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COUNTRY REPORT

Bangladesh

April 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

hAt a glance: 2001-02OVERVIEWPolitical tensions and violence will intensify with the approach of thegeneral election, which must take place by September 2001. The breakdownof a near agreement on an early election date between the Awami League(AL) government and the opposition alliance led by the BangladeshNational Party (BNP), led to a paralysing, violent national strike at the startof April. The strike was a possible precursor of more violence to come in therun-up to the election. Until a new agreement is forged, perhaps brokered bythe president, the opposition will intensify its campaign of strikes andprotests. The government, in turn, may be tempted to clampdown onprotesters, using the disorder as the pretext to target opposition activistsunder the Public Security Act, and the atmosphere in the country willremain tense until the election has passed. Despite political turmoil andstalled economic reform, the EIU forecasts growth of 5.2% in 2000/01, withgrowth picking up to 5.9% in 2001/02 as post-election stability helps tofoster economic growth and draw in foreign direct investment.

Key changes from last monthPolitical outlook• The early-April national strike, which brought the country to a standstill,

is a harbinger of events to come until the election is over. Tensionsbetween the government and opposition could easily become violent.

Economic policy outlook• Changes in the US trade regime will leave Bangladeshi exporters of

readymade garments, by far the country’s most important export, at adisadvantage relative to competing exporters from other least-developedcountries.

Economic forecast• Despite the worsening demand-side outlook for textile shipments, we

have revised upward our forecast for growth of exports of goods andservices to 11.2% in fiscal year 2000/01 and 9.5% in 2001/02. The 6%devaluation of the taka last August has boosted exports, and productioncapacity hit by the flooding in 1998 has been recovering rapidly.

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ISSN 0269-431X

Symbols for tables“n/a” means not available; “–” means not applicable

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Bangladesh 1

EIU Country Report April 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2001-027 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

18 Economic policy

20 The domestic economy20 Economic trends21 Agriculture22 Power and gas24 Infrastructure25 Financial and other services

26 Foreign trade and payments

List of tables

9 International assumptions summary10 Forecast summary27 Stock exchange indicators28 Money supply

List of figures

12 Gross domestic product12 Taka real exchange rates25 Foreign exchange reserves27 Exchange rate

2 Bangladesh


Bangladesh 3


Summary

April 2001

The run-up to the general election will be marred by general strikes, violenceand a deteriorating political situation. Growth in the agricultural, industrialand export sectors will accelerate over 2001-02. Inflation will be moderated bylow food prices. The government will continue to devalue the taka in stages,supporting export competitiveness. The current account will remain in deficit.

An election is due by September 2001 and although no date has been set, thepolitical parties have been examining their alliances and candidates havebegun to campaign. The Election Commission is preparing to ensure that thepoll is free and fair. To that end the main opposition force, the BangladeshNational Party, will place a seven-point demand before the caretakergovernment overseeing the election. The Chittagong Hill Tracts hostage dramahas ended peacefully, but an end to the conflict in the region remains elusive.A US report has noted the government’s sharply increased use of the PublicSecurity Act to attack the opposition. The India-Bangladesh visa regime hasbeen liberalised, but the Indian Supreme Court has ordered the expulsion ofillegal Bangladeshi immigrants.

The World Bank expects to reduce the amount of soft loans it will extend toBangladesh in 2001-03. A recent US trade law will hamper Bangladeshiexports of garments. Under US pressure, Dhaka will allow trade unions in EPZsfrom 2004. Despite an unorthodox privatisation of textile mills in March, theprivatisation process has virtually ground to a halt. Tighter customs inspectionsof imports seem to have boosted the public coffers.

The Asian Development Bank expects growth to surpass 5% in the currentfiscal year. City dwellers are already experiencing power shortages before thepeak summer season. The price of food will continue to fall. A definitive studyhas estimated extractable gas reserves—Petrobangla has invited a consortium ofmultinationals to develop the most-promising block, but the state-owned oiland gas company has cash-flow problems. Share prices took a downturn inApril. The money supply has increased, though less rapidly than before. Bankshave chipped away at their mountains of non-performing loans.

Foreign exchange reserves have recovered, but the situation is not secure.Exports have surged, lifting imports in their wake. This trend will, however, beblunted by the global trade slowdown. The readymade garments sector willface harsher competition.

Editors: Duncan Wrigley (editor); Graham Richardson (consulting editor)Editorial closing date: April 6th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2001-02

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Bangladesh


Political structure

People’s Republic of Bangladesh

Parliamentary democracy, following a constitutional amendment in September 1991

The prime minister is the chief executive and the head of the cabinet (Council ofMinisters), which the prime minister selects; the president has a largely ceremonial role,but appoints members of the cabinet and the judiciary, and has the power to dissolveparliament

Jatiya Sangshad, a unicameral legislature, consisting of 300 members directly electedfrom single territorial constituencies and 30 seats reserved for women; the legislature iselected for a five-year term

June 12th 1996; next election due by September 2001

Sheikh Hasina Wajed’s Awami League (AL) won the largest number of parliamentaryseats in the 1996 election, which was overseen by a caretaker government. The JatiyaParty (JP) provided the AL with the support necessary to form a majority government,but withdrew its support in March 1998. A member of the JP holds a cabinet post in theAL government. The Jatiya Samajtantrik Dal (JSD) also has a representative in thecabinet. Last cabinet reshuffle in December 1999

Awami League (AL); Bangladesh National Party (BNP); Jatiya Party (JP-Mizan-Manju);Jamaat-e-Islami (Jamaat); Jatiya Samajtantrik Dal (JSD)

President Shahabuddin AhmedPrime minister & minister of defence establishment & energy Sheikh Hasina Wajed

Agriculture Motiya ChowdhuryCommerce Abdul JalilCommunications Anwar Hossain Manju (JP)Education A S H K SadekEnvironment & forestry Syeda Sajeda ChowdhuryFinance S A M S KibriaFood Amir Hossain AmuForeign affairs Abdus Samad AzadHealth & family welfare Sheikh Fazlul KarimHome affairs Mohammad NasimIndustry Tofael AhmedLaw & justice Abdul Matin KhasruLocal government, rural

development & co-operatives Zillur Rahman

Water resources Abdur Razzak

Disaster management & relief Talukdar Abdul KhalequeEnergy & mineral resources Rafiqul IslamHealth & family welfare M Amanullah

Mohammad Farashuddin Ahmed

National legislature

Form of government

Official name

National elections

National government

Main political organisations

Key ministers

Key ministers of state

The executive

Central bank governor

Bangladesh 5


Economic structure

Annual indicators

1996a 1997a 1998a 1999a 2000b

GDP at market prices (Tk bn) 1.3 1.4 1.5 1.7 1.9a

GDP (US$ bn) 31.9 32.9 34.1 36.4 37.5a

Real GDP growth (%) 5.4 5.9 5.7 5.2 5.3

Consumer price inflation (av; %) 4.1 5.2 8.3 6.2 2.9

Population (m) 122.1 124.3 124.8 127.0 128.8

Exports of goods fob (US$ m) 4,009.3 4,839.9 5,141.5 5,458.3 6,097.1

Imports of goods fob (US$ m) 6,284.6 6,587.6 6,715.7 7,420.4 8,040.4

Current-account balance (US$ m) –991.4 –327.3 –35.0 –291.4 –325.4

Foreign-exchange reserves excl gold (US$ m) 1,834.6 1,581.5 1,905.4 1,603.6 1,486.0a

Total external debt (US$ bn) 16.0 15.1 16.4 17.5 17.1

Debt-service ratio, paid (%) 11.8 10.0 9.1 9.8 10.3

Exchange rate (av) Tk:US$ 41.79 43.89 46.91 49.09 52.14a

April 10th Tk53.85:US$1

% of % ofOrigins of gross domestic product 1999c total Components of gross domestic product 1999c total

Agriculture 34.5 Private consumption 79.5

Manufacturing 12.6 Government consumption 14.4

Construction 6.9 Gross fixed investmentd 12.4

Trade 11.2 Exports of goods & services 17.7

Transport & communications 13.5 Imports of goods & services –24.8

Public administration & defence 6.0 GDP at market prices 100.0

Banking & insurance 1.9

GDP at factor cost incl others 100.0

Principal exports 1999ce US$ m Principal imports 1999c US$ m

Garments & knitwear 2,715.6 Textiles & yarn 1,672.7

Fisheries products 306.2 Machinery & transport equipment 910.4

Jute goods 244.5 Cereal & dairy products 867.3

Leather 160.3 Iron & steel 347.0

Raw jute 56.5 Petroleum & petroleum products 303.7

Others 767.5

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total

US 32.3 India 13.5

Germany 10.4 Singapore 7.9

UK 8.3 China 7.2

France 5.7 Japan 6.0

Italy 4.8 Hong Kong 5.5

a Actual. b EIU estimates c Fiscal years ending June 30th of year stated. d Includes stockbuilding. e Exports on balance-of-payments basis differfrom exports on customs basis.

