This Selected Issues paper and Statistical Appendix examines Bangladesh’s nonfinancial state-owned enterprises. The paper argues that, given the overall policy environment and external vulnerabilities, the usefulness of the fixed exchange rate system in Bangladesh has run its course. Greater exchange rate flexibility is needed to ensure that the exchange rate sends appropriate market signals, and to enhance the authorities’ ability to address more effectively and timely both domestic imbalances and external real shocks arising from a rapidly changing global environment. The paper also outlines the structure and recent performance of the commercial banking sector.


This Selected Issues paper and Statistical Appendix examines Bangladesh’s nonfinancial state-owned enterprises. The paper argues that, given the overall policy environment and external vulnerabilities, the usefulness of the fixed exchange rate system in Bangladesh has run its course. Greater exchange rate flexibility is needed to ensure that the exchange rate sends appropriate market signals, and to enhance the authorities’ ability to address more effectively and timely both domestic imbalances and external real shocks arising from a rapidly changing global environment. The paper also outlines the structure and recent performance of the commercial banking sector.

I. Bangladesh’s Nonfinancial State-Owned Enterprises1

A. Background

1. After gaining independence in 1971, Bangladesh brought most of the economy under government control. Since then, the government has adopted an intermittent policy of gradual divestment. Bangladesh currently has over 200 nonfinancial state-owned enterprises (SOEs) under the purview of 41 sector corporations and 2 government departments (Annex Table I.1.1).

2. SOEs engage in a wide range of activities, including natural monopolies, manufacturing, urban development, and trading. Nevertheless, their direct contribution to the economy has been on a declining trend over the past decade. SOEs value-added in FY00/01 is estimated at about 3 percent of GDP, almost half of its FY90/91 level. SOEs investment is estimated to have reached 3 percent of GDP in FY00/01, compared with over 4½ percent for government investment and 23 percent for national investment. By end-FY00/01, employment in SOEs was about 250,000 persons, equivalent to less than ½ percent of the labor force and less than 1 percent of total formal employment, and some 20 percent lower than in the early 1990s (Table I.1).

Table I.1.

Selected Indicators of Consolidated Nonfinancial SOEs, FY95/96-FY01/02

article image
Source: SOE Monitoring Cell.

3. The SOEs are accountable to the line ministry in their sector. Each ministry monitors their day-to-day operations and has principal responsibility for the development of policy for the SOEs under their purview. Certain decisions, such as on administrative prices and privatization, are taken at the Cabinet level. Moreover, all SOEs expenditure decisions that have budgetary implications require approval by the Ministry of Finance. If the expenditure decisions involve the annual development program (ADP), they also require endorsement by the Ministry of Planning and final approval by the Executive Committee of the National Economic Council, which is the highest decision-making body on the ADP. The Ministry of Finance monitors the financial operations of the SOEs through a Monitoring Cell, which as of FY01/02 has started collecting unaudited data on a monthly basis for the major enterprises and quarterly for others. The quality and the timeliness of these data require significant improvement. The Ministry of Finance is now exploring with Fund staff on how best to strengthen the monitoring system.

B. Financial Performance of the SOEs

4. The financial performance of the SOEs has deteriorated markedly from an already weak base, especially since the mid-1990s. During the ten-year period ending June 2002, aggregate after-tax losses are expected to have reached over 1 percent of GDP. Ninety-seven percent of the losses are accounted by the losses of nine major corporations, which in turn account for 85 percent of the sector’s operational revenues. The major loss-making corporations include the petroleum importer and wholesale distributor (BPC), the electricity distribution company (DESA), the electricity producer, transmitter, and distributor (BPDB), and the jute mills corporation (BJMC) (Figure I.1). There are also significant losses in four out of the six manufacturing corporations and the national airline Biman. The SOE Monitoring Cell is closely tracking performance in these corporations and a company involved in exploration and distribution of natural gas and other mineral resources (BOGMC), which is operating with a profit but in an unsustainable financial position because of underpricing of its natural gas. The remainder of this chapter focuses on the key factors underlying the performance of these ten main corporations.

