bangladesh - iuj.ac.jpbangladesh july 2005 the economist intelligence unit 15 regent st, london sw1y...

Country Report

Bangladesh

July 2005

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Bangladesh at a glance: 2005-06

OVERVIEWThe political scene will be increasingly dominated by preparations for thenext general election. Controversy already surrounds the composition andresponsibilities of the caretaker government, which must be appointed inOctober 2006 to supervise the poll. The election itself will be a close contest,but the usual anti-incumbency sentiment of voters puts the opposition partiesin a favourable position. Relations with India will remain difficult, but a formaldialogue between the two countries will continue. Fiscal policy is expected tobe mildly expansionary in fiscal year 2005/06 (July-June), due in part toelection-related pressures. Interest rates may be raised slightly later this year.Economic growth is forecast to slow slightly to 5.3% in 2005/06, from anestimated 5.4% in 2004/05. Consumer price inflation increased in early 2005,and is forecast to average 6.5% for the year as a whole, before moderatingslightly in 2006. The current-account deficit is forecast to widen in both 2005and 2006, owing in part to slowing export growth. However, remittanceinflows are forecast to remain at high levels.

Key changes from last month

Political outlook• The main opposition party, the Awami League (AL), is still trying to reach

agreement with an alliance of smaller opposition parties on election-relatedissues. But this is proving difficult, particularly given the AL’s determinationto keep religion out of the contest.

Economic policy outlook• The 2005/06 budget, which was approved by parliament at the end of June,

is mildly expansionary. The extension of a “money-whitening” scheme hasproved controversial.

Economic forecast• Recent government estimates for GDP growth in 2004/05 were in line with

the Economist Intelligence Unit’s predictions. Growth in the industrial andservices sectors was much faster than in agriculture.

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Bangladesh 1

Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Bangladesh

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2005-067 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

15 Economic policy

18 The domestic economy18 Economic trends21 Agriculture22 Manufacturing23 Infrastructure

24 Foreign trade and payments

List of tables9 International assumptions summary

11 Forecast summary

15 Budget summary

16 Budgetary expenditure

19 GDP growth by sector

22 Production of major crops

24 Exports and imports by major commodity, 2004/05

25 Current account

25 Remittances from non-resident Bangladeshis

List of figures

12 Gross domestic product12 Consumer price inflation16 Sectoral division of spending in the 2005/06 budget19 Sectoral growth rates

Bangladesh 3


BangladeshJuly 2005

Summary

The political scene will be increasingly dominated by preparations for the nextgeneral election. A caretaker government to supervise the election is due to beappointed in October 2006. Fiscal policy is expected to remain mildlyexpansionary. Interest rates may be raised slightly later this year to counteractworries about high rates of inflation and credit growth and to bolster theweakening taka. Economic growth is forecast to slow very slightly, to 5.3%, infiscal year 2005/06 (July-June), from an officially estimated 5.4% in 2004/05.The current-account deficit is forecast to widen in both 2005 and 2006, largelyowing to strong import growth. Remittance inflows are forecast to remain athigh levels.

Opposition parties have been encouraged by the victory of the Awami League(AL) candidate in the Chittagong mayoral election. The AL realises that itneeds to form alliances with other opposition parties, but these are provingdifficult to pin down. The caretaker government system has been criticised.A UN Development Programme report has suggested ways to improvedemocratic dialogue. Attacks on Ahmadis have continued. Relations with Indiaremain strained, but talks between the two countries’ foreign secretaries havetaken place.

The 2005/06 budget is modestly expansionary. The extension of a “money-whitening” scheme has proved controversial. A World Bank study has detailedthe costs of corruption. Infrastructure bottlenecks remain a problem. Foreigndonors have pledged money to improve the healthcare system.

GDP growth is estimated at 5.4% in 2004/05. The government’s revenue-raisingpredictions appear to have been overly optimistic. Consumer price inflationhas started to rise again, for various reasons. Bangladesh Bank (the central bank)has warned about the implications of increased government borrowing. Thetaka has weakened against the US dollar. Rice shortfalls have pulled downagricultural output. Readymade garment exports appear to have survived theabolition of international textile quotas, but the sector faces multiple problems.A new flyover to relieve road congestion in the capital, Dhaka, has beenapproved. Air India has resumed flights to Dhaka.

The merchandise trade deficit has widened further, and the current account hasremained in deficit. Remittance inflows have continued to increase. Aninvestment deal with India’s Tata Group is close to being finalised.

Editors: Gerard Walsh (editor); Graham Richardson (consulting editor)Editorial closing date: July 4th 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2005-06

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Bangladesh


Political structure

People’s Republic of Bangladesh

Parliamentary democracy, following a constitutional amendment in September 1991

The prime minister is the chief executive and the head of the Council of Ministers (thecabinet), which she selects; the president has a largely ceremonial role, but he appointsmembers of the cabinet and the judiciary, and has the power to dissolve parliament

A unicameral parliament, consisting of 300 members directly elected by geographicalconstituencies; the legislature is elected for a five-year term

October 1st 2001; a caretaker government will be appointed in October 2006 to supervisethe next election, and must hold an election within 90 days

An alliance of the Bangladesh Nationalist Party (BNP) and three small parties won morethan two-thirds of the seats in parliament in the October 2001 election, which wasoverseen by a non-partisan caretaker government. The BNP dominates the alliance, witha large parliamentary majority in its own right. The Jamaat-e-Islami, an Islamist party, isits largest coalition partner; the Islami Oikyo Jote and the Manjur faction of the JatiyaParty complete the government

Bangladesh Nationalist Party (BNP); Awami League (AL); various Jatiya Party (JP) factions;Jamaat-e-Islami (Jamaat); Jatiya Samajtantrik Dal (JSD); Islami Oikyo Jote (IOJ); BikalpaDhara Bangladesh (BDB)

President Iajuddin AhmedPrime minister & minister of defence establishment & energy Khaleda Zia

Agriculture M K AnwarCommerce Alhaj Altaf Hossain ChowdhuryCommunications Nazmul HudaEducation Osman FaruqueEnvironment & forestry Tariqul IslamFinance & planning Mohammad Saifur RahmanFisheries & livestock Abdullah Al NomanFood & disaster management Chowdhury Kamal Ibne YusufForeign affairs M Morshed KhanHealth & family welfare Khandoker Mosharraf HossainIndustry Maulana Motiur Rahman NizamiLaw, justice & parliamentary affairs Moudud AhmedLocal government, rural development & co-operatives Abdul Mannan BhuiyanWater resources M Hafizuddin Ahmed

Salehuddin Ahmed

National government

The executive

Official name

Form of government

National legislature

National elections

Main political organisations

Key ministers

Central bank governor

Bangladesh 5


Economic structure

Annual indicators2000 a 2001 a 2002a 2003 a 2004 b

GDP at market prices (Tk bn) 2,370.9 2,535.5 2,732.0 3,005.8 3,320.6GDP (US$ bn) 47.1 47.0 47.6 51.9 56.3

Real GDP growth (%) 5.9 5.3 4.4 5.3 6.3Consumer price inflation (av; %) 2.2 2.0 3.3 5.7 3.2 a

Population (m) 137.9 140.9 143.8 146.7 b 149.8

Exports of goods fob (US$ m) 6,399.2 6,084.7 6,102.4 7,050.1 8,086.7Imports of goods fob (US$ m) 8,052.9 8,133.4 7,780.1 9,492.0 11,096.0

Current-account balance (US$ m) -305.7 -535.4 739.5 131.5 -226.0Foreign-exchange reserves excl gold (US$ m) 1,486.0 1,275.0 1,683.2 2,577.9 3,172.4 a

Total external debt (US$ bn) 15.8 15.2 17.0 18.8 20.4

Debt-service ratio, paid (%) 8.6 7.5 7.4 5.9 8.0Exchange rate (av) Tk:US$ 52.14 55.81 57.89 58.15 59.51 a

a Actual. b Economist Intelligence Unit estimates.

