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Thoughts on Economics
Vol. 21, No. 03
Performance of Bangladesh Economy in
FY2010-11 and Challenges for the Future
Ayubur Rahman Bhuyan1
[Abstract: Overall, the Bangladesh economy performed reasonably well in the
immediate past fiscal year (FY2010-11), although there were traces of
weakness in certain pockets here and there. The agriculture sector growth was
close to 5 percent. The industry and services sectors were recovering at a
steady pace. The all important tasks for government now are to develop the
country’s fragile physical infrastructure and improve the power situation to
further improve and sustain the growth in real sectors and achieve the
targeted 7.0 percent GDP growth in the current fiscal. The budget deficit was
well within the budgetary target in FY11but still remained high despite NBR’s
strong revenue performance. Because of the drastic decline in foreign
financing, government’s domestic borrowing for financing the budget deficit
increased considerably. Exports experienced strong growth. Import growth
was robust, too, but inward remittances stagnated and there was a significant
decline in inflows of foreign aid. The balance of payments position worsened
and there was a sharp depreciation of the exchange rate for Taka. The
inflation rate had already been high and continued rising throughout the
2010-11 fiscal. In June, 2011, headline inflation rose to 8.80 percent, well
past the 8.0 percent inflation target projected in the revised national budget,
and way above the annual inflation target of 7.0 percent set by Bangladesh
Bank (BB) earlier. BB has set the annual inflation target at 7.50 percent for
the present fiscal year. Coordinated monetary and fiscal policy measures
along with strong administrative actions will be needed to bring down the
inflation rate to within the 7.5 percent target.]
1.0 Introduction and Scope
Bangladesh economy has performed well in the past few years and managed to
achieve 5.5-6.0 percent annual GDP growth. The economy remained largely
immune from the adverse impact of the global financial crisis. Production in
real sectors has increased consistently. There have been significant
achievements in different areas of human resource development as well. The
1 Former Professor of Economics, University of Dhaka.
8 Performance of Bangladesh Economy in FY 2010-11…………….
country has made good progress in poverty reduction efforts and toward
achieving other poverty-related MDGs. The government is keen to accelerate
the rate of GDP growth and fulfill other requirements to qualify for graduating
out of the LDC status and become a middle income country by 2021. In the
just completed fiscal year (FY11), the economy achieved a 6.7 percent growth,
surpassing the 6.0 percent growth in the previous fiscal.
This paper reviews the performance of the economy in the 2010-11 fiscal year.
Specifically, the performance of the major sectors of GDP, viz., agriculture,
industry and services, problems of the power sector and the stock market,
developments in spheres of monetary policy, public revenue and expenditure,
foreign trade, foreign aid and remittances, balance of payments, and the state
of inflation are discussed. Also, the outlook for the economy in the immediate
term and emerging policy implications are highlighted.
2.0 Agriculture
Agriculture contributes about 20 percent of the country's GDP and employs
around 48 percent of the total labor force. This sector recorded a slightly lower
rate of growth of 4.96 percent in FY11, compared to 5.24 percent growth in
FY10, but yet contributed significantly to the overall growth of the country’s
GDP during the fiscal. Agriculture also fetched US$2.44 billion worth of
export in FY11, which was about 10.7 percent of the country’s overall exports.
Because of the importance of the agriculture sector as a source of food
security, employment generation, higher GDP growth, and poverty reduction,
good performance of the sector is crucially important for the economy, and
hence, as always, it was given a high priority in government’s budgetary
allocation in FY11. Agricultural credit disbursement, too, increased
considerably over the previous two years and steps were taken to ensure
timely availability of credit to farmers. The amount of agricultural subsidy in
the FY11 budget was 11.1 percent higher than the allocation made in the
previous year’s budget.
In the budget for the present FY2011-12, the provision of agricultural
subsidies has, of course, undergone a decline, but in view of the continuous
increase in fertilizer and other input prices in the international market, a
significant increase in subsidies in the sector may soon be needed during the
year. While the provisions of credit and subsidy should be continued, the
sustainability of the growth of the agriculture sector will also depend on the
diversification of production within the sector, which currently relies mostly
on crops.
Thoughts on Economics 9
2.1 Food grain Situation
Domestic Production. The target of food grain production for FY11 was set
by the Department of Agricultural Extension (DAE) at 35.7 million metric
tons (mmt) – aus rice 2.7 mmt, aman rice 13.2 mmt, boro rice 18.7 mmt, and
wheat 1.1 mmt. The BBS has estimated production of aus, aman and wheat at
2.13 mmt, 12.79 mmt, and 0.97 mmt, respectively. According to the DAE, the
boro crop production crossed the target of 18.7 mmt and hit a record 20.6
mmt, thanks to Allah Almighty for favorable weather as well as timely
delivery of production inputs like quality seed, fertilizer, pesticide, and
irrigation water. Thus, the total production of food grain in FY11 rose to 36.5
mmt, surpassing last year’s actual production of 33.2 mmt by 9.9 percent.
2.2 Food Security
To ensure food security, government, as in the past few years, was keen to
build an adequate stock of food grains through public procurement and
imports.
Domestic Procurement. Total domestic public food grain procurement target
for the FY11 was initially set at 1.65 mmt. Out of this target, 0.61 mmt was to
be imported, and the balance 1.04 mmt was to be obtained from domestic
procurement. However, in view of the high prices already prevailing in the
market, the government decided not to procure aman and wheat in their
respective procurement seasons (aman in December-February, 2010-2011, and
wheat in April-June, 2011), in order to augment the overall supply of grains in
the market. The Government planned to procure 0.64 mmt of boro from the
domestic market at Tk.29 per Kg in the period between June 5, 2011 and
September 30, 2011. As of June 30, 2011, 0.17 mmt of boro rice was procured
and 0.47 mmt contracted.
Food grain Import. The target for food grain import in FY11 was set by the
Food Planning and Monitoring Unit (FPMU) at 5.5 mmt, against actual import
of 3.5 mmt in FY10. In FY11, a total of 5.3 mmt of food grain was imported,
of which rice and wheat imports were 1.6 mmt and 3.7 mmt, respectively.
Bulk of the rice import was made by government (81 percent of the total)
while wheat was imported predominantly by the private sector (75 percent of
all imports). In the previous fiscal year (FY10), total import of rice and wheat
was 0.1 mmt and 3.4 mmt, respectively.
Public Distribution. The government set the target of distributing 2.73 mmt
of food grains in FY11 as against 2.68 mmt in FY10. By the end of FY11,
2.29 mmt was distributed, compared to 1.96 mmt in FY10. In view of the high
price of food grain in the market, and in order to ease the hardship of poor
10 Performance of Bangladesh Economy in FY 2010-11…………….
households, the government continued to distribute subsidized grains,
especially through OMS and Fair Price Card (FPC) channels.
Public Stock of food grains. The opening public stock of food grains for the
FY11 (1 July, 2010) was 0.52 mmt, which was about half of the opening stock
of FY10 (1.05 mmt). As of June 30, 2011, the stock stood at 0.89 mmt, of
which 0.58 mmt was in rice and 0.31mmt in wheat, according to the
Directorate General of Food.
International Prices and Production. There was a marked increase in rice
and wheat prices in the international market during the 2010-11 fiscal year.
Production shortfalls in major exporting countries resulting, for example, from
drought in Russia, and floods in Canada, China, Pakistan, Thailand and
Australia, contributed to the increase in these prices. In addition, the export
ban by Russia, restrictions on exports imposed by Ukraine, and export ban by
India on non-basmati rice raised prices in the international market and caused
limited supplies in export markets with significantly higher landed price in
Bangladeshi ports.
2.3 Fisheries, Livestock and Poultry
Fisheries, livestock and poultry sub-sectors account for 32 percent of the
country’s agricultural GDP, and contribute around 8 percent to national
income. About 90 percent of animal protein in the diet of the population
comes from fish and livestock. Faster and fuller realization of the potentials of
these non-crop sectors will require adequate government support.
Fisheries. According to the Fisheries Directorate, the fisheries sector
performed well in FY11. All three main categories of fisheries, viz., inland
capture, inland culture, and marine fisheries, did well, depicting 5 to 6 percent
growth. The Directorate estimated the production of fish at around 3.1 mmt in
FY11, compared to about 2.9 mmt in FY10 and 1.8 mmt in FY01. The
government has planned to increase fish production to 3.7 mmt by FY15 and
4.1 mmt by FY21. Recently the Bangladesh Fisheries Research Institute
(BFRI) announced that it has managed to add five new high-yielding varieties
of commercially valuable fish to the existing stock in Bangladesh, and if these
are properly propagated across the country, the supply of fish every year
would increase by 50 to 60 thousand metric tons.
Livestock. Around 3.7 million cattle (and buffaloes) are slaughtered annually
in the country, of which 20 percent are imported. Due to higher consumer
preference for meat of local breeds, cattle and goat fattening has become an
important income generating activity for small holder farmers.
