage was also reported to fish and shrimp hatcheries,and industrial units, both large and small scale. Preliminary estimates ofdamage assessment made by a joint task force of the Government and UN agenciesin October placed total rehabilitation and reconstruction needs resulting fromthe floods, (excluding housing and the recently initiated Dhaka city floodprotection scheme) at approximately $1.1 billion over a three-year period;although these estimates overstate rehabilitation and reconstructionrequirements, the damage caused by the floods is still likely to be far higherthan the $285 million estimated after the 1987 floods.
63. The Government moved rapidly and decisively to deal with the crisis bylaunching: (a) a massive relief eefort to provide immediate assistance tomillions of flood victims; (b) an international appeal for additional food aid(and relief supplies) together with substantial commercial purchases from itsown resources to ensure adequate food availability; (c) an extensive cropreplanting and recovery program to recoup aman crop losses and enhance wintercrop production; (d) steps to assess damage to infrastructure and housing andimplement a phased program of rehabilitation and reconstruction; and(e) bilateral and international initiatives to seek longer-term measures todeal with the flood problem.
64. Given the magnitude of the disaster, the relief effort, involving amajor collaborative exercise by the Government, local NGOs and individuals andexternal donors, was handled efficiently and successfully. A Flood ReliefMonitoring and Coordination Cell was set up within the President's Secretariatto oversee and direct relief operations; while civilian and military personnelwere deployed to conduct relief operations. Substantial emergency assistanceprovided by external donors (including medicines, clothing, water purificationtablets and animal vaccines and feed), and emergency food supplies providedthrough the PFDS were distributed as smoothly and effectively as could beexpected, given the scale of the disaster. Credit should be given to theGovernment for handling the crisis effectively and averting a major
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catastrophe, and to the international community1 l for providing timelyassistance to the Government.
65. As the floods receded, the Government initiated a crog reglanting andintensification program designed to minimize, and regain part of, t-he lossesin the aman crop, and to substantially increase winter crop production. Theprogram aimed at recovering at least 730,000 tons of the loss in foodgrains,mainly by increasing the acreage and enhancing the availability of inputs forthe winter crops, particularly boro rice. Unlike in FY88 when nearly 90% ofthe aman area was damaged by the 1987 floods, the scope for aman replantingthis year was much more limited, because of the slow recession of flood water.Accordingly, this year's program for the aman season (through December)includes, in addition to aman replanting where feasible, production ofadditional 100,000 tons of vegetables, smaller quantities of blackgram andsorghum on an experimental basis, and broadcast paddy on land that would haveotherwise remained fallow during the October-December period. Theintroduction of maize in the crop recovery program is a significant step inthe direction of crop diversification; and will be supported by procurement byPFDS at guaranteed minimum prices. The program includes free distribution ofseeds/seedlings and fertilizer to over 50,000 small farmers. The secondcomponent of the program to intensify the production of boro rice, wheat,maize, potato, and vegetables in the winter season include (a) freedistribution of seeds and fertilizer; (b) repair and rehabilitation of over25,000 units of minor irrigation equipment; and (c) procurement anddistribution of over 3,600 new LLPs under rental programs for small farmers,aimed at increasing crop acreage. The Government has also taken steps toensure availability of high quality seed through imports. As with last year,time limits for obtaining crop loans have been extended, while repaymentsfalling due have been again postponed by 6-12 months. As noted, thesemeasures are expected to raise foodgrain production to 16.3 million tons inFY89 or 1.2 million tons below the original target. However, given thelikelihood of a record boro crop of about 5.3 million tons, skillfulmanagement of the foodstock situation and an effective procurement drive in
15/ The UN system played a very active role in assisting the Government duringthe crisis. The Secretary General of the United Nations immediately announcedan appeal, and designated as his Special Representative the Under-SecretaryGeneral and UNDRO Coordinator, who visited Bangladesh from 13 to 18 September1988. The UNDP Resident Representative was designated as Local SpecialRepresentative. The offices of the UN Organizations in Bangladesh (UNDP, WFP,UNFPA, UNIDO, UNICEF, FAO, ILO, WHO, World Bank and IMF), supplemented byadditional staff from respective Headquarters and from the other UNspecialized agencies, provided immediate assistance to the Government for itsrelief effort, in assessing damage, and in preparing a program ofrehabilitation and reconstruction. The resident mission of the World Bankconvened a Local Consultative Group (LCG) meeting to discuss possiblecoordination of donor responses to assisting the Government's rehabilitationeffort. A number of countries also sent special delegations to review withthe Government of Bangladesh how they might assist in relief andrehabilitation efforts.
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the last quarter of FY89 will be needed to ensure remunerative prices tofarmers (para. 81).
66. The Government also initiated an assessment of flood damage andpreparation of a medium term program for rehabilitation and reconstruction,with assistance from UN agencies and bilateral donors. According topreliminary estimates (summarized in Table 1.12), the costs of the program,excluding housing, are likely to exceed $1.1 billion over the next thr.eyears, of which $425 million (equivalent to T-k 13 billion, or nearly 25 ofthe planned level of the ADP for FY89) would have to be incurred this fiscalyear to provide for urgently required rehabilitation. It should be noted,however, that these are very rough estimates, which need to be firmed up bymore detailed assessments at sector and subsector levels, which have onlyrecently begun. In a number of cases, the estimates include not only thecosts of repair and rehabilitation, but also upgrading and 7.,w investment; andcareful scrutiny by the Planning Commission would be needed before the hard-core rehabilitation program could be finalized. This work is currentlyunderway. Nevertheless, even after substantial pruning, the rehabilitationprogram is likely to be a substantial claim on limited resources, particularlywhen rehabilitation of private housinglAl is also taken into account. TheGovernment also recently initiated a Dhaka flood protection project which isestimated to cost an additional $100 million.
16/ As noted, estimates by BBS indicate that about 3.7 million housing unitswere damaged or destroyed, requiring considerable resources (mainly private)for rehabilitation.
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Table 1.12: REHABILITATION AND RECONSTRUCTION PROGRAM
Industry 124.4 3.932 100.8 3.186 225.2 7.118Small & Cottage Industry 75.5 2,387 70.7 2,235 146.2 4,622Medium & Large Industry 47.7 1,508 27.0 879 75.5 2,387
Health & Education 74.7 2,359 21.0 664 95.7 3,023
Rural Water & Sanitation 3.2 102 - - 3.2 102
Total 424.5 13.416 712.6 22.520 1.137.1 35.936
Source: Report of the Joint Task Force of the Government of the People'sRepublic of Bangladesh and United Nations on the 1988 Floods;November 1, 1988.
67. To free up resources of this magnitude for immediate rehabilitation workhas been extremely difficult. A block allocation (of Tk 150 million) providedin the FY89 budget for unspecified work in the agriculture sector andunutilized funds from donor-financed rehabilitation and reconstructionprojects initiated after the 1987 floods which were incorporated in the FYb6budget, provided some room for the Government to embark on programs in suchareas as crop rehabilitation, repair and restoration of infrastructure andschools on a priority basis. However, substantial additional reallocations ofresources had to be made; and since current expenditures also increasedsimultaneously, the ADP has had to be cut back again this year (para. 89).Moreover, the manner in which these adjustments in the ADP have been made sofar this year has proved to be more disruptive to ADP implementation thannecessary. Each Ministry was asked to accommodate priority rehabilitation
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work within its original ADP allocation, without necessarily changing theinter-ministerial allocations in the ADP and cutting back on less desirableprojects in the ADP as necessitated by the Pew priority given torehabilitation. This appears to have led to a general slowdown in ADPimplementation this year. On the other hand, an early reallocation ofresources within the ADP on the basis of a systematic, but quick, review ofresource availabilities and expenditure priorities, would have helped tominimize the disruptive effect of the cutback in the ADP; and while this wasdone last year after the 1987 floods, as discussed below, this processreceived much less attention this year. These problems contributed to anacute shortage of local resources for the ADP and slowdown in projectimplementation, which the Government has recently began to address.
68. The Government launched an appeal to external donors last October tohelp finance the rehabilitation and reconstruction effort; and a specialmeeting of the United Nations was convened on November 16 to discuss theemergency in, and provide assistance to, Bangladesh. The donors haveresponded to this request and an earlier appeal for food aid by providingadditional 300,000 tons (valued at approximately $78 million) of foodgrain;commodity assistance (including edible oil, medicines, relief goods andbuilding materials) valued at about $87 million; and support forrehabilitation and reconstruction work both through new project aidcommitments and reallocation of funds within existing aid programs."/ It wasestimated at the conclusion of the UN special meeting that total assistancepledged by donors to Bangladesh in response to the disaster (includingemergency food aid and relief supplies) will amount to about $500 million.However, not all of this is likely to be additional; in many cases, it has notbeen clear whether the pledges of assistance are a part of ongoing aidprograms, or transfers into this year's programs from commitments/programs forthe next fiscal year, or reallocations from other projects in the aidprograms, or truly additional. On the basis of presently availableinformation, it appears that the substantial part of the required financingfor the rehabilitation effort is still to be arranged.
69. The Government took decisive steps to increase food availability andensure food security. During the floods and the following months, a majoreffort was made to distribute adequate food supplies to flood victims and theneedy through VGD, relief and Food-for-Work channels of the PFDS, and toincrease foodgrain supplies in the market through open market sales. In thethree-month period September-November 1988, total PFDS distribution reached785,000 tons, of which 348,000 tons or 44% was issued through VGD, FFW andrelief channels. To mitigate price pressures, the Government also postponedan increase in ration prices scheduled for September. Steps were also takento replenish PFDS stocks through an appeal to external donors for additionalfood aid and large commercial purchases (of approximately 630,000 tons or430,000 tons more than pre-flood plans) out of its own resources.Consequently, foodgrain imports this year are projected to exceed 2.2 million
V/ A number of donors indicated that they would review with the Governmentand reprogram and increase existing aid programs on the basis of bilateraldiscussions.
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tons. In November and December alone, 876,0000 tons of foodgrain wereimported. Priority was given to handling foodgrain imports at the ports.
70. These measures helped to control and stabilize domestic foodgrainprices, which had risen sharply in August and September above the pre-floodlevels. With the arrivals of imports, and increased assurance of continuedavailability of adequate supplies through the PFDS, market prices began todecline in October; and have remained below or close to the previous year'slevels since late October.
71. Although the Government has been very successful in handling theimmediate crisis, ensuring food availability and stabilizing foodgrain prices,food stock management continues to pose problems. Understandably, theattainment of food security has become a matter of the highest priority in aperiod characterized by recurrent natural disasters. However, the manner inwhich this objective has been pursued is likely to contribute to an erosion ofincentives to farmers (para. 81).
72. A number of initiatives have been taken by the Government, withassistance from UNDP and bilateral donors to examine the causes of the floodsand ways of mitigating their effects. In addition to studies undertaken byGovernment itself, the UNDP is financing a Flood Policy Study being undertakenjointly by international and Bangladeshi experts; joint bilateral task forcesand study teams have been formed between Bangladesh and India, Nepal, Chinaand Bhutan; a team of engineers, financed by the Government of France isundertaking a feasibility study of flood control embankment proposals for theGanges and Brahmaputra Rivers; and USAID is sponsoring a study of watershedmanagement in the Ganges and Brahmaputra Basins in response to a request fromCongress. In addition to these activities Government, in cooperation withUNDP and IDA, is initiating a flood preparedness project designed tostrengthen procedures for early warning, enhance public awareness andinstitute other programs to mitigate the effects of floods. The Governmentwill wish to review the recommendations and proposals in these studiescarefully, as a basis for formulating a coherent and well designed longer-termstrategy for addressing the flood problem.
Economic Prospects in FY89
73. The floods have necessitated significant revisions in the Government'seconomic goals and targets for the current year. Before the floods, 6%overall economic growth was envisaged, with substantial increases inagricultural production (6%) and manufacturing (7%). A recovery of cropproduction from the disruptions created by the 1987 floods, an expansionarypublic expenditure policy which aimed at stimulating economic activity andraising investment levels (supported by a significant new tax effort), and arevival in demand for manufacturing production as a result of these factorswere expected to provide the basis for higher growth. The balance of paymentssituation was expected to strengthen, with improved supply availabilities(through both increased domestic production and imports) contributing to amoderation of domestic inflation.
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74. Prospects for Economic Growth. It is now clear that many of thesetargets will not be realized. Despite the crop recovery and rehabilitationeffort, agricultural. production will be substantially less this year. Incomelosses associated with this setback and reduction in gainful employmentopportunities will have a depressing effect on demand (which is unlikely to beoffset by public expenditure policy), on the manufacturing sector which hasalso been directly affected by closure of factories during the floods anddamage to equipment and inventories. The stagnation and even decline in thekey productive sectors will limit the overall growth of the economy to about1-2% in FY89, even though reconstruction and rehabilitation activities in thepublic and private sectors will help increase activity levels in constructionand services sectors.
75. Agricultural production and value added will be corsiderably less thanlast year's, due to production losses in most of the subsectors. Theshortfall in production will be mainly In the aman crop, ravaged by the floodsand the cyclone, currently projected at 7.0 million tons, compared to7.7 million tons achieved in FY87 and 8.27 million tons in FY86. The auscrop, already harvested in the summer, was also only 2.85 million tons,compared to 2.99 million tons in FY87 and 3.13 million tons in FY86. Theselosses are likely to be partly offset by increased winter crop production--boro rice and wheat--which will benefit from the crop intensification drive,expansion in cultivated acreage and improved soil fertility and residualmoisture from the floods. The boro crop is currently expected to be about 5.3million tons or 0.7 million tons more than the FY88 harvest, itself a record;while wheat production is projected at 1.2 million tons or 0.15 million tonsmore than in FY88. If these targets are realized, total foodgrain productionwould be about 16.3 million tons, but still 1% below FY88 production level.As noted, production of jute--the main cash crop--as well as of livestock,fore;try and fisheries has also been affected by the floods; although therewill be some gains in minor crops such as vegetables, potatoes and pulses.Notwithstanding these gains, given the sizable losses in foodgrain productionand additional costs incurred in replanting, value added in the agriculturesector is expected to decline by about 1%.