Main origins of real gross domestic product 2004ab % of total Components of nominal gross domestic product 2003a % of totalAgriculture 23.1 Private consumption 76.4Industry 27.8 Government consumption 5.3

Manufacturing 16.2 Gross fixed investment 23.4 Construction 8.8 Exports of goods & services 14.2

Services 49.1 Imports of goods & services 20.0

Principal exports 2004ac US$ m Principal imports 2004ac US$ mGarments 4,443.3 Capital goods 2,739.4Fish & prawns 387.5 Textiles 2,366.1

Leather & hides 244.5 Petroleum & petroleum products 1,021.4Jute goods 215.6 Cereal & dairy products 490.5Raw jute 77.0 Iron & steel 479.5

Main destinations of exports 2003 % of total Main origins of imports 2003 % of totalUS 23.9 India 15.4Germany 13.6 China 11.3UK 9.7 Singapore 10.8

France 5.9 Japan 5.9Italy 3.9 Hong Kong 4.5

a Fiscal years ending June 30th of year stated. b Factor-cost GDP at constant 1995/96 prices. c Customs basis.

6 Bangladesh


Quarterly indicators2003 2004 20052 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

OutputIndustrial production index (2000=100) 114.4 123.6 116.4 118.4 125.5 133.0 n/a n/aIndustrial production index (% change,

year on year) 5.8 8.5 5.5 3.2 9.7 7.6 n/a n/aPricesConsumer prices (2000=100) 110.0 111.9 114.4 112.3 113.2 115.6 118.5 n/aConsumer prices (% change, year on year) 5.7 5.2 6.6 2.9 2.9 3.3 3.5 n/aConsumer prices (1985/86=100) 261.2 265.7 271.7 n/a n/a n/a n/a n/a Food, beverages & tobacco 260.9 266.4 273.8 n/a n/a n/a n/a n/aFinancial indicatorsExchange rate Tk:US$ (av) 57.90 58.33 58.47 58.93 59.65 59.53 59.94 62.77Exchange rate Tk:US$ (end-period) 57.90 58.42 58.78 58.98 60.35 59.49 60.74 63.52Deposit rate (av; %) 7.81 7.35 7.91 7.64 6.56 7.22 7.02 7.62Discount rate (end-period; %) 6.00 6.00 5.00 5.00 5.00 5.00 5.00 5.00Lending rate (av; %) 16.00 16.00 16.00 16.00 15.00 14.00 14.00 14.00M1 (end-period; Tk bn) 267.4 257.4 274.0 280.8 305.0 305.6 322.9 325.9M1 (% change, year on year) 10.7 9.3 7.6 13.8 14.0 18.7 17.8 16.1M2 (end-period; Tk bn) 1,139.9 1,175.8 1,209.2 1,223.6 1,297.7 1,334.7 1,406.4 1,411.9M2 (% change, year on year) 15.6 15.7 13.1 14.8 13.8 13.5 16.3 15.4Foreign trade (Tk bn)Exports fob 72.6 90.3 73.2 88.1 93.7 109.8 101.2 n/aImports cif -152.8 -131.8 -130.9 -145.8 -179.0 -166.7 -179.6 n/aTrade balance -80.3 -41.5 -57.6 -57.6 -85.3 -56.8 -78.5 n/a

Balance of payments (US$ m)Merchandise trade balance fob-fob -810.8 -258.6 -570.2 -519.8 -906.5 -495.7 n/a n/aServices balance -166.4 -169.7 -187.2 -183.8 -222.8 -214.5 n/a n/aIncome balance -68.7 -84.1 -118.3 -76.1 -115.1 -71.0 n/a n/aNet transfer payments 913.9 820.4 948.8 1,000.9 965.6 937.6 n/a n/aCurrent-account balance -132.0 307.9 73.1 221.2 -278.7 156.4 n/a n/aReserves excl gold (end-period) 2,431.3 2,455.1 2,577.9 2,606.3 2,660.9 3,028.9 3,172.4 2,986.1

Sources: IMF, International Financial Statistics; Bangladesh Bank.

Bangladesh 7


Outlook for 2005-06

Political outlook

The Bangladesh National Party (BNP) has to hand over power to a caretakergovernment in October 2006. The caretaker government will oversee a generalelection (which must be held within 90 days of its appointment), either at end-2006 or the start of 2007. The run-up to the election is likely to see an increasein strikes and demonstrations that disrupt economic life, and an intensificationof the long-standing rivalry between the BNP and the largest opposition party,the Awami League (AL). The likely outcome of the election is unclear, but theusual anti-incumbency sentiment of Bangladeshi voters puts the oppositionparties in a favourable position. Given the poor record in government of themain political parties in the recent past, the two main Islamic parties in thecurrent government coalition—Islami Oikyo Jote and Jamaat-e-Islami—couldincrease their parliamentary representation from the combined 20 seats thatthey won in the 2001 election.

The handling of the next election is already proving controversial. The ALwants the head of the caretaker government to be appointed on the basis of aconsensus among the political parties, an idea that is supported an 11-partyalliance of left-leaning parties. But the AL’s other election-related proposals,notably an attempt to ban the “use of religion” during the campaign, aregathering less opposition support. The AL may therefore find it difficult to reachagreement with these minor parties. After the election, an important role maybe played by the Jatiya Party (JP), which says that it will support the mostpowerful party to emerge from the contest.

Protest strikes (hartals) and violence are likely to remain a central part of thepolitical landscape. The AL called a nationwide hartal on June 30th, centredaround opposition to the fiscal year 2005/06 (July-June) budget, and moreprotests are likely. Efforts to improve the process of democratic dialogue inBangladesh are likely to prove unsuccessful, at least in the short term.Meanwhile, violent attacks on individuals will continue. A number of attackson AL representatives since August 2004 are still unexplained, with the ALblaming the BNP. Attacks on the Ahmadiyya minority are also of increasingconcern, as is the issue of the rise of radical Islam in Bangladesh generally.(Some Sunni Muslims want to ban Ahmadiyya writings and missionaryactivities, seeing them as heretical.)I

The US has expressed concern about the attacks on Ahmadis, but this will notimpede a general improvement in relations between the two countries. At theend of May, Congress (the US legislature) made a strong recommendation thatBangladesh be included in the threshold programme that leads to eligibility forfinancing from the US Millennium Challenge Account (MCA). The MCA wasdeveloped by the US president, George W Bush, to provide high-performingdeveloping countries with additional financing. If Bangladesh is accepted on tothe threshold programme, US development assistance to the country, whichcurrently stands at US$100m a year, is likely to double. Bangladesh is also

Domestic politics

International relations

8 Bangladesh


negotiating with the US to gain duty-free access to the US market for some of itsmain exports, including readymade garments. On the political front, the UScontinues to voice concerns over the operation of international terroristorganisations in Bangladesh, and has offered to help the government in thefight against these groups.

Relations with neighbouring India remain poor, but there are signs of a growingpolitical consensus that relations have to be improved. In late June there wereformal talks in the Indian capital, New Delhi, between India’s foreign secretary(the most senior civil servant in the foreign ministry), Shyam Saran, and hisBangladeshi opposite number, Mohd Hemayetuddin. The discussions wereinconclusive, but both sides resolved to continue the dialogue. Various issues ofcontention between Bangladesh and India remain unresolved, including thesale of natural gas to India, Bangladeshi immigration into India and the sharingof water from the Ganges river. Domestic opposition within Bangladesh torapprochement with India will remain high, but there is an increasingrealisation of the potential benefits of improved relations, particularly on thetrade front.

