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European Report on Development 2014
Financing and other means of implementation in the post-
2015 context
Country Illustration Report: Bangladesh
Prepared by
Fahmida Khatun
Centre for Policy Dialogue (CPD)
26 August 2014
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Acknowledgements
This Country Illustration (CI) has been prepared for the European Report on Development 2014 (ERD
2014). It has benefited from valuable contributions made at an expert group meeting held in
February 2014 and a validation meeting held in Dhaka in July 2014. The ERD 2014 Core Team
member Debapriya Bhattacharya, who is Distinguished Fellow at the Centre for Policy Dialogue
(CPD) in Bangladesh, and ERD 2014 Team Leader Dirk Willem te Velde at the Overseas Development
Institute (ODI) in London, provided oversight.
The author gratefully acknowledges data support provided by Mohammed Zafar Sadique, Senior
Research Associate, Mohammad Afshar Ali, Research Associate, Shahida Pervin, Research Associate,
and Ziad Quader, Intern, all based at CPD.
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Table of Contents
Abbreviations .............................................................................................................................. 7
Section 1: Introduction ................................................................................................................ 9
Section 2: Transformation in Bangladesh .................................................................................... 11
2.1 Country context .......................................................................................................................... 11
2.2 Structural change and transformation........................................................................................ 13
2.2.1 Economic transformation ................................................................................................... 13
2.2.2 Social transformation ......................................................................................................... 15
2.2.3 Environmental transformation ........................................................................................... 17
2.3 Enablers of transformation ......................................................................................................... 18
2.4 Binding constraints ..................................................................................................................... 24
2.5 Institutional reform for improving governance .......................................................................... 26
Section 3: Financial trends in Bangladesh .................................................................................... 28
3.1 Public domestic finance .............................................................................................................. 28
3.1.1 Tax revenue ........................................................................................................................ 28
3.2 Public international finance ........................................................................................................ 31
3.2.1 Official development assistance ......................................................................................... 31
3.2.2 Other official flows ............................................................................................................. 36
3.3 Private domestic finance............................................................................................................. 37
3. 3.1 Domestic credit to private sector ...................................................................................... 37
3.4 Private international finance ...................................................................................................... 39
3.4.1 Remittances ........................................................................................................................ 39
3.4.2 Foreign direct investment................................................................................................... 40
3.5 Other sources .............................................................................................................................. 42
3.5.1 Blended funds: public private partnership ......................................................................... 42
3.5.2 South–South flow ............................................................................................................... 43
3.5.3 Regional banks .................................................................................................................... 46
3.5.4 Capital markets ................................................................................................................... 47
4
3.5.5 Innovative funds ................................................................................................................. 47
Section 4: Finance gap: preliminary estimates ............................................................................. 48
4.1 Requirement for infrastructure .................................................................................................. 48
4.2 How much is needed to eradicate poverty ................................................................................. 49
Section 5: Role of other means of implementation and specific complementary factors ............... 51
5.1 Other MoI – domestic policies .................................................................................................... 51
5.1.1 Trade finance ...................................................................................................................... 51
5.1.2 Public–Private Partnerships ................................................................................................ 53
5.1.3 Land acquisition .................................................................................................................. 54
5.2 Complementary factors .............................................................................................................. 55
5.2.1 Preferential market access and RMG exports .................................................................... 55
5.2.2 Aid for trade ........................................................................................................................ 57
Section 6: Conclusions and policy recommendations ................................................................... 59
6.1 Summary of findings ................................................................................................................... 59
6.2 Recommendations ...................................................................................................................... 62
References ................................................................................................................................. 64
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List of Tables and Figures
Tables
Table 1: Key macroeconomic indicators (as percentage of GDP at current market prices1) ............. 12
Table 2: Social indicators in Bangladesh and South Asia .................................................................... 16
Table 3: Poverty and income distribution ............................................................................................. 16
Table 4: Government expenditure on health and education sectors (as percentage of total
expenditure and GDP) .......................................................................................................................... 17
Table 5: Environmental indictors in Bangladesh and South Asia ....................................................... 18
Table 6: Government expenditure on environment sector (as percentage of total budget expenditure
and GDP) ............................................................................................................................................... 18
Table 7: Sectoral percentage share of ADP allocation .......................................................................... 19
Table 8: Comparative socio-economic indicators ................................................................................. 24
Table 9: Global Competitiveness Index (2013–2014) .............................. Error! Bookmark not defined.
Table 10: Amount needed to eradicate poverty ................................................................................... 50
Table 11: Global Competitiveness Index (2013–14) ................................ Error! Bookmark not defined.
Table 12: Summary of financial trends in Bangladesh ......................................................................... 61
Figures
Figure 1: Sectoral share of real GDP (base year 1995–1996) ............................................................... 15
Figure 2: Employment by different sectorss ......................................................................................... 15
Figure 3: Trend of revenue earned through taxes from 1995 to 2013 (as percentage of GDP) ........... 29
Figure 4: ODA in Bangladesh as percentage of GDP and ADP allocation and expenditure .................. 32
Figure 5: Trends in exports, imports, remittances and ODA ................................................................ 33
Figure 6: ODA commitment and disbursement .................................................................................... 34
Figure 7: Grants and loans disbursement (as percentage of total ODA) .............................................. 34
Figure 8: Debt–GDP ratio ...................................................................................................................... 35
Figure 9: Food, commodity and project aid (as percentage of total ODA) ........................................... 35
Figure 10: Aid disbursement by sector (as percentage of total ODA) .................................................. 36
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Figure 11: Other official flows (OOF) .................................................................................................... 36
Figure 12: Domestic credit to the private sector .................................................................................. 38
Figure 13: Trend of interest rate spread ............................................................................................... 38
Figure 14: Flow of remittance (as percentage of GDP) and percentage growth of remittances ......... 39
Figure 15: Foreign direct investment (FDI) ........................................................................................... 41
Figure 16: FDI classified by significant sectors (as percentage of total FDI) ......................................... 42
Figure 17: Bangladesh’s trade with China (USD million) ...................................................................... 44
Figure 18: Trends in Chinese and Indian FDI in Bangladesh (USD) ....................................................... 44
Figure 19: Disbursement of aid from China and India .......................................................................... 45
Figure 20: Bangladesh’s trade with India (USD million) ....................................................................... 46
Figure 21: Trend in export income from RMG sector and from total exports...................................... 56
Figure 22: Disbursement of AfT to Bangladesh (USD million, constant 2012 prices) ........................... 57
Figure 23: Financial flow to Bangladesh (USD million) ......................................................................... 61
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Abbreviations
ACC Anti Corruption Commission
ADB Asian Development Bank
ADP Annual Development Programme
APTA Asia-Pacific Trade Agreement
ASYCUDA Automated System for Customs Data
AfT Aid for Trade
BAC Bureau of Anti Corruption
BBBF Better Bangladesh Business Forum
BBS Bangladesh Bureau of Statistic
BCCRF Bangladesh Climate Change Resilience Fund
BCCSAP Bangladesh Climate Change Strategy and Action Plan
BCCTF Bangladesh Climate Change Trust Fund
BIFFL Bangladesh Infrastructure Finance Fund Limited
BIMSTEC Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
CI Country Illustration
CIC Central Intelligence Cell
CPD Centre for Policy Dialogue
CO2 Carbon Dioxide
CTG Caretaker Government
EBA Everything But Arms
EDF Export Development Fund
EPB Export Promotion Bureau
EPZ Export Processing Zone
ERD European Report on Development
EU European Union
FAO Food and Agricultural Organization
FDI Foreign Direct Investment
GAVI Global Alliance for Vaccines and Immunisation
GCR Global Competitiveness Report
GDP Gross Domestic Product
GNP Gross National Product
GSP Generalized System of Preferences
GoB Government of Bangladesh
HIC High-income country
HIES Household Income Exchange Survey
HYV High-Yielding Variety
ICT Information and Communication Technology
IDA International Development Association
IDCOL Infrastructure Investment Development Company Limited
IIFC Infrastructure Investment Facilitation Centre
IMF International Monetary Fund
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IPFF Investment Promotion and Financing Facility
LDC Least Developed Country
MDG Millennium Development Goal
MFA Multi-Fibre Arrangements
MMF Migrant Mutual Funds
MoF Ministry of Finance
MoI Means of Implementation
NBR National Board of Revenue
NGO Non-Government Organisation
NPL Non-Performing Loan
OBU Off Shore Banking Unit
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
OOF Other Official Flows
PFI Participating Financial Institution
PPCR Pilot Project for Climate Resilience
PPI Private Participation In Infrastructure
PPP Public–Private Partnership
PPP Purchasing Power Parity
PRSP Poverty Reduction Strategy Paper
REER Real Effective Exchange Rate
RMG Readymade Garments
RRC Regulatory Reforms Commission
SAFTA South Asian Free Trade Area
SAP Structural Adjustment Programme
SASEC South Asia Subregional Economic Cooperation
SME Small and Medium Enterprise
TIN Tax Identification Number
TFP Trade Finance Programme
TPC Transfer Pricing Cell
UK United Kingdom
USA United States of America
USD United States Dollar
VAT Value Added Tax
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Section 1: Introduction
As the agenda-setting discussions on the post-2015 approach to development enter their final
phase, increasing attention is being paid to the question of implementation through finance and
other means. These discussion are particularly in response to the fact that the Millennium
Development Goals (MDGs) have failed to generate adequate resources, and that MDG8 on
partnership has achieved the least progress of all the MDGs. Hence, by the end of 2014, discussions
on the post-2015 agenda are expected to address financing for development in great detail, and to
focus on mobilising and making efficient use of resources along with non-financial means of
implementation (MoI) (ERD 2014). In this context, the 2014 European Report on Development
focuses on financing economic, social and environmental transformation beyond 2015.
This Country Illustration (CI) on Bangladesh, along with CIs on Ecuador, Mauritius, Moldova, Kenya
and Tanzania, has been prepared as part of the ERD 2014, subtitled ‘Financing and other means of
implementation in the post-2015 context’. Its research question is: ‘How can financial resources be
most effectively mobilised and channelled, and how can they be combined with selected enabling
policies and MoI, to achieve a transformative post-2015 agenda?’ In other words, the ERD 2014
explores the effectiveness of finance in conjunction with enabling policies and other MoI for
achieving specific policy objectives in different country contexts. It identifies four main development
enablers that have contributed to social, economic and environmental transformation in various
countries: technology, infrastructure, governance and global linkages. In defining transformation,
the ERD 2014 highlights (a) economic transformation, which involves a shift from low to high
productivity, with a focus on infrastructure development, employment creation and trade; (b) social
transformation, based on a shift from high to low inequality, with a focus on the creation of decent
work, access to energy and social protection; and (c) environmental transformation, which requires
a shift from high- to low-carbon energy systems and the preservation of biodiversity.
In view of the above, the Bangladesh CI examines the transformations the country has achieved and
the financial processes that underpinned them. More specifically, it addresses the following issues:
What transformations the country has achieved, why the selected transformations are
important, and what were the main enablers.
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What finance options the country has used in the past, and how these are they likely to
evolve.
How finance and other MoI supported the enablers for different transformations in
Bangladesh.
The role of specific complementary factors in mobilising and using finance more effectively
for transformational changes in Bangladesh.
The analytical approach is mainly descriptive and based on secondary data from various national and
international sources. Following the guidelines provided by the ERD 2014 Core Team, the CI
discusses the issues of resource mobilisation in the post-2015 era based on data for the 1995–2013
period (the reference period varies if data are unavailable). Data and information were gathered
from the Ministry of Finance (MoF) of the Government of Bangladesh (GoB), and other agencies and
departments such as the Bangladesh Bureau of Statistics (BBS), the Bangladesh Bank and the
National Board of Revenue (NBR). Data from international organisations such as the World Bank and
the Organisation for Economic Co-operation and Development (OECD) were also used.
Following this introductory section, Section 2 discusses the economic, social and environmental
transformation Bangladesh has achieved over the last 40 years. This section argues that economic
transformation has been the dominant development change in the country, which has resulted in
visible social progress in a number of areas. The enablers and binding constraints of economic
transformation are also discussed in Section 2. Financial trends from public and private sources are
examined in Section 3. The role of complementary policies and other MoI in contributing to the
economic transformation of Bangladesh is discussed in Section 4. Section 5 seeks to estimate the
magnitude of resources required to eliminate persistent poverty by providing USD 1.25 a day to
those below this threshold. Finally, Section 6 summarises the major findings and policy
recommendations for mobilising and effectively using finance in the post-2015 period.
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Section 2: Transformation in Bangladesh
2.1 Country context Bangladesh, a least developed country (LDC) with low incomes and a population that is now about
142 million (BBS 2011a), has travelled an uneven path since achieving independence in December
1971. Bangladesh is a low-lying riverine country and 80% of its area of 147,570 km2 consists of
floodplains created by more than 300 rivers and channels. Geographically bounded by India to the
west, north and north-east, by Myanmar to the south-east, and by the Bay of Bengal to the south,
Bangladesh occupies a strategic location in the region.