76. The manufacturing sector will be affected both directly and indirectlyby flood damage and further weakening of domestic demand. The floods led toclosure of many factories for an extended period, resulting in losses inproduction; and caused considerable damage to plant and equipment andinventories, especially in the small-scale sector. While some of theproduction losses could be made up during the year, this is unlikely to besignificant in many cases because of continued weak domestic demand. Apartfrom substantial losses in rural incomes, an unusually large proportion ofpersonal incomes and savings is likely to be pre-empted by necessaryrehabilitation of damaged housing on a priority basis this year. Conse-quently, the demand for consumer goods, such as textiles, tobacco, and foodand beverages, is likely to be adversely affected; while jute manufacturingcontinues to be hampered by weak external demand and low-quality of rawmaterials (in part due to the floods). Major exceptions to this overall trendwill be industries which will benefit from increased rehabilitation activityin both agriculture and construction, such as chemical fertilizer andbuilding materials and those geared to continuing strong export demand such as
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ready-made garments. Nevertheless, overall manufacturing growth is likely tostagnate again this year.
77. Value added in the utilities sector which has grown rapidly in recentyears, is expected to be significantly lower this year, due mainly tointerruptions in the production of natural gas and electricity generationduring the floods. However, the construction and services sectors are againexpected to continue to grow steadily as last year by about 11% and 4%,respectively, in response to increased private and public rehabilitation andreconstruction activity.
78. With overall GDP growth at only 1-2% this year, per capita incomes willhave declined sharply for the second successive year. Thus, although theGovernment is making special efforts to assist th.e very poor, the livingstandards of the majority of the people in Bangladesh who are already quitepoor, are likely to fall again this year. As discussed below, an importantobjective oi the Government's short-term economic management will need to beto minimize such a decline and to ensure an early recovery to the extentpossible.
79. Food Management. Despite disruptions to foodgrain production, theGovernment has so far handled the short-term food situation successfully.Domestic food availability is excellent; and the situation is expected toremain comfortable during the remainder of FY89. Availability of plentifulstocks at the time of the floods, prompt actions by the Government inarranging additional imports and additional food aid from donors in responseto the Government's appeal have contributed to this result. As noted, theGovernment has already arranged for 2.24 million tons of imports. However,this level of imports is likely to be excessive, creating seriousdisincentives to producers, and undermining the objectives of encouragingagricultural production (see below).
80. The Government's early estimates of imports for FY89 (based on a grosscrop loss of 2.5 million tons, partly offset by an expected increase of 0.5million tons in winter crops and an anticipated reduction in consumption of1.1 million tons) suggested the need for an additional 1.0 million2 1 tons ofimports (to 2.6 million tons) to provide for a projected PFDS distribution of3.1 million tons. Consequently, aid-financed imports were expected to risefrom 1.4 million tons to 2.0 million tons, and the Government's own commercialpurchases from 0.2 million tons to 0.6 million tons. As the crop outlookimproved in recent months, these import plans have been scaled back somewhat,mainly by reducing aid-financed imports. Aid-financed imports are nowexpected to be about 1.6 million tons, while commercial purchases will beabout 630,000 tons. Of the latter, approximately 363,000 tons have arrived byend-January, with additional arrivals of approximately 270,0C0 tons scheduled
1f/ Government's original balance of payments projections assumed thatfoodgrain imports would reach 1.8 million tons, of which 1.6 million would beaid financed. However, because of increases in world prices, only 1.4 milliontons could be imported under existing food aid commitments.
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for the March to June period. PFDS offtake, allowing for increaseddistribution under VGD, relief, FFW and recently expanded modified rationing(para. 82) channels, and distribution of a further 1.0 million tons in theFebruary-June 1989 period,1 91 is now expected to be about 2.6 million tons.Consequently, (PFDS) stocks, which were rebuilt to a comfortable level of 1.2million tons at the end of December 1988, are expected to exceed 1.4 milliontons by the end of June 1988. However, if offtake were to be lower, as in thecase of last year, end year stocks could reach 1.5 million tons.
81. Such a build-up of stocks, especially at a time when record boro andwheat crops are harvested, are likely to create serious stock managementproblems and disincentives to farmers. Given the limited effective storagecapacity in the country--around 1.4 million tons--this will reduce the scopefor procurement to support the announced procurement prices; and ifsubstantial procurements are not made, farmgate prices may again fall sharply,as was the case last year. A build-up in PFDS stocks, whether through importsin the form of commercial purchases by the Government or domestic pro^urement,will adversely affect the budget and the development program by pre-emptinglimited taka resources which would otherwise be available for budgetaryfinancing. However, domestic procurement will help to support farmers'incomes and agricultural production and help stimulate domestic demand,particularly at a time when the economy remains severely depressed; while foodimports will not generate such benefits. Given the tight constraints on thebudget and the need to support economic activity and provide stimulus to theeconomy through effective management of budgetary resources, the wisdom ofutilizing such limited resources to build up PFDS stocks through importsshould therefore be reconsidered, especially when such a policy will adverselyaffect domestic farmers' prices and incomes. It should be pointed out thatthe present level of stocks--over 1.2 million tons--provides plenty of cushionfor the Government to meet any unexpected contingencies, without jeopardizingthe food security objective. As discussed below, the Government can achieveboth objectives of achieving food security and supporting domestic agriculturesimultaneously by using available resources to support domestic procurement ofboro and wheat crops rather than to procure abroad through commercial imports.
82. The Government has continued to make improvements in the PFDSdistribution during this fiscal year. Targeted distribution to the very poorthrough VGD, relief and FFW channels is expected to reach a record 1.28million tons or 49% of total PFDS distribution, compared with 1.07 milliontons or 43% last year. The Government also broadened the scope of the VGDprogram by introducing partial monetization, i.e., permitting part of thefoodgrains allocated to this program to be sold in the market and utilizingthe proceeds to provide credit to beneficiaries of the program for undertakingincome-earning activities. Changes were also announced in the modified
2/ Traditionally, PFDS offtake falls off sharply in May and June of eachyear, when the winter crops come into the market.
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rationing program to target it more effectively to the rural poor.l21 Thesechanges will correspondingly reduce the share of statutory rationing and otherpriorities which generally provide for relatively better-off consumers.
83. Budgetary Prospects. The FY89 budget, announced in June 1988, sought toincrease public expenditures to stimulate economic activity and raiseinvestment levels, particularly through a 30% nominal (or 18% real) increasein development expenditures over FY88 provisional actuals (Table 1.8).Expenditure allocations for agriculture, infrastructure and the social sectorswere increased significantly. To provide for these increases in expenditures,new taxes of Tk 6.0 billion, equivalent to 0.9% of GDP, were introducedhelping to raise total revenues by a projected 19% in nominal terms. At thesame time, the deficit on the food account was expected to decline by nearlyTk 4 billion, principally due to a planned reduction in PFDS stock.Consequently, the overall budg-t deficit and external aid receipts to financethis deficit were both expected to remain at their FY88 levels in nominalterms. However, as a proportion of GDP, the budget deficit was expected todecline to 7.2% of GDP from 7.5% in FY89 due to a 6% growth GDP and domesticinflation.
84. The budgetary outcome for FY89 is likely to be adversely affected by anumber of unforeseen factors: (a) flood-related reductions in revenues andincreases in expenditures; (b) higher than projected foodgrain import prices;and (c) possible shortfalls in commodity aid. However, as discussed below(para. 88), the adverse impact of these developments on the budget has beenexacerbated by poor short-term economic management.
85. The key assumptions underlying revenue projections in tne budget (6%overall GDP growth and 7% increase in industrial production) will not berealized. As noted, economic growth is expected to be only about 1-2% thisyear; and due to continued weak demand and low levels of economic activity,imports are projected tc fall substantially short of initial estimates.(While some categories of imports are expected to rise as a consequence of thefloods, for example, duty-exempt foodgrain and relief items, these will notcontribute to revenues.) As a result, revenues from customs duties and salestaxes on imports are expected to decline below budget projections. The floodsalso affected industrial production, resulting in lower excise dutycollections on a number of items. Given the depressed state of the economy,it is unlikely that these revenue losses could be recouped over the comingmonths. Consequently, a revenue shortfall of about Tk 2.0 billion belowbudget estimates is now anticipated.
86. Government current expenditures are also likely to increasesubstantially over budget estimates. In part, this is due to increased in-kind allocations for VGD and relief operations, which will be largely financed
ZQ/ Under the revised program, an estimated 4.5 million rural beneficiaries(below a cut-off income limit) will be issued ration cards which entitle themto one and a half kilograms of foodgrain per week; the subsidy rate will bekept to 25%.
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by food aid. However, additional cash payments of about Tk 0.1 billion havealso been incurred for relief purposes; while higher allowances and pensionpayments (Tk 1.1 billion), increased losses of the railways and the postoffice (Tk 0.3 billion), larger allocations for operations and maintenancefollowing the floods (Tk 0.6 billion) and increased food subsidies (see below)will also add to current expenditures.
87. The original budget envisaged that the food budget will have a smallnegative impact on domestic resource availability for financing the ADP.However, higher than budgeted import prices, increased import needs, slowerofftake than projected by the Government and the Government's decision todelay an increase in ration prices due in September are likely to lead to asubstantial increase in budgetary resources for financing fcod operations.Current import prices for wheat are roughly $50-60 per ton more than thebudgeted figures, while imports, at these higher prices, will exceed budgetestimates by over 0.4 million tons. The combination of higher import prices,imports of over 2.2 million tons coupled with planned domestic procurement ofabout 0.49 million tons and offtake of 2.6 million tons would lead toadditional net outlays of roughly Tk 3.2 billion for financing foodgrainoperations, with an equivalent reduction in resources for the ADP. (Of thisamount, about Tk 2 billion will represent food subsidies.)
88. The budget is also likely to be adversely affected by a significantshortfall in commodity aid receipts below the planned level of $500 million.The opening commodity aid pipeline at the beginning of FY89 is unusually low--only about $390 million--partly due to low levels of commitment over the lasttwo years and partly due to transfers to food aid by donors at Government'srequest to meet past emergency needs. Although new commitments this fiscalyear are expected to exceed $600 million, most of these commitments will befinalized in the second half of the fiscal year. Accordingly, toitaldisbursements during the year are likely to be only around $431 million,resulting in a possible shortfall in the availability of counterpart funds ofabout Tk 2.2 billion.
89. The cumulative impact of these developments would be to reduce theavailability of domestic resources for the ADP by roughly Tk 8-9 billinn, orby about 33-36% in nominal terms below budget estimates. In addition, theGovernment has made allocations of about Tk 1.8 billion for new projects andprograms after the floods--Tk 1.0 billion for high priority crop replantingand rehabilitation program and Tk 0.8 billion for the Dhaka city floodprevention scheme. Consequently, domestic resource availability for financingthe originally approved ADP is likely to be extremely tight. This situation,however, has been exacerbated by poor short term economic management, as eventhe limited available resources have not been fully utilized up to now. Atthe end of December 1988, government local currency expenditures were aboutTk 6 billion below permissible expenditure ceilings agreed with the IMF(indicating that not only the agreed borrowing limit of Tk 4 billion, but apart of the Government's own revenues were not utilized). As a result, theimplementation of the ADP has been adversely affected, with disbursements ofproject aid in the first half of FY89 lagging by about 20% in norminal termsbelow the level a year ago. This in turn has meant that the stimulus thatcould have been provided to a flagging economy through public expenditure
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policy has not so far materialized. Indeed a continuation of this policystance is likely to accentuate the current depressive trends in the economy.
90. Recognizing the seriousness of the situation, the Government in earlyMarch initiated steps to reprioritize the ADP and to provide local currencyresources to the ADP to the maximum extent feasible within the agreed creditceilings. It is expected that aided projects included in the approved coreprogram will be provided up to 95% of their original taka allocations for thisyear, with the objective of maximizing disbursements of project aid in thesecond half of the fiscal year. Allocations for crop replanting, Dhaka floodprotection and technical assistance programs will also be fully funded.However, allocations for other sectors and projects will be scaled back by anaverage of 36%, (with larger cuts in industry and power and gas), while blockallocations for upazilas and municipalities will be reduced by about 40%.This reprioritization has been based on a project-by-project analysis which isjust completed. If available resources are fully utilized in the remainingfour months of the fiscal year, it should be possible to achieve an ADP ofaround Tk 40 billion in nominal terms, including project aid disbursements ofabout $750 million--roughly 10% below last year's level of aid disbursements.
91. ProsRects for the Balance of Pavments. The 1988 floods have had asubstantial adverse impact on the balance of payments by reducing exports andincreasing imports. As a result of this development and a deterioration inthe terms of trade, soon after the floods it was estimated that the currentaccount deficit would widen to about 7.2% of GDP in FY89 from 5.7% of GDP inFY88. However, the current account deficit is now expected to be much smaller(only about 6% of GDP), due to some improvement in exports and a significantshortfall in imports below post flood estimates. Although aid disbursementsare expected to fall significantly below last year's level, the shortfall inimports and emergency assistance (of $95 million) received from theInternational Monetary Fund earlier in the fiscal year are expected to morethan offset this shortfall. Consequently, external reserves are expected torise to about $1.0 billion by the end of this fiscal year, equivalent to about3.8 months' imports.
92. Export earnings for FY89 are currently projected at about $1,300million, $70 million or 6% higher than last year's in nominal terms. Volumegrowth, however, is expected to be only about 2%, because of flood-relatedlosses in jute and leather goods, shrimp and garments exports which haveincreased rapidly in recent years. (The shortfall in export earnings inrelation to the Government's export target, which has been usually fulfilledin recent years, is about $100 million.) Initially, substantial losses inexport earnings from ready-made garments were projected; but these are nowexpected to be partially made up by increased shipments to the US and Europeanmarkets and some improvement in the product mix and prices.
93. Imports, on the other hand, are now expected to increase by only about$163 million or 5%, in nominal terms, over last year's level. Much of thisincrease reflects the impact of the floods as well as an escalation of importprices, especially for foodgrain. Imports of foodgrain, edible oil,fertilizer for winter crop production, cement and other construction materialsare expected to increase by about $184 million above pre-flood estimates to
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provide for flood-related needs. (However, even allowing for thisunanticipated need, foodgrain imports in FY89 will still be 26% lower involume terms than in FY88, because of record imports of 2.9 million tons madelast year. In value terms, however, foodgrain imports will be $95 million or19% lower than last year, because of higher import prices this year.) Asubstantial part of the increase in the import bill is also attributed to ananticipated increase (of $157 million) in residual importF (including inputsrequired for export production of ready-made garments). Imports of capitalgoods are expected to be about $25 million less than last year's level innominal terms, but will fall by about 6%, in real terms, reflecting thedepressed level of investment in the economy. Overall, total imports, inconstant FY81 prices, will be about 3% below last year's level.
