Recent Performance of the Bangladesh Economy

An Assessment of the State of the Economy and Short-Term Outlook 2009-10 by

The Bangladesh Institute of Development Studies (BIDS)

Presented at the Seminar Jointly organized by The Bangladesh Institute of Development Studies (BIDS) and The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI)

23 February 2010

Recent Performance of the Bangladesh Economy

An Assessment of the State of the Economy and Short-Term Outlook 2009-10

BIDS Research Team

The BIDS Research Team was led by Mustafa K. Mujeri and consisted of M. Asaduzzaman, Quazi Shahabuddin, Zaid Bakht, K. M. Nabiul Islam, Nazneen Ahmed, Mohammad Yunus, S.M. Zulfiqar Ali, Anwara Begum, Narayan Chandra Nath, Monzur Hossain, Md. Harunur Rashid Bhuyan, A.T.M Shaifullah Mehedi, Md. Mansur Ahmed, and Md. Zabid Iqbal. The Research Team alone remains responsible for the views expressed and analysis presented in this report.

23 February 2010

Bangladesh Institute of Development Studies E-17, Agargaon, Sher-e-Bangla Nagar Dhaka 1207 www.bids.org.bd

Contents
1. Introduction1

2. RevitalizingtheEconomy:ExpansionofFiscalSpace2
2.1 RevenueCollection2 2.2 RevenueExpenditure4

3. AcceleratingEconomicGrowth:PrioritytoAgriculture5
3.1 Agriculture5 3.2 IndustryandServices14

3.3 SMEDevelopment16

4. PromotingSocialDevelopmentandStrengtheningSocialSafetyNets19
4.1 Health20 4.2 Education22 4.3 StrengtheningSocialSafetyNets23

5. DevelopingPowerandEnergy26
5.1 GDPGrowthandElectricityConsumption26 5.2 GenerationStatusoftheElectricitySector27

6. MaintainingMacroeconomicStability32
6.1 MinimizingImpactsofGlobalRecession32 6.2 MaintainingExternalSectorStability35 6.3 EnsuringPriceStability44 6.4 ManagingClimateChangeImpacts:FinancingIssues48

7. EconomicWellBeing50
7.1 MovementsinWages50 7.2 PerceptionofChangesinWellBeing55

8. LookingAhead:ChallengesandCriticalPolicyIssues57
8.1 BoostingInvestments57 8.2 AcceleratingEconomicGrowthandEnsuringFoodSecurity59 8.3 ManagingInflationandContainingInflationExpectations59 8.4 ReducingRegionalVariationinEconomicPerformance60 8.5 ImprovingGovernanceacrosstheBoard61

9. ConcludingRemarks61

iii

Review of Recent Performance of the Bangladesh Economy

1. Introduction
The fiscal year 2009-10 (FY10) is both unique and challenging for Bangladesh in many respects. The FY10 budget is the first budget of the newly elected democratic government which came to power with pledges to bring definite changes in the socioeconomic life of the common people along with time bound targets in key areas under Vision 2021. The pledges were made in the backdrop of rising strains in the economy in the face of heightened impacts of the global recession. The global and domestic economic perspectives of FY10 were very different from a normal year facing Bangladesh due to a number of reasons. At the beginning of 2009, the Bangladesh economy started to experience the adverse impacts of the global recession in different sectors and, by the beginning of FY10, many of these impacts deepened to create longer term socioeconomic consequences. Economic growth decelerated in FY09, and export started to show absolute decline since the beginning of FY10. Sluggishness in investment assumed a persistent character and long neglect, corruption, and indecision in the power and energy sector contributed to further worsening of the investment climate. Although global recession and supply augmenting measures of the government somewhat eased the inflation situation in the first half of 2009, inflation started to pick up since the beginning of FY10 largely fueled by import induced inflation. In addition, the domestic economy faced two consecutive floods and cyclones (Sidr and Aila) which hampered normal economic activities. The economy, however, showed considerable resilience and succeeded in maintaining respectable growth and reasonable stability. The policy responses of FY10 budget were designed in the light of these realities. The proposals of the budget, in the words of the Finance Minister, were placed after carefully evaluating our preparedness to tackle the impact of global recession, analyzing the possible resource constraints, and taking into account the capacity for implementation of development programmes.1 In particular, the budget adopted an expansionary fiscal stance and identified agriculture and rural development, power and energy, human resource development, industry and trade, and social safety nets as major sectors of priority. The Medium Term Macroeconomic Framework (MTMF) provided the framework of the FY10 budget. The assumption was that economic growth in FY10 would be 5.5 percent (revised upwards to 6.0 percent later) and the average inflation rate would come down to 6.5 percent from 7.0 percent in FY09. For the external sector, the apprehension was that the export sector would be negatively affected by the global recession and the growth of remittances might slow down. On the other hand, it was expected that revenue collection would increase following the expansion of tax and nontax revenue nets. The FY10 budget raised the size of the Annual Development Programme (ADP) and adopted counter-cyclical measures to stimulate domestic demand and encourage investments. The thrust of the budget has been on generating more
1

See, Budget 2009-10: Budget Speech, Abul Maal Abdul Muhith, Minister, Ministry of Finance, Dhaka 11 June 2009, p. 6.

employment, expanding the social safety nets, creating self-employment opportunities, reducing regional disparity, providing emphasis on agriculture, achieving the target of power generation, accelerating industrialization, and building necessary infrastructure for Digital Bangladesh. 2 The government has completed its first year in January 2010 and the economy has entered the second half of FY10. This review provides an assessment of the performance of the economy during the first half of FY10 keeping in perspective earlier developments especially in FY09. The purpose is to identify both current strengths and weaknesses, and challenges that the economy might face in maintaining macroeconomic stability and achieving key socio-economic targets in the short term. It also provides an outlook for FY10 based on past developments and likely movements of major macroeconomic indicators during the rest of the fiscal year. The review has been organized around seven priority areas identified in the FY10 budget. The review draws upon two major sources of data. First, data/information collected from different government ministries/agencies as well as published/unpublished documents. Second, a Field Survey carried out by BIDS in the second half of December 2009 in selected districts of the country. The survey, though limited in size and scope, provided useful insight on grassroots level dynamics of the Bangladesh economy as experienced by the common people in specific contexts. 2. Revitalizing the Economy: Expansion of Fiscal Space
2.1 Revenue Collection

The FY10 budget set revenue target at Tk. 794.61 billion indicating a growth of 14.9 percent over the revised budget figure of Tk. 691.80 billion for FY09. But the actual revenue collected during FY09 was significantly less. According to the Ministry of Finance, actual revenue collection during FY09 is Tk. 639.79 billion with actual NBR revenue at Tk. 502.05 billion. 3 However, NBR reports a revenue collection of Tk. 525.26 billion in FY09. 4 Combining these two sets of information, actual revenue earning during FY09 is likely to be between Tk. 662 billion and Tk. 670 billion. Compared with this figure, the revenue target for FY10 implies a revenue growth of nearly 20 percent. It may be mentioned here that during the 10-year period covering FY97 to FY07, yearly growth in revenue collection varied from a low of 4.9 percent to a high of 14.5 percent; the average yearly growth being 11.2 percent. The only exception was FY08 when revenue growth shot up to 22.0 percent largely because of steep rise in the prices of imports. But in the following year (FY09) growth in revenue came down to 12.0 percent. In view of this historical trend in revenue growth, achieving the target set for revenue collection during FY10 would require better than usual performance in all three broad components of revenue, namely, NBR tax, non-NBR tax and non-tax revenue.
NBR Revenue

The budget FY10 set NBR revenue target at Tk. 610 billion. During July-November 2009, revenue collection by NBR stood at Tk. 216.67 billion, which is about 35 percent of the yearly target and 15.6 percent higher than the revenue collected by NBR during the same period of FY09. It may be mentioned here that NBR revenue collected during July-December 2008 also
2 3

See, ibid. p. 28. See, Monthly Fiscal Report, September 2009, Ministry of Finance. 4 NBR website, 24 December 2009.

experienced 15.3 percent growth over the revenue collected during the same period in the previous year. One of the main strategies set out in the FY10 budget for resource mobilization is enhancing revenue collection from income tax and local value added tax (VAT) and reducing dependence on revenue from imports. The structure of revenue collected during July-November 2009 appears consistent with this approach of the budget. Because of substantial reduction in customs duty on capital machinery and raw materials and continued low price of imports due to global recession, revenue from import sources registered only 5.4 percent increase during July-November 2009 over the import revenue collected during the same period in 2008. In contrast, revenue from local VAT and income tax during July-November 2009 grew at rates of 26.1 percent and 23.4 percent respectively over the revenue collected during the same period in 2008. The revenue target set in budget FY10 against actual revenue collected during FY09 implies a rate of revenue growth of 11.3 percent from import source, 14.8 percent from local VAT, and 19.5 percent from income tax. As is evident, both income tax and local VAT collection rates during July-November 2009 have been significantly higher than the target rates while revenue collection from import sources significantly fell short of the target. If the rate of growth in NBR revenue observed during July-November 2009 is sustained during the rest of FY10, then total NBR revenue at the end of FY10 will stand at Tk. 607.20 billion, which will be close to the NBR revenue target of Tk. 610 billion in the budget. In FY09, imports accounted for nearly 40 percent of revenue collected by NBR while the share of income tax and local VAT stood at 26.4 percent and 20.9 percent respectively. With global economy moving gradually towards recovery, the international commodity prices are showing rising trend. This, along with acceleration in the pace of imports since November 2009, is likely to result in higher revenue earning from import sources during the rest of FY10. At the same time, the on-going efforts of NBR towards improved coverage and better tax administration in the field of local VAT and income tax have started to yield results and if sustained will contribute towards better growth in revenue earnings from these two sources. The prospects of NBR in meeting its revenue target in FY10 thus appear bright. Non-NBR Tax and Non-Tax Revenue The FY10 budget set the target for non-NBR tax revenue at Tk. 29.55 billion, which is about 17 percent higher than the revised budget figure of Tk. 25.26 billion in FY09. The actual non-NBR tax collected in FY09 stood at Tk. 26.53 billion. Compared against this figure, the target of nonNBR tax for FY10 implies a growth by nearly 11.40 per cent. It may be mentioned here that according to the Monthly Fiscal Report of the MOF, non-NBR tax increased from Tk. 18.54 billion in FY07 to Tk. 23.13 in FY08 indicating a growth of nearly 25 percent. Data on non-NBR tax revenue are available for the first quarter of FY10 and show a revenue collection of Tk. 6.56 billion, which constitutes 22.2 per cent of the target revenue from this source. If this trend continues about 88.8 percent of the target revenue will be collected during the year resulting in a shortfall of nearly Tk. 3.3 billion. The target for non-tax revenue was set at Tk. 155.06 billion in budget FY10. This is 13.6 percent higher than the revised budget figure of Tk. 136.54 billion in FY09. The actual collection of nontax revenue in FY09 stood at Tk. 111.21 billion. Against this figure, the growth in revenue targeted for FY10 works out at nearly 39.4 percent.

The first quarter data show a collection of non-tax revenue of Tk. 64.12 billion, which is nearly 41.3 percent of the yearly target. If this trend continues, non-tax revenue collection could exceed the target of the FY10 budget. 2.2 Revenue Expenditure The total revenue expenditure has been set at Tk. 787 billion in FY10. During the first quarter, revenue expenditure was 13.9 percent of the total. It is likely that revenue expenditure would grow faster in the coming months with the implementation of the new pay scale for the government employees and picking up of the government activities in general. At the same time, subsidies to farmers and stimulus packages announced for different sectors would put pressure on revenue expenditures. Annual Development Programme (ADP) The size of ADP was fixed at Tk. 305 billion for FY10 which is about 75 percent higher than the actual ADP expenditure of FY09. Over the first six months of FY10, the ADP implementation rate was 29 percent, slow but better than that of the last year (24 percent). Unless the implementation rate can be increased, shortfall in utilization of targeted ADP is likely to emerge as in the past years. The disagreement over the recently modified procurement rules has also affected the implementation of donor assisted ADP projects. The rate of implementation of ADP over the July-December period of FY10 and previous three fiscal years is given in Table 2.1. The implementation rate of FY10 ADP, despite its large size, is better than the last three years with 29 percent of total ADP implemented in financial terms in the first six months. In absolute terms, this is Tk. 8,807 crore, which is 42 percent higher than the amount spent during the same period of FY09. This reflects a significant acceleration over the last few years, but this needs to be further improved in order to reach the targets of ADP.
Table 2.1: Implementation Status of ADP, July-December No. of projects of which: new projects ADP allocation (Tk. in crore) Share of project aid in total (%) % of disbursement in total allocation Utilization status (% of total): Total ADP Taka component Project aid component
Source: IMED

FY10 886 35 30,500 42 45 29 30 28

FY09 904 104 25,600 47 40 24 26 22

FY08 931 41 26,500 37 38 21 20 22

FY07 886 43 26,000 34 35 25 24 27

The utilization rates of both Taka component and project aid component have improved. The recent simplification and modification in the award process of implementing ADP projects and changes in procurement rules might have played a role in improvement in the implementation status of ADP in this fiscal. 5 Out of the 48 ministries/divisions included in the ADP, the fund
5

Several donors, however, reacted sharply against some of these changes and consequently there was a slowdown in the implementation of aided projects. The issue has now been resolved with the government deciding that the changes in the procurement rules would only be applicable to government funded projects.

utilization rate of only 19 ministries/divisions was higher than the average (29 percent). Eight ministries recorded utilization rates of more than 50 percent of the amount released: Ministry of Labour and Employment 82 percent, Energy and Mineral Resources Division 74 percent, Ministry of Commerce 62 percent, Ministry of Land 58 percent, Internal Resources Division 54 percent, Ministry of Religious Affairs 52 percent, Rural Development and Cooperatives Division 52 percent, and Ministry of Post and Telecommunications 50 percent. Five ministries (Ministries of Local Government, Rural Development and Cooperatives; Power; Communications; Health and Family Welfare; and Primary and Mass Education) received 63 percent of the total ADP allocation in FY10. Most of these ministries performed better than average. Incidentally, these ministries and divisions belong to the group that is included in the MTBF. The weak implementation capacity of the ministries/agencies continues to remain a major bottleneck of public sector investment which hurts not only the progress in terms of the social goals but also constrains the creation of essential public goods needed to promote a healthy and vibrant private sector. Budget Deficit and Financing The budget deficit in the first quarter of FY10 stood at Tk. 9.63 billion (excluding grants), much higher than Tk. 0.58 billion over the same period of FY09. From the external source, the government borrowed Tk. 7.2 billion and amortized Tk. 9.4 billion. Net foreign financing of the deficit was thus negative and there was a net outflow of Tk. 2.2 billion. Net domestic borrowing amounted to Tk. 11.33 billion in the first quarter of FY10 compared with a net repayment of Tk. 1.6 billion in the previous year. The government borrowed about Tk. 30.5 billion from the banking system while, in the case of nonbank borrowing, there was a net repayment of Tk. 19.1 billion.

3. Accelerating Economic Growth: Priority to Agriculture

The FY10 budget initially targeted a GDP growth rate of 5.5 percent considering the depressed global outlook. The growth rate, however, was later revised upward to 6.0 percent compared with 5.9 percent attained in FY09. 3.1 Agriculture Crop Production The FY10 budget proposes a comprehensive approach to developing the rural economy covering both farm and nonfarm sectors. Within the approach, one of the objectives is to achieve self sufficiency in food by 2012. For the purpose, major actions proposed in the budget include: (i) expansion of irrigated area and creation of multiple crop production opportunities; (ii) enhanced subsidy to agriculture; (iii) increased production and distribution of high yielding variety seeds and enhanced capacity for preservation and storage; (iv) emphasis on agricultural research and rehabilitation; and (v) increased flow of agricultural credit. Food grains Production Food grains production has increased rapidly in Bangladesh from around 10 million tons in early 1970s to more than 30 million tons in recent years. Total food grains production in FY09 was 32.2 million metric tons (aus 1.9 million metric tons, aman 11.6 million metric tons, boro 17.8 million metric tons, and wheat 0.9 million metric tons). The target for food grains production for FY10 is 35.3 million metric tons (aus 2.5 million metric tons, aman 12.7 million metric tons,
5

boro 19.0 million metric tons, and wheat 1.1 million metric tons), higher by nearly 10 percent than last years production. The production of aus in FY10 has been estimated at 1.7 million metric tons, lower by 10 percent from last years production. The estimate of aman production is yet to be made. Available information, however, indicates that aman production is not likely to be very different from last years production level. Drought conditions existed in some parts of the country which affected aman production. There were also reports of pest attacks in some areas. The Field Survey carried out by BIDS for this review shows that the yield rate of aman in FY10 has significant regional variations (Figure 3.1). The estimated yield of aman is highest in the northern region followed by eastern and central regions. It is lowest in the southern region (by 46 percent compared with the northern region). The yield rate in the southern region remains the lowest even if the Aila affected areas are excluded (Figure 3.2). On average, the yield rate is unchanged in the northern region compared with last years level while it has risen in the eastern region and declined in the central and southern regions. The reasons for better performance in eastern and northern regions are varied which include: (i) relatively flood free environment during cultivation and harvesting periods; (ii) absence of pest attacks; (iii) improvement in supply and availability of good quality seed, fertilizer, and diesel at reasonable costs and consequent balanced use of fertilizer; (iv) wider application of river, rain, and surface water for irrigation and availability of diesel at subsidized prices; and (v) absence of any major drought conditions during the cultivation period. 6
Figure 3.1: Estimated Yield of Aman (maund/decimal) by Regions
0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00
Ea st e r n Ce nt r a l S out he rn Nor t he r n 0.22 0.31 0.39 0.31 0.32 0.21 0.39 0.39

2008

2009

Source: BIDS Field Survey 2009

Figure 3.2: Estimated Yield of Aman (maund/decimal) excluding Aila Affected Areas
0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00

2008

2009

0.39 0.31 0.22 0.31 0.28 0.27

0.39 0.39

Ea st e r n

Ce nt r a l

S out he r n

Nort he r n

Source: BIDS Field Survey 2009

The BIDS Field Survey identified several factors that affected the yield of aman crop in the central and southern regions. The major ones are: (i) irregular rainfall during the cultivation period; (ii) insect/pest attack in many areas; (iii) salinity and saline water intrusion in Aila affected areas precluding aman and other crop cultivation due to inundation by saline water; (iv)
6