Thoughts on Economics 11
Poultry. Poultry rearing has increased across the country to meet the growing
local demand. Some of the poultry-based products such as chicken soup,
nuggets and sausages have also found export markets. Poultry and livestock
farmers, like the fisheries sector, have reasonable access to institutional credit
but they will need further government support for faster growth.
3.0 Industry
The industry sector, especially its manufacturing component, has been
gradually coming out of the slack experienced in the aftermath of the global
economic recession of 2008-09.The share of the industry sector in the
country's GDP increased by 0.4 percentage point to 30.3 percent in FY11, as
against 29.9 percent in FY10. The sector also grew at a higher rate of 8.16
percent in FY11, compared to 6.49 percent in FY10.
3.1 Manufacturing
The growth performance of manufacturing industries was better than the
broader industry sector average. The manufacturing sub-sector grew at 9.5
percent in FY11, compared to 6.5 percent in FY10. Correspondingly, the share
of manufacturing in the country’s GDP rose to 18.41 percent in FY11 from
17.94 percent in FY10. The quantum index of production (QIP) of medium
and large scale industries during the first eight months (July-February) of
FY11 rose by 13.88 percent. The rise in private sector credit and the increase
in the volume of LCs opened in the earlier months of the fiscal indicate that
manufacturing activities were on the rise.
In fact, the increased disbursement of industrial term loans, which rose by
28.78 percent during the July-March period of FY11, the first nine months of
the fiscal, compared to the same period of FY10, is strongly indicative of a
pick-up in investments in the industry sector. Since most of the term loans
went to domestic market oriented industries, it is very likely that
manufacturing industries catering mainly to the domestic market (including
small scale industries) did perform relatively better during FY11. The growth
of the manufacturing sub-sector might have been even faster if the country’s
physical infrastructure (in roads, ports, etc.) were in good order and if there
were no shortages of gas and electric power. Since infrastructural constraints
and energy deficiency are the major impediments to industrial growth,
government effort should be directed to overcoming these constraints.
Major increases in the quantum index of manufacturing production during
July-February, FY11 compared to the same period of FY10 occurred in the
following industries: jute, cotton, apparel & leather (+26.71%), basic metal
12 Performance of Bangladesh Economy in FY 2010-11…………….
products (+25.50%), and food beverage & tobacco (+20.21%). Only some
modest increase was noticed in the indices for non-metallic products
(+5.38%), wood products, including furniture (+5.29%), fabricated metal
products (+2.32%), and paper & paper products (+0.56 percent). At the
extreme, the indices for chemical, petroleum & rubber products registered an
absolute decline by 11.77 percent during this period.
3.2 SME Development
To raise employment and income, government lays strong emphasis on
developing the SME sector, the expansion of which may also significantly
contribute to poverty reduction. In the developed countries, SMEs constitute
about 40 percent of the industrial sector, but in Bangladesh SMEs account for
only 25 percent of the industrial GDP.
Data on production in the SME sector are available only up to the third quarter
of FY11. In these nine months the QIP of small scale manufacturing industries
increased only modestly – by just 1.04 percent, compared to a 9.6 percent
increase during the same period of the previous fiscal year. However,
Bangladesh Bank’s recent initiatives to expand SME loans are expected to
give a big boost to SME production (see sub-section 6.4 of this paper).
3.3 Construction
The construction sector expanded at a steady pace during FY11, as indicated
by the high growth in the production of cement, the import of construction
materials, and in investments in housing and real estate. According to
estimates by BBS, the construction sub-sector grew by 6.4 percent in FY11,
compared to 6.0 percent in FY10.The construction in the housing sector was,
however, at a disadvantage because of the shortage of power and gas. Had
there been no shortage of power and gas, the real estate sector’s growth might
have been much faster.
In fact, sale of land and apartments dropped by 30 percent due to an increase
in land transfer costs on the one hand, and the government’s inability to
provide new electricity and gas connections to residential and commercial
projects on the other. Reportedly, the realtors and developers failed to deliver
nearly 10000 ready apartments worth Tk.8000 crore to the clients on time. In
addition, due to the lack of electricity connections, some 700 new projects
comprising an estimated 10000 apartments had to suspend construction work
in Dhaka and other cities and towns in the country.
Thoughts on Economics 13
Government have recently begun giving electricity connections to new
residential projects after a halt of nearly two years, on condition that an urban
residential or industrial unit has to manage 7-10 percent of its total electricity
loads from solar power. Apartments and other small-scale residential power
consumers will have to bear the costs of solar panel installation as a
precondition to get electricity connection. Both consumers and real estate
developers are unhappy at this decision. The developers say that installing a
solar panel in an apartment will increase their total cost. They also do not
expect to get new gas connections to their fresh projects soon.
4.0 Power
No significant improvement occurred in the power sector situation during the
fiscal year under review, despite a number of attempts by the government. The
demand for electricity kept on increasing, but its production always lagged
behind. In fact, the shortage of energy now poses the biggest threat to
Bangladesh’s economic growth. With the available installed capacity of 6106
mw, actual production of power currently varies between 4200 and 4800 mw.
The present demand for electricity is 6000 mw, which is expected to rise to
7500 mw by the 2012. The estimated demand-supply gap currently is thus
1800 mw in peak hours.
The government has targeted to increase power generation to 7000 mw by the
year 2013, 8000 mw by 2015, and 20000 mw by 2021. Some 1922 mw of new
generation capacity has been added to the national grid during the past two
years, but the shortfall remains because of growing demand for electricity. The
country's power plants are predominantly gas-based, but they suffer from gas
shortage, despite some ad hoc measures to increase gas supplies for power
production. The shortage of gas is responsible for a reduction of 800 mw in
power production, which is close to a half of the demand-supply gap.
Short-term solutions to the power sector crisis that are currently being tried
include installation of diesel and furnace oil-based rental power plants (RPPs),
but the high generation cost of these RPPs may reduce the competitiveness of
firms. Government has taken a policy to generate more power through both
public and private investment and harness solar and atomic energy. The
potentials of using ‘renewable’ sources of energy for power generation such as
wind and tidal wave, and setting up micro power plants using organic matters
like cow dung, poultry droppings, rice husks, jute waste, bagasse, municipal
solid wastes, medical wastes, and industrial wastes are also suggested by
14 Performance of Bangladesh Economy in FY 2010-11…………….
certain quarters. These suggestions have little merit, however, as the suggested
mini-plants might at best produce 1-2 mw of electricity but the country now
needs a large increase in generation capacity by hundreds of megawatts.
Solar energy. Solar energy provides excellent opportunity for power
generation as the success of IDCOL’s PV programme would indicate. Strong
policy support from government will be needed to extend the programme to
more rural areas. The government may in fact seriously consider setting up a
solar panel manufacturing plant in the country, which will free the ongoing
solar programme from uncertainties of prices and supply of solar panels in the
world market and promote the use of solar energy in the country.
Nuclear power. Government has adopted a long-term plan to build a nuclear
power plant at Ruppur, despite its high initial cost. In fact, because of
limitations of non-renewable energy resources for power generation, only
nuclear energy can offer a solution of the country’s power problem in the long
run. Government will, however, need to get the most recent nuclear
technology, which is much more improved and safe compared to older ones.
Nuclear tragedies of the 1979 Three Mile Island accident in the United States,
Ukraine’s Chernobyl disaster in 1986, and the most recent Fukushima Dai-ichi
accident in north-eastern Japan in March 2011 have no doubt generated fears
worldwide, but it need not be used as an excuse by government to alter its
decision. In stead, government would need to draw lessons from past disasters
about all possible threats to nuclear safety and obtain the know-how to handle
such disasters.
The increase in power tariff. The shortfall in power supply notwithstanding,
the government raised the bulk power tariff by 11 percent and the retail
electricity tariff by 5 percent with effect from 1 February, 2011. The bulk
power tariff was raised by a further 6.66 percent from 1 August, 2011, thus
raising the bulk tariff by a total of 18.14 percent on annual basis. The tariff
increase was considered necessary to cut down the government’s subsidies to
the power sector. PDB said that even after the increase in the electricity tariff,
the power sector would still need government subsidy amounting to Tk.15
billion for in the 2010-11 fiscal year.
Business leaders and power users expressed concern over the government's
decision to raise the power tariff, stating that the tariff increase would
adversely affect the country's economic growth. They were particularly critical
about the timing of the tariff increase because it came at a time when the
nation was already in the grip of a severe power crisis and consumers suffered
for irregular and inadequate supply of electricity.
Thoughts on Economics 15
Nevertheless, there is a strong economic rationale behind the government’s
decision, because it cannot allow power sector subsidies, which constitute a
huge burden on the recurrent budget, to continue indefinitely. To meet the
growing requirement of power and remove sufferings of users, it is now
imperative on government to intensify efforts to meet the goals of increasing
power generation it unveiled in 2009 in its power sector roadmap.