At the time of its independence, Bangladesh was a resource-constrained economy with limited
opportunities and a large population, and was described as the ‘test case for development’.i Since
then Bangladesh has achieved significant development progress, making the transition from the
mid-1980s from being an inward-looking socialist economy to a liberalised economy, under the
auspices of major donors. The shifts in development policy over the years saw both successes and
shortcomings. The economy, however, moved ahead, offering many promises on the horizon. It has
attained an average annual growth rate of 6% in the 2000s, yielding an increase in its gross domestic
production (GDP) from USD 47 billion in 2000 to USD 116 billion in 2012 (BBS 2013). All broad
sectors of the economy such as agriculture, industry and services have contributed to the
acceleration of growth since the 1990s. One of the positive aspects of this growth is that it has not
been volatile despite various unfavourable situations. Economic growth has stabilised since the
1990s (Table 1) and shown resilience during periods of political volatility, natural calamities and
global recession. Increased GDP and lower population growth have resulted in higher per capita
income, up to USD 1,044 in 2013 from only USD 90 in 1973 (BBS, various issues). Higher income was
coupled with lower income poverty as the share of population living below the poverty line has
fallen from more than 80% in the early 1970s to 31.5% in 2010 (BBS, various issues).
The economy has made a transition from the closed socialist policies pursued following
independence to become a market economy since the mid-1970s. As a result, liberalisation policies
have been adopted to open up the economy through privatisation and deregulation. Opportunities
were created for domestic and foreign private investment, restrictions on trade were relaxed, and
industrial policies were pursued to change the inward-looking economy to an outward-looking one.
Currently, thanks to the liberalisation policies followed since the mid-1970s, more than 60% of the
economy of Bangladesh is integrated with the global economy through exports, imports,
remittances, official development assistance (ODA) and foreign direct investment (FDI). The share of
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exports, imports and remittances as a percentage of GDP has been on the rise since the 1990s, while
that of ODA has dropped. Table 1 provides a snapshot of Bangladesh economy since 1995.
Table 1: Key macroeconomic indicators (as percentage of GDP at current market prices1) Indicators FY1995 FY2000 FY2005 FY2010 FY2012 FY2013
Real sector
Size of GDP at current prices (USD bn) 37.9 47.1 60.4 100.4 116.1 128.8
GDP growth rate 4.92 5.94 5.95 6.07 6.23 6.03
Inflation rate (12-month m.a.) (base year FY1996) N/A 2.79 6.48 7.31 10.62 7.7
Sectoral share (as % of GDP)
Agriculture 25.0 24.6 21.4 19.6 18.8 18.1
Manufacturing 23.3 24.7 27.2 28.9 30.1 30.9
Services 47.8 46.9 47.4 48.1 47.8 47.6
External sector
Exports (as % of GDP) 9.2 12.2 14.3 16.1 20.9 21.0
Imports (as % of GDP) 15.4 17.8 21.8 23.7 30.6 26.5
Trade deficit (as % of GDP) -6.2 -5.6 -7.4 -7.5 -9.7 -5.5
Workers’ remittances (USD bn) 1.2 1.9 3.8 11.0 12.8 14.5
Current account balance (as % of GDP) -1.8 0.0 -0.9 3.7 -0.4 2.0
Real exchange rate (base year FY2001=100)2
100.0 108.1 88.5 97.7 91.4 101.7
Foreign exchange reserve (USD bn) 3.1 1.6 2.9 10.7 10.4 15.3
Foreign exchange reserve (in months’ equivalent of import) 6.3 2.3 2.7 5.4 3.5 5.4
ODA (as % of GDP) 4.6 3.4 2.5 2.2 1.8 2.2
Investment and savings (as % of GDP)
Gross investment 19.1 23.0 24.5 24.4 26.5 26.8
Public investment 6.7 7.4 6.2 5.0 6.5 7.9
Private investment 12.4 15.6 18.3 19.4 20.0 19.0
Gross domestic savings 13.1 17.9 20.0 20.1 19.3 19.3
Gross national savings 19.1 23.1 25.8 30.0 29.2 29.5
Fiscal framework of government budget (as % of GDP)
Total revenue 9.8 8.5 10.2 10.9 12.5 12.3
Tax revenue 7.9 6.8 8.2 9.0 10.4 10.4
Total expenditure 14.4 14.5 13.7 14.6 16.6 16.7
Non-development expenditure3 6.7 7.7 9.0 10.5 10.5 10.0
Development expenditure 6.6 6.4 5.5 4.0 4.4 5.1 Budget deficit 2.2 4.5 3.5 3.7 4.1 4.4
Domestic borrowing 0.7 2.8 2.1 2.3 3.3 3.1
Foreign financing 3.8 2.5 2.9 1.3 0.8 1.2
Monetary sector (annual % change)
Broad money 16.0 18.6 16.7 22.4 17.4 16.7
Domestic credit 32.7 13.3 17.4 17.8 19.5 11.0
Credit to the public sector 9.3 21.2 19.1 -2.7 18.7 11.7
Credit to the private sector 43.2 10.6 16.8 24.2 19.7 10.8
Source: Compiled and estimated from Bangladesh Bureau of Statistics (BBS), Bangladesh Bank, Export Promotion Bureau (EPB) and Ministry of Finance (MoF) data Notes: 1All GDP figures are calculated taking FY1996 as base year.
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2 The Real Effective Exchange Rate (REER) for FY1995 and FY2000 is based on FY1995=100 index assuming 11 currency baskets. The currently available index of eight currency baskets are based on FY2001=100 index. 3 Reporting structure of non-development and development expenditure has changed since FY2010. Information for FY1995, FY2000 and FY2005 is provided for revenue expenditure and the Annual Development Programme (ADP) expenditure respectively, which means that the disaggregated expenditure data are not completely comparable.
Improved economic performance led to significant development changes in a number of non-
economic aspects, resulting in major strides in social development. Along with reduced poverty,
gender parity in both primary and secondary education has been achieved. Life expectancy at birth
has increased with higher female life expectancy. Of particular note are the improvements in
primary school enrolment and immunisation against early childhood diseases and the reduction in
infant mortality rates (Table 2). The living conditions of a large number of people have improved
thanks to better sanitation and access to drinking water. Indeed, Bangladesh is leads the LDCs and
South Asian countries in achieving several MDG targets.
T
The achievements in several areas notwithstanding, a number of formidable challenges remain.
Despite a recent decline in the rate of population growth, the population is too large for it to be
possible to guarantee everyone a decent standard of living. Efforts to step up poverty reduction and
address income inequality will thus determine the quality of growth. The sustainability of high
economic growth remains a concern just as much as the issue of making a leap from the 6% growth
trajectory. In addition, environmental concerns and vulnerability to climate change continue to pose
a threat to the country. Extreme weather events such as floods, cyclones and droughts have often
brought down the normal growth figures and jeopardise the sustainability of growth.
2.2 Structural change and transformation According to the ERD 2014,’transformation involves sustainable and equitable change, and includes
considerations of political dynamics, complementary policies and effective institutions’. The
transformations required to attain sustainable development are defined here by reference to a set
of economic, social and environmental indicators. The following sub-sections present brief
overviews of various transformations achieved by Bangladesh since 1995, and discuss the enablers
of such transformations and binding constraints on further progress.
2.2.1 Economic transformation The ERD 2014 defines economic transformation as a ‘dynamic process that involves moving
employment from less productive to more productive sectors and activities (within firms, and within
and between sectors). The process involves increases in (total factor) productivity, restructuring of
14
productive sectors and increases in domestic value-added and employment’. This definition also
relates to the transformative shift 3 of the ‘Transform Economies for Jobs and Inclusive Growth’
mentioned in the United Nations High Level Panel (UNHLP) report (UN 2013).
Keeping the above definition in mind, it is clear that the Bangladeshi economy has undergone
significant transformation. This in turn has led to social transformation. The country moved from
stabilising economic growth in the 1980s to achieving higher growth in the 1990s (Mahmud 1997).
This progress was due to policy shifts and a number of reforms. The accelerated GDP growth
achieved since the mid-1990s (as shown Table 1) is due to growth in its broad economic sectors such
as agriculture, industry and services.
Economic transformation has also taken place through changes in the structure and composition of
the economy. From the early 1990s the Bangladeshi economy began to undergo structural change
whereby the role of the primary sector declined and the importance of the manufacturing and
services sectors began to rise (Figure 1). Bangladesh became industrialised when industry began to
contribute more to GDP than agriculture. The services sector has more or less maintained a constant
50% share of GDP for several years. The generation of employment has not, however, followed this
trend. Even with the lowest share in GDP, agriculture employs almost half of the total labour force
(Figure 2), indicating the existence of surplus labour. Many of these surplus labourers are forced to
engage in the informal economy in order to survive. Another economic transformation has been in
the area of trade openness. The economy of Bangladesh has integrated into the global economy
through higher exports, imports, remittances and FDI. This trade openness, measured as the
percentage share of total exports and imports in GDP, has increased to more than 47%, and over
60% of the economy is globally integrated.ii While this indicates the strength of the economy in the
global context, it also exposes it to global shocks.
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Figure 1: Sectoral share of real GDP (base year 1995–1996)
Source: Bangladesh Bureau of Statistics (BBS)
Figure 2: Employment by sector
Sources: BBS (2000), (2002), (2006), (2011b)
2.2.2 Social transformation Social transformation, according to ERD 2014, involves a ‘shift towards an inclusive society that
pursues growth with equity, guided by a redistributive social vision that is grounded on the
principles of non-discrimination, transparency and accountability’. The ERD 2014 also refers to the
UNHLP report that suggests a goal of ‘Leave No One Behind’ (UN 2013).
Bangladesh’s social achievements are even more impressive than its economic progress. Although in
terms of per capita income, Bangladesh lags behind some of the South Asian countries,iii it
outperformed the region in life expectancy, literacy rates, maternal mortality and child mortality
(Table 2). As for social transformation, one of the most significant achievements of its better
16
economic performance is the progress in reducing poverty. Sustainable economic growth has made
it possible for 16 million people to move above the poverty line in the last decade (Andrés et al.
2013).
Table 2: Social indicators in Bangladesh and South Asia Social Indicators 1995 2000 2005 2010 2012
Life expectancy at birth (in years)
Bangladesh 58.7 63.6 65.2 67.7 70.3
South Asia 60.1 62.0 63.7 65.4 66.6
Literacy rate (% of people aged 15 and above)
Bangladesh 45.3 52.8 53.5 58.6 57.7
South Asia na 58.0 na na 61.6 (2011)
Maternal mortality ratio per 100,000 live births *
Bangladesh 440 340 260 200 170 (2013)
South Asia 500 410 300 220 na
Under-5 mortality rate per 1,000 live births
Bangladesh 113.8 87.7 67.7 47.2 40.9
South Asia 111.4 94.0 77.6 64.5 59.5
Poverty headcount ratio at USD1.25 a day (PPP) (% of population)
Bangladesh 60.6 (1996) 58.6 50.5 43.3 na
South Asia 48.6 (1996) 45.1 (1999)
39.4 31.0 na
Sources: Bangladesh Economic Review (1996), (2005), (2012), (2013); World Bank online database; Report on Sample Vital Registration System (2009). *World Bank’s modelled estimate
It may not be possible to sustain the current level of social progress because of high income
inequality. There are pockets of deep and persistent poverty that are not being reached by various
government and non-government programmes. Among these are urban slums, the hill tracts, coastal
belts and other ecologically vulnerable areas. There is also a divide between rural and urban income
distribution (Table 3). Thus aggregate figures do not always reflect the reality on the ground.
Table 3: Poverty and income distribution
Indicators 2000 2005
2010
Total Rural Urban Total Rural Urban Total Rural Urban
Gini coefficient 0.451 0.393 0.497 0.467 0.428 0.497 0.458 0.430 0.452
Percentage of total household income accruing to
Bottom 5% 0.93 1.07 0.79 0.77 0.88 0.67 0.78 0.88 0.76
Top 55 28.34 23.52 31.32 26.93 23.03 30.37 24.61 22.93 23.39
Source: BBS (2010)
17
Social spending has increased overall although it has fluctuated over the years. Greater social
expenditure has contributed to the improvement of health and education services. Expenditure on
both sectors increased from the 1980s to the 2010s, with some fluctuations (according to budget
documents). It is only recently that the allocation for these sectors as percentage of total
government expenditure and total GDP has been declining (Table 4).
Table 4: Government expenditure on health and education sectors (as percentage of total expenditure and GDP) Sector 1995 2000 2005 2010 2012 2013
Percentage (%) of total budget expenditure
Education 9.12 15.20 11.54 15.59 12.53 12.28
Health and Population Planning 3.11 6.44 5.23 6.09 4.90 4.93
Percentage (%) of total GDP at current market prices
Education 1.32 2.21 1.90 2.58 2.09 2.05
Health and Population Planning 0.45 0.94 0.86 1.01 0.82 0.82
Source: MoF (Monthly Fiscal Report and Bangladesh Economic Review) various issuesiv
2.2.3 Environmental transformation Environmental transformation is ‘a transformation from high carbon to low carbon, associated with
modernising energy systems, increased energy efficiency and access to energy, the greening of
production and consumption, and adjusting to new climatic conditions’ (ERD 2014). It is directly
related to the vision of the UNHLP report that calls for ‘Putting Sustainable Development at the
Core’, of which transformation from high carbon to low carbon is critical (modernising energy
systems, increased energy efficiency and improved access to sustainable energy) (UN 2013).
Bangladesh has not made as much progress in the environment as it has in the economic and social
spheres (Table 5). The country is yet to undergo environmental transformation. It is struggling in
terms of maintaining forest coverage and protected areas, and forest coverage as a percentage of
total land area is still lower than the 17% standard set by the Food and Agriculture Organization
(FAO). Carbon dioxide (CO2) emissions are increasing rapidly, although meagre compared to many
other developed and developing countries. Bangladesh is on track to achieve the MDG on improved
water and sanitation. The proportion of the urban population living in slums decreased significantly,
and Bangladesh is on track to achieve this MDG7 target. Total earnings from natural resources,
especially from fossil fuels and minerals, are increasing, which suggests that Bangladesh is using non-
renewable natural resources to support current consumption rather than to invest in new capital to
replace what is being exhausted. Government expenditure on environmental issues remains rather
inadequate, and although there are various funds for tackling the impacts of climate change
18
(discussed in Section 3), the budget allocated to the Ministry of Environment is still too low (Table 6),
making it difficult for it to fulfil its mandate.