Figure I.1.
Figure I.1.

Bangladesh: SOE Losses

Citation: IMF Staff Country Reports 2002, 114; 10.5089/9781451804096.002.A001

Source: SOE Monitoring Cell.

5. The weak performance of the corporations in the energy sector can be attributed mostly to persistent large technical and commercial losses and inadequate domestic pricing, hi FY00/01, the petroleum trading company (BPC) incurred a loss of Tk 19½ billion as prices of imported petroleum products rose while the government left domestic prices unchanged. As of early January 2002, domestic prices of energy were adjusted by rates of up to 31 percent (Table I.2). This was the first increase since November 2000, when prices were increased by between 9½ percent and 30 percent. The latest increases have markedly increased BPC’s already existing profit margin on gasoline sales, while leaving the corporation with losses on its transactions in other petroleum products, albeit of smaller size.

Table I.2.

Administered Prices for Selected Energy Items, 2001–02

article image
Sources: Power Cell of the Ministry of Energy; BOGMC; and BPC.

Commercial and other nonresidential households are charged different prices.

6. The problems confronted by electricity corporations (BPDB and DESA) not only reflect large technical losses, but also a rapid rise in payment arrears from public and private customers, and uneconomic domestic pricing. At the end of 2001, BPDB system losses due to theft and inefficiencies averaged 14 percent of total output, compared with an international benchmark of 8 percent. In addition, the value of unpaid electricity bills rose to 2.7 percent of GDP. About 45 percent of the electricity arrears are owed by public institutions, mainly other SOEs. There are also significant intrasector arrears.

7. The government has recently adjusted electricity tariffs, but this may not be enough to improve the financial outlook of the sector. As of January 1, 2002, electricity prices were increased by up to 7 percent. The highest increase was for residential users and largely reflects the narrowing of the low-tariff “lifeline” for small residential users from up to 300 kWH per month to 100 kWH per month (Table I.3).2 The World Bank has calculated that eliminating losses would require an average increase in electricity tariffs of over 25 percent at unchanged efficiency levels.

Table I.3.

Administered Tariffs for Selected Users

article image
Sources: Power Cell of the Ministry of Energy; BOGMC; and BPC.

Commercial users are charged different prices depending on the size of the company and the time of use.

8. Despite previous restructuring efforts,3 jute mills (BJMC) have continued to incur large Josses reflecting a weak external demand, sizable overhead costs, and low labor productivity. However, the growth in losses has been somewhat contained in recent years, due to BJMCs efforts at slimming down its workforce (about 9 percent since FY95/96, to about 82,000 workers) and keeping the average wage level below the trends in the average wages of the SOEs in the manufacturing sector (Figure I.2).

Figure I.2.
Figure I.2.

Wage Developments in Manufacturing SOEs

Citation: IMF Staff Country Reports 2002, 114; 10.5089/9781451804096.002.A001

Source: SOE Monitoring Cell.

C. Resource Cost and Fiscal Impact of the SOE Sector Deficit

9. The deficit of the ten main SOE corporations amounted to an estimated Tk 71 billion (2.8 percent of GDP) in FY00701, up from Tk 38 billion (1.6 percent of GDP) in FY99/00 (Annex Table I.1.2 and Figure I.3). About half of this deficit financing was covered by the budget through equity injections and net lending. The rest was covered by other means, including external borrowing and arrears accumulation. The budget deficit for the ten main SOEs was projected to increase substantially to Tk 136 billion (4.8 percent of GDP) in FY01/02, as a result of a budget increase in capital expenditure. However, only about 40 percent of the financing had been clearly identified at the time of budget approval.

Figure I.3.
Figure I.3.

Bangladesh: Deficit of Ten Main SOEs, FY99/00-FY01/02 1/

Citation: IMF Staff Country Reports 2002, 114; 10.5089/9781451804096.002.A001

Sources: SOE Monitoring Cell; and Annex Table I.1.3.1/ Includes DESA, BPC, BOGMC, Biman, BPDB, BCIC, BSEC, BJMC, BTMC, and BSFIC.