94. Remittances are expected to rise marginally, by only about $12 millionover last year's level, (or by $25 million over pre-flood es,imates, maintlydue to flood-related contributions from private sources and voluntaryorganizations abroad). Allowing for the increase in imports, the currentaccount deficit will increase marginally by about $121 million over last yearto 6.0% of GDP this year. Aid disbursements, towards financing this deficit,will be only about $1,470 million, substantially less than last year's level.Disbursements of food aid, in nominal terms, are expected to fall short oflast year's level of $300 million by about $11 million, while commodity aiddisbursements are expected to be substantially below expectations, mainlybecause of an inadequate opening pipeline. The cutback in the developmentprogram will also mean that there will be a significant deceleration ofproject aid disbursements, in nominal terms to about $750 million. However,with special assistance of $95 million from the IMF and slower than expectedgrowth of imports, the current account deficit will be fully covered; and, asnoted, the level of gross reserves is expected to rise to about $1.0 billion,equivalent to 3.8 months of imports.
95. Bangladesh's terms of trade, following slow improvement in the last twoyears, is expected to deteriorate somewhat this year, due to higher importprices, especially for foodgrain; and still weak export prices for traditionalexports. This would be an added burden on a country recovering from majordisasters. The debt service ratio is expected to remain at about 23% ofexports of goods and services, about the same level as last year.
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D. Economic Management in the Near to Medium Term
96. The preceding sections of the report reviewed Bangladesh's recenteconomic performance and short-term prospects. It was pointed out thateconomic performance through the mid-eighties has been good; but that over thepast two years economic growth and development have suffered setbacks. To alarge extent the deceleration of economic growth can be attributed to a seriesof natural disasters (and to political unrest in FY87). However deficienciesin economic management also contributed to this process. For example, fiscalmanagement has been overly tight considering the exigencies of the situation,and insufficient attention has been given to protecting the developmentprogram, further exacerbating project implementation problems in FY88 when amore accommodating fiscal stance was needed to provide some stimulus to aflagging economy. This situation was repeated in the current year, especiallyin the first half of the year when available limited domestic resources werenot fully utilized to ensure ADP implementation to the maximum extentfeasible. Lack of urgency in expediting assessment of resource availabilities(which, despite a clearly evident resource shortfall, continued to be on itsnormal late January schedule), lack of coordination among key Governmentagencies responsible for the financing and revision of the ADP, andestablishing priorities in tne ADP quickly to minimize disruptions to moreimportant projects in the program also have slowed down the implementation ofthe development program this year. Another example is food management wherestock accumulation through imports (sometimes using own cash resources) hasoften coincided with planned bumper harvests of winter crops, pre-emptingeffective local procurement and depressing prices to farmers, and conflictingwith the objectives of enhancing agricultural production and stimulating theeconomy. Finally, as noted elsewhere, the process of economic reform, aftermaking rapid strides in the mid-eighties, has slowed down over the past 12-18months.
97. However, Bangladesh will need to revive and accelerate the momentum ofeconomic growth and development as soon as possible. The economic stagnationof the last two years makes this need even more imperative than before.Without significant acceleration of econe '' growth it will not be possible,given widespread poverty and still high r , of population growth inBangladesh, to make even modest strides ii alleviating extreme poverty andimproving the living standards of the vast majority of the population. TheGovernment fully recognizes this need; and its most recent Policy FrameworkPaper (PFP), prepared in zonsultation with the IMF and the World Bank,articulates a macroeconomic framework (summarized in Table 1.13) and requisitepolicy reforms to achieve such a goal. The PFP recognizes that, to accelerateeconomic growth and development it will be essential to significantly improveeconomic performance in the key productive sectors--agriculture and industry--(to generate incomes, employment and export earnings) which have been laggingin recent years; at the same time, it also recognizes that special effortsthrough targeted programs would be needed to improve the conditions of theextremely poor who might not directly benefit from the growth process. ThePFP outlines broad directions of policy reforms and investment and resourceneeds (both domestic and external) over the next three years to achieve theseobjectives. As discussed below, it will be virtually impossible to attainthese goals without substantial additional resources; but, at the same time
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significant improvements in the mobilization, management and utilization oflimited resources by the Government also will be needed. This is likely to beespecially important because as discussed below, public expenditure policywill need to play a particularly crucial catalytic role in promoting theprocess of growth and development in the present circumstances in Bangladesh,both in the very short term and the medium term. The remainder of thissection outlines key areas where the Government's short-term economic manage-ment needs to improve to support a revival in the economy and broad directionsof policy reforms which are needed in the medium term. The report concludeswith an assessment of Bangladesh's external resource needs for the next fiscalyear--FY90--to support a revival of the economy and continued policy reform.
Aid disbursements (in USS m) 1,641 1,677 1,707 1,908Aid disbursements/GDP 8.4 8.1 7.5 7.7Debt service (in US$ m) 526 568 652 103Debt service ratio id 22.6 23.8 25.1 25.1Debt service/GDP 2.7 2.7 2.8 2.8
/a The Policy Framework Paper estimated growth in FY88 at 3.0, but this isnow revised to 1.8% on the basis of BBS data; similarly, for FY89, 2% isthe upper range of the CEM estimate of 1-2%. More recent estimates arealso lower for investment and savings ratios.
b Percentage increase in annual average price level.Xc Owing to data limitations, operating surpluses and deficits of public
enterprises are included in private savings, while a portion of publicenterprises' investments (that which is channeled through the ADP)is included in public sector investment.
/ Debt service as a percentage of receipts from exports of goods andservices; and private transfers.
98. The immediate challenge to economic management in the short term is toensure that the disruptions caused by the recent disasters are handled in away that minimizes their adverse impact, so that public policy will helpstimulate recovery rather than exacerbate the depressive trends in theeconomy. As noted, there are number of areas where improvements are needed inthis regard. FiLst and foremost is the need to implement the developmentprogram as rapidly as possible. As observed earlier, the process of assessingresource availabilities, preparing detailed rehabilitation programs at thesubsector level, and reordering the size and priorities (for sectors as wellas individual projects) in the ADP has been quite slow; even though specialefforts to accelerate it would have been warranted given the extent ofdisruption to the development program. It should be pointed out that resourceassessment at any time of the year (unless it is close to the end of thefiscal year when it is of little use for operational needs) is subject touncertainties;21 but given the scale of the disaster this year, there wasenough evidence in late October/early November of a substantial resourceshortfall, indicating the need to mobilize additional domestic resourcesand/or to curtail current expenditures selectively, and to adjust the ADP veryearly. While a review of the ADP was initiated in early fall, this processreceived less attention than a similar exercise conducted last year, in partdue to the absence of parallel estimates of resource availabilities andexpectations that additional emergency external assistance for financingrehabilitation work would be forthcoming, thereby averting the need for majorrevisions in the ADP.2 1 As noted, the reordering of priorities in the ADPand reallocation of resources for individual project have now been finalizedin early March; and maximum efforts should be made to ensure speedyimplementation in the next four months.
Z1/ Moreover, such resource assessments would need to be done frequently; andas noted below, resulting adjustments in the ADP could be accommodated througha revival of the core programming process.
2/ These expectations were somewhat unrealistic since it would take severalmonths before official agreements on new commitments are finalized and fundsactually become available for financing expenditures.
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99. As discussed in the Public Expenditure Review, in addition to well-knownprocedural bottlenecks, the major factors impeding project implementationinclude general inadequacy of local resources (taka shortage)U1 c.nd anallocation system under which lower priority projects still receive asubstantial share of the limited taka resources. As a result, taka resourcesare spread too thinly among too many projects; and even though the Governmentestablished a core program of priority projects and improved fund releaseprocedures to ensure automatic releases of approved allocations in the firstthree-quarters of the fiscal year, these mechanisms have remained largelyineffective. Accordingly, efforts should be made in future to ensure thatresources are not spread too thinly over all projects and that priority isgiven to more important projects to facilitate their speedy implementationrelative to others. For this purpose, it would be necessary to strengthen thecore programming approach by limiting it to a smaller number of high priorityprojects and allocating a greater proportion of local currency to theseprojects. This should facilitate adjustments to be made to the ADP in theevent of unforeseen contingencies without holding back all projects. GivenBangladesh's exposure to frequent natural disasters, it is essential that thecountry develop an effective mechanism to insulate priority projects fromunexpected tightening of the resource availabilities due to such calamities,and to assess quickly where adjustments in the development program will haveto be made, in order to accommodate rehabilitation needs and to permit moreimportant projects to proceed as rapidly as possible.
100. The rehabilipation programs included so far in the ADP are estimated atabout Tk 4.4 billion (of which the project aid component is Tk 2.2 billion andthe taka component is also 2.2 billion). Of this amount, Tk 2.6 billion hasbeen carried over from the FY88 program, while Tk 1.8 billion of new projectshave been so far cleared by the Planning Commission. Some Tk 730 million ofthe new rehabilitation projects are in the agricultural sector, while Tk 800million has been allocated for the Dhaka flood prevention project. Therevised ADP, finalized in early March, would include rehabilitation work to beundertaken in other areas this year; but these details are not currentlyavailable.
101. Recent experience also suggests the need for better coordination of theimplementation of the development program and the management of the budget.It is essential that, in a situation where the economy is already depressed byadverse events and local currency constraints have curtailed the development
z3/ As discussed elsewhere, the taka shortage reflects the slow growth ofrevenues, rapid growth of current expenditures, and consequently a shrinkingcurrent surplus available to finance the development budget. Indirectsubsidies to public enterprises (for example by not enforcing debt servicepayments, postponing price adjustments which would help increase revenues, andfinancing PEs' losses through bank borrowing which could otherwise be utilizedto support the development budget), as well as overcautious budgetarymanagement by not utilizing bank financing earmarked for the budget exacerbatethe taka shortage. The latter, in turn, provides an important justificationfor bureaucratic interventions and procedures which inhibit projectimplementation.
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program, budgetary management does not impose further curbs on developmentspending by not utilizing available resources, including bank financingearmarked for the budget (as happened last year and again earlier this year).In such exceptional circumstances, the role of budget management in the shortterm should be to help offset the depressing effects of the economy byfacilitating speedier implementation of the development program, if necessaryby additional bank borrowing. This would, however, not be possible for anextended period. As discussed in the Public Expenditure Review, in the mediumterm, the Government will need to make strong efforts to mobilize domesticrevenues and restrain the growth of current expenditures selectively in orderto sustain the development program--see below. As noted earlier, theoverriding constraint on project implementation last year has been theshortage of local currency resources; and this year again the shortfall inlocal currency resources is expected to be substantial. Accordingly, in theshort term, maximum use should be made of the available ceilings for bankborrowing (i.e., Tk 2 billion by June 1989) to finance necessary developmentspending. Some overprogramming of local resources, however, may be needed toachieve this target. Given the importance of supporting domestic foodgrainprocurement to help increase rural incomes, and the seasonal nature of creditneeds for domestic procurement, additional borrowing should be considered, ifneeded, for this purpose.
102. The reasons for continued overcautious budgetary management have beennumerous. Firstly, the lack of effective mechanisms to monitor expenditureson a regular basis in the Finance Ministry has led to reluctance to releasefunds to ensure that no overspending takes place. The solution to thisproblem, however, as discussed in the Public Expenditure Review, lies inimproving reporting procedures and accountability of the spending agencies andthe monitoring capability of Finance Ministry, possibly throughcomputerization, rather than to delay fund releases. Secondly, after a numberof years of success with stabilization, achieved to a large extent throughcautious fiscal management, the changes in perceptions needed to effect atransition to support a more expansive public expenditure policy have beenunderstandably slow, particularly in an environment of crises. However, therewould be little justification for maintaining such a fiscal stance in thepresent circumstances, exacerbating project implementation problems andstagnation of the economy, while leading to an involuntary accumulation offoreign exchange reserves. Thirdly, there have been apprehensions thatadditional borrowing would be frittered away on marginal projects. For thisreason, it is essential to ensure that additional resources provided throughborrowing should be allocated to priority projects with high economic returns.Fourth is the concern with the inflationary consequences of an increase ingovernment borrowing. However, in a situation where the economy is stagnatingthis should be less of a concern; and Government actions to stabilize foodprices has helped to bring down inflation to an annual rate of about 9% thisyear. Moreover, the balance of payments situation at present is quite strong;and increased demand pressures emanating from bank borroving could beaccommodated in the short term by increasing imports, wi tout necessarily
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adding to domestic inflation. An increase in imports in turn will help toincrease government revenues and provide additional resources for the ADP.? _
103. Greater attention also will need to be paid to food management to ensureremunerative prices to farmers and support foodgrain production and incomegrowth. This could be achieved without jeopardizing the food securityobjective, by more realistic assessment of PFDS offtake and providing greaterflexibility in import planning, particularly commercial purchases. Time andagain, however, import needs have been overestimated, and scarce financialresources (which could be utilized for supporting domestic procurement and/orthe ADP) have been committed to imports early in the fiscal year, even whenthere have been serious doubts about the realism of the offtake estimates.As noted, there is a risk that it could happen again this year, depressingdomestic foodgrain prices for the (record) winter crops. The Government,therefore, should postpone some of the planned commercial purchases (forexample scheduled to arrive in May and June); but if this is not possible, atleast delay some of the import (including aid-financed) arrivals. This shouldmake room for domestic procurement physically, given the limitations oneffective storage capacity, but, since purchases have been already madeabroad, it will not eliminate the need for additional financing to supportdomestic prices to farmers.
Economic Management in the Medium Term
104. The primary objective of the Government's development strategy is toalleviate poverty through increased access to food and other basic needs andto raise the general standards of living. To achieve this objective, asoutlined in the recent PFP, Bangladesh will need to signific;-.ntly accelerateeconomic growth, while maintaining macroeconomic stability and takingmeaningful steps to alleviate poverty among the rure.l and urban. poor,particularly the landless. Of utmost importance in this regard is the need toincrease the growth of production in agriculture (including foodgrains) andindustry and stimulate (non-traditional) export growth. This in turn willrequire substantial improvements in economic policies and investments inphysical and human resource development, reversing a declining trend in publicand private investment in the eighties from 16% of GDP in FY81 to below 12% inFY88. Bangladesh will also need to improve its efforts to mobilize domesticresources to help finance such investment (through tax and financial sectorreforms) and take steps to increase the efficiency of public investment.However, given its low income level, Bangladesh will continue to needincreased disbursements of external assistance on the order of 5-6% per annumin real terms over the medium to long term to support this process.
