Regions and Countries

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p. 28 of 47 BACK | NEXT Developing Asia and the Pacific The global economy Newly industrialized economies Central Asian republics, Azerbaijan and Mongolia People’s Republic of China Southeast Asia South Asia Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka The Pacific

Bangladesh

Economic performance

Economic growth: The Bangladesh economy recovered in FY2000 (ending 30 June) with GDP growth of 5.5 percent, compared with GDP growth of 4.9 percent in FY1999. As is usual in Bangladesh, flooding in 1999 left a deposit of nutrient-rich silt that boosted food grain output the following year. Thus, FY2000 saw record-high food grain production of 24.9 million tons, compared with only 21.8 million tons in FY1999. Food grain output in FY2000 was also boosted by an adequate supply of key agricultural inputs—fertilizer, diesel, and seeds—at stable prices, allowing Bangladesh to attain food grain self-sufficiency in FY2000. For the agriculture sector as a whole, value added increased by 6.4 percent in FY2000, compared with 4.8 percent the previous year. The growth rate of industry sector output increased to 5.6 percent in FY2000, from 4.9 percent the preceding year. The services sector—comprising trade, transport, catering, financial intermediation, public administration, and professional services—maintained growth of 5.0 percent, slightly higher than in FY1999.

Employment: About two million people enter the labor force annually in addition to an already significant number of underemployed workers. Relatively slow economic growth, limited capacity for employment in agriculture, and sluggish performance in the country’s labor-intensive manufacturing subsector all contribute to the labor absorption dilemma facing policymakers. The only avenue of employment for the growing labor force is self-employment in the low-productivity segments of the informal sector.

Inflation: Consumer price inflation slowed to 3.4 percent in FY2000 from 8.9 percent the preceding year. Improved availability of food items because of a bumper harvest, weak commercial sector demand, excess capacity in manufacturing, and delays in adjusting administered prices all lowered the inflation rate. Food price inflation declined sharply from 11.8 percent in FY1999 to 4.1 percent in FY2000, while the inflation rate for nonfood items also fell from 4.1 percent to 3.3 percent. Food grain production, well in excess of demand, caused the open market price of coarse rice to decline by 14 percent.

Fiscal balance: As a consequence of weak revenue mobilization and a surge in expenditure, the budget deficit increased sharply to 6.1 percent of GDP in FY2000, compared with 4.8 percent in FY1999. Net domestic financing of the budget deficit increased to 3.3 percent of GDP in FY2000 from 2.4 percent in FY1999. The Government’s bank borrowing to finance the budget deficit increased from 0.9 percent of GDP in FY1999 to 1.6 percent in FY2000.

External sector: The growth rate of exports in FY2000 rose to 8.2 percent, compared with 2.9 percent the previous year, which was mainly depressed because of floods. Export growth continued to be concentrated narrowly in just two products—ready-made garments and knitwear—which accounted for 76 percent of total exports in FY2000. Import growth was relatively slow at 4.4 percent in FY2000, mainly because of reduced food imports resulting from the bumper harvest. However, imports of nonfood items increased by 13 percent because of a higher level of imports of petroleum and oil products, chemicals, textiles, and capital goods. With the trade deficit remaining at almost the same level as the previous year and 14 percent growth in remittances, the current account deficit declined to 1 percent of GDP in FY2000, compared with 1.4 percent of GDP the preceding year. Despite improvement in the current account, Bangladesh’s overall balance of payments remained fragile, with foreign exchange reserves totaling only $1.6 billion (2.3 months’ equivalent of imports) at the end of FY2000. While foreign exchange reserves declined to only $1.3 billion in mid-November, December 2000 saw a slight increase to $1.5 billion (equivalent to less than two months’ imports). In light of this, Bangladesh Bank introduced measures for improving foreign exchange reserves during FY2000.

Domestic policies: Broad money (M2) growth accelerated to 19 percent at the end of FY2000, compared with 13 percent in FY1999. Government borrowing from the banking system increased by 31 percent, while Bangladesh Bank accounted for about half of total credit expansion. The growth rate of bank credit to the private sector declined to 11 percent from 14 percent the previous year, mainly because of depressed economic activity and high borrowing costs. This notwithstanding, the Government took some measures to loosen the supply of money and credit in FY2000, including withdrawing the interest rate band for small-scale and cottage industries and the agriculture sector, lowering the bank rate from 8 percent to 7 percent, and reducing the cash reserve ratio requirement of banks by one percentage point to 4 percent.