Table 5: Environmental indictors in Bangladesh and South Asia Environmental Indicators 1995 2000 2005 2010 2012
Forest area (as % of land area)
Bangladesh 11.37 11.27 11.17 11.07 11.05 (2011)
South Asia 16.65 16.64 17.01 17.11 17.15 (2011)
CO2 emissions (metric tons per capita)
Bangladesh 0.19 0.21 0.26 0.37 na
South Asia 0.82 0.97 1.07 1.40 na
Improved water source (% of population with access)
Bangladesh 72.1 76.0 80.0 83.4 84.8
South Asia 75.2 80.0 84.7 89.4 91.2
Improved sanitation facilities (% of population with access)
Bangladesh 39.04 44.50 49.90 55.02 57.03 (2011)
South Asia 24.70 29.20 33.70 38.20 39.80
Access to electricity (% of population)
Bangladesh 19.4 (1991)
31.5 (2001)
38.0 48.5 60 (2013)
South Asia na na na 70.7 na
Proportion of urban population living in slums
Bangladesh na 77.8 70.8 61.6 (2009)
na
South Asia na na na Na na
Total natural resource rents (as % of GDP)
Bangladesh 2.7 3.4 6.2 5.1 4.2
South Asia 3.9 3.6 5.2 5.9 5.2
Source: World Development Indicators 2014
Table 6: Government expenditure on environment sector (as percentage of total budget
expenditure and GDP)v
Component 2000 2005 2010 2012 2013
Percentage (%) of total budget expenditure 0.15 0.18 0.81 0.81 0.50
Percentage (%) of total GDP at current market prices 0.02 0.03 0.13 0.13 0.08 Source: MoF (Monthly Fiscal Report and Bangladesh Economic Review), various issues
2.3 Enablers of transformation Economic transformation has been the most prominent change in Bangladesh over the last 40 years.
If transformation is defined as sustained change that enables individuals to be more resilient to
threats, then Bangladesh can claim to have transformed its economy. This is evident in higher and
less volatile economic growth. The volatility of long-term economic growth in Bangladesh has been
19
far lower than that of comparable countries. Notwithstanding external shocks such as the global
financial crisis that began in 2007–2008, domestic political uncertainty and frequent weather
variability, the country has maintained its growth momentum. Various enablers have contributed to
such economic transformation.
(a) Factors of production: Infrastructure has played important role in both the achievements and
failures in economic performance. The initial impetus of higher economic growth in Bangladesh
came from better physical and human infrastructure. Future growth will also be determined to a
large extent by the level of infrastructural development. The Sixth Five-Year Plan (2011–2015)
emphasises infrastructure as a critical development priority in the government’s ambition to become
a middle-income country (MIC) by 2021, as reflected in the increased budgetary priority given to
infrastructure, such as power. Table 7 presents the original allocation in the Annual Development
Programme (ADP) of Bangladesh for selected years.
Table 7: Sectoral percentage share of ADP allocation
Sector FY96 FY00 FY05 FY10 FY12
Transport 19.4 16.1 14.8 15.4 16.8
Power 10.6 11.8 14.8 11.8 15.6
Education & Religious Affairs 13.8 13.1 14.3 13.7 13.3
Rural Development & Institutions 7.2 10.7 10.7 11.9 9.6
Physical Planning, Water Supply & Housing 5.4 6.2 4.7 11.9 12.3
Health, Nutrition, Population & Family Welfare 8.1 10.2 9.8 10.7 8.6
Agriculture 5.7 5.6 4.0 5.6 5.9
Others 29.9 26.4 26.8 19.1 17.9
Total 100.0 100.0 100.0 100.0 100.0
Source: MoF, Bangladesh Economic Review (various issues)
Several mega-projects in the transport, communications, power and energy sectors have acted as
equalisers. For example, the Jamuna Multipurpose Bridge built in 1998 connected eastern and
western Bangladesh and has led to greater inter-regional trade. By facilitating the inter-regional,
cross-river transport of passengers and freight, and transmission of natural gas, telecommunications
and electricity, the bridge has also contributed to economic growth. In addition, there has been a
large investment in the gas and power sectors, water, transport and telecommunications,
particularly by international energy developers. In such a highly populated country investment in
infrastructure is efficient since there is greater use per unit cost.
20
Improved communications, roads, highways and bridges have acted both as equalisers and as
enablers of economic and social transformation – and facilitated by increased government spending
on developing rural roads (Table 7). Rural roads create employment and income opportunities in
many ways. First, poor and landless women and men can work on building and maintaining roads .
Second, improved roads reduce travel time and increase access to jobs outside rural areas.
Infrastructure has also brought opportunities for the development of rural markets. There have been
private investments in shops, restaurants, pharmacies, tea stalls, salons, etc. that have created rural
employment opportunities.vi Increased rural–urban connectivity has also significantly increased the
value of land. Thus, economic activities have generated more opportunities.
By cutting travel time, better roads have increased access to social services including health and
education. Women have therefore become more mobile both to seek employment and to avail
themselves of maternal and child health programmes. A greater number of rural schools, run by the
government and by non-government organisations (NGOs), make it easier for girls to enrol.
(b) Technology: The adoption of agricultural technology has contributed to increased food
production and food self-sufficiency in Bangladesh. With limited agricultural land, technological
innovation for high-yielding varieties (HYVs) has been crucial to increasing production. Innovation in
the agricultural sector is also a continuing process as the country is vulnerable to weather variability
and climate change. Water-tolerant and drought-resistant crop varieties have been introduced
recently, although there is still scope for further adoption of advanced technologies in order to
diversify agricultural commodities and produce high-value export crops. This calls for spending more
on research and development (R&D) in the agricultural sector. Apart from government funding, the
sector also receives private investment, which has contributed to its advancement through the
provision of improved technology.
There have also been recent initiatives to promote green agricultural technologies in order to
increase yields and also protect the environment by observing organic agricultural practices based
on a minimum of inputs and better agronomic methods (Rahman and Miah 2012).
The alleviation of poverty in Bangladesh has been facilitated significantly by technological
innovation. Computerisation has spread across the country since the mid-1990s. In the financial
sector, ports and private offices this has improved the quality of services and reduced delays – thus
cutting business transaction costs. This has also facilitated exports. Increased access to technology
has created income opportunities for the younger population.
21
The use of mobile telecommunications in the development sector has brought spectacular results in
remote villages of Bangladesh and helped promote inclusive growth. Farmers can now receive
market information through mobile services, and many women use them for various purposes.
Mobile-based services have flourished in the last 10 years, ranging from the rapid collection of
accurate data and dissemination of information, to mobile money,vii healthcare,viii education and
information, and helpline services.ix
Mobile money is particularly useful for those sending remittances, saving them both time and
hassle. As many Bangladeshis do not have access to banking services, mobile money has enabled
them to send money to their rural relatives. Mobile technology is also used by NGOs and the private
sector to provide health services to the poor, for example to issue medical prescriptions and
contribute to reducing maternal, neonatal and infant mortality in the urban slums.x Mobile
education is also of great use to those who do not have the opportunity to receive special types of
education from the government-run institutions. The helpline services have largely benefitted poor
rural women. For instance the Pallitathya (rural information) helpline provides online information on
rural livelihoods, agriculture and legal rights. More innovative ideas indicate the use of ICTs in
livelihood programmes in remote areas of Bangladesh. For example, as part of the Infolady Social
Entrepreneurship Programmexi local women provide services such as advice on health, family
planning, education, legal issues and marketing. Equipped with a laptop, mobile phone, and health
equipment the Infolady travels by bicycle to bring these services to people’s doorsteps. This has
provided non-farm rural work. Women’s participation in microcredit has increased their household
income and empowered them socially. Thus technologies such as computers and mobile phones are
contributing to inclusive growth in Bangladesh through various development-related innovations.
Technology and information flow are also contributing to women’s empowerment. Girls’ education
has not only created increased their employment opportunities, but has also had positive impacts in
other areas including higher age at marriage, and a greater say in the choice of husband and in
decision-making. Women’s education and access to information have been a critical factor in their
greater use of maternal health services and better overall health, as well as reduced fertility and
improved family nutrition (Mahmud 2008; 2004).
(c) National governance, regulatory reforms and policy coherence: A favourable policy environment
and policy continuity have been the key to strong growth in Bangladesh. Although the country
underwent a gradual paradigm shift in its development policies, after the 1975 change of
22
government subsequent governments pursued a market-oriented economy and undertook various
reforms aimed at privatisation and deregulation. The replacement of ‘planned economic growth’ by
private sector-led growth was mainly in response to donor conditionalities. For instance, n the
1980s, reforms were carried out in the areas of industry, trade, exchange rate, and fiscal, monetary
and budgetary policies under the Structural Adjustment Programmes (SAPs) designed by the World
Bank and the International Monetary Fund (IMF).
Such policy shifts contributed to macroeconomic stabilisation and introduced greater discipline in
the fiscal and monetary sectors. The reforms initiated in the 1980s in terms of the withdrawal of
agricultural subsidies, privatisation of state-owned enterprises, liberalisation of the financial sector
and withdrawal of quantitative restrictions were further consolidated in the 1990s. The open
economic policy has also facilitated the inflow of finance to various sectors that were originally in
the public sector. Both domestic and external private investment was allowed in areas such as
power generation and distribution, telecommunications, aviation, healthcare and education. Donor
support aimed to reach a number of macroeconomic and sectoral targets. Donors also supported
the decentralisation of public administration and reform of the judiciary with a view to improving
their governance. Liberalisation policies achieved further momentum in the 2000s. The country
made its currency convertible on the current account, adopted a floating exchange rate, further
reduced import duties and removed controls on the movement of foreign capital. The financial
sector adopted various reforms in the 2000s including the deregulation of interest rates, which
allowed banks to compete with each other. The reform measures continue as the country strives to
improve its economic performance.
Despite the acceptance of donor conditionalities, the flow of external foreign funds has been
declining over time. This is not only because of a drop in ODA, but also due to the increased capacity
of the domestic economy to mobilise resources thanks to the successful implementation of various
policies. The creation of an enabling environment also helped Bangladesh to be integrated into with
the global economy. One of the positive outcomes of various reform measures was the
improvement in revenue mobilisation since the 1990s. While the flow of ODA fell to only 2.2% of
GDP in FY2013, investment and savings rates as percentage of GDP started to rise. This has resulted
in higher economic growth. Due to various reforms and incentives in trade and finance there was
also an increase in private investment during the 1990s and 2000s. Conducive policies including
various tax incentives and profit repatriation facilities for foreign investors sought to attract FDI
(Khatun and Ahamad 2013).
23
(d) Global linkages: Domestic regulatory measures coupled with global policies and institutions
contributed to economic transformation, while ODA and private investment, and a number of
complementary global policies, enabled the economy to achieve a higher growth trajectory. The
quota facilities provided by the importing countries under the Multi-Fibre Arrangements (MFA) and
zero-tariff access to a number of major markets provided the major boost to ready-made garments
(RMG) exports from Bangladesh (see Section 4). This has been a major source of income and
employment for a large section of population. Women constitute about 75% of workers in the RMG
sector, meaning that it has also contributed to their empowerment. With higher incomes, women
working in the RMG sector enjoy greater economic and social freedom than they did before. Their
household contribution has given them greater voice in decision-making (Kabeer and Mahmud
2004). Bangladeshi RMG entrepreneurs were able to take advantage of favourable global policies
and increased market access for their exports and the sector received both domestic and foreign
private investment. The export processing zones (EPZs) established by the government and offering
improved facilities gave opportunities for foreign investment in the RMG sector.
Access to the global labour market by Bangladeshi workers has been another source of increased
national savings that the country could use. Low-skilled migrant Bangladeshi labourers work mostly
in the Middle East and East Asia. Although remittances are not used for infrastructure development,
they have had an impact on the rural economy as the families of remitters have more disposable
income, used mainly for current consumption. The children of these families are able to go to school
and to receive healthcare. Women have become more mobile since they often have to manage the
household when the men migrate (see Section 3). In sum, the increased investible resources
generated through the export-oriented RMG sector and migrant workers’ remittances have
contributed to sustaining higher economic growth.
24
2.4 Binding constraints There are, however, several challenges that hinder transformation. The Global Competitiveness
Report mentions that inadequate infrastructure, corruption and inefficient governance are the major
hindrances to business in Bangladesh (WEF 2013). Recent data (Andrés et al. 2013) reveal that in
2011 Bangladesh ranked sixth of eight countries in the region in terms of access to
telecommunications, and seventh to electricity and to improved water. The country fared better in
access to improved sanitation, being placed third. Bangladesh has only 0.1 km of road per 1,000
people, the lowest in the region. Only 10% roads in the country are paved, again the lowest in the
region. A comparison with South Asian and lower-middle-income countries (LMICs) more widely also
indicates that Bangladesh lags behind in most infrastructural indicators (Table 8).
