Executive Summary

Bangladesh, with a gross domestic product (GDP) per capita of US$4971 in 2008, clearly faces the same formidable development challenges that confront all other low-income countries. Its geographical location—most of the country’s land mass is less than 10 meters above sea level—makes it particularly vulnerable to climate changes. The global recession continues to have an impact on the country, with exports, investment, and remittances, the key factors spurring growth, all showing a slow-down.

The macroeconomic performance of Bangladesh economy in recent years has been quite commendable despite adverse global economic environment. The economy has recorded respectable growth performance, created jobs for the rapidly growing labor force, and reduced poverty level significantly and is firmly on the way to achieve most of the Millennium Development Goals for 2015. Bangladesh government has drawn up “Vision 2021” program and the Sixth Five Year Plan with a view to raise growth rates to 8 percent by 2015 and further to 10 percent by 2021 in line with the objectives to further reduce poverty and achieve the middle-income country status over the next decade.In line with the stated objectives of Vision 2021, a long term Perspective Plan (2010-20) has been prepared to provide the policy directions for achieving those targets. Against this backdrop, the budget strategy of the government for the next 5 years is provided in this document. The document is divided into two parts. The first part discusses the Medium Term Budget Strategy (MTBS) and the second part incorporates Budget Frameworks of all the Ministries of the Government.

On a positive note, the Ministry of Finance’s management of the economy has helped to maintain overall stability relative to other countries facing significant rises in inflation and balance-of-payments crises. The global financial crisis has also had only a modest negative impact on Bangladesh because of its modest integration into the global financial system and its position as a producer of low-cost exports. As the global economy recovers, investment and remittances should also rebound, allowing Bangladesh to focus on a long-term high-growth agenda. In looking broadly at different facets of the economy, the assessment team found that while there is still a great deal to be done at the macro level—revenue collection is one of the lowest in the world—and there are severe infrastructural and power constraints that need to be addressed

1

Introduction:

The Economy of Bangladesh: The economy of Bangladesh is a rapidly developing market-

based economy. Its per capita income in 2010 was est. US$1,700 (adjusted by purchasing power

parity). According to the International Monetary Fund, Bangladesh ranked as the 44th largest

economy in the world in 2011 in PPP terms and 57th largest in nominal terms, among the Next

Eleven or N-11 of Goldman Sachs and D-8 economies, with a gross domestic product of

US$269.3 billion in PPP terms and US$104.9 billion in nominal terms. The economy has grown

at the rate of 6-7% per annum over the past few years. More than half of the GDP is generated by

the service sector; while nearly half of Bangladeshis are employed in the agriculture sector.

Other goods produced are textiles, jute, fish, vegetables, fruit, leather and leather goods,

ceramics, ready-made goods.

Remittances from Bangladeshis working overseas, mainly in the Middle East, are the major

source of foreign exchange earnings; exports of garments and textiles are the other main sources

of foreign exchange earnings. Ship building and cane cultivation have become a major force of

growth. GDP's rapid growths due to sound financial control and regulations have also

contributed to its growth; however, foreign direct investment is yet to rise significantly.

Bangladesh has made major strides in its human development index.

The land is devoted mainly to rice and jute cultivation as well as fruits and other produce,

although wheat production has increased in recent years; the country is largely self-sufficient in

rice production. Bangladesh's growth of its agricultural industries is due to its fertile deltaic land

that depends on its six seasons and multiple harvests.

Transportation, communication, water distribution, and energy infrastructure are rapidly

developing. Bangladesh is limited in its reserves of oil, but recently there has been huge

development in gas and coal mining. The service sector has expanded rapidly during last two

decades and the country's industrial base remains very positive. The country's main endowments

include its vast human resource base, rich agricultural land, relatively abundant water, and

substantial reserves of natural gas, with the blessing of possessing the world’s only natural sea

ports in Mongla and Chittagong, in addition to being the only central port linking two large

burgeoning economic hub groups i.e. SAARC and ASEAN.

2

Economic information of Bangladesh at a glance

GDP$112 billion (nominal; 2011 est.)

$283.5 billion (PPP; 2011 est.)

GDP Growth 6.3% (2012 est.)

GDP per capita $1,900 (PPP; 2011 est.)

GDP by Sector Agriculture: 18.4%,

Industry: 28.6%,

Services: 53% (2011 est.)

Inflation (CPI) 8.69% (2011-2012)

Population below Poverty line 31.5% (2012 est.)

Labor Force 75.42 million (2012)

Labor Force by Occupation Agriculture: 45%,

Industry: 30%,

Services: 25% (2008)

Unemployment 5% (2012 est.)

Main Industries Textiles and apparel, jute, tea, leather,

telecommunications, pharmaceuticals, cement,

ceramics, shipbuilding, fertilizer, food

processing, paper newsprint, light engineering,

sugar , fisheries , rubber , ship repairing ,

agriculture

Exports $24.28 billion (2012 est.)

Export Goods Apparel, ships, jute and jute products, frozen

fish and seafood, leather and leather products,

ceramics, pharmaceuticals, cement, processed

food, fertilizer

Main Export partners US 19,7%, Germany 16,1%, UK 9,5%, France

7,2%, Netherlands 4,3% (2012 estimate)

Imports $30 billion (2012 estimate)

Import Goods Machinery and equipment, chemicals, iron and

3

steel, textiles, foodstuffs, petroleum products,

cement

Import Partners China 18.9%, India 12.7%, Singapore 6%,

Malaysia 4.7%, Japan 4% (2010)

Foreign Reserve $13.53 billion (January 2013)

Economic Scenario of Bangladesh in recent years:

Economic Performance in Fiscal Year 2012-13

Economic growth in fiscal 2012 is estimated at 6.3 percent. Bangladesh’s growth performance

has been improving in recent years. Successive bumper crop harvests, strong manufacturing

growth, continued recovery in construction, and sustained robust growth in services contributed

to this improvement.

Growth has slowed to an estimated 6.3 percent in FY12, according to Bangladesh Bureau of

Statistic’s preliminary estimate. A slowdown in growth in FY12 had been on the cards even

before the Euro debt crisis unraveled. Successive bumper harvests in the crops sector reduced

room for further strong growth despite good harvests (base effects), thus reducing agricultural

growth. Additional factors that led to slower growth in FY12 include recent macroeconomic

policy tightening measures and financial-sector restraints that were needed to stabilize the

economy and ease pressure on foreign exchange reserves; the lack of any significant

improvement in the enabling environment for private investments; and an unfavorable external

environment.

Agricultural growth has slowed from 5.1 percent in FY11 to 2.5 percent in FY12. The slower

agricultural growth was driven by a decline in crop sector growth from 5.7 percent in FY11 to

0.9 percent in FY12. Although aman production had positive growth due to good rainfall

nationwide during the aman growing season and sunny weather during the harvest, aus

production was lower and the boro3 (largest rice crop) production is likely to have been

marginally lower than the previous year’s crop, due to slightly lower acreage. Growth in animal

farming was also very sluggish at 3.4 percent in FY12, compared with 3.5 percent in FY11.

Manufacturing growth picked up slightly from 9.5 percent in FY11 to 9.8 percent in FY12.This came

entirely from a pick-up in small scale manufacturing from 5.8 percent in FY11 to 7.2 percent in FY12.

4

Fiscal incentives given to the SMEs in the FY12 budget together with credit support under the Equity and

Entrepreneurship Fund implemented by Bangladesh Bank appears to have helped growth in small scale

manufacturing. Growth in large scale manufacturing declined from 10.9 percent in FY11 to 10.8 percent

in FY12.

Weaker growth in large scale manufacturing is attributable largely to a significant reduction in export

growth. Bangladesh is likely to struggle to achieve the 15 percent official export-growth target because of

weak demand in Europe and the deteriorating efficiency of the trade logistics infrastructure. Exports grew

by 8.4 percent in July 2011-April 2012, relative to the same period the previous year. Slower growth

in woven garments, knitwear, and leather and decline in export of frozen food and jute goods

underpinned the slower export growth so far.