2A/ The need for a more active borrowing policy to help increase developmentspending, stimulate the economy and import demand, and generate additionalrevenues was implicit in the credit targets set for the first half of FY89.This opportunity has been missed. However, the steps that the Government isnow taking to implement the development program should help minimize theenforced cutback in spending.
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105. Some recovery in the economy next year could be expected, given normalweather, with a resumption of growth in crop production and continued exportgrowth. However this alone will not be sufficient to provide a sustainablebasis for longer-term growth. Significant improvements in economic policiesand management will be needed to stimulate and support such an incipientrecovery over time and to facilitate its extension into other sectors of theeconomy, particularly a depressed manufacturing sector. The issues facing theBangladesh economy and policy prescriptions which are needed to address themare not new. However, their adoption and implementation will requireconsiderable resolve and commitment on the part of the Government andsubstantial assistance from external donors to support Bangladesh's endeavors.In particular, there is a need for greater sense of urgency on the part of theGovernment in evolving appropriate action programs and getting on with theirimplementation if the potential recovery next year is to be fully realized.
106. The continued stagnation of agriculture even before the 1987 and 1988floods is a matter of serious concern both to the Government and theinternational community closely involved in Bangladesh's development.Accordingly, the Government, together with the UNDP initiated a joint reviewof the agricultural sector last year to identify the causes of this stagnationand remedial policy actions. After completion of the final report in April1989, the Government will need to carefully consider its recommendations andformulate an appropriate action program for the sector as early as possible.
107. The Government also appointed a task force in May 1988 to prepare anaction plan to increase foodgrain production to 20 million tons by the end ofFY92 (compared to a peak of 16.5 million tons in FY87). The task force'sreport, completed in September 1988, identifies the main areas with potentialfor increasing foodgrain production and provides a program to reach theproduction target in a little over 3 years. It aims to increase acreage underhigh yielding crop varieties by about 50% partly by replacing local varieties,substantially expand command area and the application of chemical fertilizers,and enhance supplementary i.rigation for transplanted aman. The report alsorecommended a special seed productior. and procurement program by BADC tosupply at least 30% of the total seed requirement; provision of crop credit(totaling about Tk 26 billion); ensuring remunerative output prices; aneffective domestic procurement policy to assure minimum floor prices; andsubstantial improvements in extension services and in the efficiency ofagricultural organizations. The report is a first step towards formulating anaction program to accelerate foodgrain production. However, the envisagedtarget, averaging a 7% annual production increase, far exceeds past trends inproduction; and will need to be modified, given the weaknesses of institutionsin the sector, the physical and financial resource needs, and the relativelylong lead times needed to bring about significant improvements in thediffusion of modern technology and the efficiency of public sectorinstitutions providing inputs and agricultural services. The report also doesnot spell out policy requirements for motivating farmers, or substantiallyexpanding minor irrigation programs, or increasing fertilizer use andimproving the efficiency of institutions. Further work will be needed toes+ablish more realistic growth targets and specify policy and institutionalreforms that are needed, drawing on the recommendations of the UNDP review andother studies in the foodgrain sector.
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108. A number of considerations will need to be borne in mind in formulatinga program for the development of the agriculture sector. Given its importancein the consumption pattern and Bangladesh's continued dependence on foodimports, continued priority to foodgrain prodiction in the medium term isstill appropriate, although over the longer term efforts will need to be madeto diversify agricultural production. However, seieral questions will need tobe addressed in this regard: for example, in view of frequent flooding, theappropriateness of flood control and irrigation strategies and designstandards and the relative priority which needs to be accorded to suchinvestments; feasibility of changing cropping patterns with greater emphasison boro production, the role of minor irrigation in promoting dry seasoncrops; and policies needed to promote this objective as well as greaterprivate sector participation in such activities; research and extension needsfor promoting crops, and their costs, etc. While a development strategy forthe agricultural sector will need to address tlhese questions, it will benecessary to recognize that what%ver crops chosen will need to be providedappropriate incentives, together with arrangements to facilitate inputdelivery (involving private as well as limited public initiatives) and accessto credit, and complementary investments in irrigation, research and extensionservices.
109. The Government has had considerable success with crash programs tosupport winter crops in the last two years. However, in designing policiesfor the medium to longer term it is important to consider the sustainabilityof chosen policies. For example, the recent crash programs have incorporateda number of elements which the Government had been gradually withdrawing:large input subsidies, postponement of credit recoveries, sales of irrigationequipment at heavily discounted prices, renewal of rental programs for suchequipment, etc. Many of these elements, however, cannot be sustained over themedium term without incurring heavy subsidies, pre-empting budgetaryresources, or undermining credit discipline and eventually reducing farmer0'access to credit, and undermining hard-won macroeconomic stability. Nor is itdesirable to introduce heavy subsidies to agriculture to compensate for highprotection afforded to the industrial sector through high tariffs and quotas.The appropriate solution to this problem would be to strengthen the tradepolicy reform process by reducing existing distortions in industry rather thanby creating new distortions in other sectors. If certain subsidies toselected target groups or activities are needed, it should be substantiatedthrough proper analysis and investigation.
110. The available evidence suggests that market-oriented input pricingpolicies do not deter input use if access to and ready availabilitv of inputs(such as water, fertilizer and credit) could be assured and if appropriateoutput pricing policies are maintained. In this context, the private sectorcould play a greater role in providing inputs (such as fertilizer) andsupplying and servicing minor irrigation equipment. For example, permittingthe private sector to import fertilizer (TSP and MP) and to purchase ureadomestically at the factory level would help to further improve retaildistributior of fertilizer. Similarly, the removal of restrictions on importsof certain types of engines, the reduction of direct and indirectsubsidization of BADC's equipment sales, and permitting the entry ol private
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mechanics into the repair and maintenance of DTWs would facilitate competitionbetween the private sector and public sector institutions on equal terms. Inaccordance with such initiatives, the role of public sector institutionsresponsible for delivery of inputs and services should be streamlined, alongthe lines of recent reports on the role of Bangladesh Agricultural DevelopmentCorporation in agricultural development and the Bangladeqh Water DevelopmentBoard, and their efficiency improved. Continued access of farmers to creditis essential; but to ensure a continued flow of credit from lendinginstitutions, credit recovery programs will need to be sustained. Finally, toprovide remunerative support prices to farmers, greater attention will need tobe given to careful management of the food situation, so that the PFDS willhave both physical capacity and financial resources to undertake substantialprocurement.
111. Rapid growth of industry is needed to help absorb an expanding laborforce, diversify the economic structure and further expand exports. For thispurpose, steps will need to be taken to improve efficiency, competitiveness,and export-orientation of the industrial sector. Continued commitment totrade liberalization by rationalizing the tariff structure and eliminatingquota restrictions to improve economic signals to investors and the allocationof resources, and flexible exchange rate management to ensure incentives forexport production are essential in this regard. These steps should facilitatethe Covernment's plans to promote further diversification of non-traditionalexports by encouraging production of leather goods, chemical products,assembly operations for basic electronic goods, etc. However, additionalinvestment (to expand production capacity), foreign technical and marketingassistance to ensure quality standards and access to markets, increasingskills through special vocational training programs, and improving incentivesto attract foreign and domestic capital for export production will also beneeded. Efforts should also be made to increase backward linkages, forexample by producing higher quality fabrics and other inputs for use in ready-made garments production and stimulating indirect exporting activities.
112. Reviving economic growth in the traditional manufacturing sector islikely to be a more painful proces.s. A recovery in agriculture and ruralincomes and an expansion of public expenditure programs (see below) shouldhelp to stimulate demand for domestic manufacturers. In addition, however,specific problems of major subsectors, such as jute and textiles (which sufferfrom a variety of problems such as overcapacity, poor investment decisions,accumulated debt problems and lack of competitiveness), will need to beaddressed. In the textiles sector, while the Government is trying to improvethe availability of inputs for producers, care should be taken not to resortto import bans and other restrictions to provide relief for sick industries.While liberalization of tariff policy will inevitably affect uncompetitivedomestic producers, assistance programs will need to be developed torationalize and restructure the operations of those producers who can becomecompetitive. This problem is likely to be serious in the jute manufacturingsector where, according to a government review, a major restructuring andrationalization will be needed.
113. Further improvements in the regulatory environment to facilitate privateinvolvement in manufacturing and steps to increase investment would help to
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promote industrial growth. While significant progress in deregulation hasbeen made in recent years, much more needs to be done to reduce time-consuminginteractions with the bureaucracy and inconsistencies in policies. Forexample, in 1988 the discouraged list has been expanded by adding 10 moreindustries to this list; similarly, there are a number of restrictions withregard to the access of industrialists to imported raw materials (projectswith imported raw material content of 50% or more require officialsanctioning, and there are restrictions on the amounts of raw materials whichcan be imported by industrial users) which make little economic sense underprevailing circumstances. The relaxation of these restrictions would help tominimize bureaucratic interventions. More importantly, new investments arealso hampered by lack of infrastructure--power connections, telephones, etc.The Government has recognized these problems and has established a Board ofInvestment (BOI) to provide a one-stop office for both domestic and foreigninvestors. The BOI is expected to further streamline investment approvalprocedures by centralizing and coordinating existing functions of severalgovernment agencies, including regulatory functions and providing supportservices. The BOI can play a very useful role to private investors bysimplifying processing er. helping to obtain access to necessaryinfrastructure, provide,d that its principal focus is on facilitatingimplementation, it operates in an efficient and speedy manner and that it isstaffed with experienced and qualified professionals who are adequatelycompensated. However, if these organiza_ional aspects are not given dueimportance, the BOI could further aggravate matters and assume a regulatoryrather than a facilitating role.
114. Given the need for increasing investment in the manufacturing sector,the recent decline in private investment is a matter for concern. Thisdecline has been due to both demand and supply factors. On the demand side,the stagnation of the economy and weak demand for domestic manufacturers andthe exiscence of some excess capacity in the ready-made garments industry dueto its rapid expansion in the mid-eighties have had a dampening effect on thedemand for new investment. On the supply side, weak financial institutions,lack of incentives for such institutions to provide term financing at lowinterest rates which do not adequately cover risks and costs of lending, theconsequences of credit recovery programs (which are needed to ensure creditdiscipline and viability of financial institutions), for example, denial ofcredit to borrowers with poor repayment records, have reduced the availabilityof financing for investment. To enable a recovery in industrial investment,these problems will need to be eddressed by improving the capacity andviability of lending institutions and giving them operational freedom to settheir lending rates according to lending risks and costs of funds. In thiscontext, increasing the availability of, and access of borrowers to, creditwill be as much or even more important than providing low interest rates toborrowers.
115. To improve the performance of public enterprises, clearer definition oftheir objectives and roles, separating commercial from socially orientedfunctions; increased autonomy of management, for example over pricing,employment and wage bargaining decisions; establishing clearly understoodcriteria for performance, together with cost-control mechanisms; andaccountability for management decisions and performance will be needed.
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Although a number of initiatives in these areas have been started recently,progress as noted earlier has been quite slow. For example, recent changeshave given enterprises considerable flexibility, in theory, to adjust prices,but this does not happen to any significant extent in practice. Sim4.larlydeveloping monitoring mechanisms and performance indicators has been quiteslow; this process needs to be expedited and extended to all major publicenterprises. The nexus of indirect bureaucratic controls and relationshipswhich inhibit management autonomy will. need to be relaxed, by specifyinggoals, giving management necessary autonomy and holding management accountablefor performance. For the latter to be possible, however, there should beexplicit recognition of the commercial functions of enterprises, and that theenterprises will be comper.sated for the costs of any extra functions andresponsibilities they are required to perform. (Eor example, the chemicalscorporation should not be burdened with the task of indirectly subsidizingfertill er sales to farmers by having to charge ex-jactory prices which aresignificantly below costs to the main wholesaler--Bangladesh AgriculturalDevelopment Corporat'on.) This should make the financial performance ofenterprises and the need for pricing adjustments more transparent. At thesame time, steps should be taken to clean up the debt structure of enter-prises, reduce intra-enterprise liabilities and hold them accountable forpayment of their debt service obligations. Though some of the issues relatingto labor management and compensation are sensitive and difficult, there is aneed to give public enterprises and their management greater freedom overemployment and wage decisions, to evolve arrangements to stied surplus laborover a period of time and to delink enterprises' wages frcm the civil servicewage structure. Finally, a clear policy framework is required for the partialdivestment program, indicating the PEs to remain in the public domain; what todo with the inherently uneconomic PEs; and the scope for further divesting the51% shares retained by the Government.
116. The PFP points out the need for Bangladesh to increase overallinvestment from the currently depressed level of less than 12% of GDP to over14% over the next three years (Table 1.13). There is need and scope for bothprivate and public investment to rise. The latter, however, is expected togrow more rapidly over the next three years, both because of the particularlylow level of economic and social infrastructure in Bangladesh, the imperativesof poverty alleviation, and rehabilitation and reconstruction requirements asa consequence of the floods; and because of the uncertainties surrounding thepace of recovery of private investment in the near term discussed earlier. Asnoted earlier, an increase in public exNenditures can play a catalytic roleover the next year by helping to stimulate demand and the level of economicactivity. Nevertheless, over the longer term, the public sector is expectedto play a supporting role by providing the infrastructure and servicesnecessary to improve the productivity of private sector activities andundertaking direct interventions to address the needs of the disadvantagedgroups, while the Government continues to place primary reliance on theprivate sector for directly productive activities.