10. In the absence of corrective measures, the main loss-making SOEs have increasingly relied on accumulating arrears as a form of financing their deficits. While total SOEs debt amounted to about 25 percent of GDP in FY00/01, the outstanding stock of arrears on debt-service payments to the government and banks and other payment obligations (including taxes) amounted to 23 percent of GDP at end-2001 (Figure I.4).4 In addition, BOGMC and BPC have external arrears in the form of overdue payments to international oil companies for the supply of natural gas under production sharing contracts amounting to about $90 million in early 2002 (0.2 percent of GDP), or about double the level from a year earlier. The World Bank has estimated contingent liabilities of the government on account of external guarantees for SOE payments in FY00/01 at $564 million (1.3 percent of GDP).5 Out of this total, $187 million was associated with payments to international oil companies mentioned above and to independent power producers for deliveries of electricity, $194 million was for an export loan, and $ 183 million for guaranteed payments on suppliers credits (Box I.1). SOEs are likely to face severe difficulties in servicing the outstanding liabilities out of their own resources, especially given the slow growth in net operating revenues and a relatively small amount of receivables for the supply of services to the private sector and the government (about 1 percent of GDP, excluding inter-SOE arrears).

Figure I.4.
Figure I.4.

Bangladesh: Outstanding Domestic Arrears of SOEs, end-2001

Citation: IMF Staff Country Reports 2002, 114; 10.5089/9781451804096.002.A001

Source: SOE Monitoring Cell; and Annex Table I.1.3.

D. Administered Prices, Resource Allocation, and Subsidies

11. SOEs pricing policies have been uneconomic and the ensuing price distortions have required substantial subsidies and given rise to monopoly rents which in turn have led to a severe resource mis allocation. Consumer and producer subsidies have been more common in the power and oil and gas sectors, but there have also been producer subsidies for sugar producers. A recent World Bank study estimates that subsidies in the power sector by BPDB and those in oil and gas by BOGMC amounted to about 0.8 percent of GDP in FY01/02. Consumers are also paying higher-man-competitive prices for sugar, certain petroleum products, and telephone services (Table I.4).

Table 1.4.

Summary of SOE Subsidies and Monopoly Rents, FY99/00

article image
Source: World Bank.

Ratio of transaction price and economic price, defined as the prevailing price in a competitive market (for urea, sugar, petroleum products, and telephone charges) or as long-run marginal cost (for electricity and natural gas).

Farmers receive a subsidy through above-market prices for their sales.

Sugar consumers pay an above-market price, in the presence of import quotas

12. The extent of implicit subsidization and taxation through monopoly rents needs to be qualified because of the prevailing widespread cross-subsidization practices. The World Bank has calculated that, due to differential pricing, the natural gas used for power generation in fertilizer production and by residential households was subsidized at an average of 30–37 percent in FY99/00 (relative to long-run marginal cost), while industrial and commercial users paid a tax of 9–36 percent. The pricing of electricity distributed by BPDB has an even larger element of cross-subsidization in FY01/02, with commercial users paying 23 percent more than the long-run marginal cost to support a subsidy of 39 percent for residential users and 53 percent for electricity used in irrigation.

Bangladesh: SOEs and Suppliers’ Credits

Faced with increasing financing requirements and declining availability of funds from the budget and other sources of concessional financing, SOEs have progressively turned to external suppliers’ credits to finance investments in power generation/distribution, bridges, roads, railways, dredgers, water supply, oil imports, and the telephone system. During FY96/97–FY01/02, disbursements under external suppliers credits to public sector agencies increased more than three-fold, and debt-service payments more than quadrupled.