6 Bangladesh


Quarterly indicators

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

OutputIndustrial production index (1995=100) 113.0 127.5 128.5 131.2 126.4 135.8 n/a n/a % change, year on year –0.8 5.7 4.9 4.0 11.9 6.5 n/a n/a

PricesConsumer prices Dhaka (1995=100) 123.9 125.0 126.2 128.5 128.1 128.2 n/a n/a % change year on year 8.9 7.8 5.1 3.4 3.4 2.6 n/a n/aJutea (US$/tonne) 250.0 258.0 294.3 300.3 n/a n/a n/a n/a

Financial indicatorsExchange rate Tk:US$ (av) 48.50 48.50 49.31 50.03 51.00 51.00 52.57 54.00 Tk:US$ (end-period) 48.50 48.50 49.50 51.00 51.00 51.00 54.00 54.00Interest rates (%) Deposit (av) 8.85 8.85 8.65 8.62 8.62 8.59 8.54 n/a Discount (end-period) 8.00 8.00 7.00 7.00 7.00 7.00 7.00 7.00 Lending rate (av) 14.00 14.00 14.00 14.50 15.50 15.50 15.50 n/aM1 (end-period; Tk bn) 166.93 172.50 170.05 184.93 198.33 199.14 199.69 n/a % change, year on year 9.1 8.6 9.3 12.8 18.8 15.4 17.4 n/aM2 (end-period; Tk bn) 599.75 630.27 646.54 689.89 714.78 747.62 774.99 n/a % change, year on year 13.1 12.8 14.7 15.5 19.2 18.6 19.9 n/a

Foreign trade (Tk bn)Exports fob 41.93 45.34 57.78 43.74 53.83 57.32 n/a n/aImports cif –92.37 –106.25 –81.81 –99.35 –81.82 –118.31 n/a n/aTrade balance –50.44 –60.91 –24.04 –55.61 –27.99 –60.99 n/a n/a

Foreign payments (US$ m)Merchandise trade balance –592.7 –572.0 –275.5 –521.9 n/a n/a n/a n/aServices balance –145.4 –201.5 –141.8 –163.0 n/a n/a n/a n/aIncome balance –32.9 –34.6 –39.2 –61.7 n/a n/a n/a n/aCurrent-account balance –228.9 –216.2 197.3 –43.7 n/a n/a n/a n/aReserves excl gold (end-period) 1,520.0 1,501.3 1,630.9 1,603.6 1,566.2 1,567.2 1,356.0 1,486.0

a Raw Bangladesh BWD, fob; Chittagong/Chalna.Source: IMF, International Financial Statistics.

Bangladesh 7


Outlook for 2001-02

Political outlook

Political tensions and violence will increase further with the approach of thegeneral election, which must take place by September 2001. The breakdown ofa near agreement on an early election date between the Awami League (AL)government and the opposition, led to a crippling national strike at the start ofApril and highlights difficulties to come in the run-up to the election. Until anew agreement—perhaps brokered by the president—is forged, the four-partyopposition alliance led by the Bangladesh Nationalist Party (BNP) will persistwith its campaign of strikes and protests. This boisterous campaign willinevitably lead to more injuries, property damage and disorder, and mayprovoke the government to use the security forces in retaliation. Thegovernment has increasingly been using provisions under the Public SecurityAct as the pretext to detain opposition activists, according to a US StateDepartment report published in February.

Neither of the two main parties recognises the other’s legitimacy to govern.Hence, both the election process and the outcome will be subject to vociferousprotest by one or both sides. Moreover, when a caretaker government istemporarily empowered to stage the election—as provided for under theconstitution—it is doubtful that it, along with the election commission, will beable to hold the election in a free and fair manner given that law and order aredeteriorating rapidly. The election outcome is therefore even more likely to bechallenged by the loser, perhaps in a violent fashion. The EU, one ofBangladesh’s biggest donors in development co-operation, is concerned aboutthe possibility of an election tainted by irregularities and is planning to send ateam of election observers.

The outcome of the election will hinge on whether voters turn on the rulingAL for failing to deliver on the pledges made in the 1996 election, and becauseof its high-handedness in dealing with opposition leaders and activists, orblame the government’s shortcomings on the BNP’s largely unsuccessful fiveyears of “agitational” politics since the AL assumed power. At present, it isimpossible to predict the winner. The BNP chairperson and opposition leader,Khaleda Zia, is confident that the opposition alliance will remain intact andwin the next election, even though the leader of one member of the alliance,Hossain Mohammad Ershad of the Jatiya Party (JP), has been barred fromtaking part. The prime minister, Sheikh Hasina, is also confident that her ALparty will retain power. She has said that even if her party secures a majority,she will look to bring in other parties in an effort to develop consensusgovernment.

Bangladeshi and Indian policy makers ended two days of dialogue onJanuary 16th with both sides agreeing to increase efforts to settle bilateralissues and improve regional co-operation. In mid-February both countriesagreed to relax their visa regimes to facilitate cross-border passenger travel.However, later that month the Indian Supreme Court ordered the expulsion

International relations

Domestic politics

8 Bangladesh


of the 20m illegal Bangladeshi immigrants from India. The South AsianAssociation for Regional Co-operation (SAARC) has not been very successfulover the years in promoting regional co-operation, as India, the largestpartner, has been less than willing to liberalise trade on a multilateral basis.Relations with Pakistan will remain difficult following the withdrawal inDecember last year of Pakistan’s deputy high commissioner from Dhaka, Irfanur Rahman Raja, after his derogatory remarks about the 1971 liberation wartriggered angry protests throughout the country.

Economic policy outlook

There is unlikely to be any shift in the direction of economic policy after thenext election, as both the AL and the BNP are officially committed to free-market policies. Bangladesh’s liberal trade regime was introduced by the BNPwhile it was in power during 1991-96. Both parties welcome foreigninvestment. Although a segment of the AL leadership is still wedded to thesocialist principles that the party espoused in the early 1970s, the AL willcontinue in its attempts to liberalise the economy, not least because of pressurefrom donors. Bangladesh’s fiscal situation has deteriorated in recent years. Thegovernment’s tax collection has been below target for the last couple of years,and in fiscal year 1999/2000 the government overshot its current expendituretarget. This trend is expected to continue in the run-up to the election owingto higher than expected interest payments on domestic debt, and theexpenditure required to implement the recommendations of the new nationalwage commission, which has raised the minimum wage by around 70%. Inaddition, the government continues to subsidise or provide public guaranteesto loss-making state-owned enterprises (SOEs), including nationalisedcommercial banks (NCBs) which have large proportions of non-performingloans in their portfolios.

A failure to reduce expenditure or increase revenue—by either broadening thetax base or through privatisation—will maintain pressure on the fiscalposition. Revenue collections grew by 19.6% in the first half of the currentfiscal year 2000/01 (July-June) compared the year-earlier period. However, thegovernment has increased spending on public projects ahead of the election inorder to stimulate the economy. The government estimates the fiscal deficitin 1999/2000 at more than 6% of GDP. The World Bank, in a recent EconomicUpdate, noted that the fiscal deficit rose from 6.7% of GDP in 1998/99 to 7.5%in 1999/2000, increasing the underlying macroeconomic risk. The EIU believesthat the budget deficit for the current fiscal year, forecast at 7.8% of GDP, willnarrow slightly in 2001/02 to 6.5% as election-spending pressures ease. Thesize of the deficit, however, remains a concern. Only decisive policies by thenew government will succeed in closing the gap, but the political consensusneeded to expand the tax base or push on with privatisation is unlikely to beforthcoming. As the inflow of bilateral aid has been declining in recent years,the government’s development spending is funded largely from domesticborrowing and multilateral donors. Over the coming years Bangladesh mustendeavour to shift from aid dependence to trade dependence. Donors to the

Policy trends

Fiscal policy

Bangladesh 9


country have decided not to meet within the Bangladesh Development Forum(BDF) until after the next election in order to be able to discuss thedevelopment agenda with the new government. This will make the task ofpreparing the next budget difficult for the current government, as it will lackdetails of donor plans for the year ahead. Domestic financing of the fiscaldeficit increased from less than 2.5% of GDP in 1999 to 3.3% in 2000. In thefirst half of the current fiscal year, however, the government’s domesticborrowing has fallen.