Economic policy outlook

Progress on economic policy reform has been slow. However, the taka has beenrelatively stable since it was floated in May 2003, a privatisation programme isunder way (although the pace is slow), and fiscal and monetary policy hasgenerally been prudent. Huge challenges remain, however, especially in thepower sector. Foreign direct investment (FDI) inflows are likely to pick upduring the forecast period, but a difficult business environment will continue toact as a brake on FDI in sectors other than natural resources. The governmentappears very close to reaching an agreement with an Indian conglomerate, theTata Group, on a proposed US$2.5bn investment in Bangladesh. The investmentwould be in the energy, steel, coal and fertiliser sectors. If it goes through, it willbe the single largest investment ever made in Bangladesh, and will send astrong positive signal to other potential investors.

In early June the government estimated a fiscal deficit of 4.5% of GDP in2004/05, up from its initial target of 4.3%. The 2005/06 budget, approved at theend of June, forecasts no change in the deficit as a percentage of GDP. TheEconomist Intelligence Unit believes it likely that this deficit target will bemissed, with election pressures forcing a more expansionary fiscal policy in2005/06. Our forecast is for a budget deficit equivalent to 4.7% of GDPin 2005/06.

In late May an ambitious Annual Development Programme (ADP) wasannounced, involving a 20% year-on-year increase in expenditure to Tk250.3bn(US$4.2bn) in 2005/06. Although the government has denied that the latestADP is designed to win votes, it seems likely that parliamentarians have beenlobbying for projects for their constituencies in the hope of increasing theirpopularity with the electorate. The 2005/06 ADP contains 1,440 developmentprojects, including 516 new and unapproved ones. The government announced

Policy trends

Fiscal policy

Bangladesh 9


that 52% of the ADP would be financed domestically, while 48% would befunded by foreign aid and loans. The external financing includes loans from theIMF and the World Bank, debt cancellation by Japan and foreign aid. Typically,the government has to revise its ADPs because of problems in the imple-mentation of projects, in the form either of local impediments to investment orof failure by the government to meet the conditionality attached to foreignfinancing.

The IMF has advised the government to tighten monetary policy in order torein in rising inflation and credit growth. However, in the short term we expectBangladesh Bank (BB, the central bank) to adhere broadly to its accommodativemonetary policy stance: the bank will provide sufficient liquidity to the privatesector to support economic growth, and to mitigate the impact of the end-2004scrapping of World Trade Organisation (WTO) textile and clothing quotas aswell as the adverse effects of last year’s floods. However, BB is likely to beforced to raise interest rates slightly in late 2005, in order to maintain price andexchange-rate stability in the face of increasing concerns about rising inflationand credit growth The inflationary impact of the wage increases recommendedby the pay commission is another worry. However, the indications are that therise in food prices and the increase in import-led inflation owing to high oilprices will prove transitory, and that a major change in the central bank’smonetary policy stance is therefore not likely. We expect the discount rate torise slightly from 5% in 2004 to 5.5% in 2005. In 2006 the rate is forecast to risefurther, to 6%, in line with the trend in global interest rates.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2003 2004 2005 2006Real GDP growthWorld 3.9 5.1 4.2 4.0US 3.0 4.4 3.2 2.8EU25 1.2 2.3 1.7 2.0Exchange rates¥:US$ 115.9 108.1 107.4 103.0US$:€ 1.132 1.244 1.222 1.260SDR:US$ 0.714 0.675 0.679 0.666Financial indicators¥ 2-month private bill rate 0.03 0.00 0.00 0.17US$ 3-month commercial paper rate 1.10 1.48 3.31 4.63

Commodity pricesOil (Brent; US$/b) 28.8 38.5 50.5 46.5Cotton (US cents/lb) 63.3 62.0 56.7 62.0Food, feedstuffs & beverages (% change in US$

terms) 6.6 9.2 -6.5 -1.5Industrial raw materials (% change in US$ terms) 13.0 21.0 4.2 -6.2

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions

Monetary policy

10 Bangladesh


We forecast that world GDP growth (on a purchasing power parity basis) willslow from 5.1% in 2004 to an average of 4.1% in 2005-06. There are several risksto our forecast, especially with regard to energy prices, as a further rise in oilprices could increase pressure on Bangladesh’s balance of payments. We haverevised upwards our forecast for oil prices (dated Brent Blend) for 2005 and2006 to US$50.5/barrel and US$46.5/b respectively. Interest rates are expected tobe rising in the developed world over the course of 2005-06, but if the rises arestronger than our central forecast, they could curb inflows of remittances fromBangladeshis working abroad. This would be damaging for Bangladesh’seconomy, which has grown heavily reliant on remittances from overseas tosustain demand.

GDP growth is now officially estimated at 5.4% in 2004/05, down from 6.3% in2003/04. The agricultural sector is estimated by the government to haveexpanded by just 0.3% in 2004/05, with growth held back by the severe floodsin August and September 2004 that inundated more than 38% of the country’sland surface. Industry and services growth picked up in 2004/05, but growth inthese sectors is likely to moderate in 2005/06, in line with lower OECDdemand and the withdrawal of quota privileges for Bangladesh’s readymadegarment sector. Our forecast assumes a partial recovery in the agriculturalgrowth rate to 3.8% in 2005/06, but there must be some uncertainty about this,as renewed flooding is possible during the forecast period. We forecast GDPgrowth at 5.3% in 2005/06, slightly down on the rate of growth achievedin 2004/05.

The year-on-year increase in inflation fell steadily from a peak of 7.9% inOctober 2004 to just 5.5% in January 2005, but then rose sharply to 6.6% inApril. Food price inflation accounts for the recent surge, although inflation isstill running at well below the rate reached in late 2004. The country continuesto suffer food shortages as a result of the decline in agricultural output owing tofloods in 2004. Non-food inflation is also rising because of high internationaloil prices (Bangladesh imports all its oil needs). There will have been additionalupward pressure on non-food inflation in the second quarter of 2005 becauseof a pay rise for government employees that took effect on May 1st and a rise infuel prices of between 6% and 13% enacted at end-May. (Price controls are stillmitigating the effect of higher international commodity prices on inflation.)Inflationary pressures will moderate somewhat in the second half of this year.However, they will remain stronger than in 2004, following the rapid rate ofliquidity growth over the past year and a slightly more expansionary fiscalstance, as signalled by the 2005/06 budget that was approved in July. Weforecast that consumer price inflation will average 6.5% in 2005, up from 3.2% in2004, before slowing to 5.2% in 2006 as the impact of transitory flood-relatedfactors fades and many world commodity prices soften.

The taka has depreciated steadily against the US dollar since it was floated atend-May 2003, when the currency peg of Tk57.9:US$1 was removed. The strongdemand for US dollars as merchandise imports continued to rise rapidly hadpushed down the taka to a level of around Tk64:US$1 by early July 2005. Thecurrency is expected to continue to depreciate over the remainder of 2005 and

Inflation

Exchange rates

Economic growth

Bangladesh 11


in 2006, partly as a result of the inflation differential between Bangladesh andits main trading partners, but also because of an already evident deteriorationon the trade and current accounts. Political uncertainty in the run-up to theelection (due in late 2006 or early 2007) could become an additional factorweighing on the taka. We forecast that the exchange rate will averageTk63.8:US$1 in 2005 and Tk65.7:US$1 in 2006.