Bangladesh’s financial sector, which is dominated by banks, is in distress because of its significant portfolio of nonperforming loans, low recovery rates, large spreads necessary for covering its substantial provisioning and management costs, weak overall institutional capacity, and deficient legal framework. As of 30 June 2000, the nonperforming bank loan ratio increased to 40 percent, from 32 percent at end-1995. Although in recent years only private and foreign commercial banks have been able to reduce nonperforming loans, some progress has been made in the legal and regulatory framework, which has allowed some recovery of bad loans. The banking companies’ act was amended to disqualify defaulting directors from remaining on the boards of banks, and changes in loan classification and provisioning standards were introduced, bringing them closer to international standards. Steps for regulating insider lending have also recently been taken.

Under the ADB-assisted Capital Market Development Program loan, the Government adopted a reform package for strengthening and more closely regulating the capital market. In addition, the Government enacted the Privatization Act of 2000, which provides the Privatization Commission greater flexibility in divestment. Another law divided the Investment Corporation of Bangladesh into three separate corporate entities that carry out merchant banking, engage in mutual fund operations, and undertake stock brokerage activities. The Government also further liberalized private sector investment.

In mid-August 2000, the Government adjusted the administered prices of natural gas and various fuel oils upward by 15 percent and 9–20 percent, respectively, to avert further losses incurred from subsidizing these products. The taka was also devalued by 5.9 percent.

ADB operations

Operational strategy: ADB’s operational strategy for Bangladesh continued to focus on reducing poverty by promoting private sector-led economic growth, creating better development opportunities for the poor, improving human development to increase the productivity of the poor, and protecting the environment. In April 2000, the Government and ADB signed the Partnership Agreement on Poverty Reduction, which sets medium (to 2005) and long-term (to 2010) goals for reducing poverty.

Policy dialogue: In keeping with its emphasis on reducing poverty and in line with the operational strategy and the Partnership Agreement, policy dialogue with the Government in 2000 focused on ensuring land tenure security and sustainability of investments in rural infrastructure; promoting policy formulation and reform in microfinance, rural infrastructure, and agriculture input supply; and updating the 1989 Road Transport Policy. Projects approved in 2000 support these objectives. The Chittagong Hill Tracts Rural Development Project will encourage the Government to establish a land commission. The Northwest Crop Diversification Project will ensure better service to farmers by microfinance institutions, emphasize the need for well-functioning operation and maintenance systems and for local participation in selecting and managing rural infrastructure, and continue discussions on promoting growth in food crop production by removing market restrictions. The Road Maintenance and Improvement Project will help prepare a new National Land Transport Policy to include road maintenance, road safety, private sector participation, and the role of transport in poverty reduction.

Loans and technical assistance: In 2000, ADB approved six loans totaling $275.1 million: a flood rehabilitation loan, a private sector power loan, and loans for the agriculture, road improvement, and rural development sectors. ADB also approved seven technical assistance grants totaling $5.2 million.

Project implementation: Since joining ADB in 1973, Bangladesh has received 143 loans, of which 37 were active at the end of 2000. Contract awards totaled $291.6 million, bringing the cumulative figure to $4.5 billion. The contract award ratio was 30.7 percent, higher than the ADB-wide average of 21 percent. Disbursements during the year totaled $264.9 million, bringing cumulative disbursements to about $4.5 billion. The disbursement ratio was 21.8 percent, higher than the ADB-wide average of 20.5 percent.

A country portfolio review, undertaken in 2000, and a review of the 1999 Action Plan indicated the need for improvements in delegating authority to project directors; streamlining procedures for recruiting consultants; simplifying procedures for land acquisition and resettlement; and ensuring adequate counterpart funds. Subsequently, ADB approved technical assistance to strengthen the Government’s capacity in project monitoring, account management, and audit; and streamline contract awards and disbursement procedures in line agencies.

   

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