Bangladesh
Recent Economic Developments

Recent economic and financial developments in Bangladesh were greatly marked by massive floods. Fiscal and monetary policies have been adopted under the government's emergency flood assistance program, with a view to funding relief and rehabilitation measures without undermining macroeconomic stability. Output growth is estimated to have declined. The overall fiscal deficit has widened and the monetary policy has been more expansionary than programmed. The government has taken important steps to improve the regulatory and legal environment for banks. External sector developments have been greatly affected.

Abstract

Recent economic and financial developments in Bangladesh were greatly marked by massive floods. Fiscal and monetary policies have been adopted under the government's emergency flood assistance program, with a view to funding relief and rehabilitation measures without undermining macroeconomic stability. Output growth is estimated to have declined. The overall fiscal deficit has widened and the monetary policy has been more expansionary than programmed. The government has taken important steps to improve the regulatory and legal environment for banks. External sector developments have been greatly affected.

I. Introduction and Overview

1. Recent economic and financial developments in Bangladesh were greatly marked by the massive floods that struck in July-September 1998. The floods caused heavy damage to infrastructure, wreaked havoc on production and distribution, and resulted in a major disruption of exports. To alleviate the economic and social impact of the floods, the government mounted a large-scale flood relief operation and sharply increased food imports, with considerable donor assistance, including from the Fund in the form of an emergency loan in October 1998. In the end, the setback to output growth and price stability turned out to be less severe than feared. With the help of an unexpectedly bountiful spring rice crop, GDP growth fell only modestly below trend in 1998/99 (July-June) and the upturn in inflation, as a result of higher food prices, was decidedly temporary. However, the recovery of manufacturing activity and exports has remained sluggish in the face of intense competitive pressures and severe infrastructure bottlenecks.

2. Fiscal and monetary policies were adapted in October 1998 under the government’s emergency flood assistance program, with a view to funding relief and rehabilitation measures without undermining macro economic stability. To keep the overrun in the budget deficit within prudent limits, the revised macroeconomic policy framework for 1998/99 envisaged a number of measures to curtail nonflood-related fiscal expenditures and to raise additional revenues. The monetary program for 1998/99 was designed to accommodate the expected increase in the rate of inflation and to meet the productive sectors’ credit needs (including the temporary post-flood credit requirements of the agricultural sector), while also aiming to protect the level of reserves. In the event, both fiscal and monetary policies turned out to be somewhat more expansionary than envisaged in the emergency assistance program. Despite substantial external support, the overall balance of payments shifted into deficit in 1998/99, and the level of official reserves declined to the equivalent of 2.1 months of imports by the end of the fiscal year.

3. Preliminary indications suggest that macroeconomic policies were eased further in the early months of 1999/2000. While inflation has remained on a declining trend, and the external current account deficit is likely to have narrowed in the face of declining food imports and weak investment demand, inadequate progress in addressing the economy’s structural weaknesses, together with an uncertain political environment, have tended to discourage private and official capital inflows. As a result, the external reserve position remained fragile during the first half of 1999/2000.

II. Real Sector Developments 1

A. Growth, Savings, and Investment

4. Reflecting the impact of the floods—the most severe in living memory in Bangladesh—output growth is estimated to have declined in 1998/99 to 4.2 percent (based on the revised national accounts with 1989/90 benchmark), compared with an average of 5.3 percent in the two preceding years (Chart 1 and Tables 1 and 2). Improved weather conditions, together with the government-supported rehabilitation efforts, led to an impressive rebound in agricultural production. In particular, a bumper boro rice crop toward the end of the fiscal year was the principal factor generating a growth rate in 1998/99 considerably higher than the 3 percent projected in the government’s post-flood adjustment program. Bangladesh’s recent output performance does not appear to have been significantly affected by the Asian crisis.

CHART 1.

BANGLADESH GROWTH AND INFLATION

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Sources: Bureau of Statistics; and staff estimates.
Table 1.

Bangladesh: Gross Domestic Product at Current Prices, 1994/95-1998/99 1/

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Source: Bangladesh Bureau of Statistics

Data based on 1989/90 benchmark and prices.

