Bangladesh: Progress Report-Poverty Reduction Strategy Paper

This paper discusses progress on Sixth Five Year Plan (2011–15) of Bangladesh. For the broad picture of performance of the Sixth Plan during the first three years in terms of achieving major development targets relating to economic growth, employment and poverty reduction is generally positive. The economy has made further solid progress in these areas, which is reassuring. Progress has also been made in transforming the economy from a rural-based agrarian economy to one that is more modern urban-based manufacturing and services-based. Export performance is on track, which has provided the impetus for the expansion of the manufacturing sector.

Abstract

This paper discusses progress on Sixth Five Year Plan (2011–15) of Bangladesh. For the broad picture of performance of the Sixth Plan during the first three years in terms of achieving major development targets relating to economic growth, employment and poverty reduction is generally positive. The economy has made further solid progress in these areas, which is reassuring. Progress has also been made in transforming the economy from a rural-based agrarian economy to one that is more modern urban-based manufacturing and services-based. Export performance is on track, which has provided the impetus for the expansion of the manufacturing sector.

Chapter 1

Methodology and Approach: Mid-term Review of the Sixth Plan

A. Background and Overview

For the first time in the history of economic planning in Bangladesh, the Sixth Five Year Plan introduced the concept of results-based monitoring and evaluation (RBME). This was done to be consistent with the spirit of indicative planning whereby the Sixth Plan was conceived as a living document that would be monitored for results, and changed and adapted in light of these outcomes and changing global and domestic economic environment. The Sixth Plan document included a development results framework (DRF) that defined quantitative benchmarks targets to evaluate the results achieved under the Sixth Plan.

The first implementation review was done in July 2012 using the RF. This was a pilot review aimed at obtaining a quick check of whether the Sixth Plan was on course and also to test the implementation of the DRF. The results of this first review suggested the need to modify the DRF in order to better reflect the goals of the Sixth Plan and also to provide a better results framework for longer-term institutional progress such as in the area of governance. A Proposed Results Framework (PROPOSED DRF) was developed, which provides a more appropriate basis for looking at the performance of the Sixth Plan after three year completion.

Although the PROPOSED DRF provides a solid basis for looking at the overall performance of the Sixth Plan, it is also helpful to look at a bit more detail on sectoral outcomes than the picture provided by the DRF. Ideally, it is appropriate that sectoral line ministries do sector specific RBME. However, this practice is still not commonly in place. In the interim, the Sixth Plan mid-term implementation review provides a broad picture of key sectoral performances that are critical to the successful implementation of the Sixth Plan objectives and targets. It is important to note that this approach cannot be a substitute for more detailed sectoral reviews of performances. It will be important to ensure that these sectoral performance reviews are available for the preparation of the Seventh Plan.

B. Methodology

As mentioned above, the PROPOSED DRF provides the main framework for doing the mid-term implementation review (MTIR). The PROPOSED DRF beefs up the quantitative sectoral targets and benchmarks for nine thematic goals of the original RF with more disaggregated targets contained in the Sixth Plan. Some additional targets are contained in the Millennium Development Goals (MDG) for Bangladesh. The end period of the MDGs happily coincides with the end year of the Sixth Plan (2015). So, to the extent that it is appropriate, the PROPOSED RF also draws on the targets contained under the MDGs. While the PROPOSED DRF is a much more detailed quantitative framework, it is still aggregative by design to keep M&E manageable. As such, the PROPOSED DRF is supplemented with more detailed sectoral analysis of policies and institutions relating to the nine core thematic sectors that play a critical role in helping secure the key goals and objectives of the Sixth Plan. The PROPOSED DRF is shown in Annex 1.

The absence of sector-specific RBM&E leaves a huge gap in the entire planning process. Until such time that this gap is addressed systematically, the MTIR uses a second-best option to request relevant sectoral line ministries to provide written analysis and key data on sectoral performance. An outline for inputs was provided to relevant sectoral ministries (Annex 3).

C. Structure of the MTIR

The basic approach of the MTIR is to evaluate the performance of the Sixth Plan against the core development objectives of the Plan, indicate which targets are on course and which are not, and provide suggestions for revised targets. The scope of the MTIR and main issues covered in this Report are briefly summarized below.

Following this introductory chapter, Chapter 2 looks at the broad picture development impact of the Sixth Plan based on the progress with GDP growth, employment and poverty reduction. These three core development indicators provide a useful summary barometer of how the overall economy is progressing and whether the Sixth Plan is broadly on track. The Sixth Plan seeks to achieve an average GDP growth of 7.3% per year over the 5 year period of the Plan. The time path targets GDP to grow from 6% in FY10 to 8% by FY15. Commensurate with this GDP growth target, employment is to increase by about 2.2 million jobs per year, which is faster than the growth of labor force (1.8 million workers per year). The pattern of employment is to change with relatively more new employment created in manufacturing and in organized services. As a result, the share of manufacturing and services sector employment is to grow to 20% and 50% respectively by the end of the Sixth Plan while the share of agriculture employment is to decline to 30%. The growth of GDP and employment along with other supportive policies and programs is expected to lower poverty from 31.5% in 2010 to 22.5% by 2015. Against these targets, Chapter 2 of the MTIR evaluates the progress so far. It indicates areas of strengths and areas where implementation has lagged. It seeks to provide an analysis of the factors that explain the current performance regarding GDP growth, employment expansion and poverty reduction and identify any constraints that might be hampering progress. It looks at the realism of the related targets for the remaining 2 years and seeks to provide suggestions for possible policy reforms that might help put the results on the targeted path.

Chapter 3 reviews progress with the implementation of the Sixth Plan’s macroeconomic framework. Prudent macroeconomic management has been a hallmark of long-term economic policy making in Bangladesh and has been a major contributor to the growth of the private sector. The macroeconomic framework contains targets for inflation, current account balances, growth of external trade, foreign currency reserves, fiscal balances, external and domestic debt, public resource mobilization and saving and investment balances. The actual macroeconomic framework needs to be consistent with the GDP growth, employment and poverty reduction targets of the Sixth Plan. Shortfall in implementation of the macroeconomic framework will likely explain most of the shortfall in the GDP growth, employment and poverty reduction targets.

Chapter 4 reviews sectoral GDP performance. The targets relating to aggregate GDP, employment and poverty are intimately linked with the performance of the three core production sectors: agriculture, manufacturing and services. The growth strategy in the Sixth Plan targeted to achieve a double digit plus GDP growth for manufacturing with a view to achieving the required structural transformation of the Bangladesh economy from a primarily agrarian and informal services economy to a more modern manufacturing and organized service based economy. This structural transformation is needed to achieve the employment targets of the Sixth Plan. The Plan also seeks to raise the productivity of agriculture to boost incomes for people who remain engaged in agriculture. A key element of the agriculture development strategy suggested in the Sixth Plan is the fostering of production diversification away from low income crops towards higher value-added crop and non-crop production. Higher income from agriculture is an important element of the underlying poverty reduction strategy of the Sixth Plan. Chapter 4 takes stock of the progress with the structural transformation of economy, review the constraints and suggest policy reforms strengthening economic performances of agriculture, manufacturing and services sectors.

The all important issue of progress with infrastructure development is taken up in Chapter 5. The Sixth Plan recognized that major infrastructure services relating to power and transport were constraining GDP growth and the expansion of private investment rate. As such the Plan puts considerable emphasis to the growth of physical infrastructure. Major expansion programs in power and gas supplies were identified for implementation. Important programs for improving roads, highways, bridges, and water and rail transport networks have been included in the Plan. The financing strategy emphasized both public funding as well as financing based on public-private-partnership (PPP). Emphasis is also placed on improving efficiency and service delivery through a series of structural reforms involving pricing policy and institutional reforms. The proper implementation of this program is essential to realize the Sixth Plan’s GDP growth targets. This Chapter examines the progress made in realizing the Plan targets for infrastructure development relating to electricity, gas and transport network. It looks at aspects of physical expansion as well as efficiency and service delivery. It provides an assessment of progress made, identifies the main constraints and provides suggestions for the coming years. It pays particular attention to the launching of the PPP strategy since this is a major initiative that has long-term implications for the development of the infrastructure sector in Bangladesh.