Summary of Public Sector Suppliers’ Credits, FY96/97–FY0I/02

(In millions of U.S. dollars)

article image

The surge of external suppliers’ credits raises questions about debt sustainability, as there are no safeguards that the projects financed by these credits will generate the resources required to cover future debt-service liabilities. Because most contracts include a government guarantee, and absent a comprehensive program to improve SOE performance, the burden of servicing much of this debt is likely to fall on the budget. Moreover, external suppliers’ credits carry risks generally associated with such negotiated single-source contracts.

The current government has taken a number of steps to curb external suppliers’ credits. Contracts that have yet to be implemented have been kept in abeyance until an ongoing review is finalized. In addition, new credits are under increased scrutiny by the interagency committee.

Sources: World Bank; and Ministry of Finance

E. The Case for Reform

13. SOEs in Bangladesh use resources at a level that cannot be justified by their role as producers and employers. As SOEs seem to be perennially short of resources, they cannot maintain an adequate standard of service delivery to customers who are able and willing to pay. For example, electricity supply is frequently interrupted and only 25 percent of the country is covered by the distribution net. Coverage of residential households by natural gas supply is a mere 4 percent.

14. The implicit subsidy and taxation through monopoly pricing are nontransparent. The social benefits derived from providing inputs to farmers and other producers at low prices are likely to be offset by the implicit taxation arising out of monopoly pricing for other inputs and consumer goods.

15. SOE reform has been very slow and partial over the last few years. The privatization program has stalled and is seriously hampered by opposition from vested interests, valuation problems, and a lack of an effective social safety net. In this context, adoption of the new privatization policy in early 2002 represents an important step forward (Box I.2).

16. The adjustment of energy prices as of the beginning of 2002 was long overdue, but will only produce a lasting improvement if it is followed with a hardening of SOEs budget constraints. Otherwise, the risk is that the additional revenues will continue to be used to finance unproductive spending. There are also renewed efforts to stem system losses and restructure the electricity sector.

17. However, more comprehensive strategy for SOE reform is needed, which should have two modules: one that aims at stemming the losses in the short term, and another that focuses on medium-term issues. The short-term action plan should build on the ongoing efforts at improving SOEs performance, and may include:

  • The establishment of a consistent and realistic set of performance benchmarks for each SOE with an effective monitoring system. Data on the financial performance of SOEs should be available on a monthly basis with a lag of no longer than five weeks. Initially, the benchmarks and monitoring could be limited to the ten main SOEs, and the coverage should be broadened over time. The data from the monitoring system should be used to make continuous assessments on the progress toward the established benchmarks, and policies should be reviewed in light of these assessments.

  • The imposition of hard budget constraints. This could be achieved by imposing strict limits on borrowing from nationalized commercial banks and from abroad, and by initiating a process to regularize outstanding payment arrears. Access to budget resources should be made conditional on progress toward the performance benchmarks.

  • Tracing steps to enhance revenue performance in the energy sector. Efforts could be made to intensify bill collection, including outsourcing of bill collection, and to introduce rational pricing policies for automatic price adjustment in the energy sector.

  • Strengthening the regulatory environment, particularly in telecommunications.

  • A thorough review of the SOEs investment program with a view to scrapping unproductive projects.

Privatization in Bangladesh—Breaking the Gridlock

Between the mass nationalization of 1972 and 1981, some 345, mainly smaller, SOEs were divested. An additional 222 SOEs were privatized in the second round of privatization that took place in 1981–85. At this time, in contrast with earlier efforts, the emphasis shifted to the privatization of jute and textile mills.

It was not until 1993 that the Privatization Board was established to boost the stalled privatization process. During its tenure until 2000, the Board oversaw the privatization of an additional 41 nonfinancial SOEs and three banks. Receipts from almost a decade of privatization amounted to Tk 2.9 billion, or less than 0.2 percent of average GDP during this period (0.4 percent of GDP if inclusive of the sale of the three banks. The method of privatization varied: 25 enterprises were sold directly, of which 8 textile mills to their employees, and 16 were divested through sales of shares.