Alongside efforts to increase power generation, concerted effort will be
needed to economize in the use of electricity by promoting efficiency in
energy use and adopting energy conservation measures. A lot of electricity can
be saved by such devices as proper load management, installation of
intelligent motor controller, use of energy saving bulbs instead of incandescent
ones, etc. The Power Division of the Ministry of Power, Energy and Mineral
Resources (MPEMR) has reportedly prepared a draft Energy Conservation
Bill, which, if enacted into law, would institutionalize the energy saving
measures.
Reducing the System Loss. Much of the power sector’s inability to meet the
nation’s growing demand for electricity could be overcome by reducing the
sector’s ‘system losses’. It is worth mentioning that the PDB’s losses, which
are sought to be met by raising the electricity price, are essentially due to the
system loss, which actually means power theft and pilferage, and poor bill
collection, all of which are embedded in the mismanagement and corruption in
the power sector. The power sector losses can never be stopped unless there
are meaningful reforms to uproot corruption from the system. Expert opinion
is that a 5% reduction in the system loss would reduce the country’s peak
electricity demand by 250 MW, which means the saving of at least Tk.10
billion as generation cost, and another Tk.7.5 billion in transmission cost,
resulting in a total saving of Tk.17.5 billion. A reduction in system loss that
would both cut down peak electricity demand and result in significant cost
saving would be a real achievement of the power sector.
Import of Electricity. To improve the power situation, government decided to
import 500 mw of electricity from India. Initially 250 mw of electricity, and
another 250 mw later, were to be imported under this arrangement. The price
of imported electricity would be similar to the price determined by India’s
Central Regulatory Commission for different Indian states. If the agreement to
import electricity could be signed now, imports might be possible in March,
2013. The 2-year time would be needed to build the required infrastructure,
which includes erecting a 120 km-long distribution line from Bahrampur in
India to Bheramara in Bangladesh. Unfortunately, the planned power purchase
16 Performance of Bangladesh Economy in FY 2010-11…………….
agreement got stuck up as Bangladesh government’s economic affairs
committee is yet to approve the power purchase proposal.
Proposed Joint Venture Power Plants. Apart from the proposal to import
electricity from India, government took a decision to set up a joint venture
power company with India, which would build two coal-based power plants of
660 mw each at Chittagong and Khulna. India’s National Thermal Power
Company (NTPC) is now examining the feasibility of setting up the plants, in
which imported coal (from India) would be used.
The proposed joint venture power plants are definitely welcome but it would
be appropriate if Bangladesh’s own coal, which is known to be of better
quality than Indian coal, were used for power production. Bangladesh has now
an estimated coal reserve of 2.9 billion metric tons in its five coal fields.
Assuming a 30 percent recovery rate of coal from the mines, the available coal
reserves are equivalent to 20 tcf of natural gas.
Once the controversy over open pit versus deep shaft mining were resolved,
preferably in favour of open pit mining, and the long-awaited coal policy
could be finalized, there should be no difficulty in using Bangladesh’s own
coal in the power plants. The construction of the coal-based power plants
could take about 2-3 years, by which time the development of the coal mines,
too, should be completed and readied for extraction.
5.0 Services Sector
The services sector maintained its fairly good performance of the previous
fiscal. In FY11, it achieved 6.6 percent growth, compared to 6.5 percent in
FY10. Its share in GDP, however, declined slightly, by 0.06 percentage points,
to 49.72 percent in FY11 from 49.78 percent in FY10. During FY11, most
service sector activities such as hospitals, IT services, travel agencies,
education, social work, public administration, road and air transport, storage,
hotels and restaurants showed good performance. The telecommunications
sub-sector, buoyed by new inflows of FDI, did particularly well and, with the
introduction of new products and services, it is expected to sustain its good
growth in FY12 as well. Financial services grew with the adoption of high
technology in the banking sector. The trade sector also got a boost during the
period because of increased availability of bank finance. The overall prospects
of the services sector in the present fiscal (FY12) appear good, if business and
Thoughts on Economics 17
investment environment improves and the growth in agriculture and industry
sectors accelerates.
6.0 Money, Credit and Monetary Policy
The central bank's major focus in the two successive half-yearly monetary
policy statements (MPS) announced in July, 2010 and January, 2011 was to
support efforts to promote economic growth, encourage credit delivery to
productive economic sectors, keep inflation within 7.0 percent by the end of
June, 2011,2 and maintain the stability of the exchange rate.
In pursuit of broad-based economic growth, BB's monetary programmes were
intended to channel adequate credit flows to productive sectors, especially to
underserved sectors like agriculture, SME, renewable energy and other eco-
friendly projects, and discourage undue expansion or diversion of bank credit
to unproductive and wasteful uses. To contain the inflationary pressure, BB
made careful use of available monetary policy instruments, but its
interventions had only limited success in keeping the inflation rate within
target.3 BB's monetary programmes are outlined in Table 1.
Table 1: Monetary and Credit Developments (growth in percent)
Particulars June, 2011
Programme
June, 2011
Estimate
June, 2012
Programme
Broad Money 16.0 21.0 18.5
Domestic Credit 18.8 27.8 20.0
Private sector credit 16.5 25.5 18.0
Public sector credit 29.2 38.0 28.1
Source: Monetary Policy Department, Bangladesh Bank
As Table 1 shows, Broad money (M2) increased by 21.0 percent during FY11,
well beyond the BB’s June, 2011 programme of 16.0 percent growth.
Domestic credit grew by 27.8 percent, vastly exceeding the BB’s June, 2011
programme level of 18.8 percent. The growth of private sector credit was 25.5
percent, which was more than one and a half times the programmed 16.5
2 The inflation target was subsequently raised to 8.0 percent in the revised national budget for
FY11. 3 Headline inflation rose to 8.80 percent by end June, 2011. Also, BB’s efforts to keep the exchange rate stable through interventions in the foreign exchange market could not prevent
the sharp depreciation of the Taka because of adverse external circumstances (see Section 16
below).
18 Performance of Bangladesh Economy in FY 2010-11…………….
percent annual growth target. The estimated public sector credit growth by end
June, 2011 was 38.0 percent, which exceeded the programmed 29.2 percent
growth during the fiscal.
BB’s monetary growth and inflation targets thus vastly exceeded BB’s
programme targets in FY11, which drew sharp criticism from experts who
questioned the relevance of BB’s monetary programming exercise. However,
BB has responded to this criticism in its Monetary Policy Statement (MPS) for
the first half of the present fiscal (FY12).4 BB admits that the CPI inflation did
indeed continue to increase in FY11, but it says that the increase in FY11 was
less steep than in FY10. Thus, while point to point inflation had increased by
as much as 6.45 percentage points in FY10 from the FY09 low of 2.25
percent, the point to point increase in June, 2011 was only 1.47 percentage
points.
The MPS also notes that the increase in the annual average (headline) CPI
inflation in FY11 was no doubt well above the inflation target projected in the
revised FY11 national budget, but that the increase was mainly due to high
and volatile food and non-food commodity prices in the global markets. On
the other hand, the annual average non-food inflation (i.e., core inflation)
remained low and declined to 4.15 percent at close of FY11 from 5.45 percent
at the opening. Therefore, according to BB, the overshoots from the
programmed monetary and inflation targets do not necessarily indicate loss of
relevance of BB’s monetary programming exercise. In stead, the evidence of
declining non-food CPI inflation and slower rise of headline CPI inflation in
FY11 indicate some amount of success of BB’s monetary policy and
programme, and thus its continued relevance and effectiveness.5
Taking into account the experience in FY11, the monetary policy stance
adopted by BB for FY12 is essentially to put a restraint on domestic credit
expansion. It says that the pickup in output and investment activity in FY11
escalated domestic credit growth, in both private and public sectors, at rates
well over 25 percent y-o-y, which was clearly out of line with the modest
13.42 percent nominal GDP growth during the past year. Growing financing
needs of public and private sector investment activities in pursuit of the
targeted 7.0 percent real GDP growth are likely to create much the same
demand pressure for credit in FY12.
Nevertheless, BB’s monetary programme for FY12 appears somewhat liberal
on public sector credit growth, since it allows public sector credit to increase
4 Bangladesh Bank, Monetary Policy Department. Monetary Policy Statement, 27 July, 2011. 5 Bangladesh Bank, ibid.
Thoughts on Economics 19
by 28.1 percent during the fiscal, compared to 18.0 percent for the private
sector. In the past fiscal year (FY11), Government’s net borrowing from the
banking system exceeded the target by 17.2 percent (to Tk.18,379 crore from
Tk.15,680 crore).6 The targeted bank borrowing in FY12 is Tk.18,957 crore
which is only slightly higher (about 3.0 percent) than the actual bank
borrowing during FY11.7
Given the declines in external capital inflows and the government’s non-bank
borrowing, there is some justification behind BB’s allowing a higher target for
public sector credit growth. It is also worth mentioning in this connection that
public sector credit constitutes only a fifth of total domestic credit, and
because of this small base, even the high growth of public sector credit as
projected in the MPS should not create any fear of crowding-out the private
sector from the credit market. Nevertheless, given that excessive government
spending out of bank borrowing may have an inflationary bias, and
irrespective of whether it may curtail the availability of bank credit for private
sector investment, government will need to be careful to strictly keep its bank
borrowing within the budgetary target.