The focus of Chapter 6 is on tracking the progress with Human Resource Development. The Sixth Plan puts considerable emphasis on Human Resource Development both as a means for accelerating GDP growth through investment in human capital as well as a basis for reducing poverty and achieving more equitable development by strengthening the capabilities of the labour force. Specific targets for expansion as well as quality enhancements in education, health, nutrition and population growth are included in the Sixth Plan. The implementation strategy focuses on service delivery improvement, higher levels of public financing and institutional reforms. This chapter of the MTIR analyzes the major developments in education, training, health, population and nutrition since the adoption of the Sixth Plan and provides an assessment of the progress against key targets. It reviews the progress with major policies relating to financing and service delivery improvements. It identifies critical constraints and provides suggestions for moving forward.

Chapter 7 looks at the developments relating to poverty, social protection and female empowerment. Attaining better equity of development is a key theme of the Sixth Plan. To this end the Plan puts substantial emphasis on policies and programs for reducing poverty, reducing income inequality, lowering regional imbalances, improving social protection mechanisms and enhancing female empowerment. Two core elements of the strategy for achieving better equity is improvement in Human Resource Development and productive employment. In addition to these aspects, the Sixth Plan identifies specific and targeted policies and programs. This Chapter draws on the relevant analysis in earlier chapters, especially chapters 2, 3 and 6, reviews the developments in these areas and provides an assessment of progress achieved based on available quantitative targets and a qualitative analysis. It seeks to highlight important gaps and constraints and identifies possible options to address them.

Progress with sustainability of development, focused on environment, climate change and disaster management, is reviewed in Chapter 8. To preserve the long-term sustainability of development, the Sixth Plan adopted major policies and programs in the areas of environment, climate change and disaster management. It is recognized that progress in these areas are long-term in nature. Also data on quantitative measures of performance is scarce. The Chapter reviews the progress with the implementation of the PROPOSED RF targets and major policy and institutional initiatives in these areas and provides an assessment of whether progress is on track. Suggestions for improving performance over the longer term are provided as appropriate.

Developments in areas relating to governance and institutions are examined in this last Chapter 9. The Sixth Plan recognized the importance of improving governance and institutions for successful implementation of the Sixth Plan as well as for securing longer-term development in line with the Perspective Plan and Vision 2021. Chapter 9 of Part 1 of the Sixth Plan lays down the objectives, targets and strategies for improving governance and institutions. The PROPOSED RF identifies indicators to monitor and evaluate the governance scenario in Bangladesh. The MTIR uses the PROPOSED RF and supplements this with a qualitative analysis of progress with policies and institutions as relevant.

Chapter 2

Progress with GDP Growth, Employment and Poverty Reduction

A. Introduction

The Sixth Plan being the first five year plan of the implementation of the Vision 2021 laid out bold targets for GDP growth, employment and poverty reduction. The related targets in the Proposed Results Framework (PROPOSED RF) are shown in Table 2.1. The assessments of progress in these three areas provide a broad overview of the aggregate performance of the Sixth Plan. The rest of the chapter provides a detailed assessment of progress in these areas and concludes with prospects and the way forward1.

Table 2.1:

Sixth Plan Targets for GDP Growth, Employment and Poverty Reduction

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Source: Sixth Plan
B. GDP Growth Performance in the Sixth Plan

Bangladesh economy has been experiencing steady acceleration in economic growth over the last several decades; this pattern continued under the first three years of the Sixth Plan (Figure 2.1). This is a remarkable achievement, although the growth rate did not reach the planned targets (Figure 2.2). Bangladesh maintained economic growth of 6.23 percent and 6.03 percent in FY 2011-12 and FY 2012-13 respectively. The shortfall in GDP growth over the planned targets is particularly significant in FY13 that needs careful review and management. On the whole, average GDP performance in the first three years is a solid (6.4 %) but significantly lower than the Sixth Plan target (7.3%).

Figure 2.1:
Figure 2.1:

Average Real GDP Growth Rate

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bureau of Statistics (BBS)
Figure 2.2:
Figure 2.2:

GDP Growth Rate FY10-FY13, Actual Vs Target

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bureau of Statistics (BBS)
GDP Growth in International Comparison

The solid growth performance in Bangladesh during the Sixth Plan so far compares favorably not only by own historical standards, it also looks very good in international comparison (Figure 2.3). Along with China, India and Indonesia, Bangladesh has been among the fastest growing countries in the World during 2011-13. This is true even with the shortfall over the Sixth Plan targets.

Figure 2.3
Figure 2.3

International Growth Comparison, 2010-13

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: World Bank Global Economic Prospects, July 2013

As a result of attaining 6 percent plus growth rate over the past three years of the Sixth Plan, per capita GDP in US dollar terms has continued to rise, reaching US$ 838 in FY13 (Figure 2.4.), which has been estimated by BBS to be US$1,044 according to new base year of 2005-06. If this pattern continues in the remaining two years of the Plan and beyond, Bangladesh would be well set to attain middle income status by 2021.

Figure 2.4:
Figure 2.4:

GDP per capita at current prices (USD) using base year 1995-96

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS
Sectoral Composition of Growth

A review of the sectoral breakdown of GDP indicates that following rapid growth in FY10-FY11, agricultural GDP performance slowed considerably in FY12-FY13 (Table 2.2). The deceleration was particularly sharp in FY13. The services sector similarly grew well in FY10-FY11 but slowed somewhat in FY12-FY13, although less sharply than agriculture. Nevertheless, industrial sector performance maintained its upward trajectory and reached almost double digit figure in FY13.

Table 2.2:

Major Sectoral Share and Growth Performance of GDP in constant prices, FY10-13

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Source: BBS, National Accounts Estimates, June 2013

The crops sector fueled the agriculture sector’s high growth in FY10-FY11. The slowdown in the expansion of the agricultural sector since then is largely due to the fall in the growth of the crops-related production. Crops sub-sector value-added growth fell sharply from an average of 5.5 percent in FY10-FY11 to only 1.9 percent in FY12. For FY13, the BBS estimates this to have grown at only 0.15% as compared with the target of 4.5%. Given the dominant role of crop production in agriculture, this slump in the crop sub-sector has caused the sharp decline in the growth of agriculture in the past 2 fiscal years.

Crop production is dominated by cereal; so, it has become weak primarily because of a stagnant cereal crop production coupled with drop in rice prices for farmers. Total food grain production in the FY12 was 34.88 million metric tons (mmt) (aus 2.33 mmt, aman 12.80 mmt, boro 18.76 mmt and wheat 0.99 mmt). This production was 1% higher than previous year’s actual production. For the FY13, the Department of Agriculture (DAE) has set aus, aman, boro and wheat production targets at 2.37 mmt (1.72%), 13.3 mmt (3.9%), 19.03 mmt (1.44%) and 1.03 mmt (4%), respectively. Estimation of aus production has been finalized by BBS at 2.16 mmt, which is 7% lower than previous year’s production.

The industrial sector growth has benefited from a buoyant manufacturing sector and solid construction activities. The manufacturing sector has broadly tracked the expansion path envisaged in the Sixth Plan. Thus, the average manufacturing sector growth rate in the first three years of the SFYP was 10%, as compared with 6% during FY00-10. This compares reasonably well with the target of 12% average growth in the Plan. The main contributor to this robust growth performance of the manufacturing sector is the readymade garments (RMG) exports. Despite many odds, including continued slump in OECD economic activities including in Europe, the Bangladesh RMG sector has led the way in boosting the growth of the manufacturing sector GDP and exports. This is a particularly heartening feature of the implementation of the Sixth Plan growth strategy that emphasized the role of manufacturing sector value-added based on exports.

The dynamics of sectoral GDP performance and underlying factors are reviewed in greater details in Chapter 3.

Structural Change and Composition of GDP

The underlying growth strategy in the Sixth Plan was aimed at facilitating a faster transformation of the Bangladesh economy away from a primarily agrarian one towards a modern manufacturing and services oriented economy. The Sixth Plan targeted manufacturing as the main engine of growth. Accordingly, the GDP share of manufacturing was to rise by 4-5 percentage point. Progress on this key objective is illustrated in Figure 2.5. It has achieved significant success as suggested by the growing GDP share of manufacturing and a falling share of agriculture. Nevertheless, full target will not likely be attained because of the likely shortfall in manufacturing sector value added in relation to the Sixth Plan target as noted earlier.