Private consumption growth kept pace with GDP growth. Private consumption remained stable at

around 75 percent of GDP. Remittances contributed to sustaining private consumption growth as

they recovered strongly, with 10.7 percent growth during July 2011-March 2012, compared with

4.1 percent during the same period last year. There was at the same time a strong 45 percent

growth in manpower exports in calendar year 2011 relative to calendar year 2010 (0.99 million in

2011 compared with 0.48 million in 2010). This bodes well for remittance growth next year.

Public investment increased from 5.6 percent of GDP in FY11 to 6.3 percent in FY12. The

government’s Annual Development Program is the single largest source of public investment.

Nominal growth in ADP spending in the first ten months was only 8.6 percent. Capital

expenditures outside ADP are significant in magnitude, but even assuming that spending will be

as per budget for these line items, it appears that total public investment in FY12 could be

overstated.

Private investment growth slowed. Private investment to GDP ratio declined from 19.5 percent in

FY11 to 19.1 percent in FY12. Investors appear to have gone into a wait-and-see mode because

of volatilities in the global economic environment and the stresses and strains emanating from

domestic sources. The latter include high variability in inflation, tightening credit conditions in

the financial sector as reflected in a significant reduction in growth in industrial term loan

disbursement, resulting in negative net disbursements, energy shortage and policy uncertainties in

the run up to elections in early 2014.

5

The national savings rate has declined from 26 percent of GDP in FY11 to 25.2 percent in FY12.

This reflected a decline in both private and public saving rates. Private savings rate declined from

22.6 percent of GDP in FY11 to 22.1 percent in FY12 while public savings declined from 3.4

percent of GDP to 3.1 percent. Private savings may have been hit by slower growth in real

disposable income and the stock market debacle which hurt small investors generally. Slower

revenue growth and large increases in subsidies contributed to the decline in public savings.

Double-digit inflation persists

Inflation continues to be volatile around double digits, with international food prices and expansionary

fiscal and monetary policies at home playing a part. The inflationary upturn started in Q2 10, reaching

11.6 percent (y-o-y) in November 2011 before starting to decline; it was 9.9 percent in April (Figure 2).

The good news, particularly for the poor, is that food price pressure has declined, from 13.8 percent in

September 2011 to 8.1 percent in April 2012. Satisfactory aman production, along with stock releases by

traders in anticipation of a November-December bumper harvest, placed downward pressure on the retail

price of rice, the largest single item in the CPI basket. The public food (rice and wheat) stock is at an all

time high of 1.4 million tons, which has led the government to cut its rice import plan by 22 percent. The

government has also revised its domestic procurement target upwards by 75 percent, to 0.35 million tons

to provide price support to farmers. The declining prices of food in the international market and in India

have helped bring food price growth down in Bangladesh.4

The bad news is that non-food prices rose to a 14 percent rate in March 2012, compared to 4.3 percent a

year earlier. It declined slightly to 13.8 percent in April. Expansionary monetary and fiscal policies have

driven the increases by expanding aggregate demand, which has also led to large nominal depreciation of

the taka. Expansionary policies sustained excess demand leading to a general increase in non-food prices.

This is evident from increases in all the sub-components of the non-food price index across the board.5

High inflation disproportionately affects the poor and vulnerable, non-poor households, but the impact

may have been somewhat mitigated by increased wages. Nominal wages increased by 13.54 percent in

February 2012 and real wages by 3.11 percent compared to a year ago, according to the Bangladesh

Bureau of Statistics.6 Beside the wage increase, various safety net programs are helping to cushion the

impact of high inflation on poor households. As of March 8, 2012, 1.2 million tons of food grain had been

distributed through the Public Food Distribution System (PFDS), which is 42.5 percent of the target for

6

the fiscal year, compared with 37.7 percent of the target during the same period last year. Open Market

Sales (OMS) resumed across the country on September 26, 2011, wherein rice is sold at Tk 24 per kg,

about Tk 5 below the open market price. Besides OMS, food grains were also distributed through

programs such as Food for Work (FFW) and Vulnerable Group Development (VGD) programs in rural

areas.

Exports

With negative growth in the Euro zone, export growth forecasts from 2012 do not paint a healthy picture.

The European Union (EU) is the main destination of Bangladesh exports. In FY11, 52.1 percent of

Bangladesh’s total exports went to EU, of which 87.7 percent were in the form of readymade garments

(RMG). Monthly growth of RMG was around 25.3 percent in August, 2011. The Bank’s Global

Economic Prospects (GEP) forecast a growth of -1.1 percent in 2012 and 1.6 percent in 2013. Taking

these into account, EU overall imports are projected to decline by 13.6 percent in 2012 and grow by 5.5

percent in 2013. Bangladesh’s RMG export to EU was resilient in the last crisis period. In October 2008,

the country’s RMG market share in EU was around 4.3 percent, and gained momentum due to the so-

called “Wal-Mart effect”, increasing to 6.2 percent in April 2010. However, even market-share gains

might not be sufficient to avoid the shock to export growth in a new Euro-zone crisis, because last time

exports slowed noticeably in all categories from October 2008. Non-RMG exports to the EU may suffer

more than those of RMG, as Bangladesh’s share of non-RMG exports in the EU have averaged just 0.05

percent over the last three years. RMG export growth to the US may be hit as well. The US is the second-

largest export destination for Bangladesh after the EU, and Europe is the largest market for US exports.

Hence, the US economy would also likely grow slowly over the next 18 months at 2.3 percent in 2012

and 2.4 percent in 2013. If so, US overall import growth would fall to 1.7 percent in 2012 (rising to 6.4

percent in 2013). So, even if the share of Bangladesh’s RMG exports to the US were to rise from their

current share of 5 percent to 6 percent, they would still lose ground through most of 2012.17 RMG export

growth may begin to improve in the latter part of 4Q 2012 and is predicted to increase in the first quarter

of 2013. Bangladesh’s share of the US non-RMG market has been 0.02 percent for the last four years and

there are no early or significant signs of product diversification.

A number of scenarios are possible: The Bangladesh export market is highly concentrated in the EU and

US. In FY11, Bangladesh exported around 74.4 percent of its total exports to these markets, but during

the last financial crisis, 2008-2010, this fell to 70 percent. It is reasonable to presume, therefore, that a

similar fall-off would occur if, as forecast, another Euro crisis were to occur over the next 18 months. A

worst-case scenario envisages flat, or even declining, exports in that period. A base case foresees a

significant decline in export growth from what occurred during the first eight months of FY12. Taking

7

account of the projected import growth of the EU and US in 2012 and 2013, the share of imports from

Bangladesh and the actual export performance over the first eight months of fiscal 2012, the export

projection for Bangladesh is

Table: 01

Projected Exports in FY12 and FY13

(Without policy adjustments)

FY11(Actual) FY12(Projection) FY13(Projection)

Exports (In Million

USD)

23,008 25079 28088

Growth % 41.7 9.0 12.0

Source: World Bank Staff Estimate

Imports

Growth in import payments may slow. Petroleum and capital goods (metals and machineries) comprise

about 37 percent of total imports to Bangladesh. Based on the experience of the last global economic and

financial crises, a Euro crisis would reduce petroleum and metal prices. In fact, payment for oil imports

declined during October-December 2008 (Figure 14). Effects of a Euro crisis on Chinese consumption of

these commodities would also determine the exact fall in their prices, and Chinese growth is already

slowing down. The price of other commodities would fall for the same reason. These declines are likely

to be reinforced by the decline in intermediate inputs due to slower export growth. Therefore, growth in

the total import bill of Bangladesh would likely decline as it imports commodities that are price-inelastic.

Revenue growth could weaken. During the last global crisis, revenue growth in Bangladesh started

slowing from August, 2008 and lasted until July, 2009 before entering a period of strong recovery (Figure

15). A Euro crisis could impact total revenue through declining growth of nominal GDP, depending on

the tax buoyancy of the country. The crisis would likely reduce the growth of nominal GDP by reducing

the growth of real GDP and inflation.