These are some general factors that helped to increase or at least maintain aman yield relative to last years level. There also exist some region specific factors. For example, aman production in Madaripur was hampered by flood last year but there has been bumper production this year because of flood free environment. Similarly, farmers in Nilphamari reported fewer problems in getting fertilizer this year which helped in raising the yield.

drought especially in high land areas of the central region; (v) low quality of seed (including those of BR33 and Heera) in several areas in the central region; and (vi) inadequate market conditions to ensure fair prices to growers. Given the production level of aus and expected production of aman which is likely to be around the same level as that of the last year, there is likely to be a shortfall of nearly 2 million metric tons compared with the production targets of these two crops set for FY10. If the rice production target of FY10 is to be achieved, boro production will have to be around 21 million metric tons compared with the target of 19.0 million metric tons. This would obviously need more efforts than planned for the boro season in terms of support to agriculture such as subsidies to fertilizer, diesel and electricity; timely availability of these inputs and quality seed in adequate quantities to the farmers; proper disbursement of agricultural credit especially to small, marginal and tenant farmers; and other support essential to raise boro production. Food Availability and Imports Ensuring higher production of boro would be critical to ensuring stability in the domestic rice market and food security in the country. Total imports of food grains was 3.01 million metric tons (0.6 million metric tons of rice and 2.41 million metric tons of wheat) in FY09. During the first three months (July-September 2009) of FY10, total rice import was 3.6 thousand metric tons (all under food aid) and wheat import was 334.9 thousand metric tons (food aid 28.9 thousand metric tons and private import 306 thousand metric tons). The import target for food grains for FY10 is 3.7 million metric tons comprising of 0.15 million metric tons of food aid, 1.05 million metric tons of government commercial import, and 2.50 million metric tons of private sector import. At the end of September 2009, public stock of food grains remained at a reasonably comfortable level of 1.38 million metric tons. The food grains market situation during the remaining period of FY10 would depend on two critical factors: production level of boro, and the volume of private sector import of food grains. The import of food grains by the private sector depends on availability and prices of food grains in the international market vis-a-vis domestic supply and prices. Although the global ending stocks of rice and wheat was higher at 311.4 million metric tons (rice 120.1 million metric tons and wheat 191.3 million metric tons) in 2008-09 compared with 260.8 million metric tons (rice 109.2 million metric tons and wheat 151.6 million metric tons) in 2007-2008, the medium term outlook indicates rising rice and wheat prices in the global market in 2009-10 due especially to decline in global rice production. Therefore, it is more likely that Bangladesh would face a rising price regime for both rice and wheat in the global market during the remaining period of FY10. Prospects of Boro Production The production of boro and wheat for FY10 is at the initial stage and it would be important to ensure a bumper boro harvest to meet the shortfalls of aus and aman production and ensure adequate supply of food grains in the domestic market. From the BIDS Field Survey, a mixed picture emerges regarding boro production from different regions of the country. In central and northern regions, the farmers are expecting good production in the absence of any natural disaster and subject to availability of adequate water for irrigation and timely supply of other inputs. In the eastern region, boro production is expected to be normal if adequate supply of irrigation and others inputs can be assured. In these regions, the area under boro cultivation does not seem to have changed much compared with the cultivated area under boro rice last year. In the southern region, prospects are good in some areas while in
7

other areas (e.g. Satkhira and adjacent areas) boro production has been hampered by saline water intrusion. In this region, total area under boro cultivation seems to have declined relative to last year. During the BIDS Field Survey, the farmers reported several problems which discouraged them to go for higher boro production. These include: (i) difficulties in accessing adequate credit; (ii) high prices of fertilizer, diesel, and insecticides; (iii) shortage of labor for cultivation in time and absence and/or high cost of alternative equipment (e.g. tractor); (iv) high probability of flooding in low lying areas (e.g. in eastern region) and coastal areas (southern region) having no embankments and sluice gates; (v) problem of water logging in specific locations (e.g. Madaripur); (vi) limited availability of surface water for irrigation; (vii) lack of timely and adequate supply of electricity for irrigation; (viii) problems with timely availability and quality of seed (especially with respect to hybrid seed), fertilizer, insecticides, and other inputs; and (ix) lack of timely advice from extension agents in case of pest attack or other problems. Overall, the BIDS Field Survey shows that the production of boro may not increase much in FY10 and it is more likely that the production of boro rice and wheat would remain closer to last years levels. According to the Field Survey, the yield of boro is likely to be above the normal level or at least at the normal level in central, northern, and eastern regions but it might slightly decline in the southern region. Normal weather conditions and the absence of any natural disasters are, however, essential preconditions of reaching the expected boro production. In view of the production levels of aus and aman, and the prospects of boro and wheat, total production of foodgrains in FY10 is likely to be around the same level as that of last year (that is around 32 million metric tons) which is about 10 percent lower than the target set for FY10. Input Subsidy, Availability of Fertilizer and Irrigation Timely availability of chemical fertilizer (both urea and non-urea) in adequate quantities and at reasonable prices is imperative for sustained growth of food grains production. Total fertilizer use in FY09 of 28 lakh tons was the lowest in the last five years (Table 3.1). This low use of fertilizer, especially non-urea fertilizer (such as TSP, MOP, DAP), may largely be attributed to their high prices particularly during the first half of FY09. The newly elected government decided to provide subsidy to the non-urea fertilizer (TSP, MOP and DAP) which reduced their prices to about half of their previous levels. It was a timely decision which contributed to promoting more balanced use of fertilizer and reducing production cost of the farmers. Following the reduction in international prices of fertilizer, the government further reduced the administered prices of TSP, MOP and DAP in November 2009. This is expected to provide further boost in fertilizer use and consequently to boro production in FY10. The cost and availability of irrigation, especially irrigation by diesel-operated pumps which constitute about 75 percent of total irrigation, is another major area of concern for boro production. The Ministry of Agricultures request for budgetary resources of Tk. 750 crore for diesel subsidy appears to be a step in the right direction, particularly when the irrigation cost claims a large share of the total production cost of boro. But ensuring proper distribution of the subsidy to the targeted farmers remains a challenge. The preparation of a comprehensive data base and introduction of Input Delivery Card for eligible farmers is a welcome move but needs to be efficiently done to avoid leakages and reach intended beneficiaries. The continuation with the provision of 20 percent subsidy for electricity used for irrigation would also help the farmers.

Table 3.1: Use of Fertilizer in Recent Years

(lakh metric ton)

FY06 Urea TSP MOP DAP Total 24.61 4.36 2.91 1.30 33.18 FY07 25.27 3.40 2.30 1.15 32.12 FY08 26.68 4.61 4.01 2.50 37.80 FY09 24.00 2.00 1.50 0.50 28.00 FY10 (projected) 28.00 5.98 4.50 2.50 40.95

Source: DAE, Ministry of Agriculture, GoB.

Disbursement of Agricultural Credit In the Annual Agricultural/ Rural Credit Policy and Programme for FY10, special emphasis has been given on expansion of agricultural credit. Along with state owned banks, private commercial banks (PCBs) and NGOs have been encouraged to disburse agricultural credit to farmers, especially in agriculturally underdeveloped areas. The government allocated Tk. 11,512 crore in FY10 budget for the purpose, which is 24 percent higher than actual disbursement in FY09. During July-November 2009, total disbursement of agricultural credit was Tk. 4,250 crore which exceeded, by more than 25 percent, the credit disbursement during the corresponding period of FY09. The recovery of agricultural credit during the period was also higher by 87 percent than the amount during the corresponding period of FY09. Thus both disbursement and recovery of agricultural credit increased. An important feature of agricultural credit of FY10 is the allocation of Tk. 500 crore by the Bangladesh Bank exclusively for the sharecroppers. This would be disbursed to the tenant farmers through BRAC. The attempt, if successful, would no doubt ameliorate the sufferings of the poor tenant farmers who cannot make required investments in crop cultivation due to severe cash constraints. Field Experience of Aman and Boro Production The BIDS Field Survey 2009 brings out several problems that the farmers faced with respect to key inputs during aman cultivation: (i) inadequate quantity and low quality of seeds during the critical period of plantation in several areas; (ii) fertilizers were not available in the open market and could only be purchased from the dealers at higher than government determined prices; (iii) higher prices of pesticides but the major problem was its quality; (iv) irrigation cost was relatively high; the farmers had to spend, for irrigating 30 decimals of land, between Tk. 500-600 for diesel and Tk. 300-400 for electricity; (v) accessing agricultural credit from the banks was difficult due to harassment by bank officials (e.g. demanding bribes and asking for documents which the farmers found difficult to produce) which compelled many farmers to turn to local landlords/mahajans for informal credit at very high rates; (vi) Bank officials often show reluctance to provide credit to small farmers (e.g. those having less than 2 acres of land) which constrain the poor farmers in accessing agriculture credit. In addition, the amount of loan is less that the farmers require. Farmers need a loan amount of Tk. 5 to 6 thousand per bigha for cultivation of boro, but the banks tend to give only Tk. 2 to 3 thousand which is not adequate to meet cash cost especially for the poor farmers; and (vii) little cooperation of block supervisors and upazila agriculture extension workers in times of need.

Regarding changes in the intensity of the problems compared with the previous year, the opinion of the farmers indicates improvements (Table 3.2). Most farmers reported that they had faced fewer problems in FY10 relative to FY09 with respect to getting seeds, fertilizer, pesticides and diesel, but the situation did not improve in case of irrigation, accessing agricultural credit, and getting extension support.
Table 3.2: Change in Overall Problems faced by Farmers during Aman Cultivation Input Overall problems faced by farmers in FY10 relative to FY09 Less Less Suggestions

Seed Fertilizer

Pesticides Irrigation

Less No change

Diesel Agricultural credit Extension support from block supervisors and agricultural officers
Source: BIDS Field Survey 2009

Less No change No change

Ensure timely supply of quality seeds in the open market. Adopt measures to ensure adequate supply of all fertilizers in rural locations/markets at government determined prices. . Ensure timely supply of quality pesticides in adequate quantities in rural areas. Subsidy for irrigation needs well targeting and timely and uninterrupted supply of diesel/electricity needed. Ensure well targeted diesel subsidy. Ensure easy and corruption free distribution. More intensive monitoring at the field level needed to ensure timely availability of required extension services and support.

The BIDS Field Survey shows that the total cost per decimal of aman cultivation varies substantially over the regions in the country (Figure 3.3). Although this is not a measure of profitability, it shows the wide variation in costs that the farmers had to incur in cultivating the aman crop. On the other hand, compared with the earlier year, total cost per decimal of cultivating aman declined in eastern, central, and southern regions but increased in the northern region in FY10. In FY10, the lowest cost was in the eastern region which was lower by more than 43 percent of the cost in the northern region. With lower yield of aman during 2009 over 2008 except in the eastern region, these cost figures mean a substantial lowering of unit costs of inputs in

Figure 3.3: Cultivation Cost of Aman per Decimal (Tk.)

100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Eas tern Cent ral So uthern No rthern

2008

2009

Source: BIDS Field Survey 2009

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all regions except in the northern region. Given that the northern region is a major aman producing zone, the rise in costs in this region is a major cause of concern both for the farmers as well as the consumers. For the FY10 upcoming boro crop, the farmers reported some problems for which quick actions are needed to ensure a good harvest: Ensuring proper irrigation for boro is necessary. The availability of surface water in most areas is limited and not much investment has been made in recent years under private/public initiatives to install new deep/shallow tubewells and/or to replace the old ones. In this situation, optimal utilization of existing facilities is essential along with ensuring adequate supply of diesel and uninterrupted supply of electricity to meet irrigation needs in a timely manner. The supply of quality fertilizer and pesticides in adequate quantity needs to be ensured in all locations. The diesel subsidy needs to be distributed to target farmers in a transparent manner. Sensitization and effective field level monitoring of block supervisors and upazila agriculture extension workers are needed to assist the farmers in mitigating any emerging problems in boro production.

For the future, the farmers recommended that (i) the government needs to find out various options (e.g. public private partnership, involvement of NGOs), if necessary, to expand surface water irrigation and install deep/shallow tube wells to increase irrigation facilities; (ii) the government needs to strengthen the mechanism for ensuring the quality of seeds and seed market monitoring; (iii) the subsidies on fertilizer and irrigation are critical for the farmers in order to ensure profitability of crop production and these should be expanded and well targeted; (iv) the market for inputs, especially that of fertilizer, should be made competitive through expanding availability in the open market and shrinking the monopoly power of the fertilizer dealers; (v) agricultural credit delivery system should be made more efficient that can ensure easy access to poor and tenant farmers along with adequate quantities; and (vi) embankments, dykes, and flood protection measures should be built in appropriate locations to protect crop outputs. Future Challenges Boro rice accounts for nearly 55 percent of the countrys total rice output while the rest comes mostly from the aman crop. Aus rice is now concentrated in specific locations and the scope of increasing its production is limited. Area under aman rice has remained mostly unchanged over years. Producing more rice out of a shrinking base of rice land is unlikely without improvements in yield per unit of land. The governments strategy is to put more emphasis on aman rice which is a step in the right direction particularly as boro which is dependent on ground water irrigation has the possibility of arsenic contamination in food chain. However, aman rice is susceptible to floods during its early phases of growth and moisture stress or drought in the later phase. This requires emphasis on research to evolve flood and drought tolerant and/or shorter maturity varieties which can avoid the moisture stress period. Some such varieties of rice are already available. Now the government needs to provide adequate extension services to popularize the cultivation of these varieties and address any field level problems that may arise. The challenge is to devote adequate resources for research and technology development in these areas and make extension a more responsive activity.
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Non-Rice Crops The BIDS Field Survey 2009 reveals better performance of non-rice crops during the first half of FY10 compared with the same period of the last fiscal year except in the aila affected areas. The reduced prices of non-urea fertilizers enabled the farmers to use more of these fertilizers thereby contributing to higher production. The period was relatively flood free with no major natural disasters which helped in vegetables and other crop cultivation. The expectation is that the better production performance will continue during the rest of the year if availability of credit for nonrice crop sub-sector is ensured; supply of non-urea fertilizer at reasonable prices is ensured; water for irrigation is available; and no major natural disasters occur. Fisheries Fisheries fall broadly into three main categories: inland capture, inland culture and marine fisheries. Inland capture fishery plays the dominant role in this sub-sector. Bangladesh has a large number of big and small rivers. All these rivers have extensive floodplains along both banks. All the floodplains remain inundated with flood water of varying depths during the monsoon. Within floodplains, there exist some deep depressions, locally called as beels or haors, some of which retain water throughout the year. All these rivers, floodplains, beels and haors constitute the source of countrys inland (open water) capture fisheries. Inland culture fisheries include pond culture, ox-bow lakes (baors) and shrimp farms. The country has thousands of manmade ponds and reservoirs, 52 percent of which are currently being used for fish culture, 32 percent are reported as culturable, and the remainder are considered derelict. Marine fisheries of the country are made up of marine industrial (trawl) and marine artisanal fisheries. The coast line of the country is approximately 480 km. in length and area of the sea as exclusive economic zone (EEZ) is about 70,000 sq. km. Inland capture fisheries still dominates the whole sector and constitutes more than 41 percent of the total fish production with an average annual rate of growth of 5.6 percent. Inland culture fisheries contribute about 39 percent of total production with an average annual growth of 6 percent. Marine fisheries constitutes about 20 percent of total fish production (with a growth of 5.4 percent per annum), of which marine artisanal alone contributes 19 percent. The availability of fish in the open water capture fisheries is decreasing in recent times because of over exploitation of resources and contamination of the environment with pollutants like agrochemicals, industrial wastes and urban sewers. Urbanization, development of housing projects, and construction of flood control embankments and roads are also the causes of resource degradation which adversely affect the breeding and spawning of many indigenous fish species. Because if these factors, rivers like Buriganga, Turag, Balu and part of Sitalakkhya have become biologically dead. Inland aquaculture production is constrained by the unavailability of appropriate seed, feed and extension services. Main constraints for the expansion of shrimp farming and coastal aquaculture include inadequacy of proper water management infrastructure, scarcity of good quality shrimp post larvae, inadequate technological support, and failure to maintain quality between harvest to processing. For sustainable exploitation of marine resources, main constraints include lack of knowledge of resource availability and location of resources, alleged over-fishing, and encroachment of trawlers of neighbouring countries.

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Growth Potentials Average yield in open water capture fisheries is around 200 kg/ha which can be doubled through proper management and enforcing fisheries legislation. There are some examples of good practices of open water fisheries management where yield has reached significantly higher than the average yield of capture fisheries. Institutionalizing community-based fisheries management, maintaining sanctuaries and no-fishing period; encouraging beel nursery and artificial restocking in the fishery; and proving training and extension services can help achieve higher growth in the open water capture fisheries in the future. The average annual yield of the cultured ponds is around 2 tons/ha, which is lower than some highly productive private farms and projects run by NGOs. Some fish farmers are achieving yield of 4-5 tons/ha, or even more. The average yield of culturable and derelict ponds is even lower; 928 and 508 kg/ha respectively. However, inland culture fishery is increasing steadily and it has considerable potential for future development. For the marine fisheries, exploration of external markets is necessary for enhancing production given the limited size of domestic market for these products. Way Forward In order support the fisheries sub-sector to grow further, the following strategies may be taken into consideration: Control of pollution of the rivers and prevention of further deterioration of water-logging, blockade of water flows, and shrinkage of water-bodies by development of roads, embankments and housing projects; Establishment and maintenance of sanctuaries and enforcing conservation strategies (e.g., ban on fishing for certain period of the year, etc.); Introducing community-based fisheries management and replicating best practice management in other places; Regulating the operation of hatcheries, nurseries and supply of spawn and fry, and production, import and marketing of fish and shrimp feed, feed ingredients, and other inputs; Promoting penculture and cageculture; Defining and maintaining shrimp culture zones in the coastal areas; Providing adequate training, technological support and extension services in all sub-sectors of fisheries; and Carrying out a comprehensive survey of marine fisheries resources and regular updating and determining maximum sustainable yield.

In addition, several other things need to be taken into consideration in order to improve the implementation capacity of the public sector programmes/projects. These include: trained manpower and promoting skills, avoiding too many small projects of similar nature, providing adequate infrastructural and transport support; providing adequate operation fund and some decision making power at the field levels, and facilitating GO-NGO collaboration.