Figure 2.5:
Figure 2.5:

Progress with Structural Change

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS
Growth Drivers: The Rate of Investment

It is well recognized that Bangladesh growth is mostly driven by investment and exports. The Sixth Plan targeted an increase in the investment rate growing from 24% of GDP in FY10 to 32% by FY15, as a critical driver of growth. While private investment was projected to lead the way, a substantial increase in public investment was also planned. The specific targets for the investment rate by source are shown in Table 2.3.

Table 2.3:

Investment Targets for the Sixth Plan

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Source: Sixth Plan

Total investment rate: The investment performance is illustrated in Figure 2.6. The Sixth Plan made some initial inroads in achieving its investment target during the first two years. The investment challenge has become progressively more difficult over time. Compared with the Sixth Plan’s target to increase the investment rate from 24% of GDP in FY10 to 32.5% by FY2014-15, the actual investment rate has stabilized at around 27 % of GDP during FY12-FY13. The inability to cross over to the 7% rate of growth of GDP is to a large extent a reflection of this investment constraint. Given this significant shortfall in FY13 and an uncertain environment in FY14, the ability to achieve the substantially larger investment targets for FY14 and FY15 do not appear feasible.

Figure 2.6:
Figure 2.6:

Total investment as Percent of GDP: Actual Vs Target

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS and National Budget

Public investment rate: The breakdown in performance shows the shortfall happened both in public and private sectors2. The Sixth Plan recognized the need for substantial increase in public investment especially to upgrade infrastructure and invest in human capital. Evidence shows that some progress was made in increasing the rate of public investment, but the effort fell substantially short of the Sixth Plan target during the first three years (Figure 2.7). There were two elements of public investment strategy underlying the Sixth Plan. The first strategic focus was to strengthen public resource mobilization with a view to financing increasingly higher levels of public investment. The second strategic consideration was that even with strong efforts there will be shortfall in required resources and as such the Sixth Plan aimed at considerable investment through public-private partnership.

Figure 2.7:
Figure 2.7:

Public Investment as Percent of GDP: Actual Investment Vs Target

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: National Budget

The implementation of public investment through the Annual Development Programme (ADP) is shown in Figure 2.8. The ADP has increased progressively, but has always fallen substantially short of the budgeted level. The gap is partly due to financing shortfalls emerging from a range of issues including revenue shortfalls, subsidy expenditures and implementation concerns.

Figure 2.8:
Figure 2.8:

ADP Implementation (taka billion)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: National Budget

These are discussed detail in Chapter 3. Despite ambitious plans, the PPP strategy has not taken off in any significant shape for a host of reasons including institutional challenges. The net result is a substantial shortfall in public investment rate in comparison with the Sixth Plan targets.

Private investment rate: The story is somewhat similar in the case of private investment. The shortfall in the actual rate of private investment from the Sixth Plan target rate is significant and growing (Figure 2.9). This is worrisome because the Sixth Plan identified private investment as a major engine of growth and exports, especially in the manufacturing sector.

Figure 2.9:
Figure 2.9:

Private Investment as Percent of GDP—Actual Vs Target

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS

It is often argued that the prime reason of lower level of private investment is the “contractionary” monetary policy stance of Bangladesh Bank since the beginning of 2012. The proponents of “easy” or so called “accommodative” monetary policy argue that the recent tighter credit situation has been constraining private enterprises from increasing real investment. Evidence suggests that while availability of credit and its cost are important, this is only one factor underlying private investment decision. Indeed in the current business environment, availability of credit is not an issue for organized business enterprises. This is suggested by the fact that the growth in the demand for credit demand is much slower than the supply. Investor surveys show that what matters more for investors is the general investment climate and competitiveness of the economy. Long delays in contract enforcement, limited access to serviced land, power and gas shortages and red tape have all become major constraints to investment in Bangladesh.

Issues in private investment climate: Some useful insights on areas of policy constraints that impinge on private domestic and foreign investment emerge from a review of the investment climate. Such data are compiled by the World Bank and other global institutions based on cross-country investor surveys.

At more than 1400 days, the time required for enforcing a contract in Bangladesh is the highest among its comparators and ranked at 182 out of 183 countries surveyed in 2012 (Figure 2.10).

Figure 2.10:
Figure 2.10:

Average Time Required for Enforcing Contracts

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Doing Business 2013, IFC.

Similarly, performance rankings for attaining construction permits, getting electricity for business, registration of property suggest that investors continue to regard these areas as problematic. Moreover rankings for getting credit facility, protection of investment, payment of tax and resolution of insolvency have worsened relative to other countries. On the whole, investors feel that getting electricity, enforcing contracts and resolving insolvency are serious constraints.

Figure 2.11:
Figure 2.11:

Bangladesh 2012 Global Performance Ranking

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Doing Business 2013

Some additional insights obtain from looking at the rankings of global competitiveness index (GCI). Bangladesh compares rather poorly with its major competitors, except Pakistan (Figure 2.12). At the global level Bangladesh ranks at 118 in terms of GCI when compared with 144 countries in 2012. Though, in FY13-14, the Global Competitiveness Report of World Economic Forum found that Bangladesh is currently ranking at 110th position out of 148 countries.

Figure 2.12:
Figure 2.12:

Global Competitiveness Index 2012

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: GCI, 2012.

One positive finding, however, is with regards to the investor protection. Bangladesh ranks amongst the best performers (top 25 countries) globally in terms of protecting investors (Figure 2.13). This is a useful result and suggests that Bangladesh is regarded by foreign investors as a safe place to invest in terms of low sovereign appropriation risks. As such improvements in problem areas relating to acquisition of land, getting electricity and enforcing contracts will boost foreign investment in Bangladesh.

Figure 2.13:
Figure 2.13:

Protecting Investors

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Doing Business 2013, IFC

On the whole, the Bangladesh investment climate remains challenging and only modest progress has been made during the first three years of the Sixth Plan. As a result, the domestic investment effort has been restrained and the flow of foreign direct investment (FDI) has been small relative to competitors. Despite some recent improvements, Bangladesh’s average net FDI level of less than 1% of GDP is the lowest among the regional comparators (Figure 2.14). It is generally believed that 1-2% of GDP in additional FDI inflows would help GDP growth by about 0.5% on average with employment generation of about 150,000 per year in the formal sector.

Figure 2.14:
Figure 2.14:

FDI Inflows as % of GDP

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: UNCTAD Database 2013
Growth Driver: Export Performance

Overall export performance: Along with investment, exports growth is a major GDP growth driver in Bangladesh, The Sixth Plan put strong emphasis on export growth, especially the expansion of a diversified manufacturing export base (Figure 2.15). Exports were projected to grow by 15% per year in current US dollar terms over the Sixth Plan period. The share of exports in GDP was to grow from 16% in FY10 to 23.9 % by the end of the Sixth Plan (FY15). Actual performance shows that exports have done well on average in the first three years (FY11-FY13), growing faster than the projected rate. If present trend continues in the next two years, the Sixth Plan target for exports will be achieved. This is a solid performance.

Figure 2.15:
Figure 2.15:

Export Performance in the SFYP

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS and Export Promotion Bureau (EPB)

The Sixth Plan also sought to strengthen the export base by focusing on the establishment of a diversified manufacturing export base. The results are shown in Table 2.4. Export performance was outstanding in FY11 (42% growth) but lost momentum in FY12 (6%). It regained momentum in FY13. Total exports increased by 11.2% to US$27 billion in FY13. In all three years, the exports of ready-made garments (RMG) played the dominant role. In addition to RMG products, a number of other items such as ICT, jute goods, leather, footwear etc. also showed respectable growth.

Table 2.4:

Export Performance in the Sixth Plan, FY10-FY13

Figures in Million USD

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Source: Export Promotion Bureau (EPB)

Nevertheless, the dominance of RMG exports prevails. Indeed, the share of RMG exports in total exports has increased further notwithstanding the Sixth Plan’s endeavour to diversify the export base (Figure 2.16). But two positive aspects of the diversification issue are worth noting.