8

Table: 02

Projected Revenues in FY12-13

(Billion Taka)

FY11 FY12 FY13

Actual Budget Passive Active Active

Direct Tax 231.2 275.6 277.4 292 379

Indirect Tax 531.8 682.2 642.4 680 829

Total Tax Revenue 763 957.9 919.8 972 1208

Tax Revenue Growth

%

22.1% 25.5 20.6 27.4 24.3

Nominal GDP Growth

%

13.4% 14.2 16.6 16.4 16.7

Source: World Bank Estimate

Overall Macroeconomic Impact

Bangladesh has very little room for maneuver. In the worst-case scenario, slowdown in remittance

reduces private consumption growth, uncertainties with respect to global outlook reduce private

investment growth, and export growth is directly affected by an EU recession and slower growth in the

US. A decline in export growth also reduces import growth. Under these conditions, GDP growth in

FY12 is estimated to have declined to 6.3 percent. The implied macro balances, particularly fiscal deficit

at 4.9 percent of GDP and domestic financing at 3.6 percent of GDP leave very little room for maneuver.

Bangladesh cannot afford to see reserves depleting further; it cannot allow more subsidies because the

deficit is being financed domestically and is crowding out the private sector, and monetary financing of

the deficit has already been over-used.

Quantitative adjustment is needed. This would require macro policy measures on the following fronts:

a tightening of monetary policy, increased exchange-rate and interest-rate flexibility, scaling back of

energy subsidies, and measures to contain risks to financial-sector stability. These will restore investor

and consumer confidence leading to higher consumption growth and investment growth. It will also

contain the decline in the export growth rate, thus enabling the economy to maintain 6 percent-plus

growth.

9

The impact on inflation in Bangladesh will depend on the extent to which global commodity prices

soften as a result of recession in the Euro zone. Given the time lag in the transmission of international

commodity price changes to changes in domestic prices, the impact is more likely to be visible in FY13.

If a deep recession in Europe were to spill over to slow growth in China and India then international

commodity prices could decline noticeably, leading to a decline in inflation in Bangladesh in ways similar

to that experienced in 2009. In Bangladesh, the difference this time is rising non-food inflation which has

constrained space for stimulus packages in response to the crisis. Another key difference is the resilience

of international oil prices around US$100-US$110 per barrel, despite recession in Europe, weak demand

in the US, and growth slowdowns in China and India. This is additional bad news for Bangladesh because

it removes the mitigating effect on the balance of payments and prices that global recession brought in

2009 for net oil importers.

Economic Performance in Fiscal Year 2012-13

Investment Scenario: Signs of Deceleration

As mentioned earlier that the current macroeconomic performance including the monetary policy

stance would entail investment slowdown leading to economic growth trade-off. A brief review

of a number of direct and indirect indicators of investment flow shows such slowdown is

gradually setting-in in FY2011-12. Such apparent deceleration comes in the backdrop of

stagnating level of private investment as reflected by its share in the GDP for the last five years.

For example, private investment-GDP share in FY2010 and FY2011 was 19.4 per cent and 19.5

per cent respectively.

The most direct measure of deceleration of investment is exposed by decreasing trend in

industrial term loan disbursement. During the first six months (July- December) of FY2011, the

growth of disbursement of term loan was 34.2 per cent – the comparable figure for FY2012 is

only 2.3 per cent. In contrast, the recovery rate of disbursement was almost 21.9 per cent during

the first half of FY2012. This resulted in a net outflow of resources on account term loan

transactions, whereas during the corresponding period in FY2011 there was a net inflow of

10

resources on this account. While the net outflow remains valid for all three categories of

industries, namely large, medium and small, it is the large scale industries which has experienced

a negative growth in disbursement – (-) 5.7 per cent during July- December 2011).

The downward trend in term loan disbursement to the large-scale industries is paralleled by

slower growth rate of import of capital machinery in FY2012. Capital machinery imported

during July-December period of FY2012 shows a growth rate of 3.1 per cent over the

corresponding period of FY2011. The comparable figure for FY2011 was as high as 28.7 per

cent. Relevant figures relating to opening of letter of credit (L/C) also indicate less than

encouraging prospect of future investment. Growth of fresh L/C opening during July- December

2011 was (-) 8.7 per cent for industrial raw material, and (-) 35.0 per cent for capital machinery

over the same period of FY2010.

Changes in level of primary energy consumption may be considered as a proxy indicator of

investment trend. A stagnating trend in gas consumption may be observed in July-November

period of FY2012 in comparison to the preceding comparable period. For example, gas

consumption for captive power generation reduced to 1,386 million cubic meter (July-November

2011) from 1,419 million cubic meter (July-November 2010). On the other hand, gas

consumption in the

Industry Sector, marginally increased from 1,375 million cubic meter in FY2011 (July-

November) to 1,396 million cubic meter in FY2012 (July-November). The state of gas

consumption is acting as a deterrent of existing capacities utilization as well as a constraint on

expansion of capacities.

The above cited indicators embody some of the proximate measures of investment in the

economy. The only direct measure concerning investment flow relates to FDI and capital market.

Review of relevant statistics suggest that net FDI during the first half of FY2012 increased to

USD 431 million from USD 342 million, i.e. by 26 per cent. However, the overwhelming part of

the incremental inflow was located in the export processing zone (EPZ), where there is little or

no gas and electricity supply constraint. The growth of FDI in the domestic tariff area was only

2.6 per cent. Investment through issuance of IPOs in FY2012 remains low – a total of five

companies have raised Tk. 588.9 crore as capital which was 58 per cent less than the comparable

period of the previous year. Good part of it is, companies involved in the real sector raised more

fund in the current fiscal year.

11

GDP Growth Prospect

GDP growth target for FY2012 has been set at 7.0 per cent. Incidentally, in all the three years

(FY2006, FY2007 and FY2011) when ‘six-and-half per cent’ GDP growth has been achieved,

manufacturing sector contributed about one-fourth of the incremental growth. In these years

agriculture sector provide more than one-sixth, while services sector contributed a little less than

half of the incremental growth. How is the scenario upholding in this regard in FY2011-12? To

seek answer to this question, we may examine the performance of the two main real economic

sectors, namely crop production and manufacturing.

During FY2012, production of Aus was robust as it recorded 9 per cent growth. However, as we

know, share of Aus in total food grains production is quite small, i.e. only 6.2 per cent. On the

other hand, Aman accounts for 37 per cent of total food grains supply. However, Aman

production in FY2012 (12,798 MT) had been almost equal to that of FY2011 (12,791 MT).

Under the circumstances, Boro will have attained more than 6.0 per cent growth to ensure

adequate contribution of agriculture sector to achieve a six-plus GDP growth. Given the trend

growth rate, such a feat will be very unlikely to be achieved.

Industrial output during the first half of the current fiscal year has been impressive, thanks to the

buoyant performance of the export-oriented industries. The Quantum Index of Production (QIP)

for large and medium industries grew by around 11.5 per cent and small industries – 10.6 per

cent. However, review of part trends suggests this level of growth may not be adequate to

achieve required manufacturing growth to attain the GDP growth target beyond 6.0 per cent.

Given the volatile global situation, it is difficult to confirm with certainty that export-oriented

industries will continue to perform at high level. The confidence level further diminishes as we

recall the decelerating trend in investment and the unsettling energy situation. Whatsoever, a six-

plus GDP growth rate, at the margin, will be seized by incremental growth of the manufacturing

along with other sub-sectors of the industrial sector, i.e. construction, electricity and extractive

industries (e.g. gas and coal) The discussion on annual GDP growth rate in FY2012, however,

needs to be situated in the context of the medium targets set by the SFYP. The SFYP envisages

that the GDP growth rate will increase sequentially from 7.0 per cent in FY2012 to 8.0 per cent

by FY2015. In this connection, breaking out of the 6.0 per cent growth trajectory becomes more

important than repeating the benchmark. In this connection, catering to the incremental

12

investment requirement through an expansionary fiscal stance becomes imperative. Regrettably,

the investment scenario has suffered a setback in FY2012. Annex Table 7.2 reveals that most

Indicators relating to public finance, monetary policy, capital market and external sector have

deteriorated since our last review in November 2011. Why did this happen, notwithstanding the

declared policy objectives of the present government? One may mention two sets of basic

reasons in this regard. First, the current government during the three years refrained from making

any serious attempt for structural reforms to address the deficits regarding macroeconomic

management and development policy implementation. The reform measures pursued by the

current government are mostly initiated by earlier regimes (including the present government in

its earlier incarnation). A good example of such incremental reforms may be observed in the

operation of NBR. The government did not initiate and deepen any structural reforms including

those for building the implementation capacity of the line ministries, for devolution of economic

power to the local governments, for streamlining public expenditure portfolio including its

productive sectors-related components, and for incrementally accessing traditional and non-

traditional resources (both debt and non-debt creating ones). Indeed, a striking example in this

regard will be the paralytic state of privatization. During the last three years, not a single of the

22 enlisted enterprises has been privatized as well as no share of any SoEs has been offloaded in

the capital market notwithstanding numerous time bound declarations. In the energy sector,

indecision regarding use of domestic coal reserve was appalling. The lack of reform of the civil

service has hurt the development administration.