Table 8: Comparative socio-economic indicators
Indicators Bangladesh South Asia Average
LMICs OECD average
Access to electricity (% of population) in 2011
59.6 73.2 72.9 n/a
Electricity power consumption (kwh per capita) in 2011
258.6 605.2 734.3 9276.9
Improved water source (% of population with access) in 2012
84.8 91.2 88.2 99.6
Improved sanitation facilities (% of population with access) in 2012
57.0 39.8 47.5 99.9
Total telephone subscribers per 100 inhabitants in 2012
0.6 2.6 5.4 46.3
Source: World Bank (2014)
The growth momentum is currently under pressure due to a host of constraining factors. These
include infrastructural deficiency including lack of power and energy, technological bottlenecks and
political instability. Lack of infrastructure is the major immediate deterrent to economic growth
because it makes it harder to do business. Infrastructure is also required to deal with the impacts of
climate change. With its very high population density Bangladesh is extremely vulnerable to natural
disasters such as floods, droughts and cyclones. The impact of global warming manifested through
sea-level rise will be massive and will inundate the coastal regions of the country. Thus technologies
will be needed to address such climate-related vulnerabilities.
Poor access to basic infrastructure by a large part of Bangladesh’s population has become a binding
constraint for further economic and social transformation. This is due to long-term under-
investment in the sector, but also because the regulatory framework has been unable to attract
adequate investment.
25
The lack of suitable land is an acute problem for investment in infrastructure. It is not only a
question of the absolute shortage of land, but also the complex regulatory framework of land
ownership. The records of land titles are not automated and disputes are common. As a result the
process of acquiring land for investment is slow and complicated.
The scarcity of skilled labour is another constraint to attracting foreign investment. This is a problem
faced by Bangladeshi RMGs, which have one of the lowest levels of productivity among competing
countries such as China and Vietnam. In Bangladesh, RMG productivity in 2012, measured in terms
of export per worker, was about USD 4,800 as opposed to USD 32,331 in China and USD 12,560 in
Vietnam (Word Bank 2013a). Lack of skills and infrastructure are the major bottlenecks for low
competitiveness in the Bangladeshi RMG sector. Unfortunately, private investment in developing
human resources is not encouraging. Although there are several private universities, there is a need
for investment in vocational and technical studies to reduce the skill gap. The quality of education at
private universities is also questionable. The major responsibility for skills development currently lies
with the government, which has to allocate limited resources across various competing priorities.
Technological upgrading is also required for higher productivity in the agricultural and
manufacturing sectors. Technical limitations are quite evident in Bangladesh compared with other
countries. In 2013–2014, Bangladesh was ranked last of 148 countries on most indicators relating to
infrastructure and technological readiness (Table 9).
Table 9: Infrastrucuture and technological readiness in Bangladesh
Pillars Indicators Value Rank/148
Infrastructure Quality of overall infrastructure 2.8 134
Quality of roads 2.8 118
Quality of railroad infrastructure 2.4 78
Quality of port infrastructure 3.5 104
Quality of air transport infrastructure 3.2 125
Available airline seat km/week, millionsxii 203.2 62
Quality of electricity supply 2.2 133
Mobile telephone subscriptions/100 populationxiii 63.8 128
Fixed telephone lines/100 populationxiv 0.6 135
Technological readiness
Availability of latest technologies 4.4 101
Firm-level technology absorption 4.2 111
FDI and technology transfer 3.9 119
Individuals using Internet, %xv 6.3 129
Fixed broadband Internet subscriptions/100 populationxvi 0.3 117
Int’l Internet bandwidth, kb/s per userxvii 2.9 128
Mobile broadband subscriptions/100 populationxviii 0.2 128
Source: WEF (2013)
26
Note: Values are on a 1–7 scale unless otherwise indicated (*). The value column reports the country’s score on each of the variables that compose the GCI. The Rank/148 column reports the country’s position among the economies covered by the GCI 2013–2014.
In conclusion, it may be said that economic and social achievements are due to focused government
policies, complemented by domestic and foreign funding, and NGO development programmes. A
number of binding constraints hinder faster development, ranging from infrastructural deficiency to
technological limitations and administrative complexities. The overarching issue is that of
governance. Reforms in public administration should seek to reduce corruption, and establish
accountability and transparency in economic management, which would in turn improve the quality
of development.
2.5 Institutional reform for improving governance As mentioned above, development efforts could be made more efficient by strengthening
governance. Although the first-generation economic reform measures led to opening up the
Bangladeshi economy in the 1990s, they were not coupled with reforms and strengthening of
institutions. The development of Bangladesh has been separate from governance to some extent, a
phenomenon that has been termed a ‘development surprise’ (Mahmud et al. 2008). In order to
accelerate its economic growth by strengthening its institutions Bangladesh initiated regulatory and
institutional reforms in some key areas of governance and development, albeit later than other
developing countries and on a limited scale. Successive governments have taken various reform
initiatives to address the issue of governance, but these failed to bring about any visible change.
Discussions on reform of the regulatory and legal systems in order to improve governance are
beyond the scope of this CI. This section will highlight only a few major reforms undertaken to
improve economic governance as well as their outcomes.
A major attempt was made in 2007–2008 under the interim Caretaker Government (CTG), which
formed two bodies – the Better Bangladesh Business Forum (BBBF) and the Regulatory Reforms
Commission (RRC). The objective was to undertake policy and reform measures in the areas of
macroeconomic management and sectoral development. Subsequent governments also made a few
reforms to improve economic management. These reforms have had only limited success due to
delay in decision-making, conflicting interests among key stakeholders (for example, decentralisation
and devolution of power cannot take place because of issues related to the remits and
responsibilities of various elected representatives) and lack of preparation (CPD 2012).
27
One major area of reform to improve financial transparency is strengthening the Anti Corruption
Commission (ACC). With the aim of ensuring good governance the ACC was set up in November
2004, replacing the Bureau of Anti Corruption (BAC), which was established in 1957. The creation of
the ACC was a condition imposed by donors, who insisted on the need for an independent watchdog
body because of their serious concern about widespread corruption in Bangladesh. Many donors
tied their financial support to the effectiveness of the government’s anti-corruption measures
(Khatun et al. 2013a).
The Sixth Five-Year Plan for the 2011–2015 period and the Perspective plan for 2011–2021 refer to
strengthening the ACC so that it can function independently without fear or favour. There is,
however, no legislation to institutionalise its activities and the lack of the necessary legal,
administrative and institutional government support render it unable to discharge its responsibilities
without political pressure. Its autonomy is also compromised by the way it is funded. The ACC
budget is categorised as ‘other expenditure’, which requires parliamentary approval. The ACC was
reconstituted in 2007 by the CTG, which investigated several corruption cases, but after the end of
its tenure the ACC reverted to being subservient to the government. At present, the ACC is a weak
institution that is incapable of taking bold decisions without political influence. Its pronouncements
to combat corruption are not necessarily backed up by a genuine commitment (Iftekharuzzaman
2012: 418). In addition, although the government has expressed its willingness to improve
transparency and accountability in public administration, substantive initiatives have yet to be been
seen. The government’s proposed Civil Service Act awaits parliamentary approval.
28
Section 3: Financial trends in Bangladesh
This section analyses the trends of various types of finance that were available in Bangladesh
between FY1995 and FY2013. In so doing it looks at the scale and characteristics of development
finance in Bangladesh to support the country’s economic, social and environmental transformations.
The section explores changes in the financial trends during the last decade in order to understand
what options may be available beyond 2015.
3.1 Public domestic finance Domestic resource mobilisation is one of the critical factors for undertaking development efforts in
Bangladesh. Every one of the country’s development plans has identified it as a key objective, and its
role in financing development projects is increasing. Tax and non-tax revenues comprise the main
domestic sources. For a long period the revenue-generation system was deemed inefficient due to
inadequate collection relative to GDP, high dependence on indirect tax, high reliability on import
duty and a narrow base of domestic indirect tax. The weak tax administration has been the major
reason for underperforming revenue potential. The tax regime has, of course, undergone various
reforms, particularly since the 1990s. These have improved efforts to collect tax revenue, as is
shown in the higher tax collection in the recent past.
3.1.1 Tax revenue Tax revenue is an important source of increased domestic resources. In FY2013, domestic resources
accounted about 67.6% of the Revised Annual Development Programme (ADP), a noteworthy
increase from 43% in FY1995. At present about 80% of total revenue in the country comes from
direct and indirect tax revenues. Income tax accounts for the lion’s share of direct tax and has risen
from 0.9% in FY1995 to 3.5% in FY2013. Both total revenue and tax revenue as a share of GDP have
increased, from 9.8% and 7.9% respectively in FY1995 to 13.5% and 11.3% in FY2013 (Figure 3).
Further disaggregation indicates that during the FY1995–FY2000 period, the average growth of
income tax, NBR-tax revenue, tax revenue and total revenue was 7.9%, 9.1%, 9.4% and 8.4%
respectively. The automation of the customs-clearing process and introduction of value added tax
(VAT) in FY1991 were pivotal to the substantial growth in revenue collection. The momentum
continued between FY2001 and FY2010 when the average growth of income tax, NBR-tax revenue,
tax revenue and total revenue increased to 21%, 15.1%, 14.9% and 14% respectively. The annual
average growth was even better in the subsequent period, particularly from FY2011 to FY2013. The
average growth of income tax, NBR-tax revenue, tax revenue and total revenue currently stands at
29.1%, 22.5%, 22.2% and 20.7% respectively.
29
Figure 3: Trend of revenue earned through taxes from 1995 to 2013 (as percentage of
GDP)
Sources: National Board of Revenue Annual Reports and Selected Statistics; various issues of Bangladesh Economic Review
Two factors played a major role in the improved revenue collection from FY2011. First is the strong
domestic demand due to a rise in disposable income per capita. Second is the introduction of a
number of tax-collection measures that contributed significantly to the substantial rise in total
revenue. These include simplification of VAT system, decrease in tax incidence, increased VAT
coverage and imposition of supplementary tax. However, the growth of NBR tax revenue and total
tax revenue fell in FY2012 and FY2013. The political impasse and blockades before the Tenth
National Parliament Election somewhat hindered the NBR tax-collection efforts. The other reason is
the lower collection of import duty. This is not only because trade liberalisation involved cutting
import duties, but also because inward investment remains dull. As a result, there is no great
demand for imported capital machinery. The domestic investment rate is only 26.8% of GDP, far
below the level required for a country aiming to become a MIC by 2021 with a 10% growth rate. The
Sixth Five-Year Plan (2011–15) aims to achieve GDP growth of 8% by 2015 (GoB 2011). In order to
achieve this, total investment has to grow by 8.1% per year and the share of investment in GDP has
to reach 32.5% by FY2015. Sadly, growth during the last few years has remained below target. Low
investment has been the most important factor in low growth, while infrastructural constraints,
bureaucratic complexities, and most of all, political instability are key factors behind the low
investment demand in Bangladesh (see Table 8).
In deciphering the composition of tax sources in Bangladesh it is evident that trade liberalisation has
meant that the relative importance of taxes such as import duty has declined over the years. This
30
shortfall has been compensated for by the introduction of VAT and the increased collection of direct
tax. Lower tax revenue is also a reflection of lower savings in Bangladesh. As shown in Table 1 the
share of gross domestic savings and gross national savings is 19.3% and 29.5% respectively. Due to
the robust flow of remittances gross national savings increased at a faster rate than the gross
domestic savings between 1995 and 2013, although 2013 saw a decline in the number of
Bangladeshi migrant workers. Another constraint on mobilising higher domestic resources is
increasing illegal capital outflow. Transfer pricing is one means of capital flight. Bangladesh is among
the top ten countries with the highest capital outflow (UNDP 2011) and the government recently
established a Transfer Pricing Cell (TPC) in the NBR. To be effective, the TPC has to be equipped with
the administrative capacity to monitor transfer pricing.
The potential for further broadening the tax base is constrained by weak physical infrastructure and
the lack of a skilled labour force. For example, the NBR needs to be comprehensively computerised
and adopt e-governance procedures to improve its services. In order to operate the modern and
digital tax system, NBR personnel need training. Since the 1990s the tax regime in Bangladesh has
gone through a number of administrative reforms. These include: (a) mandatory provision for a tax
identification number (TIN) for the registration of assets and businesses in FY1991; (b) initial
exemption limit instead of filing the threshold system in FY1993; (c) provision of outsourced
professional external auditing since FY1994; (d) establishment of the customs, excise and VAT
Appellate Tribunal in 1995; (e) introduction of large taxpayers unit for income tax in FY1999; (f)
introduction of withholding tax being the final discharge of tax liability in FY1999; and (g)
introduction of a central intelligence cell (CIC) in FY2004.
In addition, recent initiatives aim to take a comprehensive approach to establishing a modern tax
regime by pursuing structural, legal and administrative reforms. A new VAT act comes into force on
1 July 2015 to make VAT collection more efficient. A modernisation plan (2011–2016) for the NBR is
underway. The plan includes proposals such as a new income tax act, widening and deepening the
tax net, electronic tax administration for better customer service, redefining the regulatory power of
the NBR, strengthening the CIC, and personnel and institutional development. The modernisation
plan also includes automation of customs offices, bringing them under the Automated System for
Customs Data (ASYCUDA) world system. New initiatives will need to synchronise the transition from
old to new systems and depend on greater coordination among various government ministries and
departments and increased awareness and education of taxpayers. If implemented, these reforms
31
are expected to make tangible improvements in the efficiency, fairness and transparency of the tax
system in Bangladesh. This will increase the potential to obtain resources through tax system.
The low savings rate because of low per capita income and a narrow tax base reflect the inadequate
efforts to mobilise domestic resources. The overall trend in domestic resource mobilisation (DMR)
indicates that both the revenue–GDP and tax–GDP ratios have increased at a rather low rate since
1995. In 2013, the former stood at 12.3% and the latter at 10.4% of GDP. The national savings rate
has gained momentum since 2005 thanks to the inflow of remittances, which jumped from 2005
onwards (Table 1). The domestic savings rate, however, remained either stagnant or declined during
the period. Revenue generation as percentage of GDP stagnated from 2005 to 2010 due to the
volatility in tax collection.
