Proposed Program Loans People's Republic of Bangladesh: Public … · 2014-09-29 · the Government in undertaking a significant scaling up of SSNPs, effective gender targeting, and

Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 43157 September 2009

Proposed Program Loans People's Republic of Bangladesh: Public Expenditure Support Facility Program and Countercyclical Support Facility Support Program

CURRENCY EQUIVALENTS (as of 3 September 2009)

Currency Unit – taka (Tk)

Tk1.00 = $0.01448

$1.00 = Tk69.055

ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund ADP – Annual Development Program CPS – Country Partnership Strategy CSF – Countercyclical Support Facility DFID – Department for International Development EU – European Union GCC – Gulf Cooperation Council GDP – gross domestic product IA – implementing agency IFC – International Finance Corporation IMF – International Monetary Fund LCG – local consultative group MDG – Millennium Development Goal MOF – Ministry of Finance MTBF – medium-term budgetary framework NBR – National Board of Revenue NSAPR-II – National Strategy for Accelerated Poverty Reduction II OCR – ordinary capital resources PESF – Public Expenditure Support Facility PFM – public financial management PPP – public–private partnership PSC – program steering committee RTI – Right to Information SEDF – South Asia Enterprise Development Facility SMEs – small and medium-sized enterprises SSNP – social safety net program

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 begins on 1 July 2008 and ends on 30 June 2009.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General K. Senga, South Asia Department (SARD) Directors P. Heytens, Bangladesh Resident Mission (BRM), SARD A. Sharma, Financial Sector, Public Management and Trade Division,

SARD Team leaders S. Brunschwig, Senior Economist, SARD M. Z. Hossain, Country Specialist, BRM, SARD Team members F. Ahmed, Senior Governance Officer, BRM, SARD F. S. Begum, Social Development and Gender Officer, BRM, SARD G. Bhatta, Principal Governance Specialist, SARD K. Emzita, Senior Counsel, Office of the General Counsel S. Rahman, Economics Officer, BRM, SARD K. N. Shin, Senior Economist, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page LOAN AND PROGRAM SUMMARY i

I. THE PROPOSAL 1 II. THE MACROECONOMIC CONTEXT 1

A. Recent Economic Performance 1 B. Government Strategy 3

III. SECTOR ANALYSIS FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM 4 A. Problems and Opportunities 4 B. ADB Strategy and Operations 9 C. External Assistance and Development Partner Coordination 10 D. Rationale 11

IV. PROPOSED PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM 12 A. Impact and Outcome 12 B. Outputs 12 C. Important Features 16 D. Program Cost 17 E. Financing Plan 17 F. Implementation Period and Tranches 18

V. PROPOSED COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM 18 A. Country Context under the Global Economic Crisis 18 B. Government’s Countercyclical Development Program and Capacity Assessment 21 C. Poverty Impact 23 D. Impact, Scope, and Coverage 23 E. Financing Plan 24 F. Implementation Period 24 G. Justification and Estimate of Resource Requirements 24

VI. IMPLEMENTATION ARRANGEMENTS, BENEFITS AND IMPACT, AND RISKS AND SAFEGUARDS FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM AND COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM 26 A. Implementation Arrangements 26 B. Expected Benefits and Impact 30 C. Program Risks and Safeguards 31

VII. ASSURANCES 31 A. Specific Assurances 31 B. Conditions to Loan Effectiveness 32

VIII. RECOMMENDATION 33

APPENDIXES 1. Design and Monitoring Framework for the Public Expenditure Support Facility

Program 342. Design and Monitoring Framework for the Countercyclical Support Facility

Support Program 403. Sector Analysis 434. Development Coordination Matrix 505. Development Policy Letter and Policy Matrix for the Public Expenditure Support

Facility Program 546. Adjustment Costs 627. Development Policy Letter and Access Criteria for the Countercyclical Support

Facility Support Program 638. Debt Sustainability Analysis 699. List of Ineligible Items 7510. Monitoring Arrangements 7611. Summary Poverty Reduction and Social Strategy 80 SUPPLEMENTARY APPENDIXES (available on request) A. Problems and Constraints Analysis B. Social Safety Net Programs C. Poverty Analysis D. Public–Private Partnerships E. Summary of Legal Reforms F. Breakdown of Support for Social Safety Net Programs G. Access Criteria for the Countercyclical Support Facility Support Program H. Governance Risk Assessment I. Implementation Arrangements and Schedule J. Consultation and Participation Plan

LOAN AND PROGRAM SUMMARY

Borrower People's Republic of Bangladesh (Bangladesh) The Proposal Two facilities are proposed to support the reform program and

countercyclical development program of the Government of Bangladesh: (i) three loans totaling $244.85 million under the Public Expenditure Support Facility (PESF) Program to be disbursed in two tranches, and (ii) a loan of $500 million to be provided under the Countercyclical Support Facility (CSF) Support Program to be disbursed in a single tranche.

Classification

Targeting classification: Targeted intervention (TI-M) Sector (subsectors): Public sector management (public expenditure and fiscal management, economic and public affairs management, public administration); health and social protection (social protection). Themes (subthemes): Economic growth (promoting economic efficiency and enabling business environment, promoting macroeconomic stability); social development (other vulnerable groups); private sector development (public–private partnership, policy reforms), gender equity (gender equity in economic opportunities). Location impact: National (high).

Environment Assessment

Category C

Program Description The proposed PESF will support reforms for enhancing economic and

social policies essential for long-term growth as well as scaling up of social safety net programs (SSNPs). The proposed CSF will help the Government implement its countercyclical development program.

Rationale for the PESF and CSF

Sound economic management enabled Bangladesh to withstand major external shocks while sustaining its growth momentum. The economy was severely tested in FY2008 when it experienced repeated floods and the catastrophic cyclone Sidr, with major loss of life and destruction of property and crops; and the external shock resulting from surging petroleum and other commodity prices. Although Bangladesh reduced poverty significantly between 1991 and 2005, the country still remains poor—with an estimated 56 million people or 40% of population in poverty in 2005. While Bangladesh is on track to achieve the 2015 Millennium Development Goals target of reducing income poverty by half, income inequalities widened especially in the 1990s. Progress in poverty reduction has also been highly uneven across regions. Even without the global economic crisis, the development challenges in Bangladesh are daunting. Growth in exports and remittances decelerated significantly since October–December 2008 (the second quarter of FY2009). The economic slowdown is also affecting revenue

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collection. With more than 2.2 million workers directly engaged in the ready-made garments sector, and an equal number of workers employed in ancillary activities, the slowdown in exports translates into widespread poverty in both urban and rural areas. Further, slowdown in the growth of remittances will cause hardship for recipient households and deepen poverty. The decline in the number of workers leaving for overseas jobs will also create pressure on the already slack domestic job market. The Government's development agenda, which pays particular attention to economic stability, elimination of poverty, energy security, combating corruption, and good governance, reflects its concerns about the economic and social implications of the crisis, the prevailing high poverty incidence, and the effect of recent natural disasters. The Government established a task force to monitor national and global events, and provide prompt advice to enable decisions for mitigating the impact of the crisis. In April 2009, the Government announced a fiscal stimulus package for Tk34.2 billion ($495 million) for exports, agriculture, power, and SSNPs. The FY2010 budget affirms the Government's commitment to maintaining macroeconomic stability and undertaking fundamental policy and institutional reforms to attain pro-poor inclusive growth. A countercyclical development program in the form of additional fiscal expenditures was announced in the FY2010 budget in June 2009. The Government's countercyclical development program has four broad components: (i) a fiscal stimulus package; (ii) an expansion of the SSNPs; (iii) a substantial increase in the Annual Development Program; and (iv) introduction of a new public–private partnership (PPP) scheme. The Government is aware that putting the economy on a higher growth trajectory, and achieving rapid and sustainable poverty reduction will require large-scale investments well beyond what the Government can provide. More investment-enabling policy measures will clearly be needed to induce large-scale domestic and foreign investment. To ensure timely implementation of development programs, the capacity of line ministries will also need to be enhanced. In addition, ensuring continued flows of credit to the private sector, and strengthening the capital market, would help attract investors to close the investment gap. More support to small and medium-sized enterprises (SMEs) and the housing sector would also contribute to making growth more inclusive. In mitigating the adverse impact of the global economic crisis, the Government's emphasis is on protecting investments in human development through enhanced and effective spending on SSNPs. The crisis has prompted the Government to undertake policy reforms to ensure development momentum well into the future and to preempt hardships. Accordingly, support to the Government to deal with the impact of the global crisis, while also helping to address some institutional limitations, is proposed to be provided through the PESF and the CSF. The objective of the PESF is to accelerate reforms that

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are essential for higher long-term economic growth, while also improving service delivery for social protection. The CSF will supplement the PESF by providing support to scale up the Government's countercyclical development program.

Impact and Outcome The impact of the proposed PESF is to enhance pro-poor and gender-inclusive growth and improve living standards of the vulnerable populations. The objective of the proposed PESF is to support the Government to better address the adverse impact on the economy from external shocks as well as inherent weaknesses in the enabling environment for private sector development and social service delivery. The outcome of the PESF is a stable macroeconomic environment where private sector development is emphasized and where women and vulnerable populations have greater access to social services, including through effective gender targeting. The proposed PESF will support the Government to put in place policy actions in three areas: (i) delivering services effectively—by supporting the Government in undertaking a significant scaling up of SSNPs, effective gender targeting, and legal measures for greater say in ensuring quality and effectiveness of service delivery; (ii) developing a conducive investment climate—by strengthening the Government's ability to attract private investment, in particular through PPPs, in sectors critical to sustaining and accelerating economic growth; and (iii) strengthening the public financial management system—by helping the Government to increase fiscal space through enhanced efficiency and integrity in public spending, and higher revenue generation.

The impact of the proposed CSF is to contribute to Government's efforts to achieve higher growth and improve living standards given the country's exposure to external shocks. The objective of the proposed CSF is to help the Government implement its countercyclical development program for coping with the effects of the global crisis. The outcome of the proposed CSF is macroeconomic stability, higher public and private investment, and greater access to social services by women and vulnerable populations.

Financing Plan A. The proposed loans for the PESF are as follows: (i) Two loans totaling $144.85 million equivalent from the Special

Funds resources of the Asian Development Bank (ADB): (a) a “hard-term” Asian Development Fund (ADF) loan of $44.85 million equivalent, and (b) a “soft-term” ADF loan of $100 million equivalent. The ADF loans will both have a term of 24 years, including a grace period of 8 years; interest under the hard-term ADF loan will be at 1.6% per annum for the life of the loan while interest under the soft-term ADF loan will be at 1.0% per annum during the grace period and 1.5% per annum thereafter. Other terms and conditions will be set forth in the related draft Loan Agreements.

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(ii) A loan of $100 million from ADB's ordinary capital resources

will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 15-year term including a grace period of 3 years, and interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft Loan Agreement.

B. For the CSF, the proposed loan is as follows: A loan of $500 million from ADB's ordinary capital resources. The loan

will have a 5-year term including a grace period of 3 years, an annual interest rate equal to ADB's LIBOR-based lending facility plus 2.0%, and such other terms and conditions set forth in the draft Loan Agreement.

Program Period and Tranching

The implementation period for the PESF and the CSF is from October 2009 to December 2010. All policy actions and disbursements under the PESF will be implemented within this period. The PESF loans are proposed to be released in two tranches, subject to the Government meeting the conditions for release of the tranches. The CSF will be disbursed in a single tranche upon loan effectiveness.

Counterpart Funding The local currency generated from the proceeds of the PESF loans will

be used to finance adjustment costs under the PESF, including (i) scaling up of SSNPs, (ii) mainstreaming PPPs and supporting SMEs, and (iii) enhancing public financial management. The local currency generated from the proceeds of the CSF loan will support SSNPs.

Executing Agency The Ministry of Finance (MOF) Implementation Arrangements

The MOF will be responsible for the overall implementation of the PESF, including compliance with all policy actions, facilitating administration, disbursements, and maintenance of records. A joint secretary of the Finance Division, MOF, will act as the program director. The implementing agencies for the PESF will consist of the relevant ministries and agencies, as described in this report and recommendation of the President. The implementing agencies will be responsible for meeting the policy actions under their respective jurisdictions. A program steering committee (PSC) will be established and will be responsible for overall direction, guidance, monitoring, and oversight. Its members will include representatives not below the rank of joint secretary from all the relevant implementing agencies and the Economic Relations Division. The finance secretary will chair the PSC. The PSC will meet at least quarterly to discuss the progress of the facility and review macroeconomic conditions to ensure continued stability.

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The implementation arrangements for the CSF will be the same as those for the PESF, with the MOF acting as the executing agency. The implementing agencies—the same as those for the PESF—will be maintained for monitoring purposes.

Procurement and Disbursement

The loan proceeds will be used to finance the full foreign exchange costs (excluding local duties and taxes) of items produced and procured in ADB member countries, excluding ineligible items and imports financed by other bilateral and multilateral sources. The Government will certify its compliance with this formula with each withdrawal request. Otherwise, import documentation under existing procedures will be required. ADB reserves the right to audit the use of the loan proceeds and verify the Government's certification. The loan proceeds will be disbursed to the Borrower in accordance with the provisions of ADB’s Simplification of Disbursement Procedures and Related Requirements for Program Loans.

Program Benefits and Beneficiaries

Scaled up SSNPs will help to cushion the impact of the crisis; improve household well-being; and help reduce poverty through better nutrition, education, and improved opportunities to participate in the economy. Increased spending on SMEs, housing, and infrastructure will promote higher long-term growth, create jobs, and raise incomes. Other benefits include: (i) As a result of reforms supported by the PESF, the poor will be

empowered to claim and receive the benefits they are entitled to because of enhanced access to information and oversight. The Employment Generation Program for the Hardcore Poor will help improve economic opportunities.

(ii) The PESF and CSF will provide additional resources to help

expand SSNPs to also cover people who previously were not poor but who are hurt by the crisis, such as households highly dependent on remittances, laid off expatriate and factory workers in affected export sectors, women forced into low-paying and insecure jobs, and the large number of young people joining the labor market at a time of shrinking job opportunities.

(iii) The PESF and CSF will create fiscal space to enable the

Government to finance scaled up infrastructure investment and fiscal stimulus spending. These additional expenditures will help reduce the risk of unemployment and income loss in the immediate term, and also enhance long-term growth prospects without compromising macroeconomic stability or crowding out private investment.

(iv) Successful PPPs in infrastructure and social sectors over the

medium- to long-term will enable higher investment in social expenditures and broaden management capacity for infrastructure projects.

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(v) The results from performance monitoring and reporting systems will feed into the planning and budgeting process to ensure accountability on public spending and to control irregularities. Enhanced internal and external control measures and oversight will have been put in place to reduce the opportunities for corruption.

Risks and Mitigations

(i) A prolonged economic downturn would likely result in lower fiscal revenue and accentuate the risk of the budget deficit exceeding 5% of gross domestic product. This would lead to a correspondingly higher government borrowing requirement, which would be inflationary and seriously limit the availability of credit to the private sector. The countercyclical measures to support affected sectors and broaden access to credit for SMEs and women entrepreneurs will provide some relief to those most likely to be affected.

(ii) A further decline in remittances would have a negative impact on the livelihood of many rural households heavily dependent on such income. SSNPs targeting people with low income and no assets will mitigate this risk.

(iii) Leakages, poor targeting, and corruption could reduce the effectiveness of expenditures. However, actions taken under the PESF to enhance access to information for the poor and vulnerable groups and to strengthen oversight will help mitigate such concerns.

(iv) Limited absorption capacity could continue to constrain implementation of development projects. Government line ministries have been instructed to advance the preparation of project approval and procurement documents in FY2010 and their performance is being more closely monitored, which should help accelerate investment spending.

(v) Relief and reconstruction efforts in the case of natural disasters could potentially disrupt infrastructure investments and impose a heavy burden on government finances. The higher allocation in the FY2010 budget for the Fund for Climate Change and fiscal space created through the PESF and CSF would facilitate Government's response to such events.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the People's Republic of Bangladesh for the (i) Public Expenditure Support Facility (PESF) Program and (ii) Countercyclical Support Facility (CSF) Support Program.1 The design and monitoring framework for the PESF is in Appendix 1 and for the CSF in Appendix 2.2

II. THE MACROECONOMIC CONTEXT

A. Recent Economic Performance

2. The effect of the global economic crisis (global crisis or crisis) on the Bangladesh economy is significant. While limited exposure to the global financial system kept Bangladesh largely untouched by the first-round effects of the crisis, the country started experiencing significant deceleration in growth of exports and remittances from the second quarter of FY 2009 (i.e., October–December 2008). Since October 2008, the second round effects (slowdown in exports and remittances spreading to the broader economy) of the crisis have adversely impacted the real economy, as the global crisis transformed into a global recession. Growth in exports during FY2009 declined to 10.1% from 17.4% in FY2008. On a year-on-year basis, exports declined by 2.3% in April 2009, grew by only 4.3% in May, but declined again by 3% in June 2009 and a further 6.8% in July 2009. Growth in remittances, a key driver of growth in Bangladesh, started falling on a year-on-year basis from October 2008 (16% in that month) after growing at a monthly average of 43.5% during July-September 2008. Growth in remittances dropped to only 10.1% during February-April 2009, and after a brief spike in May–June 2008, fell to 8% in July 2009. The global economic slowdown is seriously affecting revenue collection⎯tax revenues in FY2009 (accounting for around 80% of total revenues) grew by only 10.7%, down from 27.3% in FY2008. 3. Prudent macroeconomic management in Bangladesh had contributed to achieving robust economic growth while maintaining internal and external balances until the onset of the crisis (Table 1). These results were achieved in the face of repeated natural disasters. Fiscal deficits remained less than 4% of gross domestic product (GDP) during FY2003–FY2007. Robust growth in exports and remittances underpinned steady current account surpluses between FY2002 and the early part of FY2009 (except in FY2005) and contributed to healthy foreign reserves. Inflation remained below 7% between FY2002 and FY2005, and slightly exceeded 7% in FY2006–FY2007. Because of the effects of the natural disasters and the rise in food and commodity prices in 2008, inflation shot up to 9.9% in 2008 and the fiscal deficit rose to 4.7% of GDP as a result of larger budgetary allocations needed to alleviate the effect on the

1 The PESF is the outcome of policy dialogue with the Government of Bangladesh to address critical constraints to

economic growth, social development, and good governance. Realizing the challenges in fulfilling its development agenda especially during the global economic crisis, the Government agreed to accelerate critical reforms that are being supported by the PESF. Building on the PESF reforms, the CSF supports social safety net measures under the Government's countercyclical development program.

2 The PESF follows the standard program loan format and the CSF is in accordance with guidelines for implementing the CSF (ADB. 2009. Enhancing ADB's Response to the Global Economic Crisis–Establishing the Countercyclical Support Facility. Manila). Processing of the PESF as a program loan with two management review meetings also enabled a detailed review of the Government's countercyclical development program to be supported by the CSF. While the core aspects of the PESF and the CSF have been discussed separately in the report and recommendation of the President (including the design and monitoring frameworks and the development policy letters), the sections such as on implementation, special features, benefits and impact have been presented jointly, reflecting their complementarity. In this report, the term "Program" refers to the PESF and the CSF jointly.

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poor. In FY2009, the inflation rate declined to 6.7% and the fiscal deficit is estimated to have declined to a little over 4%.

Table 1: Bangladesh – Selected Economic Indicators Item FY2005 FY2006 FY2007 FY2008 FY2009a A. National Accounts

1. GDP per Capita ($, current) 440.8 446.5 486.8 558.7 621.1 2. GDP Growthb (%, in constant prices) 6.0 6.6 6.4 6.2 5.9

a. Agriculture 2.2 4.9 4.6 3.2 4.6 b. Industry 8.3 9.7 8.4 6.8 5.9 c. Services 6.4 6.4 6.9 6.5 6.3

B. Price and Exchange Rate 1. Inflation Rate (average, %) 6.5 7.2 7.2 9.9 6.7 2. Exchange Rate (Tk/$, average) 61.4 67.1 69.0 68.6 68.8

C. Money and Credit 1. Broad Money (M2) Growth (%) 16.8 19.3 17.1 17.6 19.2 2. Private Sector Credit Growth (%) 16.8 18.1 15.0 24.9 14.6

D. Government Finance 1. Revenue/GDP 10.5 10.7 10.2 11.1 11.2 2. Expenditure/GDP 13.8 13.9 13.4 15.8 15.3 3. Overall Fiscal Deficit (3.3) (3.2) (3.2) (4.7) (4.1)

E. Balance of Payments 1. Export Growth (%) 14.0 21.5 15.8 17.4 10.1 2. Import Growth (%) 20.6 12.1 16.6 25.6 4.2 3. Current Account Balance/GDP (0.9) 1.3 1.4 0.9 2.8 4. Workers' Remittances ($ billion) 3.8 4.8 5.9 7.9 9.7 5. Foreign Exchange Reserves ($ billion) 2.9 3.5 5.1 6.1 7.5

F. External Indebtedness 1. Government Debt Outstanding/GDP 46.9 46.6 44.9 42.9 —

a. External Debt/GDP 30.5 30.1 28.3 25.5 23.2 b. Domestic Debt/GDP 16.4 16.6 16.6 17.4 —

2. External Debt Servicec (%) 4.8 4.1 3.6 3.2 3.0 ( ) = negative, — = not available, GDP = gross domestic product. a Estimates. b Based on constant 1995/96 market prices. c The ratios of debt service on medium- and long-term loans to total foreign exchange earnings from exports of

goods and non-factor services including workers' remittances. Sources: Asian Development Bank estimates; Bangladesh Bank; Bangladesh Bureau of Statistics; Export Promotion Bureau; and Ministry of Finance, Government of Bangladesh. 4. Bangladesh achieved an average real GDP growth of 6.2% during the period FY2004–FY2009, which is respectable but has been inadequate to achieve a major dent in the level of poverty, and lower than the 7% growth envisioned in the first national poverty reduction strategy.3 GDP growth in FY2009 is estimated at 5.9% (down from 6.4% in FY2007 and 6.2% in FY2008) even after countercyclical measures (paras. 6 and 8) due to the effects of the global economic slowdown, and GDP growth is expected to be yet lower in FY2010 (at 5.2% as compared to 5.9% in FY2009). Although agriculture has recovered, underpinned by favorable weather conditions and strong public policy support, and will be an important rebalancing factor, slower growth of exports and remittances had knock-on effects on industry and services in FY2009 that will continue into FY2010, through weaker external and domestic demand. The services sector will moderate due to the slowdown in industrial activities and trade as well as weaker private consumption due to the slowdown in remittance inflows. The growth of GDP is expected to be lower in FY2010 also on the basis of the lower growth in industrial term loans and sharp decline in the opening of letters of credit for capital machinery.

3 Government of Bangladesh. 2005. Unlocking the Potential: National Strategy for Accelerated Poverty Reduction.

Dhaka.

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5. Although Bangladesh made significant progress in poverty reduction between FY1991 and FY2005,4 the country still remains poor—with an estimated 56 million people in poverty in 2005. While Bangladesh is on track to achieve the 2015 Millennium Development Goals (MDGs) target of reducing income poverty by half, and has made progress in other indicators of well-being (such as for infant and child mortality, and has met the target for gender parity in primary and secondary schooling), income inequalities widened especially in the 1990s. In terms of calorie intake, although the incidence of poverty has declined in rural areas, it has increased in urban areas. Progress in poverty reduction has also been highly uneven across regions. B. Government Strategy

6. The global economic crisis began to have an impact on Bangladesh during the second quarter of FY2009, which coincided with the transition from a caretaker government to a democratically elected one. This transition also coincided with a general perception that Bangladesh may largely remain immune to the global crisis given its strong macroeconomic performance and limited exposure to financial contagion. However, as soon as the current Government assumed office in January 2009, the second round impact of the crisis became apparent. The Government promptly established a task force to develop a comprehensive information center, continually monitor national and global events, and provide prompt advice to help make the decisions needed to mitigate the impact of the crisis. The Government's first response to the crisis, announced in April 2009 (para. 74), was a Tk34.2 billion ($495 million) stimulus package for exports, agriculture, power, and social safety net programs (SSNPs).5 7. Cognizant of the economic and social implications of the crisis and the prevailing high poverty incidence, the election manifesto6 of the Government in late 2008 had already outlined an ambitious development agenda with particular attention to inclusive growth. The development strategy in the manifesto covers five key issues: (i) economic stability and control over commodity price hike, (ii) elimination of poverty and inequity, (iii) energy security, (iv) anticorruption, and (v) good governance. To align with these priorities, the Government is revising the National Strategy for Accelerated Poverty Reduction (NSAPR-II)7 prepared by the caretaker government in October 2008. No major overhaul is envisaged since the NSAPR-II also stresses strengthening SSNPs, creating job opportunities, ensuring regional balance in development, and facilitating decentralized growth. The emphasis in the NSAPR-II on improving governance, controlling population growth, strengthening focus on women's advancement, and ensuring environmental protection is also in line with Government priorities. 8. In its first budget (for FY2010) in June 2009, the Government provided its medium-term development agenda. The FY2010 budget attaches high priority to infrastructure, human resource development, and capacity building. It seeks to raise the level of investments by mobilizing more resources, with a major thrust on public–private partnerships (PPPs), and simplifying investment-related laws and regulations. Expansion of SSNPs, ensuring food security and addressing the effects of climate change are prominent features of the FY2010 budget. Based on the task force recommendations, the Government’s April 2009 stimulus

4 The latest Household Income and Expenditure Survey was conducted in 2005. During 1991–2005, the compound

poverty reduction rate per year is recorded at 1.3% although the rate of reduction in urban areas is faster than that in rural areas. During the period 2000–2005, income poverty was reduced from 48.9% to 40% (1.8% annually).