The second set of factors which have held back the possible breakthrough of the Bangladesh

economy to a higher growth trajectory relates to weak macroeconomic management particularly

in the area of resource mobilization, allocation and utilization. Indeed, inability to step up

resource management at an enhanced level inhibited the economic growth prospect. As a result,

the ambitious development programs remained resource starved, while large volume of

committed foreign aid aged in the pipeline. Indeed, we have come to such a stage when the

country is failing to hold its regular annual meeting with the development partners. Furthermore,

as mentioned earlier, lack of coordination among relevant parts of the government coupled with

diminished policy leadership by the Finance Ministry has significantly reduced effectiveness of

the macroeconomic management and implementation of economy-wide policies. Lack of

13

structural reforms also greatly diminished the fiscal space for maneuverability by the

government.

In this context, it will be interesting to observe how the government designs its penultimate

budget of its present tenure (in June 2012). Will it try to consolidate its achievements and

promote structural reforms to make a qualitative difference in economic governance for

achieving higher level of inclusive growth? Alternatively, in the face of the growing adverse

circumstances, will the government resort to a set of populist measures having little significance

for strengthening growth fundamentals of the economy? In the coming months it will become

apparent whether Bangladesh will be able to transcend into a higher level of economic growth as

it has done sequentially in the last two decades.

MONETARY POLICY

Maintaining price stability, creating effective employment and promoting economic growth are

the three policy objectives that any central bank in the world would like to achieve, and

Bangladesh Bank is no exception. However, an inherent trade-off between price stability and

promotion of real GDP growth with high employment cannot be undermined25, and thus may not

be possible to achieve them simultaneously more often than not. Accordingly, a central bank

requires to dramatically prioritizing between its core policy objectives, namely maintaining low

inflation and accelerating economic growth. Successive versions of monetary policy formulated

by Bangladesh Bank over the years reiterated economic growth as its core policy priority.

Nevertheless, the monetary policy in FY2011-12 seems to have assumed controlling of inflation

as its core objective, even at the cost of forgoing economic growth. Measures taken as a part of

the contractionary monetary policy are yet to make any visible mark. Indeed, the current

monetary policy stance may undermine prospects for investment and economic growth without

commensurate relief in inflationary pressure.

14

Inflation

As in the previous fiscal year, inflation continues to remain a major concern for the economy

during the first half of FY2012. General inflation reached to 11.6 per cent in January FY2012,

way above the target of 7.0 per cent and last year’s figure of 8.8 per cent. No wonder the recent

monetary policy indicated that the average inflation will be no less than 9.0 per cent in FY2012.

When compared with her South Asian neighbors, Bangladesh tops the list in terms of having the

highest rate of inflation in the current fiscal year. India, Pakistan, Sri Lanka and Nepal managed

to bring down their inflation rates from 9.48 per cent, 13.9 per cent, 6.2 per cent and 7.5 per cent

in January FY2011 to 6.55 per cent, 10.1 per cent, 3.8 per cent and 6.8 per cent, respectively in

January FY2012.

Since the mid-2000s price level of food items became the dominant contributor to inflation in

Bangladesh. However, contribution of food inflation in FY2012 (July-January, FY2012) to the

overall inflation declined to 64 per cent from 75.8 per cent in FY2011 (Table 4.1). Pointto- point

food inflation started to slow down since July 2011, thanks to reduction of prices in the

international market as well as a good harvest of Aus. On the other hand, non-food inflation

remained stubbornly high and exceeded food inflation in the first seven months of FY2011-12

due to fuel price hike and its knock on impact on other sectors including transportation fare and

housing.

Table: 03

Contribution of Food and Non-Food Items to General Inflation (In Percentage)

Year General

Inflation

Food

Inflation

Non-food

Inflation

Contribution of

Food Price

Changes to

Inflation

Rice Price

Changes to

Inflation

Non-food Price

changes to

Inflation

FY2010 7.31 8.53 5.54 68.66 23.45 31.34

FY2011 8.79 11.33 4.15 75.84 25.91 24.16

FY2012 11.35 12.35 9.68 64.02 21.87 35.98

Source: Bangladesh Bank Data

Growth rate of Export

15

The remarkable growth in export earnings in FY2010-11 started to slowdown in FY2011-12 and

gradually fell somewhat short of the target set for the year. While export of the readymade

garments (RMG) products, which accounted for almost 80 per cent of Bangladesh’s total export,

paced ahead of the target, non-RMG exports failed to match this performance. It is a matter of

some concern that export of knit RMG has underperformed in the first seven months of FY2011-

12 (July-February), registering 8.7 per cent growth; in contrast, woven garment export posted a

rise of 22.2 per cent (Table 6.1). What is somewhat in a welcome trend, despite of the crisis

spreading over the Euro zone, total exports to the EU- 27 countries posted a 17 per cent growth,

while that for export of RMG was 19 per cent.44 This was attained even as the crisis struck EU

economies such as Spain, Italy and Belgium.45 The revised rules of origin under the EU-GSP

scheme, which particularly favor export of woven wears, may have contributed to this export

surge in the EU. In contrast to the EU, export to the US market is in a weaker situation. RMG

export in the US market posted an insignificant growth of 0.3 per cent during the first seven

months of FY2012. Though growth of total RMG import by US in the first half of FY2012 was

low (4.5 per cent), some major competitors of Bangladesh, e.g. Vietnam, Cambodia, Indonesia.

Economic Performance in Fiscal Year 2012-13

Overview

In line with global economic trends, Bangladesh has experienced two volatile years (FY2008‐09

and FY2009‐10) when its economic growth was restrained below 6.0 per cent level (see Table

1). The first one, FY2008‐09, was the year of global financial and economic crisis. In the face of

fall in global demand commodity prices as well as domestic inflationary trend declined

considerably. Incidentally, during this period, Bangladesh economy not only benefited from low

prices of imported items but was also able to avoid negative pressure on its export of goods and

services.

On the other hand, in the next year (FY2009‐10), the impacts of the global economic and

financial crises started to have important consequences for the Bangladesh economy. Export

revenues and remittance income growth started to decelerate, while the domestic inflationary

trend took an upturn in consonance with the international market. A visible improvement in

16

public investment (in terms of ADP implementation as per cent of GDP) has also been a

promising feature of the last fiscal. However, over these two years Bangladesh remained an

underinvested country. The investable surplus (reflected by the gap between national savings and

total investment) could not be made use of due to the lack of domestic infrastructure. Growth in

manufacturing sector (and hence in industry sector) remained modest. On the other hand, strong

growth in agriculture sector helped maintain the GDP growth at respectable level and expansion

of safety net programs provided some protection to the living standard of the marginalized

groups.

Macroeconomic management in FY2010‐11 thus had to confront the twin tasks of (i)

accelerating the GDP growth by energizing domestic investment and responding to the lagged

impact of the global financial crisis with its demonstrated adverse consequences for

Bangladesh’s increasingly globalizing economy and (ii) maintaining macroeconomic stability to

aid a broad‐based and inclusive economic growth.

