Bangladesh: Selected Issues

This Selected Issues paper on Bangladesh underlies the export performance of readymade garment industry and inflation dynamics. Bangladesh has demonstrated that it is highly competitive in the world’s major garment markets. Inflation inertia, monetary factors, and exchange rate fluctuations are the main determinants of inflation in Bangladesh. Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.

Abstract

This Selected Issues paper on Bangladesh underlies the export performance of readymade garment industry and inflation dynamics. Bangladesh has demonstrated that it is highly competitive in the world’s major garment markets. Inflation inertia, monetary factors, and exchange rate fluctuations are the main determinants of inflation in Bangladesh. Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.

VII. Aid Flows to Bangladesh 1

A. Introduction

1. In recent years Bangladesh has made significant gains across a range of social indicators. Good progress has been made toward achieving the MDGs. Still, it remains among the poorest countries in the world and much remains to be done to improve living conditions given that more than half of the population subsists on less than $2 per day. This paper will explore external aid flows and offer some ideas on the relationship of these flows to Bangladesh’s efforts to reduce poverty. It will describe recent trends in external aid disbursements (ODA) and compare them with other LICs and explore: (i) the linkage between these flows and the execution of the ADP; (ii) the relationship between the government and donors in light of the 2005 Paris Declaration on government/donor harmonization; (iii) the relationship of these developments with Bangladesh’s progress in achieving the MDGs; and (iv) discuss some issues related to improving the provision and use of aid.

B. Trends in ODA FY1991–2005 2

2. A striking fact about net ODA inflows to Bangladesh is that they have not kept pace with GDP growth. Total net aid inflows declined in terms of GDP from almost 6½ percent to around 2 percent between FY 1991 and FY 2005. Technical assistance and food aid have also declined in recent years while emergency aid reached a peak of 4 percent of GDP in FY2005.

Figure 1.
Figure 1.

Bangladesh: Net ODA

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 230; 10.5089/9781451804232.002.A007

Table 1.

Bangladesh: Net ODA Aid Inflows 1991–2005 1/

article image
Source: OECD DAC.

Fiscal year (June–July).

3. The share of grants in total ODA to Bangladesh has increased from about 60 percent to 70 percent. Project-related grants have consistently comprised about 60 percent of total grants while technical assistance has averaged around 25 percent. Food aid and emergency aid account for the remainder in varying proportions over the period.

Table 2.

Bangladesh: Composition of Net Aid Inflows 1991–2005 1/

article image
Source: OECD DAC.

Fiscal year (June–July).

4. The source of the aid has been relatively evenly split between multilateral institutions and bilateral donors, although in recent years the relative contribution of bilateral donors has declined.

5. In the latter part of this period, net ODA inflows to Bangladesh were significantly lower than to HIPC countries. Inflows to all HIPC countries at Decision or Completion point averaged about 40 percent of GDP in 1999–2005. Even compared to other Asian LICs, Bangladesh received relatively few ODA inflows. A closer look shows that net ODA inflows to Bangladesh in terms of GDP were lower than any other Asian LICs, with the exception of India.

Figure 2.
Figure 2.

Bangladesh: Net ODA

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 230; 10.5089/9781451804232.002.A007

Figure 3.
Figure 3.

Bangladesh: Asian LICs: Net ODA

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 230; 10.5089/9781451804232.002.A007

C. Development Spending

6. Even though net aid flows have diminished, total expenditures on the Annual Development Plan (ADP) have been relatively stable at about 5½ percent of GDP. While there is no discernable trend, there is a significant amount of variance from year to year that may reflect the fact that ADP spending was, in part, a residual that was adjusted to reflect the availability of external and domestic financing.

Figure 4.
Figure 4.

Bangladesh: Annual Development Expenditures

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 230; 10.5089/9781451804232.002.A007

7. The trends in aid and development spending could be viewed as a desirable reduction in aid dependency, as it is clear that an increasingly larger share of revenues have been channeled toward development spending to replace external aid.

8. It could be argued, however, that this reduction in aid dependence is premature, given the still enormous development challenges that remain. A recent study argued that Bangladesh needs “to generate structural breaks in the trend lines of its principal social indicators” if it is to meet the MDGs.3 While the report focuses on domestic institutional constraints and the efficient utilization of resources, it is also likely that more development spending is needed. Given that there has only been modest success at increasing domestically available resources, more external aid could be helpful under the right domestic conditions.