6.1 Interest Rate Developments.
The Cash Reserve Requirement (CRR) and policy interest rates – repo and
reverse repo – are the major tools used by BB to keep the inflation rate in
check. To contain the inflationary pressure, BB raised the CRR to 6.0 percent
on 15 December, 2011 from the previous 5.5 percent that had remained
effective since May, 2010. Starting from 18 August, 2010, BB raised its policy
interest rates – repo and reverse repo – by 225 basis points in four steps in
FY11, and by another 50 basis points on 5 September, 2011. Thus, between
June, 2010 and September, 2011 ( a period of 15 months), BB raised its repo
and reverse repo rates by 275 basis points from 4.50 percent and 2.50 percent
to 7.25 percent and 5.25 percent, respectively (Table 2).8
6 Government’s net bank borrowing was negative in the previous fiscal year (FY10), when the
entire domestic financing of the budget deficit was met by net sales of NSD instruments and
treasury bills to the non-bank public. See Bangladesh Bank, Monthly Economic Indicators,
July, 2011 Update. 7 See Table 3 in Section 8.2 on Public Expenditure below.
8 The repo rate is the rate at which the central bank lends to commercial banks, and the reverse
repo rate is the rate the central bank pays to banks for deposits. A rise in the reverse repo or
20 Performance of Bangladesh Economy in FY 2010-11…………….
Table 2: Interest Rate developments in FY2010-11 (percent)
Month/Quarter Repo Reverse
Repo
Lending
Rate
Deposit
Rate
Interest
Spread
June, 2010 4.50 2.50 11.23 5.95 5.28
August, 2010 5.50 3.50 11.17 6.00 5.17
March, 2011 6.00 4.00 11.95 6.81 5.14
April, 2011 6.25 4.25 12.02 7.04 4.98
June, 2011 6.75 4.75 N.A. N.A. N.A.
September, 2011 7.25 5.25 N.A. N.A. N.A.
Source: Statistics Department, Bangladesh Bank.
Interest Spread. Scheduled banks raised both their lending and deposit rates,
which are usually calculated on quarterly basis. The average deposit rate
increased slightly faster than the average lending rate. The interest spread thus
narrowed down from 5.17 percent in September, 2010 to 5.11 percent in
December, 2010 and further to 4.98 percent in April, 2011(Table 2).
Withdrawal of Lending Interest Cap. In a circular issued on 9 March, 2011
Bangladesh Bank withdrew the prevailing 13% interest rate cap on bank
lending, other than industrial term loans, and loans for exports, agriculture and
essential imports. Earlier, in April 2008, the central bank had set the lending
cap on these and some other sectors in the backdrop of the world economic
recession.
Lately, Bangladesh Bank announced its decision to gradually phase out the
remaining lending caps, too, with a view to bringing about full flexibility of
market interest rates. The BB justified its decision by saying that in the
backdrop of high and rising demand for credit lending caps were not tenable
any more. Furthermore, on the basis of its post-March experience the BB said
that increased interest rate flexibility facilitated deposit mobilization and
restoration of balanced advance-deposit ratios in banks.9 The BB, however,
assured that it would keep banks’ lending and deposit interest rates and rates
of charges and fees for various banking services under close monitoring from
competition and consumer protection viewpoints.
repo rate means a squeeze on credit from financial institutions to the private sector, which
makes loans costlier.
9 Bangladesh Bank, op cit.
Thoughts on Economics 21
The withdrawal of the lending cap is part of the conditions attached by the
IMF to the 1 billion dollar credit offered to the BB as balance of payments
support under the Fund’s ‘extended fund facility’ According to the IMF, the
condition needs to be met in order to strengthen the monetary transmission
mechanism and improve financial discipline. The owners of Bangladesh’s
private banks, too, were demanding withdrawal of the lending cap to help
overcome the banks’ financial difficulties. Due to the liquidity crisis, the
banks raised their deposits rates. To cut down the cost of funds they now
asked for withdrawal of the lending cap.
A section of the business community expressed concern that the withdrawal of
the lending cap would raise the cost of working capital and hurt the
competitiveness of industries. The BB, however, kept the interest rate on
export credit at 7% as before. The interest rate on import finance for rice,
lentil, edible oil, gram, onion, date and sugar would also remain unchanged at
12%.
6.2 Evaluation of BB’s FY11 Monetary Programme
The BB’s monetary programme for FY11 had much to commend as it
intended to ensure adequate credit flow to productive economic activities,
discourage lending to less productive or unproductive sectors, tightly monitor
the end uses of bank credit to prevent leakages into unproductive channels,
and contain the inflationary pressure by further expanding its credit policy
measures as and when necessary.
However, there are certain issues of great import, which received insufficient
attention of the monetary authorities but which should be addressed with all
seriousness now. First, the large buildup of non-performing loans (NPL) in
the country’s public commercial banks is a cause of great concern. While the
NPLs of the private commercial banks are only 3.7 percent of their total loan
portfolio, it is 20.5 percent for public commercial banks and 24.6 percent for
public specialized development banks. The high share of infected portfolio of
public banks is a serious problem for the banking sector. Large NPLs are not
only a threat to the stability of the banking sector, but also pose a major fiscal
risk for the government. The BB will therefore need to strengthen its
monitoring over the increasing debt default of the state-owned banks and their
classified loans, especially to release the reserves made against such loans that
impact on the overall liquidity of the banking sector.
Second, while the BB is expected to discourage bank lending for unproductive
uses, BB appears to have said recently that commercial banks’ exposure to the
stock market should not exceed 25 percent of their equity capital. The BB
22 Performance of Bangladesh Economy in FY 2010-11…………….
should make its position clear to dispel any possible misunderstanding that it
is willing to allow commercial banks to invest in the stock market beyond 10
percent of their equity holdings. The BB’s responsibility is to support the
growth of real sectors that create jobs and income, and not the stock market,
which does neither create jobs nor promise any increase in real income.
Third, compliance of state-owned banks with prudential regulation is weak
because they are not within the purview of the BB’s regulations. In order to
ensure stability and orderly functioning of money and credit markets and keep
under constant watch commercial banks’ capital adequacy, liquidity, asset
quality and provisioning requirements, the public banks, which account for
more than a third of the banking sector’s total assets and liabilities, should be
brought under the BB’s effective supervision. Correspondingly, the BB’s
supervisory capacity over banks should also be enhanced significantly.
Finally, we note with concern the continued shrinking of the scheduled banks’
risk-weighted capital asset ratio (RWCAR), which has fallen below the
minimum requirement of 10 percent under the Basel II capital adequacy
framework. A bank’s capacity to meet the time liabilities and other risks is
determined by its capital adequacy ratio, but Bangladesh’s banking sector as a
whole is not compliant with the Basel II requirements. Only foreign
commercial banks meet or exceeded the Basel II requirement. Adequate
capital provides a cushion against unexpected shocks and protects the interest
of banks’ depositors and other lenders. In order to boost people’s confidence
in the banking system and promote financial stability, the BB will need to gear
up its monitoring of the scheduled banks and ensure their strict adherence to
and compliance with the Basel II requirement of maintaining capital adequacy.
6.3 Industrial Term Loans
Data on industrial term loans are available only for the first nine months of
FY11. According to the BB data, the disbursement of industrial term loans
increased by 28.78 percent in this nine month period and stood higher at
Tk.24248 crore compared to Tk.18828 crore during the corresponding period
of the previous fiscal year. The recovery of industrial term loans during this
period was Tk.19305 crore, which was 46.19 percent higher than the recovery
made during the corresponding period of FY10. The total outstanding of
industrial term loans at the end of March, 2011 was 65374 crore, of which an
amount of Tk.5864 crore, or 8.97 percent of the total was overdue.
6.4 Position of SME Loans
To develop and expand the SME sector, the BB instructed commercial banks
to enlarge their SME loan operations. A separate SME Division was opened at
Thoughts on Economics 23
the Bangladesh Bank the previous year in order to oversee lending banks’ loan
operations. BB asked Commercial banks to open SME branches instead of
SME service centres. In January 2010, Bangladesh Bank also permitted the
NBFIs to extend loans to SMEs. The BB has now three small entrepreneur
refinancing schemes, viz., Bangladesh Bank Fund (Tk. 600 crore), IDA Fund
(Tk. 116 crore), and ADB Fund (Tk. 660 crore). Bangladesh Bank has made it
obligatory on banks to lend at least 15% of the amount obtained under the
refinancing schemes to women entrepreneurs at 10% interest rate.
These initiatives of Bangladesh Bank led to a significant expansion of SME
credit. In the past five quarters between March, 2010 and March 2011, total
SME loans increased by Tk.14022 crore or by 25.7 percent to Tk.68611 crore
at the end of March, 2011 from Tk.54589 crore at the end of March, 2010.