Figure 2.16:
Figure 2.16:

Share of RMG in Total Exports

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS

First, within RMG, there has been growing diversification of products, from lower-end to higher end. And second, the performance of ICT, leather, jute goods and footwear if sustained over the longer term could provide the basis for strengthening the export base. Nevertheless, this is an area where further efforts are needed.

In terms of demand, the European Union continues to remain the largest destination of Bangladeshi exports, primarily due to RMG products. Despite recessionary economic environment in the EU region due to the ongoing debt crisis, Bangladesh’s RMG exports to the EU continued to increase in the Sixth Plan period. The sharp loss in China’s market appears to have accrued mostly to Bangladesh. In addition to competitive edge, Bangladesh’s success in RMG exports to the EU is also due the latter’s decision to change the rules of origin in favor of Bangladesh. This particularly helped the growth of woven garment exports in the EU market. The story of Bangladesh’s RMG exports to the US market is also positive, though not as robust as in the EU market. Following Vietnam, Bangladesh was the second fastest growing RMG exporter to USA. As a result, its market share of the US RMG imports is increasing steadily. Vietnam and Indonesia are more challenging competitors for Bangladesh in the US market relative to the EU.

It is clear that major western corporate buyers are still very keen to maintain strong commercial relations with the RMG sector in Bangladesh because of its competitive prices (for the quality) and the enormous capacity that Bangladesh can provide (outside China). Certainly Bangladesh need to do a lot in a number of areas including building safety standards and relocation issues; other workers safety (like fire) and working conditions related issues; workers’ rights and benefits issues (including minimum wage issue); and branding of Bangladesh RMG to restore its lost image. The export prospects in RMG and other sectors is reviewed in greater detail in Chapter 3

C. Employment Performance in the Sixth Plan
Sixth Plan Employment Challenge

There are two dimensions of the employment challenge of the Sixth Plan.

First, there is the quantitative challenge. The combined effects of the ongoing demographic transition, whereby the share of the working population is increasing, and the growing labor force participation of women has contributed to a rapidly growing labor force (3.1 % per annum), much in excess of a slowing population growth (1.3% per annum). While this presents a huge potential dividend, this also requires the ability of the economy to create sufficient number of jobs to absorb this growing labor force (1.8 million jobs per year in the Sixth Plan period).

The second dimension is the quality aspects. The last available Labor Force Survey (LFS 2010) showed that some 50% of the total employment (54 million) is in low productivity agriculture. Research shows that labor productivity and real wages are higher in manufacturing and services sectors, especially organized services. Accordingly, a major objective of the Sixth Plan is to create more jobs in manufacturing and organized services relative to agriculture and informal economy.

Analytical and Empirical Foundations

The employment strategy of the Sixth Plan is based on the rate of the growth of the economy, the main driver of employment on the one hand and the rate of growth of manufacturing and organized services. Second, the Sixth Plan also took note of the fact that Bangladesh being a labor abundant economy it will have a comparative advantage in producing and exporting labor intensive products. The experience from RMG manufacturing provides a very strong foundation to this analytical basis of the Sixth Plan. And third, the Sixth Plan seeks to build on the successes achieved in export of labor services especially to the Middle East.

Sixth Plan Employment Outcome

A major problem with assessing the employment outturn in the first three years of the Sixth Plan implementation is the absence of an updated employment database. BBS has not yet updated the labor force data base since the last LFS conducted in 2010. In view of this knowledge gap, the approach used to estimate domestic employment is to take the implicit sectoral employment elasticities underlying the Sixth Plan employment projections and apply them to sectoral and total GDP growth rates. Data on manpower exports are obtained directly from the Bureau of Manpower, Employment and Trainee (BMET). The estimated results are shown in Table 2.5.

Table 2.5:

Estimated Job Creation in the Sixth Plan

(million workers)

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Source: Sixth Plan and Mid-term Implementation Review Projections

The shortfall in the growth of total GDP as compared with the Sixth Plan targets has reduced the overall additional job creation from domestic employment but the shortfall has been made good by a much more impressive expansion of manpower exports. As a result, the total number of estimated job creation (6.1 million jobs) has likely exceeded the addition to the labor force (5.4 million). This has likely lowered the rate of open unemployment. On the qualitative side, the growth of manufacturing employment has largely been on track. However, there has been likely a much more modest transfer of labor from agriculture to the rest of the economy. Along with slowdown in agriculture growth, this has likely constrained the growth of labor productivity in agriculture.

D. Poverty Outcome of the Sixth Plan

The Sixth Plan sought to reduce head-count poverty from 31.5 percent in 2010 to 22.5 percent by 2015. Unfortunately, the last Household Income and Expenditure Survey (HIES) was done in 2010. Since then there is no survey based evidence on what has happened to poverty. HIES data reveal that incidence of poverty has been declining, on an average, at 1.74 percentage points in Bangladesh during 2000 to 2010. If this trend has continued for the last three years, the MDG target of halving the population living under the poverty line has already been achieved in 2012 and the estimated figure of poverty head count in 2013 was 26.2 percent. The lower GDP growth than the Sixth Plan target will not hamper reducing the actual rate of decline in poverty during the Sixth Plan.

Table 2.6:

Projected Reduction in Poverty During the Sixth Plan Period

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Source: GED Estimates on the Linear Trend of Poverty Reduction

E. Prospects and Way Forward

The broad picture of performance of the Sixth Plan during the first three years in terms of achieving major development targets relating to economic growth, employment and poverty reduction is generally positive. The economy has made further solid progress in these areas, which is reassuring. Progress has also been made in transforming the economy from a rural-based agrarian economy to a more modern urban-based manufacturing and services based economy. Export performance is on track, which has provided the impetus for the expansion of the manufacturing sector.

Yet, compared to Sixth Plan targets, there is a shortfall in GDP attainment targets. The shortfall in domestic employment has been offset by better-than-expected performance in overseas employment. While political stability has returned and there is likely to be a recovery in private investment. The export performance is likely to remain on track. But export will remain concentrated on RMG. On the whole, the slowdown in the rate of investment may possibly recover soon and the average growth rate to be nearly below 7 percent over the remaining two years of the Plan.

The Government can take several steps in improving the investment climate for private investment, increasing public investment and diversifying exports from RMG in order to create a better platform for higher growth in the Seventh Plan. The main priorities are:

  • Improve the investment climate by removing the constraints identified by investors. These include land procurement, deregulation, power and gas shortage, trade logistics and contract enforcement. This is a long-term agenda but continued progress is needed.

  • The shortfall in public investment needs to be addressed speedily with a range of measures including more focused and steady implementation of the Tax Modernization Plan, proper pricing of electricity and energy, and rationalization of subsidies.

  • Additional focus on labor skills and training.

  • Learning from the positive experience of RMG, improve the incentive framework for non-RMG exports.

  • The creation of more jobs in the manufacturing sector is partly constrained by the lack of dynamism in small enterprises. While the government has supported the sector with subsidized credit, other supportive policies relating to markets, technology, vertical linkages and quality assurance needed to be beefed up. A particular problem is the lack of a proper information base that needs to be addressed urgently to bring dynamism in this sector.

Chapter 3

Progress with the Macroeconomic Framework

A. Background—Macroeconomic Objectives under the Sixth Plan

The SFYP aimed at increasing the real GDP growth to 8% by FY15 in a sustainable manner, averaging 7.3% real growth over the Plan period along with continued macroeconomic stability. The outcomes for the first three years of the Plan suggest a mixed record of performance. The real GDP growth was on target in FY11 but was lower than planned in FY12 and FY13. The growth targets for the outer years were certainly ambitious. The higher GDP growth and per capita real GDP growth targets were predicated upon 8 percentage point increase in the national investment to GDP ratio over the plan period. The achievement of the investment rate expansion was predicated upon a strong public resource mobilization drive combined with incentives to increase private investment. The reduction in inflation was to be achieved through appropriate monetary management and improved domestic supply of basic staples. The stability of the external sector and the exchange rate was to be secured by a strong export drive combined with a prudent foreign resource mobilization effort with specific focus on remittances.