Table 2.

Bangladesh; Sectoral Growth Rates at Constant Prices, 1994/95-1998/99 1/

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Source: Bangladesh Bureau of Statistics.

Data based on 1989/90 benchmark and prices.

5. The resilience shown by agriculture, while also evident in some other sectors, such as wholesale and retail trade and construction, was not extended to the manufacturing sector, which had been an engine of growth in previous years. Growth in manufacturing output, which had already begun to weaken before the floods, dropped to a significantly negative rate, and began to pick up only in the later months of 1998/99. The slowdown in manufacturing output growth was reflected in a marked deceleration of export growth in 1998/99, particularly in the dominant garments sector. These developments reflected the combined effects of competitive pressures associated with an appreciated real exchange rate, critical infrastructural problems (with respect to power and transportation, in particular), labor difficulties, and the poor financial condition of many industrial (particularly state-owned) enterprises.

6. Private investment growth appears to have decelerated in 1998/99 (Table 3). The available estimates of aggregate demand are subject to a wide margin of error and need to be interpreted with caution. 2 Nevertheless, the evidence of slowing investment growth is consistent with signs of a weakening of investor confidence, which reflects in large part the lack of visible progress in addressing the country’s major structural problems. In 1999, the investment climate has been further undermined by intensified political confrontation and civil unrest caused by a widening rift between the government and the main opposition parties. These developments are disappointing in view of Bangladesh’s need to boost economic growth in order to make a substantial dent in the country’s pervasive poverty. The slowdown in investment growth was moderated during 1998/99 by the expansion of flood-related and donor-financed public investment. However, this pattern of investment could prove difficult to sustain in the period ahead. Thus, while gross investment is estimated to have remained at about 22 percent of GDP in 1998/99, the investment-to-GDP ratio would likely decrease in the period ahead if financing constraints and lagging donor support lead to a reversion to a lower pace of public investment.

Table 3.

Bangladesh: Gross Domestic Product by Expenditure at Current Prices, 1994/95-1998/99 1/

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Sources: Bangladesh Bureau of Statistics; and Fund staff estimates.

Data based on 1989/90 benchmark and prices; public investment estimates based on estimates for ADP and non-ADP capital expenditure as reflected in the central government’s accounts.

GDE minus consumption.

GDP minus consumption.

National saving minus gross investment.

B. Sectoral Developments

Agriculture

7. Foodgrain production is estimated to have risen by nearly 4 percent in 1998/99, compared with 0.5 percent in 1997/98 and an average of 3 percent in the preceding five years. Even with the large decline in the aus and aman rice crops stemming from the floods, which affected about 1.5 million hectares of land in 1998/99, a record boro rice crop of over 10 million metric tons toward the end of the year (compared with 8.1 million tons in 1997/98) contributed to a positive growth of rice output over the year (Table 4). Production of wheat increased strongly to 2.0 million metric tons, compared with 1.8 million tons in 1997/98. Emphasis was placed in 1998/99 on increasing yield per hectare for foodgrain output, rather than increasing crop acreage, achieved through a shift from local variety to high-yielding varieties and hybrid seed. Altogether, foodgrain production is estimated to have risen to 21.3 million metric tons in 1998/99 despite an estimated output loss of about 2 million tons on account of the floods.

Table 4.

Bangladesh: Agricultural Production, 1994/95-1998/99

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Sources: Bangladesh Bureau of Statistics, Ministry of Agriculture, and Ministry of Food.

Indicates final estimates.

8. In these circumstances, and assuming a daily foodgrain requirement of 455 grams per capita per day, a food gap of about 1.9 million tons emerged in 1998/99, of which 1.2 million tons was covered by foreign assistance, and the remainder by government and private imports. Following the floods, the government sought to maintain a food security stock of at least three to four months of foodgrain requirements. To that end, commercial imports of rice more than tripled from 92,000 tons in 1997/98 to 334,000 tons in 1998/99, while wheat imports rose from 155,000 tons in 1997/98 to 429,000 tons in 1998/99.