The government continues to pursue an expansionary monetary policy,despite a warning from the IMF in April 2000 that this policy threatensmacroeconomic stability. The loose monetary stance has ensured that privateinvestment has not been crowded out by the government’s massive domesticborrowing (resulting in particular from election-year spending) to finance itsbudget. Broad money supply (M2) expanded in the third quarter of 2000 at anannual rate of almost 19.9%, although the pace of expansion diminished inOctober. But growing excess liquidity has forced the banks into lowering term-deposit rates, refusing large deposits and counting on the government toborrow at cheaper rates to finance its fiscal deficit. We expect the authorities tocontinue to maintain a loose monetary policy throughout 2001-02.

Economic forecast

International assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.5 4.8 3.0 3.9US 4.2 5.0 1.4 2.9EU 2.4 3.3 2.6 2.6

Exchange rates (av)¥:US$ 113.9 107.8 122.5 122.0US$:€ 1.07 0.92 0.97 1.07SDR:US$ 0.731 0.758 0.765 0.737

Financial indicators¥ 2-month private bill rate 0.27 0.24 0.28 0.30US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39

Commodity pricesOil (Brent; US$/b) 17.9 28.4 23.9 23.0Cotton (US cents/lb) 53.1 59.2 66.8 74.8Food, feedstuffs & beverages

(% change in US$ terms) –18.6 –6.1 8.0 14.8

Industrial raw materials (% change in US$ terms) –4.6 13.4 2.6 5.1

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP)exchange rates.

The global economy is forecast to grow by 3% in 2001 and 3.9% in 2002. Weexpect GDP growth in the US and the EU, Bangladesh’s main export markets,to slow after 2000. The US economy is slowing earlier and more rapidly thanwas previously expected and, consequently, we now expect growth of 1.4% in

Monetary policy

International assumptions

10 Bangladesh


2001 and 2.9% in 2002, down from a strong 5% in 2000. The forecast forgrowth in the EU has also been revised downwards to 2.6% in both 2001and 2002. The impact on the domestic economy of an expected rise ininternational food prices will be limited, as Bangladesh has produced ampledomestic supplies in the past few years. Moreover, India may subsidise its riceexports to Bangladesh, which will undermine the price of this staple evenfurther (see The domestic economy; Agriculture). However, rising prices ofessential raw materials, such as cotton, will place upward pressure on theimport bill. This will be slightly offset by declining oil prices in 2001 and 2002.

Forecast summary(% unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP growth 5.2 5.3 5.2 5.9

Industrial production growth 3.6 6.1 6.2 6.6

Gross agricultural growth 5.1 4.9 4.2 5.3

Unemployment rate (av) 2.4b 2.4 2.5 2.5

Consumer price inflation Average 6.2 2.9 4.2 4.5

Short-term interbank rate 14.1 15.5 15.8 15.5

Government balance (% of GDP) –6.7 –7.7 –7.8 –6.5

Exports of goods fob (US$ bn) 5.5 6.1 6.6 7.2

Imports of goods fob (US$ bn) 7.4 8.0 8.7 9.3

Current-account balance (US$ bn) –0.3 –0.3 –0.4 –0.4 % of GDP –0.8 –0.9 –1.2 –1.0

External debt (year-end; US$ bn) 17.5 17.1 17.4 18.0

Exchange rates Tk:US$ (av) 49.09 52.14a 55.65 58.75 Tk:¥100 (av) 43.09 48.39a 45.43 48.16 Tk:€ (year-end) 51.23 50.25a 58.73 67.12 Tk:SDR (year-end) 70.00 70.36a 76.42 83.09

a Actual. b EIU estimates. c EIU forecasts.

The poor political situation and the stagnation of economic reform ahead ofthe election will hinder overall GDP growth in 2000/01. Economic growth andforeign investment will, however, be lifted by a temporary period of stabilityafter the election. We therefore expect GDP growth to increase from 5.2%in 2000/01 to 5.9% in 2001/02. Nevertheless, SOEs will remain unprofitable,while corruption and excessive bureaucracy will deter foreign investment. Thegovernment has revised upward its estimate for GDP growth in 1999/2000from 5.5% to 6%, on the basis of the newly rebased national accounts(with 1995/96 as the base year). The government’s forecast that GDP growthfor 2000/01 will be 6.2% is likely to be revised downward as the fiscal yearprogresses. The growth forecast by the Asian Development Bank (ADB) for thesame period is 5.7%.

Several successive bountiful harvests, a result of favourable weather conditionsbetween 1998 and 2000, have revived the agricultural sector. Stable prices andthe timely delivery of inputs, such as seeds and fertiliser, have also been

Economic growth

Bangladesh 11


helpful. We forecast agricultural growth of 4.2% in the current fiscal yearand 5.3% in 2001/02. The industrial sector has largely restocked after thefloods of 1998 and we forecast an expansion of 6.2% in 2000/01 and 6.6%in 2001/02, although poor infrastructure and inefficient resource allocationwill continue to be major obstacles to faster growth. The export sectorperformed well in the first half of the current fiscal year, growing by 21% inJuly to January compared with the year-earlier period. However, this surge inexports is likely to ease later in the year given the expected slowdown inBangladesh’s major export markets and heightened competition resulting fromchanges in the EU and US trade regimes for garments (see Foreign trade andpayments). We expect real export growth of goods and services (nationalaccounts basis) of 11.2% in 2000/01 and 9.5% in 2001/02. Imports have alsobeen growing rapidly—an increase of over 40% in the first four months of thecurrent fiscal year compared with the same period in 1999—but on a positivenote, this performance has been driven by imports of capital machinery.Although more recent hard data on actual imports are not available, banksdealing with trade financing received letters of credit valued at US$5.27bn inJuly to January, up 20.3% on the equivalent import-credit value of a yearearlier. This is an encouraging rate of growth, and is linked to higher exports—most of the additional imports were industrial raw materials, fuel or machinery.

Bumper agricultural production helped to restrain inflation to 2.5% year onyear in November. (Food expenditure constitutes over 60% of consumption.)We estimate annual average inflation of 2 .9% in 2000 given the strength ofdomestic food output. As industrial demand increases and higher prices forindustrial raw materials filter into the index, inflation is forecast to increaseto 4.2% in 2001 and 4.5% in 2002. The government’s expansionary fiscal andmonetary policies may ignite demand-related inflationary pressures later in theforecast period.

The taka was devalued in stages in 1999 and 2000 in order to promote exportsand shore up foreign exchange reserves. The average value of the taka fellby 4.6% in 1999 and then by 7% in 2000. Pressure on the currency remains,stemming from the continuing depreciation of the Indian rupee, as well asfrom high import payments and large outward remittances in the form ofdebt-servicing repayments. Although low inflation and improved exportperformance (after a 6% devaluation in the currency last August) have reducedthe pressure on the taka, we expect the government to continue to allow thevalue of the taka to depreciate by around 5-6% per year against the USdollar in 2001 and 2002. We expect the taka to average Tk55.65:US$1 in 2001and Tk58.75:US$1 in 2002.

Exports will expand during the forecast period, but not quite at the high ratepreviously expected. After the devaluation of the taka in 2000, exportcompetitiveness has improved and exports surged by 21% in the first sevenmonths (July to February) of the current fiscal year compared with the year-earlier period. But we expect export growth in 2001 and 2002 to be morerestrained as the slowdown in the US and the EU, Bangladesh’s major exportmarkets, affects demand. (Over 30% of Bangladesh’s exports went to the US in

Inflation

Exchange rates

External sector

12 Bangladesh


1999.) Export growth will also be constrained by the persistently narrow exportbase—textiles account for nearly 70% of export earnings. The readymadegarment (RMG) industry will face increased competition from least-developedcountries (LDCs) which were granted duty-free and quota-free access to USmarkets under the US Trade and Development Act, but the industry shouldbenefit from the implementation of an agreement giving duty-free and quota-free access to European markets by 2002. However, the quality of RMG exportsremains inadequate to capitalise fully on this opportunity to increase exports.

Export growth (in balance-of-payments terms) of 8.4% in 2001 and 9.4% in2002, will offset the increase in the import bill that will stem from strongerdomestic demand and higher prices for industrial raw materials such ascotton. The trade deficit will narrow to US$2.1bn this year and remainconstant in 2002. We expect inward remittances from overseas workers to risein 2001 and 2002, but this is conditional on there being no dramatic collapsein oil prices given the large number of Bangladeshi workers in the Middle East.The majority of remittances will still be made through hundi (unofficial)channels. The improving merchandise trade position will result in current-account deficits of around 1.2% of GDP in 2001 and 1% in 2002.

