Regions and Countries

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Country Strategy and Program Update 2005-2006: Bangladesh

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Political confrontations have intensified as the country enters the third year of the alliance government led by the Bangladesh Nationalist Party (BNP). After a long boycott, the major opposition party (Awami League) has recently joined the Parliament. Although the frequency of hartals (general strikes) has declined, they continue to impede the process of economic growth in the country. The Government has adopted several measures to improve the law-and-order situation, but progress to date has been limited. Rebuilding a consensus between the ruling and opposition political parities on issues of national importance is critical to sustain reform momentum, improve credibility and hence accelerate growth and poverty reduction.

2. Between 1991/92 and 2000, the national poverty incidence fell from 59% to 50%, one of the fastest rates of decline recorded worldwide. Despite considerable progress, poverty is far more extensive in rural than in urban areas. However, real agricultural wages, which are a good proxy for living standards, increased from Tk24 per day in 1991 to Tk27 per day in 2000, and further to Tk29 per day in 2002. In 2003, for the first time, the United Nations Development Programme (UNDP) put Bangladesh in the medium human development league, along with its neighbors—Bhutan, India, and Sri Lanka.

B. Economic Assessment and Outlook

3. Macroeconomic peformance in fiscal year (FY) 2003 was broadly positive. Gross domestic product (GDP) growth rose to 5.3% from 4.4% in FY2002 (Appendix 1, Table A1.2). The budget deficit declined to 4.2% of GDP from 4.6% of GDP in FY2002 due to an increase in revenue and pruning of expenditures. Higher food prices in 2003 caused a modest increase in inflation, with consumer prices rising by 4.4% in June 2003 compared with 2.8% in June 2002. In FY2003, exports and imports reversed their contraction of FY2002 to increase by 9.5% and 13% respectively. The widening trade deficit was offset by a strong 22% growth in overseas workers’ remittances, helping the current account of balance of payments to record a surplus of 0.5% GDP. Foreign exchange reserves strengthened to $2.5 billion at end-June 2003 from $1.6 billion at end-June 2002.

4. The GDP growth rate is estimated at 5.5% in FY2004, driven by the steady growth in the agriculture and industry sectors, reflecting further recovery of both domestic and external demands. Despite a shortfall in targeted revenue, the budget deficit is estimated to remain at 4.2% of GDP, mainly due to underperformance in development spending. In FY2005, the budget deficit is projected to rise somewhat to 4.3% of GDP. Export-oriented manufacturing continued to show signs of expansion, and steady growth in overseas workers’ remittances has improved the current account of the balance of payments. Notwithstanding an increase in the trade deficit, the balance of payments remains healthy and foreign exchange reserves, at $2.7 billion as of end-June 2004, provide ample cushioning for external shocks. The rising trend in food prices has been contained with inflation declining from 6.7% in November 2003 to 5.6% in May 2004.

C. Implications for Country Strategy and Program

5. Macroeconomic and sector reforms have contributed to the economy's buoyant performance. The taka has been successfully floated, and exchange rate movement has helped signal competitive allocation of resources. The Government has embarked on an ambitious program to reform the banking sector. In other sectors, the Government is setting up an independent anticorruption commission, preparing to adopt a multi-modal transport policy, and implementing a national water management plan. The energy regulatory commission has come into operation. Sound macroeconomic management, structural and sector reforms, and political stability are crucial for implementing the country strategy and program (CSP), which aims to assist the Government in consolidating and advancing the reform process, improving the investment climate, and moving the economy to a higher growth path.

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