9. Apart from foodgrain, the second most important component of the crop and horticulture subsector—jute—performed poorly in 1998/99, with a decline in output from 560,000 metric tons to 510,000 tons (Table 5). Although the floods were an important contributing factor, a continuing slump in world export prices, together with the entrenched weaknesses in the management of the government-owned Bangladesh Jute Mills Corporation, severely compressed profitability, undermined output performance, and increased the jute sector’s overdue bank loans. The 1999/2000 budget envisaged the repayment of some of these loans by the government and a continuing provision of subsidies to cover the wage costs of defunct state-owned jute mills. Nevertheless, in the face of a continuing increase in operating losses, the government has also come under pressure to significantly increase the existing subsidies for jute exports.

Table 5.

Bangladesh: Jute Goods Statistics, 1994/95–1998/99

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Sources: Prices provided by the Bangladesh Jute Mills Corporation; and other data provided by the Ministry of Jute.

Figures shown do not correspond to balance of payments data; some private mills’ production of jute yarns and tine is not included.

10. Altogether, value added in agriculture rose by 2.8 percent in 1998/99, compared with 1.9 percent in 1997/98 and 1.7 percent on average in the preceding years of the decade. In the non-crop subsector—principally fisheries, livestock, and forestry—growth in value added amounted to 6.3 percent in 1998/99, which was a modest acceleration despite major flood-induced losses in livestock and poultry. While shrimp cultivation was adversely affected by the floods, total inland and marine catches are estimated to have been substantially higher than in the previous year.

11. In the period ahead, the government plans to continue to support the agricultural sector through a number of policy interventions, with a view to promoting food self-sufficiency as envisaged in the Fifth Five-Year Flan (1997-2002). The foodgrain production target for 1999/2000 has been set at 22.3 million metric tons, representing an increase of 4.7 percent from 1998/99. To help meet these objectives, the government is continuing to take steps to ensure adequate supplies of fertilizer at subsidized prices, and prices for internal procurement of rice are continuing to be set to cover the cost of production and a profit margin, albeit at a substantial cost to the budget. Emphasis is also being placed on raising public sector seed distribution, strengthening research in new variety seeds, and encouraging greater use of organic and bio-fertilizers. Efforts to expand the disbursement of directed bank credit to agriculture, which nearly doubled in the wake of the floods in 1998/99, are also being intensified. The target for total disbursement of agricultural credit through the banking system has been set at Tk 33.3 billion for 1999/2000, an increase of 10.8 percent from the already elevated level of 1998/99.

Manufacturing

12. Production in both large-scale (particularly garments, textiles, fertilizer, and cement) and medium-scale manufacturing industries, which had reached a peak in February 1998, subsequently followed a declining growth trend and was basically stagnant over the first three quarters of 1998/99. While there was a modest pick-up of activity thereafter, its rate of growth remained sluggish. Output of ready-made garments (RMG), in particular, a major export commodity, performed poorly over much of the period, following several years of strong growth. Indigenous raw material-based industries, such as jute, fertilizer, sugar, tea, and cement, have also not performed well, while production of small and cottage industries was especially affected by the floods. Overall, manufacturing production rose by less than 2 percent in 1998/99, compared with a growth rate of more than 9 percent in 1997/98 and an average growth rate of more than 7½ percent in the preceding years of the decade (Table 8). The growth in the value added by small-scale industries, in particular, was virtually nil in l998/99.

Table 6.

Bangladesh: Public Food Distribution, 1994/95-1998/99

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Source: Ministry of Food.
Table 7.

Bangladesh: Fertilizer Statistics, 1994/95-1998/99

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Sources: Bangladesh Chemical Industries Corporation (BCIC), Bangladesh Agricultural Development Corporation (BADC).
Table 8.

Bangladesh: Manufacturing Production by Main Categories, 1994/95-1998/99 1/

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Source: Bangladesh Bureau of Statistics.

Excluding mining and electricity.