Total SME loans at the end of March, 2011 were 19.91 percent of all industrial
loans. The sizable increase in the disbursement of SME loans indicates that the
production in SMEs must have been on the increase.
6.5 Agricultural Credit
During FY11, the disbursement of agricultural credit was Tk.12184 crore,
which was 9.60 percent higher than Tk.11117 crore disbursed in the previous
fiscal. The disbursement made during FY11 was 96.6 percent of the
disbursement target of Tk.12617 crore for that fiscal. The higher disbursement
was possible because of the BB directive making agricultural credit
disbursement mandatory for all commercial banks. Agricultural credit is given
to 21 different agro and rural sectors, which include, among others,
agricultural and irrigation equipments, solar irrigation system, salt production,
handlooms, silk industry, rural finance and credit to women engaged in
income generating agriculture and allied agricultural activities. It is worth
noting, however, that the recovery of agricultural credit during FY11 also
stood higher at Tk.12149 crore as compared to Tk.10113 crore during FY10.
The position of overdue agricultural credit as percentage of the total
outstanding credit improved, decreasing from 28.35 percent at the end of June,
2010 to 23.92 percent at the end of June, 2011.
Agricultural loans at Concessional interest rate. Bangladesh Bank took a
laudable step in FY11 in the field of agricultural credit to reduce the country’s
dependence on imports of some essential agricultural products. It has
instructed all state-owned banks to extend loans to farmers at a concessional
interest rate of 2% to encourage them increase the cultivation of pulses,
oilseeds, maize and spices, which are currently imported in huge quantities.
Initially, the BB set a target of lending Tk.960 crore for the 2010-11 fiscal for
that purpose. In the first nine months (July-March) of the fiscal, banks
24 Performance of Bangladesh Economy in FY 2010-11…………….
reportedly extended loans worth Tk.447 crore, which was 47 percent of the
target.
7.0 Capital Market
A strong capital market is necessary to encourage the general people and the
business community to invest in shares. Weak and fragile capital market
retracts investment environment and directly or indirectly reduces and slows
down economic growth. Capital market is the 'heart' of investment through
which investors invest in shares of industries, financial institutions and other
commercial organizations, and thus accelerate development and growth. A
well-developed capital market can thus play a significant role in a country’s
economic development. Government can easily raise funds from the capital
market for its development projects instead of borrowing from bilateral
lenders or multilateral lending agencies under strict conditionality, or
obtaining suppliers’ credit at commercial rates of interest.
However, the Bangladesh stock market, after steady growth during the past
two years, became turbulent since December, 2010, with volatile movements
in stock prices, volumes and market capitalization. To prop up and stabilize
the stock market, significant reforms within the Securities and Exchange
Commission, steps to increase the supply of shares of companies with strong
fundamentals, and appropriate stock market-friendly monetary and fiscal
policies will be needed.
Reforms of the stock market suggested by different quarters are, among
others, to change the book building method that determines the issue price of
shares at the time of IPO floating, introduce a lock-in period for institutional
investors, and put in place a mechanism of buy-back of own shares by
companies. A proposal for demutualization of the stock exchanges has also
come up. The IMF is learnt to have supported the demutualization proposal,
saying that it will establish transparency in the stock exchanges. In a
demutualized system, brokerage houses will be totally de-linked from the
management of the stock exchange. All these proposals will, however, need to
be examined with care to avoid any chances of price manipulation in the
market.
In addition, a Tk.5000 crore open-ended mutual fund was created during the
year with contributions from the state-owned ICB, five state-owned banks and
two state-owned insurance companies. About 50 percent of the fund will be
used to stabilize the stock market at times of falling share prices. One may,
however, question the rationale behind creating such a fund for purpose of
Thoughts on Economics 25
intervening in the stock market, which in effect may serve to protect the
interest of a few unscrupulous share-investors. There is a risk of moral hazard
in such interventions, which may lead to a misuse or wastage of government
money. The impact of the fund on the stock market remains unclear till now.
The corrections and volatility in the stock price index are a common
phenomenon worldwide, and the Bangladesh stock market should not be any
exception. An important pre-requisite to stock market stability is to increase
the supply of good shares in the stock market and get rid of speculative
elements. Some suggestions in that regard are made in the following.
First, the government’s announcements made on several occasions in the past
to offload the shares of selected profitable SOEs should be quickly
implemented. Second, multinational companies operating in Bangladesh
should be asked to enlist in the country’s stock exchanges. Such listing is
compulsory in the neighbouring countries. Third, the DSE and merchant
banks will need to be more active to bring more private issues in the market.
Fourth, the DSE may persuade big listed companies to offload a bigger
percentage of their shares to meet the growing demand for shares in the
market. Fifth, strengthening the regulatory mechanism and making it more
transparent and accountable is crucially important to increase public
confidence in the stock market. Sixth, capital gains from share trading should,
as before, remain exempted from income tax. Capital gains and losses are
common in share trading, but capital losses incurred by share traders are often
much bigger and more frequent than the capital gains they make. There should
not therefore be any tax on capital gains just as there should not be any
provision for compensation for capital losses incurred by share traders.
Seventh, ups and downs in stock prices and turnovers are a common
phenomenon but it is generally the downward market trend that creates panic
among the largely uninformed investors. In such situations, brokerage houses
and merchant banks can do a lot to instill confidence among investors. In fact,
brokerage houses and merchant banks have a mandated responsibility to
advise the retail investors through orientation or training programmes for
prudently managing their share portfolio. Finally, the press, the electronic
media and market analysts do have a moral responsibility to present objective
reports on capital market developments and carefully avoid expressing views
that may be misinterpreted by the uninitiated and send wrong messages about
the market.
Government can definitely play an important role to strengthen the capital
market, but the annual budget for FY2011-12 has not shown enough
commitment in that regard. Instead, the provision of allowing the investment
26 Performance of Bangladesh Economy in FY 2010-11…………….
of undisclosed incomes in the stock market by paying a token 10 percent tax
may create more problems if such investments are taken out of the market.
8.0 Public Finance: Revenue
In FY11, total NBR revenue collection increased by 26.84 percent to
Tk.78692 crore, up from Tk.62042 crore in the previous fiscal year. The
NBR’s revenue collection was 8.4 percent above the revenue target of the
original budget (Tk.72590) and 4.1 percent higher than the revised target of
Tk.75600 crore. It was a record earning in the history of the NBR, made
possible by, among others, intensified monitoring by NBR at field level, more
use of information technology in tax collection, and the holding of income tax
fairs in the divisional cities. According to NBR statistics, revenue collection
from customs duties increased by 27.98 percent, VAT by 22.03 percent, and
income tax by 33.89 percent.
Despite the robust growth in revenue collection, however, the tax-GDP ratio in
Bangladesh remains as low as 10.0 percent, which is lower than in any other
country of comparable level of development.
In the budget for the present fiscal, the government is looking toward raising
the tax-GDP ratio by a negligible 0.2 percent, i.e., to 10.2 percent. The
country, however, needs a much more robust growth in tax receipts. As aid
inflows are falling continuously, there is no alternative to enhancing public
revenues to finance the government’s ever-growing development and non-
development expenditure. Raising more tax revenue is also important to
reduce the interference by development partners in independent policy making
by government. Significant fiscal policy reforms will be needed to raise more
revenues from taxation. Apart from raising revenues from NBR taxes, efforts
should be intensified to enhance revenues from non-NBR and non-tax
revenues.
8.1 Public Expenditure
Contrary to the good revenue performance of NBR, the implementation of public investment programs in FY11 was poor. Most major ministries and implementing agencies, other than education, lagged behind the average achievement rate in ADP implementation during the first ten months of the fiscal. In order to improve the rate of implementation of the Annual Development Program (ADP) at the fag end of the fiscal, efforts were made to complete projects in hot haste with little consideration given to the quality of work. About 92 percent of the ADP (Tk.33000 crore out of the revised ADP of Tk.35880 crore) was shown implemented during FY11, compared to 91 percent implementation in the previous fiscal. Early on, the delay in project
Thoughts on Economics 27
implementation forced the government to revise the ADP expenditure downward to Tk.35880 crore from the original outlay of Tk.38500 crore, even though the total number of projects under the ADP was increased to 1185 from the original 916.
Though the ADP implementation performance in FY11 in percentage terms was shown better than in the previous fiscal, most of the Ministries and Divisions failed to perform in line with their promises. Among the 10 top development budgetary resource spenders, the Power Division and Water Resources Ministry turned out the best performers (implementation rate between 91-99 percent) while the Bridges Division proved the worst, having been able to spend only 35 percent of its allocation for the year.
As against the slow pace of ADP implementation, non-development expenditure increased in the fiscal to finance several safety net programmes in attempts to offset the impact of the spiraling food inflation and also to finance the increased subsidy payments to energy and power sectors. In addition, additional spending was needed to rehabilitate the jobless returnee workers, for which there was no provision in the original budget.