Like every medium-term plan, actual implementation of the SFYP macroeconomic framework is also impacted by both domestic and international/global economic and non-economic developments. On the international front the lingering impact of the global economic crisis on the US economy and the emergence of EU debt crisis with double-dipping of economic activity in the EU economies have had their impacts on Bangladeshi exports to these two most important export destinations. On the domestic front, both policy implementation including execution of the budget and economic performance (particularly investment and GDP growth) have been significantly impacted by political conflicts linked to the run up to the National Elections in January 2014. At the same time, Bangladesh did not experience any major natural disasters like cyclone or flood over the last five years which allowed the Agricultural Sector to record steady increase in output albeit at a slow pace, with minimum volatility and disruptions in the level of production.

Prudent macroeconomic management has been the hallmark of Bangladesh’s long-term development. This was underscored in the Sixth Plan and the implementation record shows that it has been preserved during the first three years of the Sixth Plan. All major indicators like the fiscal deficit, export growth, export-to-GDP ratio, external current account balance, reserve build up and external debt management have been on track in line with or exceeded the Sixth Plan targets. However, inflation rate still remained higher than the target. It was significantly off-track in the first two years as excessive monetary growth and credit expansion fueled higher-than-targeted inflation. Bangladesh experienced average inflation rates of 10.6 percent and 7.7 percent in FY 2011-12 and FY 2012-13 respectively. Subsequent correction of monetary policy put inflation back on course, although at around 7.3% in FY14 but still remained higher than the Sixth Plan target (6%).

In the area of fiscal policy, although performance indicators are broadly on track, there are a number of concerns. First, the revenue outlook for FY14 is uncertain owning to the recent political disturbances and disruption of economic activities. Additionally, the implementation of the Tax Modernization Plan is much slower than expected. Second, fiscal discipline has often required cutbacks in spending in areas of high priority project and programme spending due to government’s inability to meet the Sixth Plan resource commitments in important areas (e.g. in education, health, social protection and environment), thereby adversely affecting delivery and performance of important programmes in these areas. Third, the important policy initiative of public-private-partnership (PPP) in infrastructure has not materialized.

Regarding external sector, performance in terms of most indicators generally exceeded the targets. There are however some concerns. Despite strong export performance, the diversification of the export base did not happen. On the contrary, the share of RMG exports increased further. Remittances did very well up to FY13 but have shown signs of softening in FY14. Both are worrisome trends that need to be addressed.

The key targets relating to the macroeconomic framework included in the revised RF are shown in Table 3.1

Table 3.1:

Sixth Plan Key Targets of the Macroeconomic Framework

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Source: Sixth Plan Results Framework
B. An Overview of Macroeconomic Performance in Terms of Key Indicators

Chapter 2 reviewed the progress with GDP growth, investment, employment and poverty reduction. This chapter focuses specifically on the underlying macroeconomic framework and associated policies. Specifically, it looks at fiscal developments, the balance of payments outcome, and the inflation situation.

The latest indicators of progress with the macroeconomic targets of the Sixth Plan are shown in Table 3.2. The record suggests that Bangladesh’s macroeconomic performance and management have been quite impressive despite slippages in some areas and at certain times. Exports have performed very well on average, growing faster than the average growth envisaged in the Sixth Plan. Remittances have surged, reaching 14.3 billion in FY13. Reserves have surpassed 5 months of import cover, which is substantially higher than 3.3 months projected by the Sixth Plan. The balance of payments is in surplus continuously in over the last three years. Fiscal management through FY13 was very impressive due to buoyant revenue growth and a rapid increase in the size of ADP. The tax to GDP ratio has continued to grow as envisaged in the Sixth Plan, reaching 11.0 % of GDP. Fiscal deficit has consistently been below 5% of GDP and the debt service ratios have declined steadily.

Table 3.2:

Progress with Macroeconomic Targets

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Source: Sixth Plan, BBS, Bangladesh Bank (BB) and Ministry of Finance

Early signs of emerging macroeconomic imbalances manifested through rising inflation (which reached almost 12 at its peak in FY11) and balance of payments and exchange market pressures in 2011 were forcefully addressed through a significant tightening of the monetary stance and continued prudent fiscal management. As a result, inflation has come down to the 7.5-8% range, balance of payments have been achieving surpluses in the external current account and in the overall balance. Consequently, the foreign exchange reserve of Bangladesh Bank has reached a record high $19 billion level (6 months of import coverage).

On the whole, the macroeconomic management is on track. One area of concern is the slow increase in public investment (as pointed out in Chapter 2). The inflation rate is also persistently above the Sixth Plan target and needs careful monitoring. The remainder of this Chapter describes the developments in major macroeconomic variables in the first 3 years of the Plan and the outlook for FY14.

C. GDP Growth Outcome:

The broad picture of performance under the Sixth Plan during the first three years in terms of economic growth is generally positive, but fell short of the Plan targets significantly. The SFYP targeted an average GDP growth rate of 7.3 percent for the plan period. The associated yearly time path entailed accelerating the real GDP growth rate from 6.1 percent in FY10 (base year) to 8 percent in FY15. To achieve this growth, the investment rate was targeted to rise by 8 percentage points to 32.5 percent of GDP by FY15 (end year of the SFYP).

The inability to cross over to the 7% rate of growth of GDP is to a large extent a reflection of this investment constraint. Given the significant shortfall in FY13 and an uncertain economic environment in FY14, the ability to achieve the substantially larger investment targets for FY14 and FY15 do not appear feasible. While political stability has returned in the post election period and there is likely to be a recovery in private investment, on the whole it is clear that the investment targets for the Sixth Plan will not be achieved. The detail Macroeconomic framework tables with the projections for the years beyond FY15, the terminal year of SFYP is annexed in Annex 1.

The underlying growth strategy in the Sixth Plan was aimed at facilitating a faster transformation of the Bangladesh economy away from a primarily agrarian one towards a modern manufacturing and services oriented economy. The Sixth Plan targeted manufacturing as the main engine of growth. Accordingly, the GDP share of manufacturing was to rise by 4-5 percentage points. Bangladesh has achieved significant success on this front as suggested by the growing GDP share of manufacturing and a falling share of agriculture. Nevertheless, the targeted increase in the share of GDP will not likely be realized because of the likely shortfall in manufacturing sector value added in relation to the Sixth Plan target.

Near term and Medium Term Growth Prospects: In FY14, with continued uncertainty and disruptions in the pre-election period, GDP growth is estimated to remain at 6.2 percent. From FY15, on the assumption that the political environment will remain calm, growth is expected to strengthen gradually, peaking at 6.5 percent by FY16, the final year of the SFYP aided by higher remittance and export growth, as well as by prospects for continued economic recovery in the US and the euro-zone area. A likely rise in consumer and investor confidence as the political situation stabilizes is also expected to stimulate demand and strengthen growth momentum. Private investment is expected to underpin this economic recovery supported by a substantial increase in public investment in infrastructure. Continued political stability is a precondition for the projected rebound in domestic investment envisaged under the revised macro-framework.

D. External Sector Performance

The external trade balance in dollar terms improved for the third consecutive year, primarily due to strong export growth and a major slowdown in import payments. Bangladesh’s external trade deficit came down to $7 billion in FY13 from the record high level of almost $10 billion in FY11. During most of the Plan period, export growth rate significantly exceeded the growth in import payments contributing to the reduction in trade account deficit which underpinned the continued strong overall BOP position (Figure 3.1). The overall developments in the balance of payments are summarized in Table 3.3.

Figure 3.1:
Figure 3.1:

Growth of Exports and Imports FY 10- FY 14 H1

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank
Table 3.3:

Developments in the Balance of Payments, FY10-14

(Million USD)

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Source: Bangladesh Bank

Despite a sizable and growing deficit in the services accounts, the improvement in the trade balance combined with the traditional large surplus in current transfers due to workers’ remittances, contributed to sizable surpluses in the external current account position since FY13. Based on developments in the first half of FY14, the external current account surplus in FY14 is likely to significantly exceed the high level of the preceding year ($2.5 billion in FY13), primarily depending on the pace of recovery in import growth and developments in inflow of remittances.