13. The pervasive sluggishness in manufacturing activity points to deeply rooted problems in this sector. Apart from the effects of the floods and declining world commodity prices, an array of escalating infrastructural problems, including power shortages and transportation bottlenecks, together with a significant loss of external competitiveness, have been important contributing factors. The problems have been compounded by poor commercial and financial management, particularly in state-owned enterprises (SOEs) and commercial banks. This has given rise to large SOE losses despite recourse to explicit or implicit subsidization from the budget, and a massive accumulation of nonperforming bank loans. The problems have often been exacerbated by trade union militancy. All these factors highlight the urgent need for a comprehensive reform strategy to help realize the potential of the industrial sector, including by improving the operation of SOEs, the financial sector, and the labor market, and by removing impediments to private investment, especially in the energy and transport sectors.

14. In the RMG and related sectors, to reduce the heavy dependence on imported inputs and increase the domestic value added of exports significantly above the current rate of about 30 percent, government policies have been aimed at promoting backward linkages with a view to attaining eventual self-sufficiency in textiles. Access to adequate credit facilities for new investment and working capital, as well as reduced import duties for needed machinery and quantitative restrictions on textile imports, are part of this policy strategy. However, an efficient development of these backward linkages can be achieved only if progress is made with the overall structural reform effort, particularly to provide an environment conducive to viable private investment in these sectors and to eliminate trade restrictions that result in smuggling of textile products from neighboring countries.

Construction and Mining

15. Construction activity, which had been slack in the early months of 1998/99, picked up strongly as various housing and infrastructural reconstruction projects were undertaken following the floods. The expansion was especially pronounced in the public sector, where major repair and maintenance works for roads and bridges and other infrastructural projects were undertaken. Overall, output in the construction sector is estimated to have risen by 8.1 percent in 1998/99. Output in mining and quarrying, which was adversely affected by the floods, registered only modest growth for the year as a whole.

Power

16. The output of the power sector is estimated to have picked up significantly in 1998/99, reflecting the coming on stream of three new barge-mounted power units (see below) and a continuing expansion of gas output (Table 9). However, these increases have proved insufficient to meet the economy’s increasing demand for energy. As a result, significant shortages of natural gas and electricity have persisted, with an important adverse impact on production and investment in other sectors, especially in manufacturing and services.

Table 9.

Bangladesh: Energy Statistics, 1994/95-1998/99

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Source: Data provided by the Bangladesh authorities, PDB, BOGMC and BPC.

17. To alleviate these shortages, the government has taken important steps to encourage private sector involvement in the power and energy sectors. The Private Sector Power Generation Policy provides for various fiscal incentives to attract private investment. Following the government’s decision in 1996 to seek proposals from the international private sector for independent power producer (IPP) plants, competitive bids have been solicited for four fast-track barge-mounted plants. The first of these commenced operations in October 1998, and two more were commissioned in May and June 1999. In addition, the government has put up for bid contracts for two large capacity gas-fired combined cycle plants and a gas turbine plant. In the energy sector, while private sector participation has been hampered by a lack of transparency in bidding and selection procedures, a number of Production Sharing Contracts (PSCs) for gas exploration and development are now in full operation and/or are about to be offered for a second round of bidding.

18. As of June 1999, cumulative past production and remaining recoverable reserves of gas were estimated officially at 3.574 trillion cubic feet and 10.216 trillion cubic feet, respectively. Beyond this, proven reserves are estimated privately at an additional 3 trillion cubic feet, with much larger gas resources considered highly probable. At the present rate of daily consumption, the remaining recoverable reserves, based on official estimates, are projected to meet domestic demand for about 30 years. However, if the demand for gas increases at an annual average rate of 7 percent, it is estimated that the present recoverable reserves would be exhausted by 2012/13. The government has stated that, if substantial new reserves are proven in the near future, it might take steps to increase gas utilization; however, it would consider exporting gas only after meeting the country’s long-term gas demand.

Services

19. The services sector—which comprises trade, hotels and restaurants, transport, housing, banking, insurance, and professional services—was only marginally affected by the floods. Growth in the services sector is estimated to have been broadly maintained in 1998/99 at 4.3 percent, with the depressing effect of the floods offset by the boost to the trade services sector from the growth in agricultural output.