5 SSNPs collectively refer to Government programs to support those who are geographically, socially, and seasonally vulnerable (see paras. 13 and 14, and Appendix 3 for details).

6 Government of Bangladesh. 2008. Election Manifesto of Bangladesh Awami League–2008, Ninth Parliamentary Elections. Dhaka.

7 Government of Bangladesh. 2008. Moving Ahead (National Strategy for Accelerated Poverty Reduction II). Dhaka.

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package (paras. 6 and 74) was further expanded in the FY2010 budget to give impetus (paras. 75-77) to exports, infrastructure investments, and scaling up of SSNPs. 9. The Government recognizes that in FY2010, it will face constraints in implementing its essential spending programs in the social sectors as well as infrastructure investments—the situation will be compounded by the likely weaker revenue collection. Lower revenues will also make it difficult for the Government to mobilize required counterpart funds for donor-funded projects. The global economic slowdown may also affect the flow of external aid, especially from bilateral sources. The Government is concerned that the current global crisis will also have adverse effects on its efforts to reduce poverty if there is reduced economic growth, job losses, and shrinking job opportunities. To mitigate the impact of the global economic crisis on the poor, the Government is willing to undertake long-term policy reforms so as not to disrupt development momentum and at the same time scale up SSNPs and expand essential infrastructure in the event of pronounced growth slowdown. In this context, the Government requested ADB to help prioritize and sequence the reforms in the overall context of its development agenda (para. 8), help catalyze recovery and long-term inclusive growth, and also support its countercyclical development program.

III. SECTOR ANALYSIS FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM

A. Problems and Opportunities8

1. Key Problems

10. Unleashing Bangladesh's development potential is a long and complex process, which requires far-reaching policy and institutional reforms and substantial investments in infrastructure and human development. At the same time, protecting the poor and the vulnerable sections9 of society is particularly important in view of the country's high poverty incidence and extreme vulnerability to natural disasters. The global crisis has accentuated these vulnerabilities. While inclusive growth would enable the poor to contribute to, and benefit from, economic recovery and future growth, Bangladesh has been slow to realize this potential due to deficiencies in, among others, social protection and social service delivery, investment policies, and public financial management (Appendix 3).10

a. Social Protection and Social Service Delivery

11. Notwithstanding the substantial gains in poverty reduction, progress in reducing poverty has been uneven across regions. The largest decline in poverty incidence occurred in the eastern part of the country but the poverty headcount ratio stagnated or rose slightly in the western region, where half of the population remains poor. In rural areas, earnings are constrained by low rates of return from agricultural and few nonfarm employment opportunities. 8 The Problems and Constraints Analysis is in Supplementary Appendix A and Poverty Analysis is in Supplementary

Appendix C. 9 The groups particularly vulnerable to risks include: (i) infants and children that face the risk of poverty, malnutrition,

low human capital accumulation, and exploitation in the labor force; (ii) working age adults that face the risk of unemployment and low productivity; (iii) elderly adults that lack adequate safety nets; (iv) special and excluded groups that need assistance; and (v) a majority of women who have very limited access to empowerment and productive employment opportunities.

10 For the purposes of the PESF, the term sector refers to (i) service delivery in the domain of SSNPs; (ii) public financial management, particularly, public expenditure management, public sector efficiency and revenue mobilization, and financial and fiscal management; and (iii) private sector development especially through PPPs.

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Landless seasonal workers face a yearly threat of survival during the monsoon. Moreover, frequent natural disasters cause severe losses in terms of life and property damage. Most recently, cyclone Aila hit the coastal areas of the southwest region of the country causing damage to life and property.11 As the poor live in, and depend disproportionately on, marginal lands, including coastal belts, they are the most vulnerable to natural disasters. These disasters also impose a huge budgetary burden on the Government through higher allocations for relief and reconstruction as well as tax its implementation capacity. 12. Women are more vulnerable to poverty in Bangladesh because of their limited access to economic resources, their lower level of education,12 and their extremely low participation in wage work or self-employment opportunities in nonfarm activities. Women comprise the majority of the export manufacturing workforce, but concentrate mostly in insecure jobs with low earnings. The current global crisis could throw a large number of women out of work, especially in the ready-made garments industry that employs 2.2 million workers, mostly women, or push them into insecure jobs. Reduction in remittances could severely affect household food security, especially as many families are still battered by the impact of the food crisis in 2008. Returning migrant workers could put more pressure on the already limited land resources and rural nonfarm employment opportunities. 13. The Government provides extensive SSNPs to support those who are geographically, socially, and seasonally vulnerable (Appendix 3 and Supplementary Appendix B). Up to FY2009, there were 57 SSNPs, and SSNP-related expenditure amounted to 2.3% of GDP. These SSNPs include: (i) special allowances and cash transfers for different underprivileged sections of the population; (ii) food security-based activities; (iii) employment generation for poverty reduction through microcredit programs; and (iv) education, health, training, and technical assistance to make the new generation more self-reliant. Nearly 72 million beneficiaries accessed the SSNPs during FY2009 (although this number includes those that accessed more than one SSNP). 14. It is widely recognized that SSNPs have played a major role in helping the poor and vulnerable to improve their livelihoods, and health and nutrition status, as well as protecting them from the impact of a worsening environment. Nearly half of the SSNP beneficiaries are women. Yet, the SSNPs face considerable challenges because of insufficient targeting and inefficiencies in service delivery (para.79). Weak implementation capacity of local governments and agencies and low oversight of project execution are additional issues. Despite efforts by successive governments, service delivery mechanisms in the public sector have remained weak. The main constraints to developing an effective service delivery system are lack of transparency and the absence of a legal framework to enable the citizens to have access to information to empower them to demand protection from abuses. In addition, as consumers, the people in general, and the poor in particular, have little, if any, legal protection on the quality of goods and services.

11 Cyclone Aila, in May 2009, left more than 200 people dead and set the economy back considerably, while cyclone

Sidr, in November 2007, left a death toll of almost 4,000 people and an economic loss of approximately $1.4 billion (approximately 2% of GDP). Economic costs of natural disasters are also felt hard by small businesses situated in the coastal areas. In the seven Upazilas (sub-districts) of Cox's Bazar district alone, cyclone Aila caused damage to the fish and shrimp industry of approximately $6 million (Source: Star Business. 2009).

12 This is despite Bangladesh having already met the MDG targets for gender parity in primary and secondary schooling.

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b. Investment Climate

15. With scarce public resources, it is imperative for Bangladesh to attract private sector investment for enhanced efficiency and productivity. However, inadequate infrastructure, low skill level of laborers, scarcity of skilled mid-level and senior managers, unstable regulatory environment, and a weak contract enforcement system all work against the private sector as well as foreign direct investment in Bangladesh. While the oil, gas, and telecommunications sectors have attracted foreign direct investment in recent years, projects are still delayed by long approval times. Overall, doing business remains difficult in Bangladesh, which was ranked 110 out of 181 countries in 2009 in terms of ease in doing business.13

16. Sustained growth with poverty reduction in Bangladesh cannot be attained without substantial investments in infrastructure. Although infrastructure is a critical feature of a country's investment climate, under-investment over the years has resulted in acute deficiencies in the availability of infrastructure, especially in power and energy, ports, and roads, which restrict business opportunities and access to public services. Erratic and insufficient power supply is estimated to cost Bangladesh some 2% of GDP growth every year. The situation for small and medium-sized enterprises (SMEs) is even worse, as they cannot afford generators of their own. 17. Mobilizing finance for private investment in infrastructure is a major challenge in the absence of a well-developed domestic capital market and a lack of appetite of foreign private investors for investment in infrastructure. Attempts to attract the private sector under PPP schemes have had only limited success, in part due to inadequate (i) project development efforts and skills, (ii) coordination mechanisms and leadership, and (iii) clarity on the legal framework for PPPs. Even though the Private Sector Infrastructure Guidelines (PSIG) issued in 2004 are currently the basis for implementation of PPP projects, there is a lack of clarity on the consistency between the Public Procurement Regulations and private sector project development, approval, and financing provisions under the jurisdiction of PSIG. 18. While significant financial sector reform14 initiatives are underway, market gaps remain. Credit for SMEs and the rural nonfarm sector remains inadequate notwithstanding their critical role in poverty reduction through employment generation in rural nonfarm activities. Specialized financial institutions like Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Shangstha have a poor record of lending to SMEs. The limited capacity of the credit information bureau at Bangladesh Bank (the central bank) has impeded access to reliable information on potential clients. Notwithstanding the major ongoing capital market development efforts, the market is not deep enough for mobilizing resources to support private sector activity and promote economic growth in a substantial manner.

13 In a related indicator of doing business, typical property registration procedures take around 245 days to be

completed, while the same procedures take only 5 days in Nepal, 45 days in India, and 50 days in Pakistan. In the 'shipping difficulty index' (where the higher the score, the greater the difficulty), Bangladesh scored 112 compared to India 79, Sri Lanka 60, and Malaysia 21. Doing Business 2009, World Bank 2009. http://www.doingbusiness.org/; International Finance Corporation. 2009. http://www.enterprisesurveys.org/

14 Reforms supported by the World Bank, the International Monetary Fund, and ADB in the financial sector focus on (i) greater autonomy for Bangladesh Bank (the central bank), (ii) strengthening Bangladesh Bank’s capabilities to perform its enhanced responsibilities, (iii) strengthening prudential regulations and supervision, (iv) restructuring the management and internal processes of state-owned commercial banks and ultimately privatization, (v) strengthening legal and judicial processes, and (vi) improving money and debt markets.

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c. Public Financial Management15

19. Although Bangladesh has carried out fiscal reforms with some success in recent years, revenues have remained low because of a narrow tax base, extensive use of ad-hoc exemptions and exclusions, and excessively complex tax rules and administrative procedures, as well as weak tax administration, which have encouraged pervasive tax evasion. Outdated tax laws and regulations have further complicated enforcement of fiscal discipline. Government tax revenue collection at 9.0% of GDP is low by international standards reflecting weaknesses in the public resource management system. Low revenues have constrained essential public expenditure, resulting in a level of public expenditure (15.3% of GDP in FY2009) that is low by international standards. 20. The public financial management (PFM) system has remained weak because of rigidities constraining line ministry spending, poor monitoring, low budget allocation for operation and maintenance, inconsistency between sector allocations and development priorities, and lack of a unified budget preparation system that clearly distinguishes capital from recurrent expenditures. Weak management capacity, and insufficient transparency and accountability, have hampered the efficiency of public spending despite the introduction of the Medium-Term Budgetary Framework (MTBF) in 2005 to strengthen the links between planning and budgeting as well as between resource allocation and performance. The Government has been unable to scale up public infrastructure spending. While the budget allocation for the Annual Development Program16 (ADP) has remained broadly steady, actual spending has declined from 5.0% of GDP in FY2005 to 3.2% in FY2009, mainly because of poor planning and weak implementation capacity (para. 80) in government agencies. In addition, prioritization of spending has been insufficient; transfers and subsidies to loss-making state-owned enterprises still absorb a large share of resources. 21. Public expenditures at lower levels of Government and state-owned enterprises are still not systematically consolidated in the fiscal accounts and reporting framework, making it difficult to assess and improve the use of public resources. The audit function remains weak with little focus on outcomes and performance of the programs, resulting in little impact on financial accountability. Both the annual accounts and audit reports are issued with a considerable time lag (more than 12 months from the end of the fiscal year).

2. Opportunities

a. Enhancing Service Delivery

22. In the context of the global crisis, and in response to recent natural disasters (most recently, cyclone Aila), the Government has taken a conscious policy decision to scale up SSNPs to prevent large segments of the population from sliding deeper into poverty, and to provide relief to the additional non-poor who are expected to fall into poverty. Increasing the coverage and improving the quality and effectiveness of service delivery will be critical to ensure that expanded SSNPs achieve the desired results. The Government is aware of the need to

15 As used in this document, the term 'public financial management' refers to broader perspectives of fiscal and

financial management. 16 The ADP is the annual budget for financing development investment projects in Bangladesh. As capital expenditure,

ADP is the main channel for public investment in infrastructure. Development Partners are actively involved in helping the Government prepare and implement ADP projects and provide substantial financing. The allocation for ADP in the FY2010 budget is nearly $4.4 billion compared to $3.3 billion in FY2009. The Government's countercyclical development program includes a large increase in ADP allocations.

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increase the focus on SSNPs that contribute to human capital development and reduce the impact of seasonality in the availability of work. The Government is willing to enhance the eligibility criteria for better targeting and minimizing leaks and to implement gender budgeting guidelines for tracking gender disaggregated expenditures. 23. The Government has increasingly recognized the need for addressing the generic problem of deficiencies and weaknesses in the broader governance agenda in the country, which impacts effective service delivery. Accordingly, the Government is institutionalizing a number of initiatives for enhancing transparency, accountability, and service delivery mechanisms in government agencies.17 These include access to information to help improve transparency in public service provision and to protect the rights and interests of consumers through legislative means.

b. Investment Climate

24. The Government is aware that significant acceleration of economic growth with rapid and sustainable poverty reduction will require substantial scaling up of infrastructure investment from current levels, which is well beyond the financial capacity of the Government. Government estimates, released in June 2009, suggest an investment gap of $28 billion from FY2010 until FY2014 to achieve an annual GDP growth rate of 8% by 2013.18 Therefore, the Government has launched reforms to establish an enabling environment for PPPs19 to improve the regulatory regime and simplify procedures as well as to provide resources for mainstreaming PPPs through project development, credit enhancement, and refinancing facilities. Further, the Government is keen to develop the capital market20 to help attract investors to close the infrastructure investment gap. If successfully implemented, PPPs would make an important contribution to both economic growth and poverty reduction because investment in social infrastructure as well as in transport and power would benefit the poor both directly and indirectly through better access to health facilities, job opportunities, and market outlets.21 25. Keen to create space for SMEs to play their dual role of contributing to growth and increasing employment and incomes for poverty reduction, the Government has initiated actions to facilitate SMEs' access to credit information and is pursuing the enactment of a secured

17 ADB is extending support to enhance anticorruption measures, transparency, and accountability in public service

delivery through ADB. 2007. Report and Recommendation of the President to the Board of Directors on Proposed Program Loan and Technical Assistance Grants to the People's Republic of Bangladesh for the Good Governance Program. Manila. A follow-up loan to be processed in 2010 will enable Government to better implement, and benefit from, the proposed PESF.

18 Government of Bangladesh. 2009. Invigorating Investment Initiative through Public–Private Partnership—A Position Paper. Dhaka.

19 ADB's ongoing support for financing infrastructure projects including PPPs is also helping to build capacity for developing a PPP framework and guidelines. ADB. 2008. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the People's Republic of Bangladesh for the Public–Private Infrastructure Development Facility. Manila. In the health sector, ADB is pioneering the development of a model of PPP for delivering affordable and quality primary health care services to the urban poor. ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of Bangladesh for the Urban Public and Environmental Health Sector Development Program. Manila.

20 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of Bangladesh for the Improvement of Capital Market and Insurance Governance Project. Manila. Part 1 of the Program seeks to enhance governance and the capacity of the capital market and to target the regulator, stock exchanges, market practitioners, and investors. Part 2 seeks to enhance governance and the capacity of the insurance sector, as it will support government-led reforms being pursued in the insurance sector.

21 Appendix 3 and Supplementary Appendix D provide more information on PPPs.

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transactions bill to enable SMEs to use their movable property as collateral.22 Furthermore, the Government is enhancing business support, capacity development assistance, and infrastructure facilities to SMEs, through restructuring measures for the Bangladesh Small and Cottage Industries Corporation, the main channel for providing such services.23

c. Public Financial Management 26. The Government has demonstrated strong ownership of the PFM reform agenda in preparing a Medium-Term Rolling Action Plan that outlines its PFM vision, strategic objectives, and priorities (Appendix 3). Progress has been achieved in terms of improving procedures, developing a computerized database, streamlining administrative practices, reducing time lags in the preparation of budget and accounting reports, and developing capacity in budgeting, accounting, and auditing. Recent PFM reforms have meant that timeliness of fiscal reporting has improved. To strengthen budget execution, efforts have been made to improve the accuracy and timeliness of accounts by further computerizing accounting transactions. In addition, the process of preparing the Annual Finance and Appropriation Accounts has been streamlined. Government is also increasingly generating data on its contingent liabilities vis-à-vis state-owned enterprises and reporting them. Increased transparency and timeliness provide the basis for enhancing incentives for cost saving and improved resource management. The Government is also reviewing civil service salaries and emoluments for providing adequate incentives. 27. Several new measures announced by the Government to raise the tax-to-GDP ratio provide opportunities to expand the tax base, withdraw certain exemptions and exclusions, simplify procedures, amend laws, and streamline tax administration. The Government is also committed to enhancing transparency in the procurement process. Steps have also been taken to develop awareness regarding information on progress of implementation, purchase plans, and monitoring of important projects included in the ADP. The MTBF is being introduced in additional ministries. These measures set the basis to better manage public resource allocations and enhance the link between the poverty reduction strategy and the annual budgets. B. ADB Strategy and Operations

28. ADB’s Country Partnership Strategy (CPS) 2006–201024 seeks to assist Bangladesh in addressing the critical constraints to economic growth, social development, 25 and good governance. The continued validity of these three CPS strategic pillars has been reconfirmed by recent economic and political developments, and progress in poverty reduction and human 22 This is supported by a project started in May 2009 funded by the Department for International Development (DFID)

of the United Kingdom and managed by the International Finance Corporation’s South Asia Enterprise Development Facility (SEDF).

23 These measures are based on recommendations under ADB’s ongoing SME Sector Development Program (ADB. 2004. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the People's Republic of Bangladesh for the Small and Medium Enterprise Sector Development Program. Manila). ADB is also providing further credit support to SMEs. ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of Bangladesh for the Small and Medium-Sized Enterprise Development Project. Manila.

24 ADB. 2005. Country Strategy and Program (2006–2010): Bangladesh. Manila. 25 In the social sectors, ADB is the lead development partner in primary education. ADB. 2005. Report and

Recommendation of the President to the Board of Directors on a Proposed Loan to the People's Republic of Bangladesh for the Second Primary Education Development Program (Sector Loan). Manila. In response to the food crisis in 2008, ADB provided emergency support. ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the People's Republic of Bangladesh for the Emergency Assistance for Food Security Project. Manila.

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development. While the new government is reviewing the NSAPR-II against its election manifesto (para. 7), dialogue with key government officials during the recently conducted CPS midterm review indicated no major change in development priorities. The Country Operations Business Plan 2010–2012, which is an appendix to the CPS midterm review, takes into account a possible slowdown in revenue collection in view of the global crisis, which could constrain the Government’s ability to finance essential public spending on infrastructure and social sector programs. 29. During 2010–2012, ADB is expected to continue to play a major role in supporting investment and policy and institutional reforms in energy and power, transport, education, and integrated urban infrastructure (including water supply and sanitation). ADB will also continue integrating governance concerns into its sector operations as well as its support for building local government capacity to plan and deliver services in urban primary health care, and participatory water management, as well as rural development (including agriculture). 26 In particular, the surge in global food prices in 2008 underscored the continued need for assistance to enhance the long-term productivity of agriculture. In view of the success of earlier programs, ADB will consider providing further assistance to improve core governance through programs to combat corruption, improve access to justice, and move ahead with civil service reform, and to develop the SME sector. Considering the emerging concerns and impact, ADB will also scale up support for enhancing the Government’s preparedness to cope with the effects of climate change. To effectively deliver development results, ADB will seek to strengthen cooperation with development partners, mobilize greater cofinancing, catalyze private sector and civil society involvement in development activities, promote PPPs, further improve portfolio performance, and enhance subregional cooperation. C. External Assistance and Development Partner Coordination

30. Several development partners27 are supporting effective social service delivery, creating a more conducive investment climate, and strengthening the PFM system (Appendix 4). 31. For implementing the SSNPs, multilateral agencies have focused on providing budgetary support. The World Bank is expected to provide in the first half of 2010 budgetary support (including likely support for SSNPs) to the Government after the NSAPR-II is revised and approved and its new Country Assistance Strategy is finalized. The World Bank is financing projects for supporting safety nets and employment creation and also providing assistance for extending social care services for persons with disabilities and vulnerable children as a means of promoting equity and social inclusion. In addition, the World Bank is supporting a Social Investment Program to improve livelihoods for families affected by cyclone Sidr. The European Union (EU) is financing three social safety net projects. Support from bilateral and United Nations agencies have focused on food procurement and distribution through a well-coordinated

26 Reforms in the PFM and service delivery as proposed in the PESF will further strengthen the governance reforms

initiated under the ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Program Loan and Technical Assistance Grants to the People’s Republic of Bangladesh for the Good Governance Program. Manila.

27 Bangladesh has a well-functioning development partner coordination mechanism in place through a local consultative group (LCG). The LCG plenary, the apex body of the LCG, is co-chaired by the secretary of the Economic Relations Division, Ministry of Finance (MOF), and the head of a designated development partner agency. The LCG meets frequently, at least once every month. It has subgroups for several sectors composed of the representatives of the concerned development partners. ADB coordinates the energy and transport subgroups and actively participates in numerous others. The subgroups meet several times a year. In August 2008, 15 development partners signed with Government an agreement to move toward a Joint Cooperation Strategy for better harmonization and alignment of development partner support, which is under preparation.

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approach. The Department for International Development (DFID) of the United Kingdom is funding a project on Economic Empowerment of the Poorest to improve their livelihoods, particularly women and children. The United States Agency for International Development is financing a Food Assistance Program that provides a safety net for the poor through food and cash for work projects. In parallel with the ADB's Emergency Assistance for Food Security Project (footnote 25), the World Bank provided budgetary support in response to the food price crisis in 2008. In addition to their regular programs, development partners (including ADB) routinely provide food aid and support for relief and reconstruction following natural disasters. 32. For improving the investment climate, DFID and the EU are supporting the activities of the Bangladesh Investment Climate Fund managed by the International Finance Corporation (IFC). The World Bank, DFID, Canadian International Development Agency, and the Government of Japan (Debt Cancellation Fund) are funding the Private Sector Development Support Project aiming to improve Bangladesh’s investment climate by streamlining key regulations, building capacity of a selected group of government officials, and, as a special focus, developing special economic zones with international standard infrastructure. The South Asia Enterprise Development Facility (SEDF) is supported by ADB, EU, DFID, IFC, the Government of Norway, Canadian International Development Agency, and the Government of the Netherlands. The Investment Climate Assessment component of the SEDF works in partnership with the development partners to produce comprehensive analytical and diagnostic studies on the overall investment climate and specific elements of the business environment. One of the largest projects for SME promotion in Bangladesh is KATALYST (Developing Business Service Markets), which aims to improve market access, management and technical skills, and production methods.28 KATALYST also identifies key constraints and opportunities in sectors and promotes mechanisms that improve business. 33. In the area of PFM, the Financial Management Reform Project, funded by DFID and the Government of the Netherlands, and which sought to strengthen PFM capacity of the Ministry of Finance (MOF) and selected line ministries, has just been completed (July 2009). A new project (2009–2014), to be financed through a multi-donor trust fund to be managed by the World Bank, is soon expected to be commissioned which will modernize budget management institutions with emphasis on performance orientation in PFM, and improve the effectiveness of the formal institutions of financial accountability such as the Office of the Comptroller and Auditor General and relevant parliamentary bodies. The local consultative group (LCG) of development partners on PFM/Financial Oversight works as a regular forum for coordination, information sharing, and liaison with the Government and Parliament on all PFM issues related to budgeting and financial oversight. Development partners are also supporting the improvement of public expenditure systems, including capacity building for PFM and enhancement of the mechanisms for local accountability. D. Rationale

34. While Bangladesh's GDP growth is respectable, it is inadequate to make a major dent in the level of poverty within a reasonable time frame. The country needs further economic policy measures along with institutional reforms to lock in on a higher growth trajectory, which is necessary for accelerated poverty reduction. The lack of fiscal space and weak implementation capacity has further constrained the Government's ability to undertake reforms for spurring higher economic growth and accelerating poverty reduction. At the same time, the Government

28 KATALYST is funded by DFID, Swiss Development Corporation, Netherlands Development Organization, and

Canadian International Development Agency.

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needs additional resources to protect vulnerable groups, mostly women and children through appropriate SSNPs. The new Government has shown the resolve to deal with the twin challenges of accelerating reforms and protecting vulnerable populations through quick and transparent policy actions to preempt hardships and prevent a deeper crisis. The crisis is seen by the Government as an opportunity to undertake policy reforms to ensure development momentum well into the future.

35. Bangladesh has requested assistance to deal with the impact of the global crisis and other exogenous shocks. It has sought additional resources to meet the adjustment costs of continued policy and institutional reforms that would help consolidate earlier gains from economic growth and poverty reduction by scaling up public–private investments in essential infrastructure while also helping to broaden the coverage of SSNPs and eliminating internal institutional limitations that reduce effectiveness of service delivery. Accordingly, support is proposed through two facilities: the PESF and the CSF. The objective of the PESF is to accelerate reforms that are essential for long-term economic growth while also improving service delivery for social protection. The CSF will supplement the PESF by providing support to scale up the Government's countercyclical development program.