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Livestock and Poultry Around 3.7 million cattle (and buffaloes) are slaughtered annually in the country of which 20 percent are imported through cross-border trade. Due to increased demand and consumer preferences for meat of local bred animals, cattle and goat fattening has become an important income generating activity for small holder farmers. However, livestock and poultry farming in Bangladesh is suffering from many constraints some of which include limited knowledge and technical skills, scarcity of quality feed and fodder, frequent occurrences of diseases, limited coverage of extension services including veterinary services, and absence of appropriate regulatory body. The commercial poultry farmers are also facing acute scarcity of good quality chick, feed and other inputs like vitamin premix, medicine, etc., and lack of extension services and increased threats of diseases. The acute shortages of feed and fodder in the single most important obstacles to livestock development in Bangladesh. Most of the dairy and poultry farmers are also facing problems of adulterated and inferior quality of commercial feed and feed ingredients. There are, however, potentials for increasing milk and meat yield if the quality feeding, better veterinary care, intensive extension services and improved management can be ensured. For poultry, a mix of increasing number of farms and birds together with quality improvement is expected to produce good results. Farmers perception regarding expected production of some major non-rice crops and fisheries and poultry sub-sectors are given in Table 3.3.
Table 3.3: Farmers Perception on Performance of Non-Rice and Non-Crop Sub-Sectors, July-December 2009 Region Southern Central Eastern Northern Wheat Good Very good Slightly better Same Performance relative to same period last year Pulses Potato Vegetables Poultry Good Good Same Same Very Very good Same Very good good Better Very good good Very good Same Bumper Very good Very production good Fisheries Mixed Very good Very good Same

Source: BIDS Field Survey 2009

3.2 Industry and Services The industry sector, especially the manufacturing activities, has experienced significant depression in the wake of global recession and downturn of economic activities during the first six months of FY10. Recent data on industry sector performance are not readily available and it is therefore difficult to identify the emerging trends. But whatever data are available, these indicate a rather poor performance of large and medium scale manufacturing industries. These industries registered a growth of only 2.2 percent during the first two months of FY10 over the same period of the previous fiscal year. The major export oriented industries registered little growth during the first two months, responding especially to the negative export growth of the period.
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On the other hand, manufacturing industries catering mainly to the domestic market (including the small scale industries) have performed better during the period. Some indirect evidence, e.g. electricity and gas consumption by industrial establishments shows some picking up of industrial production especially during the second quarter of FY10. The gas consumption in different industry related activities (e.g. power generation, industrial and commercial activities) rose between 10 percent and 20 percent during July-October 2009 indicating revival of the industry sector growth. The disbursement of industrial term loan rose by 9 percent during July-September 2009 compared with the same period of the previous year which indicates positive investments in the industry sector. The distribution of outstanding advances shows that most of the term loans went to domestic market oriented industries. The service related industries, on the other hand, accounted for a low share of term loans but advances for working capital financing grew robustly (at about 37 percent). Several service sector activities showed good performance in this respect including hospitals, IT services, travel agencies, and entertainment while a poor performance was recorded by cold storage, and hotels and restaurants. The trade sector also got a boost with 35 percent of total advances going to various trading activities during the period. Investment Registration with the Board of Investment During July-December 2009, a total of 686 investment proposals amounting to Tk. 95,849 million were registered with the Board of Investment (BOI) against 627 proposals involving Taka 88,213 million during the same period in 2008 showing an increase of 8.7 percent (Table 3.4). As in the earlier year, textiles and chemical industries were the two main sub-sectors of investment and accounted for almost 60 percent of the proposed investment during JulyDecember 2009.
Table 3.4: Sector-wise Registration of Investment with the BOI
Sector No. July-December 2008 Amount (Million Tk.) 2,806 1,686 49,099 1,312 30 19,684 1,910 7,666 3,950 70 88,213 Share in total (%) 3.2 1.9 55.7 1.5 0.03 22.3 2.2 8.7 4.5 0.08 100 No. July-December 2009 Amount (Million Tk.) 9,302 8,880 32,288 1,797 40 19,262 180 9,322 8,488 289 95,849 Share in total (%) 9.7 9.3 40.0 1.9 0.04 20.1 0.2 9.7 8.9 0.3 100

Agro-based industry Food processing Textiles Printing & publication Leather & leather products Chemical industries Glass and ceramics Engineering Service industry Miscellaneous Total Source: BoI

23 19 369 17 2 62 2 81 48 4 627

71 21 309 19 2 97 2 123 34 8 686

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If registered investment is taken as an expression of intent, then the above reflects positive expectations regarding the economys short term outlook. This means that the investors consider governments policy measures are in the right track and expect the investment climate to improve following effective implementation of these measures. 3.3 SME Development For small and medium enterprises (SMEs), the focus of FY10 budget is mostly on expanding access of SMEs to financial services. 7 Credit to SMEs experienced significant rise at the end of June 2009 compared with the previous year, when the overall outstanding balance reached Tk 47,495 crore. The outstanding loans to SMEs, however, came down to Tk. 42,486 crore at the end of the first quarter (July-September 2009) of FY10 but still remained 4.4 per cent higher than the amount during the same period of the previous fiscal year. The share of outstanding SME loans in total outstanding loans declined to 18 percent in September 2009 from 21 percent in June 2009 (Figure 3.4).
Figure 3.4: SME Financing by Banks/FIs
300000 (Value in crore Tk.) 250000 200000 150000 100000 June Sep,09 50000 0 T otal outstanding Outstanding loans loan to SMEs June Sep,09

SME loans as % of total 21 20 19 18 17 16 June,09 Sep,09

Source: Bangladesh Bank

Table 3.5: No. of SMEs Accessing Loans by Banks/FIs

Manufacturing Services Trading Total The number of SMEs accessing Period institutional finance experienced June 2009 48,782 11,131 321,559 381,472 significant rise at the end of September 2009 53,691 11,740 324,903 390,334 September 2009 to about 390 thousand compared with 381 Source: Bangladesh Bank thousand in June 2009, the rate of increase being 2.3 per cent (Table 3.5). In terms of number of SMEs accessing loans from banks/FIs, the manufacturing units experienced highest growth of 10 percent. The access to

When micro enterprises are included, SMEs comprise over 99 percent of all industrial units, contributing more than 85 percent of industrial employment in Bangladesh. The SME contribution to manufacturing value added is in the range of 20 to 25 percent and the micro, small and medium enterprises (MSMEs) together employ a total of 31 million people, aged 15 years and above. More than three quarters of the household income in both urban and rural areas are provided by MSMEs.

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institutional finance for SMEs is still extremely limited and only less than 18 percent of the SMEs have access to institutional loans. An important policy challenge is therefore to find out ways of effectively increasing the coverage of institutional loans to SMEs. An ongoing BIDS study suggests that adopting more prudent interest rate policies, ensuring effective risk management by banks/FIs, increasing effectiveness of Bangladesh Banks refinancing scheme, installing more effective mechanisms for encouraging women entrepreneurs, and strengthening the capacity of the SME Foundation to lead SME development within a comprehensive strategy are important considerations in bringing required dynamism in the sector. Pragmatic policies are also needed to make loans collateral-free for the SMEs as well as risk-free for the financing banks. A recent survey conducted by BIDS in selected bank branches advancing loans to SMEs shows that the recovery rates of SME loans vary between 80 and 100 percent with a low average default rate (Table 3.6).
Table 3.6: Recovery Rates of SME Loans for Sample Banks Bank Jamuna Bank Limited Mutual Trust Bank Limited Islami Bank Bangladesh Limited BASIC Bank Limited Bank Asia Bangladesh Krishi Bank BRAC Bank limited BASIC Bank Limited NCC Bank Shahjalal Bank Limited Trust Bank Limited Uttara Bank Limited National Bank limited NCC Bank
*Figures are for August 2009 Source: BIDS Survey 2009

Branch Motijheel Dholaikhal Nawabpur Mirpur Mirpur Savar HQ Gazipur Savar Jaydevpur Joydevpur Joydevpur Savar Motijheel

Recovery rate (%)* 98 100 90 80 80 80 95 96 98 100 100 90 98 97

Bangladesh Banks Refinancing Scheme The Bangladesh Bank introduced a refinance scheme in FY05 with Tk.100 crore as revolving fund for refinancing the scheduled banks and financial institutions against loans given to the SMEs at Bank Rate. The scheme has been widened since then with support from ADB and IDA and a total of about Tk. 1,118 crore has been put in place for refinancing. Under the scheme, more than 11,000 beneficiaries have so far been covered. In terms of type of financing, working capital constitutes 28.7 per cent, followed by midterm and long-term loans constituting 44.7 percent and 26.7 per cent respectively.

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Table 3.7: SME Refinancing to Women Entrepreneurs

SME Refinancing to Women Entrepreneurs

Period Industry

No. of women entrepreneurs Services Trade 83 132 219 Total 211 326 498

The refinancing scheme is May 2009 101 27 available for women at an interest 144 50 rate of 10 percent in line with the August 2009 guidelines of the Bangladesh December 2009 206 73 Bank. Although the absolute Source: Bangladesh Bank number of women entrepreneurs covered under the scheme is low, some rise is noticed in recent months with December 2009 (Table 3.7). . Total amount of loan disbursed to women entrepreneurs also increased from Tk. 13.8 crore in May 2009 to Tk. 22.0 crore in August 2009 and further to 35.4 crore in December 2009 (Figure 3.5). During the MayDecember 2009 period, mid-term refinanced loans to women entrepreneurs experienced the highest increase (224 per cent) followed by short term (118 percent) and long term (100 per cent) loans

a total of 498 in

Figure 3.5: SME Refinancing to Women Entrepreneurs

Amount of refinanced (000 Tk.) 400000 350000 300000 250000 200000 150000 100000 50000 0 Industry Service T rade T otal May,09 August,09 De ce mbe r,09

Source: Bangladesh Bank

Loan Processing and Service Centers Access to bank financing by the SMEs remains constrained by many factors. An ongoing BIDS study shows that, on average, it takes 56 days to process applications to get loans whereas the average number of visits required is around 17. These figures do not show much improvement over the past. The commercial banks have now come up with special packages for SME development. Several banks/FIs have established SME Cells/Service Centers for ensuring more efficient channeling of funds to the SME sector (Table 3.8). While the number of service centers has risen, it is still not adequate. The banks/FIs need to expand active SME wings in each bank especially in remote and potential locations to cater to the credit needs of the SMEs.

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Table 3.8: SME Service Centers of Selected Banks Bank Number of service centers June 2009 Mutual Trust Bank Limited Eastern Bank Limited City Bank Limited Islami Bank Bangladesh Limited BRAC Bank Limited AB Bank Limited Bangladesh Krishi Bank Jamuna Bank Limited SIBL Bank Limited NCC Bank Limited Exim Bank Limited Shahajal Islamic Bank Limited National Bank Limited IFIC Bank limited Southeast Bank Limited Premier Bank Limited Bank Asia Limited Dutch-Bangla Bank Limited All banks
Source: Relevant websites

December 2009 12 34 6 22 30 6 2 8 6 3 2 11 6 4 10 5 3 9 179

10 31 5 20 30 5 1 5 5 2 2 10 5 3 5 3 1 5 148

4. Promoting Social Development and Strengthening Social Safety Nets

Following the election manifesto of the government, the FY10 budget reflects the priority to social sectors especially on education, health, and social protection in terms of both allocation and new initiatives. Total allocations to the social sectors in FY10 budget amount to Tk. 7,562 crore, higher by about 19 percent in nominal terms over the revised allocations under the ADP of FY09 (Table 4.1). During July-December 2009, 34 percent of ADP allocations to social sectors have been utilized. The utilization rate is 39 percent for the education sector but rather low at 29 percent for the health sector.

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Table 4.1: Allocation to Social Sectors under ADP FY09 Revised ADP Exp. as % of allocation (Tk. in revised crore) allocation 2,615 77 3,205 97 527 84 6,347 87 ADP allocation (Tk. in crore) 3,064 3,915 583 7,562 FY10 Exp. as % of allocation (Jul-Dec 2009) 29 39 31 34

Health Education Others Total

Note: Health includes the Ministry of Health and Family Welfare; Education includes the Ministries of Primary and Mass Education, Education, and Science Information and Communication Technology; Others include the Ministries of Women and Children Affairs, Social Welfare, Food and Disaster Management, Labour and Employment, and Youth and Sports. Source: IMED

4.1 Health The total allocation for health and family welfare in the ADP of FY10 is Tk. 3,064 crore. Of the total amount, 29 percent has been utilized by December 2009. If the present momentum is maintained, the utilization of fund could be higher in FY10 than in the last fiscal. The delivery of health services, especially to the poor people and remote areas, faces several challenges that include: (i) establishing good governance by resolving structural constraints at all level, particularly at upazila level and below; (ii) providing health card to 20 percent of the people who are extremely poor enabling them to receive free health care services from any public health facilities; (iii) introducing system of charging users fee at hospitals and Upazila Health Complexes; (iv) capacity development in terms of recruiting doctors, nurses, dental surgeons, technologists and the like; (v) hospital autonomy; (vi) creating a conducive environment for health providers, particularly doctors, so that they are motivated to stay at rural settings for certain years; (vii) creating a separate Directorate for Medical Education and Training; and (viii) establishing separate Dental Health Education and Dental Health Services Units in the Directorate General of Health Services. The allocation for Health Nutrition and Population Sector Programme (HNPSP) in FY10 budget is Tk. 2,871 crore, Available information shows that only about 25 percent of the amount has been spent till November 2009. The HNPSP was planned until FY10 but extended till FY11 as the activities could not be completed. Another important project for which Tk. 173 crore has been allocated in FY10 budget is the National Nutrition Programme but its progress is very slow with only Tk. 77 lakh spent till November 2009. The target is to extend the programme to another 63 upazilas from 109 upazilas at present. The health sector budget for FY10 contains several important measures, the implementation of which requires pragmatic decisions and their timely implementation. Rural Health Care through Community Clinics The government plans to establish 13,500 community clinics in the country to provide a package of essential health services (covering health, nutrition, and family planning services) to the rural people. Under the Revitalization of Healthcare Initiatives of Bangladesh, Community Clinic (CC) programme has been re-introduced in January 2009. So far, 10,639 CCs have been built out of which 9,525 are providing basic healthcare services to the rural people.
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Maternal Healthcare Voucher Scheme

The scheme has been started in 35 upazilas and will be expanded to another 10 upazilas in FY10. The aim is to render better reproductive health care and population control services. The FY10 budget has allocated Tk. 70 crore for the scheme of which about 26 percent has been utilized till November 2009. Expansion of Healthcare Infrastructure Under the FY10 budget, allocations have been made to upgrade and modernize health care facilities. The number of beds has been increased to 50 from 31 in 135 upazila hospitals and similar expansion will be made in another 286 hospitals. The number of beds has been increased to 250 in several district level hospitals. Five new medical colleges and 6 health technology institutes, 6 nursing institutes will be upgraded to nursing colleges and 12 new nursing institutes will be established. Reconstruction and repair of old medical colleges and hospitals will be taken up. Other Measures The government has a long agenda to take up in the health sector such as finalizing the Health Policy, updating the Drug Policy, and modernizing the Department of Drug Administration. It has also been planned to fill in the vacant posts of 5,000 doctors, 5,000 nurses, 6,000 health assistants, and recruit 16,000 other health staff. The restructuring of the Health and Family Welfare Administration is also under consideration. While many of these actions are long overdue, it would be important to determine priority in implementation keeping in view the urgent need to improve service delivery and expand access to the disadvantaged groups. Agenda for Action The Community Clinics require immediate recruitment of health personnel. The PP for 13,500 clinics was approved in November 2009 but the process of implementation needs to be expedited. Moreover, the new recruits (being HSC graduates) would need proper training. Health Assistants (under DG Health), could be of either sex but Family Welfare Assistants (FWAs) should be females. At present, the roles and responsibilities of Health Assistants and FWAs are somewhat overlapping (3 days + 3 days duty at CCs). The onus of additional responsibility of visiting homes on a door-to-door basis falls on FWAs who, being women, are preferred. An amenable division of responsibilities is required. In climatically vulnerable areas, special mobile clinics with dedicated teams of medical personnel could be deployed. There are 1,200 union subcentre clinics which have been included within the 13,500 CCs. These need up-gradation to provide essential healthcare services. A very high inequality prevails in urban-rural distribution of doctors and needs urgent action. The Expanded Programme of Immunization (EPI) is a core programme for childrens health which needs strengthening in the underserved areas. An urgent priority is to increase the number of Skilled Birth Attendants (SBA) because the majority of maternal deaths occur due to excessive bleeding and obstructed labour which are preventable if attended by SBAs backed with required supplies and logistics. The SBAs must be trained to become more competent; they also require mentoring for a change in attitude. Engender Health has begun, on a pilot basis, with the administration of three pills (Misoprostol) before the onset of labour. It has proven effective in arresting post-partum haemorrhage and needs expansion in coverage.
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The EOC centres must be made fully functional. The training received by the Medical Team (comprising of one surgeon, one anaesthetist, nurses and assistants) often remains underutilized. Moreover, once training is received, the tendency is to move from upazila level (where the EOCs are established) to district levels. The Family Welfare Visitors Training Institute under the DG, Family Planning Services requires upgrading. There are 3,500 centres that require 3,500 Family Welfare Visitors who undergo an 18 month course. Previously, they were recruited and subsequently received training. Now, they undergo training (which is privately financed) and then compete for recruitment. Since there is an urgent need for such FWVs, there must be concerted efforts expended towards motivation and coordination. 4.2 Education In the FY10 budget, education has been considered as a fundamental human right and a social capital that is critical to the development of the country. Total ADP allocation for the education sector is Tk. 3,915 crore in FY10. During July-December 2009, an amount of Tk. 1,514 crore has been spent which is 39 percent of the total allocation. The new programmes of the government in the sector include: free education up to graduation in phases; continuing stipend programme for female students, introducing stipends to male students, reducing session jams in educational institutions, modernization of madrasah education, and enhancing science related studies and research. One major positive achievement of the government is the successful distribution of around 19 crore text books to all students of primary and secondary schools at a cost of about Tk. 310 crore. The government has extended the implementation time of the second phase of the Primary Education Development Programme (PEDP II) which began in 2003. The PEDP II goals are laudable, but its implementation needs streamlining so that the goals are achieved within the stipulated time. For the first time, 20 lakh primary school students sat for the Primary Education Terminal Examination at the national level in November 2009 with a success rate of 89 percent. In the education sector, another important initiative is the plan to implement the National School Feeding Programme from FY10. Initially, 87 highest poverty stricken upazilas would be covered for which the estimated cost is Tk. 1,200 crore. 8 Another proposed project for FY10 is to establish Child Friendly Learning Centres in 209 upazilas in 44 districts. The government has approved full subvention to registered and primary community school teachers in deserving areas. Satisfactory progress in these efforts will no doubt contribute to expanding coverage of education to poorest and underserved areas. Despite major success in enrolling both boys and girls in primary schools, there seems to be emerging a recent trend of falling enrollment rate for both boys and girls as reported in the Education Watch Report. The high dropout rates and low completion rates of five years of primary schooling are also persisting along with low quality. In order to increase enrolment and improve the quality of secondary education, several new and ongoing projects are included in FY10 budget. 9 The government plans to establish at least one
8

Two similar programmes are currently in operation e.g. Food for Education Programme and School Feeding Programme in some poverty stricken and remote areas with assistance from WFP and EC respectively. The proposed programme will be financed jointly by the government and WFP. 9 These include: Teaching Quality Improvement in Secondary Education Project; Secondary Education Sector Development Project; Secondary Education Quality and Access Enhancement Project, and Life Skills based Reproductive Health Education for In-School Youth and Adolescents through Peer Approach.