C. Prices, Wages and Employment

Prices

20. Inflation rose from an average of 7 percent in 1997/98 to 9 percent in 1998/99, but it declined rapidly as the flood-induced surge in food prices began to be reversed. On a year-on-year basis, inflation reached a peak of 12.7 percent in December 1998 in the face of intensifying food supply constraints, but eased back to 7.7 percent by June 1999. The year-on-year rate of inflation remained on a steadily declining trend in subsequent months and it had fallen to 3½ percent by October 1999. Food inflation, which peaked at 17.6 percent in December 1998, had declined to 10.6 percent by June 1999, falling further to 4 percent as of October 1999. While the drop in food inflation initially reflected the impact of the extensive food assistance in the immediate post-flood period, the record boro rice crop was apparently an important contributing factor in the closing months of 1998/99. Nonfood inflation, responding to the overall weakness in economic activity in the nonagricultural sector, fell steadily from a peak of 7.6 percent in September 1997 to 3.2 percent by June 1999, and declined further to 2.5 percent in October 1999, its lowest rate in many years. However, to the extent that this decline was attributable to the restraining effects on prices stemming from the recent appreciation of the real effective exchange rate, it is likely to have been partially reversed following the depreciation of the taka in November 1999 (see below). In addition, the government’s relatively rigid policy on administered prices, especially on petroleum products, is likely to have helped keep inflation at an artificially low, albeit not sustainable, level during the second half of 1999 (Tables 10 and 11).

Table 10.

Bangladesh: Retail Prices of Petroleum Products, 1994/95-1998/99

(End of period)

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Source: Bangladesh Petroleum Corporation; and staff estimates.

As of November 1999.

Table 11.

Bangladesh: Consumer Price Index, National (1985/86-100)

(Percent changes)

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Source: Bangladesh Bureau of Statistics.

Wages and Salaries

21. A national pay scale applies for all employees of the central government and nationalized corporations, except defense and police officers and workers in state-owned manufacturing industries. During the 1990s, two adjustments in national pay scales were introduced, one in 1991 and the other effective from July 1,1997. While the wage adjustment in 1991 was introduced in one step, the 1997 compensation package increase was introduced in three phases over the years 1997/98-1999/2000. The 1997 national pay scale is comprised of 20 scales, within which all civil servants are accommodated, with the highest and lowest monthly scales fixed at Tk 15,000 and Tk 1,500, respectively, as against Tk 10,000 and Tk 900 in 1991.

22. The first phase of the 1997 civil service compensation increase, covering the period July 1,1997-June 30, 1998, provided for 60 percent of the difference between the gross salary accruing under the 1991 pay scale and the gross salary receivable in terms of the revised 1997 pay scale. The remaining 40 percent was paid in phase two (July 1, 1998-June 30, 1999). The final increase in the overall compensation package, which affected allowances for house rent, medical expenses, and other fringe benefits, was introduced in phase three (July 1, 1999-June 30, 2000). According to the 1998/99 budget statement, implementation of the 1997 pay scale entailed a budgetary cost of Tk 20.75 billion spread over three years, with Tk 8.88 billion payable in 1997/98, Tk 4.95 billion in 1998/99 and Tk 6.91 billion in 1999/2000.

23. In response to pressing wage demands from labor unions, the government appointed a “Wages and Productivity Commission” in May 1998 to recommend an improved wage structure for public sector industrial workers and employees working at the factory level. The existing wage structure is in line with the recommendations of a similar Commission appointed in January 1992, which were implemented with retroactive effect to July 1, 1991. According to its terms of reference, the Commission would consider the cost of living, capacity to pay of the industrial concerns, and productivity of the workers in recommending changes in the wage structure and other benefits. The Commission, which commenced its activities in February 1999, is expected to submit its report shortly. Meanwhile, due to the delay in the submission of that report, and under pressure from the trade unions, the authorities have granted some interim benefits to the workers, which would be counted against the increases expected to be granted under the new wage scale. These are: a one time grant of Tk 1,000 and Tk 500, respectively, for the regular and casual workers in August 1999, and Tk 300 and Tk 150 per month for all regular and casual workers, respectively, effective July 1, 1999.