Financial and capital accounts of the BOP and Reserve Build Up: The financial and capital accounts also showed a marked improvement for the 3rd year in a row supported by steady pickup in Foreign Direct Investment (FDI) and disbursements of multilateral and other long-term loans. However, the size of the surplus in the financial and capital accounts at $650 million during July-December 2013 was less than one third of the surplus recorded during the same period of the preceding year. The lower surplus is primarily attributable to slower disbursement of official and private external financing due to the difficult political situation in the first half of FY14.

The combination of a sizable current account surplus and a moderate surplus in the financial and capital account contributed to a sharp improvement in the overall BOP position and a consequent rapid build-up of external foreign exchange reserves. Gross foreign exchange reserves of Bangladesh Bank increased by about $12 billion since the beginning of the Plan (July 2010) to more tha $19 billion by March 2014 which is equivalent to more than 6 months of import cover. The reserve buildup is likely to continue in the remainder of FY14, albeit at a somewhat slower pace depending on the recovery of import growth.

Figure 3.2:
Figure 3.2:

Foreign Exchange Reserves of Bangladesh Bank (Billion USD)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank

The current high reserve level should play an important stabilizing role if the economy if Bangladesh faces a major external or domestic shock. Looking forward, the high level of reserves should also play a very important role in accelerating the economic recovery of Bangladesh. The Government is undertaking a number of major initiatives to boost domestic economic activity and undertake major infrastructure projects. Any bold initiative will require massive imports and related foreign currency denominated financing, a part of which can be covered through use of reserves. Additional fiscal stimulus and resurgent private sector investment demand can only be sustained without being constrained by external sector financing if the foreign exchange reserve level remains high and comfortable. The high level of reserves will also help maintain and further improve Bangladesh’s sovereign rating, which will help catalyze higher foreign direct investment (FDI) in Bangladesh. In all respects, the high reserve level will help Bangladesh’s strive for attaining the middle-income status.

Remittance Performance: Between FY10 and FY13, remittance inflows surged and provided a very comfortable resource cover for Bangladesh. Remittances surged from $ 11 billion in FY10 to $14.3 billion in FY13. This is a remarkable achievement. If this trend were to continue, the Sixth Plan’s remittance target of $17.3 billion for FY15 would be achieved. However, there has been a precipitous fall in inflow of workers’ remittances since May 2013, which is a matter of growing concern. Remittances have been on a slower or declining trend since May 2013, and there is no sign of recovery as yet. This outcome is not surprising given that the number of workers going abroad had been declining since early 2013 and there are no signs of a recovery yet (Figure 3.4). As a result, inflow of workers’ remittances declined by $623 million (8.4%) in the first half of FY14, which is very unusual and has not been experienced in Bangladesh in recent times.

Figure 3.3:
Figure 3.3:

Remittances flows & Growth

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Figure 3.4:
Figure 3.4:

No. of persons going abroad

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank

A review of the developments in the number of workers going to different countries indicate that until 2012 the highest number of workers were going to the UAE, which was the major source of the growth in persons going abroad in FY11-FY12 (Table 3.4). Saudi Arabia which employs the largest number of Bangladeshi workers has remained closed to Bangladeshi workers for a long time. The effective closing of the UAE market for Bangladeshi workers since late 2012 is a major blow for Bangladesh. In the absence of reopening of the major markets (like Saudi Arabia, Kuwait and the UAE) for Bangladeshi worker in the GCC region, only smaller markets like Oman and Qatar are still open to Bangladeshi workers. The outlook for reopening of the Malaysian market is also not good despite the recent Government-to-Government (G2G) deal for sending labor from Bangladesh. The G2G mechanism is facing numerous difficulties due to some unspecified bureaucratic processes at both ends. Bangladesh would need to strengthen its economic-diplomacy to unlock the closed GCC markets and open new ones if it aspires to regain momentum in sending workers abroad and help sustain the growth in remittances in the coming years.

Table 3.4:

Overseas Employment in Major Markets

(in ‘000)

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Source: BMET, Bangladesh bank

Looking forward, the sharp decline in the number of workers going abroad in FY13 and in the first half of FY14 is a matter of serious concern. The impact of the lower departure number is expected to be reflected in continued lower remittance inflows in the coming months. This has not yet created any problem in terms of economic management because slower imports have mitigated its impact on the overall BOP position. However, once economic activity picks up in Bangladesh with consequent higher imports, the sharply lower inflow of remittances could potentially create pressures in the external accounts.

Development in Exports: Export performance has remained fairly buoyant despite a series of adverse developments on the domestic front (Table 3.5). Total exports during the period FY11-13 increased at a reasonably healthy despite the negative impacts of the EU debt crisis and the slower pace of recovery in the USA in the aftermath of the global economic crisis. The export growth has been primarily driven by the RMG sector and the dependence on RMG in the export basket has further increased. In the first half of FY14, exports increased by 16.5%, driven by continued strong growth in knitwear and woven garment exports. Although export receipts generally remained in the historical average range, this performance was impressive. RMG exports was increased by almost 20% to US$ 11.9 billion in the first half of FY14, compared with $9.9 billion in the corresponding period of FY13. Non-RMG export growth however was quite subdued during most of the Plan period except in FY11. However, a number of items such as leather, footwear, frozen foods, ICT etc. have been showing respectable growth. Export performance of jute and jute goods has been erratic due to fluctuations in their prices in the international market.

Table 3.5:

Export Earnings in US $ millions

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Source: Export Promotion Bureau

The European Union continues to remain the largest destination of Bangladeshi exports, primarily due to RMG products (Tables 3.6-3.8). Despite the recessionary economic environment in the EU region due to the ongoing debt crisis, Bangladesh’s RMG exports to the EU increased in both volume and value terms every year since FY09. In the initial months of FY14 Bangladesh’s market share in the EU increased further to 13.4%. Bangladesh now firmly occupies the second highest position in the EU market with double digits market share, although far behind the market leader China which at more than 40% is far ahead of Bangladesh.

Table 3.6:

RMG Export to EU; Market Shares

(In percent)

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Source: Eurostat
Table 3.7:

Bangladesh Market share

(% of Total EU textile Import)

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Source: Eurostat
Table 3.8:

RMG Export to EU

(Million Euros)

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Source: Eurostat

Bangladesh’s success in RMG exports to the EU has been continuing over the last several years and gained further momentum since FY12 due the EU decision to change the rules of origin in favor of Bangladesh. This decision particularly resulted in an increase in woven garment exports to the EU market. Reflecting these positive developments, Bangladesh’s market share in the EU market in terms of volume has increased steadily from 13.7% in FY10 to 17.9% in July-August period of FY14.

The story of Bangladesh’s RMG exports to the US market is also similar, though not as robust as in the EU market (Table 3.9). In both value and volume terms Bangladesh’s exports to the USA increased every quarter in FY13 and in the first quarter of FY14. The increase during July-September was particularly impressive, growing at 13.8% in dollar terms over the corresponding period previous year. Reflecting these positive developments, Bangladesh’s export share in the US RMG market increased from 3.5% in FY08 to 4.6% in FY12, and further to 5.1% in the January-September 2013 period. In fact, Bangladesh has moved up to the 4th position in the US market by overtaking Indonesia in the first quarter of FY14.

Table 3.9:

RMG Export to the USA

(Million US$)

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Source: Otexa
Table 3.10:

RMG Exports to the USA

(Share in Percent)

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Source: Otexa

Based on data through September 2013 it appears that Bangladeshi RMG entrepreneurs have been reasonably successful in coping with the series of adverse developments during the last one year including the Rana Plaza, Tazreen fire and the fallout of the prolonged political hostilities causing serious disruptions to transportation and production activity. Certainly, Bangladesh needs to do a lot in a number of areas, including building safety standards and relocation issues; other workers safety (like fire) and working conditions related issues; and workers’ rights and benefits issues (including minimum wage). Industry (owners) representatives, Government of Bangladesh, Labor Rights campaigners, ILO, and buyers’ representatives/forums would need to work together to alleviate the concerns expressed by the international community, domestic civil society and buyers’ representatives about the conditions in the RMG sector in Bangladesh.