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government secondary school and one government technical institute in each upazila especially to encourage employment-oriented education. The plan is also to modernize madrasah education and set up laboratories in each secondary school for developing science and IT education by 2013.The challenge, however, is to effectively implement these efforts for which the implementation capacity seems to be the greatest constraint. The government plans to expand opportunities and facilities of higher education. Three universities were set up in Jessore, Pabna, and Rangpur; while three more are planned in Barisal, Rangamati, and Gopalganj. The Private University Act will be amended to make it more effective in providing quality education. Education loan programmes are being introduced for high achievers among higher secondary school graduates and other levels. Despite the commendable progress achieved in education, the challenges facing the nation in the sector are still formidable covering several aspects e.g. achieving universal primary education and extending it to grade eight; elimination of illiteracy; creating a new generation equipped with technical and scientific knowledge; ensuring better quality teachers and teaching institutions; providing accessible and affordable education for the vulnerable sections of society; introducing universal curriculum with standardized education system as well as extensive and compulsory digital technology; and ensuring gainfully-employed, productivity-oriented schooling system and gender equality. The New Education Policy has already been framed incorporating the vision of the government. The present budgetary allocation for education is extremely low (one of the lowest in South Asia) at around 2.5 percent of GDP. It needs to be raised progressively to around 6-7 percent in the next 3/4 years so that quality education can become universally accessible and affordable. 4.3 Strengthening Social Safety Nets The FY10 budget puts emphasis on strengthening social safety nets from two perspectives: (i) support the consumption of the poorest especially due to the adverse shocks of the global crisis and make them less vulnerable; and (ii) allow them to continue to invest in human and other forms of capital that reduce intergenerational transmission of poverty. Overall, the countrys social safety nets framework covers four major areas: (i) special allowances for different underprivileged groups; (ii) employment creation through microcredit and other support programs; (iii) food security enhancing activities especially in the aftermath of disasters or during difficult times; and (iv) capacity building activities through education, health, training, and technical assistance services. The FY10 budget enhanced the amount of allowances and the coverage of beneficiaries for most of the cash support programs including those for the freedom fighters, aged and disabled persons, destitute women, and poor as well as low income working lactating mothers. Obviously, effective targeting of these programs would help alleviate, at least partly, the sufferings of the most disadvantaged groups in society. One important project of FY10 is the One Household One Farm Program initiated to rehabilitate the poor people with houses, credit, training for self employment, and khas land if available. The target of the project is to cover nearly 0.58 million rural families (with a total beneficiary of 2.9 million people) at a cost of nearly Tk. 12 billion during July 2009 to June 2014. 10 Under the
The project intends to cover female headed households, families having only homestead land, marginal farmers having less than 0.5 acre of land, and wage laborers.
10

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project, direct and/or indirect employment opportunities would be created for 2.9 million people. The FY10 budget allocated Tk. 920 million for this project. If the project is well implemented, it would contribute not only to poverty reduction but would also create positive impact on ruralurban migration through strengthening the Ghore Phera (Returning Home) programme of the government. The increase in allowances and benefits and wider coverage of cash support programs is a welcome move to support the most disadvantaged groups in society. Despite the increase, their coverage and impact still remains low and needs to be expanded in future in order to make visible impacts. Employment Generation Programmes The government has proposed a new Employment Generation for the Hardcore Poor project in place of the discontinued 100-Day Employment Generation Programme. The FY10 budget made an allocation of Tk. 1,176 crore for the project especially targeted to distressed regions including river erosion prone and monga affected areas. Under the project, employment opportunities would be created in these highly poverty prone areas during two lean periods (e.g. SeptemberNovember and March-April). The amount earmarked for the September-November 2009 period was only Tk. 177.5 crore for wage payment to labourers although income earning opportunities become more limited in the target areas during this time compared with the later phase. By December 2009, nearly 0.44 million cards were distributed and more than 85 percent of the activities were completed. In terms of geographical area, the project intends to cover about 300 upazilas where the majority of the poor (including the poorest) live. The phase implemented in September-November 2009 covered 124 upazilas in 16 districts. Hence, the impact of the project remained limited due to low coverage both in terms of area and target population. It would be important to apply the lessons learned from the administrative and implementation experiences of this phase to the next phase (March-April 2010) so that the project can be replicated more effectively over the entire target area along with ensuring the flow of the anticipated benefits to the poorest. Another programme proposed in FY10 budget is the National Service for Youth. With an allocation of Tk. 20 crore, the target group is the youth in Kurigram and Barguna districts having SSC level of education. So far, more than 44,000 applications have been received and Tk. 15 crore disbursed for selection survey. The overall situation indicates that successful implementation and replication of the project would require more resources, adoption of appropriate selection criteria, provision of training, and job placement which need effective planning and intense administrative skills. Public Food Distribution System Total public food distribution during FY09 was 2.16 million metric tons of which 1.76 million metric tons was rice and the rest was wheat. The governments plan is to distribute 2.68 million tons in FY10, nearly 26 percent higher than last fiscal. The major channels of distribution will be Vulnerable Group Feeding (VGF) and Open Market Sale (OMS) having 0.55 million and 0.50 million metric tons respectively. Besides, 0.10 million metric tons of wheat will be distributed through OMS.

24

Table 4.2: Distribution of Food grains through Different Channels Distribution in FY09 (thousand metric tons) Monetized channels Essential Priorities (EP) Other priorities (OP) Large employers (LE) Open market sale (OMS) Total Non-monetized channels Food for Work (FFW) Test Relief (TR) Vulnerable Group Development (VGD) Vulnerable Group Feeding (VGF) Gratuity Relief (GR) Others Total Total
Source: FPMU

Allocation in FY10 (thousand metric tons)

Distribution during July-December (thousand metric tons) FY09 FY10

219 22 10 194 445

279 45 22 600 946

98 9 4 188 299

113 9 6 2 130

395 368 279 507 43 123 1,715 2,160

375 400 265 550 64 75 1,729 2,675

8 32 125 326 6 30 527 827

18 0 120 221 22 12 393 523

The distribution through different channels during July-December 2009 is given in Table 4.2. The total distribution during the period was 523 thousand metric tons which is lower by nearly 37 percent during the same period of the last fiscal. The distribution through both monetized and non-monetized channels fell, by 57 percent and 25 percent respectively. Each Member of the Parliament (MP) has been allocated 350 metric tons of rice (the allocation to female MPs is 150 metric tons) under TR. For rural infrastructure development during January-February 2010, the government has earmarked 0.29 million metric tons of rice under FFW. Also, 0.11 million metric tons of rice has been allocated under TR. The lower delivery under two channels, OMS and VGF, has mainly contributed to the decline in total distribution under PFDS. The lower distribution under OMS is somewhat puzzling as despite substantially lower price of rice under OMS (Tk. 22 per kg compared with the market price of Tk. 25-26 for coarse rice) the uptake has been rather poor. There may be two reasons: either the consumers are more conscious about quality or the quality of the coarse rice that is distributed under OMS is substantially inferior than the coarse rice available in the market. Additionally, there may be management and other problems in the operation of OMS. On the other hand, VGF is more a sign of distress situation regarding access to or availability of food. There has not been any major occurrence of such situations during the first six months of FY10 except some cases of localized nature.

25

5. Developing Power and Energy This section examines the developments in the power and energy sector over the first six months of FY10 keeping a historical perspective in view since development of the sector requires a longer term perspective. The supply of electricity to the consumers depends on an integrated functioning of the inter-locked systems of generation, transmission, and distribution. A successful story of power supply to the people requires efficient functioning of all three components of the system. Of course, generation is the key starting point and the present review is confined to this aspect only. 5.1 GDP Growth and Electricity Consumption
Figure 5.1: GDP, Predicted GDP and Electricity Generation

The level of energy use is positively related to the gdp predicted gdp gwh level of development. Higher levels of GDP and higher levels of energy go together. 11 Given such a 350 30 relationship, one would expect a similar situation in 300 25 Bangladesh for commercial energy in general and for 250 20 electricity in particular since electricity is the most 200 15 versatile form of energy and is at the apex of the so 150 called energy ladder. Figure 5.1 shows that actual 10 100 GDP and predicted GDP on the basis of an 5 50 econometrically estimated relationship with electricity 0 0 are pretty close. The implication of this relationship is that for achieving higher growth, greater availability of electricity generation is essential. Figure 5.1 also shows that electricity generation has somewhat kept Source: Asaduzzaman and Ahmed (2009) op.cit. pace with GDP growth. However, there is another Figure 5.2: Electricity Intensity aspect to growth in electricity generation as indicated (GWH/Tk. 1,000 crore GDP) in Figure 5.2. Electricity intensity of GDP is continuously rising. Electricity intensity has been 90 80 only about 30 GWH per Taka thousand crore in the 70 early 1980s but crossed 80 GWH per Taka thousand 60 crore of GDP in 2002. The change in the structure of 50 GDP may be a major reason behind this increase of 40 electricity intensity. As industry sector requires more 30 electricity than agriculture per unit of output and the 20 share of industry in GDP is rising, electricity intensity is rising too (Table 5.2). Services which include wholesale and retail outlets of various types may also have contributed to the growth in electricity intensity.
G D P (K c ro re T k )
19 8 19 1 8 19 3 8 19 5 8 19 7 8 19 9 9 19 1 9 19 3 95 19 9 19 7 9 20 9 01 20 0 20 3 05 20 07

11

There is of course a chicken and egg problem here in that the literature is replete with attempts to show that higher level of use of energy, particularly commercial energy including electricity, leads to higher level of growth or the other way round. For an attempt to explain the situation in Bangladesh, see Asaduzzaman, M, and M. Ahmed, Power and Energy

Development in Bangladesh: A Benchmark and Future Policies Background Paper prepared for Sixth Five Year Plan, Planning Commission, Dhaka, 2009.

26

G W H (K )

Table 5.1: Sectoral Share of GDP (%) at Constant 1995/96 Prices Fiscal Year Agriculture Industry Services Total 1980-81 33.1 17.3 49.6 100 1985-86 31.2 19.1 49.7 100 1990-91 29.2 21.1 49.7 100 1995-96 25.7 24.9 49.4 100 2000-01 25.0 26.2 48.8 100 2005-06 21.8 29.0 49.2 100 2007-08 20.8 29.7 49.5 100 2008-09 20.6 29.7 49.7 100

Source: GoB, Bangladesh Economic Review, 2009.

Another causal factor of rising electricity intensity may have to do with inefficiency in consumption of power and consequent wastage. Particularly, anecdotal evidence suggests that, in many cases, industrial and commercial establishments pay only a fraction of the actual cost of electricity making it cheaper to them compared with others. This is part of the so called nontechnical system loss and does certainly breed inefficiency and wastage. The estimation of relative contribution of structural change in the economy and inefficiency and wastage to increased energy intensity would require deeper analysis. Despite low level of use of power, the country is unable to meet the present aggregate demand. Even those, who have access to electricity, do complain about the quality of its supply as frequent load shedding, voltage fluctuations and billing anomalies are common problems. At the same time, system losses had been ubiquitous and far above the acceptable technical loss. The lack of adequate and reliable electricity supply has thus emerged as a major impediment to the expansion of investment, especially foreign investment, and economic growth of the country. 5.2 Generation Status of the Electricity Sector The generation capacity of electricity has increased over the years, but only by fits and starts (Figure 5.3). The gap between installed capacity and generation capacity is also highly variable and mostly fluctuates around 25 percent. For the period for which data are available in FY10, it rose to 28 percent. For Bangladesh, the elasticity of generation (consumption) with respect to GDP is estimated at 1.73. 12 This means that every 1 percent rise in GDP would raise the demand for gross generation by 1.73 percent. The growth of electricity generation has always been below 10 percent which increased the gap between demand
Figure 5.3: Installed and Maximum Production Capacities (MW)
Capacity 7000 6000 5000 4000 3000 2000 1000 0
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-

Max. Production 80.00 78.00 76.00 74.00 72.00 70.00 68.00 66.00

and supply and led to a severe power outage at times of intense demand. And this failure also explains at least partly why the country has not been able to grow at rates above 6 percent in a sustained manner.
12

Asaduzzaman, M, and M. Billah, Energy for the Future, in IRBD, CPD, Dhaka, 2008.

27

Average generation increased markedly since March 2009 compared with the same period of 2008 and 2007 (Figure 5.4). Despite such increase in 2009, the power crisis was no less severe in 2009 compared with earlier years, as demand for electricity has also risen in the meantime.

Figure 5.4: Maximum Daily Electricity Generation (Average) in MW

4500 4000 3500 3000 2500 Jan

2008

2007

2009

Feb

Mar Apr May Jun

July Aug

Sep

Oct

Nov Dec

Independent Power Producers (IPPs) During the last one decade or so, electricity generation received a boost due to entry of the private sector in the industry in the form of Independent Power Producers (IPPs). Total electricity generation by the IPPs has increased from a mere 578 GWH in 1998-99 (when IPPs first started their operation) to nearly 9,137 GWH in FY08. Since the inception of IPPs, electricity generation and supply from them has continuously risen. Yet, the total rise in generation has been slow due to slower growth in electricity output from BPDB compared with its previous generation history. The reasons are not clear, but some studies show that BPDB and IPPs do not have the level playing field. The IPPs are considered more efficient in power generation than BPDB as IPPs accounted for 26 percent of total installed capacity in June 2008 while they had a share of 36 percent of total power generation. There is, however, a flip side to this apparently positive picture. Average purchase cost of electricity from IPPs varies widely. The purchase cost of electricity per kwh from KPCL is around Tk.10, while the average cost of BPDBs generation is Tk. 2.36 (Figure 5.5). However, three companies namely AES Haripur, AES Meghna, and APSCL are supplying electricity to BPDB at a rate lower than BPDBs unit generation cost. The share of these IPPs in total purchase of BPDB from IPPs is about 25 percent which means that the average sale price to BPDB of the IPPs as a whole is higher than the unit generation cost of BPDB.
Figure 5.5: Average Cost (Tk) of Generation of BPDB and Purchase of Electricity from IPPs in 2007-08 (Tk/kwh)
10.00 8.00 6.00 4.00 2.00 0.00
hn a L PS C A PC L BD tm on t LT D ur N EP C RP C W es M eg H BP D K ar ip B

Per Unit Cost

Average Cost

A ES

Source: BPDB, Annual Report 2007-08.

28

ES

This has two implications. First, there may be an economy of scale in case of IPPs and the government therefore should emphasize on large plants in the private sector. Second, while the IPPs have a much more favorable ground of operation compared with BPDB, their high sale price of electricity may reflect either low or less efficient technology or deficiencies in the specific pricing formula that had been built into the purchase contract or both. These are matters of concern for entering into such contracts in future. In any case, the high cost of purchase by BPDB means subsidization of sales by BPDB to the ultimate consumers by the government. Questions, however, remain as to whether it would have been a better policy to provide the subsidy to BPDB to produce electricity at lower cost than purchasing it at higher prices from IPPs and subsidizing it afterwards. In any case, this means that the pricing agreement is a major issue for the future. 13 Power System Development Initiatives The governments vision is to bring the entire country under electricity service by the year 2021 and to make electricity available to all. The government also wants to ensure reliable and quality supply of electricity at reasonable prices. Yet, the reality is that ADP
Figure 5.6: Revised ADP Allocation to Electricity Sector (Crore Taka)
4000 120 Revised ADP Allocation (FY10 Budget) Percentage of ADP Implementation 3308 3500 3397 100 94 100 96 93 3097 87 3000 89 3092 80 2677 79 2863 2528 2500 2339 2000 1500 1000 500 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 20 0 1910 60 40
Percent of ADP Utilisation

allocation to the sector has fallen in recent years (Figure 5.6). It is against this background that the Finance Minister in his budget speech mentioned his firm determination for taking appropriate measures to increase electricity generation. Major initiatives mentioned by him included speeding up of the construction process of power plants that are under construction, immediately initiating the process of new power plants generation, enhancing the capacity of existing plants, etc. To address the power crisis, the government has therefore allocated 32 percent higher resources in ADP in FY10 compared with that in FY09. But later the revised allocation has brought it down to a level lower than in the last fiscal year. Even more alarming than the fall in revised allocation is the actual expenditure. Although we have no figure for the last two years, the trend had been continuously downward.

for an analysis of the pricing problem within a principal-agent framework, see Asaduzzaman, M. Power to the People: Reform and Governance of the Electricity Sector in Islam, N and M. Asaduzzaman (ed.), A Ship Adrift: Governance and Development in Bangladesh, Bangladesh Institute of Development Studies, 2008 .