The volume of international trade is increasing in Bangladesh, but the tax on goods and services has
not increased at the same rate. This implies that although there has been structural change from a
predominantly agricultural to an industrial and service-based economy, tax collection has not been
commensurate with this transformation. This is due to the nature of jobs and types of industries and
services. Most jobs are poorly paid because of low skills and lack of opportunities in the formal
economy. This calls for scaling up operations with modern technology and skilled staff in the
industry and service sectors.
3.2 Public international finance
3.2.1 Official development assistance The need for ODA is in part due to the shortfall in revenue generation in the face of higher public
expenditure, even though as a share of GDP it has declined drastically in Bangladesh since
independence. As Bangladesh has increasingly become integrated into the global economy since the
1990s through higher exports, imports and remittances, the dependency on ODA has fallen
substantially. The value of exports and ODA were almost equal in 1991, but ODA was little above
13% of GDP in 2007. Imports have increased by 1.5 times during this period and remittances have
increased several times over compared to ODA. The trend of ODA disbursement was volatile
between FY1995 and FY2007, and the share of ODA in GDP declined steadily from 4.6% in FY1995 to
2.2% in FY2013. The share of ODA in ADP implementation has also dropped, from 62.7% in FY1995
to 42.9% in FY2013 (Figure 4). The lower share of ODA in development financing does not necessarily
indicate greater self-reliance or higher DRM efforts in Bangladesh. Rather, the discrepancy between
committed and disbursed ODA is more prominent now than before because a large amount remains
in the pipeline. With some exceptions, disbursements were far below commitments (Figure 5). In the
32
recent period the share of ODA in ADP implementation has fallen noticeably as the country is unable
to complete its development projects in time. Administrative complexities such as delays in land
acquisition due to land disputes and slow procurement impede the timely implementation of
projects, while the capacity of public administration and slow decision-making processes add to the
problem.
Figure 4: ODA in Bangladesh as a percentage of GDP and ADP allocation and expenditure
Source: MoF, Bangladesh Economic Review (various issues)
33
Figure 5: Trend in exports, imports, remittances and ODA
Sources: MoF, Bangladesh Economic Review (various issues); Bangladesh Bank and Export Promotion Bureau
The flow of ODA has undergone number of changes. Apart from the increased gap between the
commitment and disbursement mentioned above, its composition has changed as loans take over
from grants. The share of loans in total ODA increased from 48.8% in FY1995 to 74.2% in FY2013,
while the share of grants fell from 51.2% in FY1995 to 25.8% in FY2013 (Figure 6). The increased
share of loans in the ODA basket risks increasing the country’s debt burden. Bangladesh, however,
has not defaulted on external debt-service payments despite not benefitting from debt-relief
programmes extended to many countries experiencing similar social, natural and political problems
– in fact, the debt–GDP ratio is declining (Figure 7). Another feature of ODA is that it comes as
project aid rather than food or commodity aid (Figure 8). This underlines the importance of
improving project-implementation capacity in order to attract ODA. It also indicates that the country
is better able to implement development projects and repay project loans (Khatun et al. 2013).
34
Figure 6: ODA commitment and disbursement
Source: MoF, Bangladesh Economic Review (various issues)
Figure 7: Grants and loans disbursement (as percentage of total ODA)
Source: MoF, Bangladesh Economic Review (various efforts)
35
Figure 8: Debt–GDP ratio
Source: MoF, Bangladesh Economic Review (various issues)
Figure 9: Food, commodity and project aid (as percentage of total ODA)
Source: MoF, Bangladesh Economic Review (various issues)
Despite the declining share of ODA in the GDP of Bangladesh it remains a significant contributor to
sectors such as health, education and physical infrastructure (Figure10). Increased allocation in the
social sectors can augment productivity and assist in achieving the MDGs. Although it is difficult to
attribute to ODA the success of Bangladesh in being on target to reach a number of MDGs, it can be
argued that ODA directed towards the social sectors has contributed to meeting them. The
allocation of ODA to the productive sectors can also potentially contribute to reducing poverty as
36
there is a direct linkage between the performance of productive sectors and poverty reduction.
Allocation in infrastructure improves connectivity, which potentially augments productivity although
the correlation has not been established in Bangladesh.
Figure 10: Aid disbursement by sector (percentage of total ODA)
Source: MoF, Bangladesh Economic Review (various issues)
3.2.2 Other official flows Other official flows (OOF) refer to official flows excluding ODA, either because the funds are not
primarily intended for development, or because the grant element is less than 25%. OOF has been
volatile between 1995 and 2012, and although it rose from USD -8.8 million in 1995 to USD 174.6
million in 2012, its share in GDP grew slowly over the period except 2009. The share of OOF in terms
of GDP rose from 0.02% in 1995 to 0.15% in 2012 (Figure 11).
Figure 11: Other official flows (OOF)
37
Source: Author’s calculation based on OECD Database
3.3 Private domestic finance
3. 3.1 Domestic credit to private sector Domestic credit to the private sector fluctuated during the 1995–2013 period, falling from 43.2% in
FY1995 to 11.7% in FY1997. From FY1998 to FY2007 it has experienced a steady annual average
growth of 14.6%. After FY2008 it became more volatile and there is no growth trend, but in FY2012
and FY2013 it took a downward turn. These years were the pre-election period when entrepreneurs
lost confidence due to political instability. The resulting shortfall in investment led to low domestic
credit to the private sector in FY2012 and FY2013 (Figure 12).
The lower flow of domestic credit to the private sector is not a reflection of a decline in domestic
credit in the country. Excess liquidity in the banking system is a common phenomenon in
Bangladesh, as banks sit on large amounts of idle money. Apart from political uncertainty, the lack of
infrastructure also discourages potential investors. The lack of decent roads and highways
in Bangladesh causes traffic congestion, which in turn increases freight costs. There is a high demand
for electricity given the size of the population and increasing industrialisation. Frequent power cuts
continue to hamper productivity. Inadequate infrastructure was mentioned as the second most
important bottleneck for doing business in the Global Competitiveness Report 2013-14 (WEF 2013).
Due to infrastructural bottlenecks, credit to the private sector has not picked up as much as it might
be expected to do in an emerging economy. The private sector also complains that the high cost of
finance makes it hard for business to be competitive – although both deposit and lending rates are
high in Bangladesh (Figure 13). Several reforms of the banking sector have been undertaken since
the mid-1980s in order to improve performance. The efficiency of the sector also depends on the
quality of credit to the private sector. The existence of high non-performing loans (NPL) in
commercial banks has been a perennial problem. From January to December 2012 the rate of NPL
was 10% (Bangladesh Bank 2012). One reason for this is inappropriate lending practices, which are
influenced by political pressure, resulting in loans being given without a proper assessment of
business proposals. Moreover, weak management, human resources and supervision and the lack of
accountability contribute to high NPL in Bangladesh (Khatun 2013).
38
Figure 12: Domestic credit to the private sector
Source: Bangladesh Bank
Figure 13: Trend of interest rate spread
Source: Bangladesh Bank
Despite limitations, domestic credit to the private sector has contributed to the infrastructural
development of the country. Electricity generation through quick rental power plants and the
construction of flyovers in Dhaka are two recent examples of major projects funded by domestic
commercial banks. Commercial banks have been financing large infrastructural projects through
syndicated lending, which increased from Tk. 3,844 million in 2001 to Tk. 37,432 million in 2010
39
(Amin 2011). Syndicated loans are made to sectors such as health, aviation, small and medium
enterprises (SMEs), ICTs, ceramic, steels, pharmaceutical and power.
3.4 Private international finance
3.4.1 Remittances Bangladesh’s experience of resource mobilisation has been shaped significantly by the growing flow
of remittances. From FY1995 to FY2013, remittances increased from USD 1,217 million to USD 8,729
million, or 3.2% of GDP in FY1995 to 11.1% in FY2012. The average annual growth of remittances
from FY1995 to FY2012 was 19.6%, although remittances fell drastically in FY2013 both in the share
of GDP and in growth (Figure 14). In FY2013, remittances witnessed a 30.5% fall. This drop is due
first to political instability in the pre-election period, which discouraged migrants from sending
remittances. Second, there has been a downward trend in labour migration since 2008. Third, in
2011 and 2012 the share of skilled migrant workers dropped compared to previous years.xix
Figure 14: Remittances (as percentage of GDP) and percentage growth of remittances
Source: Bangladesh Bank
Remittances have played a positive role in reducing poverty in Bangladesh – one study found that
the share of poor people dropped by 6% due to having a higher income thanks to receiving
remittances (Ratha and Mohapatra 2007). Remittances are also found to have a multiplier impact of
3.3 on GNP, 2.8 on consumption and 0.4 on investment in Bangladesh (ILO 2004).
Remittances are mostly used for consumption, but expenditure on items such as food and clothing,
home construction and repairs, marriages, loan repayments, education, healthcare and purchase of
land keep people from poverty (Khatun 2009; Siddique and Abrar 2001). A recent survey shows that
40
only 25% of the households that receive remittances invest in productive sectors (BBS 2014). The
government has made efforts to support remitters both before and after working abroad. It set up
the Probashi Kallyan Bank (PKB) (Expatriates’ Welfare Bank) in April 2011 in order to facilitate the
transfer of remittances, provide loans to workers going abroad and help create opportunities for
returnees. The bank gives collateral-free loan at 9% interest to aspiring migrant workers and
agricultural loans to returning migrants. xx Loans are useful since the cost of migration is very high.
For example, it costs Tk 1,000,000 (approximately USD 12,500) to go to work in Saudi Arabia while
those going to Qatar had to spend Tk 700,000 to 800,000 (Siddiqui and Reza 2013).
There have been suggestions that remittances can be used to generate further income that can be
used in a productive manner. The idea of a diaspora bond was proposed by Ketkar and Ratha (2010)
in countries with large diaspora populations as a means to mobilise financial resources, and Sobhan
(2013) has suggested establishing Migrant Mutual Funds (MMF) for South Asian counties. If these
were successful, MMF could also be used for investment in development-oriented activities,
including infrastructure.
3.4.2 Foreign direct investment (FDI) Even though Bangladesh has adopted FDI-friendly policies since the early 1980s,xxi much before
some of its neighbours, it has been unable to obtain as much FDI as anticipated. The flows of FDI
were volatile from FY1998 to FY2013. From FY1998 to FY2004, the average share of FDI (as a
percentage of GDP) was 0.72%, while the same figure for the FY2005–FY2013 period was 1.02%
(Figure 15). Bangladesh has been unable to attract higher FDI due to its poor physical infrastructure,
lack of skilled personnel at various levels, unreliable energy supply, corruption and political
instability.
41
Figure 15: Foreign direct investment
Source: Author’s calculation based on the Bangladesh Bank
In the 1990s there was an incentive for East Asian and European investors to invest in the RMG
sector of Bangladesh thanks to the Generalized System of Preferences (GSP) and the availability of
cheap labour. Currently, FDI is mainly in transport, storage and communication, manufacturing and
power, gas and petroleum and is only nominal in agriculture, trade and commerce, and services. In
2012, the manufacturing sector was the highest recipient of FDI while the construction sector
received the lowest share. The growth of FDI in Bangladesh has, however, been very unstable. There
was a major inflow in the mid-2000s (Figure 15) but during 1980s there was very little FDI in
Bangladesh, mostly focused in banking and a few other sectors. Bangladesh started attracting FDI
from 1996 in the energy and power sector because of adopting favourable policies for foreign
investment and undertaking economic reforms, as well as unexplored gas and oil resources (Figure
16). Bangladesh is linked into Global Value Chains (GVCs) mainly through products such as RMGs,
leather, jute and frozen foods. Since RMGs are the major export, their potential participation in
GVCs is higher than for other products. The European Union (EU) and the United States of America
(USA) are its major markets (more in Section 5.2.1). Investment in the RMG sector is mainly by local
entrepreneurs, who have proved their business skills in the last few decades. The challenge for
Bangladesh is now to move upwards in the GVC. Like other LDCs Bangladesh also needs
technological improvement, skills development and better safety standards for workers in order to
face such challenges (Bhattacharya and Moazzem 2013). A number of donors have provided
technical and financial support to the RMG sector, mainly in (a) training and skills development for
entrepreneurs and workers; (b) export promotion through product diversification, quality
42
improvement and compliance; (c) market expansion through proactive marketing abroad; and (d)
relevant research (Khatun et al. 2013b).
Figure 16: Trend of FDI inflows classified by significant sectors (as percentage of total FDI)
Source: Bangladesh Bank
3.5 Other sources
3.5.1 Blended funds: public–private partnership (PPP) Given the limited government resources, the private sector could play a greater role in building
infrastructure in public–private partnership (PPP) arrangements. In Bangladesh there have been only
a few PPP initiatives, insufficient to meet its infrastructural needs. A handful of PPP projects have
been implemented, mainly in power and telecommunications. Investment in the power sector has
been for small independent power producer (IPP) projects. The government allocated Tk. 2,500
crore in FY2010 (equivalent to 2% of the GDP) when the PPP initiative was enthusiastically
announced in the national budget. The money remained unused, however, due to the lack of PPP
project applications.