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117. However, as pointed out in the Public Expenditure Review,ul the scopefor increasing public expenditures is constrained by the severe shortages oflocal currency and procedural and implementation problems which inhibiteffective absorption of aid. At the same time, increased demands on thepublic sector (for example rehabilitation and reconstructior needs and aprolleeration of projects) in the face of financing and implementationconstraints have created a major need to reassess priorities in the publicexpenditure program. This problem can be effectively handled only by makingvigorous efforts to alleviate the domestic resource and implementationconstraints, and by limiting the number of projects and establishing clearpriorities in the public expenditure program. Without such efforts, given thelocal currency constraint, expenditures in the near term for new projects,including those for flood rehabilitation, will largely displace publicinvestments that would otherwise have taken place, unless donors are willingto cover an exceptionally high share of project costs. (This is amplydemonstrated by the experience of both last year and this year when theimplementation of the normal public investment program was severelydisrupted.) Therefore, the priority and timing of such new investments willneed to be closely examined.
118. The Public Expenditure Review identifies a number of areas where theGovernment can take steps to increase the effectiveness of public expendituresboth by restructuring current expenditures and by refocusing priorities in theADP. For example, while current expendituree will need to be restrained inmany areas, increased allocations could be justified for social sectorprograms, such as health and education, and for operation and maintenance ofexisting and new assets. Similarly, within the ADP substantial re-ordering ofexpenditures will be needed. For example, higher priority needs to be givento water resource development and research and extension servi.:es inagriculture; to transmission facilities in the power sector (while reducingexpenditures on power generation); and rural roads, urban development andwater supply and port development in infrastructure; while cutting back oninvestment in industry other than for fertilizer production for export. Giventhe high economic returns to rehabilitation work, (for example, flood-damagedirriAation and water control structures and the road network), high priorityalso needs to be given to such work. At the same time, the initialrp:iabilitation estimates need to be re-examined, as there are important partsof the program that reflect longer-term investment proposals rather than theimmediate damage due to floods, before they are allowed to displace otheractivities in the ADP. The report also identifies substantial possibilitiesfor cost savings in a number of areas for example by transferring activitiesto the private sector (e.g., in fertilizer distribution and road transport),withdrawal of support from programs which have been proved inefficient orineffective (e.g., agricultural cooperatives and commercial fishingactivities), and shifting programs from local to donor financing to releasetaka resources for the other priority projects.
IV Bangladesh: Public Expenditure Review, Report No. 7545-BD, 1989.
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119. The report also recommends a review of the bridge construction programand other large projects (such as the proposed Jamuna Bridge project), whichare candidates for inclusion in the ADP. Although such projects might befully externally financed, they are large enough to have a significantmacroeconomic impact on the economy by absorbing scarce local currencyresources which would otherwise be available for other development projects,increasing the external debt service ratio, and pre-empting the limitedskilled managerial and administrative capacity in the country. Therefore, thesocial and economic benefits and costs of such projects will need to becarefully examined in the broader macroeconomic context; and their timing andphasing should be considered carefully.
120. While above measures can help to improve the efficiency andeffectiveness of public expenditures, steps will need to be taken to addressthe perennial problems which have slowed down project implementation and aidutilization in Bangladesh. The PER makes a number of practicalrecommendations aimed at improving project preparation and planning, reducingdelays with regard to procurement, technical assistance, land acquisition andrecruitment and staffing of project activities, accelerating commodity aidutilization and improving the budgeting, monitoring and expenditure controlprocedures. These recommendations will need to be discussed and implementedas appropriate as quickly as possible. The relatively slow progress of astudy in a related area, aimed at identifying the constraints which affect theefficiency of public administration, is symptomatic of the implementationproblems. The preliminary preparations for the study were initiated nearlytwo years ago, but because of delays in approval of technical assistance andsubsequent recruitment of consultants, the study has yet to get off theground. Much greater commitment and a sense of urgency to find solutions tothesa problems are needed if progress is to be made in these difficult areas.
121. As noted earlier, the difficulties of sustaining public expenditureshave been due to a considerable extent to local currency shortage, in part areflection of Bangladesh's inadequate revenue effort. In order to increaseoverall investment levels in the economy, a significant improvement inresource mobilization by the public sector and in private savings will berequired, with additional external assistance supplementing these efforts. Inthe public sector, implementing a phased program of structural reforms toimprove the revenue elasticity and equity of the tax system (proposals forreform of the tax system have been under discussion for some time), increasingnon-tax revenues by improving public sector debt management, reducing largesubsidies to public enterprises in the transport and communications sectors(railways, post office and the airlines), improving public enterprises'pricing policies and greater emphasis on self-financing of investments by suchenterprises can help improve public savings.
122. The reform of the financial sector is an integral part of efforts toincrease mobilization of domestic resources and improve their allocation. Thekey elements of a reform program under consideration by the Government seek tostrengthen institutions in the financial sector by restructuring their capitalbase, improving their capability for assessing and managing their loan risksand increasing their autonomy to take lending decisions; liberalize interestrates within margins to provide adequate incentives to banks, to encourage
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them to mobilize resources and to lend to creditworthy customers; reduce thescope of mandated lending programs at low interest rates, and compensate banksfor losses incurred in such lending; improve banking supervision; and developflexible irnstruments for monetary management by the Central Bank.Reclassification of the loan portfolios of banks as a prerequisite to theirrecapitalization; and more importantly, a strong commitment to enforce loanrecovaries to ensure continued viability of lending institutions are alsoessential elements of the reform. In the absence of such a commitment, theviability of the financial system could be further endangered, even if otherreform measures are fully implemented. Reaching accord on the program andinitiating implementation of the program, however, have been slow.Perceptions that low interest rates would be needed to promote investment hascaused less enthusiasm for interest rate reforms; while credit needs for floodrehabilitation and recovery programs, as noted earlier, have led to thepostponement of loan recoveries. Given the critical importance of thesereforms for establishing a viable financial system, high priority needs to begiven to this task.
123. A greater sense of urgency is needed for improving and expandingprograms aimed at the alleviation of widesRread poverty, which is one of thehighest priorities in the Government's agenda. As discussed, significantimprovements in the food distribution system and targeted programs have beenmade recently. A resumption of a reasonably high rate of economic growthwould facilitate progress towards this objective; buc, some of the urban andrural poor, particularly the landless, assetless, pcor women and unskilled,may receive only modest benefit from such growth. Accordingly, the Governmentaims to expand the scope of targeted programs to assist such groups.
124. The quick and efficient manner in which the Government responded tomitigate the short-term effects cf the floods of 1987 and 1988 indicates thatthe basic framework for addressing, at least, short-term poverty issues is inplace. This includes short-term emergency relief programs (e.g., GratuitousRelief), targeted relief and employment programs for the very poor (such asVGD, FFW) and programs such as the Rural Poor Program (RPP) of the BRDB toenhance the earnings capacity of the poor and to generate employment in therural areas. These programs need to be supplemented by a greater commitmenton the part of the Government aimed at (a) improving the effectiveness ofpoverty-oriented programs such as FFW, VGD and RPP, (b) support for greaterNGO participation in poverty alleviation, (c) strengthening of conventionalsocial sector and human resource development programs and (d) exploration andexpansion of innovative employment generation activities.
125. Improvements in poverty-oriented Uroarams. Existing targeted poverty-oriented programs, such as the FFW and VGD, although largely reaching theirintended beneficiaries, have raised concerns about their predominantly rel.eforientation and the lack of integration with the mainstream developmentactivities of the Government. It is suggested that the development aims of aprogram such as the VGD could embrace many different activities such asliteracy, family planr.,ng and health, credit and skills training. Similarly,the FFW program could be integrated into the mainstream development programsat the upazila level and implemented outside the ambit of the Ministry ofRelief and Rehabilitation. Recognizing these concerns, the Government (with
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donor assistance) has established a task force to review the food aid programsand the institutional arrangements for delivery. The Government, with donorassistance, is also reviewing the cooperative setup and RPP. Efforts shouldbe made to complete these studies quickly and prepare plans to strengthenthese programs; although, given the weaknesses and the undeveloped nature ofinstitutions at the upazila level, the Government's own limited counterpartresources, and the shortage of technical personnel in the area of planning andproject execition, these will pose major challenges. The Government shouldalso explore the scope for enhancing the development oriented activities ofboth VGD and FFW.
126. Encouraging NGO garticipation. The coverage of the Government'spoverty-oriented programs is in general constrained by the lack of financialresources and qualified staff. Greater participation of non-governmentorganizations (NGOs) can help in the expansion of coverage. There are anumber of NGOs such as the Bangladesh Rural Advancement Committee (BRAC),Swarnivar, Proshika and the Grameen Bank (which is partly owned by theGovernment) which have played an important role in providing income generatingopportunities and services such as training, health care and education toselected groups of poor people. They have, in particular, been extremelyuseful in reaching destitute women and providing disaster relief. In a fewcases, NGOs have provided direct services to the Government on a contractualbasis, such as BRAC's training and employment generating activities with VGDparticipants. The Government should promote such cooperation between itsinstitutions and NGOs performing similar services. Furthermore, if NGOs areto play a more significant role in poverty alleviation and to complementGovernment's efforts, much more attention needs to be focused on reforming thegovernment policies towards NGOs, especially by further simplifying theinstitu-ional arrangement-s for approval of NGO projects so as to speed upproject implementation. The Government could also explore the scope forchanneling resources to the poor through increased use of NGOs, therebyreducing the demands on its limited technical personnel. In addition,management training facilities could be made available to some NGOs in orderto enhance their capabilities.
127. Strengthenina human resource develoRment. The conventional humanresource development programs (family planning, health and education) if theyare to support the Government's poverty alleviation objectives would needstrengthening. In family Rlanning and health, the displacement of people anddisruption of services due to the floods may have seriously affected theeffectiveness of family planning programs. The relatively lower levels ofachievement in contraceptive performance in 1987 and the anticipated shortageof contraceptive supplies in 1988 resulting from the floods, reinforce theexpectation that no further fertility decline will occur in the short-term.The critical issue is to improve the utilization of existing facilities. Thisraises concerns about the balance between capital and recurrent expenditures,since, given the existing infrastru-ture, in order to improve family planningand health care delivery to the poor, there should be an increased resourceallocation for supplies and equipment. Steps should also be taken to addressthe setback to fertility improvement by improving delivery services and byrehabilitating family planning and health facilities. If the Government's
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population reduction objectives are to be met, a greater effort would alsoneed to be devoted to family planning education.
128. In educatign, the existing system is characterized by low enrollmeuitrates particularly for girls and poor performance at the primary level (three-quarters of those who enter primary school fail to complete it). Poorperformance may be attributed to the pressures on a weak delivery system (interms of inadequate planning, management and administrative capacity) toaccommodate a rapidly growing school age population. This has been compoundedby inadequate physical resources (that have been badly affected by recentdevastating floods); and in the rural areas, a private opportunity cost ofeducation which is much higher than the expected medium-term returnsUl andthus has served as a disincentive in retaining students, especially girls.In addition, it is estimated that about 19,000 educational institutions werepartly or fully damaged by the flood of 1988, of which 2,417 are primaryschools needing complete reconstruction. In view of the inability of thesystem, even under normal circumstances, to meet the primary school enrollmentrate targeted in the Third Five Year Plan (TFYP), and the high wastageexperienced in the past, the setbacks due to the floods require acomprehensive review.
129. If the educational system is to play a greater role in poverty alle-viation through enhancing the human capital of the poor, the Government shouldspeed up its efforts at structural reform, which includes the identificationand resolution of factors that account for the large wastage in the system.The Ministry of Education has recently (June 1988) completed a draft "PolicyPaper on Education" which focuses on the three key issues of the sector: thelow and inequitable access to education, the unacceptably poor quality andrelevance of existing education, and the need for unit cost containment. Thisinitiative needs to be supplemented by efforts to:
(a) better understand the dynamics of demand for education (especiallyprimary education at the rural areas) and the formulation ofremedies to cater for the needs of the underserved: such as schoolfeeding program, food for education, flexible school year, etc.thereby promoting equitable access; and
(b) expand the coverage of education by exploring further privatizationoptions, greater use of NGOs, and further cost sharing programs.
130. Exploring innovative emplovment generation. In the medium to long term,the only self-sustainir.g means to reduce poverty is employment generation.The Government is cognizant of this and has created an Employment MonitoringUnit within the Planning Commission in order to incorporate employmentconcerns in its policies and programs. In the search for innovativeemployment opportunities, special attention needs to be paid to ruralemployment generation, targeted at the assetless/landless who form the core of
2.~ For evidence on this see, Mahabub Hossain, "Education and EconomicPerformance in Rural Bangladesh," Paper presented at the 8th BiennialConference of the Bangladesh Economic Association, Dhaka, July 15-17, 1988.
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the poor. Experience with Government and NGO programs which organize the poorand provide them with credit and non-farm productive activities, suggests thatthe scope for mass coverage is limited by existing management andinstitutional capacity. Hence, these programs have reached only a smallfraction of the poor. There is, nevertheless, some scope for expanding thoseprograms such as the Grameen Bank that have been successful, especially inreaching poor women, and for exploring new schemes such as the proposed BRACBank. Similarly, alternative approaches based on successful ongoing programswould need to be developed.
131. In view of the extent of the poverty problem, a recognition of the roleinnovative approaches can play in generating employment, incomes and skills,and the need for experimentation and improvisation during implementation torectify the weaknesses of such initiatives is important. However, this shouldnot be a reason for delays in initiation of such programs. In this context,reaching early agreement on the scope and elements of the poverty projectwhich has been under consideration for some time and begin implementing it asearly as possible is an important step in harnessing external resources foraddressing the issues in this critical area.
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E. Foreign Aid Trends and Aid Requirements for FY90
Foreign Aid Trends
132. Since its independence, Bangladesh has depended heavily on external aid,in view of major structural imbalances in the economy. Initially, theseimbalances were quite severe; and although fiscal and external deficits havebeen reduced to more manageable levels, external aid inflows of the order of7-8% of GDP have been necessary to ensure macro-economic viability and sustaindevelopment programs. The need for external aid is expected to continue inthe foreseeable future, in view of the necessity for increasing investment,and other public expenditures in key areas to accelerate economic growth anddevelopment.
133. External donors for the most part, recognizing the country'svulnerability to frequent natural disasters, have responded sympatheticallyand swiftly to assist Bangladesh. Nevertheless the recent years havewitnessed increasing concerns on the part of both donors and the Government,with the utilization of available external aid, particularly in view of asomewhat sluggish disbursement performance and the continuing build-up of alarge project aid pipeline (Table 1.14). While the reasons for implementationdifficulties are discussed extensively in the Public Expenditure Review, theconcluding section of this report examines the recent trends in aidcommitments and disbursements, and implications for the level and compositionof external aid commitments for the next fiscal year--FY90--in the light ofboth the country's short-term needs and the recommendations for improving theeffectiveness of public expenditures made in that review.