Table: 04

Indicators Actual Planned

FY09 FY10 FY11

Real Growth (%) 5.7 5.8 6.7

Agriculture Sector 4.1 4.7 NA

Industry Sector 6.5 6.0 NA

National Savings (%

of GDP)

29.6 28.8 NA

Gross Investment (%

of GDP)

24.4 25.0 26.4

Total govt. outlay (%

of GDP)

14.3 13.8 16.9

ADP (% of GDP) 3.1 3.7 4.9

ADP as % of total

govt. outlay

21.7 27.2 29.0

Inflation (12 month

annual average %)

6.7 7.3 6.5

17

Export (% change) 10.1 4.1 15.0

Import (% change) 4.2 4.1 16.0

Remittances (billion

USD)

9.7 11.0 14.0

Source: Estimated from Ministry of Finance (2010 and 2010a) and Bangladesh Bank (2010).

Inflation and Monetary Policy:

In recent years, successive monetary policies in Bangladesh have tried to facilitate growth

acceleration with an accommodative monetary policy without losing the focus on inflationary

expectations. No wonder, the emerging inflationary pressure has drawn considerable attention

from the monetary authority. In this connection, one may point out that the current inflationary

phenomenon is very similar to the one experienced by Bangladesh during 2007 and 2008, when

inflationary trends were driven by the upturn in international commodity prices in addition to

supply‐side constraints and distortions in the domestic supply chain. One can readily observe

that the current inflationary trend is predicted by three factors.

Chart: 01 Inflation rate comparison

18

Oct'08 Oct'09 Oct'100

2

4

6

8

10

12

14

16

18

20

BangladeshIndiaPakistan

Source: Bangladesh Bank

Rate of Inflation compared to Neighboring countries

(a)The overall inflation is driven by food inflation. Given this, demand side management can

hardly work given the inelastic nature of demand for food items. Thus it would be advisable to

use apart from strengthening public safety net programs to protect the income disadvantaged

groups and ensure incentives to boost domestic food supply.(b) International price hike – as a

small open economy, Bangladesh cannot influence the global price level, and hence, providing

strategic and effectively delivered subsidy remains one of the few viable choices to protect

competitiveness of the economy. (c) Information asymmetry, lack of infrastructure and weak

institutional capacity – there is no shortcut solution to these issues other than facilitating

information flows, strategic market interventions and effective market (global and domestic)

monitoring.

In recent months, the central bank is discretely moving towards demand side management with a

soft contractionary stance. For example, for the second time over the last six months Bangladesh

Bank has adjusted its policy rates to squeeze credit expansion ability of the commercial banks.

The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) have been increased by 0.5

percentage point (to 6.0 per cent and 19.0 per cent respectively), whilst SLR for Islami banks has

also been raised by 1 percentage point to 11.5 per cent, applicable from 15 December 2010.22

19

CPD estimate suggests these revised rates may result in a withdrawal of about Tk. 2,000 crore

from the market (8.0 per cent of the prevailing excess liquidity). Given the recent signals

alluding to some turnaround in the investment, one wonders what these measures will mean

regarding credit availability for servicing private sector demand. High level of excess liquidity in

the banking sector while being on the slide also indicates space for credit expansion. Over the

first five months of FY2010‐11 the level of excess liquidity has declined steadily (see Figure 1).

Excess liquidity of the scheduled banks stood lower at Tk. 24,757 crore as of end November

2010 as against Tk. 34,500 crore as of end June 2010, i.e. a decline by 28.0 per cent. This

consistent fall of excess liquidity may have been compounded by several factors. First, the

industrial credit demand experienced acceleration.23 Second, soaring global commodity prices

coupled with higher demand for import of capital machineries and intermediate goods, resulted

in higher money demand for financing of the imports. Third, a significant part of the money

supply has also been diverted to the capital market for more lucrative returns. While the first two

factors mentioned above are creating legitimate demand, the third factor reflects operational

failure on the part of concerned banks. Under such circumstances, the increase in policy rates put

severe pressure in the call money market. The call money interest rate shot up to as high as 175 ‐

180 per cent as the contractionary stance came into effect. The central bank also had to act

immediately by injecting additional money in the market through repo.

Export Situation

In the backdrop of the low export growth of FY2009‐10 (‐7.0 per cent), the robust performance

during the first five months of FY2010‐11 is indeed encouraging. Export registered a 35.8 per

cent growth in this period. This growth in export was shared by both RMG and non‐RMG

sectors such as, raw jute, frozen food and leather products (see Table 4). However, it is to be

noted that this high growth was against the low benchmark of the comparable period of the

previous fiscal year. During December‐June FY2009‐10 export posted a 12.1 per cent growth

which implies that subsequent growth over the next few months of FY2010‐11 will need to be

estimated over higher benchmark figures.24

20

RMG export growth during the first five months of FY2010‐11 was an impressive 36.4 per cent

while non‐RMG posted a 33.7 per cent growth.25 Over this period, export has been able to pace

ahead of the target set for the current fiscal year.26 Achieving export targets has acquired

enhanced importance given the deceleration in the trade balance of the country.

Table: 05

Product Growth

Target for

FY2010‐11

Growth

Jul‐Nov

FY11

Growth

Jul‐Nov FY10

Required

growth for

Dec‐Jun FY11

RMG 10.0 36.4 -6.7 -5.9

Knit 10.0 36.9 -.57 -7.8

Woven 10.0 35.8 -7.8 -4.1

Non RMG 28.2 33.7 -8.1 24.9

Raw Jute 30.0 68.2 34.7 -0.2

Total 14.2 35.8 -7.0 1.1

Source: Estimated from EPB (2010).

The observed robust growth of RMG export during the early months of FY2010‐11 continued to

remain volume‐driven in view of heightened demand in major importing countries. However, in

view of the significant rise in cotton price since the end of FY2009‐10, there has been a hike in

production cost of RMG items. This is perhaps yet to be reflected in the current export figures

since most of the export orders predate this rise.27 It is conceivable that future prices will reflect

this and future growth of RMG will, at least in part, be value‐driven. Non‐RMG export growth

was mainly volume driven (except for leather). High price of raw jute in the domestic market

should have led to a value driven growth in the jute export, but a closer scrutiny revealed a

decline in unit price of exported raw jute.

A number of recent events allude to further opportunities to boost the export sector. First, the

European Union (EU) has revised the Rules of Origin (RoO) under generalized system of

preference (GSP) for LDCs allowing single‐stage processing for manufacturing RMG products.

21

This will allow duty‐free export of RMG even when the fabric is imported. Exporters of woven

RMG will be the major beneficiaries of this change in the RoO. This will help continue

Bangladesh’s current good performance in the EU apparels market and will likely lead to a shift

in the composition of apparels in favor of woven‐wear. The amended RoO will also have

positive impact on production of higher value‐added items. The changed RoO for non‐RMG

items (a 30 per cent domestic value addition in most cases) will also hopefully play a conducive

role in promoting export of non‐RMG items to the EU. Second, Bangladesh’s export of apparels

to Japan has seen significant growth in recent times. The envisaged change in the RoO for

knitwear (from three to one stage conversion) should allow Bangladesh to further strengthen her

position in the Japanese market.29 Third, it has recently been agreed, on principle, that India will

remove 61 items from its existing sensitive list for Bangladesh, of which 47 are RMG items

(both knit and woven). This, when implemented, will help Bangladesh to increase her export to

the Indian market. Fourth, duty‐free cotton imports from India through Benapole port has

resumed recently (after six months of suspension) which is expected to allow weavers to access

yarn at competitive price. Fifth, as global recovery from the financial crisis gain pace, global

demand of Bangladesh’s exportable goods has also been on the rise. During July‐ October

FY2010‐11, Bangladesh’s RMG export to US market registered a 21.6 per cent growth which

was (‐) 9.8 per cent over the comparable months of FY2009‐10. Other competitors of

Bangladeshi RMG exporters such as Cambodia, Vietnam and China also were able to post high

growth rates for exports to the US market. In the EU market, Bangladesh posted a 20.2 percent

growth in RMG export during July‐September FY2010‐11. China and Vietnam posted similar

growth while

Cambodia’s growth was relatively low at 10.4 per cent. It needs to be mentioned here that, unlike

the other three competitors for which this growth was achieved over a rather low benchmark,

Bangladesh posted such high growth over the 7.6 per cent growth registered during the

comparable months of the previous fiscal.