13

Revised ADP Allocation (Crore Taka)

29

The retirement of existing plants is another setback that might worsen the gap between electricity demand and supply. There are several power plants that are in the process of retirement by 2010, and the days for scheduled maintenance will rise as the plants become older. Moreover, as most of the existing plants are based on natural gas and future availability of gas at adequate quantity is somewhat uncertain, the operation of these plants could also become uncertain. The government needs to replace the old plants and establish new ones to achieve its vision in the power sector. This would require huge investment and wider participation of the private sector to raise electricity generation and eliminate the gap between demand and supply by 2013 as envisioned by the government. Earlier, the government undertook short, medium, and long-term development plans for the sector (Table 5.2). The progress so far, however, shows that the targets have remained unattained.
Table 5.2: Power System Development Plan up to 2020 Sl. 1. 2. 3. Item 2004-2005 Installed Capacity, MW Peak Demand, MW Net Generation, MKWh 5,025 3,743 20,932 2005-2007 6,441 5,368 26,651 Year 2008-2012 9,666 7,887 39,157 2013-2020 17,765 14,600 76,545

Source: www.powerdivision.gov.bd accessed in October 2009

The Power System Master Plan (PSMP) Update of 2005 provided a forecast about future electricity demand for Bangladesh. According to the base forecast, the maximum demand in 2009, 2012, and 2015 would be about 6,066 MW, 7,732 MW and 9,786 MW respectively. The demand is expected to be 13,993 MW in 2020. However, the need for generation might be much higher due to huge unmet demand as reflected in frequent power outage. Thus, the actual volume of electricity generation needs to be higher than the estimates made by the PSMP update of 2005. Indeed, the update failed to take into account the changes in the structure of demand due to life styles geared more towards the use of household electric gadgets in recent years. Hence, these demand projections are likely to provide the minimum level of demand for electricity that must be satisfied. To meet the projected demand of electricity together with achieving reliable reserve margin, the government has undertaken a comprehensive programme, depending on the private sector mostly, to build the required number of power plants in phases by 2012. Three underconstruction power plants in Chittagong zone will add 255 megawatts (mw) of electricity to the national grid in January (55-mw plant at Shikalbaha), April (150-MW plant at the same site) and June 2010 (50 mw from third unit of Karnaphuli hydroelectric power plant). Table 5.3 provides a picture of planned power generation projects up to 2015 in both public and private sector.

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Table 5.3: Committed Power Generation Projects up to 2015 Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Name of Project Under Construction (Public) Fenchuganj 90 MW CC 2nd Unit Siddirganj 2*120 MW Picking Power Plant Shikalbaha 150 MW Picking Power Plant Planned Plants under Public Sector Khulna 150 MW Picking Power Plant Sirajganj 150 MW Picking Power Plant Sylhet 150 MW Gas Turbine Plant Chandpur 150 MW CC Power Plant Bhola 150 MW CC Power Plant Haripur 360 MW CC Power Plant Siddirganj 150*2 MW Gas Turbine Plant Barapukuria 125 MW Third Unit Kaptai Power Plant 6th and 7th Unit Bheramara 360 MW CC Power Plant Committed Power Plants under Private Sector Bibiana 450 MW CC Power Plant Sirajganj 450 MW CC Power Plant 10-30 MW Capacity Small Power Plants Rental Power Plant (15 Years ) Rental Power Plant (3 Years) Total Capacity (MW) 90 240 150 150 150 150 150 150 360 300 125 100 360 450 450 132 50 215 3,772 Expected date of Commissioning Waiting to be commissioned June 2009 2009-10 2009-10 2009-10 2010-11 2011-12 2011-12 2011-12 2013-14 2012-13 2012-13 2013-14 2012-13 2012-13 2008-09 2008-09 2008-09

Source: MoF, Bangladesh Economic Review 2009.

Even if these projects are successfully implemented, due to retirement and increased maintenance scheduled days of existing power plants, the target of achieving generation capacity of 9,786 MW may not be feasible. The government needs to initiate several other projects of its own as well as in the private sector to achieve the goal of matching demand and supply. Moreover, the source of fuel for newly established electricity generation plants will have to be given due consideration. In this regard, the governments decision of generating an additional 7,000 MW within the next three years is a welcome decision. What is not clear though as to how the generation plan would be materialized without making firm arrangements for supply of the required primary fuel (e.g gas, coal, oil, or nuclear power) and how the resources will be generated. A possible way out is to rely on the IPPs. The experience so far has, however, been mixed as discussed earlier. Power Import from India Against the backdrop of yawning gap between demand for and supply of electricity, the government has recently signed a Memorandum of Understanding with India seeking openended import and export of electricity with an option to purchase power from both public and private sectors of India. Initially India has agreed to supply 250 MW of electricity to Bangladesh. The modalities of power trade are, however, yet to be known. However, India's willingness to export 250 MW of electricity to Bangladesh is a welcome step considering Bangladesh's present difficulties in the sector.

31

After the memorandum of understanding with India for importing 250 MW of electricity, several issues have come to the forefront. As there is no physical interface between Indian and Bangladesh national grids, the two has to be connected at some place. Technical details will have to be worked out and put in place with a monitoring system for actual delivery and receipt of electricity formally accepted by both parties on a daily basis for settling payments. These will entail substantial investments in infrastructure and dedicated human resource. Who will pay for the investment and wherefrom this will be generated need to be worked out which are acceptable to both parties. The synchronization of timing of investment and commissioning of the technical establishments is essential for speedy realization of the contract. The contract should also clearly state the period for which it will remain valid and the necessary provisions if supply fails to materialize as stipulated for long time without valid reasons and the issues of compensation in such cases. A major concern is the pricing. The implications of alternative pricing options need weighing to judge the best one within a transparent process. Demand Side Management Demand side management has remained somewhat neglected so far as this is more difficult than augmenting supply through large scale engineering-based solutions. Two recent attempts by the government may be mentioned. One was the day light saving by advancing the clock by one hour during the summer time and putting it back during the winter. The government claimed to have made substantial savings in this manner. The second is the programme to distribute energyefficient CFL bulbs free to consumers to replace less efficient incandescent bulbs. Whether day light saving has made substantial net saving in power consumption has been debated. Nevertheless, the government has taken the decision to make it a permanent feature in future and clocks will be advanced by one hour on 31 March and put back to old time on 31 October every year. It is desirable that the benefits are widely publicized in support of these initiatives. The distribution of energy-saving lamps free of cost should be targeted only to the poor consumers based on explicit criteria and without leakage. The other side of the decision is that the energy so saved also means saving of emission of carbon di-oxide. It would be desirable if this could be traded in some form in the international carbon market. It would not be out of place to mention here that similar financing can be obtained under various mitigation-related funds. This includes introduction of highly efficient technology of generation of power and use of primary renewable energy for generation. Bangladesh needs to explore these avenues.

6. Maintaining Macroeconomic Stability

6.1 Minimizing Impacts of Global Recession The global recession created adverse impacts on the domestic economy on at least three major fronts: export, import, and remittances. Many other areas, including employment, income, and important social indicators, were indirectly affected mainly resulting from the fall out effects from these affected sectors. Along with fiscal and monetary policy responses, the government provided special short term support and incentive packages for the affected sectors (see Box 1). The incentive packages were aimed to provide some support to the worst hit export sectors and stimulate domestic production and demand. The stimulus included additional cash subsidy for worst affected export sectors; enhancement of credit funds to facilitate increased disbursement of
32

credit to critical sectors, such as export, agriculture and SMEs; and additional subsidy to the power sector and agriculture. It also included a number of policy support measures, such as easing of payment arrangement of cash subsidy, lowering of bank interest rate, easier rescheduling facilities for repayment of bank loans, and export supportive exchange rate policy. In order to keep domestic demand buoyant alongside exports, steps were taken to make several funds operated by the Bangladesh Bank more comprehensive, strengthened, and effective. These included the Equity and Entrepreneurship Fund (EEF), Housing Fund (HF), SME Fund (SMEF) and Investment Promotion and Financing Facilities Fund (IPFFF). The Housing Fund was raised from Tk. 300 crore to Tk. 500 crore and the SME Fund from Tk. 500 to Tk. 600 crore. Emphasis is placed on agriculture and power sectors so that domestic demand does not remain deficient due to supply constraints. Agriculture, pro-agriculture activities, agro-processing, small and cottage industries are given the utmost priority to increase domestic demand. Within the long-term vision, the target is set to reach a position of fulfilling minimum electricity demand by 2011. The importance is given on environment friendly energy technology, greater use of renewable energy like solar power, tapping coal in an environment friendly way, setting up a gas development fund for Bapex, conservation of energy and greater emphasis on partnership between private and public sectors.
Box 1: Stimulus Packages for Countering Impacts of Global Recession In order to address the adverse impacts especially on the real economy, the government set up a high powered task force and took up fiscal stimulus packages covering a variety of measures including support to agriculture and small and medium enterprises, expansion of safety nets, employment generation, strategic industries support, and others. The first stimulus package worth US$ 500 million was announced in April 2009, of which 13 percent was allocated for cash subsidy to selected export industries, 44 percent for agriculture, 18 percent for energy, 15 percent for agricultural credit, and 11 percent for social safety nets. The cash subsidy from this package was allocated mainly to provide support to three worst-hit sectors, jute and jute goods, frozen food, and leather and leather products. Cash subsidy rate for each of these sectors was increased by 2.5 percent. Of the total export incentive, 70 percent was released immediately. In the FY10 budget, the government provided another US$ 725 million as a means to offset the adverse impact of contraction in external demand and rebalance growth toward domestic demand. While the intent to boost spending is clear, the challenge however is to determine where and how to increase spending and ensure the capacity to plan and implement effective spending programs. However, none of the first two packages provided direct allocation to the RMGs sector. In November 2009, the third stimulus package was announced, which made special provisions for the RMGs sector. This package included provisions of cash incentives for the exporters to new markets (markets other than the US, Canada and EU), special incentives for small and medium enterprises (SMEs) in RMGs sector those have exported up to US$3.5 million, subsidy on electricity usage (of 10 percent usage) until 30 June 2010 for SMEs who do not have own captive or diesel run generator, L/C amendment and transfer fees, etc. The limit of the Export Development Fund (EDF) is planned to be raised by combining the resources of three commercial banks, while the government will create a Contributory Fund with Tk. 300 crore (US$ 42.9 million) as seed money. In addition to support for the RMGs sector, the third package also included cash incentives for export-oriented yarn sector and for shipbuilding and crust leather sectors.
Source: Ministry of Finance

33

In order to reduce the adverse social impact of global recession, the government has expanded the social safety net programmes by increasing budgetary allocation and the number of beneficiaries with the intent to protect the poor from vulnerability. In the FY10 budget, more than 18 percent of the total outlay has been allocated to social safety nets programmes. Similarly, higher allocations have been provided to rural development and labour intensive industries including agro-processing; garments, knitwear, and the linked textile sector; leather goods; toys; furniture; consumer durables; drugs and pharmaceuticals; ship building; light engineering goods; and information and communication technology. Table 6.1 shows how projections of growth, exports, imports, and remittances of Bangladesh have been revised for FY10 and afterwards as a result of the impact of the global crisis. All growth projections are now lower compared with their pre-crisis projections. 14 Likewise, the projected remittance inflows are lower than their pre-crisis projections.
Table 6.1: Revised Projections for Selected Macro Indicators of Bangladesh Indicators Real GDP growth (%) Export growth (%) Import growth (%) Remittances (US$ million) After crisis Before crisis After crisis Before crisis After crisis Before crisis After crisis Before crisis FY07 6.4 15.7 16.6 5,979 FY08 6.2 15.8 25.6 7,915 FY09 5.9 6.5 10.3 15.5 4.1 26.7 9,400 9,500 FY10* 5.5 7.0 12.5 19.3 13.0 28.8 10,575 12,100 FY11* 6.0 7.2 17.5 20.3 17.0 31.1 11,632 15,500

Note: * As projected in the Medium-Term Budgetary Framework of the Ministry of Finance. Source: Ministry of Finance, Bangladesh Bank, and Export Promotion Bureau.

The projected lower growth of the domestic economy will also have some social implications. However, many of these social impacts would take time to manifest following complex processes of transmission of impact of changes in household income, intra household decisions, and resource allocations. Some estimates show that, as a result of growth slowdown due to the global economic crisis, loss in incremental employment was 0.1 million in FY09, which would rise to 0.6 million in FY10 and 1.1 million in FY11. 15 The analysis also shows that the crisis has adversely affected Bangladeshs progress towards achieving poverty reduction and social development goals including the MDGs. Bangladesh thus faces difficult and complex challenges. Along with providing stimuli to growth, the government must also make efforts to ensure that
It may, however, be pointed out that the contraction in economic activity in other developing Asian countries is much more intense than in Bangladesh with the greatest impact projected in 2009. The overall growth in developing Asia is projected to fall to 3.4 percent in 2009 from 6.3 percent in 2008 before rising modestly to 6.0 percent in 2010. Only countries with lesser external linkages are able to partly defy the dominant regional trend in economic growth. See, Asian Development Outlook 2009, Asian Development Bank, Manila. 15 See, Mujeri, M.K. and Nazneen Ahmed, Social Impacts of Global Economic Slowdown: The Case of Bangladesh, Background Paper presented at the Conference on The Impact of the Global Economic Slowdown on Poverty and Sustainable Development in Asia and the Pacific, 28-30 September 2009, Hanoi.
14

34

poverty reduction and key social development gains are not reversed. While the government is the key actor, a shared paradigm is necessary in which partnerships among all stakeholders can foster technology diffusion and capacity building for inclusive and sustainable development. 6.2 Maintaining External Sector Stability Since the beginning of FY10, the external sector experienced a deepening impact of the global economic crisis. 16 The FY10 budget announced several measures to tackle the short run impact of the crisis on export industries as well as medium to long term social impacts e.g. on employment, education, health, and social protection. These measures included: Stimulus package including increased cash incentives to heavily affected sectors and special incentives for ready-made garments sector Reduction of bank interest rate to 12-13 per cent. Rescheduling facilities for loan reimbursement Expansion of the export development fund. Withdrawal of license renewal fees payable by the captive power users Measures to solve problems of sick enterprises including garment units Rehabilitation of retrenched workers from abroad and provide them with skill development trainings Diplomatic initiatives to prevent retrenchment of workers and explore new labor markets abroad Emphasis on public-private partnership for employment generation, infrastructure development, increased investment and strengthening private sector.

The Ministry of Finance revised its post-crisis projections of external sector indicators in the Medium Term Budgetary Framework (MTBF) taking into account the possible impact of the global economic crisis (Table 6.2). Table 6.2: Revised Projections for Selected External Sector Indicators
Indicators Export growth (%) Import growth (%) Remittances (US$ million) After crisis Before crisis After crisis Before crisis After crisis Before crisis FY07 15.7 16.6 5,979 FY08 15.8 25.6 7,915 FY09 10.3 15.5 4.1 26.7 9,400 9,500 FY10* 12.5 19.3 13.0 28.8 10,575 12,100 FY11* 17.5 20.3 17.0 31.1 11,632 15,500

Note: * As projected in the Medium-Term Budgetary Framework of the Ministry of Finance. Source: Ministry of Finance, Bangladesh Bank, and Export Promotion Bureau.

16

The year 2009 experienced the first contraction of the global economy in the post World War II era. The global economic activity, which grew by 3.1 percent in 2008, is estimated to have declined by 1.4 percent in 2009 and is expected to rise modestly by 2.5 percent in 2010. The volume of world trade grew by 2.9 percent in 2008, but contracted by 12.2 percent in 2009.

35

Export In 2009, the volume of global merchandise trade contracted by 17.6 percent. It is projected to expand by only 4.3 percent in 2010 and 6.2 percent in 2011. In this backdrop, Bangladeshs export performance was relatively good in FY09 given the weak demand situation in the global market. The overall export growth was 10.3 percent. However, the yearly growth was triggered by high growth (42.3 per cent) in the first quarter of FY09, which declined in the later parts of the fiscal year, becoming negative in the second and fourth quarters. Export target for FY10 has been set at $17.6 billion, which is 13.1 percent higher than the actual export of FY09. The export performance over July-November 2009 shows that total export of this period is 7.2 per cent lower than the export earnings of the same period during FY09.
Figure 6.1: Export Performance of Bangladesh Figure 6.2: Growth of Export (year on year)

Monthly export trend shows declining trend till October and showed a somewhat upward trend in November 2009 (Figure 6.1). Compared with the respective months in the last fiscal, growth rates of export in the first five months of FY10 are much lower only except in the month of October 2009 (Figure 6.2). Quarterly export performance reveals that the export in first quarter of FY10 is 11.7 per cent lower than the respective quarter of the previous fiscal. Export of almost all important export items (including woven and knit garments) experienced negative growth during the first quarter of FY10 (Table 6.3). It may, however, be noted that the first quarter of FY09 experienced unusually high growth relative to which the growth rate has been lower in the first quarter in FY10.

36

Table 6.3: Quarterly Growth of Major Export Commodities, FY09 and FY10 Commodities Share in total exports in FY09 (%) 38.0 41.3 2.9 2.0 1.7 1.1 100 Q1 (FY09) Q2 (FY09) Export growth (%) Q3 Q4 FY09 (FY09) (FY09) FY08 Q1 of FY10

Woven garments Knitwear Frozen food Home textile Jute goods Leather Total export

36.7 52.0 15.7 27.8 -4.3 -6.4 42.3

6.5 4.7 -24.3 9.3 -32.0 -50.2 -1.6

14.3 10.8 -32.5 5.6 -18.3 -41.6 6.0

4.1 3.7 -21.0 -9.1 -7.2 -46.8 -0.6

14.5 16.2 -14.9 7.6 -15.4 -37.7 10.3

10.9 21.5 3.6 13.4 -0.8 6.9 15.9

-9.7 -2.0 -29.8 -0.2 5.2 -5.9 -11.7

Source: Export Promotion Bureau

Export performance of Bangladesh depends on the demand situation in its two most important export destinations, EU and the USA. Bangladeshs export performance during the ongoing global economic crisis appears to be better than its competitors both in USA and EU markets. However, Bangladeshs export performance in the US market is worsening and, during January-November 2009, the growth was negative.

Figure 6.3: Growth of Export to USA

Note: 2009 refers to January-November period Source: USITC database.