The political scene

The atmosphere of limited conciliation between the ruling Awami League (AL)and the opposition alliance led by the Bangladesh Nationalist Party (BNP),ended in a paralysing general strike at the start of April. The strike followed thebreakdown in late March of talks on setting a date for the general election. Theprime minister, Sheikh Hasina Wajed, had been moving towards a compromisebetween the opposition’s demand for her government’s immediate resignationand the date on which her term must end, July 13th. Her apparent offer tohand power over to a caretaker government on April 17th, which would havepaved the way for mid-June elections, was rebuffed in late March by the former

Government-oppositionrow leads to general strike

Bangladesh 13


prime minister and BNP-opposition leader, Khaleda Zia, who sought a clearvictory with a government climb-down.

The president, Shahabuddin Ahmed, had been staging separate meetings withthe two rival party leaders in order to broker an election date and avoid arepetition of the hartals or national strikes that have crippled the country for atotal of 80 days since the AL came to power in June 1996. It was only in earlyMarch, while on a pilgrimage to the Saudi Arabian city of Medina, that SheikhHasina had responded to opposition demands for a late-May election bytalking about a mid-June election. Under the Bangladeshi constitution, after agovernment resigns, the president appoints a caretaker government that musthold elections within 90 days. The prime minister’s new position implied atransfer of power in mid-April, a timing she confirmed later in March. BeforeMarch, Sheikh Hasina had been holding out for her government’s fullmandate, set to last until mid-July. The reason for staging an early election,according to Sheikh Hasina, was that a ballot in September or October (thelikely time if her government served out its full term) would be disrupted bymonsoons.

The opposition—a four-party alliance of the BNP, Jatiyo Party (JP-Ershad),Jamaat-e-Islami and Islami Oikko Jote (IOJ), which has long called for thegovernment’s resignation—initially heralded the prime minister’s new positionas a victory for the people, whom it says are opposed to AL rule. That wasapparently not enough, however, as Ms Zia then left the discussions and issuedan ultimatum demanding that the government step down by March 30th.Sheikh Hasina responded by reverting to her original position of no earlyresignation. The three-day strike, in which at least one person was killed,hundreds injured and much property damaged, went ahead. With the prospectof more hartals and intensified violence, the government remains underpressure to call an early election and some arrangement may yet be made. Itwill be the eighth parliamentary poll in the nation’s turbulent three-decade-long history.

With the parliamentary poll looming, the political parties are busy examiningtheir alliances and looking at their June 1996 election performances to gleanlessons for the forthcoming polls. In that contest, the AL won 146 seats with37.4% of all votes cast and the BNP 116 seats on 33.6% of the vote. Given thatno single party is expected to win a majority, attention will focus on potentialalliances. The groupings that centre on the major players, the AL and the BNP,are likely to remain constant. The BNP’s alliance, which is over two years old,with the JP (Ershad), Jamaat and the IOJ, mainly comprises the right andcentre-right political forces. A last-minute rift in the BNP-led alliance, especiallystemming from its least reliable partner, the jailed former president, HossainMohammad Ershad, cannot be ruled out. The BNP is nonetheless promise-bound to maintain the alliance through the elections and subsequently toform a coalition government, if it can. The alliance members have yet todecide whether to campaign for the elections under the same banner.

Another crucial detail has yet to be decided—how seats will be shared amongthe parties. The BNP-led alliance has been facing the almost insurmountable

Pre-election alliancedynamics come to the fore

Opposition refusesgovernment compromise

14 Bangladesh


problem of settling on a seat-sharing scheme. The BNP wants to fight for asmany as 220 seats to maintain its majority in the 300-seat parliament. But theopportunity to run in the remaining 80 seats may not satisfy its allies. In theJune 1996 general election, the BNP won 116 seats, JP (Ershad) 14 seats, Jamaatthree seats and IOJ one seat which ultimately went to the AL when the IOJrepresentative defected to the AL after the election.

Although the AL does not have a formal alliance, it has been sharing powerwith two other political parties: the JP faction led by Mizan Chowdhury andAnwar Hossian Manju, the communications minister; and the JatiyaSamajtantrik Dal (JSD), whose president, A S M Rab, also holds a cabinetposition. These parties will continue to support the AL. The AL’s focus on leftand centre-left politics will also earn it the support of the 11 small, left-leaningparties. The AL’s relations with these minor parties had soured somewhat afterthe bombing in January of the Communist Party assembly in Dhaka that led toa series of opposition-instigated strikes. But the AL-led alliance’s main problem,like that of the BNP grouping, will be in dividing up the spoils. Although theAL won 146 seats in the last poll five years ago, its time in power has allowed itto develop the capability to contest all 300 parliamentary seats, and it may wellfind it difficult to sacrifice as many seats as the other members of its informalalliance may demand.

When the election date is settled, the onus will fall on the ElectionCommission (EC), a constitutional body, to hold the poll in a free and fairfashion under the supervision of a caretaker government. The president, inconsultation with the major parties, will form a caretaker governmentimmediately after the resignation of the AL government. The temporarygovernment will probably be headed by a former chief justice of the supremecourt, Latifur Rahman. In the meantime, the chief election commissioner(CEC), M A Syed, met the president in early March to inform him of the EC’sreadiness to hold the next general election by mid-June, before the rainyseason sets in. The EC wants reforms to the election laws in order to make theelection process more credible and transparent and to make polls easier toconduct. Among other proposals, it wants to register all political parties, andallow a person to contest only two seats at one time (at present, one person canrun for five seats). In addition, it wants the existing ceilings for campaignfinancing revised and the code of conduct for election candidates updated.Carrying out such reforms would, however, require consensus among politicalparties. It is impossible in the current pre-election environment to judge thechances of a post-election consensus.

The largest opposition party, the BNP, has apparently accepted the CEC, whoseappointment it had rejected previously. The party formally met the CEC onMarch 18th, thereby acknowledging his neutrality. But the BNP still wants theremoval of Safiur Rahman, one of the other two election commissioners,whom it accuses of being an active supporter of the AL.

The Election Commissionprepares for the poll

BNP prepares demand forcaretaker government

AL looks to consolidatepartners’ support

Bangladesh 15


To ensure a free and fair election, the BNP has a seven-point proposal for thecaretaker government as soon as it takes over. As outlined by the secretary-general of BNP, Abdul Mannan Bhuiyan, in mid-March, the demands include:

• recasting the election commission and removing controversial personsfrom the constitutional body;

• amending certain election rules;

• revising the voters’ list to include genuine voters currently not registeredand remove fake voters;

• recovering illegal arms, prohibiting the use of licensed arms during pollsand cancellation of arms licences given to terrorists and branded cadres by theAL government;

• withdrawing all controversial and partisan persons from administrativepositions;

• releasing all arrested and jailed political leaders and activists as well aswithdrawing false cases against opposition activists; and

• ensuring the impartiality of state-owned radio and television.

The BNP secretary-general said that it would not be possible to ensure a fairand peaceful election without properly addressing these issues.

The European Union (EU) has decided to send a 66-member mission tomonitor the general election. The mission members, drawn from all 15 EUstates, may arrive in Dhaka as soon as the countdown for the next electionbegins with the announcement of an election schedule, according to the EUambassador in Dhaka, Antonio de Souza Menezes. The team will compriseelection law experts, members of parliament, media and logistic experts,representatives of human-rights organisations, and government officials whohave monitored elections elsewhere. The EU will send the team at the requestof the Bangladesh Election Commission, the government and the oppositionpolitical parties. The Co-operation Agreement between Bangladesh and the EUincorporates a provision for political co-operation and functioning ofdemocratic institutions as a key element. The EU sent 29 observers toBangladesh for the last election in 1996.

The three European construction consultants abducted in February by rebelsoperating in the country’s south-eastern Chittagong Hill Tracts (CHT), wererescued in a pre-dawn raid by army troops on March 17th. Commandosstormed the kidnappers’ hideout located in the Nakchichari jungle, 38kmnorth-west of Rangamati, a hill town around 400km south-east of Dhaka.Neither the government nor the foreign missions would speak to the pressimmediately. However, the hostages said that they had been well treated bytheir kidnappers and the security forces claimed that no one had been killeddespite the exchange of gunfire during the raid. The kidnappers, who hadinitially demanded a ransom of Tk90m (US$1.8m) to release the hostages, wereable to flee into the jungle after the raid.