There are three important bodies to finance and facilitate infrastructure projects: the Infrastructure
Investment Facilitation Centre (IIFC), the Infrastructure Investment Development Company Limited
(IDCOL) and the Bangladesh Infrastructure Finance Fund Limited (BIFFL). The IIFC, set up in 2000,
identifies projects to be undertaken by the private sector and helps relevant ministries to explore
potential investors.xxii Established in 1997, IDCOL facilitates bridging the financing gap for developing
medium- to large-scale infrastructure and renewable energy projects.xxiii It can provide long-term
loans of up to 40% of capital costs provided the project sponsor bears at least 20% of investment
43
costs through equity financing. The BIFFL is a public limited company and aims to provide mainly
long-term financing for PPP projects by issuing bonds and debt instruments and equity offerings.xxiv
The government also created the Investment Promotion and Financing Facility (IPFF) in 2006 as a
separate cell of the Bangladesh Bank, mainly to finance infrastructure projects developed by the
private sector.xxv The IPFF is funded by the World Bank and provides loans to Participating Financial
Institutions (PFIs), provided they request them. Projects developed solely by the private sector but
identified by the government to be in the public interest are eligible. Sectors that can apply for IPFF
finance include power generation, transmission, distribution and services; port development;
environmental, industrial and solid-waste management projects; highways and expressways,
including mass transit, bridges, tunnels, flyovers, city roads, bus terminals, commercial car parking,
etc.; airport terminals and related aviation facilities; water supply and distribution, sewerage and
drainage; economic development, including industrial estates and parks; social sectors, including
infrastructure in health and education; and information technology.
3.5.2 South–South flow The impressive economic growth of two of Bangladesh’s large neighbouring countries, China and
India, has important implications for the country’s development perspectives. In recent decades
both China and Bangladesh witnessed a significant growth in trade. China is Bangladesh’s largest
trading partner. Bangladesh’s total trade with China was over USD 7 billion in 2010, although China
remains a minor export destination. In 2010, Bangladesh’s exports to China amounted to less than
USD 400 million, representing only 2% of its total exports, owing to Bangladesh’s non-diversified
export basket and conventional trading patterns. To address the growing trade imbalance, Beijing
has offered duty-free access for 4,721 Bangladeshi products (Islam 2012) and exports to China rose
from USD 17 million in 2001 to USD 599 million in 2013. In a similar vein imports from China
multiplied more than ten-fold between 2001 and 2013 (Figure 17). The bilateral trade deficit
between Bangladesh and China stood at USD 9,112 million in 2013.
44
Figure 17: Bangladesh’s trade with China (USD million)
Source: UN Comtrade database
Chinese investment in Bangladesh is not particularly noteworthy. Until 2010, Bangladesh was not a
priority for China, investing only USD 250 million between 1977 and 2010. In 2011, however, China
invested some USD 200 million (Islam 2013). China significantly increased its FDI in Bangladesh from
2010, indicating that its investment is not linked with bilateral trade. Chinese FDI in Bangladesh
almost quadrupled between 2008 and 2012. During this period, India’s FDI in Bangladesh trebled,
indicating that China’s FDI in Bangladesh has been growing faster than India’s in recent years, but a
comparative analysis of Chinese and Indian FDI in Bangladesh during the 2000–2012 period
underlines India’s prominence (Figure 18).
Figure 18: Trends in Chinese and Indian FDI in Bangladesh (USD million)
Source: Bangladesh Bank
45
In FY2010, China was the third largest investor in Bangladesh, followed by Saudi Arabia and South
Korea, xxvi when China signed 12 investment projects worth a total of USD 21 million. Most of these
projects were in infrastructure and the service sector. More recently, however, Chinese investment
in Bangladesh has shifted to manufacturing, specifically the RMG sector (Islam 2013).
China was not a major donor to Bangladesh and its aid contribution was negligible until very
recently. Chinese assistance is mainly for infrastructure development, for instance providing a USD
25 million loan to build the China-Bangladesh Centre in Dhaka. China has also expressed growing
interest in infrastructural development in Bangladesh. A Chinese company won the contract for the
Dhaka-Chittagong Highway expansion project to connect the capital with the port city. China also
submitted lowest bid for the Padma Bridge River Training Project, a major component of the
proposed Padma Multipurpose Bridge to connect the south-west with the rest of the country and to
facilitate the transmission of natural gas, telecommunications and electricity. This 6.15 km bridge
will cost USD 3 billion.xxvii The Chinese company has offered to conduct the river training work for
USD 0.78 billion, although unfortunately, there have been criticisms of its work ethics and quality of
work.xxviii Figure 19 compares the trends of aid from China and India.
Figure 19: Aid from China and India
Source: Economic Relations Division (ERD), MoF
Between FY2001 and FY2013, Bangladesh’s exports to India increased more than eight-fold, and
imports from India grew by 18.9% over the same period (Figure 20). Despite Bangladesh’s robust
export growth to India, its trade deficit rose from about USD 1.1 billion in FY2001 to around USD 2.5
billion in FY2009 and USD 4.1 billion in FY2013.
46
Figure 20: Bangladesh’s trade with India (USD million)
Source: Export Promotion Bureau (EPB)
Although Indian FDI grew by 38.6% over the 2001–2012 period, its share of total FDI in Bangladesh
remains stagnant at around 2.2%.
In terms of aid, although India has recently increased its support compared to China, the relative
share is still very low. The highest support from India was a credit line worth USD 800 million in
2010. The rate of interest was initially 1.75%, which was later reduced to 1%. This support was
primarily for infrastructure, communications and transport. An amount of USD 200 million credit has
been converted to a grant, of which USD 150 million has been disbursed for constructing the Padma
Bridge. India also provided aid worth over USD 37 million to Bangladesh to cope with floods and
other natural disasters in 2007–2008. In addition, India provides technical cooperation to
Bangladesh, offering for instance 100 slots under ITEC and 35 under the Technical Cooperation
Scheme of the Colombo Plan. From FY2007 to FY2010, a total of 414 Bangladeshis have received
training under these two cooperation frameworks.xxix
3.5.3 Regional banks Regional banks such as the Asian Development Bank (ADB) are an important source of infrastructure
finance in Bangladesh. Since the country joined in 1973, the ADB has financed projects in water
supply, municipal infrastructure and services, transport and ICTA, and its recent contribution to the
transport sector is the Chittagong Port Trade Facilitation Project with a loan of USD 30 million
between 2004 and 2012. The main objectives were to increase the capacity of the port by
47
computerising the terminal management system and improving its environmental compliance and
security to international standards. The ADB has also launched a programme to design and develop
the Dhaka–Chittagong Expressway. This is will be a major contribution towards improving
communication with the port city. Export-oriented industries will particularly benefit.
Initially, the ADB supported the agricultural and natural resources sectors to achieve food security in
Bangladesh. From the mid-1980s the ADB began to support the infrastructure, energy and transport
sectors and has increased support for energy, transport, education, and water supply and other
municipal infrastructure and services since 2005. In 2013, the ADB assisted the South Asia
Subregional Economic Cooperation (SASEC) Bangladesh-India Electrical Grid Interconnection Project.
In 2013 it inaugurated South Asia’s first-ever high-voltage interconnection between Bangladesh and
India. The ADB has been providing direct financial assistance to projects in the non-sovereign public
sector and private sector in the form of direct loans, equity investments, guarantees and trade
finance. With a view to supporting trade, the ADB Trade Finance Programme (TFP) aims to bridge
the market gaps by providing guarantees and loans through partner banks. xxx
3.5.4 Capital markets In contrast to banks, which finance only well-established and safe borrowers, stock markets can
finance risky and innovative investment projects. Bangladesh does not have a mature capital market
although market capitalisation has increased over a short period of time. Market capitalisation of
listed companies increased from 7.9% of GDP during the 1994–1998 period to 15.1 between 2009
and 2013.xxxi The capital market is both volatile and shallow, however, as it lacks sectoral
diversification and is concentrated in the financial sector, which is represented mainly by the
banking sector. Hence there is only limited opportunity to finance large infrastructural projects by
raising funds from foreign portfolio investment, off-loading shares in the state-owned enterprises
and various equity and bonds from the capital market.
3.5.5 Innovative funds
Funds to the health sector: Bangladesh receives financial assistance for the health sector under
the Global Alliance for Vaccine and Immunisation (GAVI). Bangladesh is the second largest LDC
recipient of GAVI disbursements. Up to March 2014, Bangladesh has received USD 315.6 billion
(about 88%) of a commitment equivalent to USD 359.2 billion.xxxii
Funds to address climate change: In order to tackle the impact of climate change the
government has set up two dedicated funds. The first is the Bangladesh Climate Change Trust Fund
48
(BCCTF), formed under the Bangladesh Climate Change Trust Fund Act 2010, xxxiii and in which the
government invested nearly Tk 14 billion (approximately USD 171 million). The Bangladesh Climate
Change Resilience Fund (BCCRF) has been set up with an initial amount of USD 113.5 million with
assistance from Denmark, the EU, Sweden, Switzerland and the UK.xxxiv The World Bank manages
both funds. Under the BCCRF, the Pilot Project for Climate Resilience (PPCR) is underway. The two
funds are used to support actions identified in the Bangladesh Climate Change Strategy and Action
Plan (BCCSAP) that the government prepared a few years ago.
Section 4: Finance gap: preliminary estimates
4.1 Requirement for infrastructure Despite rapid growth and poverty reduction, Bangladesh still has huge infrastructure gaps both in
terms of financing needs and the quality. In order to ensure its continued progress, Bangladesh
needs investment in energy, transport, telecommunications, water and sanitation, and social
infrastructure such as education and health. The budgetary allocation for infrastructure has
increased over the years. The private sector also contributed about 35% of total investment in the
late-1990s and early-2000s (World Bank 2011). Total national spending on infrastructure for the
1995–2012 period indicates efforts to increase expenditure on social and physical infrastructure.
However, there are fluctuations in sectoral allocations and the share of health and education in
total ADP allocation has been on the decline since FY2010 (as shown in Table 7).
While Bangladesh achieved sustained economic growth from the 1990s, thanks to the various
enablers including infrastructure (as discussed in Section 2), this growth also increases the demand
for infrastructure. Infrastructural development has not kept pace with economic growth due to the
lack of investment. Studies have highlighted the need for greater investment in order for the
country to continue its growth momentum. The World Bank has estimated that developing
countries overall need to spend about USD 1.1 trillion annually on infrastructure up to 2015. The
LICs will need to allocate 12.5% of their GDP, higher than MICs (World Bank 2011).
Andrés et al. (2013) estimate that Bangladesh will have to spend between USD 7.4 billion and USD
10 billion a year between 2011 and 2020, or 7.38% to 10.02% of its annual GDP, to improve its
infrastructure. This is required to bring its power grids, roads and water supplies up to the standard
needed to serve its growing population. According to Andrés et al. (2013), between 1990 and 2012,
Bangladesh succeeded in attracting only USD 10.14 billion from the private sector in the
telecommunications and energy sectors, or 1.14% of GDP (2007–2012) and 2.83% of total private
49
participation in infrastructure (PPI). But it failed to attract the necessary PPI in water supply and
sanitation, or in transport to best serve the population.
Andrés et al. (2013) also note that Bangladesh will have to give the highest priority to its transport
sector and needs to spend between USD 36 billion and USD 45 billion per year to expand its
communications network. The power sector will require an investment of between USD 11 billion
and USD 16.5 billion to ensure that the poor have access to reliable electricity since only about half
of the population is connected to the national grid. Improving water supply and sanitation will need
investment of between USD 12 billion and USD 18 billion, solid-waste management between USD 2.1
billion and USD 4.2 billion, telecommunications around USD 5 billion, and irrigation between USD 7.7
billion and USD 11.6 billion until 2020.
4.2 How much is needed to eradicate poverty? A ‘back of an envelope’ estimate gives some idea of the resources required to eradicate persistent
poverty in Bangladesh. The estimate is based on the following.
i. Number of people living on less than USD 1.25 a day: Based on the 2010 Household Income
and Expenditure Survey (HIES), we determine the number of people whose income is
lower than USD 1.25 a day (or Tk. 3,000 per month).
ii. Average income of people in various income ranges: The HIES 2010 defined income ranges
and the number of people within each range. We assume that the average income of
people within a certain income range will be approximately half of the lowest and
highest income.
iii. Difference from non-poverty income (Tk. 3,000): Next we measure the difference between Tk
3,000 and the average income in each income range. This gives the amount a person
needs to stay above the poverty line.
iv. Amount needed in order that nobody lives below the poverty line: Finally, the income
difference is multiplied by the number of people in each range to calculate the income a
person needs in order not to live in poverty. Our estimation shows that in order to bring
everyone up to the USD 1.25 per day threshold a total of USD 2.18 billion per month
would be required. Annually, USD 26.19 billion is spent on anti-poverty efforts, which is
about 26.1% of the GDP of Bangladesh at the current market price in FY2010 (Table 10).
The above methodology can be expressed as the following formula.
Y = a × [b – (c + d)/2]
Where
Y = amount needed to provide USD 1.25 a day to those who are below this income
50
a = number of people living below USD 1.25 a day
b = monthly income to stay above the poverty line (Tk. 3,000)
c = lower income in the income range
d = higher income in the income range
Table 10: Amount needed to eradicate poverty
Income range (in Tk.)
Average income (in Tk.)