INVESTMENT SCENARIO

22

After declining for four consecutive years, implemented Annual Development Program (ADP) as

a percentage of GDP demonstrated improvement, albeit marginal, in FY2009‐10 and stood at 3.7

per cent (as against 3.2 per cent in FY2008‐09). This was underpinned by the ADP expenditure,

showing an impressive growth of 31.8 per cent over the actual ADP expenditure in FY2008‐09.

However, the level of ADP delivery in general remains far from adequate given the overall low

level of investment in Bangladesh (24.3 per cent of GDP), apart from the longstanding doubts

with regard to its quality. For FY2010‐11, an ADP of Tk. 38,500 crore has been adopted, which

would be 4.9 per cent of the targeted GDP for the fiscal year (Figure 5). It may be recalled here

that the ADP‐GDP ratio has steadily declined from the peak of 6.5 per cent of GDP in FY1999‐

00. The programmed ADP of FY2010‐11 is 26.2 per cent larger than the original ADP of

FY2009‐10 and 48.5 per cent larger than the actual ADP of FY2009‐10. Thus, full delivery of

the current ADP constitutes a critical challenge for the government.

Implementation status observed during the first five months (July‐November) of FY2010‐11,

however, does not depict encouraging trend. Compared to 22.6 per cent implementation level

achieved during the July‐November period in FY2009‐10, a lower level of expenditure, i.e. 20.4

per cent, has been recorded during the corresponding period of the current fiscal year.34 Lower

budget deficit that has been experienced during the early months of the current fiscal year (see

Section 2) reflects low expenditure on ADP. This also implies that a phenomenal improvement

in expenditure trend (a growth requirement of 61.1 per cent) needs to be attained over the

remaining seven months in order for the targeted ADP to be realized in full. The recorded

slowdown is largely due to the comparatively lower utilization of the project aid component of

ADP financing. While utilization of local currency improved by 1.4 percentage point to 24.1 per

cent, off take of aid component declined to 14.8 per cent during the first five months of FY2010‐

11 from 22.6 per cent in the previous year. Lower contribution of foreign financing that has been

observed in financing the budget deficit bears the marks of such low utilization of the project aid

component in the ADP.

Economic Performance in Fiscal Year 2009-10

23

The newly elected government led by the Awami League assumed power on January 6, 2009 and

presented its first budget in June 2009. If macroeconomic management in FY2008-09 was shared

equally (in terms of duration) by the CTG (first half) and the Awami League-led government

(second half), governance of the economy in FY2009-10 has been the sole responsibility of the

new government. Bangladesh economy was able to navigate the turbulent waters at a time of

heightened global crisis, with commendable success, registering a 5.9 per cent GDP growth in

FY2008-09. Both the CTG and the new government ought to share this credit. However,

FY2009-10 started its journey at a time when lagged impact of the crisis, as was apprehended

earlier, was becoming increasingly evident. A lower GDP growth target of 5.5 – 6.0 per cent was

fixed for FY2009-10 in view of the emerging challenges; on the other hand, ambitious targets

were set in line with the election manifesto of the Awami League, with higher targets for ADP,

counter-cyclical measures that entailed higher budgetary deficits and a slew of measures to

stimulate domestic demand and encourage investment.

In January, 2010 the government passed its first full year in power; meanwhile, Fiscal Year

2009-10 has also crossed its half-way mark. This Interim IRBD report of the CPD focuses

primarily on the assessment of the performance of major macroeconomic indicators during July-

December period of the ongoing FY2009-10. In the following sections an attempt has been made

(a) to present an analysis of the performance of the major macroeconomic indicators for the

duration of the first few months of FY2009-10 (where appropriate, calendar year 2009 has also

served as the reference point), (b) to identify the strengths and weaknesses that emerged from

this assessment and (c) to flag some of the emerging challenges that will need to be addressed by

policymakers if near tem (FY2009-10) and medium term targets in key sectors of the economy

are to be attained.

MONETARY SECTOR

Bangladesh has successfully cushioned itself from the headwinds of the ongoing financial crisis

and remained largely unaffected by the global economic slowdown mainly due to its limited

openness to short term capital flows, and the robust performance of its export sector and

remittance flows. However, the emerging challenges in an increasingly uncertain global

economic environment require that the monetary policy stance of the country play a key role in

stabilizing inflation, sustain a high trend of economic growth while maintaining an exchange rate

24

that would uphold the exporters’ and consumers’ interest. Taking note of the trends in the global

commodity markets, the Bangladesh Bank in its Monetary Policy Statement (MPS) for the first

half of the FY 2009-10 emphasized mainly on credit growth to support a targeted GDP growth of

6.5 per cent and reduction of money supply through a flooring of the Cash Reserve Ratio (CRR).

Since then a number of changes have taken place in the monetary sector of Bangladesh which

will need to be addressed in the upcoming MPS. The following sections provide an overview of

these changes in terms of a number of important indicators pertaining to the monetary sector

during the second half of FY 2008-09 and the first half of FY 2009-10.

Money Supply

Data shows that broad money (M2) has increased by 18.5 per cent in October 2009 compared to

October 2008 (Figure 3.1). On the other hand, during July-October period of FY 2009-10 the M2

increased by 5.42 per cent as opposed to 6.06 per cent during July-October of FY2008-09.

Reserve money (RM) as of October 2009 had increased by 26.04 per cent compared to October

2008 and the main determinant for this, net foreign assets component, has experienced an

increase of 68.59 per cent during the same period. Figure 3.1 shows the trend of M2 and RM

over the years.

Chart: 02

Source: Bangladesh Bank.

25

The decline in M2 can be related to the decline of inflation rate in FY 2008-09. Inflation rate

started to increase towards the end of 2007 and beginning of 2008 due to continued price hike in

the global commodity market and increase in domestic food prices. Since October 2008

inflationary pressure started to ease very slowly from a rate of 10 per cent inflation (12-month

annual average CPI, 1995-96 = 100) experienced in July 2008. Inflation rate continued to decline

throughout calendar years 2008 and 2009 due to a rapid fall of commodity prices including fuel

prices in the international market and bumper production of boro crop in the country. As a result,

inflation rate was well within the government’s projected rate of 9 per cent in the FY 2008-09. In

October 2009 the 12 month average inflation rate came down to 5.14 per cent compared to 9.8

per cent in October 2008. Point to point inflation rate also decline from 7.26 per cent in October

2008 to 6.71 per cent in October 2009.

Though food inflation was much higher than non-food inflation the increase in non-food

inflation had also been significant. The 12 month average non-food inflation, particularly due to

high price of petroleum products was as high as 7.31 per cent in January 2008 which came down

to 5.33 per cent in January 2009 and to 5.23 per cent in October 2009 as opposed to 5.89 percent

in October 2008. The 12 month point to point food inflation rate was 8.08 per cent in October

2008 which came down to 7.78 per cent in October 2009. The 12 month point to point non-food

inflation declined to 5.07 per cent in October 2009 from 5.95 per cent in October 2008. It is to be

noted that inflation rates in South Asian countries are also on a declining trend except for India

where in the first quarter of FY 2009-10 the economy has faced an inflation rate of 11.7 percent

compared to 4.7 per cent in Bangladesh, 10.7 per cent in Pakistan and 0.9 per cent in Sri Lanka.

Domestic Credit

Domestic credit which stood at Tk. 299545.10 crore in October 2009 experienced an increase of

Tk. 33364.6 crore or by 12.53 per cent from October 2008 (Figure 3.2). However, domestic

credit had increased by almost 23.4 per cent over the period October 2007 and October 2008. On

the other hand, domestic credit had only increased by 3.81 per cent over the period July-October

2009 compared to 7.04 per cent increase in July-October 2008. The increase in domestic credit

over the period October 2008-2009 and October 2007-2008 can be mainly attributed to private

sector credit which increased by 15.4 per cent and 24.7 per cent respectively over this period.