The current-account balance will remain in deficit in 2005-06. We forecast adeficit of US$346m (0.6% of GDP) in, rising to US$446m (0.7% of GDP) in 2006.The deterioration is primarily owing to a burgeoning trade imbalance asgrowth in the cost of imports far exceeds the rise in export receipts. BetweenJuly 2004 and March 2005 export revenue rose by 12.8% year on year toUS$6.1bn, but import costs rose by 26.4% to US$8.7bn. Imports are forecast tocontinue to grow rapidly in volume terms in 2005-06 as demand for capitalgoods and some industrial raw materials remains strong. Export growth,however, is forecast to moderate, owing to slowing demand in the OECD andincreased competition. High world oil prices are an additional factor causingthe trade deficit to widen in 2005-06, but there have also been Bangladeshicomplaints that the rising deficit is the result of global trade liberalisation,notably the removal of quotas on international textile trade. Current transfers,largely consisting of remittances from Bangladeshi workers overseas, willcontinue to offset much of the trade deficit: transfers are likely to exceedUS$4bn a year in 2005-06. The services and income side of the current accounthas traditionally been in deficit, and we expect this to remain the case.

Forecast summary(% unless otherwise indicated)

2003a 2004 b 2005c 2006c

Real GDP growth 5.3 6.3 5.4 5.3Industrial production growth 6.5 6.5 6.7 6.8

Gross agricultural production growth 3.1 4.1 a 0.3 3.8Unemployment rate (av) 2.5b 2.5 2.5 2.5

Consumer price inflation (av) 5.7 3.2 a 6.5 5.2Short-term interbank rate 16.0 15.3 16.0 16.5

Government balance (% of GDP) -4.3 -4.2 -4.5 -4.7Exports of goods fob (US$ bn) 7.1 8.1 8.1 8.6Imports of goods fob (US$ bn) 9.5 11.1 11.3 12.2

Current-account balance (US$ bn) 0.1 -0.2 -0.3 -0.4Current-account balance (% of GDP) 0.3 -0.4 -0.6 -0.7

External debt (year-end; US$ bn) 18.8 20.4 21.1 23.2Exchange rate Tk:US$ (av) 58.15 59.51 a 63.77 65.71Exchange rate Tk:¥100 (av) 50.17 55.04 a 59.37 63.79

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

External sector

12 Bangladesh


Bangladesh (a) Asia excl Japan

Gross domestic product(% change, year on year)

Bangladesh (a) Asia excl Japan

Consumer price inflation(av; %)

(a) Fiscal years ending June 30th of year stated.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 01 02 03 04 05 06

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 01 02 03 04 05 06

The political scene

The mayoral election on May 9th in Chittagong, Bangladesh’s second-biggestcity, was seen as the final popularity test for the main political parties ahead ofthe national election. The incumbent mayor and opposition Awami League(AL) candidate, Mohiuddin Chowdhury, defeated Mir Nasiruddin, the candidatebacked by the ruling Bangladesh Nationalist Party (BNP)-Islamist coalition. Themainstream opposition parties were quick to interpret the BNP’s election defeatin Chittagong as a wider sign of popular dissatisfaction with the federalgovernment.

The BNP, which, like the main opposition AL, remains a secular party, relies onthe support of two Muslim parties to remain in government: the Jamaat-e-Islami (Jamaat) and the Islami Oikyo Jote (IOJ). The AL is keenly aware thateven if it makes gains in the parliamentary elections—and the tendency ofBangladeshi voters to vote against the government in power puts it in afavourable position to do this—it might not be strong enough to form the nextgovernment, as long as the BNP maintains its alliance with the Muslim parties,which command about 10% of the national vote.

One option for the AL is to form an alliance with the second-biggest oppositionparty, the Jatiya Party (JP), which is led by Hussain Mohammed Ershad,Bangladesh’s military ruler between 1982 and 1990. Mr Ershad, however, seemsin no mood to enter into an alliance at this early stage, maintaining in mid-Junethat his party would lend its support to the most powerful party that emergesfrom the general election, rather than picking a running partner now.

Meanwhile, the AL is garnering support for its proposals to reform the caretakergovernment system and the electoral law, and is attempting to use this issue tobuild a broad-based anti-government alliance ahead of the general election.The AL has threatened to boycott the election unless the current system isreformed.

Under the constitution, the existing government will hand over power to acaretaker government in October 2006 for three months. The caretaker

Political parties consider theirelection strategies

The caretaker governmentsystem comes under fire

Bangladesh 13


administration will be headed by the last retired chief justice of the SupremeCourt. (If he or she is unwilling to carry out this duty, the responsibility will fallon another retired chief justice or appeal judge.) The caretaker government’smain responsibility is to oversee the parliamentary election, which must beheld within 90 days of its appointment. Sheikh Hasina Wajed, the AL leader,has accused the last caretaker government of siding with the BNP-ledgovernment in the 2001 election, in which her party was defeated. (There wasalso a major row over the caretaker government system in 1993, which requiredforeign diplomatic intervention.)

The AL wants the next head of the caretaker government to be appointed onthe basis of a consensus among all political parties. The AL has also demandedthat the Ministry of Defence be put under the control of the caretakergovernment. (Under the present constitution, the defence ministry isresponsible to the president during the caretaker government’s administration.)Although the members of the 11-party alliance of left-leaning parties broadlyagree with the AL's proposals relating to reform of the caretaker governmentsystem, they reject the AL’s desire to ban the “use of religion” in the electioncampaign and to punish those candidates who exceed the legally determinedlimit on election spending. Negotiations between the AL and the alliance tofind a common position on these issues were still going on in early July. Asuccessful outcome to these negotiations will depend on many seats the ALagrees to allow the alliance to contest, and how much power the AL is willingto share if it wins the election.

The AL boycotted the budget session of parliament in early June. Following thepresentation of the budget for fiscal year 2005/06 (July-June) on June 9th, theAL called for a countrywide hartal (protest strike) on June 30th as part of itsongoing campaign of anti-government agitation, and demanded that thegovernment implement a 13-point proposal for revision of the proposed budget.As part of the build-up to the hartal, on June 27th the AL and its ally, the JatiyaSamajtantrik Dal (JSD) party, organised a rally in the capital, Dhaka. Thousandsof party supporters formed a human chain, and demonstrators carried bannerswith anti-government slogans.

The use of hartals as a means to influence policy and voice protest is not theexclusive domain of the AL: all major political parties have used the practiceduring their time in opposition. The practice reflects the “winner takes all”nature of Bangladeshi politics, and the lack of effective alternative means ofvoicing opposition either through parliament or via other channels. Parlia-mentary procedures assure the government’s dominance in parliament andassign the opposition a minimal role.

A UN Development Programme (UNDP) report, Beyond Hartals: TowardsDemocratic Dialogue in Bangladesh, which was released in March, recom-mended institutional reforms to strengthen democratic debate. The reportargues in favour of considering alternative electoral systems (such as pro-portional representation), reducing the parliamentary term from five to fouryears and allowing the opposition to set the parliamentary agenda on occasion,through the introduction of “opposition days”. However, there are no signs that

Hartals remain a political tool

14 Bangladesh


changes to the existing system are imminent. Mud-slinging between the twomain parties is likely to continue, with each refusing to accept the legitimacy ofthe other, thus preventing more effective governance and thereby also harmingthe economy.

The Bangladeshi government is facing increasing international and domesticcriticism over its failure to act to prevent rising violence and discriminationagainst Bangladesh’s Ahmadiyya minority. The Ahmadis, who number some100,000 out of a population of about 150m, are a religious group that identifiesitself as Muslim. On June 24th a series of attacks on Ahmadis took place,including the bombing of a mosque and homes in the town of Brahmanbaria,some 50 miles north-east of Dhaka. The latest attacks followed other violentincidents, which are believed to have been the work of the Khatme Nabuwat(KN), an umbrella group of Sunni Muslim extremists. KN has demanded agovernment declaration that Ahmadis are not Muslims, and a ban on allAhmadi writings and missionary activities. (Ahmadis are seen as heretical bymany Muslims, as they do not accept that Mohammed was the final prophet.)