IV. PROPOSED PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM

36. The proposed PESF aims to support the Government to better address the adverse impact on the economy from exogenous shocks as well as inherent weaknesses in economic and social service delivery. The Design and Monitoring Framework is in Appendix 1, and the Development Policy Letter and the Policy Matrix for the PESF are in Appendix 5. A. Impact and Outcome

37. The impact of the proposed PESF is to enhance pro-poor and gender-inclusive growth and improve the living standards of the vulnerable populations. The outcome of the PESF is a stable macroeconomic environment where private sector development is emphasized and where women and vulnerable populations have greater access to social services, including through effective gender targeting. B. Outputs

38. The proposed PESF supports the Government in putting in place policy actions in three areas: (i) effective service delivery—by supporting the Government to undertake a significant scaling up of SSNPs, effective gender targeting, and legal measures for greater say in ensuring quality and effectiveness of service delivery; (ii) conducive investment climate—by strengthening the Government's ability to attract private investment, in particular through PPPs, in sectors critical to sustain and accelerate economic growth; and (iii) strengthening the PFM system—by helping Government to increase fiscal space through enhanced efficiency and integrity in public spending, and higher revenue generation. 39. The PESF is a culmination of sustained policy dialogue and development coordination on ongoing social, infrastructure, governance, and financial sector interventions. Anchored in the Government’s medium- and long-term reform strategies for addressing weaknesses and vulnerabilities, the design of the proposed PESF benefited from the Government's proactive reform stance. The Government, in consultation with ADB, identified specific actions to address the weaknesses and vulnerabilities and made corresponding resource allocations in the FY2010

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budget. The clear priorities of the Government and the concern over the impact of the global crisis enabled substantial progress on the reforms supported by the PESF.

1. More Effective Service Delivery

40. Expanded Social Safety Net Programs. Considering Bangladesh's low income level and high poverty incidence, as well as its vulnerability to disasters, the Government expanded the existing SSNPs for the vulnerable populations (Appendix 3, Table A3). The total allocation for SSNPs at Tk173.3 billion ($2.5 billion) in FY2010 is a 25.2% increase over FY2009 (paras. 75 and 77). The number of beneficiaries29 is also expected to increase substantially. The Government has introduced a new Employment Generation Program for the Hardcore Poor30 with an allocation of Tk11.8 billion ($170 million) for an estimated 4.9 million person-months. The Government will spend at least 60% of the budget allocated to the Employment Generation Program for the Hardcore Poor before release of the second tranche of the PESF. Further, the Government will finalize an operational plan31 for developing a comprehensive list of hardcore poor and other vulnerable populations for more effective targeting of SSNPs. 41. For ensuring food security, an integral part of SSNPs, the Government has drawn up a detailed plan of action outlining strategic areas of intervention, and priority actions to be undertaken in the short, medium, and long-term during 2008–2015. The plan of action identifies responsible government and non-government agencies and defines policy targets and indicators for monitoring progress. Aligned with the NSAPR-II, the plan provides guidelines on inter-ministerial coordination and sectoral planning and budgeting for effective implementation. 42. Gender Targeting. In line with the constitutional requirement for promoting social and economic equality as well as for better targeting of SSNPs, the Government has finalized gender budgeting guidelines for tracking gender disaggregated expenditures to inform budgeting decisions and guide policy reform priorities. Further, the budget and beneficiary data for four ministries have been disaggregated on a gender basis and a report on Women's Advancement and Rights in Four Ministries' Activities32 was submitted to the Parliament. The Government will implement the budgeting guidelines in the 20 line ministries that have adopted the MTBF (para. 53) to ensure greater transparency and accountability of the share of expenditure for women's development.33 43. Oversight Opportunities for Vulnerable Groups. The enhancement of the SSNPs and introduction of gender budgeting guidelines will not necessarily ensure that services are being provided effectively. To improve service delivery, the Government has enacted the Right to Information (RTI) Act, 200934 which provides for access to information on public service delivery

29 Poor people having less than $1 dollar daily income, especially women and destitute workers, who are bypassed

by the growth process and also miss out on most of the targeted interventions. 30 This will replace an earlier '100 days Employment Scheme' which was disbanded due to widespread leaks and

poor targeting. 31 The Government intends to utilize the National Identity Cards, prepared for the 2008 elections, and link them with

the database of the MOF and with the lists of SSNP beneficiaries. 32 The report reviews how issues of women's advancement have been dealt with as well as the decision making

structure from a gender perspective by analyzing the employment structure and salary distributions in the ministries for education, health and family welfare, social welfare, and food and disaster management.

33 The gender budgeting guidelines have a specific section on poverty and gender impact to be adhered to by the ministries that are using the MTBF.

34 ADB's Good Governance Program (footnote 17) had provided assistance to the Government to prepare the act, and has also set aside resources to support its implementation. The RTI Act is part of the broader perspective on good governance being taken by Government as contained in the National Integrity Strategy that it is developing.

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to ensure proper accountability of local officials. The RTI law became effective from 1 July 2009 with the appointment of the Chairman and two Commissioners of the Information Commission along with provision of a new office and some staff. The organization structure of the Information Commission will be approved by the Government, and operational staff appointed. In addition, the Government, with the assistance of the United Nations Development Program, will develop an action plan to put in place a citizen's charter35 for public sector agencies including its dissemination across the country for improving service delivery and implementation. 44. In addition to the RTI Act, the Government also enacted the Consumers' Right Protection Act, 200936 for enhancing the quality of services. The Consumers' Right Protection Act, which became effective in April 2009, aims to protect the rights of consumers and prevent activities that interfere with consumer rights. To implement the act, a National Consumers' Right Protection Council will be established with financing provided from the block allocations in the FY2010 budget. The National Consumers' Right Protection Council will undertake elaborate publicity and awareness building campaigns through print and electronic media, and by holding seminars, workshops, and symposiums.37

2. More Conducive Investment Climate

45. Private Sector Development and Public–Private Partnerships. Mainstreaming PPPs has emerged as a key Government priority for bridging infrastructure gaps across all the economic sectors. Drawing lessons from international best practices, the Government has taken a comprehensive approach for implementing PPPs that covers (i) a position paper on PPPs for investment and operations; (ii) allocation of funds for a viability gap fund38 for enhancing the bankability of projects, attracting private capital, and catalyzing private sector efficiencies; (iii) allocation of funds for a technical assistance fund for financing PPP project preparation activities such as feasibility studies; and (iv) allocation of funds for a PPP infrastructure investment fund to finance bankable PPP projects on a loan or equity basis. 46. Going forward, the Government will revise and reissue the 2004 PSIG to place a concise, transparent and strong legal and institutional framework for PPPs. In addition, a PPP Cell will be established and operationalized for coordinating the mainstreaming of PPPs. The progress of PPPs in infrastructure in Bangladesh, including the legal and institutional frameworks, will be monitored and assessed and review reports posted on the MOF website. 47. Small and Medium-Sized Enterprise and Housing Sector Development. Harnessing the SME sector's potential for creating jobs and providing greater access to housing is both an immediate priority as well as fundamental for setting the basis for higher long-term growth.39 Accordingly, the Government has raised the size of allocations from TK8.0 billion ($116 million) to Tk11 billion ($159 million) to its Small and Medium Enterprises Fund and Housing Fund maintained with the central bank. In addition, during the PESF, the Government will prepare an 35 In May 2007, the Government instructed all ministries and agencies to formulate a "citizen's charter" that includes

the duties and responsibilities of officials along with their telephone numbers to be displayed including on the web. 36 The scope of the act covers price, quality, weight, and availability of, and access to goods and services. The

national council and the district committees under it will create awareness about consumers' rights, and supervise the activities of enterprises selling goods or rendering services with the objective of protecting consumers' rights.

37 Supplementary Appendix E provides summary of the laws enacted as part of the PESF. 38 This support is especially important for sectors where financial rates of returns are low but social returns are high. 39 Because of higher employment-intensity and lower capital requirement, the expansion of the SME Fund is

expected to boost the SME sector, create more job opportunities, and raise domestic demand by increasing the purchasing power of households. This will add stimulus to the economy through the linkage effects to other domestic sectors, and create jobs.

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action plan to support SME centers, women's entrepreneurship, and one-stop facility for enterprises. The Government will also merge two state-owned banks, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Shangstha, for streamlining their operations and enhancing SME financing. 48. Enhanced Business Environment. Bridging the major investment gap, especially in infrastructure, requires significant foreign direct investment. Bangladesh's approval of the Money Laundering Prevention Act in February 2009 demonstrates the Government's commitment to transparency and good governance and is likely to enhance investor confidence. The Act equips the Anti Corruption Commission and Bangladesh Bank with powers to deal with offences related to money laundering. The Government has established the Bangladesh Institute of Capital Markets to foster a policy environment and institutional structure necessary for growth and development of the domestic capital market. The Government has also extended merchant banking facilities to three state-owned commercial banks to increase trading volumes in the capital market.

3. Strengthened Public Financial Management

49. Public Sector Efficiency and Revenue Mobilization. A strong PFM system—especially where the state takes on a considerable role to provide services—relies substantially on prioritizing expenditures and enhancing revenues. The Government has taken major steps in pursuit of its policy for corporatizing public sector enterprises to improve service delivery, viability, efficiency, and competitiveness, and to reduce subsidies. Specifically, the Government has (i) divested 30% of its shares of Jamuna Oil and Meghna Oil for subscription by the general public; (ii) converted the national air carrier Bangladesh Biman into a limited liability company under the Company Act through the Bangladesh Biman Corporation (Amendment) Act, 2009; and (iii) converted the Bangladesh Telegraph and Telephone Board into a limited liability company under the Company Act through Bangladesh Telegraph and Telephone Board (Amendment) Act, 2009. 50. Along with divestments and corporatization, the Government has amended the Income Tax Ordinance, 1984, to streamline income tax administration, simplify tax collection procedures, and introduce revenue-enhancing and rationalization measures. As a step toward phasing out the tax holiday schemes by 2012, a reduced tax rate for certain sectors40 has been introduced to gradually prepare them to shoulder a normal tax burden. With regard to administrative arrangements, the appointment of the chairman of the National Board of Revenue (NBR) has been streamlined through the National Board of Revenue (Amendment) Act, 2009. 41 The Government has also implemented a debt service liability management system for keeping more accurate records and improving transparency of liabilities resulting from borrowings by state-owned enterprises. During the PESF, the Government will finalize plans to expand the tax base by identifying new taxpayers through surveys covering city, district, and sub-district levels. The Government will also improve the incentive structure for civil servants by implementing the recommendations of the Pay Commission.

40 These are for sectors such as agro-processing, rubber-based goods, textile industries and machinery, spinning

industries, and garments-producing industries. 41 Earlier, the provision was to appoint one of the members of the Board as the NBR chairman. In practice, a

secretary to the Government is always appointed as the NBR chairman. The National Board of Revenue (Amendment) Act, 2009 provides for appointment of a secretary to the Government as chairman of the NBR and removes the anomaly and legal contradiction.

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51. Streamlined Financial Management Processes. As part of the efforts to streamline the financial management process and enhance transparency, the web-based Integrated Budget and Accounting System for facilitating daily consolidation of accounting data has been extended to 58 districts to make it easier to share on-line information for budgeting and accounting purposes.42 In this context, the Government will issue policy directives and prepare an action plan to improve the quality and timely submission of the annual accounts of the government agencies.43 52. Slow implementation of public sector investment projects is a major factor hindering infrastructure development in the country. Recognizing this, the Government will review and revise public sector project approval procedures to bring greater dynamism and speed in project processing. The Government will also set up a high level task force to enhance monitoring of major public sector projects covered by the ADP. The aim is to improve project implementation through more intensive monitoring, closer scrutiny, and regular supervision (para. 80). 53. Mainstreaming Medium-Term Budgetary Framework. The Government is mainstreaming the MTBF for integrating revenue and development budgets and strengthening the link between the national poverty reduction strategy and annual budgets. The application of the MTBF in 20 ministries during FY2010 is intended to strengthen fiscal management and the flexibility and capacity of the line ministries to manage resource allocation. The Government will establish a planning and budget wing in at least five ministries where the MTBF has been adopted to ensure dedicated staff and developing adequate capacity for its implementation. Further, as an initial step toward a decentralized budget, the Government will finalize plans to present a district-wise budget starting with one district per administrative division. Complementing these measures, the NSAPR-II is being revised to embody the development priorities of the Government. The Government has also established a Macroeconomic Wing in the Finance Division headed by a full time joint secretary and supported by a number of qualified staff for enabling the MOF to deal with evolving macroeconomic developments preemptively. C. Important Features

54. The most important feature of the proposed PESF is its human and gender dimensions, By undertaking actions to mitigate the social impact of the crisis, and protect as well as enhance investments in human capital, it broadens support for reforms. The PESF builds on the political commitment of the Government to bring about necessary economic reforms in the country. The reforms reflect the continuum of policy actions and ADB engagement in the sectors and subsectors which are proposed to be supported. The PESF is (i) based on Government's strategy for poverty reduction, (iii) aligned to the outcomes sought from other ADB programs, and (iii) fully consistent with the interventions of other development partners. 55. Good governance, one of the drivers of change under ADB's Strategy 2020, is integrated in the design of the PESF through measures for creating access to information for improvement of service delivery, protection of citizens' rights, effective gender budgeting, and enhancing PFM. The PESF also facilitates private sector development, which is the first driver of change under ADB's Strategy 2020. Corporatization and divestment will enable more space for private sector participation in industry, infrastructure, and service delivery. 42 The network will be expanded to Upazila (sub-district) accounts offices during the next phase of PFM reform. 43 There is no legal deadline for submitting the Annual Finance and Appropriation Accounts to Parliament. Delays in

getting certification from the Office of Comptroller and Auditor General on these accounts lead to a considerable delay in the publication and submission of these documents to Parliament.

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Greater fiscal space will enable the Government to allocate more resources to much-needed social and economic infrastructure, which, in turn, provides more opportunities for the private sector. D. Program Cost 56. The PESF reflects the development financing needs of the Government as specified in the FY2010 budget (Table 2). The Government aims to increase development and social spending in FY2010 given the stress imposed on the economy (and especially the vulnerable groups) by the global crisis and natural disasters. Given this need for additional funding, a budget deficit of 5.0% of GDP is targeted for FY2010.

Table 2: Gap and Borrowing in Overall Budget for FY2010 ($ million)

Item Sub-total Total Domestic revenue 11,506 Foreign grants 743 Total revenue 12,249 Expenditure 16,481 Resource gap 4,232 To be covered by: Foreign borrowing 1,256 Domestic borrowing 2,976 4,232

Source: Government of Bangladesh FY2010 Budget. 57. The PESF only meets a fraction of the related adjustment costs (Appendix 6). A detailed breakdown of ADB support for SSNPs through the PESF is in Supplementary Appendix F.

E. Financing Plan

58. The Government has requested a program loan of $244.85 million from ADB for the PESF which consists of:

(i) $100 million loan from ADB's Ordinary Capital Resources (OCR). The loan will

have a 15-year term including a grace period of 3 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions as set forth in the draft Loan Agreement. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB.

(ii) $100 million loan from ADB’s special funds resources, which will have a fixed

term of 24 years, including a grace period of 8 years; interest will be at 1.0% per year during the grace period and 1.5% per year thereafter (ADF soft term).

(iii) $44.85 million loan from ADB's special funds resources, which will have a fixed

term of 24 years, including a grace period of 8 years; interest will be at 1.6% per year for the life of the loan (ADF hard term).

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F. Implementation Period and Tranches

59. The PESF will be implemented during October 2009 to December 2010. The PESF is to be released in two tranches to meet the expected occurrence of associated costs of policy reforms (Table 3).

Table 3: Proposed ADB Tranches for PESF ($ million)

ADF Tranche

OCR Soft-term Hard-term

Total Amount

Release Date

First 60.00 60.00 27.50 147.50 Upon loan effectiveness Second 40.00 40.00 17.35 97.35 8 months after the first tranche and

upon satisfactory compliance with all second tranche policy conditions (or earlier than 8 months if the conditions have been met)

Total 100.00 100.00 44.85 244.85 Source: Asian Development Bank estimates.

V. PROPOSED COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM

A. Country Context under the Global Economic Crisis44

60. Despite numerous external and domestic shocks, Bangladesh’s economic performance has been sound in recent years. Gains have been made on the macroeconomic front and social sector development including on poverty alleviation. Real economic growth has been sustained at above 6%, inflation ranged between 6.5–7.2% except during the commodity price shocks of 2008, and the external current account balance has been consistently in surplus due to buoyant export and remittance inflows. Gains on social indicators have also been impressive although much remains to be done with 40% of the population still below the poverty line. 61. Such strong macroeconomic performance is the outcome of a long track record of prudent demand management policies of successive governments. By limiting the level of the fiscal deficit in relation to GDP to well below the level considered debt-stabilizing, both the debt-to-GDP and debt service ratios have declined significantly over time and are currently at reasonably low levels. Sound macroeconomic management has also enabled the country to withstand major external shocks while sustaining its growth momentum. The economy was severely tested in FY2008 when it experienced repeat floods and the catastrophic cyclone Sidr, with major loss of life and destruction of property and crops; and the external shock resulting from surging petroleum and other commodity prices. 62. The economy had rebounded strongly from these shocks, and gained further momentum in the first quarter of FY2009 (July–September 2008) before the impact of the global crisis set in. Export receipts grew by 42.4%, import payments rose by 34.9%, workers’ remittances surged by 43.5%, private sector credit expanded rapidly (26.5%), and firms were in the midst of expanding their production capacity. The overall bullish environment was also reflected in the index of manufacturing, which grew by more than 12% and term lending for investment, which grew by 30%.

44 In reviewing the country’s macroeconomic policies and public finances, the International Monetary Fund's (IMF)

latest Article IV consultations were referred to. The latest IMF consultations with the Bangladesh authorities were held in September 2008.

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63. Up to the end of the first quarter of FY2009, all indicators were pointing to a robust macroeconomic outlook for FY2010 with higher economic growth, and with moderate inflationary pressure due to exogenous price shocks as the only major challenge for the Government. Its intensified efforts to boost agricultural output were also paying dividends with successive bumper rice crops. Bangladeshi textile exporters had their order books full and were looking forward to brisk business. At the start of the global crisis, there was a general perception that Bangladesh would be largely spared given its limited linkages with the global capital market. However, as the crisis deepened, its impact started to be felt in Bangladesh as well. 64. Key Transmission Channels: First Round Effects. The direct impact of the crisis on Bangladesh economy could primarily be felt through three channels: financial sector contagion; foreign trade; and workers’ remittances, with the extent of transmission depending on the linkage and exposure of the sector in question to the rest of the world.

1. Financial Sector Contagion

65. Bangladesh’s financial sector did not experience any turbulence from the meltdown in the global financial sector because of its limited connectivity with the international financial system. Extensive capital controls, strict guidelines on the net foreign exposure of Bangladeshi financial institutions, and controls on the quality and types of investments that financial institutions are allowed to make limited the exposure of Bangladeshi financial institutions and their potential losses, particularly to toxic mortgage–based assets. The prompt steps taken by Bangladesh Bank by asking all domestic financial institutions to deposit their foreign assets with it and converting them into safe assets helped minimize any loss from the collapse of many international financial institutions. These developments notwithstanding, because of the sharp movements in exchange rates among major currencies, Bangladesh Bank had to incur a sizable valuation loss in its holdings of foreign assets. 66. The stock market in Bangladesh suffered only moderate losses relative to its global counterparts. At the peak of the global financial meltdown when major stock markets lost almost one-third to one-half of their market capitalization, the Dhaka Stock Exchange remained largely unaffected. This was attributable to many factors, including (i) foreign investment in the stock market was estimated to be only about 3%, and because of small exposure, its impact on the domestic market was minimal; and (ii) the real estate sector in Bangladesh is not leveraged and did not experience any softening in prices, despite the unprecedented appreciations (250%–350%) in property values in recent years. 67. Since the financial sector in Bangladesh, dominated by commercial banks, was not directly affected by the crisis abroad, there was no liquidity and financial crisis in the domestic economy. Deposit growth and credit demand both remained healthy and asset quality was not adversely affected by the first round impact of the crisis. There was also no visible adverse impact on the availability of trade financing for Bangladeshi exporters and importers.

2. Foreign Trade

68. After a very strong first quarter of FY2009, exports slowed down markedly. Almost all categories of exports registered a sharp slowdown (such as for readymade garments and knitwear) or a sharp decline (for almost all non-garment exports). The extent of the fall in export growth and the speed of the fall were unprecedented in Bangladesh, and can only be explained by the external demand and price developments promoted by the crisis.

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69. The growth in exports decelerated sharply after October 2008 with the beginning of the economic crisis in the industrial countries (the major destinations of Bangladeshi exports) when all categories of exports started to fall significantly. From October 2008 to June 2009 (the last three quarters of FY2009), year-on-year export growth was only 1.4%, a major drop from the 23.7% growth in the corresponding period in FY2008. Three-fourths of the shortfall is attributable to textile products and other export categories, while all other important export categories also recorded significant shortfalls. Based on the export performance since October 2008, significant slowdown in export growth is expected in FY2010.

3. Workers' Remittances

70. The flow of workers’ remittances, while still growing in dollar terms, is decelerating rapidly and the number of workers going abroad has declined sharply. Growth of workers’ remittances slowed to 15.5% during January to June 2009, down from 43.5% growth recorded in the first quarter of FY2009. In March and April 2009, the growth rates in remittances were 9.5% and 7.6%, respectively. Although the growth rates in May and June picked up to 22.6% and 22.0% respectively, the growth rate fell again to 8.0% in July 2009. 71. The monthly rate of overseas worker departures declined from almost 92,000 in January 2008 to 38,568 in June 2009. Much of the rise in the growth of workers going abroad during 2007–2008 originated from the Gulf Cooperation Council (GCC) countries following the oil price surge. The decline in the number of workers going abroad in recent months has also originated from the GCC countries in the aftermath of the decline in oil prices due to the global recession. Cutbacks and postponement of investment plans in the GCC countries have contributed to this reduction in labor demand. The growth of remittances, which still continues, is attributable to the lagged effect of the large number of workers who left the country up to October/November 2008. Generally, it takes several months before the workers start remitting money. After accounting for this lag, the growth rate of remittances is expected to decline further in the coming months. 72. Second Round Effects of the Crisis. The adverse impact of the marked slowdown in export and remittance growth is spreading to the broader domestic economy. Exports and remittances have been important factors contributing to domestic growth. Millions of ordinary Bangladeshi households across the country are direct beneficiaries of remittance inflows and a large part of domestic demand expansion also depends on such inflows. Manufacturing sector performance is significantly dependent on export sector developments and thus on the health of the global economy. With global economic activity likely to be in difficulty in the first half of FY2010 before moving to a recovery phase, both domestic and foreign demand for Bangladeshi products is expected to remain subdued due to slower growth in remittance inflows and lower demand for exports leading to slower manufacturing growth. The uncertainties about the economic outlook created by the global crisis have contributed to slower private investment. Even firms, which are expanding their volume of production, are postponing or delaying their investment programs in order to ride out the slowdown in the global economy. Reflecting this sentiment, demand for industrial term loans fell by 9.6% during July–March FY2009 compared with a 66% rise recorded in the corresponding period of the preceding fiscal year. 73. The Government is also facing a significant tax revenue shortfall compared with the target because of lower imports and slower domestic activity. The revenue performance was in surplus relative to target during the first quarter of FY2009 but, thereafter, sharply turned into a growing shortfall. The shortfall in tax revenue, primarily from import-based taxes, was more than Tk20 billion ($290 million) in FY2009. After achieving record growth in tax revenue in FY2008

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(27.4%),45 the Government set the tax revenue target at Tk545 billion ($7.9 billion) for FY2009. At that time, it was envisaged that the targeted revenue growth of 15.5% was not ambitious compared with recent performance. The actual revenue growth in FY2009 was 10.7%, down from 27.4% in FY2008. All major taxes recorded sluggish growth after September 2008. B. Government’s Countercyclical Development Program and Capacity Assessment

74. In April 2009, the Government announced a fiscal stimulus package for Tk34.2 billion ($495 million) to support the sectors adversely affected by the global meltdown. Cash incentives, consisting primarily of direct transfers to exporters, were raised for sectors like leather, jute, and frozen foods. The total allocation for the export sectors was Tk4.5 billion ($65 million). The package also allowed for greater flexibility in repayment of bank loans for all manufacturing exporters. Allocations under various special refinancing schemes were also raised for SMEs and the housing industry, while larger allocations were made for agriculture, power, and SSNPs. 75. Policy Responses through the Budget. The Government's countercyclical development program announced through the FY2010 budget has four broad components: (i) a fiscal stimulus package; (ii) an expansion of the SSNPs; (iii) a substantial increase in the ADP; and (iv) introduction of a new PPP scheme. In selecting these components and making corresponding resource allocations in the FY2010 budget, the Government in consultation with ADB focused on measures that mitigate the social impact of the crisis and help catalyze economic recovery and long-term growth. The Government expects these measures to contribute significantly in offsetting the effects of the global recession on the Bangladesh economy.

Table 4: Government's Countercyclical Development Program ($ million)

FY2010 FY2009 % Increase Fiscal Stimulus Package 724 495 46.3% Social Safety Net Programs 2,509 2,005 25.2% Annual Development Program 4,416 3,330 32.6% Public–Private Partnership 362 0 Introduced in FY2010

Source: Government of Bangladesh 76. The Government has announced that it will continue the fiscal stimulus package announced in April 2009 (para. 74) through FY2010 and expand the package further based on how the situation evolves. The Tk50 billion ($724 million) fund established in the FY2010 budget will allow the Government to have the required flexibility to respond in a timely manner to the problems faced by different sectors. The cash incentives announced in the first stimulus package will also continue and the funds will be disbursed in six-monthly installments through Bangladesh Bank. Roughly one-third of the new FY2010 fiscal stimulus allocation is earmarked for the export sector to offset the effects of the global recession on export items such as textiles, frozen foods, leather goods and certain other items. The power sector is also expected to get a substantial part of the fiscal stimulus package, in addition to agriculture. The Government has also announced measures to reduce the tax burden on certain export items. 77. Consistent with the Government’s political commitment to alleviate poverty, about 15.2% of the total non-development and development budget (2.5% of GDP) has been allocated for SSNPs. The existing SSNPs have been strengthened and some new ones introduced 45 The stronger revenue collection was due to tax revenue collected by the NBR, which accounts for over 95% of tax

revenues, and over 78% of total revenues.