24. Apart from the above, the Minimum Wage Board, a permanent body under the Ministry of Labor and Manpower, has been recommending minimum wages for workers in various private sector industries since 1960. Until 1996, this Board has recommended minimum wages for 38 categories of industrial activities. Recently, the government has requested the Board to recommend revised minimum wages for the unskilled and juvenile workers in the private sector.

Employment

25. Employment statistics for Bangladesh are dated, the latest Labor Force Survey having been conducted in 1995/96 (Table 12). Aggregate employment increased in the first half of the 1990s at a somewhat faster pace than the population, and this trend is likely to have continued during the latter years of the decade. An increase in the participation rate, especially for women, accounts for this. The share of agriculture in total employment has declined, a trend that is likely to continue with further improvements in agricultural productivity and continuing rural-urban migration. The shift in the labor force to urban areas has been directed importantly to the service sectors, where trade, transport and communication services in particular have provided expanding employment opportunities. A striking development has been an apparent decline in the share of employment in the manufacturing sector between 1990/91 and 1995/96. Although the sharp expansion, until recently, of the garments industry has strongly increased its demand for labor, especially female labor, the lack of dynamism in much of the industrial sector, especially in the state-owned enterprises, has significantly inhibited productive employment opportunities. A key concern over coming years will be the need to absorb labor from the informal sector (principally the non-farm rural sector), partly through appropriate training and other facilities, into potentially more remunerative labor-intensive activities. Markedly higher economic growth rates and labor market flexibility will be a prerequisite for expanded job opportunities and reduced underemployment and poverty in Bangladesh.

Table 12.

Bangladesh: Labour Market Statistics, 1990/91-1995/96 1/

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Source: Bangladesh Bureau of Statistics and Ministry of Finance.

Based on labour force surveys. Figures in paranthesis refer to 1998/99.

Natural growth rate (Crude Birth Rate minus Crude Death Rate).

Aged 10 years and above.

III. Fiscal Developments 3

A. Central Government Finances

Developments in 1998/99

26. The overall fiscal deficit (excluding grants) is estimated to have widened from 4.2 percent of GDP in 1997/98 to 5.1 percent of GDP in 1998/99 (Chart 2 and Table 13). While the deficit outturn exceeded the initial budget target by over ½ percentage point of GDP, it was only slightly above the post-flood emergency assistance program target. Although revenues fell significantly short of the post-flood target, and there was a higher-than-projected pick-up in current expenditures, delays in the implementation of development expenditure programs helped restrain the overall impact on the deficit. With the pace of project-aid disbursements also slowing, net external financing remained at its 1997/98 level of about 2½ percent of GDP, despite the surge in flood-related assistance. The government’s domestic borrowing requirement rose to more than 2 percent of GDP in 1998/99 or about ½ percentage point above the average level recorded in preceding years. As a result, government borrowing from the banking system, which had been targeted to remain at 0.7 percent under the emergency assistance program, rose to 1 percent of GDP in 1998/99.

CHART 2.
BANGLADESH FISCAL DEVELOPMENTS
A01ct02
Sources: Bengladesh authorities; and staff estimates.
Table 13.

Bangladesh: Central Government Operations, 1994/95-1999/2000

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Sources: Data provided by the Bangladesh authorities; and Fund staff estimates.

The Initial Budget column is based on pre-flood estimates.

Consists of capital spending, net lending, also some current spending, and from 1997/98, the Food-for-Work Program.

Includes the Food-for-Work program, miscellaneous investment, loans and advances, and other expenditures, until 1996/97; from 1997/98 the Food-for-Work Program is classified under ADP.

Difference between the balance of revenues and expenditures from the fiscal accounts and the estimates of total financing.

Includes foreign grants and loans.

Consistent with net claims on central government in the monetary accounts; excludes net claims on railways, telephone and telegraph, and other bodies.

Includes financing through National Savings schemes, prize and wage bonds, and the surplus of the National Provident Fund