Progress with privatization has been hampered by a number of factors:

  • Privatization is often opposed by vested interest groups, including workers and managers in SOEs.,

  • Valuation of enterprises has been difficult because of large debt arrears and problems in valuing the assets. In a number of cases, privatization has become entangled in the courts because of disputes over the valuation of assets and inventories, debt restructuring, and payments.

  • The lack of an adequate social safety net to mitigate the impact of retrenchment.

  • The absence of an effective regulatory environment for natural monopolies. This is a major obstacle for the divestment of a number of key SOEs, including those in the energy and utility sector and BTTB.

With the new Privatization Act of 2000, the Privatization Board has been replaced by the Privatization Commission. A new privatization policy was approved by the government in early 2002. Under the new rules, the Privatization Commission identifies a list of SOEs eligible for privatization in consultation with the line ministry and subject to Cabinet approval. In addition, the Commission takes control over enterprises on this list. The Commission has full autonomy in the divestment of listed enterprises of which the sales price does not exceed Tk 250 million (including any long-term debt that becomes the responsibility of the buyer). In all other cases, government final approval is required. The new rules allow for various methods for privatization, including liquidation of nonviable enterprise, commercialization, restructuring, and leasing. The Privatization Act has also insulated the process of privatization from court injunctions. The government is working on establishing a regulatory framework for the energy sector and telecommunications. As a first step, the draft Electricity Reform Act was approved by the Cabinet in February 2002. The approval of the Gas Act is also expected shortly.

The government has listed 46 SOEs in the manufacturing sector for privatization in the near future. To mitigate the social cost of divestment and overcome opposition, the government intends to establish a social safety net for laid-off workers, for instance by building on the voluntary separation scheme. In addition, the government plans to introduce a retraining program as well as other social safety net instruments.

Source: Privatization Commission

18. As regards the medium-term strategy needed to address deeper-seated issues of right-sizing the public sector and eliminating inefficiencies in the remaining SOEs, the World Bank has made a number of suggestions, including:

  • Liquidating nonviable enterprises and privatizing SOEs whose functions can best be undertaken by the private sector. Commercializing the remaining SOEs and corporatize government enterprises.

  • Introducing transparent accounting of financial flows between the budget and the SOEs, as well as of contingent liabilities.

  • Restructuring the SOE workforce with the aim of making it smaller and more productive.

  • Decentralizing wage-setting and linking corporation-wide wages to productivity gains.

  • Adjusting differential prices for varying groups of customers so that they reflect differences in the cost of supply.

It should be noted that the two modules outlined above could be implemented at the same time.


Table I.1.1.

Bangladesh: Nonfinancial State-Owned Enterprise Sector Corporations 1/

article image
Sources: SOE Monitoring Cell; and World Bank.

Including government departments (BTTB and BR).

Table I.1.2.

Bangladesh: Summary of Finances of Ten Main SOEs, FY99/00–FY01/02 1/

article image
Source: SOE Morning Cell.


Preliminary estimate as of end-2001

Table I.1.3.

Bangladesh: Domestic Payment Arrears of the Public Sector, FY01/D2

(in billions of taka; end of period unless otherwise indicated)

article image
Source: SOE Monitoring Cell.

The main contributor to this chapter was Marijn Verhoeven (Resident Representative), with assistance from Jamshed uz Zaman


The lifeline ceiling in other countries in the region varies from 20 kWH per month in parts of India and Indonesia to 100 kWH elsewhere in India. Pakistan has a lifeline for consumption up to 50 kWH. In the rural areas of Bangladesh, where electricity is supplied by REB and PBS, there is no lifeline tariff


A jute restructuring program, initiated in the early 1990s with support of the World Bank, was not implemented fully and failed to turn BJMC around. Under the program, 30,000 workers were retrenched and four mills closed. Also, the program financed BJMC’s losses for a few years.


Based on Ministry of Finance estimates for overdue payments owed by SOEs for debt servicing, which are disputed by the SOEs.


This represents the payments that could maximally fall due in FY00/01 under these guarantees.

Bangladesh: Selected Issues and Statistical Appendix
Author: International Monetary Fund