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(Appendix 3). The major components of the SSNPs include cash transfers, food security, microcredit, employment generation, and stipends for students. In addition, the enhanced ADP and new PPP scheme, if implemented fully, would amount to a 44% ($1.45 billion) rise in government capital spending in FY2010. In addition to boosting domestic activity, if executed effectively, the additional spending through the ADP and PPPs would help bridge the infrastructure gap and contribute to future growth. 78. Capacity Assessment. The Bangladesh authorities have a long experience in administering SSNPs and the ADP. However, implementation has been less than effective due to a number of factors including governance, capacity, and monitoring. 79. During the last two decades, the Government has been pursuing a number of SSNPs. SSNPs are mainly administered through the Ministry of Food and Disaster Management, Ministry of Social Welfare, and the Ministry of Women and Children’s Affairs. Many SSNPs are implemented in collaboration with nongovernmental organizations and are often cofinanced by development partners (para. 31). Greater attention is needed to (i) increase the focus on programs that contribute to human capital development, (ii) reduce the impact of seasonality in the availability of work, (iii) increase the focus on the urban poor, and (iv) increase the focus on other disadvantaged groups. For reducing leakages and improving targeting, implementation capacity at the level of local administration and agencies needs to be enhanced, oversight of project execution needs to be improved and transparency about entitlements needs to be ensured (paras. 40-44). The Government is aware that greater emphasis on external monitoring, as well as building monitoring capacity of the line agencies, is needed to minimize leakages and it has taken steps to address these issues. 80. Implementing the infrastructure components of the Government’s countercyclical development program will also be a challenge. In recent years, ADP implementation has been much lower than target. The size of the ADP has declined by half in relation to GDP over the years. A review of the last five fiscal years’ actual ADP spending against the budget targets suggests an average shortfall of 15% in ADP implementation. The key factors contributing to the unsatisfactory ADP implementation are: (i) inadequate capacity of the implementing agencies; and (ii) a lack of proper monitoring of these agencies. Because of these and other constraining factors, ADP utilization has failed to grow in line with the growing needs of the economy. The efficiency of the government implementation ministries and agencies needs to be enhanced by strengthening their administrative capacity and accountability. Close monitoring of the agencies implementing the ADP program would be needed for reaching the target level (para. 52). 81. The Government is fully aware of the implementation challenges due to the ambitious size of the ADP, and is adopting the following approach to accelerate implementation:

(i) reforming the time consuming and complex project approval process; (ii) emphasizing preparation of procurement plans earlier in the fiscal year; (iii) paying greater attention to the efficiency of project directors, given their crucial

role in project implementation; (iv) bringing the 10 ministries, which implement 78% of the ADP, under special and

intensive monitoring arrangement; and (v) monitoring the major projects through critical path method process by

establishing a task force.

82. The authorities, under the chairmanship of the minister for planning, have been regularly reviewing project preparation in ministries. Ministries and line agencies have been instructed to

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start preparing the development project proposal (government project document) from the beginning of the fiscal year, prepare procurement plans within the first two months of the fiscal year, and prepare tender documents alongside the preparation of the development project proposal. Secretaries of development ministries are regularly following up on project preparation to ensure that projects are ready for approval on time. Policy actions on improving service delivery, creating a more favorable investment climate, and strengthening PFM will also help implement the countercyclical development program. C. Poverty Impact

83. The adverse impact in the export sector will affect poverty through job losses and wage cuts (para.12, Appendixes 3 and 11, and Supplementary Appendix C). With more than 2.2 million workers directly engaged in the ready-made garments sector, and an equal number of workers employed in ancillary activities, the slowdown in the ready-made garments sector will translate into widespread poverty both in urban and rural areas. The slowdown in income growth will hit the existing poor the hardest. This group consists of a variety of vulnerable groups, mostly the old, children, and women. SMEs are also disproportionately vulnerable to the global economic crisis, which has potentially huge poverty implications. 84. The slowdown in growth of remittances will cause hardship for the recipient households and deepen poverty. For many households in rural areas, remittance earnings are the main source of income and livelihood. A fall in remittance income will directly affect consumption and the nutritional status of a large number of families in rural areas and have effects on overall poverty incidence. The fall in the number of workers leaving for overseas jobs will create pressure on the already slack domestic job market and the rise in the number of workers returning home after losing jobs, who often sell their land and other belongings to buy job contracts and pay for air tickets, could mean additional people slipping into poverty. D. Impact, Scope, and Coverage

85. The impact of the CSF is to contribute to Government's efforts to achieve higher growth and improve living standards given the country's exposure to external shocks. The objective of the CSF is to help the Government implement its countercyclical development program announced in the FY2010 budget for coping with the effects of the global crisis. The outcome of the proposed CSF is macroeconomic stability, higher public and private investment, and greater access to social services by women and vulnerable populations. 86. The CSF loan will directly contribute to implementing the expanded SSNPs to cushion the impact of the global economic crisis on the poor and vulnerable. Implementing the expanded SSNPs will serve the twin functions of immediately addressing the needs of the poor and vulnerable affected by the global crisis through income and food support, and also providing strong stimulus to growth, as such spending will directly raise aggregate demand. This, in turn, will free up fiscal space for financing the other components of the Government's countercyclical development program—in particular, the planned scaling up of infrastructure investment, so that efforts to enhance longer-term growth potential or macroeconomic stability are not compromised. The Design and Monitoring Framework is in Appendix 2 and the Development Policy Letter and the Access Criteria are in Appendix 7.

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E. Financing Plan

87. The Government has requested a loan of $500,000,000 under the CSF from ADB's OCR. The loan will have a 5-year term, including a grace period of 3 years; an interest rate determined in accordance with ADB's London interbank-offered rate (LIBOR)-based lending facility plus 200 basis points, commitment charge of 75 basis points on undisbursed loan balance, and such terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board. The Government has provided ADB with (i) the reasons for its decision to borrow under the ADB's LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. F. Implementation Period

88. The CSF loan will be implemented during October 2009 to December 2010.

G. Justification and Estimate of Resource Requirements

89. Bangladesh has a strong case for accessing the CSF and is in full compliance with the access criteria (Appendix 7, Supplementary Appendix G). Bangladesh is experiencing a sharp slowdown in exports and remittances and slower economic growth. The country is also facing fiscal constraints as the growth in revenue collection is decelerating. In addition, Bangladesh is still very poor and is vulnerable to natural disasters. It is also affected by an economic crisis not of its making. Further, as a developing member country with access to blend resources from ADB, Bangladesh is not able to access the additional $400 million in ADF resources being provided in the context of the crisis. The need for enhanced financial support from external sources to carry out the countercyclical development program is also underlined by (i) the likely revenue shortfalls, (ii) crowding out concerns of the private sector, and (iii) securing external financial assurance for the budget. The proposed CSF will not have any significant negative impact on debt sustainability. The estimated resource requirement is in Table 2. 90. Likely Revenue Shortfalls. In the coming fiscal year, when the Government needs a large amount of revenue to finance its spending plans, revenue potential will be constrained by subdued growth in taxes due to lower import prices and the effect of slower economic growth (as has already happened in FY2009). Furthermore, domestic demand would also be less buoyant because of slower growth in remittance inflows. Thus, while the budget targets a 15% growth in revenue, this is not expected to be more than 10–12% even with some additional revenue measures. 91. Crowding Out Concerns of the Private Sector. Because of the lack of depth in the financial system, non-inflationary domestic financing of the fiscal deficit is difficult. Due to the relatively narrow base of the financial sector—with a very low financial assets-to-GDP ratio—the Government is significantly constrained by its reliance on domestic financing of the budget. Traditionally, this problem has been addressed through recourse to reliance on external financing. In this fiscal year, owing to the larger size of the deficit, the dependence on both domestic and foreign financing will be correspondingly higher. 92. The Government's spending plans to overcome the global crisis, combined with an optimistic revenue target, have accentuated the risk for the budget deficit to exceed the 5% of GDP target leading to a correspondingly higher borrowing requirement. Larger deficit financing from the banking system than envisaged in the budget would seriously limit the availability of

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credit for the private sector. Nevertheless, in the event of a significant shortfall in external financing, the Government would be forced to curtail its spending plans or resort to more domestic borrowing. The average historical level of external borrowing amounting to $1.8 billion per year would lead to a correspondingly higher government borrowing requirement from the banking system. Borrowing of this magnitude is not possible without sharply reducing private sector borrowing from the banking system. The proposed financing through the CSF will reduce the potential crowding out of the domestic private sector credit by reducing government borrowing by an equivalent amount. A disbursement of $500 million under the CSF will reduce bank financing requirement of the Government by an equivalent amount thus allowing for a healthy flow of credit to the private sector. 93. Securing External Financial Assurance for the Budget. The FY2010 budget envisages Tk35 billion ($500 million) as special support/credit for development. The authorities expect to secure this amount from development partners as budget support. Discussions are underway with the World Bank although the availability of these resources will have to await the World Bank-International Monetary Fund (IMF) Joint Staff Assessment of the NSAPR-II (to be finalized) and approval of the World Bank’s country assistance strategy. The CSF would help the authorities partly offset any potential shortfall in revenue and reduce Government’s recourse to domestic bank financing. 94. Debt Sustainability. As macroeconomic management in Bangladesh has always been prudent, the intended increase in borrowing under the CSF will not have any significant impact on debt sustainability. The IMF's debt sustainability analysis (DSA) indicates that Bangladesh’s primary deficit has always been less than what is required for stabilizing public debt in relation to GDP and that performance is expected to hold in the future, pointing to a steady decline in the debt-to-GDP ratio from 42.9% in FY2008 to 33% by FY2028. These conclusions are also supported by the analysis done by ADB (Appendix 8) using assumptions broadly consistent with those underlying the IMF's DSA. The proposed CSF financing will not have any adverse impact on the overall public debt level, since it will only change the composition of public debt. The external component of public debt will go up by $500 million, while the domestic borrowing requirement and consequently domestic debt will be lower by an equivalent amount. 95. The change in the composition of public debt in favor of external debt may also have a favorable impact in two important ways. First, interest payments on external debt would be less than the interest payments on borrowing from domestic sources by issuing debt of equivalent maturity. The interest rate on 5-year domestic debt instruments is 12.5% while the rate of interest payable on CSF borrowing would at most be between 5–6% (assuming a 5-year swap rate). Although there could be costs associated with exchange rate movements, the spread between the domestic interest rate and the CSF borrowing rate is wide enough to make it much less costly to borrow from ADB. Second, by allowing more credit to flow to the private sector and also facilitating capital spending, the CSF would facilitate more effective execution of the countercyclical development program and thereby boost domestic activity. Such positive economic impacts would also enhance the public sector’s capacity to service debt. 96. Servicing of external debt, however, will increase. But given Bangladesh’s low and declining external debt service ratio, comfortable and growing levels of official foreign exchange reserves of the central bank, and its track record of strong balance of payments positions characterized by both external current account and overall balance of payments surplus positions, debt servicing should not be major cause for concern (Appendix 8).

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VI. IMPLEMENTATION ARRANGEMENTS, BENEFITS AND IMPACT, AND RISKS AND SAFEGUARDS FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM AND

COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM

A. Implementation Arrangements46

1. Program Management

97. MOF will be the executing agency, and will be responsible for the overall implementation of the Program (the PESF and the CSF) including compliance with all policy actions and administration, disbursements, and maintenance of records. In principle, MOF will be responsible for day-to-day implementation activities, report implementation progress, and provide guidance and direction to the implementing agencies. A joint secretary of the Finance Division, MOF, will act as the program director. The program director will be responsible for coordinating and ensuring that the work of the executing agency, the implementing agencies, under the guidance of the Program Steering Committee (PSC, para. 98) is carried out on time, so as to ensure Program implementation as scheduled. 98. The implementing agencies will be (i) Finance Division of MOF; (ii) National Board of Revenue under MOF; (iii) Ministry of Food and Disaster Management; (iv) Ministry of Women and Children Affairs; (v) Local Government Division of Ministry of Local Government, Rural Development, and Cooperatives; (vi) Implementation, Monitoring and Evaluation Division of Ministry of Planning; (vii) Socioeconomic Infrastructure Division of the Planning Commission, Ministry of Planning; (viii) Roads and Railways Division of Ministry of Communications; (ix) Power Division and Energy and Mineral Resources Division of Ministry of Power, Energy, and Mineral Resources; and (x) Ministry of Commerce. Each of the implementing agencies will be responsible for meeting the policy actions of the PESF under their respective implementing agencies. Since there are no policy actions for the CSF, the implementing agencies will function and provide support for the purpose of monitoring expenditures financed by the CSF. 99. The PSC for the Program will be formed and will be chaired by the secretary, Finance Division, MOF. The members will include representatives not below the rank of joint secretary from each of the implementing agencies and the joint secretary of the Economic Relations Division. The PSC will be responsible for providing overall direction, guidance, monitoring, and oversight under the Program. The PSC will meet at least on a quarterly basis to discuss the progress of the PESF and review macroeconomic conditions to ensure continued stability.

2. Procurement and Disbursement

100. The PESF will be released in two tranches and the CSF in a single tranche upon loan effectiveness. The loan proceeds will be used to finance the full foreign exchange costs (excluding local duties and taxes) of items produced and procured in ADB member countries, no more than 180 days before the effectiveness date of the loan. Items specified in the list of ineligible items (Appendix 9) and imports financed by other bilateral and multilateral sources are excluded. In accordance with the provisions of ADB’s Simplification of Disbursement Procedures and Related Requirements for Program Loans (1998), the loan proceeds will be disbursed to the People's Republic of Bangladesh as the Borrower. No supporting import documentation will be required if during each year that loan proceeds are expected to be disbursed, the value of Bangladesh total imports minus imports from nonmember countries,

46 See Supplementary Appendix I for further details on the implementation arrangements.

27

ineligible imports, and imports financed under other official development assistance is equal to or greater than the amount of the loan expected to be disbursed during such year. The Government will certify its compliance with this formula with each withdrawal request. Otherwise, import documentation under existing procedures will be required. Disbursements will be made under the simplified procedures for program loans. In accordance with the simplified disbursement procedures and related requirements for program loans, all goods and services produced and originating in ADB member countries will be procured, with due consideration to economy and efficiency, in accordance with the Government’s standard public procedures and normal private sector commercial practices acceptable to ADB. Goods commonly traded on the international commodity market will be procured in accordance with procedures appropriate to the trade and acceptable to ADB.

3. Counterpart Funds

101. The local currency generated from the proceeds of the PESF will be used to finance adjustment costs under the PESF, including (i) delivery of scaled up SSNPs, (ii) strengthening of the funding and implementation of PPPs, and enhancement of access to credit for SMEs and the housing sector, and (iii) revenue mobilization measures, reforms in PFM processes, and application of the MTBF. The CSF will supplement the PESF by funding additional SSNPs (Appendix 3, and Supplementary Appendix B), including for returning migrants, unemployed youth, stipends to keep students in school, pensions, public works in disaster-prone areas, and food-based assistance. Supplementary Appendix F provides breakdown of support for SSNPs through the PESF and the CSF.

4. Anticorruption Policy and Governance Risks

102. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Program. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Program. In particular, all contracts financed by ADB in connection with the Program shall include provisions specifying the right of ADB to audit and examine the records and accounts of the EA and all contractors, suppliers, consultants, and other service providers as they relate to the Program. 103. As part of preparation for the Program, a governance risk assessment was conducted along the lines prescribed by the implementation of the Second Governance and Anticorruption Action Plan (Supplementary Appendix H). A close review of the PFM and other systems shows the following areas that are of particular concern:

(i) Weak institutional capacity. In order for the Program to succeed, it is imperative that relevant institutions are strengthened.

(ii) Non-sustainability of policy reforms. There should be continuous engagement

with the Government and other relevant stakeholders on the reform measures to ensure appropriate buy-in and ongoing commitment. Civil society and other development partners should be consulted as part of this on-going process.

(iii) Mismanagement of resources in the public sector. Adequate auditing

provisions, and a fully functional and effective Ombudsman office, supported by a

28

constantly vigilant media and civil society, would lessen mismanagement in the public sector. Close performance monitoring will also be necessary to help reduce the negative effects of implementation delays due to capacity constraints.

(iv) Weak coordination. The MOF will have to play a much stronger role to ensure

proper coordination across government departments, particularly in light of the focus on implementation of the MTBF under the PESF.

(v) Fiduciary risks. Quarterly reporting arrangements are built into the Program.

104. The success of the Program depends on the Government’s continuing strong commitment to governance reforms in general and, more specifically, to successfully countering endemic and widespread corruption. There is a risk that recently initiated reforms may be reversed; this risk may be mitigated by continued policy dialogue, not only with the Government but also with other stakeholders. The ongoing ADB-funded Good Governance Program provides adequate support to all levels of Government to ensure that mismanagement of resources is more effectively addressed. It has also set aside resources for capacity building to ensure that government agencies are building the relevant capacity for grievance handling and service delivery feedback.47

5. Accounting, Auditing, and Reporting

105. The Government will maintain separate records of accounts for the Program (PESF and CSF). To ensure proper fund management, ADB retains the right to audit the use of program loan proceeds. The accounts will be managed, operated, and liquidated in accordance with terms satisfactory to ADB. For the PESF, the Finance Division, MOF, will prepare a quarterly consolidated progress report on policy and institutional reforms implementation and will forward the same to ADB at the time of submission to the PSC. The reports will describe progress made in the PESF and any changes to the implementation schedule, and will also identify any problems encountered and remedial actions taken. Not later than 3 months after PESF completion, the Government will provide ADB with a PESF completion report, including an assessment of overall PESF performance. 106. For the CSF, the Finance Division, MOF, will maintain all monitoring data and evaluate the benefits of the CSF, and will also submit a semiannual progress report to ADB that reviews the macroeconomic and fiscal conditions. Within three months after the CSF completion, the Government will provide ADB with a CSF completion report that includes an assessment of the extent of progress and the impact of actions under the CSF.

6. Program Performance Monitoring and Evaluation

107. The Government and ADB have agreed on a set of indicators and targets that will be used to assess progress toward meeting the objectives of the Program. MOF shall be responsible for maintaining all monitoring data and evaluating benefits. The PSC will monitor implementation and outcomes of the core components as follows:

47 The ADB-funded ongoing Good Governance Program (footnotes 17 and 34) makes provision of approximately $15

million for 2009 and 2010 to build the capacity of sector agencies as well as local authorities for implementation of the National Integrity Strategy, a key part of which is supporting application of the Right to Information Act, anticorruption-related reforms, and strengthening grievance-handling mechanisms.

29

(i) Macroeconomic and fiscal monitoring will be based on data from the Bangladesh Bureau of Statistics, MOF, the Planning Commission and Bangladesh Bank, as well as data from the IMF.

(ii) To monitor progress in enhancing the provision of safety nets and empowerment programs for the poor and vulnerable, the PSC and ADB will rely on SSNP data recorded by local administrations and agencies; Ministry of Social Welfare; Ministry of Local Government, Rural Development, and Cooperatives; Ministry of Food and Disaster Management; and MOF, as well as quantitative and qualitative information available from development partners, civil society organizations and nongovernment organizations active in this area—when available, data from the Household Income and Expenditure Survey conducted after 2005, and gender-disaggregated data from existing gender budgets, will also be used.

(iii) MOF, Ministry of Planning, Bangladesh Bank, and Federation of Bangladesh Chambers of Commerce and Industry will be the primary sources of information to monitor progress in putting in place the necessary PPP framework and in accelerating implementation of public infrastructure projects under the ADP and PPP; information from IMF will also be consulted.

108. For each of these indicators, progress will be measured against a baseline in FY2009 (Appendix 1 and Appendix 2). The responsible line ministries working in these sectors will review these frameworks every three months to determine progress and identify constraints. The executing agency will have the primary responsibility for monitoring implementation and outcomes and assessing the status of reforms. It will closely coordinate the monitoring of reforms in social protection, private sector investment, and PFM with development partners working in these areas through regular reviews; and it will report to ADB on the status of the Program targets and indicators. ADB will also review progress in implementation of reforms through review missions, in consultation with other development partners, as needed. A detailed description of the monitoring arrangements is in Appendix 10. 109. Program reviews will be undertaken on a continuing basis. MOF will conduct joint quarterly meetings with the PSC and the implementing agencies to review progress. MOF will, as needed, hold consultative meetings with the private sector and development partners to solicit their feedback on emerging policies and on the impact of the Program. A review of the PESF will also take place prior to the scheduled release of the second tranche. This review will, among others, (i) assess implementation performance against the tranche release conditions and covenants; and (ii) identify relevant problems and constraints. If the reviews determine that changes are required, the Government and ADB will agree on measures, including changes in implementation arrangements, to ensure that the Program obligations are met. 110. The PSC and ADB shall jointly conduct semi-annual reviews of the macroeconomic and fiscal conditions of the economy and assess the impact and evaluate the benefits of actions under the CSF on the real economy and the social sectors, in accordance with ADB’s performance management review requirements. MOF shall be responsible for maintaining all monitoring data and evaluating the benefits of the CSF. Within three months after the CSF period, MOF, with the support of the implementing agencies will submit a CSF completion report to ADB that assesses the extent of progress under the CSF. The economics, governance, and portfolio management units at the ADB resident mission will continue to closely monitor macroeconomic performance, status of reforms, and the impact of the measures taken even after Program completion.

30

B. Expected Benefits and Impact

111. The Program will provide financing for scaling up SSNPs and will support reforms to implement the SSNPs more effectively through better targeting. Regardless of the global crisis, expanding the coverage of SSNPs and improving targeting would have been critical to prevent the hardcore poor and most vulnerable segments of the population, especially women and people living in disaster-prone areas, from falling more deeply into poverty. As a result of reforms supported by the Program, the poor will be empowered to claim and receive the benefits they are entitled to, because of enhanced access to information and oversight. Training and microcredit schemes (such as that provided through the Palli Karma Shahayok Foundation) will also help improve economic opportunities for the poor. The immediate benefit from these will be to safeguard the gains in economic and social welfare in a very poor country. The Summary Poverty Reduction and Social Strategy is in Appendix 11. 112. In the context of the economic slowdown and lower revenue collection, the Program will provide additional resources to help expand SSNPs so as to also cover people previously non poor who are hurt by the crisis, such as households highly dependent on remittances, laid off expatriate and factory workers in affected export sectors, women forced into low-paying and insecure jobs, as well as the large number of young people joining the labor market at a time of shrinking job opportunities. The SSNPs will make it possible for poor, including female-headed households, to preserve adequate food intake through various food relief schemes, and to invest in their children's education with the help of stipends for primary, secondary, and drop-out students. Thanks to uninterrupted pension payments, poor pensioners will be able to continue sustaining their families. The 'Skill Development Fund for Expatriate Returnees and New Entrants to the Labor Market', as well as the 'Ghare Fera (Returning Home) Program' will facilitate the economic and social reinsertion of migrant workers. Rural employment opportunities will also help absorb some of the excess labor force and ensure a minimum livelihood to people with no other resources. 113. In addition to the direct benefit for the poor, the Program will create fiscal space to enable the Government to finance scaled up infrastructure investment and a fiscal stimulus package. These additional expenditures will help reduce the risk of unemployment and income loss in the immediate term, and also enhance longer-term growth prospects without compromising macroeconomic stability or crowding out private investment. Moreover, the benefits from the structural reforms supported under the PESF will be felt in the medium and long term by helping to remove institutional impediments to higher private sector participation in infrastructure investment. 114. Successful PPPs in infrastructure and social sectors, over the medium- to long-term will enable Government to expand the level of social expenditures and broaden management capacity for infrastructure projects. In the short run, a key benefit from scaled up investment in infrastructure will be job creation, which will help absorb the large labor force, preserve livelihoods and sustain demand at a time of collapsing income-earning opportunities at the global level. These investments will also build potential for more rapid growth in the medium term. SMEs would receive adequate support, thus helping to contribute to more inclusive growth. 115. The results from performance monitoring and reporting systems will feed into the planning and budgeting process. The Public Accounts Committee will use the audit results to ensure accountability on public spending and control irregularities. Internal and external control measures and oversight will have been put in place to reduce the scope for corruption.

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C. Program Risks and Safeguards

116. Risks. Success of the Program depends on Government's continuing strong commitment to the economic reform agenda as demonstrated in the FY2010 budget. Some of the risks include (i) continuation of the global crisis and its impact on the Bangladesh economy that would accentuate the risk of the budget deficit exceeding 5% of GDP—this would lead to correspondingly higher borrowing requirement, which would seriously limit the availability of credit for the private sector and could compromise macroeconomic stability, (ii) a further decline in remittances, which would reduce livelihoods for many rural households heavily dependent on such income, (iii) lack of targeted focus on capacity enhancement in Government to implement the economic reform agenda, (iv) leakages, poor targeting, and corruption that could reduce the effectiveness of expenditures through mismanagement of resources, weak business processes, and weak internal accountability in the system, (v) reduced focus on the enabling conditions (such as appropriate legal and policy framework) for reform efforts such as on PPPs, and (vi) ineffective service delivery as a result of low capacity at the local level. 117. Mitigation Measures. The countercyclical development program to support affected sectors will reduce the risk of job shedding, and broaden access to credit for SMEs and women entrepreneurs. SSNPs targeting people with low income and no assets will provide protection in the event of a further decline in remittances. Actions taken under the PESF to enhance access to information and to strengthen the representation of the poor and vulnerable groups will help mitigate some of the concerns regarding possible leakage, mismanagement, or corruption. Line ministries, being instructed to advance the preparation of project approval and procurement documents in FY2010 and their performance being monitored more closely, should help accelerate actual investment spending. Additional measures to mitigate these risks include (i) ring-fencing of specific PESF-supported reforms so that Government commitment to fund them is maintained, (ii) targeted capacity building by Government for specific areas of PESF focus, and (iii) continued engagement with Government on governance reform measures, such as that currently in place. 118. Safeguards. The Program has been reviewed for its impact on the various relevant ADB and Government safeguards, and no adverse impact is expected on the environment, resettlement, or indigenous population as a result of the policy interventions. For all three areas, the Program is rated a category C.