European Union to monitorthe election

The CHT hostage dramaends peacefully

16 Bangladesh


The kidnapping is a reminder that peace remains elusive in the insurgency-ridden CHT region, even though the government signed a peace accord withthe rebels over three years ago, in December 1997. The persistence of conflictin the region casts doubt on the significance of the peace accord, which hasbeen highlighted as a major achievement of the government and especially theprime minister, Sheikh Hasina, who basked in the international acclaimsurrounding the agreement. The government signed the peace accord with thepolitical organisation, Parbatya Chattagram Jano Sanghati Samity (PCJSS), alsoknown as Shantu Larma. Although when it agreed to peace the PCJSSrepresented the spectrum of local tribal groups, the signing of the accord hassubsequently divided the CHT inhabitants into what are in effect threeconflicting camps: a pro-accord PCJSS group; an anti-accord PCJSS group thatbroke away from the PCJSS and later formed the United Peoples DemocraticFront (UPDF); and the new settlers group, the Bengalis, who migrated to theregion from other parts of the country. The UPDF rejected the accord, arguingthat it failed to provide the constitutional guarantee of full autonomy for theCHT region. The new settlers oppose the accord because it denies voting rightsto the landless Bengalis living in the area and bars Bengali voters fromcontesting the local elections. The EC recently ruled that these provisions wereanti-constitutional and incorporated all Bengalis, landholders and landless, inthe voters’ list.

The controversial Public Safety Act (PSA), enacted in mid-February last year,has been directed against opposition political parties, especially since late lastyear, as conflicts between the ruling AL and the BNP-led opposition allianceintensified. Highlighting details of the misuse of the PSA, the US State ofHuman Rights Report 2000, released in early February this year, claimed thatthe Bangladesh government continued to arrest and detain persons arbitrarilywithout formal charges or specific complaints. The report also asserted that thegovernment frequently uses the police for political ends and encouragesviolence by urging retaliation against opposition members. Prominentopposition political leaders accused under the PSA include the chiefs of twopolitical parties belonging to the BNP-led four party alliance—the jailed formerpresident Hossain Mohammad Ershad, who leads the Jatiya Party (JP) andFazlul Haq Amini, head of the Islami Oikyo Jote (IOJ).

The US human-rights report observed that violence is a pervasive feature ofpolitics in Bangladesh, as political campaigns and elections are often marred byviolence, voter intimidation and ballot rigging. It also noted that thegovernment exerts influence over the judiciary, particularly in the lower courts.The legal process, it said, was slowed by a large backlog of cases and blemishedby corruption. Corruption is also widespread in the police force, where, partlybecause of a lack of discipline, police officers commit serious human-rightsabuses, including extra-judicial killings. Yet, according to the report’s findings,the government rarely convicts or punishes those responsible for torture and aclimate of impunity allows such police abuses to continue.

With regard to violence against women, the report noted that much of suchtreatment stems from disputes over dowries—there were 81 dowry-related

Abduction widens cracks inthe Peace Accord

Political use of PublicSafety Act rises sharply

US report points out otherhuman right violations

Bangladesh 17


killings during last year. There is extensive trafficking in women for thepurpose of forced prostitution inside and outside the country. There is also athriving trade in children, primarily to India and Pakistan as well as domesticdestinations. Unicef has estimated that Bangladesh has around 10,000 childprostitutes, while other estimates range up to 29,000.

At an official meeting in New Delhi in mid-February, Bangladesh and Indiaagreed to revamp their long-standing visa regime in order to facilitate theburgeoning passenger travel between the two countries. Dubbed a milestone invisa relations between the neighbouring countries, the changes include: a visa-free regime for diplomatic passport holders; multiple-entry visas withunrestricted entry for one year for businessmen, students and researchers; nosponsorship requirement for tourist visas; new year-to-year visas for work-permit holders; multiple-entry visas for members and officials in diplomaticservices and missions; allowing passengers entering by air to exit through landroutes; and allowing passengers travelling by road to exit through anotherpoint. Every year at least 50,000 Bangladeshi students go to study in India andabout the same number of people go for medical treatment.

The Indian Supreme Court ordered the Indian government in late February toexpel around 20m Bangladeshis believed to be living illegally in India. Theforcible repatriation of 20m Bangladeshis would be one of the biggestundertakings of its kind. The three-judge bench saw the immigrants as a threatto both the economy and domestic security and said that illegal immigrationneeded to be halted urgently. Most illegal Bangladeshis are said to reside in theborder states of Assam and West Bengal, where they work as domestic servantson farms and construction sites The Bangladeshi Foreign Ministry denies thepresence of illegal Bangladeshis in India and fails to find any economic logicfor its citizens to leave Bangladesh for Indian states like Assam or West Bengal,which are believed to be poorer than Bangladesh. India, however, is moreconcerned with secessionist movements in its eastern and north-eastern states,especially in Assam, where Muslims—many of whom are said to beBangladeshi—are in the majority in many border districts. If the influxcontinues, Muslims could soon outnumber Hindus in Assam.

Indian separatist leader and general secretary of the united liberation front ofAssam (ULFA), Anup Kumar Chetia, who is serving a six-year jail term inBangladesh, was sentenced to an additional three years by a special tribunal inDhaka on February 19th for illegally holding foreign currency. Although theBangladeshi government has denied him and his two lieutenants politicalasylum, it has also refused to hand them over to India because the countrieshave no extradition treaty.

To check cross-border terrorism and prevent the entry of illegal immigrants,India has begun to fence part of the 856 km-long border between its north-eastern state of Tripura and Bangladesh. The land border between the twocountries is separated only by concrete pillars. Tripura-state officials believethat at least two outlawed tribal separatist groups—the National LiberationFront of Tripura (NLFT) and the All Tripura Tiger Force (ATTF)—operate from

India-Bangladesh visaregime liberalised

Indian court ordersexpulsion of Bangladeshis

A rebel Assam leader isjailed in Bangladesh

India to fence border withBangladesh

18 Bangladesh


Bangladeshi territory in order to carry out hit-and-run strikes in India. Bothparamilitary groups are fighting for an independent Tripura. The state policechief has complained of the difficulty in responding to guerrilla attacks, notingthat international conventions prohibit his forces from chasing the guerrillasacross the frontier to their bases in Bangladesh. Over the past two decades, over10,000 people have been killed in separatist conflict in Tripura. Bangladesh alsoborders the Indian states of West Bengal, Assam, Mizoram and Meghalaya.

Economic policy

The World Bank, in its country assistance strategy (CAS) 2001-03, warnedBangladesh that the Bank’s assistance to the country will decline further,reflecting the slowing pace of reforms. At the release of the CAS in Dhaka inmid-March, the Bank’s country director for Bangladesh, Frederick Temple,pointed out that his institution’s assistance to the country in fiscal year2000/01 had fallen too low to sustain investments for growth and povertyreduction. The CAS forecasts total lending to Bangladesh of between US$800mand US$2bn during fiscal years 2000/01 and 2002/03, depending on thepolitical will to implement reforms and the performance of the government.Bangladesh must prepare a poverty-reduction strategy by June 2002 to beeligible for future assistance from the International Development Association(IDA), the Bank’s soft-loan window. Despite progress on tackling poverty inrecent years, Mr Temple said that poverty continued to be deep, pervasive andmulti-dimensional in Bangladesh. The CAS predicts that donors will rely moreon NGOs and other civil-society organisations to deliver services to the poor.

The Bank identified macroeconomic slippages as a danger for the Bangladeshieconomy. A shortfall in revenue collection, combined with declining foreignexchange reserves, could lead to mounting pressure on the country’s balance ofpayments. Although average GDP growth of 5% is satisfactory by internationalstandards, Mr Temple pointed out that, given the pervasive poverty in thecountry, Bangladesh must grow at an annual rate of 7-9% to reduce povertysubstantially and become a lower-middle-income country by 2020 or 2025. Heidentified weak institutions, poor governance and corrupt, inefficient publicadministration as constraints to economic performance, but was silent on thetransparency and accountability of the NGO-funded projects.

Bangladesh is expected to benefit from the recent move by the EuropeanCommission (EC) to accord duty- and quota-free access for products from 48 ofthe least-developed countries (LDCs) to the EU. This is a move from apreferential-trade system to a free-trade regime, which is based upon opencompetition among the LDCs in which no LDC enjoys special treatment. Evenso, Bangladesh stands to benefit from this measure because free access to the15-country EU market that it had under the Generalised System of Preferences(GSP) is set to expire by the end of December. Most exports of Bangladesh’sflagship readymade garments (RMG) industry, as well as of shrimps, go toEurope and will particularly benefit from the EC’s decision. Now, however,Bangladeshi products will have to compete with those from other LDCs, while

World Bank foresees IDAfund flow slowing

EC decision benefitsBangladesh exports

Bangladesh 19


free access under the new regime will be accompanied by tighter importmonitoring safeguards and more stringent rules of origin.