134. Table 1.14 shows that total aid commitments, in nominal terms, haveaveraged about $1.6 billion a year, with project aid around $900 million ayear, and commodity aid commitments showing a greater degree of variability.Aid actually committed (i.e., agreements have been signed), especially projectand commodity aid, has been considerably less than the indications provided bydonors at Aid Group meetings in recent years, in large part reflecting delaysin project preparation and finalization of economic reforms associated withplanned commodity aid programs on schedule. In effect, the real value of aidcommitments has fallen substantially over the past few years. However, inFY89 both project aid and commodity aid commitments are expected to besomewhat higher (with project aid around $1,150 million and commodity aidaround $600 million), partly reflecting additional aid indications by donorsin response to Bangladesh's recent flood disaster.
135. Total disbursements rose sharply through FY87 to about $1.6 billion, innominal terms, with project aid rising to $967 million. The ratio ofdisbursements of project aid to the opening pipeline--the conventional measureof disbursement performance--also improved steadily from a low point of 15% inFY83 to 21% in FY87. The Government's efforts in the mid-eighties to improveproject implementation, for example, by introducing a core program forpriority projects and improving fund release procedures, helped to raise thedisbursement ratio in the mid-eighties; while the completion of a number ofstand-alone projects in power and fertilizer subsectors contributed to theexceptional improvement in FY87. However, over the past two years, the
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implementation of the development program has been less satisfactory; asgrowing local resource constraints, exacerbated by the disruptions of the lasttwo years, appear to have slowed down the implementation of many aid programs.(In FY88, total disbursements still exceeded $1.6 billion, mainly due toincreased food and commodity aid disbursements.) Consequently, project aiddisbursements declined sharply in FY88 and will decline further in FY89;correspondingly, the project aid disbursement ratio fell to 19% in FY88, andis expected to slip to 16% this year. This has been particularly serious inthe case of IDA programs, where the disbursement ratio has fallen from 16% inFY86 to only 12% in FY88, and is expected to remain at that level in FY89.
Table 1.14: EXTERNAL AID - TRENDS IN COMMITMENTS AND DISBURSEMENTS, FY81-FY89
FY81 FY82 PY83 FY84 FY85 FY86 FY87 FY88 nYg
Opening Aid Pigeline (2 mln)Project Aid 2,003 2,444 3,044 3,374 3,644 4,061 4,633 4,390 4,699Non-Project Aid 449 420 503 519 652 570 784 816 689
La Disbursements as a ratio of openLng pipeline.Lk Excludes $50 mllion for initial deposits in SAFE accounts.LS Disbursements as a ratio of 75 of openin8 plpelLne and 25X of nev commitments.id DLsbursements as a ratio of 1001 of opening pipeline and 75X of new commitments.la Estimate.
Sources External Resources Dlvision.
136. Apart from delays in the preparation and implementation of associatedreform programs, the high variability of commodity aid commitments has beencaused by a number of other factors. For example, on several occasions(including particularly FY88) natural disasters have necessitated diversion ofdonor commitments from commodity aid to provide emergency food aid. Theflexibility for many bilateral donors to increase commodity aid commitments
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has also been limited. In some cases, perceptions of increasing disbursementdelays have caused some unwillingness to increase commodity aid commitments bysome donors. While there are clearly program-specific problems which havecreated delays in disbursements from particular bilateral programs, donorrestrictions on commodities, sources of procurement and pricing, as well asgovernment procedures have contributed to these delays. (In the case ofprograms where procurement is essentially untied and available for competitivebuying, as in the case of Japanese and IDA credits, there has been little orno disbursement delays. At the same time, the flexibility available withinsome programs has not been fully utilized by the Government.) On the whole,however, disbursement problems on commodity aid (as well as food aid) havebeen relatively minor. Although the unutilized commodity aid pipeline rosesomewhat during FY87, this trend has now been clearly reversed; and asdiscussed earlier, the immediate short-term problem in FY89 has, in fact, beenan unusually low commodity aid pipel'ne.
Aid Recommendations for FY90
137. Despite concerns with the pace of project implementation and aidutilization, the need for continued external assistance to Bangladesh shouldnot be a matter of debate. Given the structure of the economy and widespreadpoverty, Bangladesh will need to continue to depend on such assistance. Thereal challenge facing the Government and external donors is to work togethertowards finding ways of relaxing the implementation constraints so thatexternal aid potentially available to Bangladesh could be fully utilized inthe short-term, and to assure that the development impact of such assistanceis maximized to help bring about necessary structural changes in the economy,including social development and alleviation of poverty, in the medium tolonger term.
138. Bangladesh's aid needs for FY90 should be viewed in the context of itsdevelopment needs both for the short and the longer term. To accelerateeconomic growth and development, Bangladesh will need to substantiallyincrease the rate of (public and private) investment in the economy over thenext few years. To make this possible and to simultaneously increaseessential public expenditures in other areas (including O&M and increasedrecurrent expenditures in education, health and family planning), substantialadditional resources will be needed. This will require sustained efforts onthe part of the Government to mobilize more domestic resources to ensure thatBangladesh's own contribution towards financing development activities wouldrise over time, and a greater commitment to ass-re that such resources will bedevoted to increasing development activity and higher priority currentexpenditures in such areas as O&N and the social sectors, rather thansupporting the present pattern of current expenditures. In the short term,however, the low level of per capita incomes and the need for strengtheningstructural reforms in such areas as trade liberalization, will limit the rateat which tax revenues could be mobilized; although efforts should still besustained to increase both tax and non-tax revenues. Increases in externalassistance could therefore be justified to support the development effort,provided that the Government takes complementary actions to ensure that suchassistance will be utilized to support an expansion of development activity.
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139. The need for external assistance also has strong balance of paymentsjustification. Although the balance of payments situation strengthenedconsiderably and external reserves increased in the past two to three years,this trend is likely to be ephemeral. Stagnation of the economy in the lasttwo years on the heels of a prolonged period of demand management has keptimport demand in check up to now. But, the economy will need to beresuscitated, with broad-based distribution of the benefits of such growth,which vill increase consumption and investment demand. With further progressin trade liberalization, imports are expected to pick up significantly nextyear and thereafter. On the other hand, although non-traditional exports andremittances have grown rapidly in recent years, this pace is unlikely to besustained in the near future. The narrow concentration of exports on readymade garments will mean that, as available quotas are utilized, the momentumof export growth is likely to decelerate until new export products and marketsare developed in the medium to longer term; at the same time, increasedcompetitiveness and pressure on wages in the middle east market for immigrantlabor, create considerable uncertainty regarding the future growth ofremittances. Accordingly, che balance of payments current account deficit isexpected to widen to about 7% of GDP over the next three years. To financethis deficit and to maintain gross reserves at the modest level of theequivalent of three months' imports, the Government's Policy Framework Paperestimates that disbursements of external assistance will need to increase byabout 5% per annum over the next three years from the level of totaldisburseLents achieved in FY88. This estimate is consistent with the analysiscontained in recent World Bank reports which projected the need for aiddisbursements, in real terms, to grow at 5-6% p.a. to sustain a GDP growthrate of slightly over 5% per annum over the medium term.
140. The level of aid commitments needed to provide for aid disbursements ofthis order will depend on a number of factors which also have importantimplications for the composition of aid. As noted earlier, Bangladesh alreadyhas a large pipeline of project aid of nearly $4.7 billion. In addition,rehabilitation and reconstruction demands (excluding rural housing and theDhaka flood prevention project), as a result of recent flood damage is.4stimated by the Joint Task Force of the Government of Bangladesh and theUnited Nations at roughly $1.1 billion. (Many donors have already indicatedtheir willingness to finance rehabilitation programs, although how much ofthis support will be additional to ongoing aid programs is not yet known.)While the "need' for more project assistance could be justified on thesegrounds, given the various constraints impeding project implementation,particularly the severe local currency shortage, additional project aid forrehabilitation or for new projects will exacerbate the local currencyconstraint, unless effective action is taken by both the Government and donorsto address this problem. Without such action, limited local currencyresources will be spread too thinly, and all projects, includingrehabilitation projects, will be subjected to implementation delays.Therefore, the Government will need to streamline and establish clearpriorities for the public expenditure program for rehabilitation and otherex?enditures as quickly as possible; and initiate strong efforts to mobilizedomestic resources in order to meaningfully improve project implementation andutilization of available project aid. If such action is taken, external
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donors will need to take complementary actions as discussed below to supportthe Government's initiatives.
141. The Public Expenditure Review suggests a number of ways in whichexternal donors can contribute more effectively to improve the implementationand development impact of the public expenditure program: First, the donorswill need to work closely with the Governmint in establishing priorities forthe public expenditure program and adapting their aid programs according tothe Government's revised priorities. This is because, given that donorsalready finance the large part of the development program, efforts tostreamline and reprioritize the ADP will inevitably affect a number of donor-financed projects. Accordingly, new project aid commitments (including thosefor rehabilitation) should be considered carefully, to ensure that they haverelatively high economic returns, and given the limited availability of localresources, such new commitments will not adversely affect the implemelntationof priority projects in tte ongoing program. This should mean that newproject aid commitments shzuld be limited to high priority areas. Second,where commitments for new projects are made, donors should finance a largerproportion of total costs (including local costs) to minimize the demands onlocal currency resources in the short term. In many instances, donors arealready financing some local costs through reimbursable project aid (RPA); buta higher proportion of donor financing should be considered. This would beparticularly true of rehabilitation projects (which would on average entailmore local costs). Third, donors would need to consider financing ofincremental recurrent expenditures in the social sectors for programs inhealth, education and family planning, where substantial real increases inrecurrent expenditures would be needed over the next ten years to achieveprogram objectives. While this would represent a new approach to most donors,it would directly support the poverty alleviation and social developmentgoals. Fourth donors should also consider picking up, after careful review,some of the projects which are now fully locally funded, where there is soundeconomic and social justification, in order to assist the Government toallocate more local currency resources to other donor-financed projects.
142. These recommendations suggest that the priority with regard to projectaid over the next year should be on finding ways and means of improvingdisbursements from the large existing pipeline and accommodating essentialrehabilitation needs. Given the rehabilitation needs, the scope for other newprojects would be limited. Therefore, as discussed, new project aidcommitments should be directed, on the basis of discussions with theGovernment, towards meeting clearly identified priority expenditure needs. Tomeet these needs, given the constraints on implementation capacity discussedearlier, a level of new project aid commitments of around $1.1 billion a yearis recommended. (This excludes possible financing for the Jamuna Bridge, theeconomic justification of which is still under review.) What is moreimportant, however, is to provide, within this level of new commitments,sufficient flexibility to increase the share of donor funding of local costs,including financing recurrent expenditures on social sector programs.
143. As discussed earlier, the primary justification for commodity aid is tosupport the balance of payments by providing quick disbursing funds needed topay for essential imports. If the economy were to continue to stagnate, this
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justification would bo' considerably weakened. However, present expectationsare that the economy would rebound next year, and imports will increasesubstantially. A secondary justification for commodi.ty aid is that it wouldhelp generate counterpart funds which are primarily used for supportingdevelopment projects. In the short term, given the tight local currencyconstraint, this justification is still valia, provided that the Governmenttakes the necessary measures to increase development activity. As notedearlier, the Government has already taken some actions to help improve theimplementation of this year's ADP; but much more needs to be done over thenext year to revive the momentum of development and increase the effectivenessof the public expenditure program. In the expectation that the Governmentwill continue to take such actions, new commitments of about $600 million willbe needed next year, to provide for disbursements of about $550 million nextyear and to ensure a satisfactory opening pipeline (of about $600 million inFY91). To achieve this level of commodity aid commitments, exceptionalefforts on the part of the Government will be needed to prepare and implementon schedule adjustment programs in key areas to ensure that prospectivecommitments from multilateral institutions could be finalized as speedily aspossible. Complementary efforts will also need to be made by bilateral donorsto increase thte proportion of quick disbursing commodity assistance in theiraid programs, to relax the procurement, pricing and commodity conditionalityattached to such programs, and to finalize the aid agreements as early aspossible, so that disbursements from new commitments could be made relativelyquickly. The Government on its part could assist this process by implementingrecommendations made in recent studies on commodity (and project) aidutilization to improve commodity aid utilization by eliminating the existingallocation procedures and transferring as many commodity aid programs aspossible to the secondary market. Most importantly, the Government shoulddemonstrate that such assistance is devoted to supporting the developmentprogram and supplementing the Government's own resources allocated to prioritypublic expenditure activities. Without such a commitment on the part of theGovernment, the case for continued commodity aid would be seriously weakened.
144. Bangladesh has usually received food aid of the order of $250 millionannually in new commitments, except in FY88 when they reached $364 million.External donors have responded generously to Bangladesh's appeals to providespecial emergency assistance whenever required. It is to be hoped that nextyear a resumption of growth in agriculture, in the absence of unexpectedcalamities, will reduce foodgrain import needs. However, given the frequencyof natural calamities, it will be prudent to plan to provide flexibility tothe Government to meet any emergency. At the same time, the recent sharpincrease in international foodgrain prices will reduce the real value of foodaid commitments. Moreover, due to floods, disbursements of food aid in thelast year and this year will be high; and the closing pipeline at the end ofFY89 will be about $225 million. Accordingly, new commitments of about $300million (equivalent of about 1.6 million tons of wheat at present prices), arerecommended for FY89. However, the Government will need to exerciseconsiderable judgement in utilizing such aid, particularly in schedulingimports, to minimize disruptive effects on incentives for domestic producers.This in turn will require considerable flexibility on the part of externaldonors to adopt a two-to-three year programming approach to enable the
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Government to reschedule foodgrain imports as needed by domestic food stockmanagement requirements.