VII. ASSURANCES

A. Specific Assurances

119. For the PESF, in addition to the standard assurances, the Government will be requested to give the following specific assurances, which will be incorporated in the Loan Agreements:

(i) The Government will (a) ensure that all policies adopted and actions taken under the PESF, as set forth in the Policy Letter and the Policy Matrix, will continue to be in effect for and beyond the duration of the PESF, and (b) promptly adopt and implement the policies and actions included in the Program PESF set forth in the Policy Letter and the policy Matrix.

(ii) The Government will give due consideration to the findings and

recommendations proposed as a result of the PESF while carrying out the policies and actions under the PESF.

32

(iii) The Government will keep ADB informed of, and the Government and ADB will

from time to time exchange views on, the progress made in carrying out the policies and actions set out in the Policy Letter and the Policy Matrix and in the formulation and implementation of new related policies.

(iv) The Government and ADB will promptly discuss problems and constraints

encountered during the implementation of the PESF and appropriate measures to overcome or mitigate such problems and constraints.

(v) The Government will keep ADB informed of policy discussions with other

multilateral and bilateral aid agencies that may have implications for the implementation of the PESF and will provide ADB with an opportunity to comment on any resulting policy proposals. The Government will take into account ADB’s views before finalizing and implementing any such proposals.

(vi) The Government will ensure that the counterpart funds are used to finance the

local currency cost relating to the implementation of the PESF and other activities consistent with the objectives of the PESF and will provide the necessary budget appropriation to finance the structural adjustment costs relating to the implementation of reforms under the PESF, including (a) revenue mobilization measures, reforming financial management processes, and application of MTBF, (b) strengthening the funding and implementation of PPPs, and (c) delivery of social safety nets.

(vii) The Government will undertake periodic reviews during the PESF

implementation to evaluate the scope, implementation arrangements, progress and achievement of the objectives of the PESF. In addition to the periodic reviews, a review of PESF will take place prior to the second tranche release. The Government will ensure that ADB will have the opportunity to participate in these reviews.

B. Conditions to Loan Effectiveness

120. The following are the conditions for program loan effectiveness: (i) All conditions for the release of the first tranche of the PESF, as specified in the

Policy Matrix, have been complied to the satisfaction of ADB; (ii) The Government will have established the PSC and appointed the implementing

agencies for the PESF and the CSF; (iii) the loan agreements for the PESF will have been duly executed and delivered on

behalf of Bangladesh and all conditions precedent to their effectiveness (other than conditions requiring the effectiveness of the CSF loan agreement) will have been fulfilled; and

(iv) the loan agreement for the CSF will have been duly executed and delivered on behalf of Bangladesh and all conditions precedent to their effectiveness (other than conditions requiring the effectiveness of the loan agreements for the PESF) will have been fulfilled.

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VIII. RECOMMENDATION

121. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $100,000,000 to the People's Republic of Bangladesh for the Public Expenditure Support Facility Program from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a term of 15 years, including a grace period of 3 years; a commitment charge of 0.15% per annum; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board;

(ii) the loan in various currencies equivalent to Special Drawing Rights of 64,036,000

to the People's Republic of Bangladesh for the Public Expenditure Support Facility Program from ADB’s Special Funds Resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board;

(iii) the loan in various currencies equivalent to Special Drawing Rights of 28,720,000

to the People's Republic of Bangladesh for the Public Expenditure Support Facility Program from ADB’s Special Funds Resources, with an interest charge at the rate of 1.6% per annum; a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board; and

(iv) the loan of $500,000,000 to the People's Republic of Bangladesh for the

Countercyclical Support Facility Support Program from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility plus 200 basis points; a term of 5 years, including a grace period of 3 years; and such other terms and conditions set forth in the draft Loan Agreement presented to the Board.

Haruhiko Kuroda President 21 September 2009

Appendix 1 34

DESIGN AND MONITORING FRAMEWORK FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM

Design Summary

Performance Targets and/or Indicators

Data Sources and/or Reporting Mechanisms

Assumptions and Risks

Impact To enhance pro-poor and gender-inclusive growth and improve living standards of the vulnerable populations

Real GDP growth sustained at an average of more than 5.5% until FY2012 (FY2009 baseline: 5.9%)

Poverty incidence reduced by 3 percentage points by FY2011 (FY2008 estimated baseline: 40% of population)

Numbers of hardcore poor as percent of total population decline by 5 percentage points by FY2011 (FY2009 baseline: 20% of total population)

Bangladesh Bureau of Statistics International Monetary Fund World Bank National surveys

Assumptions Continued strong commitment for reforms

Global economy recovers from the global crisis

Risks Weak implementation of reforms

Calamitous natural disasters persist

Outcome Stable macroeconomic environment where private sector development is emphasized and where women and vulnerable populations have greater access to social services, including through effective gender targeting

Food inflation will not exceed 10% (FY2009 baseline: 6.7%)

Tax and non-tax revenue to GDP ratio will increase by 1 percentage point (FY2009 baseline: 11.2%)

Ratio of private investment to GDP will increase by 2 percentage points (FY2009 baseline: 19.6%)

Coverage of vulnerable people by social safety nets increases by 33% (FY2009 estimated baseline: 72 million people) Coverage of women by women-targeted SSNPs increased by 20% (FY2009 estimated baseline: 7.2 million women)

Bangladesh Bureau of Statistics Ministry of Finance Bangladesh Bank International Monetary Fund Reports from relevant government departments

Assumptions Inflation pressure eases

Global crisis does not worsen

Risks Countercyclical fiscal policy insufficient to mitigate growth slowdown

Crisis policy responses are not well coordinated

Revenue collection slows down further

Outputs 1. More effective service delivery

25% increase in the number of vulnerable populations

Government statistics

Assumptions Government has information on clusters of

Appendix 1 35

Design Summary




covered by the food security programs (FY2009 estimated baseline: 46.7 million)

50% increase in the number of hardcore poor covered by the employment generation program (FY2009 baseline: 3.1 million)

20% increase in the number of women covered by allowances for widowed, deserted, and destitute women (FY2009 baseline: 0.9 million women)

20% increase in the number of hardcore poor women supported by the Vulnerable Group Development Program (FY2009 baseline: 80,000 women)

Application of the citizen report cards in at least 25% of the 40 poorest districts (FY2009 baseline: none)

Gender-based budgeting completed in 20 ministries (FY2009 baseline: 4 ministries)

Reports from civil society LGED reports Ministry of Finance, Ministry of Social Welfare, and Ministry of Food and Disaster Management

vulnerable populations that merit the safety nets

Pro-poor targeting under social assistance program remains effective

Ministry of Food and Disaster Management has requisite skills sets and capacities

Risks Apathetic local governments fail to support voice and oversight measures

Social assistance program overstretched

Weak inter-ministerial coordination

2. More conducive investment climate

Value of infrastructure projects under implementation rises by 20% over FY2009 levels (FY2009 estimated baseline: $2.8 billion implemented)

Resource allocation criteria for PPP infrastructure investment projects (FY2009 baseline: no criteria in place)

10% increase in the level of foreign direct investments (FY2009 baseline: $882 million)

Ministry of Finance Ministry of Planning Bangladesh Bank International Monetary Fund Government website Federation of Bangladesh Chamber of Commerce and Industry

Assumptions Timely inter-ministerial support for the regulation

Public sector willing to collaborate with private sector

Private sector motivated, willing to invest

Private sector participation results in pro-poor job creation

Enabling environment for PPP and PSD exists

Appendix 1 36

Design Summary




Infrastructure Investment Fund and Viability Gap Fund in place (FY2009 baseline: no funds in place)

At least 5 PPP projects identified and invited for private sector participation (FY2009 baseline: none) The country's ranking in the World Bank Doing Business Survey reverts to the 2007 level (2009 baseline: 110th out of 181 countries)

Risks Weak inter-ministerial coordination

Community non-acceptance of service delivery by private sector Lack of mutual trust between key stakeholders

3. Strengthened PFM

MTBF introduced in 20 ministries (FY2009 baseline: 16 ministries)

Debt service liability management system introduced and implemented (FY2009 baseline: system being developed)

Integrated budgeting and accounting system operational in all districts (FY2009 baseline: 55 districts)

Ministry of Finance Planning Commission

Assumption Government is committed to carrying out the policy reforms Risks Limited acceptance of new approaches by Government and reluctance by the bureaucracy

Gaps in internal accountability mechanisms in government agencies.

Weak capacity in some ministries or at the district level.

Activities with Milestones 1. More effective service delivery:

By October 2009: 1.1 Enact the Right to Information Act, 2009 1.2 Enact the Consumer's Right Protection Act, 2009 1.3 Introduce SSNPs for vulnerable populations and expand existing programs 1.4 Introduce an enhanced Employment Generation Program for the Hardcore

Poor 1.5 Consult with the operation sections, development sections, and budget

wings of the Ministries and line agencies under the ministries, with a view to identify key issues related to gender budgeting

1.6 Finalize gender budgeting guidelines to ensure greater transparency and accountability of the share of expenditure for women development

1.7 Submit to Parliament a budget report entitled Women's Advancements and Rights in Four Ministries' Activities

Inputs

PESF Loan ADB: $244.85 million (OCR: $100 million; ADF: $144.85 million)

Policy Reforms and Outputs More effective service delivery: Social safety nets: $168 million

Voice and oversight: $4 million

Appendix 1 37

Activities with Milestones under the PESF Inputs 1.8 Finalize operational plans to establish a reliable food security system 1.9 Support Union Parishads to seek and act upon feedback from vulnerable

populations with respect to delivery of SSNPs 1.10 Commence implementation of the suite of safety net programs that have

been developed

By December 2009: Form an Information Commission in pursuance of the Right to Information Act and approve its organization structure

1.11 Appoint the operational staff of the Information Commission to implement the Right to Information Act

1.12 Instruct all ministries to fix a day a week for hearing public complaints and develop a database on public complaints in each ministry

1.13 Establish the National Consumers' Right Protection Council, socialize the Act, earmark funds from the block allocations in the FY2010 budget for the Council and its activities

1.14 Develop, and/or strengthen existing, service delivery mechanisms for implementation of SSNPs at the Union Parishad level: (i) design an employment generation program with targeted geographical and group coverage; and (ii) design guidelines to operate new programs

1.15 Develop requisite processes and capacity building measures at the Ministry of Food and Disaster Management

1.16 Finalize an action plan to put in place citizen's charters in public sector organizations

1.17 Finalize an operational plan to prepare a comprehensive list of hardcore poor and other vulnerable populations

By March 2010: 1.18 Orient the LGIs and others on the new guidelines for implementation of

SSNPs 1.19 Prepare a dissemination and orientation plan for effective use of the gender

budgeting guidelines down to line agency levels 1.20 Expend at least 60% of the budget allocated for the Employment Generation

Program for the Hardcore Poor 1.21 Implement the budgeting guidelines in at least 20 ministries that have

adopted MTBF to ensure greater transparency and accountability of expenditures on women's development

2. More favorable investment climate: By October 2009: 2.1 Allocate funds for the Viability Gap Fund 2.2 Allocate funds for the Technical Assistance Fund 2.3 Allocate funds for the PPP Infrastructure Investment Fund 2.4 Establish the Bangladesh Institute of Capital Markets 2.5 Allocate funds for SME and housing sectors 2.6 Enact the Money Laundering Prevention Act of 2009 2.7 Extend merchant banking facilities to the existing three state-owned

commercial banks

More conducive investment climate: PPPs: $27 million Support for SMEs and Housing: $21 million

Business environment: $2 million Strengthened PFM: Public sector efficiency and revenue mobilization measures: $9 million

Financial management processes: $9 million

MTBF: $5 million

Appendix 1 38

Activities with Milestones under the PESF Inputs By March 2010: 2.8 Establish and make operational a PPP cell 2.9 Revise and reissue the 2004 Private Sector Infrastructure Guidelines

2.10 Establish a financial institution, by the merger of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Shangstha

By September 2010: 2.11 Review and prepare an action plan to support SME centers, women

entrepreneurship, and one-stop facility, and make the plan public on the MOF website

2.12 Review the progress on PPPs in infrastructure in Bangladesh, including assessing the legal and institutional frameworks for PPPs, and make public the review report on the MOF website

3. Strengthened Public Financial Management By October 2009: 3.1 Divest shares in Jamuna Oil and Meghna Oil 3.2 Convert Bangladesh Biman to a limited liability company under the Company

Act and enact the Bangladesh Biman Corporation 3.3 Convert the Bangladesh Telegraph and Telephone Board into a limited

liability company under the Company Act and enact the Bangladesh Telegraph and Telephone Board (Amendment) Act, 2009

3.4 Enact the Income Tax Ordinance (Amendment) Act, 2009 3.5 Enact the National Board of Revenue (Amendment) Act, 2009 3.6 Extend the coverage of the Integrated Budgeting and Accounting System to

at least 55 of the 64 district account offices under MOF 3.7 Roll out the adoption of the MTBF to 20 government departments 3.8 Put in place and implement a debt service liability management system in

MOF 3.9 Establish a macroeconomic wing in the Finance Division of MOF 3.10 Introduce a system of reduced corporate tax rates for industries in certain

sectors in lieu of the existing tax holidays schemes

By March 2010: 3.11 Establish a Planning and Budget Wing (or branch) in at least five ministries

in which the MTBF has been applied 3.12 Review and revise the development project approval process

By June 2010: 3.13 Finalize plans to expand the tax base by identifying new tax payers through

surveys covering cities, districts and upazilas 3.14 Finalize the revised National Strategy for Accelerated Poverty Reduction II 3.15 Issue policy directives and prepare an action plan to improve the quality and

ensure timely submission of the annual accounts and audit reports 3.16 Form a task force to enhance monitoring of the major ADP projects 3.17 Implement the recommendations made by the Pay Commission on civil

servant salary

Appendix 1 39

Activities with Milestones under the PESF Inputs By September 2010: 3.18 Implement a system for online submission of income tax 3.19 Notify the first round of withdrawal of tax exemptions and exclusions,

simplified procedures, and streamlined tax administration 3.20 Finalize plans to present district-level budget for at least one district of each

division in the country

By December 2010: 3.21 Review and expand debt service liability management system

4. Supervision and management: 4.1 Establish Program Steering Committee (by September 2009) 4.2 Conduct reviews:

(i) by PSC (December 2009, March 2010, June 2010, and September 2010)

(ii) by ADB (December 2009, June 2010, and September 2010) (iii) by ADB on tranche condition review (April 2010)

ADB = Asian Development Bank, ADF = Asian Development Fund, ADP = Annual Development Program, GDP = gross domestic product, LGED = Local Government Engineering Department, LGI = local government institution, MOF = Ministry of Finance, MTBF = medium-term budgetary framework, OCR = ordinary capital resources, PESF = Public Expenditure Support Facility, PFM = public financial management, PPP = public–private partnership, PSC = program steering committee, PSD = private sector development, SME = small and medium enterprise, SSNP = social safety net program.

40 Appendix 2

DESIGN AND MONITORING FRAMEWORK FOR THE COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM

Design Summary




Impact Contribute to Government's efforts to achieve higher growth and improve living standards given the country's exposure to external shocks

Real GDP growth sustained at an average of more than 5.5% until FY2012 (FY2009 baseline: 5.9%)

Poverty incidence reduced by 3% points by FY2011 (2008 estimated baseline: 40% of population)

Numbers of hardcore poor as percent of total population decline by 5% points by 2011 (2009 baseline: 20% of total population)

Bangladesh Bureau of Statistics

International Monetary Fund

World Bank

National surveys

Assumptions Continued strong commitment for reforms

Global economy recovers from the crisis

Risks Weak implementation of reforms

Calamitous natural disasters persist

Outcome Macroeconomic stability, higher public and private investment, greater access to social services by women and vulnerable populations

Fiscal deficit remains within 5% of GDP (FY2009 estimated baseline: 4.1% of GDP)

Food inflation will not exceed 10% (FY2009 estimated baseline: 6.7%)

Public investment rises to 4.8% of GDP in FY2010 (FY2009 baseline: 4.6% of GDP)

Ratio of private investment to GDP will increase by 2% points (FY2009 baseline: 19.6%)

Coverage of poor and vulnerable people by social safety nets increases by 33% (FY2009 estimated baseline: 72 million people) Coverage of women by women-targeted SSNPs increased by 20% (FY2009 estimated baseline: 7.2 million women)

Ministry of Finance Bangladesh Bank Bangladesh Bureau of Statistics International Monetary Fund

Assumptions Inflation pressure eases

Global crisis does not worsen

Export and remittances do not collapse

Risks Countercyclical fiscal policy insufficient to mitigate growth slowdown

Crisis policy responses are not well coordinated

Revenue collection slows down further

Appendix 2 41

Design Summary




Outputs 1. Expanded SSNPs delivered

25% increase in the number of vulnerable populations covered by the food security programs (FY2009 estimated baseline: 46.7 million) 50% increase in the number of hardcore poor covered by the employment generation program (FY2009 baseline: 3.1 million)

Ministry of Social Welfare Ministry of Food and Disaster Management

Assumptions Government has information on clusters of vulnerable populations that merit the safety nets

Pro-poor targeting under SSNPs remains effective Ministry of Food and Disaster Management has requisite skills sets and capacities Risks Apathetic local governments fail to support voice and oversight measures

SSNPs overstretched

Weak inter-ministerial coordination

2. Larger ADP implemented

Value of infrastructure projects under implementation rises by 20% over FY2009 levels (FY2009 estimated baseline: $2.8 billion implemented)

Ministry of Finance Ministry of Planning Government website


Procurement on time

Project processing procedure streamlined Risks Weak inter-ministerial coordination

Procurement delayed

Project processing slow

3. Private Sector investment leveraged under PPP

Infrastructure Investment Fund and Viability Gap Fund in place (FY2009 baseline: no funds in place)

At least five PPP projects identified and invited for private sector participation (FY2009 baseline: none)

Ministry of Finance Government website Federation of Bangladesh Chamber of Commerce and Industry Ministry of Finance


Government willing to collaborate with private sector

Private sector motivated, willing to invest

42 Appendix 2

Design Summary




Enabling environment for PPP and private sector development exists

4. Assistance to affected export sector provided under FY2010 stimulus package

At least 50% of the budget allocation earmarked for export sector affected by global crisis, delivered

Bangladesh Garments Manufacturers and Exporters Association Bangladesh Knitwear Manufacturers and Exporters Association Other major exporters associations

Risks Weak inter-ministerial coordination Lack of mutual trust between key stakeholders Assumption Government is able to decide on the mechanism to deliver support Risk Failure to agree on the modality and amount with the major exporters association

Inputs CSF will finance $500 million (in addition to $168 million from the PESF) for implementing the Government's outlay of $2.5 billion for the SSNPs. The remaining expenditures for the SSNPs and other components of Government's countercyclical development program (Annual Development Program, PPPs, and Fiscal Stimulus Package) will be borne by the Government from its own resources and from domestic and external finances.

Activities and Milestones

(i) Government's countercyclical development program contained in the FY2010 budget has been approved in June 2009.

(ii) The first phase of the fund allocation has been made to the concerned ministries in July-August

2009.

(iii) Government's countercyclical development program is implemented (ongoing). Supervision and management 1. Establish PSC (by September 2009) 2. Conduct reviews:

• by PSC (December 2009, March 2010, June 2010, and September 2010) • by ADB (December 2009, June 2010, and September 2010)

ADB = Asian Development Bank, ADP = Annual Development Program, CSF = countercyclical support facility support program, FY = fiscal year, GDP = gross domestic product, PESF = public expenditure support facility program, PSC = Program Steering Committee, PPP = public–private partnership, SSNP = social safety net program.

Appendix 3 43

SECTOR ANALYSIS A. Overview1

1. The ongoing global economic crisis, as well as the recent natural disasters, has had a severe impact on Bangladesh and its economy. Chief among the impacts has been the slide of millions of vulnerable people (paras 2 and 3) towards greater poverty in a country where nearly 40% of the population are already below the poverty line.2 Concerned at this development, the Government of Bangladesh (the Government) is aware that (i) on the one hand, it is vital that the short-term impacts of the crisis on vulnerable people be immediately addressed; and (ii) in the medium- to long- term, it is important that measures be in place to improve the public financial and expenditure management system, and make the investment climate more conducive for the private sector to augment public sector investments. The Public Expenditure Support Facility (PESF) Program is aligned with these specific measures taken by Government. B. Definition of Vulnerable People

2. While data limitations do not allow measuring the extent of vulnerability, poverty and vulnerability are often closely linked, with the poor being the most vulnerable to falling into deeper poverty as a result of life cycle and aggregate climatic shocks. Poor households have limited human and physical assets, and shocks to individual members (e.g., illness, loss of job) or the community (e.g., floods) force them into ineffective risk coping strategies (child labor, sale of productive assets, informal lenders) that push them deeper into poverty. 3. The groups particularly vulnerable to risks include: (i) infants and children that face the risk of poverty, malnutrition, low human capital accumulation, and exploitation in the labor force;3 (ii) working age adults that face the risk of unemployment and low productivity; (iii) elderly adults that lack adequate safety nets; (iv) special and excluded groups that need assistance;4 and (v) a majority of the women who have very limited access to empowerment and productive employment opportunities. C. Social Safety Net Programs

4. Bangladesh relies on a range of informal and formal instruments to mitigate the risk of vulnerable populations falling into poverty, and to help them cope with poverty. The Government has initiated numerous social safety net programs (SSNPs), 5 including safety nets, social insurance (e.g., pensions, unemployment benefits), and labor market policies/programs to (i) 1 For purposes of the PESF, the term sector refers to the public expenditure domain, particularly, public financial

management (including public sector efficiency and revenue mobilization, and financial and fiscal management), private sector development, and service delivery in the domain of SSNPs. These three are inter-related sub-components of the PESF.

2 Poverty line constructed using the cost-of-basic needs method represent the level of per capita expenditure at which the members of a household can be expected to meet their basic food calorie requirement (2,122 kilo calories per day per person) and also non-food consumption.

3 Over 60% of households in Bangladesh with multiple children are poor. Access to education is still inequitable with only 24% of expenditures at the secondary level, and only 17% of expenditures at the tertiary level accruing to the poor. About 20% of children aged 5-17 years are working and over four-fifths of these come from poor households. Malnutrition remains a serious concern, with nearly half of all children under 6 years of age being underweight or stunted.

4 Special categories include the disabled, widowed women, hill tribes, and other minorities and groups that are among the poorest and most marginalized in Bangladesh. Hill tribes, for example, constitute only about 1% of the population, but their needs are extreme.

5 Further details on SSNPs are in Table A3 and Supplementary Appendix B.

44 Appendix 3

help the poor and those vulnerable to cope with shocks to their incomes and livelihoods; (ii) help workers retrenched during industrial restructuring, including by providing access to credit; and (iii) strengthen disaster prevention and mitigation strategies. Income transfers from SSNPs have also played an important role in protecting and expanding asset bases of the poor and vulnerable. Notwithstanding these, the SSNPs face several challenges including coverage, leakages, targeting, and oversight opportunities. The PESF aims to address some of these aspects in a substantive manner. In addition, the Countercyclical Support Facility Support Program facilitates the scaling up of the SSNPs and frees up fiscal space for other areas of the Government's countercyclical development program.

5. Coverage. Increasing the coverage of the SSNPs is a major challenge.6 As a result, the coverage of food security, a primary element in the SSNPs, is considered inadequate. The expansion of SSNPs for mitigating the adverse impacts of natural disasters and external price shocks on the food security of vulnerable populations is constrained by limited fiscal space and also by weak institutional capacities of the relevant government agencies. 6. Leakage. 7 Leakage in SSNPs and the service delivery system is also a serious challenge in Bangladesh. Minimizing the number of intermediaries in service delivery, realigning incentives for more efficient service delivery, and making the decisions of intermediaries more transparent are some solutions. Given that leakage and misallocation problems may go undetected for long periods of time if monitoring and management capacity are inadequate, putting greater emphasis on monitoring capacity within line agencies is critical. There is a need for digitization and greater use of information technology to make SSNPs more effective.

7. Targeting. While the new SSNPs introduced in the FY2010 budget (Table A3) will certainly help address the adverse impacts of the global crisis, there is an equally pressing need for enhancing targeting of SSNPs for maximizing their impact. SSNPs can be made more effective by improving targeting criteria,8 for which it will be necessary to target households using criteria that are more closely related to occupation and income than to assets such as land. At a systemic level, the Government will need to put in place stronger gender budgeting guidelines for greater accountability of the share of expenditure for women development. 8. Oversight Opportunities. In order to strengthen gender targeting and for more effective service delivery, it is important to ensure that oversight opportunities are available to the vulnerable people that access SSNPs to ensure that service provision is being done in a transparent and accountable manner. In this regard, legislative measures such as the Right to

6 Although the number of beneficiaries covered under SSNPs looks high from Government records, it may be noted

that the same beneficiary could be included in separate programs and counted more than once. 7 Leakage is manifested by a gap between the value of a good or a service delivered and a reasonable cost of the

item for the producer and the service provider. Leakage could be the result of a technical loss, weak financial management, theft, and/or corruption.