8.2 Budget Financing
A significant development in budget financing during FY11 was the vast increase in the domestic financing component of the budget. Total budget financing of the government during FY11 stood lower at Tk.30,600 crore, compared to Tk.34,514 crore projected in the original budget (Table 3). In financing this 30,600 crore Taka deficit, total domestic financing (net borrowing from banks and the non-bank public) stood higher at Tk.24,817 crore as against Tk.23,680 crore projected in the original FY11 budget. Net foreign financing, on the other hand, fell drastically from the projected Tk.10,834 crore to Tk.5783 crore at the end of FY11.
Table 3: Budget Financing (Taka in Crore)
FY10 FY11 FY12
Actual Budget Revised Budget
Overall Deficit (including grants)
Financing
Foreign Borrowing (Net)
Domestic Borrowing
Borrowing from the Banking system
Non-bank Borrowing
21,856
6,036
15,820
-2,092
17,912
-34,514
10,834
23,680
15,680
8,000
-30,600
5,783
24,817
18,379
6,43
-40,266
13,058
27,208
18,957
8,251
Source: Ministry of Finance
28 Performance of Bangladesh Economy in FY 2010-11…………….
The fall in foreign financing was due to the slump in gross aid inflows,
allegedly because of non-implementation of aided projects. Net aid receipts
declined because, as usual, amortization payments continued, even though
gross aid inflow did not increase. The shortfall in the availability of foreign
financing forced the government to take resort to the high-cost domestic
borrowing, mainly from the banking system. As non-bank borrowing (from
the general public) is costlier than borrowing from banks, the government cut
down its net non-bank borrowing during FY11 to Tk.6438 crore from Tk.8000
crore projected in the FY11 budget. The government fell back on bank
borrowing so keenly that while its net borrowing from the banking system was
negative in the 2009-10 fiscal (-Tk. 2092 crore), it borrowed a large sum of
Tk.18379 crore in FY11.
9.0 Exports
Export earnings in FY11 were US$22924 million, which was 41.5 percent higher than the previous year’s export earnings of US$16205 (Table 4). The export earnings in FY11 surpassed the yearly target of US$18500 million, buoyed by shipments of readymade garments and jute and jute goods.
Category wise export data available at EPB place knitwear products at the top of the list with exports worth US$9490 million, followed by exports of woven garments worth US$8430 million, jute and jute goods worth US$1110 million, home textiles worth US$790 million, and oceangoing vessels, which fetched US$40 million. The extension of duty-waiver facility by the EU from January 1, 2011, and relaxation of EU Rules of Origin under the Generalized System of Preferences (GSP) by Euro zone for the least developed countries greatly helped Bangladesh’s export growth. Bangladesh has recently started exporting to some new markets such as Japan, South Africa, Australia, Canada, New Zealand and some Latin American countries. Bangladesh’s exports to these countries are steadily increasing.
Table 4: Trends in Exports
Period Exports (million US$) Growth Rate (%)
FY2009-10R FY2010-11
P
July-September 3886 5033 29.52
Oct.-Dec. 3395 5230 54.05
January-March 4257 5944 39.63
April-June 4668 6717 43.89
July-June 16205 22924 41.46
Note: P=Provisional; R=Revised Source: EPB and BB.
Thoughts on Economics 29
10.0 Imports
Bangladesh’s overall imports during FY11 grew by 41.8 percent (Table 5). Of
the total import payments of US$33657 million, imports under Cash and for
EPZ stood at US$32132 million, import under Loans/Grants US$45.70
million, import under direct investment US$131.50 million, and short term
loan by BPC US$1347.80 million.
Table 5: Trends in Imports
Period Imports (million US$) Growth Rate (%)
FY2009-10R FY2010-11
P
July-September 5125 7022 37.01
Oct.-Dec. 6032 8217 36.22
January-March 6034 8987 48.94
April-June 6547 9431 44.05
July-June 23738 33657 41.79
Note: P=Provisional; R=Revised Source: BB.
Imports increased markedly mainly due to increased imports of food grains,
particularly rice and wheat. The importers were encouraged to open LCs for
importing food grains to ensure the country's food security. BB provided
foreign currency support to commercial banks for settlement of food grains
import bills. Imports of other essential items, including petroleum products,
industrial raw materials and capital machinery, also increased significantly
during the period.
According to BB statistics, import LCs worth US$31952 million were settled
during FY11, compared to US$23053 million during FY10 (a 38.6 percent
increase). Fresh opening of import LCs also increased by 34.04 percent during
FY11 – to US$38581 million from US$28783 million in the previous fiscal
year.10
11.0 Remittances
Despite the crisis in some Middle Eastern (ME) countries, Bangladeshis
working abroad remitted US$11650 million in FY11 (Table 6). The growth of
remittances, however, slowed down to 6.0 percent in FY11 from 13.4 percent
in FY10. The growth of remittances, however, picked up in the second half of
the fiscal when the country received US$6100 million, registering a 11.8
10 Bangladesh Bank, Monthly Economic Indicators, July, 2011 Update.
30 Performance of Bangladesh Economy in FY 2010-11…………….
percent growth over the same period of the previous fiscal, contrary to
pessimistic predictions by certain experts that remittances would decline
because of the panicky situation in different ME countries.
Table 6: Inward Remittances in FY10 and FY11
Months Remittances (million US$)
FY2009-10 FY2010-11
July –December 5534 5551
January -June 5453 6100
July-June 10987
(+13.40)
11650
(+ 6.03)
Source: Foreign Exchange Department, Bangladesh Bank
However, the slowing down of the pace of remittance growth cannot but be a
cause of concern for the country. The deceleration in remittance growth in
FY11 was due to the falling manpower export and also a growing number of
returnees from overseas. After 2007-08, manpower export has been falling
every year. In 2009, 475 thousand Bangladeshis went abroad for work, but the
number went down to 391 thousand in 2010. At present 7.5 million people
work overseas, of which around 6.0 million are employed in the Middle East
and Malaysia. These countries, including Saudi Arabia, the largest employer
of Bangladesh workers, do not recruit additional labour from Bangladesh.
The return of a growing number of workers from overseas in the wake of the
political unrest in Libya and several other countries has been a serious concern
for the government. The situation may worsen if the unrest spreads to more
countries of Middle East and North Africa. To prevent occurrence of social
unrest in the country, government will need to take adequate measures in
quick time to rehabilitate the jobless returnee workers.
Till recently, the decline in remittances in most countries was attributed to the
global economic crisis, but this was not so in Bangladesh, because even in the
difficult years of global economic recession, 2007-2009, remittances in
Bangladesh did not decline but increase by double digit. The major causes
behind stagnant or falling remittances to Bangladesh could be the shortage of
skilled workers and bad country image created by non-professional conduct
and rowdy behaviour of expatriate workers abroad.
The BB earlier took a series of measures to encourage expatriate Bangladeshis
to send money through formal banking channels instead of the illegal 'hundi'
system. Also, four state-run commercial banks and dozens of private
Thoughts on Economics 31
commercial banks have stepped up efforts to increase remittance flow from
the Middle East, the United Kingdom, Malaysia, Singapore, Italy, and the
United States, where most of the expatriate Bangladeshis are currently
working. As part of the move, some banks are trying to set up their own
exchange houses or making arrangements with overseas companies in
different parts of the world. The mobile operators were also permitted to
disburse remittance through their outlets.
These are no doubt welcome moves, but proactive diplomatic efforts to
improve workers' welfare abroad, programmes organized by government and
stakeholders to develop skills among workers to meet specific demands of
manpower recruiting countries, and impart training to improve workers' work
ethics and professional conduct would be needed to improve the situation.
12.0 Foreign Aid
Compared to FY10, foreign aid disbursements fell drastically in FY11, due
mainly to the slow implementation of foreign aided projects under ADP. Net
receipts of foreign aid declined, too, because the repayment on aid increased,
although gross aid flows declined (Table 7). Aid disbursement in FY11 stood
lower at US$1777 million, compared to US$2164 million in FY10. Net receipt
of foreign aid also stood lower at US$1050 million in FY11, as against
US$1477 million in FY10.
Table 7: Foreign Aid receipts and Repayments in FY10 and FY11 (Million US dollars)
Fiscal Year Food Aid Project Aid Total Aid Repayment Net Aid
2009-10 83.30 2076.15 2164.45 687.40 1477.05
2010-11 83.00 1694.33 1777.33 727.54 1049.79
Source: Economic Relations Division (ERD), Ministry of Finance
There is, however, a critical need for increased ODA for financing priority
social spending. Government should, therefore, seek additional aid
commitments by donors alongside the release of aid lying in pipeline. Donor
aid is often stopped or delayed if conditions attached to aid commitments are
not met in time. For instance, the World Bank deferred its budget support of
$1 billion for FY11 due to slow progress in government reforms, especially in
the telecom sector.