26

Public sector credit only increased by 3.72 per cent during October 2008 and October 2009, a

significant fall from the increase of 19.6 per cent it had experienced during October 2007 and

October 2008. Credit to the “other public sector” though showing an increase of 6.58 per cent

over the period October 2008 and October 2009 reflects a fall from 14.06 per cent over the

period October 2007 and October 2008.

.Chart: 03

Source: Bangladesh Bank

Excess Liquidity

One of the uncomfortable features of the monetary sector in FY 2008-09 had been the increase of

excess liquidity with the scheduled banks which continued to show up in the first few months of

FY 2009-10. When the first quarter of the FY 2009-10 is compared with the first quarter of

FY2008-09, the rate of growth of excess liquidity is only 1.0 per cent during June-October 2009-

10 as opposed to 60.56 per cent during the same period of FY2008-09. The lower growth rate of

excess liquidity in recent months is mostly because of the fact that excess liquidity has already

been on the rise, at a faster rate, since February 2009 and reached record high to Tk. 34,762.08

crore in June 2009 (Figure 3.3). In October 2009 excess liquidity stood at Tk. 35111.1 crore

compared to Tk.20853.9 crore for the corresponding month of the previous year. With high

excess liquidity and low demand for credit banks are investing in government treasury bills

which are considered to be risk-free investments. The rates of 91-day, 182-day and 364- day T-

bills were 7.87, 8.08 and 8.56 per cent respectively in October 2008 which declined to 2.14, 3.51

27

and 4.57 per cent respectively in October 2009. The impact of decline in excess liquidity has also

started to be reflected in call money rate which was 5.02 per cent in December 2009 compared to

1.71 per cent in June 2009.

Inflation

Inflation rate declined in 2009 due to a rapid fall in commodity prices including fuel prices in the

international market and bumper production of boro crop in the country. As a result, inflation

rate was well within the government’s projected rate of 9 per cent in the FY 2008-09. In October

2009 12 month average inflation rate had come down to 5.14 per cent compared to 9.8 per cent

in October 2008. The 12 month point to point inflation rate also declined from 7.26 percent in

October 2008 to 6.71 per cent in October 2009.

Chart: 04

Source: Bangladesh Bank

Even though average inflation has remained low at the end of October, 2009, there are

possibilities for inflation to gain pace in the coming months. Implementation of the pay scale of

28

the government employees could add to the inflationary pressure when fully implemented. First,

the implementation of the annual development program (ADP) is expected to gear up during the

second half of FY 2009-10 which is likely to increase the money in circulation. Second, the

recently observed higher trend in price of rice could continue. Third, high foreign exchange

reserves and robust remittance flow could also add to inflationary pressure.

Agriculture

Production and Procurement of Food grains

According to the final estimates of the Bangladesh Bureau of Statistics (BBS), total production

of food grains (rice and wheat) in FY2008-09 was 32.16 million metric tons (mmt) (Aus: 1.89

mmt, Aman: 11.61 mmt, Boro: 17.81 mmt and wheat: 0.85 mmt) which was 8.0 per cent higher

than the previous fiscal year (FY2007-08) (Figure 4.1). Higher production of food grains in

FY2008-09 was due to good harvest of rice in all the three seasons (Aus, Aman and Boro) and

wheat. Total rice production in FY2008-09 was 8.2 per cent higher than previous year.

The Department of Agricultural Extension (DAE) has set the operational target for production of

food grains in FY2009-10 at 35.25 mmt (Aus 2.49 mmt, Aman 12.74 mmt, Boro 19.00 mmt and

wheat 1.02 mmt) which was 9.6 per cent higher than actual production in FY2008-09. According

to the estimates of the BBS, total Aus production in FY2009-10 is 1.71 mmt, which is 9.7 per

cent lower than previous year (FY2008-09) but 31.3 per cent less than the targeted production

level of FY2009-10. Cultivation of Aman rice in some areas was affected by early drought in

2009. The MoA provided no-cost electricity for irrigation pumps in the drought-prone areas for

Aman cultivation. Farmers have by now harvested the Aman crop. According to the DAE, total

production of Aman rice is 13.10 mmt (B. Aman: 0.51 mmt, and Local and HYV T. Aman:

12.59 mmt), which is 12.83 per cent higher than actual production in FY2008-09 and 3.15 per

cent higher than the production target in FY2009-10. However, achievement of food grain

production target in FY2009-10 will mainly depend on the production of Boro rice, which

contributes more than 55 per cent of total food grains in Bangladesh.

Foreign Direct Investment

Foreign direct investment did not gain momentum in FY2009-10 as only USD207 million worth

of investment took place in July-October, 2009 which was about half that of the same period of

29

the previous year (USD402 million) (Table 4.7). Investment in EPZs during July-November,

2009 was in better shape (USD90.3 million) compared to the previous year (USD65.3 million).

In general foreign investment outflow has been low in 2009 in the backdrop of global financial

crisis. That domestic investment did not pick up has also contributed to this. As it happened last

year, the telecom sector may experience one or two incidences of acquisition in this year. This

would contribute to more FDI flow in the county. Similar is the case of portfolio investment;

foreign investors have yet to regain confidence in order to invest in emerging and developing

countries capital markets. However, local investors have been coming to the country’s capital

market in increasing numbers and with increasing investible resources.

FOREIGN INVESTMENT (IN MILLION USD)

Table: 06

January-October July-October

2008 2009 Percentage

Change

FY2008-

09

FY2009-

10

Percentage

Change

FDI 865 442 -48.9 402 207 48.5

Portfolio

Investment

-8 -140 -7 -29

Source: Bangladesh Bank.

From the balance of payment (BoP) perspective, FDIs’ contribution in January-June, 2009 was

rather disappointing (Table 4.8). FDI flow after deducting FDI related outward flow was

negative (USD-193 million) during the January-June, 2009 period since a total of USD428

million has been transferred out of the country by foreign companies during this period, against

new investment of USD235 million. A substantial part of the outward transfer had taken place in

terms of transfer of income by oil, gas and power companies, which was USD332 million. This

amount of outward transfers was more than the total FDI invested during January-June period. A

large outward flow of income of foreign companies also indicates that surplus generated by FDI

companies is not being ploughed back to the economy of Bangladesh.

30

During FY09 (July 2008 - June 2009), the Bangladesh economy attained 5.9 percent realGDP growth only mildly impacted by the ongoing global slowdown because of the limited

openness and strengthened domestic demand. Adequate domestic production in crops and

resilience of the service sector helped the real economy to remain steady. The Government and

the Bangladesh Bank continued to adopt policies in bringing the economic stability and higher

growth. Economic growth was also aided by slowed but still double digits sustained healthier

growth in exports and buoyant workers' remittances inflows. Inflation has significantly subsided

during FY09 due mainly to falling prices of crops in the domestic market because of higher

growth of crop production, and declining prices of most imported items in the international

market, particularly non-food items in the backdrop of ongoing global recession. The annual

average inflation declined to 6.7 percent in June 2009 from 9.9 percent in June 2008, while 12-

month consumer price inflation on point to point basis declined sharply over the same period to

2.3 percent. Broad money (M2) grew by 19.2 percent in FY09, which was higher than the 17.6

percent growth recorded in FY08 and also higher than the target under the program. Total

domestic credit grew by 15.9 percent, while credit to private sector increased by 14.6 percent in

FY09 as compared to 24.9 percent in FY08 reflected in weakening external demand and

entrepreneur's extra-cautiousness in investment activities in the face of global recession. In U.S.

dollar terms, export earnings recorded a slower but sustained healthier growth of 10.1 percent

during FY09, while the growth of import payments was low at 4.2 percent. At the same time,

remittances from non-resident Bangladesh nationals increased substantially by 22.4 percent. The

country's external current account balance continued to record a significant surplus with a

substantial increase in remittances more than offsetting trade deficit and services deficit. A

significant surplus in current account balance and a surplus in capital account more than

offsetting a deficit in financial account led to a sizeable surplus in the overall balance, which

helped improve the international reserve position.

31

Growth Performance

The 5.9 percent real GDP growth in FY09 was underpinned, on the supply side, by a strongly

performed growth in the agriculture and services sector, while growth in industry sector slowed

mainly due to weakening of export demand.