In the EU market, the relative position has improved and Bangladeshs export growth is higher in 2009 compared with the growth in 2008. Thus EU market is now the driver of export performance of Bangladesh. Knitwear is the main export product in this market and Bangladesh is the third largest knitwear exporter. However, Bangladeshs export in this market is also declining since August 2009.
Figure 6.4: Growth of Export to the EU-27 Figure 6.5: Export from Bangladesh to EU-27

37

In order to achieve the export target for FY10, Bangladesh needs to give special attention to export performance of various sectors. In this connection, the implementation of stimulus package, especially the third package announced in November 2009, is needed. The attempts to diversify export destinations need to be vigorously pursued e.g. efforts to expand export market in Japan. Also quick disbursement of cash incentive for export industries is needed. Out of Tk. 1,800 crore cash incentive to export allocated for FY10, Tk. 900 crore has been released in the first phase. Import The countrys import declined in FY09 due mainly to two reasons: first, fall in international prices especially oil and food commodities; and second, decline in import volume. The growth in imports was only 4.1 percent in FY09 in contrast to 26.1 percent growth in FY08. During the first five months of FY10, import has declined by 12.23 percent compared with the respective period of FY09. However, trend in monthly import growth reveals that year-on year monthly import growth is rising since August 2009 (Figure 6.7).
Figure 6. 6: Total Imports of Bangladesh (million $) Figure 6.7: Growth Rate of Imports

It is also observed that during the first five months of FY10, there has been a decline in food grains import by 16.5 percent (Table 6.4). Also the import of capital machineries has declined. The decline in food grain import is mainly due to 97 percent fall in rice import resulting from good harvest in 2009. The decline in import of capital machineries indicates slowing down of new investment in the economy, especially in the manufacturing sector. Moreover, the decline in imports of raw materials of textiles and garments (e.g. cotton, yarn, and other products) indicates slowing down in these sectors. The decline in imports of industrial raw materials and capital machineries is also evident from the information on fresh L/C opening and settlement during this period (Table 6.5).

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Table 6.4: Import of Selected Commodities (million US $) Commodities Food Grain (A) Rice Wheat Other Food Items (B) Milk and Cream Spices Oil Seeds Edible Oil Pulses al sort Sugar Petroleum and industrial goods ( C) Clinker Crude Petroleum Petroleum products Chemicals Pharmaceutical Products Fertilizer Dying, Tanning, etc. Plastic and Rubber articles Raw Cotton Yarn Textile and Articles Thereof Staples fibres Iron and Steel and other base metals Capital Goods and Others (D) Capital Machinery Others (including EPZ) Total (A+B+C+D)
Source: Economic Trends, Bangladesh Bank.

FY09 (Jul-Nov) 368.03 188.03 180.00 709.05 40.58 31.24 30.51 369.20 54.60 182.92 5,753.14 120.00 403.07 1,074.01 437.52 43.50 694.74 129.20 375.91 564.09 366.86 906.42 51.97 585.84 3,409.78 661.61 2,748.18 10,240.00

FY10 (Jul-Nov) 307.40 5.95 301.45 951.38 31.35 52.39 62.41 483.02 123.37 198.84 4,343.11 101.74 195.50 696.95 370.54 29.90 311.76 107.11 361.83 496.52 287.52 800.44 48.19 535.12 3,395.36 647.61 2,747.75 8,997.24

Growth (%) -16.47 -96.84 67.47 34.18 -22.75 67.71 104.55 30.83 125.95 8.70 -24.51 -15.22 -51.50 -35.11 -15.31 -31.27 -55.13 -17.09 -3.75 -11.98 -21.63 -11.69 -7.28 -8.66 -0.42 -2.12 -0.02 -12.14

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Table 6.5: L/C Opening and Settlement (in million US$) July-December 2009 Sectors/ Commodities Fresh LCs opening Consumer goods Intermediate goods Industrial raw materials Capital Machinery Machinery for misc. industry Petroleum and petro. products Others Total, of which back to back 1,813.19 1,123.01 4,720.66 Settlement of LCs 1,264.33 959.10 4,010.11 Fresh LCs opening 925.75 1,176.59 4,587.56 Settlement of LCs 929.74 1,051.17 4,609.44 July-December 2008 Growth in July-December 2009 over July-December 2008 Fresh LCs opening +887.44 -53.58 +133.10 Settlement of LCs +334.59 -92.06 -599.32

863.87 986.64

722.59 900.98

628.87 865.11

773.89 783.35

+235 +121.53

-51.31 +117.63

1,170.09

929.07

1163.49

1,163.22

+6.60

-234.15

2,517.36 13,194.81 1,036.45

1,931.24 10,717.42 1,480.26

1,829.26 11,176.63 1,658.81

1,804.58 11,115.39 1,673.13

+688.10 +2,018.19 -622.36

+126.66 -397.97 -192.86

Source: Bangladesh Bank

As can be noticed from the monthly import trend, the cost of import is expected to rise mainly due to rise in international prices of various commodities in the coming months. The prices of almost all commodities have started to rise in the world market since October 2009. The commodity price index in November 2009 was 20.4 percent higher than the index one year earlier. Table 6.6 shows that prices of all commodities including sugar, oil, and other food items are increasing in the international market. In this backdrop, special attention is needed to address any unusual rise in domestic prices and production costs of important industries especially in the export sector.

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Table 6.6: Changes in Commodity Prices in International Market Sep 09 over Aug 09 -3.3 -1.6 -4.3 -4.5 -3.1 -8.0 -0.9 -9.2 -7.4 -13.9 -0.7 -1.8 % Change Oct 09 over Sep 09 5.6 1.7 8.0 8.3 0.9 0.0 11.1 4.1 6.4 -4 -2.6 2.6 Nov 09 over Oct 09 4.2 3.9 4.5 4.7 3.6 3.8 2.6 6.1 7.1 2.8 4.3 2.6 % Change Nov 09 over Nov 08 20.4 15.3 23.5 43.5 12 -10.0 4.5 -7 17.3 15.3 8.1 22.2

All Commodity Non-Energy Energy Crude Oil Food Rice Corn Wheat Soybean Oil Soybeans Sugar Industrial Metals

Source: IMF and FAO Rice Market Monitor

Remittances and Employment Abroad Remittance inflows from Bangladeshi migrants abroad have reached 10 percent of GDP, which was only 3 percent in 1995, putting Bangladesh among the top ten remittance receiving countries in the world. In 2008, nearly 6 million workers were employed overseas. During FY09, Bangladesh received US$ 9.7 billion as remittances, which was 22.4 percent higher than the remittance inflow of FY08. The growth rate, however, shows considerable monthly variations (Figure 6.8). The growth rates of monthly remittance inflow compared with those of respective months of the previous year came down drastically since January 2009. This downturn continued till April 2009 and picked up afterwards. It showed declining growth during the first five months (July-November 2009) of FY10 and again a lower growth in December 2009. Thus remittance growth has been rising with fluctuations. The outmigration of labour, however, has been declining in absolute terms since 2008. Outmigration in FY09 was 33.7 percent lower than that in FY08 (Figure 6.9). Around 650 thousand workers migrated

Figure 6.8: Monthly Growth of Remittance Inflows

Source: Bangladesh Bank

Figure 6.9: Growth in Monthly Outflow of Bangladeshi Migrants

Source: Bangladesh Bank and BMET

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outside in FY09 compared with 981 thousand in FY08. The growth rates of monthly outmigration (compared with respective months in the previous year) have been negative since the beginning of FY09 (i.e. since July 2008) and the trend continued till September 2009 and slightly increased in October and November 2009. Since no reliable data are available on returnee migrants, the impact of global recession in terms of job loss of Bangladeshis abroad is difficult to assess. There has, however, been some reports (e.g. in newspapers) on return of migrants due to job loss resulting from the recession, especially due to fall in construction boom in many Middle East countries. Some projections show that global and regional remittance flows would decline in 2009 and are likely revive in 2010 and 2011 (see Outlook for Remittance Flows 2009-2011, July 2009, World Bank). It is apprehended that recession-hit sluggishness in migrant-destination countries would bring down global remittance flows by 7.3-10.1 percent in 2009. The projected decline in remittances for South Asia is 3.6-6.4 percent. However, in case of Bangladesh, the decline in remittance flow in absolute term has not been visible as yet though the growth rate has declined. In this context, it is important to recognize that the impacts of global economic crisis on remittances depend on a number of factors such as sources of remittance inflows to Bangladesh, nature of job performed by Bangladeshi migrant workers, and macroeconomic conditions in the domestic economy, including inflation and the exchange rate. In the case of Bangladesh, three countries--Saudi Arabia, U.A.E and Kuwait provide 58 percent of total remittance earnings. In fact, 64 percent of remittances of Bangladesh came from the Middle East countries in FY09 (Figure 6.10). Therefore, inflow of remittances to Bangladesh depends much on the economic health of these countries, which significantly depends on oil prices. Though oil prices declined in the wake of the economic crisis, the Middle East countries managed to build up huge budget surpluses in the face of high oil prices in 2007.
Figure 6.10: Top Ten Sources of Remittance Inflow, FY09 (% share in total)

Source: Bangladesh Bank and BMET

Figure 6.11: Remittance Inflow from Major Sources, July 2008 November 2009

Source: Bangladesh Bank and BMET

The surplus resources are increasingly being utilized by these countries now to undertake counter-cyclical policies, so that any adverse effects of the world recession may be offset. 17 Overall, remittances to Bangladesh continue to rise (though with fluctuations) from these countries (Figure 6.11). This is mainly because the overall stock of Bangladeshi migrants
In 2008, the budget and current account surplus of Saudi Arabia was SR 385 billion and US$ 162 billion. See, The Global Financial Crisis, Implications for Bangladesh, BIDS-PRP Working Paper 1, Bangladesh Institute of Development Studies, 2009.
17

42

continues to rise despite the global economic crisis. Moreover, the exchange rate has remained stable along with a rising trend in remittance flow from major sources. Given the healthy situation in remittances flow, the government needs to ensure the best use of this resource. The government has recently succeeded in stopping the retrenchment of workers in Mauritius. Still, migrant workers are deprived in many ways at home and abroad. The cost of migration is very high and efforts are needed to make migration safe and remunerative especially for women migrants. It is also important to give special assistance to migrate to new markets like Eastern Europe, South Africa and North African countries. Though migration of semi-skilled and skilled workers has increased in recent times, more efforts are needed towards producing skilled labour with potential demand. The National Skill Development Council needs to be made effective to play a vital role in this regard. Balance of Payments As a result of comfortable growth of export, robust growth of remittances, and slowing down of import payments, the balance of payments situation of Bangladesh remained healthy in FY09 and has continued with a similar trend so far in the current fiscal. The overall balance in first five months (July-November 2009) is US$ 2,156 million, which was US$ 248 million during the same period of FY09 (Table 6.7). This comfortable situation in the balance of payments may face some pressure in the coming months due to rising international commodity prices and thus the import value. It would be important therefore to increase export earnings so that the trade gap does not widen too much to put unsustainable pressure on the overall balance.
Table 6.7: Balance of Payments (in million US$) Items Trade balance Services Current transfers Official transfers Private transfers of which: Workers' remittances Current account balance Capital account Financial account Errors and omissions Overall balance
Source: Bangladesh Bank.

FY09 -4,708 -1,621 10,226 72 10,154 9,689 2,536 451 -808 -121 2,058

FY09 (Jul-Nov) -2,664 -1,073 3,949 6 3,943 3,747 -79 74 137 116 248

FY10 (Jul-Nov) -1,975 -653 4,904 9 4,895 4,659 1,692 114 850 -500 2,156

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Foreign Exchange Reserves At the end of FY09, foreign exchange reserves rose to US$ 7,472 million, which was US$ 6,148.8 in FY08. During the first five months of FY10, the reserves became higher than the corresponding month of FY09 (Figure 6.12). The main reasons are robust growth of remittance flow, decline in import payment, and comfortable growth of export earnings. In September 2009, the foreign exchange reserve was adequate to meet import requirements of 4.3 months of the country.

Figure 6.12: Foreign Exchange Reserves

Overall the health of the external sector appears to be satisfactory bearing in mind some reservations for the export sector and rising trend in international price of commodities including industrial raw materials. To stimulate export production, major challenges are to keep adequate supply of electricity especially in the coming summer, improve access to credit, and ensure socio- political stability to maintain uninterrupted production and lead-time of export products. Remittance will continue to be strong. Recent attempts of the government to expand markets for migration are worth mentioning. However, more efforts are needed to reduce the cost of migration and the cost of transfer of remittance through the formal channel. 6.3 Maintaining Price Stability The FY10 budget was framed within the medium term macroeconomic framework based on the assumption that the annual inflation rate will come down to 6.5 percent in FY10 from 7.0 percent in FY09. For maintaining price stability, the policy priority has been to contain average inflation at moderate levels and reduce inflation expectations. Overall inflation in Bangladesh generally follows the trend in food inflation which has a weight of nearly 65 percent at the national level (67 percent in rural areas and 57 percent in urban areas). With larger weights of food items in the consumption basket of the poor, high inflation hurts the poor more and also adversely affects economic growth. Inflation, particularly food inflation, in the country is affected, in addition to demand side factors, by both domestic and international supply side developments. Lack of healthy competition in the market, temporary disruptions in supply due to seasonal and other factors, inadequate storage and warehousing facilities, transportation bottlenecks, and similar other factors are considered as major reasons behind domestic supply shocks. On the international front, the volatility of prices of food, oil, and other essential commodities significantly affects domestic prices and are considered as key drivers of imported inflation. On the other hand, high growth in M1, M2, private sector credit, market capitalization, and remittances are the main demand side drivers of inflation. For Bangladesh, it is prudent to consider relative importance of both sets of factors for containing inflation and maintaining price stability.

44

Recent Price Developments The recent movements in inflation (July-November 2009) are closely linked with the inflationary situation in the first half of 2009. This review considers the movements in both 12-month average and 12-month point-to-point (p-t-p) inflation. 18 Figure 6.13A shows the 12-month average CPI inflation (general, food, and non-food) during January-November 2009, while Figure 6.13B gives the 12-month p-t-p CPI inflation. Average inflation showed a declining trend from January 2009 to October 2009. However, a slightly increasing trend is seen from November 2009. The p-to-p inflation shows an increasing trend since June 2009. The p-to-p food inflation remained lower than non-food inflation until August 2009, but it surpassed non-food inflation afterwards.
Figure 6.13A: 12-month average CPI inflation (percent), 2009 Figure 5.13B: 12-month p-t-p CPI inflation (percent), 2009

The 12-month average CPI inflation has declined from more than 10 percent in January 2009 to about 6 percent in November 2009. The average inflation rate was 7.6 percent for the first half of 2009 while it declined to 5.44 percent during July-November 2009 with very little month to month variability. Food inflation has been higher at about 9.0 percent over the first half of 2009 and 5.5 percent afterwards, while non-food inflation remained stable at about 5.5 percent throughout the period (Table 6.8).

P-t-p inflation contains seasonality elements and hence is more volatile. However, by conveying actual changes in the price index from one month to another, p-t-p inflation provides valuable information about the short run price dynamics. For short term analysis, it is important therefore to focus on p-t-p inflation. On the other hand, 12-month average inflation is useful to analyze the long-run price behaviour.

18

45

Table 6.8: Mean and Standard Deviation of Monthly Inflation Rates Inflation rate (12-month average) General Food Non-food Mean 7.62 8.96 5.50 5.44 5.54 5.43 Standard Deviation 0.63 1.14 0.26 0.49 0.23 Inflation rate (12-month p-t-p) General 4.98 5.34 Food Mean 4.56 Non-food 5.88

January-June 2009 July-November 2009 January-June 2009 July-November 2009

5.77 4.81 Standard Deviation 1.38 2.30 0.66 1.58 1.97 1.02

0.39

Source: Bangladesh Bank and BBS.

Figure 6.14: Recent Movements in International A combination of factors including low Prices global commodity and oil prices, sluggish investment demand emanating from global recession, and lower food prices due to the governments efforts to curb essential commodity prices (especially rice) as well as bumper production of boro rice in 2009 helped in keeping domestic inflation at a relatively low level throughout the year. However, a rising and somewhat volatile trend in prices of several commodities such as edible oils, crude oil, rice, wheat, and fertilizers in the international market has contributed to inflationary pressure in recent Source: Pink Data set, World Bank months (Figure 6.14). It is likely that this

could emerge as a major cause of concern for inflation in the coming months. Moreover, the recovery of global economy from the current recession could fuel further inflationary pressure in the economy. The recent uptrend in inflation is not an exception from the global trend; there has been a rising trend in commodity prices in the developing world in the fourth quarter of 2009 which is expected to continue in the first half of 2010 (Figure 6.15).
Figure 6.15: World Bank Index of Commodity Prices for Developing Countries

Source: Pink Data set, World Bank

46

Policy Responses The Bangladesh Bank (BB), in its recent Monetary Policy Statement for the period January-June 2010, mentions that the monetary policy stance would remain basically unchanged during the second half of FY10. The supportive monetary conditions will continue to facilitate the recovery of exports and attract new investments. The expectation is that successful spurring of growth will keep inflationary pressures in check by maintaining benign situation on the supply side. The emphasis of monetary and credit policies would be on targeted programs to priority sectors (e.g. agriculture and SMEs) and population groups underserved by the market. One major development during the first half of FY10 was the emergence of surplus liquidity (high excess reserves of banks with BB, remittance inflow accumulations in foreign exchange) which reached a high of Tk. 34,360 crore in November 2009. The excess liquidity situation has, however, improved in recent months with the resumption of reverse-repo and active treasury-bill auctions supported by private sector credit and import growth. The improved situation is also reflected in the increase in the call money rate from 1.71 percent in June 2009 to 5.04 percent in December 2009. Looking at the monetary aggregates, a relatively high growth is observed especially for reserve money (RM) and broad money (M2) exceeding the BBs monetary policy program targets set in the Monetary Policy Statement of July-December 2009 (Table 6.9). If these high growths are sustained over longer periods, further inflationary pressure may build up unless investment demand picks up and excess liquidity situation further improves.
Table 6.9: Monetary Aggregates and Demand Side Factors (y-o-y growth in percent) Jun 2009 Sep 2009 Nov 2009 Jun 2010 (prog) 27.50 13.10 15.60 11.90 13.80 0.00 16.70 15.50 7.00

Net foreign assets Net domestic assets Domestic credit Credit to public sector i) Credit to central govt ii) Credit to other non fin. public sector Credit to private sector Broad money Reserve money
Source: Bangladesh Bank