In January 2004 the government imposed a ban on all Ahmadiyya pub-lications, and has generally failed to prosecute those involved in anti-Ahmadiviolence. The Ahmadis fear that institutionalised discrimination and violencewill become the norm if, as demanded by the IOJ, they are officially declaredto be non-Muslim.

Three days after the most recent attacks, in a meeting with the prime minister,Khaleda Zia, the US under-secretary of state for political affairs, Nicholas Burns,expressed serious concerns over the growth in incidents of persecution ofAhmadis, and asked the Bangladeshi government to protect their fundamentalrights. According to the government, eight people have been arrested inconnection with the attacks on Brahmanbaria Ahmadis. However, because ofits reliance on the junior coalition partners, the BNP has so far appearedreluctant to condemn the religious violence and take active steps to protect theAhmadiyya community. The government continues to dismiss claims thatIslamic extremism in Bangladesh is on the rise.

Relations between Bangladesh and India have been strained in recent months.Various issues between the two neighbours remain unresolved, includingBangladesh’s alleged role in harbouring Indian insurgents, the future sale ofnatural gas to India, the sharing of water from the Ganges river and the illegalmigration of Bangladeshis to India. In April a commander of the Indian BorderSecurity Force (BSF) was killed and two soldiers were wounded when fightingbroke out with Bangladeshi troops on the frontier with the Indian state ofTripura. (The two countries share a 4,000-km border.) The incident triggered abarrage of allegations and counter-allegations, but formal talks on June 21st inthe Indian capital, New Delhi, between the Indian foreign secretary (the mostsenior civil servant in the foreign ministry), Shyam Saran, and his Bangladeshicounterpart, Mohd Hemayetuddin, were reasonably purposeful. During thetalks the Indian side emphasised its requirement for border fencing within 150yards of the international border, while the Bangladeshi side stressed the needfor India to conform to the 1975 border guidelines between the two countries

Relations with India remainstrained

Attacks on Ahmadis continue

Bangladesh 15


and avoid any action that might adversely affect peace and stability in theborder areas. Both sides pledged to continue the dialogue on the borderquestion and other unresolved issues.

Economic policy

In early June the finance minister, Saifur Rahman, published the government’sbudget proposals for fiscal year 2005/06 (July-June). This is the last full-yearbudget under the current four-party governing coalition led by the BNP. NextJune the government will announce a budget for only three months, beforehanding over power to a caretaker government in October 2006.

Budget summary(Tk bn; fiscal years Jul-Jun)

Budget Revised estimates Budget2004/05 2004/05 2005/06 % changea

Revenue & foreign grants 431.9 418.4 490.3 17.2 Revenue 413.0 392.0 457.2 16.6 Tax revenue 336.4 319.5 373.1 16.8 Non-tax revenue 7.7 7.3 8.4 3.6 Foreign grants 1.9 2.6 3.3 25.0 Total expenditure 572.5 556.3 643.8 15.7 Non-developmental expenditure 332.1 336.7 380.8 13.1 Developmental expenditure 238.4 226.8 265.5 17.1 Fiscal deficit excl grants -159.5 -164.3 -186.6 13.5 % of GDP -4.3 -4.5 -4.5 n/a

a Budget 2005/06 compared with revised estimates 2004/05.

Source: Ministry of Finance.

The budget for fiscal 2005/06 is mildly expansionary. It is based on theassumption of GDP growth of 6% (rather higher than the 5.3% forecast by theEconomist Intelligence Unit), and envisages a 15.7% increase in total expenditureover the revised figure for the previous fiscal year. Revenue is forecast to be16.6% higher than the outturn in the previous fiscal year. The projections for taxcollection are optimistic, and, given spending pressures ahead of the generalelection that is due to take place in late 2006 or early 2007, the government’sfiscal deficit target of 4.5% of GDP seems ambitious. In his presentation of thesupplementary estimates for 2004/05, Mr Rahman said that the governmenthad missed its fiscal deficit target of 4.3% of GDP; the deficit outturn isestimated by the government to have been 4.5%.

The main features of the fiscal year 2005/06 (July-June) budget

• There is to be an increased emphasis on poverty reduction programmes,through increased social safety-net payments and employment generation

• Expenditure on the education sector will account for 15% of total budgetaryoutlays, making it the largest spending category

• Subsidies to the agricultural sector are to double to the equivalent of US$200m• The amnesty period for businesses and individuals to legitimise undeclared

income (by paying a 7.5% tax on it) has been extended until June 30th 2006.

The budget for 2005/06 ismildly expansionary

16 Bangladesh


• The annual ceiling on tax-exempt income is to rise from Tk100,000 (US$156) toTk120,000. The limit on the total income that attracts the highest tax rate of 25%is to rise from Tk900,000 to Tk1m (US$1,560)

• Customs duties are unchanged at 7.5% on basic raw materials, 15% onintermediate goods and 25% on finished goods

• Customs duty on crude petroleum will be reduced from 25% to 7.5%, and dutyon refined petroleum products will fall from 25% to 15%. The supplementaryduty of 15% on refined petroleum products will be withdrawn

• The value-added tax (VAT) rate for essentials including salt, powdered milk,diesel and kerosene will rise to 19%

• The tax rate for non-listed companies is to increase from 37.5% to 40%, toencourage firms to go public

• To provide protection to domestic industries the budget proposes a number ofmeasures, including the imposition of tariffs on items that were previously tariff-free, the raising of existing tariffs and the imposition of supplementary duties

Budgetary expenditure(fiscal years Jul-Jun)

Budget 2004/05(revised)

Budget 2005/06(proposed) % change,

Sector Tk bn % of total Tk bn % of total year on yeara

Education 72.8 13.1 96.9 15.0 33.0 Public services 58.4 10.5 85.3 13.3 46.2

Transport & communications 67.9 12.2 66.0 10.3 -2.7 LGRGb 56.8 10.2 63.8 9.9 12.5

Agriculture 44.9 8.1 47.3 7.3 5.3 Defence 41.1 7.4 43.2 6.7 5.0

Fuel & energy 42.7 7.7 42.9 6.7 0.5 Health 31.8 5.7 42.4 6.6 33.5 Public order & safety 30.3 5.4 32.5 5.0 7.4

Social security & welfare 26.0 4.7 31.2 4.9 20.1 Others 83.7 15.0 92.2 14.3 10.2

Total 556.3 100.0 643.8 100.0 15.7

a Proposed budget 2005/06 compared with outturn 2004/05. b Local government engineering department.

Source: Center for Policy Dialogue (CPD).

Others 44.5

Agriculture 7.3

Transport and communications 10.0

Public services 13.3

Education 15.0

Local governmentengineering 9.9

Sectoral division of spending in the 2005/06 budget(% of total; fiscal year Jul-Jun)

Source: Centre for Policy Dialogue.

Bangladesh 17


The budget was passed by parliament on June 30th, with only two minoramendments. A proposed Tk1,200 (US$18) tax on SIM cards for mobile phoneswas reduced to Tk900, and a proposed 10% tax on the earnings of computersoftware companies was dropped. However, another controversial budgetproposal was given the go-ahead. This was the extension for another year of aprovision, originally due to expire on June 30th 2005, to enable firms andindividuals to legitimise undeclared income (so-called black money). Under theprovision, the government allows illegal income to be “whitened” simply bypaying 7.5% tax on it. The continuation of this practice, which has beenfollowed by almost every government since Bangladesh became independentin 1971, is a major concern, as it means that it remains economically prudentnot to declare income (the tax rate on an annual income of Tk120,000 is 10%).