8 To facilitate better targeting, it is necessary first to prepare a comprehensive list of the hardcore poor and other vulnerable populations. At the moment, the Government does not have the complete picture of the true variance between those in need of the coverage and those that are actually accessing the SSNPs. This gap in service delivery is serious, and requires that the Government take a concerted approach to prepare an operational plan to collect the necessary information from all the districts and sub-districts.

Appendix 3 45

Information Act, and the Consumers' Right Protection Act need to be operationalized. Also useful will be application of the citizen's charter in public sector organizations.9 D. Public-Private Partnerships 9. The second critical element of the sector, and one that is substantively related to the first,10 has to do with the manner in which the Government is able to focus on the more long-term requirement of infrastructure development for fostering economic growth. Over the last few years, public investment in infrastructure in Bangladesh has remained stagnant at under 5% of the gross domestic product (GDP). Persistent neglect of public infrastructure services has hampered domestic economic growth and restrained Bangladesh from living up to its full potential from a regional standpoint of being able to assume the role of a transport and transshipment hub for the subregion. Furthermore, inadequate infrastructure limits the country’s opportunities for integrating economically with its neighbors. 10. As is the case in most of South Asia, the public sector has been the main provider of basic infrastructure in Bangladesh. However, public financing alone will not be able to generate the investments needed to provide the required level of infrastructure facilities. Aware of this limitation, the Government agencies⎯Infrastructure Development Company Limited, Investment Promotion and Financing Facility, and Infrastructure Investment Facilitation Center⎯are engaged in enhancing private sector investments in infrastructure services. 11. Notwithstanding some limited success, significant scaling up of infrastructure development still faces formidable challenges. While earnest efforts have been made to upgrade the existing public–private partnership (PPP)11 guidelines, no detailed PPP framework has emerged so far. Gaps in technical and management capabilities and in identifying market opportunities also severely impede the potential for PPPs. Even though the Private Sector Infrastructure Guidelines (PSIG) issued in 2004 are the basis for implementation of PPP projects, there is lack of clarity and consistency between the Public Procurement Regulations and PSIG. Mobilizing finance for private investment in infrastructure is also a major challenge in the absence of a well-developed domestic capital market. 12. Realizing its role in catalyzing infrastructure development 12 the Government in its FY2010 budget has taken a comprehensive approach13 for mainstreaming PPPs, which include:

(i) PPP Cell for coordinating the mainstreaming of PPPs nationwide;

9 Citizen's charters allow the service recipients to be not only aware of their entitlements but also of their rights in

accessing those entitlements. Where such tools have been used effectively, they have been powerful tools to give service recipients greater voice in the service delivery process. Such tools, however, have to be applied in conjunction with legislative measures such as the right to information so that lapses in service delivery can be effectively reported and corrective action taken by service providers.

10 Largely through better access to health facilities, job opportunities, and market outlets. 11 PPP projects are typically projects developed, implemented, and operated by bidders (stand-alone special purpose

vehicles). Further, these projects are selected on the basis of a competitive and transparent bidding arrangement and are expected to be build-and-operate infrastructure based on a concession arrangement with the Government.

12 The Government has reviewed and drawn lessons from ADB's ongoing support for mainstreaming PPPs in India. ADB. 2006. Technical Assistance to India for Mainstreaming Public–Private Partnerships at State Level. Manila; ADB. 2007. Technical Assistance to India for Mainstreaming Public–Private Partnerships at Central Line Ministries of the Government of India. Manila; and ADB.2008. Technical Assistance to India for Preparing the Public–Private Partnerships Pilot Projects Initiative (Mainstreaming Public–Private Partnerships). Manila.

13 Government of Bangladesh. 2009. Invigorating Investment Initiative Through Public-Private Partnership⎯A Position Paper. Dhaka.

46 Appendix 3

(ii) Viability Gap Fund for enhancing the bankability of projects, attracting private capital, and mobilizing private sector efficiencies;

(iii) Technical Assistance Fund for financing PPP project preparation activities such as feasibility studies; and

(iv) PPP Infrastructure Investment Fund to provide refinancing against loans disbursed by commercial banks and other financial institutions for PPP projects.

13. The allocations made for the above measures in the FY2010 budget are approximately $362 million. The Government will also revise and reissue the 2004 PSIG to place a strong legal and institutional framework for PPPs. The ongoing financial sector reforms, especially on improving money and debt markets, are also being pursued to ease financing constraints. While the measures taken by the Government reflect its intent to usher in private sector investment in delivery of infrastructure, the convergence of policy, legal, and institutional aspects for mainstreaming PPPs is a medium to long-term process. Accordingly, further assistance especially for strengthening capacity building14 would be considered by ADB on the completion of the PPP reforms initiated under the PESF. E. Public Financial Management

14. Efficient and accountable public financial management (PFM) and financial management institutions are key elements of good governance. Sound public financial management encompasses four broad elements: (i) maintenance of sound fiscal policies, (ii) allocation of resources in accordance with the stated policies and priorities of government, (iii) appropriate use of budgeted funds and assets, and (iv) adherence to internationally accepted accounting and auditing standards and firm internal control measures. While Bangladesh has achieved a sustainable fiscal balance and low budget deficit, there is need for improving coordination and efficiency in the three other financial management elements. 15. In light of the global crisis and its short- and medium-term impacts on the economy, the Government realizes that there is need to ensure strong PFM as well as efficient public expenditure management systems. Towards this end, several specific areas of reforms are being targeted under the PESF including (i) public sector efficiency and revenue mobilization, (ii) accounting, auditing, and project approval process, and (iii) wider application of the medium-term budgetary framework (MTBF). 16. Efficiencies and Revenue Mobilization. For enlarging the fiscal space, and making more resources available for public investment in infrastructure and human capital development measures need to be stepped up to increase the public resource envelop not only by strengthening the tax system but also by improving efficiencies in the public sector. The Government can, through corporatization and divestiture, reduce its expenditure burden (thus freeing up resources to be channeled for investments and for SSNPs). To this end, the Government can use measures that are legislative (such as amendments to the Income Tax Ordinance), or institutional (such as reconstituting companies under the Company Act, or

14 Capacity development for refining the PPP policy and regulatory framework; meeting compliance/public safety

norms; improving information; improving bidding documents and procedures; determining risk sharing; and determining adequate monitoring arrangements. ADB's ongoing support for financing infrastructure projects including PPPs is also providing capacity building support for developing PPP framework and guidelines. ADB. 2008. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the People’s Republic of Bangladesh for the Public-Private Infrastructure Development Facility. Manila.

Appendix 3 47

divesting shares from state-owned enterprises). Government also has plans to expand the income tax base by identifying new taxpayers through relevant surveys covering areas in districts and cities that are still outside the income tax net, and expanding the tax net to Upazila (subdistrict levels). 17. A stronger revenue administration is critically important for raising revenue significantly. The National Board of Revenue (NBR), which collects direct and indirect taxes (accounting for around 95% of tax revenues), has over the years sought to modernize and attract skilled staff, and carry out its statutory functions. Yet, past reform programs have not fully addressed all the areas needing improvement and modernization. The business community generally feels that tax administration needs to be improved to make it more responsive to business needs, ensure more stable tax policies and more consistent and uniform application of tax laws. Tax regulations also need to be modernized in step with the changing needs and practices worldwide. 18. Public Sector Accounting and Fiscal Reporting. Public sector accounting standards and practices in Bangladesh need to be updated. The Government follows a cash-based accounting standard (rather than an accrual-based system) that recognizes expenses only when actual cash is paid rather than when commitment of resources is made. The practice underestimates future expenses in the present fiscal year and complicates the budgeting process. Accuracy of government accounts also need to be enhanced by ensuring greater consistency between bank balances shown in the government balance sheet and those reflected in Bangladesh Bank statements. Control mechanisms need to be strengthened to prevent misclassification of public expenditure accounts, and any concealment of misappropriation of resources. Foreign-assisted expenditure also needs to be properly reflected in the consolidated monthly accounts, to ensure accuracy of the information on public expenditure. 19. Monthly financial reports showing actual expenditures against the budgeted levels are produced within five weeks after the end of each month. Although all significant expenditures of the central government are included in the fiscal reports, fiscal reporting remains incomplete as the expenditures of the local government and state-owned enterprises are not incorporated. Annual Finance Accounts of the government are also submitted with considerable time lag, more than 12 months after the close of the financial year. While the Government generates information on its contingent liabilities, the lack of comprehensiveness in the report on liabilities indicates a low reliability of fiscal reporting. Finally, approval and reporting processes for development projects are lengthy and complex, which has jeopardized the pace of completion of the Annual Development Program (ADP). 20. Budget Preparation and Execution. While the Government has put in place a MTBF (which has been adopted in 20 of the 42 government ministries/divisions, covering 53% of total budget and 86% of ADP), application of the MTBF needs to be made uniform across the public sector. Also important is to institute the budgeting process in the 64 districts of the country. Given that Bangladesh does not have a federal form of government, much of the impetus in the economic and fiscal realms stems from the center. As service delivery needs to be delegated to the local levels, if it is to be effective and efficient, there is a corresponding need to strengthen district budgeting processes, which will also ensure transparency of public expenditure and greater accountability in program implementation. The Government is contemplating the first step in this regard, by preparing a district budget for one district in each administrative division of the country in the national budget for FY2011.

48 Appendix 3

21. To improve the effectiveness of application of the MTBF across public sector agencies, the capability of the agencies that are currently implementing it needs to be enhanced. The practice of rotating staff in the administration, particularly at the senior level, also needs to be rationalized for facilitating efficient mainstreaming of the MTBF within the agencies. This will be essential to achieve a sustainable MTBF process that can contribute effectively to the realization of improved budget outcomes.

Appendix 3 49

49

Table A3: Social Safety Net Programs Number of Beneficiaries Cost of SSNPs

(‘000 person) (‘000 person-months) ($ million) Name of Programs FY 2009 FY2010a FY 2009 FY2010a FY2009 FY2010

Running Programs Cash Transfer (Allowances) Programs Social Protectionb 4,265 4,643 0 0 698 782 Social Empowermentc 25 28 0 0 1 1 Cash Transfer (Special) Programs Social Empowerment 990 2,850 0 0 7 9 Food Security Programs Social Protection 46,717 66,667 22,864 22,617 765 851 Micro-Credit Programs Social Empowerment 6,068 6,500 0 0 44 72 Miscellaneous Funds Social Empowerment 483 204 0 0 31 16 Social Protection 0 0 3,127 40 182 197 of which 100 days Employment Schemed 0 0 3,087 0 134 0 Development Sector Programs Social Empowerment 11,063 12,734 0 0 277 335 New Programs Social Protection 0 0 0 6,361 0 244 of which Employment Generation Program for the Hardcore Poor 0 0 0 4,900 0 170 Development Sector Programs Social Empowerment 0 210 0 0 0 2 Total running and new SSNPs 69,611 93,836 25,991 28,718 2,005 2,509 % Increase 34.8% 10.5% 25.2% % of Total Budget 14.7% 15.2% % of Gross Domestic Product 2.3% 2.5% a Budget b Social protection programs guarantee the availability of resources (in cash or in kind) to cover basic food requirements and other needs.

c Social empowerment programs provide the means to make a better living through education, training, access to microfinance, etc. d Discontinued in FY2010

SSNP = Social Safety Net Program. Sources: Ministry of Finance, Government of Bangladesh; and Asian Development Bank estimates.

50 Appendix 4

DEVELOPMENT COORDINATION MATRIX 1. Bangladesh has had considerable support from development partners in the broad areas of social safety net programs, improving the investment climate, and public expenditure reform.

Table A4: Development Partners' Work on Program-Related Areas

Area of Program/Project – Development Partner

Areas of Coverage/Objectives Financial and Other Information

A. More Effective Service Delivery Australian Agency for International Development Challenging the Frontiers of Poverty Reduction (CFPR)

CFPR is a multi-donor funded program, implemented by BRAC. It aims to lift approximately 4.3 million people out of extreme poverty by 2011. This goal is aligned with the Government of Bangladesh's Millennium Development Goals target of halving extreme poverty by 2015.

$223 million (2007–2011); Australia supports this program along with DFID, CIDA and Oxfam

Canadian International Development Agency Procurement (Essential Drugs and Medicines for the Poor project: planned intervention)

Stand-alone project complementing the health sector-wide assistance program (SWAp). The objective is to contribute to strengthening and reducing opportunities for corruption in national procurement systems.

Can$12.5 million 2009–2014

Department for International Development Economic Empowerment of the Poorest Project

Improving livelihoods of very poor people, particularly women and children.

£55.4 million

European Union Food Facility Programme To target improvements in low levels of

agricultural productivity and the inability of marginal or landless farmers and landless agricultural laborers to access sufficient food as a result of both high food prices and structural chronic poverty.

€2.0 million

Food Security for Ultra Poor To contribute to reduction of extreme poverty and food insecurity of the most vulnerable women and their dependants, with special reference to their capacity development, establishment of means for income generation and ensuring household food security. Priority areas will include those prone to disasters.

€36.5 million

Rural Employment Opportunities for Public Assets (REOPA)

To contribute to the long-term sustainable socio-economic development of rural Bangladesh, and to mainstream women in development programs. REOPA's primary beneficiaries are destitute women and casual laborers (poor women and men of landless households who depend on manual labor)

€20 million

Appendix 4 51



Vulnerable Group Development for Ultra Poor

To reduce the level of deep poverty and food insecurity in Bangladesh. Targets the capacity enhancement of some 80,000 rural hardcore poor women with the objective to improve and sustain their long-term socioeconomic development and food security.

€20 million

GTZ Enhancing Municipal Governance for Poverty Reduction

Pilot scheme to support Pourashavas (municipalities) in identifying hardcore poor for social transfers. Pilot Pourashava is Naranganj

$0.3 million grant technical assistance support 2007–2009

Social Safety Net Projects/Programs

Includes cash-for-work programs, preparatory steps for a National Cash Transfer Programme and the piloting of urban health safety net schemes. A proposed urban health voucher scheme is being developed.

United Nations Development Programme Local Governance Make financial resources available to union

parishads in equitable and appropriate ways, improve public expenditure systems for union parishads, and enhance mechanisms for local accountability.

$18.12 million up to end of 2011; cost sharing from UNCDF, EU and DANIDA

United States Agency for International Development Food Assistance Program Providing safety net for the poor through food

and cash for work projects. $78 million

World Bank Voice and anticorruption Initiate several corruption-related studies

contributing to the development of an anticorruption strategy, freedom of information policy note and dialogue, WBI Media and Information Environment, undertaking political economy analyses of various sectors in order to assess risks and understand the politics of institutional reform, and some survey work with think tanks on corruption in the roads and power sectors.

No specific amount can be ascertained; the WBI media project is for Can $2.5 million; $2.5 million for Anticorruption Commission planned

Bangladesh Local Governance Support Project

To support union parishads (sub-districts) in providing services that meet community priorities, and capacity building, particularly regarding financial management and procurement.

$208 million (World Bank $111.5 million; UNCDF, UNDP, EU, and DANIDA $18 million; remainder government); 2006–2011

Food Crisis Development Support Credit Bangladesh Disability and Children-at-risk Project Social Investment Program

Scaling up existing safety net programs, and undertaking an employment guarantee scheme to help people in distressed areas during lean seasons. Extending social care services for persons with disabilities and vulnerable children for promoting equity and social inclusion. Improving livelihoods for families affected by cyclone SIDR.

$130 million $35 million $50 million

52 Appendix 4



B. More Conducive Investment Climate Canadian International Development Agency KATALYST Improving market access, management and

technical skills and other activities for better business

Cofinancing by CIDA, DFID, Netherlands Development Organization, Swiss Development Corporation

European Union Bangladesh Investment Climate Fund

Private sector development to address challenges linked to improving governance and investment climate through regulatory reform and better management of economic zones; strengthening civil service capacity for this.

Total project cost: €43.9 million; EU contribution: €15.8 million; cofinancing with DFID and IFC

South Asia Enterprise Development Facility

Undertaking analytical and diagnostic study on investment climate

Cofinancing by ADB, CIDA, DFID, Government of the Netherlands, Government of Norway, and IFC

Private Sector Development Support Credit

Improving investment climate by streamlining regulations, building capacity in the Government, and developing special economic zones.

Cofinancing by CIDA and Government of Japan (Debt Cancellation Fund)

C. Strengthened Financial Management Canadian International Development Agency Strengthening core governance institutions

Stand-alone projects: (i) The Strengthening Comptrollership and Oversight of Public Expenditures Project strengthens comptroller and auditor general (CAG) operations and functions in line with international standards for supreme audit institutions. The project complements the Government of Bangladesh's flagship Strengthening Public Expenditure Management Program (SPEMP); (ii) Joint CIDA-WBI Parliament and Media Support Project. Parliamentary component focuses on strengthening Parliamentary oversight of the allocation and use of public funds; (iii) Bangladesh Bank/Research and Policy Analysis: WBI project to improve policy analysis skills in line with modern central bank research departments.

(i) Can$15.0 million 2008–2013 (ii) Can$5.0 million 2005–2010 (iii) CIDA contribution Can$1.0 million; co-funded with World Bank 2005–2009

Department for International Development of the United Kingdom Public Finance Management (planned intervention to support the Strengthening Public Expenditure Management Program [SPEMP])

The objectives of SPEMP are to: (i) strengthen and modernize budget management institutions, and (ii) improve the effectiveness of formal institutions of financial accountability through strengthening (i) the capacity of the CAG; and (ii) functioning of relevant parliamentary bodies.

$50 million

Appendix 4 53



European Union Public Finance Management (planned intervention)

To improve the efficiency and effectiveness of the allocation of resources and to achieve more equitable and improved public service delivery.

EU contribution €15 million; co-financed by DFID, CIDA, DANIDA and World Bank

The Netherlands Financial Management Reform Project

Strengthen public financial management system in the Ministry of Finance, and selected line ministries, to provide relevant, accurate, and timely information to Government policy makers and other stakeholders.

Co-funding with DFID. Embassy of the Kingdom of Netherlands contribution; ended July 2009. Total EKN amount €10 million.

World Bank Public Procurement Reform Project II

To improve performance of the public procurement system progressively in Bangladesh, focusing largely on the key ministries and targeting their implementing agencies.

$24.9 million; 5-year program from 2007

Strengthening core governance institutions

(i) Stand-alone project: Strengthening the Public Accounts Committee; (ii) Support the comptroller and auditor general in drafting Audit Act; (iii) WBI Parliamentary Program; (iv) Workshop series on Institutions of Accountability:

(i) $0.8 million (ii) nonlending TA support; (iii) $2.5 million over 3 years; (iv) approximately $0.25 million

ADB = Asian Development Bank, AusAID = Australian Agency for International Development, BRAC = Bangladesh Rural Advancement Committee, CIDA = Canadian International Development Agency, DANIDA = Danish International Development Assistance, DFID = Department for International Development, EKN = Embassy of the Kingdom of the Netherlands, EU = European Union, IFC = International Finance Corporation, UNCDF = United Nations Capital Development Fund, UNDP = United Nations Development Fund, USAID = United States Agency for International Development, WB = World Bank, WBI = World Bank Institute. Sources: Asian Development Bank, with inputs from development partners.

Appendix 5 54

DEVELOPMENT POLICY LETTER AND POLICY MATRIX FOR THE PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM

Appendix 5

55

Appendix 5 56

Appendix 5

57

58

Appendix 5

Table A5: BANGLADESH PUBLIC EXPENDITURE SUPPORT FACILITY PROGRAM POLICY MATRIX

Outputs and sub-outputs

First Tranche

(upon loan effectiveness)

Second Tranche (8 months after release of 1st tranche, or earlier if all

conditions have been met) 1. More Effective Service Delivery

(i) Expanded social safety net programs

The Government will have introduced, new and expanded, existing social safety net programs for vulnerable populations (doc: copy of the Budget statement and the detail budget – MOF) The Government will have introduced a new Employment Generation Program for the Hardcore Poor (doc: copy of the Budget statement and the detail budget – MOF) The Government will have finalized operational plans to establish a reliable food security system (doc: Copy of the approved plan – MOF)

The Government will have expended at least 60% of the budget allocated for the Employment Generation Program for the Hardcore Poor (doc: copy of the detail budget - MOF) The Government will have finalized an operational plan on preparing a comprehensive list of hardcore poor and other vulnerable populations so that targeted assistance of social safety nets is more effective (doc: copy of the approved plan – MOF)

(ii) Gender targeting

The Government will have finalized gender budgeting guidelines to ensure greater transparency and accountability of the share of expenditure for women development (doc: copy of the approved guidelines – MOF) The Government will have submitted the Budget report entitled Women's Advancements and Rights in Four Ministries' Activities to Parliament (doc: copy of the report – MOF)

The Government will have implemented the budgeting guidelines to ensure greater transparency and accountability of the share of expenditure for women development in at least 20 ministries that have adopted MTBF (doc: copy of the budget proposal from the 20 ministries - MOF)

(iii) Oversight opportunities for vulnerable groups

The Government will have enacted the Right to Information Act, 2009 (doc: copy of the Gazette notification and the Act – MOF) The Government will have enacted the Consumers’ Right Protection Act, 2009 (doc: copy of the Gazette notification and the Act – MOF)

The Government will have implemented the Right to Information Act, by establishing the Commission, approving the organization structure of the commission and appointing the operational staff (docs: copy of the notification on the establishment of the commission, the organogram, and the office order on the appointment of the operational staff) The Government will have implemented the Consumers' Right Protection Act 2009, by establishing the National Consumers' Right Protection Council, socializing the Act, earmarking funds from the block allocations in the FY2010 budget for the Council and its activities. (doc: copy of the notifications on the establishment of the council; copy of awareness and socialization campaign and budget allocation – Ministry of

A

ppendix 5 59


First Tranche



conditions have been met)

Commerce; letter from the Finance Division confirming the budget allocation—MOF) The Government will have finalized an action plan to put in place Citizen's Charters in public sector organizations (doc: copy of the plan – Cabinet Division/Ministry of Establishment)

2. More Conducive Investment Climate

(i) Private sector development and public-private partnerships (PPPs)

The Government will have prepared a position paper on implementing PPPs for investment and operation (doc: copy of the position paper – MOF) The Government will have allocated funds for the Viability Gap Fund for enhancing the bankability of projects, attracting private capital, and mobilizing private sector efficiencies (doc: copy of the Budget Statement and the detail budget – MOF) The Government will have allocated funds for the Technical Assistance Fund for financing PPP project preparation activities such as conducting feasibility studies for suitable PPP projects (doc: copy of the Budget Statement and the detail budget – MOF) The Government will have allocated funds for the PPP Infrastructure Investment Fund to finance on loan or equity basis bankable PPP projects (doc: copy of the Budget Statement and the detail budget – MOF)

The Government will have revised and reissued the 2004 Private Sector Infrastructure Guidelines (doc: copy of the gazette notification on the revised Private Sector Infrastructure Guidelines and copy of the revised Guidelines – MOF) The Government will have established, and made operational, the PPP Cell to be located in one of the Borrower's Ministries (doc: copy of notification and the terms of reference – MOF) The Government will have conducted review on the progress of PPPs in infrastructure in Bangladesh, including assessing the legal and institutional frameworks for PPPs, and will have made public the review report in the MOF website (doc: copy of the review report – MOF)

(ii) Small and medium-sized enterprise (SME) and housing sector development

The Government will have allocated funds to provide refinancing facilities against loans disbursed by commercial banks and other financial institutions in SME and housing sector (doc: copy of the report on allocation of funds – MOF)

The Government will have prepared an action plan to support the SME centers, women entrepreneurship, and one-stop facility, and will have made the plan public in the MOF website (doc: copy of the approved action plan – MOF) The Government will have established a financial institution created by the merger of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Shangstha, for enhanced financing to the private sector, including for SME development (doc: copy of the notification – MOF)

60

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First Tranche



conditions have been met) (iii) Enhanced business environment

The Government will have enacted the Money Laundering Prevention Act 2009 (doc: copy of the Gazette notification and the Act – MOF) The Government will have extended merchant banking facilities to the existing three state owned commercial banks (doc: copy of the Budget Statement and the Government Order from MOF – MOF [Banking Division]) The Government will have set up the Bangladesh Institute of Capital Market (doc: copy of Gazette Notification on the establishment of the Institute of Capital Market – MOF)

3. Strengthened Public Financial Management

(i) Public sector efficiency and revenue mobilization

The Government will have divested part of its shares in Jamuna Oil and Meghna Oil (doc: copy of the Executive order or copy of the transfer deed – MOF) The Government will have converted the Bangladesh Biman into a limited liability company under the Company Act and have enacted the Bangladesh Biman Corporation (Amendment) Act, 2009 (doc: copy of the Gazette notification and the Act – MOF)

The Government will have finalized plans for expanding the tax base by identifying new tax payers through surveys covering cities, districts and upazila levels. (doc: copy of the approved plan – MOF) The Government will have implemented the recommendations made by the Pay Commission on civil servant salary increase (doc: Budget statement and Letter of Certification from the MOF – MOF)

The Government will have converted the Bangladesh Telegraph and Telephone Board into a limited liability company under the

Company Act and will have enacted the Bangladesh Telegraph and Telephone Board (Amendment) Act, 2009 (doc: copy of the Gazette notification and the Act – MOF) The Government will have enacted the amendment to the Income Tax Ordinance (doc: copy of the Gazette notification and the Act – MOF) The Government will have put in place and implemented a Debt Service Liability Management System in MOF (doc: copy of the DSLMS report – MOF) The Government will have enacted the National Board of Revenue Amendment) Act, 2009 (doc: copy of the Gazette notification (and the Act – MOF)

A

ppendix 5 61


First Tranche



conditions have been met) The Government will have introduced a system of reduced

corporate tax rates for industries in certain sectors in lieu of the existing tax holidays schemes (doc: copy of the Finance Act 2009 – MOF)

(ii) Streamlined financial management processes

The Government will have extended the coverage of the Integrated Budgeting and Accounting System to at least 55 of the 64 district account offices under MOF (doc: Letter or certification from the MOF – MOF)

The Government will have issued policy directives and prepared an action plan to improve the quality and timely submission of the annual accounts of government agencies (doc: copy of the policy directives and the approved plan – MOF) The Government will have reviewed and revised the development project approval process (doc: copy of the office order for the project approval process - MOF) The Government will have established a task force to enhance monitoring of the major ADP projects (doc:

copy of the notification and the terms of reference – MOF).