27.18 17.76 15.85 20.27 23.24 4.51 14.62 19.17 31.94

49.67 11.57 12.41 8.13 12.87 -13.31 13.65 16.90 24.26

91.70 10.46 11.84 -4.59 -4.67 -4.21 16.73 20.44 32.02

The recent build up of inflationary pressure can partly be attributed to the liquidity expansion that has taken place in the first half of FY10. The liquidity in the banking system has rapidly expanded largely as a result of the rapid buildup of net foreign assets (NFA) stemming from continued large remittance inflows and the decline in import payments. In the absence of
47

sterilization, liquidity expansion has created some pressure particularly in asset markets (especially stock and real estate markets) and in non-food prices. These issues need more explicit consideration in BBs monetary policy response along with clear signals for the future. Inflation and inflation expectations seem to have been taking a persistent nature at present and this requires a fresh look at the underlying monetary policy framework as well as supply management. In particular, the apparent difficulty in curbing inflation expectations by adjusting key policy rates raises questions on the efficacy of the monetary transmission mechanism for addressing inflation. Further, it underscores the necessity of mixing prudent monetary and nonmonetary policy initiatives to control inflationary pressure within tolerable limits. Future Outlook Recent price trends in the domestic and international market indicate that upward inflationary pressure is likely to continue during the coming months. A steady recovery from global recession will increase demand for investments (credit growth), which will eventually contribute to demand-pull inflation. Therefore, both demand and supply side measures need to be complemented for maintaining price stability. In the past, any rise in international prices has quickly been transmitted to domestic prices while the reverse happened with a lag and remained mostly incomplete. Moreover, irrational profit motive of unscrupulous businesses is alleged to have played important roles in fueling inflationary spirals. In such situations, appropriate policy response would be to take measures that minimize volatility in domestic prices especially food prices. The short-term price stabilization measures might involve augmenting food (rice) supply in the upcoming boro season, fine tuning the domestic procurement goals, planning and announcing advanced schedule of open market sale of food grains, and temporary withdrawal of duties and taxes as appropriate. A prudent supply management policy should also include developing a proper market monitoring mechanism as well as identifying and resolving cartel, if these exist in particular markets. The government should take measures for increasing competition through encouraging entry of more importers particularly in the case of edible oil. In addition, strengthening the TCB could increase competition in the import market. In addition to constant efforts in making monetary policy instruments more effective, nonsterilized intervention in the foreign exchange market and excess liquidity in the banking sector must be handled with great care to contain inflationary pressure in the near future. In this connection, maintaining a stable exchange rate could help contain high pass-through effects. In order to maintain high GDP growth, in addition to supply-side measures, more efforts would be needed to promote efficient and effective lending practices, raise effectiveness of monetary policy instruments, and ensure better exchange rate and liquidity management without necessarily limiting the growth of domestic money supply (or credit). 6.4 Managing Climate Change Impacts: Financing Issues Bangladesh is most vulnerable to climate change while contributing practically nothing to the root cause of the problem. The policy of the government is to integrate climate change issues (such as adaptation, mitigation and related technology development and transfer as well as capacity building) into the normal development processes and planning. For success in this effort, it is important to make clear how and what would be integrated into the planning process, how much resources will be necessary, and how to generate them.

48

Level of Fund Requirements At the outset, it must be borne in mind that the climate change related activities will have to be carried out by all economic agents such as the private sector (households, firms), NGOs and CBOs and of course, the government. Hence, the needs of all of them have to be considered. Their needs and level of resources are different. The generation and sources of funds may also thus be different. Estimates by BIDS show that, at the present level of economic activities by these agents, the country is likely to require US$ 9.5 billion per year for investment for full integration of climate change issues. Of this, US$ 3 billion (US$ 1 billion for adaptation and US$ 2 billion for mitigation) will be required by the government at the present level of its ADP. The private sector may need US$ 6 billion (US$ 4 billion for adaptation and US$ 2 billion for mitigation) while the NGOs may need US$ 0.5 billion for adaptation. With increased level of economic activities, the financing requirement will also go up. It will go up further if the major GHG emitting countries of the world fail to adopt measures quick enough for limiting future rise in global temperature to 2 degrees celsius. This will be the case particularly for additional safety net measures for the poor. Apart from financing adaptation, mitigation and related programmes, there may also arise the need for other adjustments due to economic and social consequences of response measures as well as adaptation to mitigation in agriculture and other sectors. In all these cases, there is a major worry over possible increase in food insecurity in the country. If additional food has to be imported in future which Bangladesh would not have done in the absence of such response measures, resources to be expended for this purpose will also form a part of the cost of adaptation which will be additional to the above adaptation costs. On the whole therefore, the future costs of adaptation may be much higher than at present even if the level of economic activities does not go up appreciably. Resource Mobilization at the Global Level The developing countries (represented by G77) and China support the proposal for the developed country to provide 1.5 percent of their GDP as grant financing for adaptation. 19 This comes to US$ 600 billion at the present level of GDP of these countries. The LDCs have proposed that 70 percent of this resource will have to be allocated to the least developed and most vulnerable countries such as the small island states. This money will be over and above the normal ODA. Against this demand, two points may be made. First, so far the fund generated or administered directly or indirectly by the UNFCCC is extremely small. However, issues may arise when resources would be available as promised globally under the so called Copenhagen Accord which is not legally binding, but amounts to US$ 30 billion for 2010, 2011 and 2012 with could rise to US$ 100 billion by 2020. The first fund is basically for adaptation and the latter for adaptation as well as mitigation although there is some confusion about it. The LDCs are expected to be provided funds for adaptation on a preferential basis. Unfortunately, the funds are yet to be operational till the Copenhagen Accord or some variant of it becomes a legal instrument. Recently, the UN Secretary General has formed a High Level Panel for Alternative Sources of Funding for Climate Change Activities which is expected to submit its preliminary report around May/June 2010 when more definitive ideas for future extent of funding as well as sources may be available.

These figures are closer to what has been suggested under a Carbon tax formula or those stated in the Stern Report.

19

49

The resources for adaptation has been agreed internationally to be provided entirely as grant. For mitigation, it is unlikely to be so. However, for mitigation under Nationally Appropriate Mitigation Action (NAMA), Bangladesh may claim it as grant as it is not under legal obligation for Bangladesh to mitigate as an LDC. Further, even when a mitigation activity is financed through loans or other means, if the technology to be employed has to be state of the art for such mitigation then Bangladesh can and should demand the additional funding necessary for deploying advanced technology over and above the conventional one to be provided as grant. Other Sources Ideas are now being floated by all and sundry for building up adaptation fund as stated above. But getting it operational and under a workable internationally accepted architecture may yet take a few years to materialize. In 2007, the Bali Action Plan endorsed three ideas floated earlier. These are levies on international maritime transport and aviation and REDD (reducing emission form deforestation and forest degradation). No consensus has emerged on the first two yet, but prospects are bright. Several billion dollars a year may be raised per year through such measures. For Bangladesh, REDD remains a distinct possibility. The idea is to get international financing and technology for rehabilitation of degraded forest and keeping the carbon locked in trees for a long time. Various countries have already begun piloting with encouraging results. It is highly recommended that the Forest Department prepares pilot projects under REDD and thus both adapt to and mitigate climate change with grant funds from other countries. There is a prickly issue related to REDD. This has been treated as mitigation but, afforestaion is also adaptation depending on circumstances such as coastal forestry which safeguards the coastal areas against storm surges. How to deal with this issue is still unclear. More importantly, as it is also a mitigation issue, question has been raised if the carbon sequestered in the forest may be traded internationally. This is still contentious. There is also the issue of carbon trade. Bangladesh has not really gone into this at all particularly there has been little interest in the market mechanism as well as complexities of project preparation and approval. The recent decision of distributing millions of energy saving lamps free by the government is a case in point. Has the government tried to find out if the carbon so saved could be traded in the market through which much resources can be generated? The upshot of the above discussion is that very large sums of money would be involved in managing climate change which would be a gigantic task both internationally as well as domestically. Particularly, the institutional mechanisms within the country have to be fully geared up to the task at hand.

7. Economic Well Being

7.1 Movements in Wages The movement in wage rates has significant implications on the well being of the majority of the households in Bangladesh. The HIES 2005 shows that, among the household heads who report agriculture as their main source of occupation, 37 percent in the rural areas and 39 percent in the urban areas work as day labourers. The share of day labourers in the non-agriculture sector is also high: 35 percent in the rural areas and 25 percent in the urban areas. These shares are particularly high among the poorest: 48 percent in both rural and urban areas for agriculture and 49 percent and 50 percent in rural and urban areas respectively for the non-agriculture sector for the poorest quintile of the per capita consumption distribution. Thus changes in the wage rate
50

affect the income level of a large number of households in both rural and urban areas of the country. The wage differential among regions and sectors also significantly affect sectoral changes in occupations and regional movements of labour force across the country. Table 7.1 shows the movement in daily wage rates of agricultural and non-agricultural labourers in four regions of the country. The table gives both nominal wage rate (including values of all non-monetary payments) and the real wage rate in terms of kg. of rice. The data show significant variation in the wage rate both across regions and seasons. In general, daily wages in both agriculture and non-agriculture are highest in the central region and are significantly lower in northern and southern regions. Wage rates normally decline during the lean months of agricultural activities and the intensity and duration of such seasonal troughs vary across regions.
Table 7.1: Movements in Wage Rates
Region Dec 07 Jul 08 Oct 08 Nov 08 Dec 08 Jul 09 Oct 09 Nov 09 Dec 09 Nominal (Tk. per day) Agriculture Eastern 210 Central Northern Southern Non-agriculture Eastern Central Northern Southern 188 92 94 210 238 114 106

150 225 100 150 163 263 120 164

194 130 140 188 231 146 155

185 219 139 133 193 256 156 158

208 238 122 136 215 281 168 139

148 244 116 171 183 288 147 183

213 130 165 175 284 149 180

223 275 139 155 213 313 194 173

223 219 164 153 213 313 197 173

Coarse rice price deflated wage (kg. per day) Agriculture Eastern 7.5 5.4 6.6 Central 6.5 8.7 6.3 7.6 Northern 3.4 3.2 4.1 4.7 Southern 3.4 5.2 4.8 5.6 Non-agriculture Eastern 7.5 5.8 6.3 6.9 Central 8.2 10.1 7.5 8.8 Northern 4.2 3.9 4.6 5.0 Southern 3.8 5.7 5.4 5.6
Source: BIDS Field Survey 2009

6.7 7.6 4.0 4.6 6.9 8.9 5.5 4.6

5.0 9.4 7.2 7.8 6.2 11.1 7.2 7.8

7.7 5.8 8.0 6.7 10.3 6.6 8.7

8.7 10.0 6.0 7.2 8.4 11.4 8.4 8.0

8.6 7.7 8.8 6.5 8.2 11.0 8.8 7.3

In some regions, slack seasons indicate a severe decline in both wage rates and employment opportunities. In the eastern region, little employment opportunities exist in agriculture in some months (e.g. July and October) while day labourers migrate from other regions to the eastern region during aman and boro plantation and harvesting times. The central region is undergoing
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rapid structural transformation and the local labour is getting more involved in non-agricultural works and services while migrant labour, especially from the northern region, work in larger numbers in agriculture during peak seasons. In the largely agricultural economy of the northern region, employment opportunities are highly seasonal and somewhat insecure forcing the labourers to remain un or underemployed and/or migrate to other regions for employment. During the lean periods, out-migration becomes a common feature especially in search of low paid non-farm activities. The situation in the southern region is similar with marked seasonal pattern in wage rates and in- and out-migration of labour during peak and slack agricultural seasons. Inadequate expansion of non-agricultural activities is the main factor in marked depression of both agricultural and non-agricultural wages in the northern and southern regions.
Box 2: Eliminating Monga: Recent Progress Monga hits regularly in some districts of Northern Bangladesh. Households, especially agricultural labour households, dependent on the agricultural economy of the region do not have much work to do during the lean seasonsespecially between July to October and in March and April every year. Besides food insecurity of the poor households, marginal farmers lack the capacity to invest in agriculture. Non-farm employment opportunities are extremely limited so that the poor households do not find any alternative income earning activities. While the earners of the poor households usually migrate temporally to other areas to undertake odd jobs, the households belonging to the lower middle class suffer more as they find no other alternatives rather than staying in their villages. Most of the households are forced to borrow from local money lenders at high interest rates falling into permanent debt traps. In the poor households, women and children bear the brunt of monga as they are left alone while the male workers migrate for work. During the monga period (July-October) this year, the situation was somewhat different as the government took up several targeted programmes for the monga affected areas. The government distributed VGF cards and introduced allowances for poor elderly people and widows. In Kurigram, the government implemented a 40 day road construction project to provide jobs for local labourers. Each poor household was given 10 kg rice before the Eid ul Azha festival. The NGOs also came forward to provide loans to the villagers to cope with the monga crisis and undertake various income generating activities. Some NGOs are involved in training the local people, especially women, on how to make compost fertilizer in the homestead. The NGOs are popularizing vegetables and potato cultivation including homestead production to earn cash income and bring diversity in agricultural production. Also the introduction of short maturity varieties (e.g. BR33) of rice contributed to reducing the intensity of monga. While these efforts have reduced the severity of monga this year, long term efforts are needed to improve agricultural productivity through providing easier access to fertilizer, quality seeds, irrigation, and timely provision of credit for the poor farmers to ensure food security. The monga prone areas need priority in establishing industrial activities to diversify sources of income of the local households and earn incomes throughout the year. The government needs to implement more development projects in these areas to improve local infrastructure and other facilities so that private entrepreneurs can come forward to establish new enterprises and create more jobs. Skill development and credit facilities are needed for the local people including women to set up small and medium enterprises including poultry rearing, handicrafts, and other potential activities. Also skill training for overseas jobs could open up new sources of employment in these areas. The persistence of monga in the region makes it important to deepen the understanding of the regions growth dynamics in order to improve the effectiveness of policies. This would require new strategies to strengthen the employment nexus between economic growth and poverty reduction. Along with growth in income earning opportunities, poor workers in these locations where poverty trap exists need to have 52

the health, education and skills, and resources to gain access to expanded employment opportunities. Since informal employment is the main source of employment of these poor workers, an integrated policy response is needed taking into account the diversity and heterogeneity of the informal economy. Policies are needed to raise the productivity of informal enterprises through access to capital, business development services, infrastructures, and supportive regulations and policies. In promoting such policies, public investment has to play a key role along with massive programmes to strengthen education and training as well as in providing social protection, representative voice, legal identity and rights, and health services. This calls for rapid increase in public investment in these areas to provide essential public goods and create the infrastructure and environment for attracting private entrepreneurs to invest.
Source: BIDS Field Survey 2009

Price Variations The prices of essential goods remained volatile over the year. The price of coarse rice was high in December 2008 which fell afterwards but started to rise again in the second quarter of FY10. The regional variation is also striking (Figure 7.1). During the July-December 2009 period, prices of several essential commodities including potato, sugar, pulses, ginger, onion, salt, vegetables, and beef showed rising trends over the same period of the previous year while prices of eggs, chicken, diesel, fertilizer,

Figure 7.1: Volatility in Coarse Rice Price, 2008 and 2009

40.00 Eastern 35.00 Central Northern Southern

30.00

25.00

20.00

15.00

Source: BIDS Field Survey 2009

pesticides, and edible oil showed a somewhat declining trend. However, there were marked fluctuations in market prices of all commodities across regions and over months.
Box 3: Devastation of Aila: Urgent Steps Needed for Livelihood Rehabilitation The cyclone Aila affected the coastal belt in 2009. Some parts in the coastal belt were severely affected: most of the houses were damaged and lands were inundated by tidal saline water. Now water logging is one of the major problems for the persons in these villages which stands against the rehabilitation of their livelihoods. A BIDS Field Survey, conducted in December 2009, in some parts of the worst hit areas in Satkhira district shows that most of the people in these areas still live in miserable conditions. The economic activities in the area revolve around agriculture, mainly rice and jute cultivation and shrimp production. One of the villagers observed: aila has damaged almost all our houses, our agricultural lands are totally inundated by saline water so that we cannot cultivate, the shrimp farms were flooded, and most of the trees and livestock died. We have nothing left to start our livelihoods. Now many people live beside the road or on the embankment, which creates social and security problems for their families, especially for women and girls. The household heads cannot go outside their villages to work and have to live without two meals a day. 53

The government and some NGOs (e.g. BRAC, Shusilon, Grameen Shakti, Muslim Aid, World Aid, Red Crescent, and Notary Public) came forward with assistance after the cyclone and provided medicines, drinking water, rice, pulses, dried food, and other essential items. Several NGOs assisted some villagers in building new houses and rebuilding the damaged ones. But these were not enough. During the survey, it was found that only 19 households have VGD cards and 300 have VGF cards in two affected villages. There is no cyclone shelter in these villages. Education has been the worst victim. All primary schools in these villages remain closed as these are used as shelter for cyclone affected people. Most students failed to appear in the primary completion public examination this year. Health problems are also widespread with most community clinics not functioning. Aila has destroyed embankments, houses, natural resources, roads, closures (culverts used for passing water from the river to agricultural and shrimp farming lands) and all other assets of these people. One villager demanded: We need the embankment to be rebuilt first, then construction of cyclone shelters, reconstruction of roads, and agricultural credit at low interest rates. In the worst affected unions, 75 percent of the embankments have been affected. The villagers observed that the height of the WAPDA embankments should be raised from existing 14 feet to at least 20 feet to protect them from inundation of cyclone water in future. At the same time, the number of closures should be increased to facilitate easy irrigation for agriculture and shrimp production.