Of greater concern for Bangladesh is the US Trade and Development Act 2000which excludes the country from favourable treatment accorded to otherLDCs. This recent piece of US legislation grants 33 LDCs duty- and quota-freeaccess to the US market, leaving out Bangladesh and 14 other LDCs. The localbusiness community views it as double jeopardy because the same 33 LDCswith special access to the US—mostly Caribbean and sub-Saharan Africancountries—are also entitled to duty-free access to European markets. Under theUS trade law, these LDCs will have a big tariff advantage over Bangladesh whenexporting to the US. Competing effectively against these LDCs will requireBangladeshi exporters to reduce costs by 15-20% to offset their relative tariffdisadvantages, according to a recent study by Bangladesh’s garmentmanufacturers and exporters association.

The much-talked-about debate on trade union activities in the exportprocessing zones (EPZs) has been resolved, with the government deciding tolift the ban on workers forming organisations. In a gazette notification onJanuary 31st, the government said that the EPZ workers would be allowed torun trade union activities from January 2004. Leaders of different tradeunions welcomed the decision, saying it was a step towards implementingthe convention of the International Labor Organisation (ILO). Bangladeshhas six EPZs, including two under construction, with around 84,000 workers.The government has thus met the demand of the US and its labourorganisations to permit union activities in the EPZs, which have been bannedsince the establishment of the first EPZ in Bangladesh in 1980. The AmericanFederation of Labor and the Congress of International Organisation (AFL-CIO),an umbrella labour organisation, demanded the revocation of GSP privilegesto Bangladesh because of its failure to allow freedom of association inthe EPZs. Japanese and Korean investors, however, issued a counter-threatthat they would withdraw their investment if trade union activities wereallowed in the EPZs. The Bangladesh government is now likely to amend theexisting labour laws to limit trade union activities in the EPZs to encouragethe unions to pursue collective bargaining and other, less disruptive meansrather than strikes.

In late March the AL government handed over nine state-owned textile millsto a joint body of workers and managers. The unusual privatisation, against theadvice of the IMF and the World Bank, came about because previous moves tosell the mills failed owing to a lack of political will and the fear of labourdisputes. After four years of talk, workers, banks and the state holdingcompany signed an agreement for the mills to be run as a private companywith a board of management comprising workers and executives. Critics havesaid that the move was intended to win votes within the working class, whilethe government has pointed to the mills’ annual loss of Tk30bn (aroundUS$600m). The privatisation commission has sold 20 state-owned enterprises(SOEs) since it was set up in 1993, but the process has slowed because ofadministrative and political bottlenecks and the lack of a national consensus,

Trade unions in EPZs to beallowed

US trade law poses a threatto exports

Privatisation is stalled

20 Bangladesh


resulting in government-buyer disputes and inordinate delays in handing overof the SOEs. The privatisation commission is preparing to sell governmentshares in six companies.

The mandatory pre-shipment inspection (PSI) for private-import businessintroduced in July last year, seems to have significantly boosted governmentrevenue, following the crackdown on collusive practices to fix import dutiesand other taxes. Import revenue earnings rose sharply in the first eight months(July-February) of the fiscal year 2000/01, surging to Tk61.65bn, an 18%increase on the Tk51.9bn collected in the year-earlier period. Actual importrevenues also exceeded the eight-month target of Tk57.1bn by almost 8%. Inits recent economic update, the Asian Development Bank (ADB) also laudedthe role of the PSI in boosting import revenues. Over 55% of revenue camefrom import duties alone in the first half of the current fiscal year, according tothe National Board of Revenue. Board officials have forecast imports to surpassUS$9bn in the current fiscal year, against US$8.4bn in 1999/2000.

The World Bank has approved US$53.3m of soft credit from its InternationalDevelopment Association concessional lending window for a human-development project aimed at improving and expanding literacy andeducation in Bangladesh. The project is to benefit newly literate adults fromamong the country’s poorest people in order to reduce poverty and promotemore equitable human development. The five-year project is expected tobenefit 1.6m learners, half of them women. The project will cost US$71.5m,with US$53.3 provided by the Bank (the credit has 40 years to maturity anda 10-year grace period), US$7.0m supplied by the Swiss Agency forDevelopment and Co-operation (SDC) and the remaining US$11.2m tocome from the Bangladeshi government. In late March the Bank announced itwould support a six-year project, to which it would contribute US$30.6million, to help Bangladesh make its judicial system more efficient, effectiveand accountable.

The domestic economy

Economic trends

The Asian Development Bank (ADB), whose scale of lending has been fastcatching up with that of the World Bank in recent years, has lauded theBangladesh’s macroeconomic performance and forecast growth to exceed 5%this financial year. In a recent Economic Update, the Dhaka office of the ADBpraised the country’s achievements in agriculture, manufacturing, revenuecollection and export growth. However, the ADB advised the government totrim the fiscal deficit and bolster the balance of payments. The report said that,despite flooding in south-western Bangladesh last year, the country is set foranother record harvest in fiscal year 2000/01. It noted that manufacturingrebounded sharply in the first quarter of this year by comparison with the

ADB forecasts over 5%growth this fiscal year

PSI pays dividend

World Bank grants US$53mfor literacy project

Bangladesh 21


previous quarter. Textiles, including garments exports, led the surge, increasingby 20%, with food processing posting a 10% gain in output and chemicalproduction swelling by 12%. If the trend continues, the report said, themanufacturing sector will grow by at least 7-8% this year. But the report didhighlight the cost of political unrest and hartals (general strikes). In 2000 theADB provided US$275m of assistance to Bangladesh, of which US$203m was inthe form of a concessional loan (with favourable terms).

Agriculture

Following last year’s record harvest of 11.1m tonnes in the aman season(planted in March/April and harvested in June/July), the market price of ricefell to US$0.22/kg in fiscal year 1999/2000 from US$0.26 in 1989/99 and islikely to fall further, hurting farmers’ incomes. The US Department ofAgriculture (USDA) has forecast total rice production in 2000/01 (including theboro and aus seasons) to reach 24m tonnes, 1m tonnes more than in theprevious fiscal year. The government of India is also considering subsidising itsrice exports. Bangladesh’s rice imports grew sharply after the floods of 1998,but have since been declining as domestic production has recovered. TheUSDA foresees imports falling to 240,000m tonnes in 2000/01 from 433,000mtonnes in 1999/2000, but this forecast decline may turn out to be overstated ifIndia opts for heavy subsidies—as it did for wheat exports. Reportedly, Indianrice exports to Bangladesh in 1999/2000 were mostly displaced by cheapershipments from Vietnam and Myanmar. If bumper domestic harvests in2000/01 combine with an influx of Indian rice, the domestic price will bedriven down and the government will have to spend money in supportingfarmers’ incomes.

Despite the national prospects of a bountiful rice harvest for 2000/01, the borocrop (planted in December/January and harvested in April) in the northernpart of the country is threatened by drought. The boro crop, unlike the amanand aus crops, is primarily irrigated and in 1999/2000 hit a record 11m tonnes.But as of mid-March the Padma river, which flows from India to northernBangladesh, had dried up and the region had not received any rain for fourand a half months, the entire boro season. Most of the shallow wells were dryand queues were forming in local towns for drinking water. Even though itseems unlikely that the boro harvest this year will match last year’s, the overallrice harvest will be sustained by the aman and aus crops, leading to downwardpressure on prices. Bumper tomato and potato production has also causedprices for these vegetables to fall to the extent that farmers have left crops torot in the fields.

The government has opted not to raise the price of fertiliser this year, despiterising production costs, and will risk shortages and distribution problems.State-owned factories sell fertiliser at Tk4,800 per tonne compared with aproduction cost of Tk5,500. Fertiliser factory workers have petitioned thegovernment to hike the price but the government fears this would result infarmers using less, leading to falling output and the need for expensive importsof food. Meanwhile, farmers in Kushtia province have complained of soaring

Falling rice prices threatenfarmers’ incomes

Low price of fertiliser mayherald shortages

22 Bangladesh


fertiliser prices, with market prices typically more than double the price tag atthe factory gate. Unless the government can boost the production of the statefertiliser factories to meet demand and ensure efficient distribution of theinput, shortages of fertiliser and farmer discontent will spread.

Power and gas

Wild speculation about the gas reserves in Bangladesh were laid to rest in mid-February when a Bangladeshi-US study team published its estimate that thecountry has 32.1trn cu ft of undiscovered, technically recoverable gas. Of that,23.3trn cu ft is located onshore and 8.8trn cu ft offshore. The report (whichwas prepared by experts from the US Geological Survey, the US Department ofEnergy and Bangladesh’s gas authority, Petrobangla) estimates the amount ofgas available for extraction to range between 8.4trn cu ft and 66.7trn cu ft,with the headline estimate, the mean average, at 32.1trn cu ft. Because theyhave used the same methodology as the International Energy Agency’s WorldEnergy Outlook 2000, the Bangladeshi-US team maintain that their report ismore rigorous and data intensive than prior assessments. Bangladesh also haspotential reserves of LNG, using the same criteria and methodology, of 153mbarrels, according to the report. The report did not examine oil deposits.