9. The government may also be devoting fewer resources to poverty reduction than other LICs. Poverty reducing expenditures, a broader measure of development spending than the ADP, have only been reported in Bangladesh since 2003, but they are potentially a better indicator to use when performing cross-country comparisons because they include relevant current as well as capital expenditures. There are, however, important limitations to be kept in mind when making cross-country comparisons. There are no universally accepted definitions of such expenditures or accepted ways to evaluate their productivity. Still, the available data may be indicative and it implies that Bangladesh has scope to increase poverty reducing spending. Poverty reducing expenditures in Bangladesh averaged 6.2 percent of GDP during 2003–05. In the HIPC countries, such expenditures averaged almost 9 percent of GDP in the same period.

Table 3.

Bangladesh: Poverty Reducing Expenditure

(In percent of GDP)

article image

10. This is not surprising, however, because the HIPC countries had more resources available. The additional resources were not only the result of higher net ODA inflows, but also because they are more effective at collecting revenues, which averaged 16 percent of GDP during the same period, compared to about 10 percent of GDP in Bangladesh.

Table 4.

Bangladesh: Resource Envelope

(In percent of GDP)

article image

D. MDGs, Nongovernmental Organizations, and Donor Harmonization

11. In spite of spending less, however, Bangladesh has made significant progress in improving social indicators in the last 15 years. One MDG has already been achieved (gender parity in primary and secondary schooling) and Bangladesh is on track to achieve several more by 2015, including halving the share of the population living under $1/day. There have also been significant gains in reducing infant mortality and maternal mortality.

12. Some observers have attributed this progress to the NGOs that have provided diverse services in areas where the government has not been able to do so. It is difficult to obtain reliable and comprehensive information on NGO financing and expenditures, partly because expenditures related to supporting NGOs are not fully recorded in the budget. A recent study, however, estimated that the share of aid to NGOs as a portion of total aid to Bangladesh rose from 14.4 percent in the first half of the 1990s to 24.6 percent since then.4

13. Recent work, however, highlights many challenges that still need to be confronted. In particular, concerns have been raised about transparency and accountability in the NGO sector.5 Similarly, the forthcoming DAC review on implementation of the Paris Declaration notes, among other things, that more progress needs to be made in the area of improving PFM.6 In particular, the DAC report notes problems with the independence of the Office of the Comptroller and Auditor and also notes that the procurement system has been a major source of corruption.

14. Improvements in donor-government harmonization and PFM could also help in the struggle to reduce poverty. The DAC report concludes that some progress has been made towards meeting the standards of aid effectiveness set out in the Paris Declaration, but that significant challenges remain. Among other things the report notes that: (i) ownership has improved, but changes to the budget process need to continue as Bangladesh is still in the early stages of linking the budget process with national priorities through a medium-term budget framework developed as part of the PRSP; (ii) alignment has improved as the government is playing an increasingly active role in managing its aid and the PRSP has facilitated more government-led dialog with donors; (the report estimates, however, that only about 88 percent of aid is reported in the national budget); and (iii) little progress has been made in harmonization, as there is a continued predominance of uncoordinated project approaches by donors.

15. A further strengthening of national policies may be the important priority. The World Bank MDG report concludes that Bangladesh could meet all the MDG outcomes—including difficult ones like maternal mortality and child malnutrition—provided that it improves accountability and transparency of public services, that growth is sustained by removing key constraints, and that successful existing programs such as female secondary scholarship are maintained and expanded into urban areas. Without such a new strategic approach to the growing problems in urban areas, however, the MDG outcomes in those areas risk bringing down the national outcomes.

E. Improving the Provision and Use of Aid

16. Higher aid flows—in combination with the improvements in transparency and accountability of public services—could be an important contributor to sustained development. This seems especially so, given the relatively low net inflows in terms of GDP in recent years, but what effects would an increase have on the macroeconomy? Concerns about the macroeconomic effects of an increase in aid flows center on external competitiveness and debt sustainability. First, to what extent would higher flows cause the real exchange rate to appreciate thereby creating problems for export sectors? Second, what would be the impact on the external debt profile in the event that increased flows come in the form of concessional loans rather than grants?

17. The effects on the real exchange rate will depend on the nature of the increase in expenditure resulting form the increase in aid. Little can be said about the effects on competitiveness without knowing the specific medium-term expenditure framework that should underpin such an increase. In general, however, to the extent that the related expenditures are on imports the effect on the real exchange rate will be minimized. Similarly, to the extent that the expenditures are focused on increasing productive capacity (thereby augmenting domestic supply) the pressure for real appreciation will be reduced.

18. It is clear from the recent DSA presented in 2006 that there is space for Bangladesh to receive more loans from the donor community.7 Based on this analysis, Bangladesh is significantly below the indicative thresholds for NPV of debt in terms of GDP, exports, and revenues. While the report concluded that there is little risk of debt distress based on the external debt profile, the public sector DSA indicated there would be some risk in the event that contingent liabilities related to the banking sector were realized. These risks should be minimized by addressing the causes of contingent liabilities directly.