According to Anu Muhammad, a professor of economics at Jahangir NagarUniversity, most black money comes from corruption in development and oiland gas projects—the beneficiaries often being government officials. (There havebeen a few sacrificial lambs: the minister for energy and mineral resources,A K M Mosharraf, resigned on June 18th following controversy over hisacceptance of a car from a Canadian oil company, Niko Resources.) With a yearand a half left until the parliamentary election, the likely extension of theprovision is probably politically motivated: Professor Muhammad estimatesthat about 95% of the funds for election campaigning consist of black money.

The government’s failure to deal with this symptom of corruption does notinspire confidence in its commitment to address the causes of graft. It alsoundermines the work of the Anti-Corruption Commission (ACC), an agencythat the government created in November 2004. The Bangladeshi economyproduces an estimated Tk7trn (US$10.9bn) in black money every year, accordingAbdul Barakat, the general secretary of the Bangladesh Economic Society.

Pervasive corruption, poor infrastructure and the high cost of finance are themain hindrances to higher export competitiveness, according to a reportpublished in May by the World Bank, Bangladesh: Growth and ExportCompetitiveness. The Bank’s research shows that customs clearance bribesimpose a heavy cost on businesses, as they often hit exporters twice—firstwhen raw materials and components are imported, and second whenclearance is sought for the export of their processed goods.

The World Bank surveyed 1,001 firms in the capital, Dhaka, and the country’smain port city, Chittagong. The majority of those firms viewed corruption as amajor constraint on business. For example, bribes paid at the point of importfor knitwear manufacturing equipment typically raise the cost of such items by6-10%, the study found. Ironically, the Bank points out, importers often haveto pay a bribe to obtain the advantage of an official duty exemption forsome goods.

Infrastructure bottlenecks also add significantly to the cost of doing business inBangladesh—particularly in the area of power, gas and telecommunications.Erratic electricity supply, for example, means that Bangladeshi firms are oftenforced to produce their own electricity by using generators, which is around 2.5

“Money-whitening” proposalsprove controversial

A World Bank study details thecost of corruption

Infrastructure bottlenecksremain a problem

18 Bangladesh


times as expensive as drawing power from the electrical grid. Similarly, portcongestion results in a significant cost for exporters, as does the fact that thenational carrier, Bangladesh Biman Airlines, in effect monopolises air cargofacilities, thereby raising the cost to exporters of gaining access to overseasmarkets. Finally, the World Bank notes that interest rates charged on loans toindustry in Bangladesh are 30-100% higher than in countries such as India andChina—Bangladesh’s main competitors in the readymade garment sector.

On April 28th the World Bank approved a US$300m credit to help theBangladeshi government to raise the quality of its healthcare system andimprove access to it. The funds are part of a larger effort by donors to helpupgrade Bangladesh’s health sector under the government’s Health, Nutritionand Population Sector Programme (2003-10). The total cost of the project isestimated at approximately US$4.3bn; the remaining funds will come from theBangladeshi government and a large group of other donors, including theEuropean Commission, the UK’s Department for International Development(DFID), the Netherlands, the UN Children’s Fund (UNICEF), the World HealthOrganisation, the UN Population Fund (UNFPA), and the US Agency forInternational Development (USAID). The programme aims to strengthen publichealth sector management, improve service delivery and develop health-awareness campaigns, targeting the poorest households.

In approving the credit, the World Bank noted that that although Bangladesh’shealth indicators had improved significantly over the past decade, the countrynow faced the threat of an increase in non-communicable diseases.Communicable diseases, such as respiratory infections and diarrhoeal diseases,malaria, and tuberculosis remain prevalent, and HIV/AIDS rates are rising. Theprogramme is seen as crucial if Bangladesh is to attain the UN’s MillenniumDevelopment Goals in the areas of health, nutrition and population.

The domestic economy

Economic trends

Bangladesh probably achieved GDP growth of above 5% in fiscal year 2004/05(July-June). The Bangladesh Bureau of Statistics (BBS) is currently estimatingGDP growth of 5.4% in 2004/05, after growth of 6.3% in 2003/04. If this estimateis confirmed, it would be a fairly good result, given that the economyexperienced two external shocks in the past financial year: the floods of July-August 2004, and the ending of international quotas on textiles and appareltrade on January 1st 2005.

Economic activity appears to have picked up markedly in the third quarter(January-March) of 2004/05. Although no quarterly GDP data are available, anumber of other economic indicators suggest that the economic recoveryfollowing last year’s devastating floods was broad-based. Manufacturing outputgrew by 7.6% quarter on quarter in volume terms in January-March. The totalcargo volume handled by Chittagong port, which accounts for about 80% ofBangladesh’s seaborne export-import cargo, rose by 14% quarter on quarter.

Foreign donors pledge moneyto the healthcare system

GDP growth is estimated at5.4% in 2004/05

Bangladesh 19


Strong private-sector credit growth boosted money supply growth, with broadmoney expanding by 15.4% year on year.

The agricultural sector recovered partially in the third quarter, owing to a year-on-year increase in production of boro rice and other crops. However, thesector’s poor performance in the first half of 2004/05 means that agriculture’scontribution to GDP growth during the fiscal year was negligible, according tothe BBS’s estimates. By contrast, industry is estimated have expanded by 8.6% in2004/05, and the services sector is thought to have grown by 6.6%, makingthese sectors the twin engines of economic growth.

The latest economic data provide few signs that the business-cycle upturn inthe non-agricultural economy will cool off soon. Continued strong economicgrowth, while very welcome, has increased the need for tighter economicmanagement. The main threats to the economy, increasingly visible in early2005, remain rising inflation, reduced export competitiveness (reflected in adeteriorating external balance and currency depreciation), and the negativeimplications of rising international oil prices.

GDP growth by sector(% change, year on year; fiscal years Jul-Jun; 1995/96 prices)

2001/02 2002/03 2003/04 2004/05a

Agriculture 0.0 3.1 4.1 0.3 Industry 6.5 7.3 7.6 8.6

Services 5.4 5.4 5.7 6.6 Total 4.4 5.2 6.3 5.4

a Estimates.

Source: Bangladesh Bureau of Statistics (BBS).

-2

0

2

4

6

8

10

2001/02 2002/03 2003/04 2004/05

Agriculture Industry Services

Sectoral growth rates(% change; fiscal years Jul-Jun)

Source: Economist Intelligence Unit.

The government’s original predictions for revenue collection in 2004/05 werefar too optimistic. In the first nine months of the fiscal year revenue collectionreached only 61% of the annual target. The government now estimates that thefiscal deficit reached 4.5% of GDP in 2004/05—higher than the government’starget of 4.3%—and that this estimate could be revised upwards. The totalshortfall on the government’s original revenue forecasts is likely to have beenbetween US$500m and US$1bn.

Government revenue isbelow target

20 Bangladesh


Data from Bangladesh Bank (BB, the central bank) show that revenue collectionfrom value-added tax rose by 17.2% year on year in the first nine monthsof 2004/05 and constituted the largest contribution to total tax revenue,accounting for Tk60.9bn (US$1bn), or 33.5% of the total. Revenue from customsduties increased by 9.1%, accounting for 28.2% of total tax revenue, whilecollections of income tax rose by 19.7% and contributed 15.1% to the total. Theshortfall in revenue will inevitably lead to increased government borrowing,thereby adding to already existing inflationary pressures in the economy.

The annual rate of consumer price inflation is rising again, after dipping below6% in the final months of 2004. The most recent available data for consumerprice inflation show that the annual rate of inflation rose from 5.5% inDecember to 6.6% in April, mainly driven by the poor aman rice crop harvest,and by the rising cost of imported food resulting from the depreciation of thetaka. Annual food price inflation shot up to 8.2% in March from 6.7% inDecember, before moderating to 8% in April. Non-food price inflation increasedto 4.3% year on year in March and 4.5% in April, from 3.7% in December,reflecting higher fuel prices and rising clothing and healthcare costs.