BB is currently negotiating a $1 billion loan from the IMF as balance of
payments support under the IMF’s ‘extended fund facility’, but the IMF has
attached a set of tough conditions to the loan. There is the fear that the
conditions attached to the loan will raise the cost of doing business, narrow
32 Performance of Bangladesh Economy in FY 2010-11…………….
down the scope for strategic support to leading sectors of the domestic
economy, and limit the government’s fiscal flexibility and policy autonomy to
attain faster economic growth.
The conditions include increased interest rate flexibility, tighter monetary
policy to slow down credit growth, greater exchange rate flexibility to allow
the official exchange rate to rise and come closer to the market exchange rate
(i.e., further depreciation of the Taka), further import liberalization, raising the
prices of fertilizer, electricity and petroleum fuels and cutting down
government subsidies thereon, privatization of state-owned enterprises, and
putting in place new VAT and income tax laws to raise the tax rates.
Some of the conditionalities such as the increase in electricity tariff and fuel
prices are on the government’s reform agenda, but the IMF-suggested tight
monetary policy will have a negative impact on the country’s investment,
production and employment, inflation, and the growth of GDP. Interest rate
flexibility will raise the cost of credit and hurt investment. Business circles are
complaining that the withdrawal of the lending cap at the behest of the IMF
has already started to have its adverse impact on domestic investment.
Again, a further liberalization of imports will lead to an increase in the cost of
imports and raise trade and balance of payments deficits. Limiting BB’s
intervention in the foreign exchange market will lead to a further depreciation
of the Taka, raise the cost of imports, and increase the inflation rate further.
BB and the Finance Ministry will, therefore, need to be cautious while
negotiating the terms and conditions of the IMF loan so that the
conditionalities do not damage the country’s growth prospects.
13.0 Foreign Direct Investment
Net foreign direct investment (FDI) registered a decline in the first eleven
months of FY11. In July-May, 2010-11, FDI inflows were lower at US$716
million, compared to US$818 million in July-May, 2009-10 (Table 8).
Inadequate land and industrial plots and a lack of utilities are the major
reasons behind the fall in FDI inflows. In the previous fiscal year (FY10), net
FDI inflow was US$636 million. Larger doses of FDI will be needed to
accelerate the process of the country’s economic growth.
14.0 Balance of Payments
Data on balance of payments are available up to May of FY11 (Table 8).
Pressure on the country's overall balance of payments (BoP) increased during
the period due to the widening trade gap, slower growth of inward remittances
Thoughts on Economics 33
and bigger deficits in the balance of services and the financial account. The
country's trade balance recorded a bigger deficit of US$7103 million during
July-May, 2010-11, as compared to US$4873 million in the corresponding
period of the previous fiscal. The deficit in the services account increased, too.
In current transfers, the country received US$10611 million as worker
remittances during the July-May period of 2010-11, which was marginally
higher than US$10095 million in the corresponding period of 2009-10. As a
result of these developments, the current account surplus fell drastically to
US$609 million during July-May, 2010-11 from US$2966 million during
July-May, 2009-10. There was also a big decline in the overall balance, from
the surplus of US$2661 million to a deficit of US$747 million, mainly because
of a large deficit in the financial account caused by higher amortization of
MLT loans and repayment of trade credit.
Table 8: Balance of Payments (in million US$)
Items FY10P
July-June
FY10R
July-May
FY11P
July-May
Trade Balance -5152 -4873 -7103
Services Balance -1237 -1578 -2229
Income Balance -1487 -1268 -1205
Current Transfers 11610 10685 11146
Of Which: Workers’ Remittances 10987 10095 10611
Current Account Balance 3734 2966 609
Financial Account -755 -287 -1102
Foreign Direct Investment (net) 636 818 716
Overall Balance 2865 2661 -747
Notes: P=Provisional; R=Revised
Source: BB
15.0 Exchange Rate and Foreign Exchange Reserve
Exchange Rate. Exchange rate is a key macroeconomic variable because of
its implications for inflation, export competitiveness, import costs, and the
overall state of economic activity. BB follows a free float but nevertheless it
intervenes in the foreign exchange market by selling and buying foreign
currency to stabilize the exchange rate. The exchange rate of Taka per US$
34 Performance of Bangladesh Economy in FY 2010-11…………….
rose to Tk.74.1450 as of 30 June, 2011 from Tk.69.4100 at the end month of
July 2010 (Table 9).
Table 9: Exchange Rate Movements
Month FY2010-11P (Taka per US$) FY2009-10
R (Taka per US$)
Month
Average
End
Month
Month
Average
End
Month
July 69.4370 69.4100 69.0602 69.0600
October 70.5474 70.7850 69.1019 69.1500
January 71.0363 71.1500 69.2059 69.1700
April 72.8235 72.9000 69.2565 69.2850
June 73.8848 74.1450 69.3579 69.4450
Note: i) P=Provisional; R=Revised, NA=Not Available
ii) Exchange rate represents the mid-value of buying and selling rates
Source: BB
Taka thus depreciated by 6.82 percent in FY11. The fall in the external value
of Taka was due to the increased demand for foreign currency to finance
current account transactions. Besides, BB was also providing overdraft (OD)
facilities to the commercial banks to settle payment bills against import of
essential items, including food grains, petroleum products, and power plant
equipment. Despite the depreciation of the Taka, the Taka/dollar exchange rate
in the open market is still at least 3 percent higher than the official exchange
rate.
The IMF is putting pressure on BB to allow greater exchange rate flexibility,
which will push the official exchange rate higher and closer to the market rate.
However, a further weakening of the Taka at the moment will make the
country’s imports much more costly, worsen the balance of payments position,
and also push up the already high inflation rate. There is, therefore, no good
rationale for raising the exchange rate at the moment, and BB will be expected
not to yield to the IMF’s pressure.
Foreign Exchange Reserve. BB's gross foreign exchange reserves stood at
US$10912 million (with ACU liability of US$837.48 million) as of end June,
2011, as against US$10431 (with ACU liability of US$434.05 million) by end
May, 2011. There were ups and downs in foreign exchange reserves, perhaps
due to the unstable political situation in some of the major manpower
importing countries in the Middle East and North Africa and the devastation
Thoughts on Economics 35
caused by the earthquake, tsunami and nuclear disaster in North-East Japan.
The gross foreign exchange reserve, without ACU liability, at end June, 2011
was equivalent to import payments for 3.67 months.
16.0 Price Situation
Bangladesh Bank raised the inflation target for FY11 from 6.5 percent to 7.0
percent. Later, in the revised FY11 national budget government projected the
inflation target at 8.00 percent for the fiscal, but the upward trend in inflation
continued. The price of coarse rice went up by as much as 50 percent. Prices
of many other essentials, especially kitchen items, moved up steeply. Data on
price inflation in FY11 are presented in Table 10.
Table 10: Monthly Trends in Inflation (CPI Inflation, in percent, Base: 1995/96=100)
Month 12 Month Average 12 Month Point to Point
General Food Non-
food
General Food Non-
food
June, 2009-10 7.31 8.53 5.45 8.70 10.88 5.24
2010-11P
July 7.63 8.98 5.54 7.26 8.72 4.87
August 7.87 9.38 5.47 7.52 9.64 3.76
September 8.12 9.78 5.41 7.61 9.72 3.69
October 8.12 9.83 5.31 6.86 8.43 3.82
November 8.14 9.98 5.04 7.54 9.80 3.33
December 8.13 10.12 4.73 8.28 11.01 3.27
January 8.14 10.24 4.51 9.04 11.91 3.85
February 8.21 10.40 4.37 9.79 12.77 4.36
March 8.36 10.67 4.27 10.49 13.87 4.32
April 8.54 11.00 4.15 10.67 14.36 3.97
May 8.67 11.20 4.10 10.20 13.16 4.78
June 8.80 11.34 4.15 10.17 12.51 5.73
July 9.11 N.A. N.A. 10.96 13.40 6.46
Notes: P=Provisional
Source: BBS
36 Performance of Bangladesh Economy in FY 2010-11…………….
Headline inflation, i.e., the annual average rate of inflation (12-month
annual average CPI, 1995/96=100), rose from 7.31 percent in June, 2010 to
8.80 percent in June, 2011, and then to 9.11 percent in July, 2011. The main
factor behind the rise in overall inflation was the rise in food prices. Since
June, 2010, food inflation increased fast, though non-food inflation recorded a
decline. The average food inflation rose from 8.53 percent in June, 2010 to
11.34 percent in June, 2011, while the average non-food inflation rate slightly
declined, from 5.45 percent to 4.15 percent, during the same period.
The point to point inflation increased from 8.70 percent in June, 2010 to
10.67 percent in April, 2011, but after declining from that point to 10.20
percent in May and to 10.17 percent in June, 2011, it started to rise again and
reached 10.96 percent in July, 2011. Point to point food inflation rose from
10.88 percent in June, 2010 to 13.16 percent in May, 2011, and then fell
slightly to 12.51 percent in June, 2011, but the downward movement was
quickly reversed and food inflation rose to 13.40 percent in July, 2011. The
point to point non-food inflation first fell for a certain period, coming down
from 5.24 percent in June, 2010 to 3.27 percent in December, 2010, which was
lower than in any month since June, 2010, but climbed thereafter to 5.73
percent in June, 2011, and 6.46 percent in July, 2011.