Although the Bangladeshi-US team’s estimates are comparable with previousevaluations, it differed in its conclusions on the distribution of resources. Itfound better prospects for hydrocarbon in eastern Bangladesh than in the west.The next stage is to conduct economic feasibility studies to assess how muchgas is accessible on commercial terms.

Long before the onset of summertime high demand, urban dwellers havealready begun suffering from the vexing problem of power failures. Yet thepower development board (PDB) denies there to be any shortages of powergeneration, which currently averages around 2.7 gw, against peak demandof 3 gw. With the overhaul of several power stations—Raujan (210 mw),Ghorashal Unit-4 (210 mw) and Ghorashal (55 mw)—due to finish in earlyMarch, the PDB should be able to meet peak demand. By May, the 230-mw AESHaripur plant will have begun generation and the renovation of three plants,two in Khulna and one in Fenchuganj, will also be finished. By then, the PDBshould even have a reserve margin in case of emergencies. Despite this,many parts of the country have recently been experiencing powershortages. This may be a result of faults in the distribution system, whichputs the responsibility squarely on distributors such as the Dhaka electricsupply authority (DESA) which is responsible for distribution in the capitaland adjoining areas. DESA, in turn, blames antiquated distribution linesthat are unable to carry the load needed to meet summertime demand—any load above 1 gw is risky for its system. In summertime, the PDB has tocater for the additional demand of 300 mw from farmers who run 100,000irrigation pumps.

In early March, the state-owned monopoly on gas, oil and mineral resources,Petrobangla, invited three foreign oil companies, Tullow Oil, Chevron

Power shortages returns assummer approaches

Foreign oil companiesinvited to sign PSC

Bangladesh’s gas reservehas been estimated

Bangladesh 23


(Bangladesh) and Texaco (Asia Pacific Pathfinder), and the BangladeshPetroleum Exploration Corporation (Bapex, a subsidiary of Petrobangla), tosign a production-sharing contract (PSC) to explore and develop block 9, themost sought-after concession, from early April. Under the PSC, Tullow,Chevron and Texaco will each own 30% of the equity for the block, which isbelieved to have the largest deposit of gas and oil in Bangladesh. Bapex willhold the remaining 10% share. Although Tullow will be the operator duringthe exploration period, Chevron is expected to take control during thedevelopment period.

While Petrobangla’s outstanding bills, mostly owed to government agencies,stood at Tk9.9bn (US$183m) late last December and continue to rise, its debtto foreign oil companies has soared in recent months. In the five months toFebruary, Petrobangla’s overseas debts had soared to Tk5.5bn owing to highinternational gas prices. Under the PSCs signed previously, Petrobangla buysgas from Shell for US$2.9 per 1000 cu ft and from Unocal at US$2.8 cu ft,prices that are far above the average local production cost. The foreigncompanies supply 254.2m cu ft (23.4%) of Petrobangla’s total needs of1.08bn cu ft a day. Buying gas from overseas costs Petrobangla roughly US$21mper month, which must be paid in hard currency. The arrears, which haveaccumulated since last October, were due to be cleared by early March againstthe country’s fragile foreign-exchange reserves.

Petrobangla’s cash-flow is problematic because a large proportion of the moneyit is owed is from government-owned power and gas utilities which, in turn,are finding it difficult to collect their bills from their main customer, the publicsector. The share of Petrobangla’s outstanding bills that government utilitiesowe has soared to 40% in recent months, followed by 30% from industry, 21%from households and 3% from the commercial sector. Titas Gas, a distributioncompany of Petrobangla, owed Tk7.2bn up to end-2000, while Bakhrabad Gasowed Tk1.7bn, Jalalabad owed Tk823m and Wesgas Tk224m. These companiesdefaulted because they, in turn, could not recover their dues from thegovernment sector that consumes the bulk of their gas output. The PowerDevelopment Board (PDB) consumes 45.5% of total gas production and blamesDESA for not clearing electricity bills that climbed to Tk21bn. State-ownedfertiliser factories consume 24.6% of total gas and their dues to Petrobangla’sassociates rose to Tk1.5bn by the end of last year. With intransigent customerslike these, Petrobangla has had to depend on government bail-outs to meet itsown obligations.

US oil company Unocal, which has signed PSCs with the Bangladeshigovernment to explore and develop gas resources in three blocks, said that itwas seeking investment from Indian financial institutions and gas users, suchas fertiliser companies, for its proposed gas pipeline from Bangladesh tonorthern India. Unocal has been negotiating with the National Thermal PowerCorporation (NTPC), India’s largest electric power generating company, andthe Calcutta Electricity Supply Corporation, which generates and suppliespower in and around the eastern Indian city of Calcutta, on building thepipeline. The pipeline would run all the way to New Delhi and join the Gas

Petrobangla’s debt mounts

Unocal seeks investmentfor gas pipeline with India

24 Bangladesh


Authority of India’s (GAIL) HBJ gas pipeline—the country’s main domesticpipeline—which connects Hazira on India’s western coast in Gujarat withJagdishpur in Uttar Pradesh in northern India. GAIL, India’s largest natural gasdistribution company, has said that it plans to sign a pact with Unocal toexplore the idea of piping natural gas from Bangladesh. But Bangladesh has yetto decide on whether to export gas to India; both major parties, the ruling ALand opposition BNP, are committed not to export gas.

Infrastructure

India and Bangladesh reached an agreement in early March to start a direct busservice between the Bangladeshi capital, Dhaka, and Agartala, the capital of theIndia’s north-western state of Tripura. The service, set to commence in July,will be the second direct bus connection between the two neighbouringcountries. The Dhaka-Kolkata route began running in June 1999, when theIndian prime minister, Atal Behari Vajpayee, and the former West Bengal chiefminister, Jyoti Basu, visited Dhaka to mark the occasion. The new Dhaka-Agartala cross-border journey will take around five hours and will enablepeople from India’s north-eastern region to cut their travel times to Kolkataand other parts of India by cutting through Bangladesh. The two countrieshave also sought to ease passenger traffic across the border by simplifying visaprocedures (see The political scene).

The Bangladeshi government now allows private cargo operators to operateinternational cargo flights from three domestic airports through Dhaka.According to Civil Aviation Ministry sources, private operators will now be ableto fly from Chittagong, Sylhet and Jessore. Formerly, only two companies,Bismillah Air Lines and Best Aviation Ltd, had permission to transport freightby air, and then only from Zia International Airport (ZIA) in Dhaka. The move,which will encourage the creation of new air-freight firms, was made tofacilitate local exports to the Middle East, Europe and elsewhere. The nationalcarrier, Bangladesh Biman, has the sole remit to provide ground services at ZIAand private operators complain that Biman’s charges are much higher thancomparable international airports, yet with a much poorer service.

Bangladesh Biman has once again delayed the closing date for other airlines tosubmit a request for proposal (RFP) to become its strategic partner by buyingup to a 40% stake in the national carrier. The new deadline is June 30th. Undera World-Bank-aided programme to restructure and commercialise the airline,Biman has been searching for a partner for about a year. Biman has extendedthe closing date twice since it invited RFPs on December 2nd last year. Onlytwo airlines, Gulf Air and Qatar Airways, submitted the RFP by January 7th, theprevious deadline. The Bangladesh carrier and its consultant, Citibank Groupof New York, now hope that British Airways, Virgin Airlines, KLM Royal DutchAirlines and Air Alitalia will make bids. Biman flies to 25 destinationsworldwide with sizeable market shares in the Gulf, Europe and the Far East.

Dhaka-Agartala bus serviceto start from July

Private cargo operators touse domestic airports

RFP deadline for Bimanprivatisation extended

Bangladesh 25


Financial and other services

The share price indices of both the Dhaka Stock Exchange (DSE) and theChittagong Stock Exchange (CSE) fell in early April on the back of growingpolitical instability as opposition parties carried out a three-day nationalstrike. The all-share DSE share index fell to 619.8 on April 8th from at 639.4on March 18th. Until the slight upturn in mid-March when the governmentand the opposition had seemed ready to agree on an election date, thestockmarket performance had been lacklustre. On January 30th, the DSEindex closed at 630.

The new DSE-20 price index, which lists the largest companies, has followed asimilar pattern. After its introduction in January at 1000, it rose swiftly to 1248on January 30th but then barely moved to reach 1253.6 on March 18th. Butthe deterioration of the political situation in April sent it into decline and theDSE-20 closed April 8th at 1196.9 points.