19. At the microeconomic level, the key concerns have to do with absorptive capacity and the level of governance and transparency in the public expenditure system. In this regard, it appears that some progress will need to be made to ensure that any increased aid would be used effectively to combat poverty and it might be necessary to encourage donors to commit to such a strategy. Another point regarding the mobilization of resources: if the government prepared a well-designed proposal for scaling up poverty expenditures it would likely make it easier for donors to garner support from their headquarters.

F. Conclusion

20. At least three questions arise from the above discussion: (i) Why has donor aid to Bangladesh decreased in terms of GDP in the last 15 years while in most other LICs (even non-HIPC Asian LICs) it has increased? (ii) To what extent can the “NGO model” (i.e., using NGOs to provide important services to the poor) be expanded and generalized?; and (iii) Under what conditions would more aid help to achieve the MDGs?

21. Donors in Bangladesh provided two answers to the first question. First, several donors noted that at the global level there was an emphasis on providing aid for HIPC countries and African LICs. Second, specifically with regard to domestic factors, individual donors, as well as the DAC report, noted that there has not been sufficient progress in public financial management. As noted above, increasingly donors have channeled aid to NGOs and, to some extent, this has been an effective strategy as a way to continue to support poverty reduction efforts notwithstanding concerns about the transparency and efficiency of PFM systems.

22. It seems unlikely, however, that this “NGO model” can be expanded and generalized and it might not even be desirable. First, as noted in the recent work, there are significant problems with accountability and transparency regarding the finances of the NGO sector; there are a few well-run and effective NGOs but a large part of the sector is less effective and efficient. It is unlikely that donors will be willing to channel even more aid to the sector without significant reform and it is unlikely that most NGOs will be able to absorb and use effectively increases in funding. Second, while NGOs might be able to provide services in areas that the government is unable to reach, they cannot undertake sorely needed large infrastructure projects. Finally, to the extent that donor aid bypasses the PFM system, it undermines the modernization of these systems and such modernization is a crucial part of the economic development process.

23. Regarding the third question, given the relatively low levels of development spending in Bangladesh, it is likely that more aid could help, provided that national capacity is developed and PFM systems are improved so that the aid is used effectively. In this regard donor coordination and harmonization could help to the extent that they reduce transactions costs thereby making it easier for the government, with its limited resources, to execute development projects.

References

  • International Monetary Fund, Initiative for Heavily Indebted Poor Countries and Multilateral Debt Relief Initiative—Status of Implementation, August 23, 2006 (SM/06/289).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2006, Bangladesh: Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, Extension of the Arrangement, and Rephasing—Staff Report; Staff Statement; Press Release; and Statement by Executive Director for Bangladesh on the Executive Board Discussion, IMF Staff Country Report No. 06/406 (Washington).

    • Search Google Scholar
    • Export Citation
  • OECD, Aid Statistics, online database (http://www.oecd.org/statisticsdata/0,2643, en_2649_34447_1_119656_1_1_1,00.html).

  • OECD DAC: Bangladesh: 2006 Baseline Survey on Paris Declaration (forthcoming).

  • World Bank, “Economics and Governance of Nongovernmental Organizations in Bangladesh,” PREM Sector Unit South Asia Region, April 2006.

    • Search Google Scholar
    • Export Citation
  • World Bank, 2007, “To the MDGs and Beyond,” Bangladesh Development Series Paper No. 14. World Bank, January (Dhaka).

1

Prepared by Perry Perone (PDR).

2

The aid flow data used in this chapter is from the OECD Development Assistance Committee online database. There are significant differences between this data and the data reported by the authorities in the BOP. Such discrepancies are common to all LICs and the DAC database was used because it provides the most detailed breakdown by creditor and type of aid. The Statistics Department of the IMF is involved in ongoing work with the donors and member governments to improve data reporting in this area, but this is likely to be a long process requiring in the first instance that donors report aid flows categorized in a way to facilitate comparison to BOP flows.

3

See “To the MDGs and Beyond”; Bangladesh Development Series Paper No. 14. World Bank Office, Dhaka 2007.

4

See “Economics and Governance of Nongovernmental Organizations in Bangladesh,” PREM Sector Unit South Asia Region, April 2006.

5

Ibid.

6

See DAC: 2006 Baseline Survey on Paris Declaration (forthcoming).

7

EBS/06/130 Annex I.

Bangladesh: Selected Issues
Author: International Monetary Fund