Map showing some worst affected areas One villager lamented: Our rehabilitation process has been going on for so long and we do not know when our miseries would end. We have repaired most of our houses on our own with some help from the NGOs. We are yet to return to our normal livelihoods as it is not possible to cultivate our lands because of saline water logging. Our children have just started to go to schools after a long interval. Still we are suffering from various diseases including skin diseases. We are yet to return to our normal lives. Aila was a big curse for us which is still disrupting our living. Natural disasters are common for us; we face disaster almost every year. But Aila has put all our lands under saline water and we cannot grow any crop. We need deep tube well for fresh water. If we get fresh water, we shall be able to cultivate our land and get back our livelihoods. For bringing back normal economic activities in these worst hit Aila affected areas, the short term priorities are to: (i) provide fresh water supply (e.g. through sinking deep tube wells or digging ponds) for household and agricultural uses; (ii) provide agricultural credit as subsidized rates; and (iii) create 54

immediate employment opportunities under various programmes to reconstruct village roads and small embankments. At the same time, measures are needed to: (i) implement plans to speedily rebuild the WAPDA embankment; (ii) undertake reconstruction of road communication; (iii) establish cyclone shelters in villages; (iv) launch tree plantation and natural resources development activities: and (v) provide alternative livelihoods to supplement agriculture based activities.
Source: BIDS Field Survey 2009

7.2 Perception of Changes in Well Being The overall economic situation during the first six months (July-December 2009) of FY10 shows significant fluctuation across different regions of the country. Agricultural production (especially rice production), which still remains the main determinant of economic situation in the rural areas, showed marked variation. In general, the people of the northern and southern regions are more dependent on farm employment and income earning opportunities in non-farm activities are extremely limited. The situation of the eastern region is also similar. The central region has a more diversified economy and has emerged as the prime source of employment for both migrant agricultural and non-agricultural labour from other regions. The perception of the people residing in different regions captured in the BIDS Field Survey 2009 regarding positive changes in overall welfare over the first six months of FY10 is shown in Figure 7.2. It shows that 80 percent of the respondents in the central region expressed improvements in their overall economic situation. Similar share is 70 percent in the eastern and northern regions. However, the situation is worse in the southern region where only 20 percent expressed improvement in their overall situation. The monga situation has improved in the northern region. In the eastern region, crop production has been diversified into profitable cash crop and vegetable production.
Figure 7.2: Perception of Positive Changes in Well Being, July-December 2009
90 80

Percent of Respondents

70 60 50 40 30 20 10 0 East ern Central Northern Sout hern

Source: BIDS Field Survey 2009

In the central region, both farm and non-farm activities have expanded. The southern region, on the other hand, remains less dynamic with limited progress in infrastructure development and expansion of livelihood opportunities. Parts of the region are still struggling to come out of the destructions of aila and consequent adverse impacts on their livelihoods. Highlights of the opinion of the respondents are given in Table 7.2.

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Table 7.2: Highlights of Major Socioeconomic Changes, July-December 2009

Region

Overallchanges

- Communication system has improved - Along with crop, vegetable cultivation has expanded giving more incomes Eastern region - Improved delivery of agricultural inputs - Extreme poverty declined - Prices of some essential commodities show rising trend - Cultivable land drastically falling due to unplanned industrialization and urbanization - Expansion of cash crop cultivation Centralregion - Increased labour demand in both farm and non-farm sectors - Increased incomes of farmers through crop diversification - Expanding non-farm activities - Decline in extreme poverty - Improved monga situation - Crop diversification received momentum Northernregion - Improved delivery of agricultural inputs - Improved infrastructure and communication - Prices of some essential commodities show rising trends - Not much change in overall situation - Aila devastated infrastructure and transport/communication system yet to be rehabilitated Southernregion - Reconstruction of roads, cyclone shelters, and embankments remains overdue - Agricultural input supply needs overhauling especially for poor farmers - Increased risk to agricultural production - Price hike of some essential commodities
Source: BIDS Field Survey 2009

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8. Looking Ahead: Challenges and Critical Policy Responses

Currently, the Bangladesh economy seems to be coming out of the shocks that it faced in succession over the last year rooted in both domestic and global economy. This demonstrated resilience against shocks is the main source of its strength and leads us to think positively about the short term prospects. In the global economy, a breakout from recession has begun which makes three issues important for Bangladesh at the present time: (i) is the Bangladesh economy poised to take full advantage of the global recovery; (ii) which policies are required to create an enabling environment for the economy to move forward; and (iii) how do we ensure that Bangladesh transits to the desired long-term growth path needed to fulfill its social goals. Among the macroeconomic fundamentals, an important source of strength is the secularly rising and intrinsically high gross domestic savings rate rooted in household behaviour. The external sector remains robust with satisfactory inflow of remittances despite timid export performance in the first half, but the expectation is that it would turn around in the second half of FY10. The present assessment shows that the Bangladesh economy needs to address five critical challenges at present: (i) raise the level of investment; (ii) accelerate economic growth and promote food security; (iii) manage inflation and lower inflation expectations; (iv) reduce regional variation in economic performance; and (v) improve governance across the board.
8.1 Boosting Investments

During the first six months of FY10, overall investment in the economy remained depressed which adversely affected economic growth and overall performance of the economy. The economy, however, has been showing signs of recovery; along with improvements in the perceptions of the private entrepreneurs. Investment climate is improving and several investment related indicators are showing signs of gradual strengthening despite supply constraints in power and energy and other bottlenecks. At present, an important agenda for policy is to provide all necessary support to sustain and further deepen and broaden this improvement process along with adopting short term measures of reducing electricity and gas shortages and removing transport and other bottlenecks. The full advantages of short term measures of augmenting power supply (e.g. small scale private power generation) need to be exploited along with proper demand management (e.g. introducing day light saving time, adjusting day offs in industrial/commercial establishments, and similar measures). In this regard, the governments decision of generating an additional 7,000 MW of electricity within the next three years is a welcome decision. Specific details are needed to be finalized speedily to materialize the generation plan along with decisions on supply of required primary fuel and arranging required resources. A possible option would be to rely on the IPPs. The experience so far has, however, been mixed.
Public Investment

In the case of public investment, the ADP implementation rate during the first six months of FY10 has improved compared with the last few years, but a much better performance is needed to reverse the declining trend of public investment as a share of GDP. This is necessary to ensure the supply of essential public goods, create better investment climate, and crowd in private investment. Several aspects of ADP implementation need attention: (i) improve the quality and relevance of the projects; (ii) enhance both institutional and human capacity of the implementing agencies; (iii) adopt appropriate capacity building mechanisms, incentive structures, and accountability frameworks; and (iv) ensure regular monitoring of project activities including outputs/outcomes and their quality.
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The capacity of the government to expand public investment and provide essential public services is limited by the amount of resources available with the government. Over the years, the tax-GDP ratio has remained stagnant limiting the capacity of the government to provide essential public services. Enhancement of public revenue is a priority to make priority public investments. Our review of revenue collection of the first five months of FY10 suggests optimistic performance in this front, which needs strengthening in the coming months. For expanding the direct tax net, more people having taxable income need to be brought within the income tax system and systematic efforts are needed to reach the target of bringing 0.4 million new taxpayers within the tax net by this fiscal year. In the case of indirect taxes, import based taxes are likely to remain somewhat subdued due to slow growth of imports which would require concerted efforts to collect additional taxes based on domestic activities to meet the revenue generation targets of FY10. The introduction of procedural simplicity; improvement of human and institutional capacity of NBR; wider use of online and IT facilities; and measures to make the tax system taxpayer friendly and transparent are needed to provide the required boost to revenue generation.
Private Investment

The perception of the business community has shown significant improvements in recent months regarding the overall investment climate in the country. Among others, this is reflected in the rise in the number and volume of investment by local investors registered with the Board of Investment over the first half of FY10 relative to the same period of the last fiscal although foreign/joint venture investments have remained somewhat depressed. It is more likely that private investment would show a visible upturn if the current trends of improvements are continued and no unexpected events (e.g. natural disasters) strike the country. The continuity and transparency of the policy framework is important for attracting private investment, especially FDI. The problems that the entrepreneurs face in making investments are well known. What is needed are measures to minimize these to the extent possible within the existing institutional and other limitations. The establishment of special economic zones (SEZs) needs to be given priority for attracting both domestic and foreign investments.
Public Private Partnership

One of the ambitious and noteworthy initiatives of FY10 budget is the pledge to bring a qualitative shift in the investment strategy through taking special measures to involve the private sector under public private partnership (PPP) especially to meet investment gap in infrastructure development and maintenance. The proposal is to create three new expenditure heads in FY10 budget for undertaking new projects under PPP: (i) PPP technical assistance; (ii) viability gap funding; and (iii) infrastructure investment fund. In FY10 budget, Tk. 100 crore, Tk. 300 crore, and Tk. 2,100 crore were allocated for these heads respectively. The FY10 budget also recognized the challenge of setting up the institutional framework for preparing and implementing the PPP budget with capacity to ensure innovative ways, independent operation, and accountability of planning and budget process of the private sector. Unfortunately, not much progress has been made so far to meet these challenges. The operational details of PPP are yet to be unveiled. For establishing a well functioning PPP framework, the government needs to address three major issues without delay: (i) put in place a proper regulatory framework either by revising the 2004 Private Sector Investment Guidelines (PSIG) or enacting a new PPP Law; (ii) create a functional PPP Cell with proper institutional framework, required manpower, and other resources; and (iii) declare an appropriate incentive
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regime and viability gap funding mechanism to attract private investment in the infrastructure sector. The key challenge in FY10 in this respect would be to secure some early successes and show that the PPP system is workable. For the purpose, a few medium sized PPP projects in selected sectors such as energy, roads, healthcare and similar other areas could be selected which can be taken as pilot projects and the lessons learned from these can be replicated to undertake bigger and complicated projects. 8.2 Accelerating Economic Growth and Ensuring Food Security The target for GDP growth has been fixed at 6.0 percent for this fiscal year. Economic growth in the first six months of FY10 has been relatively slow creating doubts regarding whether the growth rate would be achievable. The economy has, however, been picking up since late-2009. The important concern is to sustain and strengthen this upturn over the remaining period of FY10. Estimates by BIDS show that, if the current improvements are sustained and can somewhat be expedited, GDP growth could be around 5.8 percent in FY10. Obviously, such projections are beset with significant uncertainties especially at a time when both domestic and global economies are undergoing wide ranging transformations. The analysis of this review shows that food grains production is not likely to rise much in FY10 compared with the level of FY09; hence agricultural growth in this fiscal will come mostly from non-rice crops and non-crop agriculture especially vegetables, fisheries, and poultry. The review highlights the imperative of ensuring a bumper boro harvest this year for ensuring food security especially in view of the expected tight global market situation of rice in 2010. Also of importance would be to ensure fair prices to growers, deliver quality inputs in time, expand food grains storage and warehousing facilities, and ensure timely intervention in the market when needed to maintain reasonable price stability. For the manufacturing sector, several signs of turnaround are mentioned in the review, which are likely to strengthen in the coming months due to positive stimulus both from domestic and external demand. The negative impact of global economic crisis on exports is likely to diminish gradually and overall export growth in FY10 could achieve a reasonable growth rate if strong demand for Bangladeshi exports is present. In this context, it would be helpful if policy decisions and incentive packages declared earlier are fully implemented including cash subsidies and support measures to the export oriented industries. For raising productivity and maintaining competitiveness, the welfare of the workers is a key concern especially in the RMG industries and any escalation of labour unrest would be counterproductive for all. Since a major share of GDP growth of FY10 has to come from the industry sector, a top priority would be to strengthen measures for diversification of both export products and markets.
8.3 Managing Inflation and Containing Inflation Expectations

Current indications show that commodity prices in the international market are likely to rise during the coming months of FY10. With greater global economic integration, inflation in Bangladesh is more open now than before to external pressures coming from outside the country. The reasons lie in many factors including high import dependence, increased global pressure of excess demand, weak productivity growth in the domestic economy, and persistence of significant structural and institutional rigidities. The last inflation episode that Bangladesh faced was not policy induced, but was fueled more by domestic supply shocks and global price hikes. But the current buildup of inflationary pressure can partly be attributed to the liquidity expansion that took place in the first half of FY10. With rapid buildup of net foreign assets (NFA) and in
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the absence of sterilization, liquidity expansion has created some pressure particularly in asset markets (stock and real estate markets) and in non-food prices. These issues need more explicit consideration in Bangladesh Banks monetary policy response along with clear signals for the future. Inflation and inflation expectations seem to have taken a persistent nature at present and this requires a fresh look at the underlying monetary policy framework as well as supply management. In particular, the apparent difficulty in curbing inflation expectations by adjusting key policy rates raises questions on the efficacy of the monetary transmission mechanism for addressing inflation. It also underscores the necessity of further monetary as well as nonmonetary policy initiatives. In particular, lowering long term inflation expectations needs building credibility through adoption of prudent monetary policy and augmentation of capital formation in the farm sector to bridge structural supply-demand imbalances in agriculture. At present, the economy seems to have been passing through a unique episode. On the one hand, the economy shows the signs of a soft patch largely due to slow export demand and low private investment. On the other, the balance of payments position of Bangladesh has never been so strong in the past with record foreign exchange reserves and high current account surplus. In view of the complex nature of the current inflation dynamics, the monetary authority no doubt faces a difficult environment with significant uncertainties surrounding the choice of right policies. Moreover, the pass-through of higher prices in the international market will add on to inflation pressures at least in the near term. In the present situation, direct measures can play important roles in reducing inflationary pressure such that the burden of keeping inflation at low levels does not fall on demand management policies alone. With rising food prices, the governments policy of maintaining adequate strategic buffer stock of food is a step in the right direction which could be released when needed through different food transfer programs targeted to the poor and food insecure households. Similarly, targeted safety nets programs, feeding programs for school children, foodfor-work programs, open market sales, and employment program for the poor and disadvantaged households especially during the lean seasons could be used in the short run to enhance food entitlements and stabilize prices. The Trading Corporation of Bangladesh (TCB) can be made effective in playing a major role in stabilizing the market of important commodities. Along with mitigating the inflationary impact on the poor through generating short-term employment opportunities and providing access to transfer incomes in the rural areas, it is important to ensure food to the poor at subsidized prices especially in the urban areas. In particular, coordinated monetary and fiscal measures are needed to contain inflation and achieve higher growth for which it would be desirable to firmly anchor inflation expectations at reasonable levels. It would be important to address the sources underlying slow domestic demand and take steps to counter their adverse impacts. At the same time, the Bangladesh Bank needs to identify the factors contributing to monetary expansion, assess the extent of the problem, and design appropriate policy mix consistent with current situations.
8.4 Reducing Regional Variation in Economic Performance

One important aspect that the present assessment brings out is the uneven progress achieved during the period under review across different regions of the country. The BIDS Field Survey 2009 shows significant variation in economic performance as well as changes in well being of the residents of different regions. In recent years, the east-west divide in economic performance has been brought into the forefront indicating that the eastern region of the country is progressing
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fast whereas the western region is lagging behind. This, however, masks the fact that the issue goes deeper across regions. The FY10 budget takes reducing regional disparity as one of its thrust areas. For effectively addressing the issue, it is important to deepen our understanding of regional growth dynamics in order to improve the effectiveness of policies. The evidence that some regions have benefitted the least from the past pattern of economic growth brings out the reality that these regions not only suffer from low level of endowments but also there exist mismatches between their structure of endowments and the opportunities created by the countrys growth process. Thus two important dimensions of policy need to be harnessed: first, enhance the endowments and capabilities of the lagging regions; and second, minimize the mismatches between newly created opportunities by the growth process and the level and structure of endowments of these regions. For these regions, new strategies are required to strengthen the employment nexus between economic growth and poverty reduction. Along with high growth, poor workers need to have the health, education and skills, and resources to gain access to expanded employment opportunities. Since informal employment is the main source of employment of the poor workers in these regions, an integrated policy response is needed taking into account the diversity and heterogeneity of the informal economy. Policies are needed to raise the productivity of informal enterprises through access to capital, business development services, infrastructures, and supportive regulations and policies. In promoting such policies, public investment has to play a key role in growth and development along with massive programmes to strengthen education and training as well as in providing social protection, representative voice, legal rights, and health services. This calls for rapid increase in public investment in these regions to provide essential public goods and create the infrastructure and environment for attracting private entrepreneurs to invest in these regions.
8.5 Improving Governance across the Board

The scope of improving governance, especially economic governance, is wide across all sectors. It is also essential to improve economic performance in the short term. The focus needs to be on injecting momentum in development administration and raise its efficiency. The FY10 budget recognizes the need to adopt a pragmatic approach to reforms in priority areas such as strengthening of development administration and decentralization, continuity and coherence of reform initiatives, and consolidation of positive gains of past reforms. While the intentions are laudable, the present concern is the unduly long time spent in taking decisions and the slow pace of their implementation. Bringing the required dynamism in development administration remains a key challenge for satisfactory implementation of the FY10 budget and achieve desired outcomes. While the process no doubt is time consuming, all available opportunities need to be harnessed including building partnerships with the private sector and NGOs, bringing local government structure more effectively into the development process especially at the grassroots level. Many of the procedural complexities can be overcome by streamlining the existing procedures and enforcing transparency and accountability. 9. Concluding Remarks The present assessment brings out a number of positive developments that have taken place in the economy during the first six months of FY10 that are likely to unfold higher growth

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dynamics in the second half of the fiscal year. At the same time, there are considerable downside risks that require bold decisions and quick actions. In order to move the economy to a higher growth path, significant efficiency and productivity gains are required to meet the challenge of limited resources, particularly land (and thus food) and energy. Moreover, effective implementation of reform agendas is imperative to strengthen competitiveness, foster growth, and generate productive and decent job opportunities. Obviously moderating inflation and raising economic growth require painful tradeoffs. However, this should not be taken as an excuse for delays in implementing needed corrective policy measures to the detriment of both short- and medium-term outlooks. For Bangladesh to graduate to the middle income country group by 2021, would mean raising income by an average of 7-8 percent per year in a sustained manner. This is challenging but not impossible. The government seems to be aware of this challenge and is laying down the foundations of major infrastructure projects. Similarly, if the projects such as management of river flows and river basin development are designed and implemented in a sound manner, the resultant improvement in natural endowments and environmental capital will reduce risks of natural disasters as well as provide stimulus to food production. In agriculture, the need is to adapt the production system to the ecology based on cutting edge knowledge and technology. The manufacturing sector has to emerge as the major source of stimulus to raising GDP growth for which export diversification, technology upgradation of SMEs to promote export linkages, and promoting new sources of growth are major challenges. For continuous improvement in the energy and power situation, there does not seem to exist any quick fix solution unless the issue of primary fuel for electricity is resolved. In the short to medium run, a feasible option is to go for coal-fired power stations for which optimal extraction of coal from the domestic mines is an urgent necessity. In the longer run, other options may be considered e.g. higher extraction of gas through proper reservoir management, nuclear power, and renewable particularly solar power. Obviously, the need is to move to a new growth paradigm capable of delivering the goals articulated in Vision 2021.

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