Table: 07

Numbers given as percentage

Particulars FY08 FY09

1. Agriculture 3.2 4.6

a) Agri. & Forestry 2.9 4.8

b) Fishing 4.2 4.0

2. Industry 6.8 5.9

a) Manufacturing 7.2 5.9

b) Power & Gas 6.8 4.5

c) Construction 5.7 5.7

3. Services 6.5 6.3

a) Transport &

Communication

8.6 7.6

b) Hotel & Restaurant 7.6 7.6

c) Health & social

works

7.0 7.6

GDP 6.2 5.9

Source: Bangladesh Bureau of Statistics

The agriculture sector achieved a robust growth of 4.6 percent in FY09, supported by favorable

weather and optimistic price expectation, overcoming adversities of the preceding year. The

crops and horticulture, and animal farming sub-sectors attained higher output growth in FY09

(5.0 and 3.5 percent respectively, against previous year’s 2.7 and 2.4 percent). The growth in

32

forest and related services sub-sector in FY09 remained at the same 5.5 percent level of FY08.

The fishery sub-sector achieved a slightly lower rate of growth of 4.0 percent in FY09 as

compared to 4.2 percent in FY08 due mainly to decline in shrimp exports – which resulted

mainly from the voluntary bar imposed by the Bangladeshi shrimp industry on the use of nitro-

furan, a banned antibiotic 1.10 The industry sector grew by 5.9 percent in FY09, was lower than

6.8 percent of FY08.

The growth in manufacturing sub-sector weakened significantly from 7.2 percent of FY08 to 5.9

percent of FY09. There was a sustained growth rate increase in the mining and quarrying sub

sector. The growth rate of power, gas and water supply sub-sector dipped to 4.5 percent in FY09

as compared to 6.8 percent in FY08, reflecting persistent inadequacy of physical infrastructure.

The growth rate in construction sub-sector in FY09 remained at the same 5.7 percent level of

FY08.

Overall, the services sector grew by 6.3 percent in FY09, slightly lower than 6.5 percent

recorded in FY08 and remaining well above the trend level. Despite some fluctuations, the

growth was fairly well spread in the different sub-sectors. Wholesale and retail trade is likely to

attain a somewhat lower growth of 6.4 percent in FY09 because of decreases in industrial

production, and import of commodities.

Transport, storage and communication subsector also made a lower growth in FY09.

Savings and Investment

Available data indicate that domestic savings-GDP ratio decreased from 20.3 percent of FY08 to

20.0 percent in FY09, and investment-GDP ratio remained at the same 24.2 percent level of

FY08 (Chart 1.1). The savings-investment gap as a percentage of GDP, correspondingly,

increased from 3.9 in FY08 to 4.2 FY09, financed by net factor income from abroad.

The pace of export growth slowed significantly but still maintained a double digits steady

growth, while import growth was low in FY09. However, remittances from workers abroad

showed a strong and steady growth. Exports (fob) increased by 10.1 percent from USD 14,151

33

million in FY08 to USD 15,583 million in FY09 and remittances from workers abroad recorded

22.4 percent growth from USD

7,915 million in FY08 to USD 9,689 million in FY09; while imports (fob) increased slowly by

4.2 percent from USD 19,481 million in FY08 to USD 20,291 million in FY09. As a result,

current account balance exhibited a notable surplus of USD 2,536 million at the end of FY09.

Expressed in proportion of GDP, export earnings decreased from 17.8 percent in FY08 to 17.4

percent in FY09, while import payments decreased from 24.5 percent in FY08 to 22.7 percent in

FY09. The export earnings achieved a low but still double digits growth in FY09, falling 6.4

percent short of the expected growth as global recession affected shipments mainly in the second

half of FY09. Exports in RMG sector achieved an impressive growth. Specifically, exports of

knitwear (41.3 percent of total exports) grew by a robust 16.2 percent in FY09, somewhat lower

than the target, driven by a 20.4 percent increase in export volume and 3.5 percent decrease in

unit price. Exports of woven garments (38.0 percent of total exports) - exceeding the expected

growth - posted a growth of 14.5 percent in FY09 due mainly to increase in volume by 15.2

percent.

Frozen food witnessed a 14.9 percent negative growth during FY09, and leather exports also

slipped by 37.7 percent. Exports of footwear, home textiles, textile fabrics and agricultural

products achieved growth, but fell short of targets. Exports of terry towels, handicraft, computer

services and chemical products increased over last year performance. This indicates a trend

toward diversification of the export base.

Import Growth

The lower growth of imports in FY09 (4.2 percent) was mainly attributable to the lower prices of

fuel oil and some other imported commodities in the international market, and decreased imports

of food grains because of good domestic harvest. Imports payments for capital machinery also

posted a negative growth during FY09, indicating sluggishness in investment activities.

34

Conclusion

The present assessment brings out a number of positive developments that have taken place in

the economy during 2009-2013 that are likely to unfold higher growth dynamics in the years. At

the same time, there are considerable downside risks that require bold decisions and quick

actions.

In order to move the economy to a higher growth path, significant efficiency and productivity

gains are required to meet the challenge of limited resources, particularly land (and thus food)

and energy. Moreover, effective implementation of reform agendas is imperative to strengthen

competitiveness, foster growth, and generate productive and decent job opportunities. Obviously

moderating inflation and raising economic growth require painful tradeoffs. However, this

should not be taken as an excuse for delays in implementing needed corrective policy measures

to the detriment of both short- and medium-term outlooks.

For Bangladesh to graduate to the middle income country group by 2021, would mean raising

income by an average of 7-8 percent per year in a sustained manner. This is challenging but not

impossible. The government seems to be aware of this challenge and is laying down the

foundations of major infrastructure projects. Similarly, if the projects such as management of

river flows and river basin development are designed and implemented in a sound manner, the

resultant improvement in natural endowments and environmental capital will reduce risks of

natural disasters as well as provide stimulus to food production. In agriculture, the need is to

adapt the production system to the ecology based on cutting edge knowledge and technology.

The manufacturing sector has to emerge as the major source of stimulus to raising GDP growth

for which export diversification, technology upgrade of SMEs to promote export linkages, and

promoting new sources of growth are major challenges.

For continuous improvement in the energy and power situation, there does not seem to exist any

quick fix solution unless the issue of primary fuel for electricity is resolved. In the short to

medium run, a feasible option is to go for coal-fired power stations for which optimal extraction

of coal from the domestic mines is an urgent necessity. In the longer run, other options may be

considered e.g. higher extraction of gas through proper reservoir management, nuclear power,

and renewable particularly solar power. Obviously, the need is to move to a new growth

paradigm capable of delivering the goals articulated in Vision 2021.

35

References

Bangladesh Bank 2012, Major Economic Indicators: Monthly Update. Dhaka, Bangladesh:

Bangladesh Bank. Available at: http://www.bangladesh-bank.org/econdata/openpdf.php?i=6

[Accessed 1st April]

Bangladesh Bank. 2012, Selected Indicators. Dhaka, Bangladesh: Bangladesh Bank. Available at

http://www.bangladesh-bank.org/econdata/openpdf.php?i=1[Accessed 1st April]

Ministry of Finance. 2012, Budget in Brief. Dhaka, Bangladesh: Finance Division, Ministry of

Finance, Government of Bangladesh. [Accessed 31st March]

Bangladesh Bank. Annual Reports 2009-2011. Dhaka: Bangladesh Bank.

CPD 2010 State of the Bangladesh Economy in 2009-10 and Outlook for 2010-11. Dhaka:

Centre for

Policy Dialogue (CPD).

CPD 2011 State of the Bangladesh Economy in 20010-11 and Outlook for 2011-12. Dhaka:

Centre for

Policy Dialogue (CPD).

CPD 2012 State of the Bangladesh Economy in 20011-12and Outlook for 2012-13. Dhaka:

Centre for

Policy Dialogue (CPD).

IMF 2012. World Economic Outlook Update. January. Washington, D.C.: International

Monetary

Fund (IMF).

World Bank 2012. World Economic Prospect. January. Washington, D.C.: The World Bank.

36