Stock exchange indicators

1996 1997 1998 1999 2000 2001a

No. of listed companies 201 222 224 244 241 240

Market capitalisation Tk (bn) 258.41 107.82 62.26 44.74 62.92 60.95

DSE All Price Share Index (high) 3,648 2,450 760 546 649 641

DSE All Price Share Index (low) 751 711 573 462 503 503

a Up to March 18th.Source: Press reports.

The Securities and Exchange Commission (SEC), the country’s watchdog overstockmarkets, in mid-March acted to discourage insider trading and eliminatemanipulations in the market. It asked listed companies to make price-sensitive disclosures immediately available to the SEC and the stock exchangewhere the company is listed. In addition, companies were asked to publishsuch disclosures in at least two daily newspapers. Insider trading has beenone of the major reasons for the lack of investor confidence in the country’sfinancial markets. The new measure, it is hoped, will draw investors back tothe capital market.

Broad money supply (M2) increased by 0.8% to Tk781.3bn last October, fromTk774.9bn the month before. Over 12 months, this is equivalent to anannualised rate of 10% and compares unfavourably with the rate of increase inthe third quarter of 2000 when M2 was around 20% higher than the year-earlier period. Narrow money supply (M1) in the third quarter of 2000 climbedmore slowly, at 14.8% year on year, to Tk199.6bn. Despite the swelling moneysupply, inflation has remained subdued because of successive bumper harvests,slow domestic credit growth, and bearish stockmarkets.

April downturn inshare prices

SEC obliges disclosure ofprice-sensitive information

Money supply increases

26 Bangladesh


Money supply

(Tk bn unless otherwise indicated)

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

M1 166.93 172.50 170.05 184.93 198.33 199.14 199.69 % change, year on year 9.12 8.56 9.31 12.80 18.81 15.44 17.38

M2 599.75 630.27 646.54 689.89 714.78 747.62 774.99 % change, year on year 13.10 12.80 14.70 15.50 19.81 18.64 19.86

Domestic credit 662.98 685.72 694.66 753.47 759.69 776.82 795.52 % change, year on year 16.76 14.58 13.93 13.93 14.59 13.29 14.52

Sources: Bangladesh Bank and IMF, International Financial Statistics.

Non-performing loans (NPLs) of the banking system registered a 3.8% year-on-year fall in December 2000. The value of NPLs fell in December 2000to Tk228.6bn, from Tk237.2bn a year earlier. The four state-owned,nationalised commercial banks (NCBs), long crippled with NPLs, made someprogress. NPLs as a proportion of total loans at the NCBs fell to 38.6% from apeak of 45.6% in 1999; their value declined to Tk117.3bn from Tk128.9bn. Butthe development-finance institutions (DFIs), private commercial banks andforeign commercial banks showed mixed results. NPLs at the DFIs increasedby Tk1.7bn over the year to reach Tk63.6bn in December 2000. Private bankssaw their NPLs swell to Tk46.2bn, an increase of Tk1.1bn over 12 months. Inpercentage terms, however, NPLs at the private banks shrank to 22% of totalloans from 26.4% in December 1999. Foreign banks suffered a slight expansionof NPLs, to Tk1.4bn from Tk1.3bn. Again, in percentage terms, foreign banksmanaged to bring the NPL ratio down over the year to 3.5% from 3.9%.

Domestic private banks have enlarged their market share of the banking sector toabove 25%, from around 5% a decade ago. One reason for this, as the WorldBank recently pointed out, is that the quality of private bank assets has improvedwhile the portfolios of the state banks has continued to deteriorate. The trend ofprivate banks taking the state banks’ market share is set to continue. Despitetougher classification standards, private banks have managed to control theirNPLs, capping them in percentage terms at least. A good part of this achievement,according to the Bank, is owing to the IMF, which helped Bangladesh Bank (thecentral bank) buttress its regulatory and supervisory capabilities.

Foreign trade and payments

Bangladesh’s foreign exchange reserves rose to US$1.56bn by the end ofFebruary, a partial recovery from its vulnerable situation in the prior fewmonths. Last November the reserves dipped close to US$1.2bn, barely enoughto cover the country’s import bills for six weeks. Under tremendous pressurefrom a poor balance-of-payments situation and facing widespread panic amongbusinesses, Bangladesh Bank (the central bank) has been frantically proppingup its foreign exchange reserves in the last few months. It imposed a series ofrestrictions on foreign exchange transactions, curbed hundi transactions (hundisare financial instruments similar to cheques but without legal status) to

Banks put squeeze onnon-performing loans

Private banks’ share ofsector rises to 25%

Foreign exchange reservesincrease slightly

Bangladesh 27


encourage remittances to go through official channels such as banks, placed aceiling on bank endorsements of passports, discouraged less-important importsand urged the repatriation of as many export receipts as possible. Instead of afixed rate of purchasing dollars, Bangladesh Bank has been buying dollars fromdealer banks at negotiated rates, which encouraged the dealers to sell dollars tothe central bank and helped to reduce the flight of dollars to the kerb market.The central bank also imposed a 50% letter-of-credit margin on commercialimports to discourage the importation of consumer goods and stem theoutflow of foreign exchange. So far, these measures appear to have paid off asthe foreign exchange reserve situation has been gradually improving.

Bangladesh runs trade deficits with all its fellow-member countries of theSouth Asian Association for Regional Co-operation (SAARC). According to theSAARC Chamber of Commerce and Industry, Bangladesh’s trade deficit withneighbouring nations amounted to US$832.4m in fiscal year 1999/2000.Bangladesh exported US$102.4m-worth of goods to its six neighbours—Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka—against an import billof US$934.8m. Bangladesh’s biggest trade gap is with India: exports to Indiastood at US$64.88m in 1999/2000 against imports worth US$836m, leaving aUS$771.2m trade gap. Bangladesh also ran a US$1.77m trade deficit withNepal. Bangladesh had enjoyed trade surpluses with Sri Lanka and Nepal from1990 to 1996, but since then has run deficits with these two countries. Withthe exception of Sri Lanka and Nepal, Bangladesh has had bilateral tradedeficits with all SAARC countries since 1990-1991.

Bangladesh’s exports in the first seven months (July-January) of the currentfiscal year 2000/01 earned US$3.8bn, beating the government’s target by 4.7%and exceeding the earnings of the same period of the last fiscal year by 21%.This was largely owing to the 6% devaluation of the currency last August andthe continued recovery of production after the floods in 1998. Over the sevenmonths, the volume of exports increased by 18.6%, while the export priceindex rose by 2.3%. Except for raw jute and jute goods, which have performedpoorly for several years now, all major export items, including readymadegarments (RMG), knitwear, frozen foods, leather, chemical products, tea andhandicrafts posted growth during the seven-month period. RMG, the country’s

Trade deficit with SAARCcountries widens

Exports beat target by 4.7%

28 Bangladesh


flagship export commodity, earned US$2bn, beating the target for the periodby 5.8% and exceeding earnings of the year-earlier period by 17%. Knitwearearned US$870m, which was slightly above target, but almost 30% higherthan the earnings of the same period of the previous fiscal year. Frozen foodswere well above their target and earnings of a year before, while exports ofleather and chemicals—relatively minor exports—also did reasonably well.Against the trend, jute goods earned US$140m, 20% below target and 17%below the earnings of the year-earlier period, mainly because of fallingvolume. The US remains the leading market for Bangladeshi exports, accountingfor US$1.4bn or 40% of annual export earnings.

Recent changes in the trade regimes of two main destinations for RMG, the EUand the US, have placed the manufacturers of this major export at a crossroads.They have been losing out to other developing and least-developed countriesthat have competitive advantages over Bangladesh through bilateral andmultilateral preferential trade agreements. Some major buyers of BangladeshiRMG have already withdrawn from dealing with the country’s companies,according to the Bangladesh garments manufacturers and exporters association.These large buyers prefer to source goods from much cheaper regions, such as withinthe North American Free Trade Agreement (NAFTA) area or the Middle East.

Mexico and Canada have seen their apparel exports to the US increase 800-foldsince the creation of NAFTA. Last year, by volume Mexico supplied 16.4% ofUS apparel imports, worth US$62bn, while Honduras held a 6.7% share andChina, the Dominican Republic and Hong Kong all had at least 6% of themarket. Bangladesh was behind all these countries with its 5.5% share. Egyptand Syria have entered into the US trousers market, while South Africancompanies are competing for flannel shirt orders—both are mainstayBangladeshi exports. The EU has become a tougher market for Bangladeshafter the EC recently waived the quotas on certain categories of clothing fromChina and Sri Lanka. Jackets made in China are no longer subject to quotaand Sri Lanka is now permitted to export items such as trousers and shirts tothe EU without quantitative restrictions. Much of the global textile trade,worth US$350bn each year, remains vigorously protected under scores ofpreferential agreements.

Readymade garmentssector tumbles

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