Countries and Regions

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p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2004-2006: Bangladesh

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Despite confrontational party politics, the overall political situation remained stable. The major opposition (Awami League) discontinued boycotting Parliament, but it continues to stage frequent walkouts from parliamentary sessions. Two local government elections (Union Parishad and two city corporations) were completed in March 2003. There was considerable improvement in the law-and-order situation across the country resulting from a 3-month armyled anticrime drive from October 2002 to January 2003; but the effects appear to have been only temporary. The Government is working to reform and strengthen the police and the criminal justice system, which is essential to improve the law-and-order, and human security situation on a sustainable basis. A series of antiwar processions were held against the war in Iraq, but most were carried out in a peaceful manner.

2. The Government has completed “A National Strategy for Economic Growth, Poverty Reduction and Social Development” (NS-EGPRSD).¹ The strategic elements of the NSEGPRSD include (i) economic growth to increase income and employment of the poor, (ii) human development to raise the capabilities of the poor to participate in the development process; (iii) women’s advancement and the closing of gender gaps; (iv) social protection to the poor through targeted efforts; and (v) participatory governance to involve the poor in the decision-making process. The NS-EGPRSD will form the core of the Government’s 3-year rolling plan providing the basis for the annual budget including the Annual Development Program. It will also provide the basis for external assistance to support the Government’s development priorities, and policy and institutional reform initiatives, and specifically, the basis for formulating ADB’s new country strategy and program (CSP) for Bangladesh.

B. Economic Assessment and Outlook

3. The gross domestic product (GDP) growth rate moderated to 4.4% in fiscal year (FY) 2002 (July 2001–June 2002), compared with 5.3% in FY2001, due mainly to a contraction in agriculture and slower industrial growth. Following several measures to contain government expenditures and raise revenues, the budget deficit declined to 4.7% of GDP in FY2002 from 5.1% in FY2001. Annual inflation edged up to 2.4% in FY2002 from 1.6% in FY2001. Despite a contraction in exports, the current account posted a surplus of 0.4% of GDP in FY2002 after a deficit of 2.3% of GDP in the preceding year. This was mainly owing to depressed imports and a surge in overseas workers' remittances. Foreign exchange reserves increased to $1.6 billion, or 2.5 months of imports at the end of FY2002, compared with $1.3 billion at the end of FY2001.

4. During FY2003, macroeconomic environment has been strengthened through prudent fiscal and monetary policies, and structural and sector reforms. GDP growth rate is estimated at 5.3% in FY2003, driven by steady growth in agriculture and industry sectors with stronger domestic and external demand. The budget deficit is estimated at 4.2% of GDP due to an increase in revenue and pruning of expenditures. The FY2004 budget projects a higher deficit of 4.8% of GDP due to the greater availability of external concessional resources. A recovery in exports, and robust growth in overseas workers’ remittances have improved the current account of the balance of payments. Prudent policies have augmented foreign exchange reserves to nearly $2.5 billion by end-June 2003. Inflation appears to be on the rise, at 6% in March 2003 on a point-to-point basis. The rising trend in inflation is likely to be contained as rice prices have started falling with the onset of the winter harvest. The war in Iraq is unlikely to have any major adverse impact on the economy, and thus far, neither has the severe acute respiratory syndrome (SARS).

C. Implication for Country Strategy and Program

5. Sound macroeconomic management, structural and sector reforms, and political stability are crucial for implementing the CSP. The Government has undertaken some politically difficult measures to improve the fiscal situation and to stabilize the domestic economy, such as: (i) launching rigorous revenue mobilization efforts; (ii) increasing prices of gas, electricity, and fuel; (iii) further closing or privatizing state-owned enterprises (SOEs); (iv) strengthening the banking system; and (v) restricting costly suppliers’ credit. Further structural and sector reforms are needed to address deep-rooted problems in governance and the financial and infrastructure sectors, in an attempt to improve the investment climate and move the economy to a higher growth path. An increased level of support from development partners (DPs), including ADB, would be critical to sustain the momentum of the ongoing reforms and deepen the reform process to improve sector efficiency and accelerate growth.

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