Several factors suggest that rising inflation in early 2005 will necessitatemonetary tightening in the second half of the year. Economic activity picked upin January-March, and is likely to have been strong in the final quarter (April-June) of 2004/05. BB noted in its quarterly economic assessment for January-March that private-sector credit from banks, non-financial institutions andmicrofinance institutions had expanded by a phenomenal 19.5% year on yearduring the quarter. This trend is likely to have continued in the final months of2004/05, for which the relevant data are not yet available. Unchanged nominallending rates at a time when inflation is increasing have pushed down realinterest rates, making borrowing increasingly attractive.

An expansionary pre-election budget, pay rises for public servants due to beimplemented in July and a weakening taka have emerged as other majorfactors contributing to increased inflation. The central bank has warned that anincrease in government borrowing from the banking sector (to finance theexpected revenue shortfall in 2004/05 and 2005/06) would also push upinflation. Although there has been fierce resistance to tightening monetarypolicy on economic grounds, political pressures resulting from higher prices(highly sensitive in a low-income cash economy such as Bangladesh) are likelyto force the authorities to bow to the inevitable and raise interest rates beforethe end of 2005.

Bangladesh enjoyed relative exchange-rate stability between the removal of theold currency peg of Tk57.9:US$1 in May 2003 and the beginning of 2005. Thetaka benefited from the waning fortunes of the US dollar in internationalcurrency markets, and as a result depreciated only gradually against the USdollar. However, since the beginning of 2005 the revival of the dollar, risingdomestic inflation and a widening current-account deficit have been weighingheavily on the taka. The currency depreciated from an exchange rate of aroundTk60.5:US$1 in December 2004 to Tk64:US$1 in early July, despite the central

Inflation is above 6% andrising

Interest rates may have to rise

The taka has come underpressure

Bangladesh 21


bank’s attempts to limit the pace of decline by selling US dollars in the foreign-exchange market. The real effective exchange rate—a measure of the country’sexport competitiveness—has also fallen since the beginning of the year.

Aside from strong demand for US dollars owing to high commodity prices—particularly for oil—and increased capital goods imports associated with therecent rapid industrial growth, the supply of US dollars could also be curtailedby moderating remittance inflows from Bangladeshi workers overseas. Overall,receipts from exports have been consistently outpaced by the demand for hardcurrency to finance the country’s import bill.

Agriculture

Bangladesh’s economy depends heavily on the agricultural sector, whichaccounts directly for 23% of GDP. (Many other industries depend on thepurchasing power of the millions of people employed in agriculture.) However,the country is one of the most densely populated in the world, and there islittle room to expand the area used for crop cultivation. Rice production—whichaccounts for 70% of the sector’s value added—has risen by about 150% since themid-1970s, largely owing to productivity increases, although the area undercultivation has risen by a mere 5%. The agricultural sector remains prone tonatural disasters, and even though the government subsidises crop cultivationheavily, major flooding, such as that occurring last year, often leads to shortagesin food supply. Faced with depleted stocks, soaring rice prices and the failure tomeet domestic food-procurement targets, the government had to resort toemergency food imports at the beginning of 2005.

Crop production fell in the first half (July-December) of 2004/05, in the wake ofthe floods that hit the country in August 2004. The government estimates thatthe aus and aman harvests in the first six months of 2004/05 were respectively12% and 7% below the previous year's production levels. However, productionof boro rice and other crops increased in the second half of the fiscal year: thearea under the boro crop had increased significantly, owing to timely dis-tribution of seeds, fertiliser and other inputs, a government-engineered boomin agricultural credit and favourable weather conditions.

The government expects production of boro rice, which accounts for about one-half of total cereal production, to have been 8% higher in 2004/05 than in theprevious fiscal year. This will partly compensate for the flood-inducedproduction shortfall of other crops. Nevertheless, the crop subsector is likely tohave contracted by 3.3% year on year in 2004/05, according to estimates by theBBS. Only a good performance in other subsectors—notably animal farming (upby 7.8%), forestry (up 4.3%) and fishing (up 4%)—ensured that, by recordingestimated growth of 0.3%, the agricultural sector as a whole escaped con-traction in 2004/05.

Rice shortfalls pull downagricultural output

22 Bangladesh


Production of major crops2003/04 2004/05

Area Output Area Output Area Output (100,000 ha) (m tonnes) (100,000 ha) (m tonnes) % changea % changea

Aus rice 12.0 1.8 10.1 1.6 -16.2 -11.9 Aman rice 56.8 11.5 52.4 10.7 -7.7 -7.3 Boro rice 39.4 12.8 42.9 13.8 8.8 7.6

Wheat 6.4 1.3 5.6 1.1 -13.4 -16.2

a 2004/05 compared with 2003/04.

Source: Bangladesh Bureau of Statistics.

Manufacturing

Bangladesh’s merchandise exports are driven mainly by one industry: thereadymade garments (RMG) sector now accounts for more than four-fifths oftotal goods exports. The industry was virtually non-existent a few decades ago.It was in effect created by the Multi-Fibre Arrangement of 1974, which grantedBangladesh a guaranteed quota for RMG export sales, mainly to the US andEurope. The quotas shielded Bangladesh from Chinese and Indian competition,and allowed the country to develop a thriving garment sector. By the time thequotas were eliminated at the beginning of 2005, the export of garments haddeveloped into a business with annual value added of US$5bn, accounting for9.5% of GDP and about 30% of the manufacturing sector’s contribution to GDP.

Its heavy reliance on this one export category makes the economy vulnerableto external shocks arising from changes in global demand for readymadegarments. Many analysts had predicted that the elimination of quotas at thestart of 2005 would have serious consequences for employment, RMG exportsand the economy as a whole. About 2m people—90% of them women—work inthe garment sector, and another 15m jobs depend indirectly on garmentmanufacturing, through the backward-linked industries that produce thread,buttons and textiles.

The latest trade data do not support the gloomy predictions made ahead of thescrapping of quotas. Knitwear exports continued to grow, expanding by 38.1%year on year to US$2.3bn in the first nine months of 2004/05, although exportsof woven garments grew by only 3.8% year on year during the same period.(More detailed data for the early part of 2005 will be needed before a clearpicture of export trends emerges.) Slower growth in woven garments partlyreflects a fall in international prices for woven-fabric clothing, according to theBangladesh Garment Manufacturers and Exporters Association.

A World Bank report, Bangladesh—Growth and Export Competitiveness, publishedin May, finds that the costs associated with corruption, poor infrastructure andhigh interest rates remain major obstacles to improved export competitivenessin the RMG sector, particularly compared with China, India and Vietnam.Other factors that place the Bangladeshi RMG industry at a disadvantage,especially relative to China, are Bangladesh’s heavy reliance on importedtextiles (mainly from India) and the highly controlled nature of the industry,

Readymade garment exportsweather the storm

Graft and barriers to entry stillthreaten the garment sector

Bangladesh 23


which makes entry difficult for foreign firms and thereby slows inflows offoreign capital, technology and best practices.

The sector has other problems. The collapse of a garment factory 25 km north-west of the capital, Dhaka, on April 10th highlighted poor safety standards inthe industry. Dozens of workers were killed in the incident; the factory hadapparently been built on a swamp, without planning permission. Thousands ofgarment workers rallied in Dhaka on Labour Day on May 1st, demanding thatthe government set a minimum wage for the industry of Tk3,000 (US$50) amonth and improve safety standards. There is no minimum wage in Bangla-desh, and low labour costs constitute the garment industry’s main competitiveadvantage.

Infrastructure

In a major step towards easing traffic congestion in Dhaka (one of the mostdensely populated and congested cities in the world), the government hasgiven the green light to the construction of the country’s third and longestflyover. The 7.5-km elevated expressway will run between the Gulistan andJatrabari areas of the city, and will cost an estimated Tk7.1bn (US$110m).Construction is due to start in July, two years after the Dhaka City Corporation(DCC) and the Ministry of Local Government first submitted the proposal forthe flyover to the cabinet committee on economic affairs.