145. To bring about a significant improvement in aid utilization over themedium-term to support the objectives of accelerating economic growth andsocial development in Bangladesh, both the Government and external donors willneed to adopt a positive approach towards resolving present implementationdifficulties. This should entail better coordinat:on of their aid programs onthe part of external donors to respond to the country's needs and prioritiesand a willingness to provide an appropriate mix of aid to match these needs.The primary responsibility for taking a more vigorous and imaginative approachto improving project implementation and effectively utilizing externalassistance which is potentially available to Bangladesh, however, will restwith the Government. This report and the Public Expenditure Review clearlyidentify actions the Government will need to take in this regard. TheGovernment, on its part has, time and again, demonstrated its capability foreffectively mobilizing and harnessing the country's resources and themanagement talents of its leadership to deal with various exigencies, forexample, handling the recent crises and mounting a major effort to find alonger-term approach to dealing with the flood problem. Given the importanceof resuscitating the economy and the critical role the public sector has toplay in this regard, the objectives of establishing a sound basis f^rsustained development by mobilizing more domestic resources, refocusingexpenditure priorities and giving greater priority to the development program,improving project implementation and ensuring effective utilization ofexternal assistance potentially available to Bangladesh, should receivesimilar attention.
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STATISTICAL APPENDIX
Tableo., Section/Title Page No.
HUMAN RESOURCES ..................... .. . 77
1.1 Population Projections, 1985-20301.2 Population Benchmarks by District, 1961-19851.3 Vital Population Statistics, 1980-19871.4 Comparison of Child Nutritional Status Results from
Three National Surveys1.5 Health Statistics, 1980-19871.6 Family Planning Statistics, 1980/81-1987/881.7 Education Statistics, 1974 and 1981 Census1.8 Distribution of Population by Economic ActivitLes,
1981, 1983/84 and 1984/851.9 Employment by Occupation and by Sex, 1983/84 and 1984/851.10 Income Distribution and Poverty Indica,-ors, 1973/74-1985,861.11 Number of Pe-sons Going Abroad for Employment, 1976/79-1988
3.1 Balance of Payments, 1980/81-1987/883.2 Balance of Payments - Requirements and Sources Format,
1980/81-1987/L.3.3 Value of Total Exports by Commodity, 1980/81-1987/883.4 Quantity and Value of Traditional Goods Exports, 1980/81-1987/883.5 Quantity and Value of Non-Traditional Exports, 1980/81-1987/883.6 Quantity and Value of Mr.jor Import Commodities, 1980/81-1987/883.7 Imports and Exports Vriume and Price Indices and
Terms of Trade, 1951/82-1.987/883.8 Total Import Finan.ing, 1972/73-1987/883.9 Aid Pipeline, 1980/81-1987/883.10 Commitments and Disbursements of Aid by Type of Aid,
1976/77-1987/883.11 Average Exchange Rates, 1976/77-1987/88
4.1 External Public Debt Outstanding Including Undisbursed(December 31, 1987)
4.2 Service Payments. Commitments, Disbursements and OutstandingAmounts of Exti.rnal Public Debt (December 31, 1987)
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TableNo. Section/Title Page N_o_.
BUDGET .... 105
5.1 Conventional Budget Summary, 1980/81-1988/895.2 Current Budget, 1980/81-1988/895.3 Annual Development Program, 1972/73-1988/895.4 Financial Performance of Public Sector Industrial
7.1 Land Use By Area, 1986/877.2 Farm Size Pattern and Landlessness, 1960-1983/847.3 Area Under Main Crops, 1980/81-1987/887.4 Irrigation Summary, 1980/81-1986/877.5 Public Sector Irrigation Programs, 1980/81-1987/887.6 Commercial Fertilizer Distribution By Type and Region,
1980/81-1987/887.7 Production of Main Crops, 1970/75-1987/887.8 Public Foodgrain Distribution System Operations7.9 Seasonality of Public Foodgrain Distribution System Offtake,
1972/75-1987/887.10 Aus and Aman Production by District, 1970/75-1987/887.11 Production of Boro and Wheat by District, 1970/75-1987/887.12 Jute Production by District, 1970/75-1987/887.13 Supply and Disposition of Raw Jute, FY79-FY887.14 Public Foodgrain Procurement by District, 1975/FO-1987/887.15 Puolic Procurement of Aus and Aman Rice and Paddy by
District, 1975/80-1987/887.16 Public Procurement of Boro and Irri Rice and Paddy and
8.1 Bangladesh Bureau of Statistics Tndustrial Production Indices,1980/81-1987/88
8.2 Jute and Cotton Milling Sta'istics, 1980/81-1987/888.3 Sugar and Pulp and Paper Mill Statistics, 1980/81-1987/888.4 Production of Selected Industrial Products by Public Sector
Corporations, 1972/75-1987/888.5 Natural Gas Statistics, 1979/80-1987/888.6 Electrizity Production and Consumption, 1975/80-1987/888.7 Railwa.y Statistics, 1972/75-1987/888.8 Transport Statistics, 1974/75-1986/87
PRICES AND WAGES .138
9.1 Consumer Price Indices, 1980/81-1987/889.2 Natural Gas and Petroleum Product Prices, 1980-19889.3 Electricity Tariff Structure of the Bangladesh Power
Development Board, Effective August 1, :9879.4 Wholesale Prices of Consumer Goods in Urban Areas,
1980/81-1987/889.5 Wholesale Price Indices of Agricultural and Industrial
Products, 1976/77-1987/889.6 Public Foodgrain Ration Quotas and Issue and Sales Prices,
Note: Data shoan represent actual census results, not adjusted for probable undercounting.The adjusted 1981 Census estimate of total population is 89,940,000 for the Census date of March 8, 1981.
la Extrapolated to 1985 at 1974 to 1981 growth rate and adjusted proportionately to estimated 1985 total.
Source: Brangadesh B1uren of Statistics and staff eastimates.
Definitions oftChronlc maln trition < 90X median < 902 median < 902 mdian
lielght for age height for age neLght for age
Aute malnutrition < 802 median < 802 median < 802 medLanweight for height weight for helght welght for height
Actual sample slse 430 cross-sectional 510 cross-sectional 3283 urban and ruralcross-sectional; fourdata collectlonperiods
Age range 0-59 months 0-59 months 6-71 months
Reference standard used Harvard Harvard ICES
Population covered Rural Rural Urban and rural
IBS - Institute of Nutrition and Food Sciences, Dhaka Universlty.BBS - Bangladesh Bureau of Statistics, Natioael NutritLon Survey and Household
Expenditure Survey.
a Showvs percent rate among total population.
Notez The IFS surveys used the Harvard Standard as the international referencestandard for comparlson of child growth data while BBS used NC08 reference.Sam variation In nutritional status would be accounted for by the differentstandards used. Random -ariation due to small sample slaes used by INFS are orelikely to account for the differences in nutritional status found by thethreo surveys. The BBS survey sample vs. divided ilnto four data collectionperiods over a yea's time while 1F8 surveys collected data once duringthe year.
la Cumulative, assuming year-to-year cary-over of 90S.lb Assuming one couple-year of protection per 15 cycles of pills, 15t: condoms
or ioam tablets, or 4 doses of injectables or vials of EMXO.la Cumulative, ass Ling year-to-year corry-over of 70S.Id Staff estimates based on a*ge-specific marriage rates from 1981 census.le Couple-years of protection per married female aged 15-49.
Sources: MIS, Department of Population Control, Bangladesh Bureau of Statisties, and staff estLmates.
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Table 1.7EDUCATION STATISTICS, 1974 .a" 1981 Census
/a The refined rate of civllLan Jabor force Ls the percentae of person 10 years old and above found engaged in productivectivity durng the eurvey period.
Source: Population Census 1981, Ls 1983/84, and LYS 1984/85. 3BS.
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Table 1.9EULODEUT BY OCCUPATION AM BY SEX 1983184 and 1984185 la(thousands)
/a MerchandLse imports are reported on a mixed valuation basis, partly fob and partly cif./b 71 on average level of reserves./c Including valuation changes other than those of reserves.Id Including chAnges in the valuation of reserves.
Source: Bangladesh Bank.
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Table 3.2BALANCE OF PAYMENTS - REQUIREMENTS AND SOURCES FORMAT, 1980/81-1987/88(US$ millions)
/a A. a large portlon of food import. is financed an a grant ba.si, unlt prices are oftenavailable for accounting purposes only.
/b Does not include crude oil shipped to and refined in Singapore for the account of BPC during FY80-FY83./c Includes petroleum products imported by BPC from lts refining operations in Singapoze as well afi
imports of non-fuel petroleum products./d As aome fertilizer imports are financed an a grant basis, unlt prices are often available
for accounting purposes only.
Note: 1 bale of raw cotton - 500 lbse 1 bale of polycster - 618 lbst1 bale of Viecoae - 441 lb., 1 bale of yarn - 400 lbs.
Sources Planning Comission.
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Table 3.7IMPORTS AND EXPTRSS VOLUME AD PRICE INDICES AND TERKS OF TRADE, 1981/82-1987188(1980181-100)
Note: Data reflect payments rather than commodlty arrivals.Valuatlon for commodities financed under loans and grants is on amixed fob/clf basis, depending on the terms of the respective aidaereementos all other categorles reflect cf valuation.
Notes OPL-Opentag plpeline, NC=ew comasttentseCommodity aid Includes cash aid, and ptoject aid includes tscbnlcal ssist neDLscetpepiLes between closing pipeline In one year and opening pipeline in the nextyear result from adjustments for currency revaluations, aid cancellations, andreclasifiLcations.
Source: External Resources Divislon.
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Table 3.10CUOHITMENS AND DIS8UR8EHZMN OF AM0 BY SYE OF AID. 1976177-1987/88(Us$ million)
/a Unvweihted averages of monthly exchange rates shown. The rates are period averages of the market rate (IFS, llne rf).which are cross rates based on a fixed relationship to the Pound SterlLng since January 1972.
lb UnweiLhted averages of end period monthly data.tc Unvelghted averages of quarterly exchange rates shown.
Source: International Monetary Pund.
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Table 4.1
EXTERNAL PUILIC DEBT OUTSTANSINi INCLUDING UNiDISBURSED AS OF DEC 31. II7
INCLUDES ONLY DEBT COSITTED 000000 - DEC 31t t987DEBT REPAYVALE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)
DE 8 T UTST A N I N G I N A R R E A R S
DISBURSED: UNDISBURSED: TOTAL PRINCIPAL : INTEREST
TOTAL BILATERAL LOANS 4.397.605 767.569 5,185,174 3,832 41
TOTAL EXTERNAL DEBT 8.851,126 3.731.357 12.582.483 5.711 96
NOTES: (I) Oniy debts with an original or extended maturity of over one year are included in tnis table.(2) Debt outstanding Includes principal In arrears but excludes lntOreSt In arrears.
Table 4.2
SERVICE PAVMENTS. COMMITMENTS. DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBTPROqJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC 31. 1987
INCLUDES ONLY DEBT COMMITTED 000000 - DEC 31. 1987DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)* * * TABLE TOTAL * *
DATE DEBT OUTSTANOING AT T R A N S A C T I O N S DUR N G P E R I OD OTHER CHANGESEND OF PERIOD
DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y N E N T S CANCEL- ADJUST-ONLY UNDISBURSED MENTS MENTS ----------- -----------:----------- LATIONS * MENT *s
Projected amounts In thIs column are amounts excluded from projections because of unknown terms.
* This column shows the amount of arithmetIc imbalance in the amount outstanding including undisbursed from one period tothe next. The most common causes of imbalances are changes in exchange rates and transfers of debts from one categoryto another in the table.
la Including effect of new measures (Tk 416 crore) but reduced on account of subsequentwithdrawal of some of these measures (estim-ted at Tk 28 craoe).
Sourcet Ministry of Finsnce.
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Table 5.2CURRMNT 8005T, 1980181-1988I89(Tk erore)
1980181 1981162 1982186 1983184 1984165 1985186 1986187 1987188 1987188 1988189Actual Actual Actual Actual Actual Actual ReYvisd fludget Actual Budget
la Pre-taz profits or losses. Negative sign (-) denotes net losses.lb These are the accounts of all the mills, including the ones that were transferred to the private sector in 1982183./c These ace the accounts of the mills that are still in the public sector as of 1982/83.
Source: Mraitoring Cell, Ministry of Finance.
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Table 6.1MONEY SUPPLY AND DOMESTIC LIQUIDITY, 1983-1988(Tk billion)
I& Inludes refInancig provided by Somali Bank to TCCAa/KSSa through the IRDPIRDB.lb Includes agricultural term credit as wall "s finaning for marketing, transport and egro-induatries.Ic lnlud"e tk 54.28 ¢rore under B2B and Sk 22.67 crore w"der RaJhsahl 2riahl Ulnayen Blnk for which bre kdown by type of loan is not available.
/a Includes jute and allied fiberx.lb Includes forestry and vood products.Ic Includes gl"s snd oeramIcs.Id lncludes ind wate r and road transport, cinemas, hotels, and clinios./. Includes aromt Isveted In the Govar snt securities.If Net of subsequent caellatina ad adjustments.
Sources: BSB BSR28.
Table 6.4RIMIEL IRTEREST RAME6 0 S6ELECTED SAVIIGS INSTUMTS, August 1977 - August 1988(percent per asnm)
Three months to under siL months 7.00 12.00 12.00 12.00 12.00 12.00 12.00Six months to under one year 7.50 13.00 33.00 13.00 13.00 12.50 lb 12.50One year to under two years 8.25 14.00 14.00 14.00 14.00 13.25 lb 13.25Tvo vears to under three years 9.25 14.50 14.50 14.50 14.50 13.75 lb 13.75Three years and over 10.25 15.00 15.00 15.00 15.00 14.25 lb 14.25
Post Office Savings Bank Deposlt Rate:Ordinary Deposits 8.50 11.50 11.50 11.50 11.50 11.50 11.50Plied DepositstOne year to under two years 9.20 15.00 15.00 15.00 15.00 15.00 15.00Two years to under three years 10.20 15.50 15.50 15.50 15.50 15.50 15.50Three years and over 11.20 16.00 16.00 16.00 16.00 16.00 16.00
Goverment BorrowingtTreasury Bills 6.00 8.50 8.50 9.00 9.00 8.00 8.00 _Tap Treasury Bllls lc 7.00 9.50 9.50 - - - -Ways and Means Advances 7.00 9.50 10.50 10.75 10.75 ,0.25 10.25Two-year Special Treasury Bonds: Id
Issued at discount - 15.70 15.70 15.70 15.70 15.70 -Issued at par - 14.20 14.20 14.20 14.20 14.20 -
/a 10.02 for rural areas./b Effectlve from January 17, 1987./c SLnce repaid by August 1985.Id With effect from February 5, 1984 and repaid by June 1988.le Wlth effect fram February 24, 1981.