The RMG sector minimum wage increase by 77% after a three year period was significant and the currently compares favorably with other private sector wage increases. During the last three years domestic price level measured in terms of the CPI increased by less than 30%, and thus the wage increase for the sector entailed a 36% increase in real wages over a three year period. This level of real wage increase for RMG workers appear substantial and should boost worker incentives. Nevertheless, the increase has happened from a low base and in dollar terms the current minimum wage rate of US$68 per month (after the increase) is still somewhat below the rates applicable in major comparator countries (Figure 3.5). However, after adjusting for the relative productivity differences the actual differential may have disappeared vis a vis countries like Indonesia and Vietnam.

Figure 3.5:
Figure 3.5:

Selected Countries—Minimum Wages in US$ per Month 2012

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: National Minimum Wage Board Bangladesh: Ministry of Human Resources and Social Security of the People’s Republic of China: Wage Indicator Foundation: International Labour Organization: US Department of State:

Exchange Rate Policy: Bangladesh Bank’s exchange rate policy has played a major role in the building up of reserves and at the same time supporting domestic exports. During the initial two year period under the Plan the exchange rate of Bangladesh Taka was virtually fixed against the US dollar In the range of Tk. 68-69 per US$1.0, despite the surge in inflation and import demand. As balance of payments pressures emerged in FY11, Bangladesh Bank responded promptly by tightening the monetary policy stance and allowing the exchange rate to be market determined. This dual action paid solid dividend in terms of bringing down inflation and achieving stabilization of the exchange rate at a depreciated level of about Tk. 78 per US$1, following some overshooting of the exchange rate (up to as high as Tk. 84 per US$1) for several months.

As import payments declined since FY13 due to lower domestic demand, higher inflows associated with buoyant export receipts and remittance inflows contributed to excess supply of foreign exchange in the interbank market leading to a significant nominal appreciation of the Taka against the US dollar in FY13. Had Bangladesh Bank not stepped in to purchase foreign exchange from the interbank market, the exchange rate for the Taka would have further appreciated undermining the competitiveness of Bangladeshi exporters. Through continued large amounts of purchases, Bangladesh Bank has succeeded in keeping the nominal exchange rate at around Tk. 77-78 per US$1.0.

In principle it is true that central banks may limit the movement of the exchange rate of the domestic currency or even may keep it fixed, and prevent its appreciation or depreciation in nominal terms due to market forces for a certain period. However, what the central banks cannot control is the movement of the real exchange rate or the real effective exchange rate, which really matters for export competitiveness. Central banks can control either the nominal or the real exchange rates and certainly cannot control both. This is particularly the case when the country’s inflation rate is different from its trading partners. Accordingly, in the case of Bangladesh, the Real Effective Exchange Rate (REER) appreciated significantly during FY12-14 due to inflation differentials with Bangladesh’s trading partners (Table 3.11).

Table 3.11:

Real Effective Exchange Rate Index; 2000-01=100

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Source: Ministry of Finance and Bangladesh Bank.

Managing the exchange rate is a delicate balancing task, and by allowing the rapid buildup of external reserves, Bangladesh Bank has simply prevented a further significant nominal appreciation of the domestic currency which could have negative impacts on exports. However, the underlying real effective exchange rate has already significantly appreciated although so far that appreciation appears to have no major negative impact on Bangladesh’s export performance. The REER has already appreciated to 99.7 in FY13 from a recent low of 89.4 in FY11 following the nominal depreciation of the currency in that year. The REER in all likelihood might have crossed 100 by end-December 2013. Bangladesh Bank should take this issue into account in formulating its exchange rate policy and may consider adopting either a more aggressive stance on its fight against inflation or allow for a nominal depreciation of the currency over time in line with inflation differential over the medium term.

Near Term and Medium Term External Sector Outlook: Defying all odds Bangladesh RMG sector is expected to march forward consolidating its relative position in the global economy. Bangladesh’s RMG exports to the EU and US market has increased in both volume and value terms during most of these years including in FY14. This trend is expected to continue hence the export growth is expected to remain robust as the RMG sector will be playing the dominant role. Looking forward, managing the RMG sector safety, working condition and labor rights issues should remain priorities for sustaining such strong export growth as predicted in the revised MEF. Remittance growth has been falling and turned negative since the second half of FY13 as the outflow of workers continued to decline due to migration restrictions in some Gulf countries. Remittances are expected to remain weak in FY14 and the current account is projected to remain in surplus in FY14. Assuming some reopening of the traditional markets in the Gulf region and access to new markets, remittance growth is expected to normalize from FY15; demand for migrant labor should improve driven by expected infrastructure investments in the Gulf countries.

To conclude, looking beyond FY14 the outlook appears somewhat more comfortable in terms of export growth, current balance and the overall BOP position. The sustainability of the external balance will depend on addressing RMG and remittance related challenges. Export is expected to grow at an average of about 14.4% for the next five years (FY14 –FY18) as the RMG industry upgrades both factory and labor standards. Remittance flows, as mentioned earlier, are expected to increase from FY15 reaching 12% growth thereafter. This outlook is based on the assumption that improved demand for Bangladeshi labour with the relaxation of restrictions in Saudi Arabia, UAE and Kuwait, would be made possible by intensified economic diplomacy. Failure to act in time on RMG standards and on the legal status of Bangladeshi workers in GCC countries, combined with a pick-up in import growth due to a recovery in private investment demand, may quickly change the external sector outlook in terms of current account and overall balance of the BOP.

E. Implementation of Fiscal Policy during the Plan period, FY11- FY15

Prudent fiscal management has always been the cornerstone of Bangladesh’s success in maintaining macroeconomic stability. Some of the important features of fiscal management were: (i) in the first three years of the Plan period, the overall fiscal deficit always remained significantly below the 5% of GDP mark despite a sharp increase in the overall level of fiscal spending; (ii) revenue performance was very impressive in first two years of the Plan period (FY11-FY12) and helped sustain fiscal expansion while containing the fiscal deficit; (iii) capital spending measured in terms of ADP implementation increased every year in relation to GDP; and (iv) in line with government’s commitments to provide greater coverage and improved quality of public services including social protection, the size of the government spending was increased (in terms of government spending as percent of GDP) significantly.

Table 3.12:

Summary of Fiscal Operations, FY10-FY15

(In billion Taka)

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Source: Ministry of Finance and Bangladesh Bank

In the midst of these gains, through prudent debt management policy public sector debt and in particular external debt burden in relation to GDP and external debt service ratios continued to decline steadily (Figure 3.6 and 3.7).

Figure 3.6:
Figure 3.6:

Total Debt and External Debt

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Ministry of Finance
Figure 3.7:
Figure 3.7:

Total and External Debt Service

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Ministry of Finance

Looking forward, the outlook for public debt and debt service is expected to remain favorable over the medium term. While total debt and debt service burdens are expected to remain broadly unchanged at the current comfortable levels, the share of domestic debt and domestic debt service would continue to increase along with a continued decline or stable external debt and debt service ratios over the medium term. A similar medium-term debt and debt service outlook is also reported in the IMF/World Bank joint debt sustainability exercise prepared in the context of the IMF Article IV Consultation Staff Report, 2013.

Developments in NBR Revenue: Financing of public sector spending under the Plan was greatly facilitated by the strong revenue performance in the initial years of the Plan. Supported by buoyant economic growth and domestic demand, NBR revenue exceeded the budget targets for FY10-FY12, despite quite ambitious targets set in the budgets in line with the Plan. Revenue enhancing reforms and broadening of the tax base through withholding mechanisms—particularly in the areas of direct tax and domestic VAT–also helped realize and exceed the revenue targets.

Revenue from VAT, which is the most important revenue source for Bangladesh, grew by 20 % per year during FY10-13 primarily due to a very impressive performance in the domestic VAT front. Direct taxes continued to remain strong through the Plan period due to expanding economic base and widened withholding mechanism. This success in the first three years of the Plan period was achieved without the benefit of major reforms in these two key areas. VAT law has been enacted and preparations are underway to modernize VAT administration and procedures. Reform of the direct tax law and modernization of its administration is also under consideration. Once these reforms are in place and fully implemented, the tax to GDP ratio is likely to grow significantly.