The project is scheduled to be completed in the first half of 2008. It will be thecountry’s first flyover project to be run by private investors. A UAE-Canadian-Indian joint venture, Belhasa Accom and Associates, will build, own andoperate the flyover for 24 years, before handing control to the DCC. TheDCC will receive 5% of the operational income of the flyover. To use thetoll road, motorcycles will have to pay Tk5 (about 8 US cents), cars Tk35 andtrucks Tk200.

In mid-June the Indian flag carrier, Air India, resumed its flight operations toDhaka, Bangladesh’s capital, ending a 12-year suspension of direct flightsbetween the two countries. Air India will operate flights with Boeing B777-ERaircraft three times a week between the Indian capital, New Delhi, and Dhakaon its Delhi-Dhaka-Kolkata-London service. Flights from Dhaka to New Delhiwill also operate three times a week as part of the London-Kolkata-Dhaka-NewDelhi service. The new flight connection between the two South Asianneighbours brings the number of international airlines serving Dhaka’s ZiaInternational Airport to 13. These include five carriers from the Gulf, three fromthe South Asia region (Pakistan, India and Bhutan) and another three fromSouth-east Asia (Malaysia, Singapore and Thailand). British Airways continuesto be the only European carrier to serve the Bangladeshi capital. There are nodirect flights between China and Bangladesh.

In early May, Bangladeshi and Chinese business leaders urged their respectivegovernments to establish a 900-km road link between Bangladesh’s second-biggest city, Chittagong, and Kunming, the capital of China’s Yunnan province,

Air India resumes flights toDhaka

A new Dhaka road flyover isapproved

Business ties with Chinastrengthen

24 Bangladesh


via Myanmar. The plea was made following a meeting in Dhaka between theleaders of the Federation of Bangladesh Chambers of Commerce and Industryand a Chinese business delegation from Yunnan.

Bilateral trade between the two countries is increasing rapidly, albeit from a lowbase. Total trade reached US$1.2bn in 2003/04, up from around US$800m inthe previous fiscal year. However, trade is heavily tilted towards China: in2003/04 China exported goods worth US$1.2bn to Bangladesh, while Bangla-deshi exports to China were worth a mere US$45m.

Foreign trade and payments

Bangladesh’s trade deficit continued to widen in the third quarter (January-March) of fiscal year 2004/05 (July-June), according to data released byBangladesh Bank (the central bank). In the first nine months (July-March) of thecurrent fiscal year the merchandise trade deficit (in balance-of-payments terms)reached a record high of US$2.6bn. (The customs-based figure given in the tablebelow is rather higher, largely owing to the inclusion of carriage and freight inthe imports total.)

Exports and imports by major commodity, 2004/05(Jul-Mar)

% change,US$ m % of total year on year

ExportsWoven garments 2,677 43.9 3.8Knitwear 2,051 33.6 38.1Jute goods 181 3.0 -3.0Shrimps & fish 167 2.7 -39.0Leather 159 2.6 7.8Fertiliser 74 1.2 34.1Raw jute 51 0.8 -2.8Towels 49 0.8 1.6Total exports incl others 6,097 100.0 12.5ImportsCapital goods 2,045 21.3 20.0Textiles & textile articles 1,185 12.3 22.2Petroleum products 878 9.1 82.5Crude oil 246 2.6 22.4Raw cotton 482 5.0 14.5Rice & wheat 459 4.8 40.0Iron ore, steel & other metals 455 4.7 35.4Chemicals 359 3.7 20.5Total imports incl others 9,617 100.0 26.2

Source: Bangladesh Bank, Major Economic Indicators.

The services and income balance—traditionally in deficit—also remained a dragon the current account in the first nine months of 2004/05. However, a 15%year-on-year rise to US$3.5bn in remittance inflows from overseas Bangladeshisin the first nine months of 2004/05 limited the size of the overall current-account deficit to US$420m.

The merchandise trade deficitwidens further

Bangladesh 25


The current account is, however, now firmly in the red, following several yearsof surpluses. The factors behind the deterioration are strong import demand,moderating export growth, the rising price of oil and other commodities, and,more lately, a depreciating taka, which has inflated the country’s already risingimport bill.

Current account(US$ m)

Jul-Mar Jul-Mar2003/04 2004/05

Merchandise exports 5,367 6,055

Merchandise imports -6,872 -8,689Trade balance -1,505 -2,634

Service exports 741 853Services imports -1,289 -1,529Services balance -548 -676

Net income payments -277 -276Net transfers 2,758 3,166

Current-account balance 428 -420


The export of labour—Bangladesh’s only abundant exportable resource--resulted in remittances inflows of US$3.4bn in 2003/04. The government’sremittance inflow target of US$3.6bn in 2004/05 is likely to have beenexceeded: the finance minister, Saifur Rahman, told parliament on June 21st thatexpatriate Bangladeshis had sent home US$3.5bn in the first 11 months of thefiscal year.

Official data released by the central bank show that quarterly remittances fromBangladeshis working overseas crossed the US$1bn mark for the first time inJanuary-March 2005. During this period about 65% of total remittancesoriginated from the Middle East, with more than one-half coming from SaudiArabia. Other major transfer inflows came from countries with large Bangla-deshi expatriate communities, such as the US (14% of total remittances) and theUK (12.4% of the total). Substantial inflows of remittances are crucial toBangladesh’s macroeconomic stability, as they have traditionally largely offsetthe country’s trade deficit and its services and income account deficit.

Remittances from non-resident Bangladeshis(US$ m)

2003 2004 20054 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Remittances 843.3 924.8 867.6 833.7 943.5 1045.6


In April the Tata Group, one of India’s largest privately owned conglomerates,submitted a US$2.5bn investment proposal to set up a 1,000-mw power station,a steel mill with an annual production capacity of 420,000 tonnes and a largefertiliser factory in Bangladesh. This would be the largest-ever foreign invest-ment in Bangladesh, and would also constitute the largest investment by Tataoutside India. The Bangladesh Board of Investment has invited Tata to hold

Remittance inflows continueto increase

A deal on Indian investmentdraws closer

26 Bangladesh


“conclusive negotiations” from July 2nd onwards to set up the steel, power andfertiliser units. As well as demanding to be supplied with gas at an "agreed rate"over the lifetime of the project, Tata has asked for a guarantee of uninterruptedgas supply for 30 years, whereas the Bangladeshi government is likely to offerto guarantee only 20 years' gas supply.

Once an agreement has been signed, Tata is likely to start negotiations withmultilateral lending agencies to help fund the projects, while the governmentalso enters negotiations with these lenders to secure funding for the infra-structure projects that will be required to support the three Tata plants. Ifimplemented, the projects will have a positive impact on sentiment towardsBangladesh among other investors, most of which still remain tentative aboutinvesting large sums of money in the country owing to concerns aboutBangladesh’s poor business environment and potential political instability.

As part of its investment commitment, Tata is seeking licences to develop coalmines, and coal extraction could become a major investment area. In late Junethe UK-based Asia Energy Corporation announced plans to invest US$1.4bnover 30 years in coal mining in northern Bangladesh. Bangladeshi coal depositsare among the highest-quality coal reserves in Asia. Two weeks before theannouncement of the Asia Energy deal, the state-owned oil and gas company,Petrobangla, had signed deals with two Chinese companies to extract coal fromBoropukuria, close to the existing Phulbari coalfield in the north of the country.

Coal may attract substantialforeign investment

bangladesh - iuj.ac.jpbangladesh july 2005 the economist intelligence unit 15 regent st, london sw1y...

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