No of Population
Difference between average Income and Tk. 3,000
Monthly requirement to stay above poverty line in Tk. billion
c d E a B Y
0 500 250 6,113,462 2,750 16.8
500 599 549.5 4,084,344 2,451 10.0
600 699 649.5 5,015,254 2,351 11.8
700 799 749.5 5,658,380 2,251 12.7
800 899 849.5 5,828,587 2,151 12.5
900 999 949.5 7,037,890 2,051 14.4
1000 1249 1,124.5 16,291,751 1,876 30.6
1250 1499 1,374.5 14,925,920 1,626 24.3
1500 1749 1,624.5 12,383,936 1,376 17.0
1750 1999 1,874.5 9,204,811 1,126 10.4
2000 2499 2,249.5 15,005,026 751 11.3
2500 2999 2,749.5 11,179,364 251 2.8
Resource requirement in Tk. billion 174.6
Resource requirement in USD billion per month 2.2
Resource requirement in USD billion per year 26.2
GDP of Bangladesh (in USD billion) 100.4
Required amount as % of GDP 26.2
Source: Author’s calculation
Although the estimate of resources needed to bring the population above the poverty line is for only
one financial year, the figures reveal some stark realities. The effort to alleviate poverty in
Bangladesh is reflected in the budgetary allocation for a social safety net, which has been hovering
around 2% for the last five years, according to government figures. It may be argued that poverty
alleviation is not dependent solely on social safety nets, but also on other economic activities and
government investment. But the fact remains that the government has to generate this level of
investment to keep people above the poverty line. This reality underlies the importance of adequate
financial flows into the economy.
51
Section 5: Role of other means of implementation (MoI) and specific
complementary factors
Resource mobilisation for infrastructure beyond 2015 will be contingent upon the role of MoI and a
number of complementary factors. As discussed in Section 2, reforms and policy continuity have
helped to maintain macroeconomic stability and encouraged the private sector. Global policies and
institutions have also contributed towards the country’s economic growth. This section looks at land
acquisition, PPPs and trade finance as other domestic MoI. Preferential market access and Aid for
Trade (AfT) are discussed as complementary factors.
5.1 Other domestic MoI
5.1.1 Trade finance As the country is increasingly integrated into the global economy the importance of trade finance is
also felt by the private sector. Bangladesh’s growth as a frontier market in Asia is directly related to
its growth in foreign trade. Given Bangladesh’s increasing import needs the imperative is to enhance
export earnings. As mentioned in Section 2, the government has steadily liberalised trade. In order
to finance the country’s growing imports, successive governments have adopted policies to support
industries that can bring in foreign exchange.
Banks use various financing instruments to provide trade services to exporters and importers. Below
are the main strategies and international trade financing schemes that have helped Bangladesh to
consolidate its position as an emerging Asian economy.
Development of letter of credit (L/C) system: To date this is the most popular trade payment
method in Bangladesh. In particular, the RMG sector has benefitted from the system, which has
largely facilitated its financing needs. This has also been the gateway for back-to-back credit
facilities whereby new credit is opened on the basis of the original credit in favour of a second
beneficiary. In this arrangement, the exporter who obtained the first credit offers it as security
for the issuance of the second credit. The beneficiary of the back-to-back credit is not necessarily
located in the original beneficiary’s country. This has resulted in easier imports of essential raw
materials. One survey found that in 2011, 97% of import payments and 66% of export payments
in Bangladesh were handled through L/C (Habib et al. 2012).
52
Open Account Trading: To expedite exports, Bangladeshi firms have often engaged in direct
sales via sales/purchase of contracts. Open account provides for payment at some agreed future
date and without requiring the buyer to issue any evidence of this legal commitment. The
vendors must therefore have absolute trust that they will be paid on the agreed day. This
arrangement helps to reduce banking charges but entails higher risks.
Export Development Fund (EDF): With the intention to promote non-traditional manufactured
items export from Bangladesh, the International Development Association (IDA) arranged the
EDF in 1989 with a balance of USD 31.2 million. The present balance is more than USD 1 billion.
The primary objective of the EDF is to ensure the consistent supply of foreign exchange to meet
the import requirements of non-traditional manufactured items. This facility is available to non-
traditional exporters, particularly new exporters, exporters diversifying into higher-value goods
and exporters diversifying into new markets. Businesses use the EDF to make a payment of
import bill against back-to-back sight L/Cs and export. Currently, the EDF interest rate is LIBOR +
1.5% as per the Central Bank circular of 15 December 2013.
Usance L/C facilities and UPAS L/Cs: To better manage their cash flows, businesses in
Bangladesh have been increasingly utilising Usance L/C facilities. This has helped by creating a
financial tool for short-term cash flow needs for three main reasons: the interest rate is more
competitive than short-term working capital loans; the business can to draw immediately on the
line of credit; and the business can retire the facility prior to the maturity date if required.
Usance Bill Paid at Sight, known as UPAS, is an import-finance mechanism whereby the exporter
is paid by the L/C opening Bank at sight against a Usance Bill. The L/C opening bank finances the
usance bills from its Off Shore Banking Unit (OBU) in foreign currency and is paid by the importer
at maturity of the bill. This allows the bank to retain the discounting income which otherwise
would have been paid in the exporter’s country. This has also propelled the emergence of bill-
discounting products and the opening-up of OBU, often catering to the EPZ companies first by
foreign commercial banks, and now accepted as a valid business model by private commercial
banks.
Foreign currency (FCY) debt market: Given the double-digit cost of obtaining finance in the
Bangladeshi market, businesses have turned to the international market, which provides
leverages at more competitive LIBOR plus rates. To facilitate Bangladesh’s ambitious plans to
expedite economic growth, there is a need for a substantial increase in investment rates from
53
the current 26.8% of GDP to 38% by 2021. Here inflows from the FCY market can add valuable
momentum. To date FCY borrowing approvals have reached USD 1.6 billion and further loan
approvals in export-driven sectors and high-impact industries such as infrastructure (energy,
transportation and technology, and critical enablers like telecommunications) will add further
impetus. In addition, the current foreign exchange reserve of USD 15 billion adds further stability
for supporting expansion of FCY leverage.
Despite various trade finance facilities, the financial market is still underdeveloped and lags behind
many countries. The development of the financial market in Bangladesh and the difficulties in
obtaining funds are reflected in various finance-related indicators presented in Table 11.
Table 11: Financial market development in Bangladesh
Pillars Indicators Value Rank/148
Financial market development
Availability of financial services 3.9 101
Affordability of financial services 3.7 109
Financing through local equity market 3.9 41
Ease of access to loans 2.3 114
Venture capital availability 2.0 125
Soundness of banks 4.3 103
Regulation of securities exchanges 3.0 125
Legal rights index, 0–10 (best)xxxv 7 42
Source: WEF (2013)
Notes: Values are on a 1–7 scale unless otherwise indicated (*). The Value column reports the country’s score on each of the variables that compose the GCI. The Rank/148 column reports the country’s position among the 148 economies covered by the GCI 2013-2014.
The trade finance instruments have undoubtedly assisted exporters and importers of Bangladesh,
but such facilities are not available to SMEs on the grounds of their size. In fact, access to finance by
the SME sector is a significant problem in Bangladesh. The requirement of collateral, high interest
rates, cumbersome loan-application procedures and the short grace period for repayments
discourage SMEs from applying for bank loans.
5.1.2 Public–Private Partnerships (PPP) Bangladesh’s Sixth Five-Year Plan aims for private investment to substantially augment traditional
public investment, using the PPP policy adopted in 2010. In 2011 the government set up the PPP
office, which receives support from the Prime Minister’s Office and the ADB. To date, however, PPP
arrangements have not realised their potential to bring in private investment.
54
The 2004 Private Sector Infrastructure Guidelines established rules and institutional mechanisms to
promote and handle private investment in a number of sectors eligible for PPPs, including terms of
tender and award processes, allocation of risk between the public and private partners, and financial
terms. Furthermore, the 2010 PPP policy defines a wide scope of potential applicability of PPPs and
expands on the broad sectoral coverage defined in the 2004 guidelines. According to the 2010 policy
the public sector can be involved in PPPs through technical assistance financing, viability gap
financing and infrastructure financing.
The lack of interest in investing through PPPs is due to similar problems associated with other
investment in the country. The infrastructural gap and political uncertainty are the principal ones.
The project approval process for PPPs should be strengthened and major projects should have
parliamentary approval to ensure the greater political ‘buy-in’ that will help the projects to be more
sustainable. There is also a need to strengthen the capacity to manage PPP projects.
5.1.3 Land acquisition Infrastructure development is complicated by the lack of available land and complex land titles.
Problems of land titles in Bangladesh arise mainly from land scarcity and ownership validation.
Population density makes land scarce, but the problem becomes even more acute because of the
difficulties in streamlining land records. One of the most important uses of land is for agricultural
production. When it comes to land for infrastructure, acquisition is delayed due to complicated
regulations. Taking an average of 245 days to register land, Bangladesh is currently ranked 175th on
the ‘Doing Business indicator’ based on the ‘registering property’ criterion (World Bank 2013b).
For industrial development the Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh
Small and Cottage Industries (BSCIC) and the public works department all provide land. Industrial
land is primarily situated near Dhaka, Chittagong and Khulna. The Bangladesh Board of Investment
facilitates access to publicly owned industrial estates. There needs to be a review of the institutional
and regulatory framework of land procurement to make it easier for industrial investors to obtain
land and to deal with land-clearance issues for development (mainly roads). Making land allocation
more efficient would call for the establishment of a universal coordinating institution and a
comprehensive public land database listing all plots available for development by location, size,
facilities etc. Bangladesh promotes industrial parks and EPZs under a PPP framework whereby land is
made available to private investors on short-, medium- and long-term leases. It is important to enlist
55
the support of zone developers who build and maintain the infrastructure, run the zone on a day-to-
day basis, promote it and maximise occupancy rates and allocate plots to investors.
5.2 Complementary factors
5.2.1 Preferential market access and RMG exports Access to global markets for its exports under preferential arrangements has contributed immensely
towards boosting export income that could in turn be invested in the development of the country.
As mentioned in Section 3, Bangladesh has moved from being an aid-dependent to a trade-
dependent country in little more than 20 years. This is due to a number of policies adopted by
successive governments since the 1980s. These policies included market-oriented reforms, tariff
liberalisation and an export-oriented growth strategy. Significant reductions of various customs
duties and tariff waivers were introduced in the early 1990s, along with the removal of trade-related
quantitative restrictions, the elimination of import-licensing procedures, and the unification of
exchange-rate regimes (Rahman et al. 2008). At present there are various incentives and policy
support to boost exports in identified sectors and products. For example, higher tariffs apply to
finished products while lower or zero tariffs apply to intermediate or primary products and
machinery. Export-oriented inputs enjoy zero-tariff status..
Bangladesh also has some advantages as an LDC. For instance, the country enjoys preferential
treatment in the EU under the Everything But Arms (EBA) initiative, and in the USA, Canada and
Japan under their respective GSP schemes. The items under these schemes include important
exports such as jute and jute products, shrimp and frozen foods, leather, garments and fertilisers,
although the US GSP does excludes the latter, an issue of long-standing debate between the two
countries. Australia and South Korea also offer preferential market access to Bangladesh, and under
regional trading arrangements and bilateral initiatives, Bangladesh enjoys preferential market access
in China and India. Notable trading agreements include the South Asian Free Trade Area (SAFTA), the
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the
Asia-Pacific Trade Agreement (APTA). Under the SAFTA accord, Bangladesh receives preferential
tariff treatment from India, Pakistan and Sri Lanka for items not on their respective sensitive lists,
many of which have become significantly shorter over time. Under APTA, China and South Korea
have eliminated customs duties for 83 and 139 goods respectively.
In case of RMGs, several changes in the global trade environment and domestic policy reforms
facilitated the rise of the sector in the 1980s. At that time, Bangladesh began undertaking important
policy changes to meet World Bank and IMF loan conditions. Among these, the SAP was intended to
stimulate industrial investment in the private sector and increase exports through trade
56
liberalisation. As part of this reform, the tariff structure was rationalised, the number of duty tariff
bands (for different income ranges) was reduced, and tariff rates were brought down. Policy
initiatives such as the development of domestic supply capacities including bonded warehouse
facilities, duty-drawback incentives, cash-compensation schemes and the ease of procuring raw
materials, especially fabrics under back-to-back L/Cs, also contributed to the expansion of the
sector.
Moreover, Bangladesh enjoyed quota facilities offered by the importing countries under the Multi-
Fibre Arrangements (MFA) and zero tariff access to a number of high-income country (HIC) markets,
notably the EU under the GSP. The MFA, as well as changing global sourcing patterns of the
dominant international buyers, shifted garment production from traditional Asian producers like
Hong Kong, South Korea and Taiwan to mainland China and a number of Southeast and South Asian
countries. Preferential market access and GSP schemes have played an important role in enhancing
RMG exports to markets abroad, and apparel constitutes the bulk of exports. Figure 21 presents the
trend in RMG exports and total exports from Bangladesh.
Figure 21: Trend in export income from RMG sector and from total exports
Source: Bangladesh Bank
57
5.2.2 Aid for trade Bangladesh is eligible for funding under the Aid for Trade (AfT) package, which is part of ODA. The
AfT initiative was launched at the Hong Kong Ministerial Meeting of the World Trade Organization
(WTO) in 2005 with the aim of extending support to LDCs. Under AfT, financial and technical support
is provided to improve export diversification in LDCs and enhance the quality of their exports so that
they can increase their trade. Such support is expected to help LDCs overcome their supply-side
constraints so that they can take advantage of duty-free quota-free market access offered by several
HICs.
Although Bangladesh has achieved an impressive export performance, mainly through RMG
exports, the country is unable to take advantage of the market-access facilities due to various
domestic constraints.
Its lack of resources, poor infrastructure, weak productive capacity and technological base, low
competitiveness, weak institutions, bureaucratic complexities and lack of trade-related
professional expertise, result in Bangladesh being less competitive than comparable countries in
the Global Growth Competitiveness Index. Bangladesh has received support under the AfT
initiative in three categories: economic infrastructure, building productive capacity, and trade
policy and regulation. Most of the AfT flow to Bangladesh was for economic infrastructure and
productive capacity (Figure 22).