(iii) Mainstreaming medium-term budgetary framework (MTBF)

The Government will have rolled out the adoption of the MTBF to 20 government ministries (doc: copy of the MTBF document FY2010 – MOF) The Government will have established the Macroeconomic Wing in Finance Division, MOF (doc: copy of the Notification and terms of reference – MOF)

The Government will have finalized the revised National Strategy for Accelerated Poverty Reduction II (NSAPR II) (FY2010-FY2011) (doc: Copy of NSAPR II– MOF) The Government will have finalized plans to present district level budget in at least one district of each administrative division in the country (doc: copy of the approved plan – MOF) The Government will have established a Budget and Planning Wing or Branch in at least 5 Ministries in which MTBF has been adopted (doc: copy of the notification and the terms of reference – MOF)

62 Appendix 6

Table A6: ADJUSTMENT COSTS ($ million)

PESFa

Outputs and Areas of Support

Total Cost of Policy

Actions Tranche

1 Tranche

2 Total PESF

CSFa

A. Output 1. More Effective Service Delivery 1. Expanded social safety net programs 2,509 103 65 168 5002. Gender targeting and oversight opportunities for vulnerable groups 66 4 0 4 0B. Output 2. More Conducive Investment Climate 1. Private sector development and public-private partnerships 362 27 0 27 0

• Viability Gap Fund 43 3 0 3 0• Investment Development Fund 304 22 0 22 0• Technical Assistance Fund 14 2 0 2 0

2. SME and housing sector development 304 6 15 21 03. Enhanced business environment 11 0 2 2 0C. Output 3. Strengthened PFM 1. Public sector efficiency and revenue mobilization 133 6 3 9 02. Streamlined financial management processes 133 2 7 9 03. Mainstreaming medium-term budgetary framework 66 0 5 5 0Total 3,584 148 97 245 500Note: Numbers may not sum precisely because of rounding. CSF=Countercyclical Support Facility Support Program; PESF=Public Expenditure Support Facility Program; PFM=Public financial management; SME=Small and medium-sized enterprises. a Breakdown of the social safety net programs supported by the PESF and the CSF are in Supplementary Appendix F. Sources: Ministry of Finance, Government of Bangladesh and Asian Development Bank estimates.

Appendix 7 63

DEVELOPMENT POLICY LETTER AND ACCESS CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY SUPPORT PROGRAM

64 Appendix 7

Appendix 7 65

66 Appendix 7

Appendix 7 67

Table A7: Bangladesh - Access Criteria for the Countercyclical Support Facility Support Program

68 Appendix 7

Appendix 8 69

DEBT SUSTAINABILITY ANALYSIS A. Overview 1. Debt sustainability analysis indicates that Bangladesh does not have a debt sustainability problem. Bangladesh’s external debt burden indicators do not breach the relevant indicative thresholds established under the International Monetary Fund (IMF)−World Bank debt sustainability analysis (DSA) framework. Debt burden indicators are somewhat worse when domestic debt is included in the analysis, in part because of higher interest rates on such debt. 2. Box A8 summarizes the medium-term macroeconomic framework underlying the DSA exercise. It is based on the projections of real gross domestic product (GDP) growth that are in line with, but slightly lower than, Government’s medium-term framework, and estimates of external assistance that reflect natural growth while pointing to diminishing dependence on external financing over the long term, in line with the trend observed in recent decades. Export growth is slightly higher in the medium term in line with recent export performance, but tapers off to more moderate levels in the outer years. Both the GDP and export growth assumptions are broadly similar to the assumptions in the IMF−World Bank DSA prepared in 2008. Import growth is also projected to be significantly higher than the historical average throughout the projection period in line with in the IMF−World Bank DSA. Finally, due to strong growth in remittances from the oil exporting Gulf Cooperation Council states, United States, Europe, and Malaysia, private net current transfers are expected to remain buoyant.

GDP = gross domestic product. Source: Asian Development Bank.

Box A8: Bangladesh: Macroeconomic Assumptions Underlying the Debt Sustainability Analysis

The macroeconomic assumptions are as follows: Real GDP growth in the medium term is projected to be between 6-6.5%, slightly above the recent historical average of 6%, and it picks up in the outer years to 7%. This is close to (but slightly lower than) the Government's own medium-term projection, and assumes continued progress in broad-based structural reforms and increased openness of the economy that should allow Bangladesh to benefit from dynamic growth elsewhere in the Asian region. Inflation, as measured by the GDP deflator, increased in 2008 due to higher food and energy prices, but then declines and stabilizes at around 5.5% over the medium and long term. The growth of both exports and imports is strong in the medium term, in the 12-15% range. As the economy opens, both will increase in percent of GDP with imports gaining the most as imports of investment and intermediate goods increased. The current account (including grants) moves from a small surplus to a deficit, which peaks in the outer years at about 2% of GDP, as a result primarily of continued strong growth of capital and intermediate goods imports related to increasing investment projects. These effects are offset to some extent by strong growth of remittances, which are projected to grow at an annual average of about 12% and 10% over the medium and long term, respectively. The current trend of declining reliance on external financing of the budget deficit will continue over the medium and long term. The level of foreign grants is assumed to remain unchanged at the current level of $700 million per year throughout the projection period. Gross external financing will increase slowly over the long term to about $4 billion per annum from the current level of $2.0 billion − $2.5 billion. The grant element of external loans will also decline over time. The overall fiscal deficit (excluding grants) is assumed to remain close to the historical average (around 4% of GDP), while the primary deficit declines slightly over time. A modest rise is assumed in the revenue-to-GDP ratio (excluding grants) in the initial years (from 11.5% in FY2008 to 13% in FY2013), supported by efforts to mobilize domestic revenues. Higher revenues will allow for correspondingly higher public sector spending in relation to GDP allowing for improved quality of public services. Real interest rate on domestic debt is assumed to stay more or less constant at about 5.5%. There is scope for reducing the real interest rate significantly, if the authorities initiate major financial sector reforms. If that happens, the debt profile will improve in future, or will release more resources for higher government spending.

70 Appendix 8

B. External Debt Sustainability Analysis 3. All external debt indicators remain well below the policy-dependent debt burden threshold under the baseline scenario. Given the growing dependence on domestic debt over time and the fiscal deficit at its historical level of about 4% of GDP (excluding grants), external debt in relation to GDP would tend to fall very rapidly (Table A8.1 and Table A8.3). Total public debt in relation to GDP will also fall, albeit at a much slower pace, by 8% points to 34% of GDP by FY2028.

Table A8.1: Total and External Debt in Relation to GDP and Total External Debt Service in % of Exports and Remittances

Fiscal Year

Total Government Debt Outstanding

(% of GDP) External Debt

(% of GDP)

Total External Debt Service (% of exports and

remittances) 2008 42.7 25.4 3.7 2009 40.8 23.2 3.9 2010 40.8 22.1 3.7 2011 40.7 20.6 3.4 2012 40.1 19.2 3.1 2013 39.1 17.9 2.8 2014 38.6 16.7 2.5 2015 37.2 15.6 2.3 2016 36.6 14.5 2.1 2017 36.3 13.6 2.0 2018 35.6 12.7 1.8 2019 35.2 11.9 1.7 2020 34.9 11.2 1.6 2021 34.7 10.5 1.5 2022 34.5 9.9 1.3 2023 34.4 9.3 1.2 2024 34.3 8.7 1.1 2025 34.2 8.2 1.1 2026 34.1 7.7 1.0 2027 34.1 7.2 0.9 2028 34.1 6.7 0.8

GDP = gross domestic product. Source: Ministry of Finance.

4. Bangladesh’s external debt service ratio is already low at less than 4% of export and remittance receipts. Given the buoyant trend in export and remittance inflows projected in the DSA analysis, external debt service in relation to exports and remittances will decline to less than 1.0% by FY2028 (Table A8.1). This scenario also assumes a reduction in the concessionality of external debt as the average interest rate on foreign debt is projected to increase slightly. 5. Although no present value analysis has been prepared because of a lack of data on the concessionality of individual loans, the analysis prepared by the IMF indicates that the debt ratios would tend to fall significantly if foreign debt is expressed in net present value terms. The (Table A8.2) summarizes Bangladesh’s indicative thresholds, actual FY2007 ratios, and

Appendix 8 71

average debt service ratios under the baseline scenario prepared by the IMF–World Bank staff in FY2008.

Table A8.2: Policy-Based Debt Burden Thresholds Item Threshold Ratio 2007 2008–2028a Present Value of Debt in % of GDP 40 17 11 Exports 150 84 44 Revenues 250 166 92 Debt Service in % of Exports 20 5 3 Revenues 30 10 6 a Average for the period under the baseline scenario. Source: Article IV Consultation Report 2008, International Monetary Fund. C. Public Debt Sustainability Analysis 6. Domestic debt has been relatively stable over the past 5 years. Gross domestic debt has remained at about 17% of GDP during the period FY2002 through FY2008. The majority of domestic debt is in the form of treasury bills and savings certificates held by nonbank financial institutions; and just a quarter is held by the central bank. 7. The baseline scenario (Table A8.3) entails a steady decline in the public debt-to-GDP ratio, with external debt declining but domestic debt increasing in relation to GDP. This is the natural outcome of the trend observed in the last two decades, with a growing reliance on domestic financing of the budget deficit. External aid, which was in the range of $2 billion per year in the 1980s, has remained in the same range in nominal terms in recent years. The outlook for concessional external financing is also not so favorable. However, the scenario still allows for gross external financing of the budget to increase to more than $4 billion by FY2028, compared with the $2.0 - $2.6 billion received in recent years. D. Capacity to Pay to ADB 8. The Government of Bangladesh has requested $500 million under the ADB's Countercyclical Support Facility Support Program to help cover its budget financing needs. In addition, the Government has also requested for an additional $245 million (approximately) for budget support. This additional borrowing by the Government would increase the overall external debt service payments in the medium term, in particular to ADB.

9. Analysis presented below (Tables A8.4−A8.6) indicates that while such additional external borrowing of $745 million (approximately) will increase interest and amortization payments to ADB in the coming years, it will not have any significant adverse impact on Bangladesh’s capacity to service its obligations. In relation to receipts of exports and remittance inflows, total external debt service to ADB (by FY2015) will still be about 1%. In relation to the level of reserves, debt service payments to ADB will be below 5% at their peak in FY2014, which would be quite manageable.

72

Appendix 8

($ billion, unless otherwise stated)

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2017 FY2018 FY2023 FY2027 FY2028Total Govt Debt Outstanding,in % of GDP 42.7 40.8 40.8 40.7 40.1 39.0 38.0 36.0 35.6 34.4 34.1 34.1 Foreign debt in % of GDP 25.4 23.2 22.1 20.6 19.2 17.9 16.7 13.6 12.7 9.3 7.2 6.7 Domestic debt in % of GDP 17.2 17.6 18.8 20.1 20.9 21.1 21.4 22.4 22.9 25.1 26.9 27.4Total Debt Service, in % of GDP 3.0 2.9 3.0 3.2 3.2 3.2 3.2 3.2 3.2 3.3 2.9 2.7 Foreign debt service (%) 1.0 0.9 0.9 1.0 1.0 0.9 0.9 0.7 0.7 0.5 0.4 0.4 Domestic debt service (%) 1.9 2.0 2.1 2.2 2.3 2.3 2.4 2.5 2.5 2.8 2.5 2.4Fiscal Accounts Govt budget deficit in % of GDP (excluding Grant) 4.9 4.1 5.0 5.0 4.5 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Govt budget deficit in % of GDP (including Grant) 4.1 3.3 4.3 4.3 3.9 3.5 3.5 3.6 3.7 3.8 3.9 3.9

Foreign Debt 20.3 20.8 21.4 22.4 23.5 24.6 25.7 29.7 31.1 39.4 47.0 48.9Gross Financing 2.5 2.2 2.6 2.6 2.6 2.7 2.8 3.1 3.2 3.7 4.0 4.0 Grant 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Gross borrowing 1.9 1.5 1.9 1.9 1.9 2.0 2.1 2.4 2.5 3.0 3.3 3.3 Amortization/repayment 0.6 0.8 0.8 0.9 0.9 0.9 0.9 1.0 1.0 1.2 1.4 1.4Net Foreign Borrowing 1.3 0.8 1.2 1.0 1.0 1.1 1.2 1.4 1.5 1.8 1.9 1.9Total Foreign Debt Service 0.8 1.0 1.0 1.1 1.1 1.2 1.2 1.4 1.4 1.7 1.9 2.0 Interest payment on foreign debt 0.2 0.2 1.2 2.2 3.2 4.2 5.2 8.3 9.3 14.3 18.4 19.4 Average interest rate on foreign debt (%) 1.0 0.9 0.9 1.0 1.0 1.1 1.1 1.2 1.2 1.2 1.4 1.5

Domestic Debt 13.7 15.7 18.4 21.4 24.4 27.5 30.6 40.3 43.6 61.1 76.1 80.0Gross Financing 2.0 2.1 2.9 3.0 3.0 3.1 3.1 3.3 3.3 3.6 3.8 3.9 Interest payment on domestic debt 1.6 1.7 2.9 4.0 5.1 6.2 7.3 10.6 11.7 17.3 21.7 22.8 Average interest rate on domestic debt (%) 11.3 11.1 11.2 11.0 10.9 11.0 11.0 11.0 11.0 11.0 11.0 11.0

Total Govt Debt Outstanding 34.0 36.5 40.0 43.4 46.9 50.2 54.0 68.5 74.5 117.0 171.2 188.6International Reserve 6.5 7.4 7.7 9.0 9.9 11.3 12.7 18.1 19.9 34.4 49.7 54.6International reserve, (month of imports) 4.0 4.3 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0External Debt in % of Exports and Remittances 92.8 82.3 77.2 70.4 64.0 58.8 54.1 42.9 40.2 28.9 22.1 20.6Debt Service in % of Exports and Remittances 3.7 3.9 3.7 3.4 3.1 2.8 2.5 2.0 1.8 1.2 0.9 0.8

Memo ItemsGDP Growth (real) 6.2 5.9 5.5 6.0 6.5 7.0 7.0 7.0 7.0 7.0 7.0 7.0GDP Growth (nominal) 15.5 12.7 12.4 12.4 12.4 12.9 12.9 12.9 12.9 12.9 12.9 12.9GDP Deflator 8.1 7.2 6.5 6.0 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5Exports 13.9 15.5 17.1 19.6 22.6 25.9 29.8 44.2 49.5 87.2 137.3 153.7Exports Growth (%) 15.7 11.3 10.0 15.0 15.0 15.0 15.0 12.0 12.0 12.0 12.0 12.0Remittance 7.9 9.7 10.7 12.3 14.1 15.8 17.7 24.9 27.9 49.1 75.9 83.4Remittance Growth (%) 25.6 22.6 10.0 15.0 15.0 12.0 12.0 12.0 12.0 12.0 10.0 10.0Total Exports and Remittances 21.9 25.2 27.7 31.9 36.7 41.8 47.5 69.1 77.4 136.3 213.1 237.2Exchange Rate (Tk per $) 68.5 68.8 70.0 72.3 74.2 76.0 77.8 83.6 85.7 96.6 106.3 108.9Nominal GDP 79.7 89.4 98.1 106.7 116.9 128.8 142.0 190.0 209.4 340.5 502.4 553.6Inflation Rate of Bangladesh (%) 9.9 8.2 6.5 6.0 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5Inflation Rate of Trading Partners (%) 6.0 2.5 2.4 2.6 2.9 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Table A8.3: Debt Sustainability Analysis of Bangladesh, Baseline Scenario

Source: Asian Development Bank

Debt Sustainability IndicatorsActual Projection

A

ppendix 8 73

ADB =Asian Development Bank, ADF = Asian Development Fund, OCR = ordinary capital resources. Source: Asian Development Bank.

ADB = Asian Development Bank, ADF = Asian Development Fund, CSF = Countercyclical Support Facility Support Program, OCR = ordinary capital resources Source: Asian Development Bank.

Proposed ADB Loans FY2010 FY2011 FY2012 FY2013 FY2014 FY2015CSF loan ($500 million) Principal 0.00 0.00 0.00 116.01 249.70 134.29 Interest 1.43 4.28 4.28 4.28 2.76 0.57Total CSF debt service 1.43 4.28 4.28 120.28 252.47 134.87

OCR loan ($100 million) Principal 0.00 0.00 0.00 2.25 4.84 5.33 Interest 0.17 0.74 0.86 0.86 0.83 0.78 Commitment charge 0.02 0.02 0.00 0.00 0.00 0.00Total OCR debt service 0.19 0.76 0.86 3.10 5.66 6.12

ADF loan ($144.85 million) Principal 0.00 0.00 0.00 0.00 0.00 0.00 Interest 1.72 1.72 1.72 1.72 1.72 1.72Total ADF debt service 1.72 1.72 1.72 1.72 1.72 1.72

Total projected interest 3.33 6.75 6.85 6.85 5.31 3.07 Total projected principal 0.00 0.00 0.00 118.25 254.54 139.62

Projected interest and principal of new loans (CSF,OCR, ADF)

Table A8.5: Background Table on New ADB Loans($ million)

Outstanding Debt Service Payments to ADB FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022ADF Principal 101.8 207.3 221.1 230.8 240.9 251.1 258.0 271.5 279.7 279.9 276.2 272.8 265.1 259.5 Interest 30.2 58.3 56.7 54.9 52.9 50.7 48.4 46.2 44.4 41.3 38.2 35.1 32.1 29.2 Subtotal 132.1 265.6 277.8 285.7 293.8 301.8 306.4 317.7 324.1 321.2 314.4 307.9 297.2 288.7OCR Principal 16.9 17.7 19.9 22.7 25.4 28.0 30.9 34.1 37.5 41.4 38.4 29.7 27.5 23.5 Interest 8.6 8.4 8.1 7.8 7.4 6.9 6.5 5.9 5.3 4.7 4.0 3.4 2.9 2.5 Commitment Charge 4.7 4.5 4.6 0.5 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sub total 30.1 30.5 32.7 31.0 33.0 35.0 37.4 40.0 42.9 46.1 42.3 33.1 30.4 26.0Total ADB outstanding debt service 162.1 296.2 310.5 316.7 326.8 336.8 343.8 357.7 367.0 367.3 356.7 341.0 327.6 314.6 Total interest payments 43.4 71.2 69.4 63.2 60.6 57.7 54.9 52.1 49.7 46.0 42.2 38.5 35.0 31.7 Total principle payments 118.7 225.0 241.1 253.5 266.3 279.1 288.9 305.5 317.3 321.3 314.6 302.5 292.5 283.0

Table A8.4: Background Table on Existing ADB Loans($ million)

74

A

ppendix 8

ADB= Asian Development Bank, CSF = Countercyclical Support Facility Support Program, GDP = gross domestic product, PESF = Public Expenditure Support Facility Program. Source: Asian Development Bank.

Debt and Debt Service Indicators FY2010 FY2011 FY2012 FY2013 FY2014 FY2015Scenario 1: Before New Borrowing from ADBTotal debt outstanding 40,041.4 43,387.5 46,860.8 50,202.4 53,990.8 58,269.1 % of GDP 40.8 40.7 40.1 39.0 38.0 37.2 Total external debt 21,396.9 22,444.2 23,465.8 24,561.1 25,729.2 26,969.4 % of GDP 22.1 20.6 19.2 17.9 16.7 15.6 % of exports and remittances 77.2 70.4 64.0 58.8 54.1 49.8 Total external debt service 1,018.9 1,080.9 1,121.0 1,164.6 1,208.1 1,248.3 of which ADB 162.1 296.2 310.5 316.7 326.8 336.8 Interest 191.0 228.1 242.6 259.9 276.3 288.5 of which ADB 43.4 71.2 69.4 63.2 60.6 57.7 Principal 827.9 852.8 878.4 904.7 931.9 959.8 of which ADB 118.7 225.0 241.1 253.5 266.3 279.1 Total external debt service in % of exports and remittances 3.7 3.4 3.1 2.8 2.5 2.3 of which ADB 0.6 1.0 0.9 0.8 0.8 0.7 Total external debt service in % of external reserves 13.2 12.1 11.4 10.3 9.5 8.8 of which ADB 2.1 3.3 3.2 2.8 2.6 2.4 External reserves 7,720.0 8,955.2 9,850.7 11,328.3 12,687.7 14,210.3 Imports payment 23,160.0 26,865.6 29,552.2 33,985.0 38,063.2 42,630.8 External reserves, in month of imports 4.0 4.0 4.0 4.0 4.0 4.0

Scenario 2: Reflecting New ADB Loans (CSF & PESF Financing)Total external debt service 1,022.2 1,087.6 1,127.8 1,289.7 1,467.9 1,391.0 of which ADB with new loans 165.4 302.9 317.2 441.8 586.6 479.4 Interest 194.3 234.8 249.4 266.7 281.5 291.5 of which ADB with new loans 46.7 77.8 76.2 70.0 65.8 60.7 Principal 827.9 852.8 878.4 1,023.0 1,186.4 1,099.4 of which ADB with new loans 118.7 225.0 241.1 371.7 520.8 418.7 Total external debt service in % of exports and remittances 3.8 3.6 3.3 3.4 3.5 2.9 of which ADB with new loans 0.6 0.9 0.9 1.1 1.2 0.9 Total external debt service in % of external reserves 13.2 12.1 11.4 11.4 11.6 9.8 of which ADB with new loans 2.1 3.4 3.2 3.9 4.6 3.4

Table A8.6: Capacity to Pay Scenario($ million)

Appendix 9 75

LIST OF INELIGIBLE ITEMS 1. The loan proceeds will finance the foreign currency expenditures for the reasonable costs of imported goods except the following:.

(i) Expenditures for goods included in the following groups or subgroups of the United Nations Standard International Trade Classification (Revision 3) or any successor groups or subgroups under future revisions to the classification, as designated by the Asian Development Bank by notice to the Borrower.

Table A9: List of Ineligible Items

Chapter Heading Description of Items 112 Alcoholic beverages 121 Tobacco, unmanufactured; tobacco refuse 122 Tobacco, manufactured (whether or not containing tobacco substitute) 525 Radioactive and associated materials 667 Pearls, precious, and semiprecious stones, unworked or worked 718 718.70 Nuclear reactors and parts thereof, fuel elements (cartridges), nonirradiated

for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.30 Jewelry of gold, silver, or platinum group metals (except watches and watch

cases); goldsmiths’ or silversmiths’ wares (including set gems) 971 Gold, nonmonetary (excluding gold ore and concentrates)

Source: Asian Development Bank.

(ii) Expenditures in the currency of the Borrower or of goods supplied from the territory of the Borrower.

(iii) Expenditures for goods supplied under a contract that any national or international financing institution or agency will have financed or has agreed to finance, including any contract financed under any loan or grant from the Asian Development Bank.

(iv) Expenditures for goods intended for military or paramilitary purposes or for luxury consumption.

(v) Expenditures for narcotics. (vi) Expenditures for environmentally hazardous goods, the manufacture, use, or

import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party.

(vii) Expenditures on account of any payment prohibited by the Borrower in compliance with a decision of the United Nations Security Council taken under chapter VII of the Charter of the United Nations.

76 Appendix 10

MONITORING ARRANGEMENTS A. Introduction 1. The monitoring framework of the Public Expenditure Support Facility (PESF) Program and the Countercyclical Support Facility (CSF) Support Program is structured around three main features: (i) use of baseline indicators already collated during the processing of the Program (the PESF and the CSF), (ii) leveraging existing systems and protocols at country level, and (iii) coordination across development partners. Figure A10 shows the overall design of the monitoring framework. 2. Use of Baseline Indicators: The design and monitoring frameworks for both the PESF and CSF contain baseline indicators already collated. These indicators (listed in Appendix 1 and Appendix 2) are benchmarks against which progress will be monitored. 3. Existing Protocols and Systems at the Asian Development Bank (ADB): ADB at present already has an existing set of activities to monitor the elements of the Program. This includes not only the work of the Bangladesh Resident Mission (BRM) but also other ongoing ADB-funded interventions.

(i) BRM. Over 70% of the portfolio has been delegated to BRM (the highest among the ADB Resident Missions), and there is considerable capacity to maintain a monitoring protocol that will be used to conduct economic surveillance and assess, on a continuing basis, the performance and direction of the Program. This protocol includes: (i) BRM's Economics Unit, which undertakes regular monitoring of macroeconomic and fiscal developments and reform progress in the country, and publishes the results in, for example, the Quarterly Economic Update and bimonthly Economic Indicators Update; (ii) efforts of the Portfolio Management Unit of BRM on Annual Development Plan implementation issues in the context of ongoing ADB projects and programs; and (iii) the annual Country Portfolio Review Mission which provide important monitoring milestones. (ii) Existing and proposed programs. These include, for example, (i) the proposed small-scale technical assistance on strengthening macroeconomic and fiscal monitoring at the Ministry of Finance (MOF); (ii) the Good Governance Program, 1 which has conducted a vulnerability to corruption assessment in several sectors, including health, railways, port operations, and education; and (iii) Regional Technical Assistance 6445: Support for Implementation of the Second Governance and Anticorruption Action Plan, under which assistance is provided in the monitoring of governance indicators, including on service delivery, as part of the work on the National Integrity Strategy. Results from these assessments also serve as benchmarks against which the progress of the Program, as applied in these sectors, will be monitored.