High Inflation has now become an issue of global concern. The rising prices of
food and energy during the past months have triggered inflation in the USA,
Europe, China, India and many other countries around the world. Analysts fear
a further rise in prices because of adverse weather conditions and natural
calamities in the major food producing countries and also because of the
political instability in the Middle East and North Africa that may affect oil
exports from that region.
Trends in commodity supplies and prices in domestic and international
markets indicate that there is little chance for the inflation rate to come down
in the immediate term. Moreover, with a faster recovery of the world
economy, global prices are very likely to increase further, which might as well
push the domestic inflation rate in Bangladesh much further in the coming
months.
The occasional increase in the administered prices of publicly provided goods
and services also contributes to high inflation. The two-stage increase in
electricity tariffs by a total of 18.14 percent in February and August, 2011 was
necessary, but it certainly put an additional pressure on the general price level.
Again, even after the recent upward revision of petroleum prices, another
round of upward adjustment of petroleum prices has become inevitable in
order to reduce subsidies and thus the pressure on the government’s budget.
Thoughts on Economics 37
In the national budget for FY12, government has set the annual inflation target
at 7.50 percent, but in the very first month of the present fiscal the average
inflation rate crossed the annual target and rose to 9.11 percent, and the point
to point inflation rose to 10.96 percent. Because of the increase in global
commodity and fuel oil prices, a likely further depreciation of the Taka, the
recent 18 percent increase in the power tariff, and the expected increases in
CNG and fuel oil prices, it might be extremely difficult to bring down the
inflation rate to within the 7.50 percent target projected in the budget.
16.1 Inflation Control
To keep inflation under control, Bangladesh Bank’s monetary policy statement
announced in July, 2011 proposed to curb domestic credit growth in the
present fiscal. However, given the need for stimulating investment to boost
economic growth, it would be advisable for the BB to pursue an
accommodating monetary policy that will encourage private sector investment
in productive economic activities. Easy availability of credit to the private
sector is of paramount importance for fighting inflation, as it will work toward
raising real sector production and consequently bring about a downward
movement of prices.
An increase in administered prices of petroleum fuels, fertilizer and electricity
is necessary to reduce the government’s subsidy burden, but the increase in
these prices should be implemented in small doses and in a gradual manner
over a period of time, so that the price hike becomes less burdensome to the
people.
An important factor behind the growing inflationary pressure in the country is
the high degree of protection accorded to local industry. While the highest
statutory customs duty in the country is 25 percent, the imposition of various
additional duties and taxes such as regulatory duty (RD), advance trade VAT
(ATV), advance income tax (AIT), and supplementary duty (SD) raises the
level of protection to more than 200 percent.
A rationalization of the tax structure by lowering the maximum rate of
customs duty, bringing down the para-tariffs to a minimum, and avoiding the
multiplicity of taxes would therefore be needed to reduce the inflationary
pressure.
The depreciation of Taka is no doubt partly responsible for the present high
rate of inflation, but yet any deliberate attempt at the moment to strengthen the
Taka would be unwise. An appreciation of the Taka might harm the country’s
exports, which have only recently come out of the negative growth
experienced during the closing months of FY10.
38 Performance of Bangladesh Economy in FY 2010-11…………….
The price of food is a very sensitive issue as food accounts for more than 70
percent of total expenditure of more than 50 percent of the country’s
population. Government should therefore continue its open market sales
(OMS) programme, introduced last year, in order to minimize the sufferings of
the poor and the lower middle class people until food prices come down to a
tolerable level.
Market manipulation by cartels of dishonest traders is allegedly behind the
recent surge in inflation, a view held even at the highest level of government.
If that is true, the government will need to deal with the market manipulators
with an iron hand.
In addition, government will need to remove infrastructural bottlenecks and
transportation impediments that prevent free movement of goods, adopt strong
measures to reduce corruption in the administration responsible for the
delivery of public services, and prevent the growing incidence of extortion and
illegal toll collection by anti-social elements, all of which add to production
costs and raise the final price of the products.
Inflation control will thus require simultaneous action on a number of fronts.
Apart from various policy supports that would reduce production costs and
enhance production and supplies, improvements in overall governance and law
and order conditions would contribute to easing the inflationary pressure.
Finally, monetary policy, though important, is not sufficient on its own to rein
in inflation unless complemented by policies and actions in other areas. A
coordination of monetary policy with fiscal and other economic policies will
be needed to achieve the desired growth and inflation control objectives. The
Monetary Policy Coordination Council, which is headed by the Finance
Minister, is best suited to do this job.
17.0 Summary and Concluding Observations
The foregoing review indicates that the economy performed reasonably well
in FY11. Several policy conclusions emerge from the review. The agriculture
sector experienced good growth in FY11 and established, once more, its high
importance in the national economy. The sector does not only provide the
country’s much-needed food security but also supply essential raw materials
for the country’s manufacturing sector. Without the contribution of the
agriculture sector, which grew at about 5.0 percent during the year, the overall
GDP growth in FY11 could be much lower. Nevertheless, there is no scope
for complacence. The FAO has already put Bangladesh on a list of 31 food-
insecure countries. All round effort will therefore be needed to improve the
Thoughts on Economics 39
performance of the agriculture sector. To that end, government must continue
to provide, and, if necessary enhance, the prevailing subsidies on fertilizer,
diesel and electricity to this sector. The reduction of agricultural subsidy in the
FY12 budget has not been prudent, according to many experts.
Production was steadily recovering in the manufacturing sector. While the
sector to some extent suffered from the adverse impact of global recession, the
dominant obstacles to the sector’s growth are indigenous, viz., under-
developed physical infrastructure, insufficient and irregular supply of power
and gas, high interest rates on bank loans, and a host of non-economic factors
like poor law and order conditions. Slow growth of electricity and gas sub-
sectors, in particular, poses a threat not only to industrial growth but also to
the development of all other sectors of the economy. Every conceivable action
will need to be taken to remedy these problems. Attaining the targeted 7.0
percent growth in FY12 and enhancing it to 8.0 percent thereafter will hinge
upon the government’s success in this area.
The private sector is the engine of growth in a market-based economy, but
since public investment has a strong crowding-in effect on private investment,
a speedier implementation of the ADP will be needed to accelerate the process
of economic growth. A faster implementation of ADP is also necessary to
convince the donor community about the country’s implementation capability
and persuade them to release the large amount of aid money that now lies in
the pipeline. Getting more aid money is necessary to avoid the dependence on
high-cost domestic finance as well.
In the area of infrastructure development, the PPP initiative adopted by
Government two years ago to boost infrastructure investment needs to be
operationalized without delay.
The Government is committed to increasing the power generation capacity to
meet the growing need for electricity in the country. While there is no quick
fix for solving the country’s power sector problems, and an enduring solution
can be found only in the medium and long term, Government should take
some immediate measures like rehabilitation and maintenance of old power
plants, reduction of system loss etc., that will enhance the medium term
prospects and, to some extent, improve the present situation as well.
The country’s natural gas reserves are depleting fast. In the 13 years since
1998, there has been only one discovery of gas field – by BAPEX at Gopalpur
in 2011. In order to meet the growing need for gas by the power sector as well
as by many other industrial, commercial and household consumers, gas
exploration effort will need to be intensified.
40 Performance of Bangladesh Economy in FY 2010-11…………….
NBR’s achievements in revenue collection are encouraging but, given the
slowdown in foreign aid inflows, much stronger effort will be needed to raise
more revenues in the present fiscal year to meet the government’s ever-
growing development and non-development expenditure. The tax base should
be significantly widened. The collection of non-NBR and non-tax revenues
should be raised to their maximum potential. The tax-GDP ratio should be
raised by at least 1 percent of GDP every year from the present 10 percent
level to, say, 15 percent in the course of the next few years.
The high export growth recorded in the 2010-11 fiscal year will need to be
sustained and accelerated further, through diversification of export production
and exploring newer export destinations. The quality of export infrastructure,
in particular the management and services of Chittagong port will need to be
greatly improved to facilitate timely shipment of exports and also to quickly
release import cargoes on which most export activities heavily depend. The
relaxed rules of origin under the European Union’s new GSP scheme will need
to be fully exploited.
Most importantly, exporters will need to improve the price and quality
competitiveness of their products. Competitiveness of exports should be
achieved through quality improvements and cost reduction, not by relying on
government subsidy. The central bank, in its turn, will need to keep the
exchange rate favourable to exporters by preventing any appreciation of the
Taka so that the competitiveness of the country’s exports is not impaired in the
world market.
Inflation is a serious national problem. A mixture of monetary, fiscal, and
other policies together with tough administrative actions to prevent hoarding
and price manipulation by dishonest traders will be needed to keep the
inflation rate under control.
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