Figure 22: Disbursement of AfT to Bangladesh (USD million, constant 2012 prices)
Source: OECD-CRS database
58
One of the concerns related to AfT is that the disbursement has not been additional since 2005
compared to the 2002–2005 period (Khatun et al. 2013). Only AfT for trade policy and regulation
was additional, though the actual volume is far lower than that of other sectors. Disbursement
improved substantially in 2006 and 2007, but the gap between commitment and disbursement
has since widened. The predictability of AfT also continues to be a problem. The gap between
commitment and disbursement, changing donor priorities and delayed project implementation
are the factors behind the unpredictability of AfT. The other concern is the composition of grants
and loans. Although the share of AfT in the form of grants has increased slightly in recent years,
most trade-related assistance is provided as loans.
The growth of AfT in Bangladesh is lower than the global average. Although the total volume of
AfT has increased since 2002, the average annual growth rate in Bangladesh between 2006 and
2011 is negative (-28.68%), as opposed to 67% positive growth at the global level (Khatun et al.
2013). This calls for further domestic initiatives to obtain more AfT. One important reason for the
low AfT disbursement is the lack of project proposals from the public and private sectors because
of a lack of awareness of the availability of AfT. The opportunity provided by AfT to provide funds
for economic infrastructure and productive capacity should thus be explored more actively in
order to overcome resource constraints for the country’s infrastructural development.
59
Section 6: Conclusions and policy recommendations
6.1 Summary of findings This CI has presented a number of findings that are summarised below. The trend of financial flows
between 1995 and 2013 and the major conclusions are presented in Figure 24 and Table 12.
i. Bangladesh’s economic growth has been impressive. As an LDC, it attained 6% GDP growth
per annum from the 2000s. Growth in Bangladesh has not experienced volatility despite
challenges such as political instability, natural calamities and the global recession. The
GDP reached USD 129 billion in FY2013 from USD 38 billion in 1995.
ii. Transformation can be observed in a number of achievements, including steady economic
growth, growth of the RMG industry, access to remittances and social progress,
including primary school enrolment, immunisation against early childhood diseases,
reduction in infant mortality, and significant improvements in the water and sanitation
sector.
iii. Persistent problems include skewed income distribution, environmental degradation and
reliance on non-renewable natural resources, including fossil fuels and minerals. The
forest cover is lower than the standard of 17% of area set by the FAO, and total earnings
from natural resources continue to increase. Environmental concerns and climate
change continue to pose a threat to the country.
iv. Infrastructure, such as improved communications, roads, highways and bridges, has acted as
equalisers and enablers of economic and social transformation. Economic and social
transformation was facilitated by the investment in rural roads, which has created
employment and income opportunities for rural men and women.
v. Technology and information flows are also contributing towards the empowerment of
women. Women’s education and access to information are critical to their increased use
of maternal health services and overall better health, as well as reduced fertility and
improved family nutrition.
vi. Girls’ education has not only created increased their employment opportunities, but has also
made positive impacts in areas including higher age at marriage, and a greater say in the
choice of their husband and in decision-making.
vii. Despite the achievements, there remain infrastructural deficiencies. Furthermore,
technological limitations, administrative complexities and poor governance hinder faster
development. Reforms in public administration are needed to reduce corruption and
establish accountability and transparency in economic management. This will in turn
improve the quality of development.
60
viii. A low savings rate because of low per capita income and a narrow tax base explains the
country’s weak domestic resource mobilisation (DRM). The revenue–GDP and tax–GDP
ratios have increased very gradually since 1995 and reached 12.3% and 10.4% of GDP
respectively in 2013. Due to the robust inflow of remittances the national savings rate
has gained momentum since 2005, but the domestic savings rate remained either
stagnant or declined over the same period. Revenue generation as a percentage of GDP
stagnated between 2005 and 2010 due to volatility in tax collection.
ix. DRM is the major source of finance, principally in the form of credit to the private sector
(Figure 23). Remittances have become a major source of finance, while ODA is in decline
– although its contribution still outstrips FDI. The capital market is volatile and shallow as
it lacks sectoral diversification of shares. There is still only limited opportunity to finance
large infrastructural projects by raising funds from foreign portfolio investment, off-
loading shares in state-owned enterprises and various equity and bonds from the capital
market. Overall, the sources of finance are limited since there has been little progress in
attracting PPP or South–South Cooperation (SSC) and there are no innovative and
modern instruments such as sovereign bonds.
x. Several international trade-financing schemes have helped exporters and importers to
contribute to increased trade. Back-to-back L/Cs, EDF, usance L/C facilities and UPAS
L/Cs and FCY debt market are some of the instruments being used by Bangladeshi
traders. The greater maturity of Bangladeshi companies in terms of managerial
efficiency and the size of projects have given access to these schemes, some of which
are in foreign currencies.
xi. Huge resources will be required to pursue the post-2015 agenda. A simple estimate suggests
that USD 26.2 billion (equivalent to 26.2% o GDP at 2010 current prices) will be required
annually to ensure that everyone has at least USD 1.25 a day to take them above the
poverty line.
xii. There is a role for complementary policies and other MoI in supporting (or obstructing)
transformation. The government should work on policy reforms for macroeconomic
stability, partnerships with non-government actors and policy continuity. Domestic
constraints include the low capacity of development administration (e.g. to use
increased resources), the lack of appropriately skilled personnel and poor governance.
xiii. Complementary factors at the international level include preferential access for exports in
global and regional markets and greater AfT, both of which have demonstrated a
positive impact at the micro level (e.g. in the RMG sector).
61
Figure 23: Financial flow to Bangladesh (in USD million)
Source: National Bureau of Revenue, Ministry of Finance and Economic Relations Divisions
Table 12: Summary of financial trends in Bangladesh
Category of finance Type of finance Trend Use for infrastructure
Public domestic Tax Increasing as % of GDP; second highest share in total resource mobilisation
Yes
Public international ODA Declining as % of GDP Yes
OOF Volatile
Private domestic Domestic credit to the private sector
Increasing; highest source of resource mobilisation
Yes
Private international Remittances Increasing, but recent fall No
FDI Increasing, but volatile Yes
Blended PPP Has not taken off; only a few small projects in power sector
Yes, limited
Innovative Climate Insignificant
Health Insignificant
Sovereign bond Does not exist N/A
Diaspora bond Does not exist N/A
Infrastructure bond
Proposed, but not taken off N/A
Other South–South Yes, but low Yes
Capital market Inadequate fund, low depth and highly volatile
No
Other MoI
Trade finance Improving; instruments used Yes
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are: back-to-back L/C, open account trading, export development fund, usance L/C facilities and UPAS L/Cs, FCY debt market
PPP Low Yes
Land acquisition Scarce and cumbersome Yes
Complementary policies
Preferential market access
Supported RMG exports Yes
Aid for Trade Volume has increased, but growth not impressive
Yes
Source: Author, based on the present study
6.2 Recommendations On the basis of the findings, we make the following recommendations for mobilising more resources
for infrastructural development:
Increased DRM will be the major source of finance. Low levels of ODA (2% GDP) and FDI
(<1% GDP) indicate that the economic transformation achieved to date is largely driven by
the domestic private sector. Tax revenue has increased in recent years due to more efficient
tax administration. This has allowed the government to increase social expenditure,
although the needs far outweigh the budgetary allocation. The new VAT law that comes into
force in July 2015 will require appropriately qualified NBR personnel and the use of
computer technology to complement their skills.
The prospect of higher PPP depends on addressing several limitations. The Sixth Five-Year
Plan allowed for about 2% of GDP in PPP-related investment initially, with a view to reaching
6% of GDP by 2015. Unfortunately, PPP has not taken off. Infrastructure needs significant
investment over the next few years in sectors such as power and energy, roads and railways
and telecommunications. The financing gap is significant and investment is only about 27%
(in FY2013) of GDP. There is a need to promote PPP as a means to fill this gap. A host of
problems exist in attracting PPP, ranging from issues of land acquisition to the lack local
government capacity, unclear procedures for the private sector to enter the market,
contradictory and overlapping regulations, poor governance and an inadequate business
environment.
63
South–South Cooperation (SSC) holds some promise. To date, however, support from China
and India remains insignificant, providing only 4.83% of total FDI in Bangladesh in 2010.
Recently, China has expressed keen interest in investing in infrastructure, particularly roads
and bridges. There is a need for the government to strengthen its assurance mechanism to
ensure that projects are completed on time at competitive costs without compromising
quality.
The use of ODA through higher absorption capacity can lead to higher aid disbursement.
Despite the falling share of ODA in the economy, the need for ODA for budgetary and
infrastructure support will continue in the immediate future.
Limited access to physical infrastructure, particularly gas and electricity, obstruct FDI. The
recent increase in FDI has been observed mainly in the EPZs as they have little or no gas and
constraints in electricity supply such as the domestic tariff area. In order to overcome
infrastructural bottlenecks, aid for productive capacity needs to be enhanced significantly.
The effective use of FDI has to be ensured through higher accountability and transparency in
its application.
Innovation of financial instruments should be explored. At present there are very few
financial instruments in Bangladesh. Various finance products such as commercial sovereign
bonds, diaspora bonds and infrastructure bonds could help to mobilise finance for
infrastructure. In the absence of sovereign bonds external investors are unwilling to invest in
Bangladesh because the risk is not covered.
64
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69
i Economists Just Faaland and Parkinson (1976) termed Bangladesh as ‘test case for development’.
ii Estimated based on the data from MoF, EPB and Bangladesh Bank
iii In 2013, GDP per capita, Purchasing Power Parity (PPP) at current prices was: Bangladesh: USD 2,557;
India USD 5,410; Pakistan USD 4,699; Sri Lanka USD 9,736 (World Development Indicators database, available
at
http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?order=wbapi_data_value_2013+wbapi_data_value+
wbapi_data_value-last&sort=desc).
iv Ministry of Finance (actuals for 2010–13, from Monthly Economic Update).
http://www.mof.gov.bd/en/index.php?option=com_content&view=article&id=68&Itemid=1 and (1995–2005,
Bangladesh Economic Review). There may have some discrepancies due to different method of reporting – in
some cases there is separate reporting for the indicator, in others ministry expenditure, both revenue and
development, was totalled.
v Ministry of Finance (actuals for 2010–13, from Monthly Economic Update)
http://www.mof.gov.bd/en/index.php?option=com_content&view=article&id=68&Itemid=1 and (1995–2005,
Bangladesh Economic Review).. There may have some discrepancies due to different method of reporting – in
some cases there is separate reporting for the indicator, in others ministry expenditure, both revenue and
development, was totalled.
vi http://ifad-un.blogspot.com/2013/05/infrastructure-development-in.html. Projects such as ‘Market
Infrastructure Development Project in Charland Regions (MIDPCR)’, implemented by the International
Food and Agricultural Development (IFAD), found several benefits of market infrastructure in char areas
(char is land located in river basin that is subject to erosion and accretion).
vii For example, the Grameen-Obopay Bank A Billion Initiative aims, by providing mobile technology in
the most impoverished and remote corners of the world’, to ‘empower life and work endeavors’, by ‘providing
access to affordable financial services, including cross-border remittances, money transfer, payments, savings
and credit accounts’ (http://www.kiwanja.net/database/project/project_obopay.pdf).
viii BRAC’s health programme, ‘Manoshi’, uses community health workers to assist poor women in
childbirth and provide neonatal healthcare. This programme also uses mobile technology to improve the
documentation of records and prioritise emergency cases (http://health.brac.net/manoshi).
ix http://www.pallitathya.org/MainDetails.php?Id=44
x http://health.brac.net/manoshi
xi http://infolady.com.bd/
xii Scheduled available airline seats per kilometers per week originating in-country (in millions) (2013).
xiii Number of mobile telephone subscriptions per 100 population (2012 or most recent year available.
xiv Number of active fixed telephone lines per 100 population (2012 or most recent year available).
xv Percentage of individuals using the Internet (2012).
70
xvi Fixed broadband Internet subscriptions per 100 population (2012 or most recent year available).
xvii International Internet bandwidth (kb/s) per Internet user (2012 or most recent year available).
xviii Mobile broadband subscriptions per 100 population (2012 or most recent year available).
xix www.bmet.gov.bd
xx http://www.pkb.gov.bd/index.php/pkb-activities.html
xxi The Investment Promotion and Protection Act 1980 was such an attempt.
xxii http://www.iifc.net/
xxiii http://www.idcol.org/home/about
xxiv http://www.biffl.org.bd/
xxv http://www.bangladeshbank.org.bd/aboutus/dept/ipff/ipff_project_brochure.pdf
xxvi http://www.boi.gov.bd/index.php/investment-climate-info/fdi-in-bangladesh
xxvii http://www.bba.gov.bd/projects/padma-bridge-2/padma-multipurpose-bridge/
xxviii http://www.thedailystar.net/newsarchive/failed-company-to-get-0-78b-padma-job-32820
xxix http://wwsw.hcidhaka.org/pdf/Political%20and%20Economic%20relations.pdf
xxx www.adb.org
xxxi http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS
xxxii http://www.gavialliance.org/results/disbursements/
xxxiii http://www.moef.gov.bd/Climate%20Change%20Unit/Climate%20Change%20Trust%20Act_2010.pdf
xxxiv http://bccrf-bd.org/
xxxv Degree of legal protection of borrowers’ and lenders’ rights on a 0–10 (best) scale (2012).