4. Donor Coordination: This is largely done through the local consultative group (LCG), which brings together development partners in Bangladesh, including the Joint Strategy Partners (World Bank, Japan International Cooperation Agency, Department for International Development of the United Kingdom, and ADB). A separate LCG working group on public financial management is currently being formed which, along with the existing governance working group, will also be involved in helping monitor the broader context of the CSF. In

1 ADB. 2007. Report and Recommendation of the President to the Board of Directors on Proposed Program Loan and Technical Assistance Grants to the People's Republic of Bangladesh for the Good Governance Program. Manila.

Appendix 10 Appendix 10 77 77

addition, there are numerous sector-specific LCG working groups that closely monitor public expenditures in their respective areas of focus that can be drawn upon to assist in the broader monitoring effort. B. Proposed Measures 5. The proposed monitoring system consists of the following:

(i) Program steering committee (PSC). The PSC will meet regularly to review the progress of the Program and report it to ADB. There will also be liaison with the private sector and development partners to solicit their feedback on emerging policies and the impact of the Program. semi-annual reviews of the macroeconomic and fiscal conditions will also be carried out by the PSC.

(ii) Monitoring macroeconomic performance. ADB will review and assess

developments in the key macroeconomic indicators presented and described in the Access Criteria Matrix and the design and monitoring framework for the CSF, including quarterly fiscal data and budget outturns, public debt ratios, external balance and monetary survey. In assessing the macroeconomic performance, it will draw on International Monetary Fund reports on Bangladesh including the Selected Issues and its annual Article IV Consultations with the Government, and other relevant materials.

(iii) Monitoring the Government's countercyclical development program. ADB

will monitor and review aggregate budget outturns for the CSF and disbursement rates of the key line ministries implementing the social safety net programs (SSNPs). In coordination with the MOF, ADB will also monitor progress of implementation of the Government’s countercyclical development program on the major SSNPs, especially those implemented under the administrative control of the Ministry of Food and Disaster Management, Ministry of Women and Children's Affairs, and the Local Government Division of the Ministry of Local Government, Rural Development, Cooperatives. The information will be available from the Government’s public financial management systems, including reports from the office of the Controller General of Accounts, a department under on the MOF.

C. Implementation Mechanisms for SSNPs 6. Policy directives on SSNPs are provided in the budget documents and the directives issued by the MOF, while implementation is the responsibility of various line ministries. The SSNPs are implemented through the Government's various programs or projects, such as, allowances for the destitute women, rehabilitation of physically disabled, 'one household, one farm', employment generation for the hardcore poor, rural roads maintenance program, Test Relief, Food for Works Program, vulnerable group development for ultra poor women, micro credit through nongovernment organizations, old age pension, vulnerable group feeding, school feeding program, and rural road maintenance program. Respective line ministries prepare program or project documents, which need to be approved by the ministry in consultation with the MOF. Each SSNP is budgeted and its annual allocation is provided in the Government's recurrent or development budget. Line ministry formulates guidelines on the roles of each implementing agency, departmental field offices, district administration and local governments; and on the arrangements for implementation, and also defines entitlements and benefits.

78 Appendix 10

Modality for involving elected local officials, and setting up local level committees for oversight is also determined by the line ministry. 7. Food related assistance schemes are implemented by the Ministry of Food and Disaster Management with the assistance of the departments under it, district administration, union parishads (sub-districts) and departmental field offices. The Ministry of Food has a well-functioning and reliable monitoring system to ensure transparency in the procurement and distribution of food grains. The food planning and monitoring unit under the Ministry provides a daily countrywide report on the Public Food Distribution system by collecting data from food silos, ports, and other food warehouses located at the district and sub district level. The Ministry of Food also submits quarterly progress reports to the Finance Division of MOF covering progress on food distribution through different SSNPs. 8. Ministry of Social Welfare is the line ministry, while the Directorate of Social Welfare is the implementing agency for the old-age allowance program. Old-age allowances are delivered by the Ministry, based on the list of eligible recipients prepared by the field administration following specified selection criteria. The fund is channeled through five state-owned banks. The Directorate receives reports from the field offices on utilization of funds by the banks. In addition to the central monitoring done by the Directorate, arrangements exist for local monitoring by its field offices. 9. Employment generation for the hardcore poor is a new program, being implemented by the Ministry of Food and Disaster Management. The field level project implementation units are responsible for fund management, implementation and monitoring. 10. The Local Government Division of the Ministry of Local Government, Rural Development and Cooperatives and the Local Government Engineering Department under it, with support of the union parishads, implement the rural roads maintenance program. Allocations are provided through the annual budget of the Government and there are guidelines on the implementation modality and roles of different agencies. Destitute women are organized in Labor Contracting Societies and provided the contract to maintain particular rural roads including tree plantation, and they receive daily wages at fixed rates. Similar implementation arrangements and monitoring systems are there for other safety net programs, including micro credit for small income generating activities. 11. Release of funds for the SSNPs is subject to compliance with the financial and treasury rules of the Government. Accounts are maintained by the government accounts offices and the use of funds is subject to audit by the government audit offices. 12. Overall, there are established procedures, controls, and systems to implement all SSNPs. ADB will use the measures described above to monitor their performance.

Appendix 10 Appendix 10 79 79

Appendix 10 79

Figure A10: Monitoring Framework for the Program

Features: (i) baseline indicators already collated for the PESF and the CSF; (ii) leveraging off of existing protocols and systems; (iii) coordination across development partners (through the LCG)

Organizational

Program Steering Committee (PSC)

ADB

Government

Features: (i) semi-annual progress reports on macroeconomic and fiscal conditions; (ii) consultative meetings with private sector and DPs; (iii) MOF to maintain all monitoring data

Focus of monitoring

Macroeconomic performance

Usage of PESF funds

Countercyclical development program

BRM (i) Economic surveillance; (ii) Portfolio Management Unit; (iii) CPRM; (iv) work of Economics Unit and Governance Unit

Other programs

(i) Good Governance Program; (ii) RETA 6445; (iii) SSTA on strengthening economic monitoring and surveillance

Ministry of Food and Disaster Management; Ministry of Women and Children's Affairs; Ministry of Local Government, Rural Development, and Cooperatives

(i) Review and assess developments in macroeconomic indicators in the Access Criteria Matrix and the DMF, including quarterly fiscal data and budget outturns, public debt ratios, external balance and monetary survey; (ii) draw on IMF reports on Bangladesh including the Selected Issues and its annual Article IV Consultations with the Government, etc.

(i) ADB to monitor and review aggregate budget outturns for CSF and disbursement rates of key line ministries implementing SSNPs; (ii) ADB to also monitor progress of implementation of the Government’s countercyclical development program on the major SSNPs; (iii) reports from the office of the Controller General of Accounts

Counterpart funds for: revenue mobilization measures, reforming financial management processes and application of MTBF, strengthening the funding and implementation of PPPs, and delivery of social safety nets

Macroeconomic and fiscal monitoring, as well as monitoring of PPPs, based on data from, among others, Bangladesh Bureau of Statistics, MOF, Planning Commission, Bangladesh Bank, Ministry of Planning, Bangladesh Chamber of Commerce and Industry, etc.

ADB = Asian Development Bank, CPRM = Country Portfolio Review Mission, CSF = Countercyclical Support Facility, DMF = design and monitoring framework, DP = development partner, IMF = International Monetary Fund, LCG = local consultative group, MOF = Ministry of Finance, MTBF = medium-term budgetary framework, PESF = Public Expenditure Support Facility, PPP = public-private partnership, PSC = program steering committee, RETA = regional technical assistance, SSNP = small-scale technical assistance, SSTA = short-term technical assistance.

80 Appendix 11 Appendix 12

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country and Project Title: Bangladesh: Public Expenditure Support Facility Program and Countercyclical Support Facility Support Program Lending/Financing Modality:

Policy-Based Program Countercyclical Support Facility

Department/ Division:

South Asia Department/ Financial Sector, and Public Management and Trade Division

I. POVERTY ANALYSIS AND STRATEGY A. Link to the National Poverty Reduction Strategy and Country Partnership Strategy The proposed Program (PESF and CSF) is harmonized with the Government’s National Strategy for Accelerated Poverty Reduction II (NSAPR II) and the Bangladesh Country Partnership Strategy (CPS) of the Asian Development Bank (ADB). The NSAPR II reaffirms that reducing poverty and accelerating the pace of social development are the most important long-term strategic goals for Bangladesh. The NSAPR II aims to halve the number of poor people by 2015, and to achieve substantial improvement in all aspects of human development. The Program will provide assistance to the Government for implementing its social safety net programs (SSNPs), its primary tools for poverty reduction. The improved investment climate would lead to higher investment on power and energy, transport, and urban services. ADB support will also foster macroeconomic stability by reducing the need for inflationary domestic borrowing (which is also costlier) and preventing crowding out of private investment. By improving public financial management (PFM), the Program will increase the efficiency of public spending and create more fiscal space for spending that benefit the poor. Through these activities, the Program will help maintain satisfactory economic growth and address poverty concerns of the vulnerable segments of the population. B. Poverty Analysis Targeting Classification: Targeted Intervention (TI-M) 1. Key Issues Bangladesh has made mixed progress in reducing poverty. From 2000 to 2005, the depth and severity of poverty declined simultaneously both in urban and rural areas. However, the number of people living below the hardcore poor poverty line increased to 27 million in 2005 from 24.9 million in 2000. The most severe poverty is located in urban slums and in the Chittagong Hill Tracts. Just less than 20% of the population falls into the category of extreme poverty (lacking resources to acquire a minimum dietary intake). From 1991 to 2005, the poverty reduction rate per year was 1.3% points. However, from 2000 to 2005 income poverty declined from 48.9% to 40% (or 1.8% points annually, on average).

Adverse impacts in the export sector stemming from the global economic crisis will directly affect poverty via employment losses and wage cuts. With more than 2.2 million workers and equal number of workers employed in ancillary activities, a slowdown of ready-made-garment exports will translate into widespread poverty both in urban and rural areas. As the majority of ready-made-garment workers are female, a crisis in the ready-made-garment sector will have substantial poverty impacts. Furthermore, a deceleration in gross domestic product (GDP) growth and contagion of the crisis to other sectors will push a vast pool of the laborers and their families below the poverty line. Small and medium-sized enterprises (SMEs) are disproportionately vulnerable to global economic crises; this potentially has huge poverty implications. A slowdown in income growth will hit existing poor people—consisting of a variety of vulnerable groups, mostly the elderly, children, and women—hardest. Likewise, a fall in remittance inflows will result in direct income loss to recipient households. For many households in rural areas, remittance earnings are the main source of income and livelihood. A fall in remittance income will directly affect consumption and the nutritional status of many rural families. Because of higher linkage effects, the poverty impacts of a fall in remittance income will have an amplified effect on overall poverty incidence.

Appendix 11 81

A slowdown of economic activities will severely squeeze the Government's fiscal space. Given the uncertain aid inflow, fiscal revenue will be insufficient to finance poverty-related expenditures—particularly targeted social safety net programs (SSNPs).

2. Design Features Design features of the Program that will help reduce poverty directly or indirectly include: (i) Financial support to the Government to reduce the fiscal pressure on the budget arising from expanded SSNPs. By reducing the financing gap, the Program will directly contribute to mitigating the potential adverse impacts of the global economic crisis on poverty by enhancing access to food and employment opportunities, as envisioned in the SSNPs.

(ii) The Program will support the Government’s efforts to encourage greater private investment in infrastructure, accelerate public infrastructure project implementation, and improve social service delivery to maximize pro-poor growth. By mitigating the adverse impacts of the global crisis on fiscal space to finance pro-poor development activities and promoting basic social service delivery and infrastructure spending, the Program will also positively contribute to income acceleration and employment. C. Poverty Impact Analysis 1. Discuss the impact channels of the policy reform(s) (direct and indirect, short and medium term) to

the country and major groups affected. The Program will support the Government's immediate actions to mitigate the impacts of the global crisis on the poor and vulnerable groups. They will also support reforms for enhancing pro-poor growth and improve living standards in the medium term. The poverty impact will be reflected in two particular streams: (i) in the short term, budgetary support will help fill the financing gap stemming from global-crisis-related revenue shocks, which will allow critical public expenditure programs to remain in place or be strengthened—in particular, SSNPs; and (ii) maintaining macroeconomic stability will stimulate private investment and promote faster economic growth in the medium term—thereby enabling the creation of an effective social safety net system that benefits poor and vulnerable groups, and ultimately helps the country attain its poverty reduction goals. 2. Discuss the impact of the policy reform(s) on vulnerable groups and ways to address it/them (refer

to social analysis). Improving and scaling up safety net operations will ensure increased access to food and social services for the poor and help to also cover people previously non poor who are hurt by the crisis. Mechanisms will be put in place that creates opportunities for poor and vulnerable people to be informed about the benefits they are entitled to, and to claim their rights. Preparing a comprehensive list of hardcore poor and vulnerable populations will also lead to improved targeting and effectiveness of SSNPs. The establishment of a reliable food security system will help to protect against food inflation and improve access for the poor. In addition, scaled-up infrastructure investment and a fiscal stimulus package will help reduce the risk of unemployment and income loss in the immediate term, and also enhance longer-term growth. Closer performance monitoring will strengthen accountability on the use of public resources and. reduce the scope for irregularities or corruption. Microcredit programs for women entrepreneurs and support for SMEs will contribute to make growth more inclusive. 3. Discuss how the policy reform(s) contribute(s) to poverty reduction, pro-poor growth, and the

Millennium Development Goals. The Program’s support of SSNPs will create fiscal space which will enable the Government to scale up infrastructure investment and implement a fiscal stimulus package while ensuring the continued flow of credit to the private sector. These actions will help reduce the risk of unemployment and


income loss in the immediate term, and also enhance longer-term growth. Closer performance monitoring will strengthen accountability on the use of public resources and. reduce the scope for irregularities or corruption. Providing support to improve the business environment is part of the Government's holistic approach to promoting private sector development and pro-poor growth.

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis The Bangladesh economy has been severely impacted by the global crisis. The coming months will see the effects of the crisis compounded. Already overseas workers are returning home and export orders are slowing. The resultant drop in remittances, migration, and exports of ready-made garments will slow economic growth, drive down household incomes, and lead to rising unemployment in the formal and informal sectors. At the household level, the economic downturn is reducing job opportunities, incomes, and purchasing power. This is forcing households to seek alternative work, mainly as casual laborers at reduced real wages. Opportunities for wage employment—the top priority for the poor—are already decreasing. If the poor are earning less, the risk increases that they will fall into debt and/or be unable to afford proper healthcare, education, food intake, nutrition, or other vital services. Even though food prices have declined, the largest share of the average household budget is still spent on food (52%). Lower income could force poor households to cut food spending, which could affect nutrition status and have long term adverse effects on health. Microfinance institutions that rely on commercial funding may face refinancing threats; this risk could be magnified if donors reduce their support. Other potential social consequences are malnutrition, morbidity, frustration, social tension, and deterioration of law and order—all of which carry unquantifiable costs. Employment, income, availability of food in markets, efficient delivery of services, affordability of goods and services are all important issues. B. Consultation and Participation 1. Provide a summary of the consultation and participation process during the project preparation. The Program, processed in response to the economic crisis, was conceived by ADB jointly with the Government of Bangladesh (the Government). The needs assessment and consultation schedule were drawn up jointly with the Government, with inputs from other development partners and relevant stakeholders. Components of the Program were designed after extensive consultation with the Ministry of Finance and the Ministry of Food and Disaster Management. As part of its CPS midterm review, ADB discussed the idea of the Program (especially the PESF) with civil society, academic, and private sector representatives. Regular interaction with various agencies continued during the preparation phase. ADB's proposed support for strengthening safety nets for the poor and vulnerable was supported by stakeholders. In addition, mechanisms to ensure benefits for the poor and for women through improved delivery of SSNPs, including through employment guarantee and food security schemes, as well as support for SMEs and women entrepreneurs, were also discussed. Donors thought that ADB's support was useful to create greater fiscal space for additional countercyclical expenditures that could avert a sharper reduction in growth and employment. 2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring?

Information sharing Consultation Collaborative decision making Empowerment

Appendix 11 83

3. Was a C&P plan prepared? Yes No If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget, consultant input, etc.). If no, explain why. The Program was processed quickly to provide budgetary support to the Government, thus a full-fledged C&P plan was not prepared. However, a short C&P Plan has been prepared (Supplementary Appendix J) The plan includes the objectives and methods of involvement of various stakeholders in strengthening and scaling up existing SSNPs to benefit the poor, women, and other vulnerable groups. Local government institutions will be involved in implementing the SSNPs. Nongovernment organizations will be involved in identifying beneficiaries and in delivering and monitoring some old and new SSNPs. C. Gender and Development 1. Key Issues Women generally face the challenges of managing households' food security and nutritional needs. During economic crises, they face an enormous challenge in managing their households' food supply. According to the International Labour Organization, the global crisis will plunge a huge number of women into unemployment and push them into insecure jobs. Women make up a majority of the export manufacturing workforce, but concentrate mostly in insecure, low-wage, low-skill jobs. Women who have migrated to urban areas and abroad are also being hard hit by the crisis. Their wages and remittances are important sources of family income. Overseas workers are returning home in increasing numbers, affecting the family food security situation. Female garment workers are still reeling from last years' food crisis, and their situation is worsening. Though experts predict that the Bangladesh economy will see few factory closures or job cuts, the pricing advantage in the garment sector over competitors will count little as demand for Bangladesh's exports in the West is shrinking. A drop in export prices would put pressure on workers' wages, the majority of whom are women. Employers often exploit the low bargaining power of women to evade statutory labor rights, like signing redundancy letters to avoid payment of severance benefits and replacement of regular employees by casual workers. Enterprises not cutting jobs are trying to cut wages, overtime payments, subsidized meals, transport, and other such benefits. The potential refinancing threat to microfinance institutions that rely on commercial funding may cause problems in microfinance operations, affecting household food security and livelihoods where the majority of beneficiaries are women. Lacking unemployment insurance and cash benefits, unemployed women will quickly become destitute. Often women sell their assets and resort to money lenders for survival. Female-headed households suffer the most from loss of income and employment. Family health and nutritional needs are often sacrificed, resulting in long-lasting negative effects on their children's lives. Often households cope by reducing the number of meals per day they feed their family, or reducing the quality of their diet. Women often forgo their own nutrition to ensure that other family members get enough to eat. This practice ends up severely affecting their own health. As Government revenues shrink and deficits rise, expenditures on SSNPs to protect households living in poverty will decline unless external aid is increased. Strategy to maximize impacts on women: The proposed loans will allow the Government to maintain SSNPs focusing on poor households (especially households headed by women, who constitute the majority of the poor population). The Government's annual budget for FY2010 allocates $2.5 billion for SSNPs; about 83% of this will go toward social protection programs targeting mainly poor women. The Program will allow the Government to generate 5 million person-months of work in rural areas; again women will be the main beneficiaries. Budget support to preserve macroeconomic stability and stimulate private investment will also benefit poor and vulnerable groups by creating an environment for additional employment in the private sector and infrastructure.


2. Key Actions

Gender plan Other actions/measures No action/measure

The Program will contribute to the Government's plan to scale up SSNPs to cover 96 million beneficiaries with livelihood support. The key indicators will be the number of women covered under social SSNPs, the number of women trained under various schemes, and access to work opportunities. The Program will monitor the increase in coverage of vulnerable people by SSNPs (FY2009 estimated baseline: 72 million people). The Government, assisted by development partners, has developed a strategy to monitor the effectiveness and reach of most ongoing SSNPs. The Government will soon finalize a plan to prepare a list of hardcore poor that will serve as the basis for better targeting and monitoring. The Government's initiatives to improve public financial management and the investment climate, and to create better mechanisms for SSNPs, will also benefit women.

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Significant/Limited/ No Impact

Strategy to Address Issue Plan or Other Measures Included

in Design Involuntary Resettlement

No Impact The Program does not involve any construction, land acquisition, and resettlement; therefore, they do not trigger resettlement or compensation requirements.

Full Plan Short Plan Resettlement

Framework No Action

Indigenous Peoples

Limited Indigenous people will

potentially benefit from the safety net programs. Better targeting of SSNPs and streamlining of the distribution channels will ensure better food security and ensure that indigenous peoples’ interests are addressed.

Plan Other Action Indigenous

Peoples Framework

No Action

Labor Employment opportunities

Labor retrenchment

Core labor standards

Significant positive Additional employment opportunities will be created through the formation and/or improvement of SSNPs, private–public partnerships, SME initiatives, etc.

Plan Other Action No Action

Affordability No Impact The Program will improve poor peoples’ food security through the Government’s SSNPs and infrastructural investments; no significant affordability issue is envisaged.

Action No Action

Appendix 11 85

Issue Significant/Limited/

No Impact Strategy to Address Issue Plan or Other

Measures Included in Design

Other Risks and/or Vulnerabilities

HIV/AIDS Human trafficking Others(conflict, political instability, etc), please specify

Limited

Future natural calamities or financial crises may create pressure on both the Government and the population, especially the poor. The Government will be responsible for mitigating such events

Plan Other Action No Action

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No ADB = Asian Development Bank, C&P = consultation and participation, CPS = country partnership strategy, CSF = Countercyclical Support Facility, GDP = gross domestic product, NSAPR II = National Strategy for Accelerated Poverty Reduction II, PESF = Public Expenditure Support Facility, PFM = public financial management, SME = small and medium-sized enterprise, SSNP = social safety net programs.

Appendix 12

86 Appendix 11

Table A11: POVERTY IMPACT ANALYSIS MATRIX

Channel Effect Reform Summary

Effect on the Poor/Other Stakeholders

General

Specific

Direct Short Run

Indirect Short Run

Indirect Medium

Run

Major Groups

Affected

Key Issues for Poverty Reduction

and Targeting

Mitigation or Enhancement

Measures

Labor Market

Formal Informal

Increased wage employment generation for the poor and other target groups

Increased employment in infrastructure, SMEs

Expanded labor market in SMEs, infrastructure, microfinance activities

Poor, vulnerable, unemployed, skilled and semiskilled workers

Unemployment, retrenchment, displacement because of economic shock

Employment generation schemes, facilitating conducive environment

Prices and Income

For consumers, producers, mediators

Higher income for targeted groups, noninflationary impacts on prices

Services and support to livelihoods and lower inflation rate

Accelerated medium-term growth potential, higher price stability

Poor, private sector, all income groups

Reduced income, low real wage and low fiscal space because of economic shocks

Budget support for reforms to improve service delivery provisions, conducive macroeconomic environment

Access for Poor

For poor and hardcore poor, women

Protect livelihoods and nutrition, children remain in school

Opportunity for self employment, job creation, increase human capital

Pro-poor growth, economic and social integration, access to microfinance

Poor, vulnerable, unemployed, skilled and semiskilled workers

Low income, unemployment, retrenchment, displacement because of economic shock

Budget support for reforms to improve the delivery of services to the hardcore poor and women, conducive macroeconomic environment

Access to Assets

Physical, financial, human, social, and others

Increased income, food, cash, skills, subsidy, stipend, etc.

Greater access to productive employment opportunities

Greater access to infrastructure, social services, livelihood support, and SMEs

Poor, vulnerable, women, indigenous, unskilled, orphan, elderly, etc.

Low income, unemployment, food insecurity, low real wage

More transparent open market sales, wage employment, cash and food aid

Transfers Private transfer, public transfer

From public sector to the target groups

From benefited target groups to other non-target groups

Positive distributional impacts

Poor, private sector, all income groups

Monitoring of distributional impacts of proposed interventions

Income transfer, and scaling up of infrastructure expenditures

Appendix 12 87

Appendix 11 87

Channel Effect Reform Summary

Effect on the Poor/Other Stakeholders

General

Specific

Direct Short Run

Indirect Short Run

Indirect Medium

Run

Major Groups

Affected

Key Issues for Poverty Reduction

and Targeting

Mitigation or Enhancement

Measures

Net Impact The net impact is positive but will take some time to be evident

Information Basis or Crucial Assumption

That strengthened public financial management, conducive investment climate and effective service delivery will ultimately positively impact the lives of the poor

By mitigating the adverse impacts due to global economic slowdown, the program outputs will help the country to attain its medium term poverty reduction goals as outlined in NSAPR II

Brief Narrative The poverty impact of the Program is expected to be reflected in: (i) in the short term, the Program will support the Government to provide immediate relief for the poor through scaled up SSNPs benefiting the hardcore poor and women, as well as workers retrenched from sectors affected by the global crisis; (ii) at the same time, financial support for SSNPs will free public resources and enable higher investment in infrastructure, thus protecting jobs; (iii) in the medium term, the Program will help the country to attain its poverty reduction goals by raising the country's growth potential through reducing recourse to domestic financing for investment so as to preserve macroeconomic stability, stimulating private investment, and improving transparency and efficiency in public resource management. NSAPR II = National Strategy for Accelerated Poverty Reduction II, SME = small and medium-sized enterprise, SSNP = social safety net program. Source: Asian Development Bank.

Documents

Proposed Program Loans People's Republic of Bangladesh: Public … · 2014-09-29 · the Government in undertaking a significant scaling up of SSNPs, effective gender targeting, and