Source: Bangladesh Bank, Research Department.
Table 6.5NOMINAL INTS RAM ON ADVANCES, August 1977 - August 1988
(percent per anmun)
Aug. 1977 Oct. 16, 1980 Jan. 1985 Sept. 1985 July, 1986 Sept. 1987 Aug. 1988
/a Includes jute, jute goods and loose tea./b Ineludes packet tea and jute carpets.lc Namely light engineering and electric goods, handicrafts and hoadloom products.
Id Includes service charge. The rate was 122 up to September 30, 1983. Thereafter service charge at 4S over the rate of 121 on short term
loans and servlce cbrage at 32 over the rate of 132 on other term loans are applied vith effect from October 1, 1983.
/a Service charge at 22 over the rate of 132 are app!lied with effect from Aptll 1, 1984.
Source: Bangladesh Bank.
-114-Table 7.1LAID USE BY ARA, 1986187(thousand hectaer)
-------- Land area and classificationL------------ ----------------------- aL Utilisztion-----------------------Total Not Culti- Forests Cultivable Cultiva- Current Net Cropped s811181 Double Triple Gross Cropped
Ditrict Area vable la Are- lb ble Vast* FPllows Area Ic Cropped Croppod Cropped Area Id____________ ----------------------------------------------------------------------------------------------------------------------
I& Rivers, tidal creeks laks, ponds tros, buildings, homesteds *tc.lb Total area not of not cultivable *rea and forests.tc Area cropped at leat once during the year.
Id Sum of single-cropped area plus 2 x double-cropped area plus 3 x triple-cropped area.Ic Ratio of gross cropped area to net cropped area.If Ratio of gross cropped area to nt cropped arc plus currt fallows./g Ratio of gross cropped area to cultivable ares.lh Area irrigated by gravity systems, cals and traditional mt-xds (such a* swing baskets doons, etc.).IL Percentage of cultivabl, are. irrigated.
Sources: Bangladesh Bureau of Statistics and staff estimates.
Table 7.2FARM S1ZE PATTUER AND LANDLESSSUESS, 1960-1983184
1960 1977 1983184P
Percentage of form by fean as.. (ha)
up to 0.40 24.3 15.9 40.50.41-1.01 27.3 33.8 29.91.02-3.04 37.7 40.9 24.7babve 3.04 10.7 9.4 4.9
Percentage of land operated by faw eLse (ha)
up to 0.40 3.2 2.7 7.80.41-1.01 12.9 16.3 21.21.01-3.04 45.7 49.4 45.1
above 3.04 38.1 32.7 25.9
Rural Houxeholds ('000)
Total 8239 10871 13818
Form 6139 6257 10048Non-Yam 2100 4614 3770
Loandess 2100 4614 3770Near Landless la 803 342 2417
subtotal 2903 4956 6187
la Owning less than 0.2 ha.
Sources: Agricultural Census Reports, 1960 and1977, and preliminary estimates of1983184.
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Table 7. 3AREA UNDER MUR CROPS, 1980181-1987188(o000 hectarea)
la Including a total of 225,000 hectare trrigation of F.C.D.I. small scheme and water control structures.
Note: Comparlson with BBS data suggest that data for tube well and LLP acreage irrigated may be overreportedby implementing agencies.
Source: Bangladeah Bureau of Statistics, Bangladesh Water Development Board, Bangladesh AgriculturalDevelopment Corporation, Bangladesh Irishi Bank, and Integrated Rural Development Programse.
-1 19-
Table 7.6COMMECIAL FERTILIZER DISTRIBUTION BY TYPE AND REGION, 1980/81-1987/88('000 matric tons)
la Based on total area and mill farm yield estLmates, probably substantially overestimated.lb Revised data for 1984-88 period. Comparable figures for earlier years not available.
Source: Bangladesh Bureau of StatistLes.
Table 7.8PUBLIC FOODGRAIN DISTRIBUTION SYSTEM OPERATIONS('000 metric tons)
I& From 1967168 to 1969170. Including Patukhcali.lb Yrom 1967168 to 1969170, included In Barisal.Ic From 1967168 to 1978179 Included In Mlyinn4ngh.Id From 1967168 to 1969/70. including Jamalpur and Tangail, from 1970171 to 1975176, including Jzmalpur./a From 1967168 to 1969170. included in MPymnuLngh.If Bandarban was a subdlvision of Chittagong Hill Tracts untll 1982.
Source: Bangladesh Bureau of Statistics.
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Table 7.11PRODUCTION OF BORO AND WHEAT BY DISTIUCT. 1970/75-1987188('000 metric tons, rice equivalent)
Indez of Manufacturing Production /a 100.00 97.29 143 143 136 142 147 144 156 151Public sector 77.50 75.40 MA NA KA NA NA RA NA NPrivate sector 22.50 21.89 nA NA NA NA NA NA NA NA
Index of MIning Production /b 0.29 144 177 186 220 245 265 301 363Index of Electricity Production lb 2.42 210 240 271 296 360 377 407 512Index of Industrial Production 100.00 145 146 139 146 152 150 162 160--------------------------------------------------------------------- ___------__----------------------------------------------------
la Weights shown in second colum apply to the overall index of industrial production/b Entirely In the public sector.
Notes The 1dex of manufacturtng production covers approxImately 93X of value added in large and medium-scalemanufcturing. Ercluded are. among others, the manufacturIng of footwear, leather, furniture endano-ferrous metal products, printing ed publishing, as well as all small ad cottage Industries(which include spInnig, dyeing and handlom waving).
Sources Bangladesh Bureau of Statistics.
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Table 8.2JUTS AND COTTON MILLING STATISTICS, 1980181-1987188
la Data shown for 1982183 and beyond are not directly cemparable vith those for earlier* years, as BTKC dislnvested itself of a number of its mllls durlig 1982183 and 1983184.
Notes: - Capacity data are annual averages.
- At the end of June 1982, ITmC had 66 enterprises under lts control:31 spinntng mills, 22 composite spinning & veaving mills, 4 specialixedmills, 1 engineering unlit, and 8 enterprises vithout any physical assets.
- At the end of June 1987, BTMC had 44 enterprlses under lts controls24 spinnig mills, 12 composite spinning & veaving mills, 4 specializedmills, 1 enginesesring unit. and 3 enterprises vitho-_t any physical assets.
* Fron 1986187 omnrds, following replacement, the capacity has bean incr esed to 3000 MT.
ls Based on 120 dys of erushitg.lb In 1982183: based on technical fesibllity.Ic Nationalised in 1965.Id The mill is closed from 1975176 and its capacity hb not been lncluded in the total.le Shut down In 1975, rehabilitated end reopened in 1982183.
Notes ALL mills established after 1947 were in the ublic sector.
Sources: Banladesh Sugar and Pood Industries Corporation, Bangladesh ChemicalIndustrie Corporation and Bangladesh Bureau of Statistics.
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Table 8 .4PRODUCTION OF SELECTED D TRIAL MownS bY PUIILIC SECSlRM CP(RDAUBOS to(units as shown)
/a Includes prlvate sector production of tea, egtettes, ed matches. Jute and cotton tetlile.plastic board, radio and TV. fish processing. soft bevrage and bread and bLscuit.
Soure.s Miniatry of Industry, corporations. Plannin Comission. and Bangladesh Bureau of Statistics.
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Table 8.5 UAT5UAL GAS STATISTICS, 1979180-1987188(1Slleon , mm)
la Data cover only roads constructed and maintained by the Roads and HigSvaye Department. Ulih road areroads with camcnt, concrete, bituminous cncrete or bitviminus surfae, lovl rods are roads withston, gravel, brick, or *erth surface, but uhich are properly aligned and have drainage structures.
lb Including jute boats and flats.lc Can travl up the main river route.
! ~ ~-------------------------------------------------------------------------------------------------------Notes- Dhaka middle incoM Land" refers to families vith 1973/74 incomes of Tk 300 to Tk 999.
Dbhak governnrt employess index refers to non-gasetted employees vith monthly salaries ofTk 100 to Ik 400 Lz 1969/70.
Sources Bmgladesh Bureu of Statistics.
Table 9.2MORAL GAS AND flELED PRUCT PRICES, 1980-1988
ffzectlv DatesNAUA GAS --- -----------------------------------------------------------------------------------------------------------------------------
Tim srsT June?, JUV 7, July 1. Juo 30. Jura 7, June 30, Jww 27. Jin 18. MY 1,WNWu 1980 1981 18 1984 18 1986 197 1988
PUTOLEW PODCTS lb July 1980 may 1981 September 1981 July 192 Norch 193 July 1986 Jun 1986 Jim 19S7 Jm 1988UARAl t MIAL GAILLO Ex-Ref h-depot Bh-Ref h-depot h-Reof B-deot h-Ref an-depot h-Ref Bh-epot x-depot x-Ref E-depot x-Ref B-depot Br-Rof h-depot
I& Price wse raised to Tk 75Jcylioder with effect from 12 August 1982.lb Ea-refinery n ex-depot at ClittWagn. In July, 1984 Prices were fixed in liters with minor
adjustmets in ex-depot prices as shomn ht-refinery prices were not changed,Jc Double.
ource lita Ga Cutany and Rangiedesh Petroleum Corporation.
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Table 9. 3ILECIRICI T TARIFF STRUCTUROF TH BUAGLADUESH POWR DEVELOPMENT BOARD(Effeotive August 1, 1987)
Conimu r Group Mini-" Charge Unit Rates------------------------------------------------------------------ __---------__--------------_------------
Category A: Residential Not applicable - Monthly consumptionLi4ht and Power up to 70 KWh Tk 1.25/KWh
- Monthly consumptionfrom 71 KWh to 200 KWh Tk 1.401KWh
- Monthly consuptLonover 200 KVh Tk 2.85/KWh
Category 3: Agricultural Tk 123/UP per month - Wlthout time-of-dayPu¢ping durlng season but not meter Tk 1.70IKh
less than Tk 500 for single - With time-of-day moterphase or Tk 2000 for - Off-peak hours Tk 1. 351KWhthroe phases. Also not - Peak hours Sk 4. 00/KWhless than Tk 1500 for singlephase or Tk 6000 for threephases per season.
Category C: Small - Without tiLe-of-dayIndustrial Consumer meter Tk 2.301RKh(up to 30 KW) - With time-of-day
Category Fs Medium Voltage Tk 80/KI of sanctioned - Wlthout time-of-dayGeneral Purpose load but not less than meter Tk 2.10/KWh(up to 2.5 MW) Tk 8000/month - With time-of-day
meter- Off-peak hours Sk 1.70/Kih- Peak hours Tk 4.00/KWh
CategoY G: Extra-high Tk 80/IK of contracted - Off-peak hours Sk 0.75/KWhVoltage General Purpose load - Peak hours Tk 2.75/KIh(132 gV and up to 150 NW)
Category H: High Tk 80/KM of contracted - WIlthout time-of-dayVoltage General Purpose load meter Tk 2. 00/KWh(33 aV nd up to 10 MW) - With time-of-day
Categoy J: Street Light Not applicable Tk 2.15/KWhand Water Pumps
Temporary Power Service Double of applicable - Double of applicable rate forrate for the tariff Category E for 230/400category - Double of appLicable rate
for Category F for 11 xV- Double of applicable rate
for Category 8 for 33 KV
Note: The tariff hAs been revised recently by about 52 but details were not availablet? be included in thLs report.
Source: Bangladesh Power Development Board.
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Table 9.4IIUOALBSZ 19201 01r co96um 0000 29 mmBA 4 , 1980181-1987188(Taka per unit shown)
TzaditienalItems UnIts 1980181 1981162 1962143 1953184 1984185 1985186 1986,87 1987188
lotes Th wholesale price indices (base 1969170 - 100) *er prepared for sL urbsn centers in RanlaedsDh(k Chittagong.hulnJ, Rajobshl, Sylhet nd Rangpur) and cover 44 Lndlvldual item. Weights orv assigned in proportion to the gross
value of production for each item in the base year 1969/70. The national index repr<esnts the unveishted averageof the Lidices for the six urban centers.
Source; Bangladesh Bureu of Statistics.
-143-
Table 9.6PUBLIC FOODGRAIN RATION QUOTAS AND ISSUE AND SALES PRICES, 1965-1988[Tk/maund][Maund = 37.326 kg]
Effective Date Issue Sale Issue Sale Total Rlee Wheat Ratio----------------------------------------------------------------- __----------__-------------------------------
/a For wheat, since April 15, 1961./b Since April 11, 1981, ex-godovnlex-mill issue prices payable by
ration dealers have been differentlated slaihtly ln accordance wlththe distance of the dealers' shops from the nearest MOP warehouse ormill, whlIe retail prices have been maintained at a uniform levelthroughout the statutory rationing areas. As of January 3, 1983,the actual issue prices vary by up to Taka 0.50 per maund for rice,paddy and vheat.
lc For wheat, effective December 12, 1981, the issue prLce xcr wheatsold to flour mills and large employers was set at Tk 129 per maund.
Id For wheat, effectlve July 3, 1982, the issue prlce for wheat sold toflour mills and large employers was set at Tk 139 per maund.
/e For wheat, effective January 3, 1983, the lssue prlce for vheat soldto flour mills and large employers was set at Tk 150 per maund.
/f For wheat, effective Aprll 1, 1985.Ig Applicable for statutory rationing areas.Ih Effective on July 18, 1983, ration quotas are set in kilograms.
Notes: The wholesale issue price ls the ex-godownlex-mill price chargedto ration dealers (and ineludes the cost of guniLes), whlle theretail sales prlce is the price charged to ration card holdersbuying their permissLble quota at ration shops. The dlfferencebetween vholesale lssue price and retail sales price, thus,represents the official margin for the ration shop dealers.
Source: MinLstry of Food.
-144-
Table 9.7DAILY WAGES FOR UNSKILLED LABOR. 1979180-1987188 /a(Tk/day)
/a Based on average wage rates for Dhaka, Chittagong, Rajahahi end Rhuln Divisions./b Deflated by rural consumer price index./c Deflated by the average of the consumer prlce lndices for industrial workers ln Chittagong, Rhulna and Narayangani./d Refers to sklll workers.