Figure 3.8:
Figure 3.8:

NBR Tax Revenue

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Ministry of Finance
Figure 3.9:
Figure 3.9:

NBR Revenue Relative to Budget Targets, FY11- FY14 (Jul-December)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Ministry of Finance

Revenue performance however has suffered a setback in FY14 due to slower economic activity and negative impacts on the private sector demand due to prolong political disturbances in the first half of FY14. At the beginning of FY14, the government had set an ambitious NBR revenue target of Tk. 1,360 billion which was 22% higher than the revised estimate for FY13. In the event, the NBR revenue shortfall in FY13 compared with the revised estimate was about Tk. 3.5 billion, which implied that the NBR revenue target for FY14 was 25.9% higher than the actual FY13 level. This would have been a very challenging task under normal circumstances, but the economic slowdown and shutdowns due to political disturbances made it impossible for NBR to achieve the target. Accordingly, the NBR revenue target has been reduced.

Experience with tax revenue mobilization under the Plan indicates that while there is huge potential for collecting tax revenue, it would require NBR to accelerate reforms in the tax system and tax administration for the NBR to regain and support the growth momentum in the VAT and direct tax systems. As noted, progress has already been made in the area of VAT reforms and the Government is also contemplating reforms of income taxes. Given the revenue outlook for FY14, acceleration of these reforms assumes fundamental importance. All kinds of support (both financial and political) will be key to NBR’s success in implementing these reforms.

Near- and Medium-Term Outlook: The overall fiscal deficit (excluding grants) may still turn out to be broadly in line with the target established in the budget in FY14, but in many respects the budget will fall short of meeting its other core objectives. In particular, the overall size of government spending will not increase as much as envisaged because of cuts in total spending. Fiscal management from the financing side also appears comfortable but there will be need for serious cuts in spending if the emerging large and growing revenue shortfalls are taken into account. Under these circumstances the overall fiscal deficit (excluding grants) is expected to increase by up to 0.4-0.5 percentage point to 5.1% of GDP in FY14. Taking into account the government’s commitment and performance in recent years, the overall fiscal deficit is expected to hover around 5% of GDP in the final year of the Plan (FY 15). Domestic sources, mostly banks, are expected to cover more than two-thirds of financing.

The tax-to-GDP ratio is projected to remain flat at about slightly more than 10 percent of GDP between FY12 and FY14, with a decline of revenue from import-related taxes offset by gains in income taxes and domestic VAT. The revenue to GDP ratio is projected to increase slightly in FY15 and then more decisively beyond the Plan period with the launch of the new VAT system at the beginning of FY16. Reform of the direct tax law and modernization of its administration is also under consideration. However, several of the reforms envisaged in the Tax Modernization Plan – such as reorganizing the entire National Board of Revenue along functional lines (which has typically been associated with considerable efficiency gains in the administration), have met with considerable resistance internally. A more gradual approach might be more feasible, but the NBR should remain committed to the full implementation of the Tax Modernization Plan and its objectives if the revenue potentials are going to materialize. Once these reforms are in place and fully implemented, the tax to GDP ratio is likely to grow significantly.

Implementation of the Public Investment Plan, Including the Annual Development Programme (ADP): Implementation of public investment including the ADP has always been a major challenge for Bangladesh. Implementation challenges have multiple aspects: (i) increase the size of the ADP to meet the growing infrastructure needs of the economy; (ii) slower implementation rate during the first half of the fiscal year; (iii) while the implementation rate picks up significantly in the second half of the year, the pace is unusually high in the final quarter; (iv) utilization of foreign aid always significantly lags behind the utilization rate for domestically financed resources; and (v) due to the unusual rush for spending in the final quarter, there is scope for inappropriate use of ADP funds.

Public investment in Bangladesh declined to levels below 5% of GDP in the years preceding the SFYP, contributing greatly to the widening/deteriorating infrastructure gap/deficiency in Bangladesh. The Plan aims to change this situation by increasing significantly public sector investment through increased allocation to the ADP, better utilization of ADP resources and implementation of an ambitious public-private partnership programme focused in infrastructure. Significant gains have been made in the area of ADP allocations, but progress has been weak in mobilizing PPP investments. As a result, total public investment rate is significantly lower than the Sixth Plan targets (Table 3.13).

Table 3.13:

Public Investment as % of GDP

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Source: Sixth Plan and Ministry of Finance

Notwithstanding the significant increase in ADP size over the Plan period, the implementation rate also recorded progress. Early release of fund by the Ministry of Finance, better coordination among implementing agencies and development partners, and close monitoring at the line ministry and government levels helped improve the implementation capacity. A comparison with the original ADP target however indicates that there is scope for further improvement in both ADP formulation and its implementation since the pace of implementation in terms of original (budgeted) ADP is still not up to the mark reaching a peak of 91% in FY13.

Figure 3.10:
Figure 3.10:

ADP Utilization rate as % of ADP and Revised ADP (RADP)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Ministry of Finance

In particular, the ultimate size of ADP and its utilization rate is likely to decline in FY14. Until January 2014 only 33% of the budgeted ADP has been implemented. This pace is 5 percentage points lower than the level achieved during the corresponding period last fiscal year. While the ADP implementation will likely accelerate in the remainder of the fiscal year, the large and growing NBR revenue shortfall will essentially force the government to cut significantly the overall size of the ADP in FY14.

Improvements in the Gap between Commitment and Disbursement: From the mid-nineties till FY2004, there were substantial gaps between the amount of aid commitments made by the development partners and the actual amount disbursed. Such pronounced and prolonged under-disbursement of committed aid was indicative of bottlenecks in the disbursement of development assistance linked to both constraints on delivery systems and limitations on absorptive capacities. Notably, due to improvements in policy and practice, the gap between the amount committed and what is actually disbursed has diminished significantly in the recent years (Figure 3.11). This improved situation has been maintained during the Plan period despite significantly higher levels of commitments and utilization. This is a commendable positive development. Nevertheless, there is still a substantial unutilized foreign aid pipeline that can be better utilized with improved efforts.

Figure 3.11:
Figure 3.11:

Foreign Aid Commitment & Disbursement (Million USD)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Economic Review, Ministry of Finance

The evaluation of performance through comparing disbursement of foreign aid of a particular financial year with commitment achieved of that year may be a debatable issue. Commitment of foreign aid for a particular project does not mean a disbursement of the whole committed amount in the year in which it is committed. Rather a commitment is a plan to utilize foreign aid within the life span of the project. Thus, the mismatch between disbursement and commitment for foreign aid of a particular financial year is obvious. ERD opines that commitment is more of an issue of resource mobilization while disbursement is related to project implementation. Performance of resource mobilization has improved considerably during last few financial years. In the last three financial years, a foreign aid amounting to 16.58 billion USD has been committed. As a result, the amount of foreign aid in the pipeline has shot up.

Various challenges both from GoB and DP slow down the speed of implementation of the project and it suffers planned disbursement of the foreign aid. However, disbursement of foreign aid increased in last two financial years which are reflected from the nominal growth rates of 19.68% in FY 2011-2012 and 32.19% in 2012-2013 from corresponding previous year.

F. Inflation and Monetary Management

Despite a surge in inflation in the initial year of the Plan, Bangladesh Bank’s tightening of monetary policy stance and favorable domestic supply situation have helped bring down the inflation rate to 7-7.5% in recent months. While food inflation still remains high and has also increased in recent months, weak domestic demand has helped contain non-food inflation.

Figure 3.12:
Figure 3.12:

Average Inflation (Base Year 1995/96)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank

An accommodative money/credit policy adopted by Bangladesh bank since early FY10 had contributed to a rapid acceleration of credit growth and liquidity expansion (measured in terms of broad money). Private sector credit growth surged to 29% from normal growth rates of 18-19%, and broad money expansion also exceeded significantly the targets established by Bangladesh Bank. The policy of maintaining a cap on private lending rate at 13% and keeping the exchange rate virtually fixed in the interbank market despite surging domestic demand pressures contributed to the surge in inflation and to formation of asset price bubbles. Stock prices and land and real estate prices all surged to unprecedented high levels setting the stage for major corrections in all these markets. Government in order to stabilize the capital market has taken some long term measures including demutualization of the exchanges introducing surveillance software to monitor any wrong play etc.

Figure 3.13:
Figure 3.13:

Private and Public Sector Developments in Credit Expansion

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank

Following the stock market correction, and in response to the growing balance of payments pressures in FY11-12, Bangladesh Bank started to move away from its accommodative monetary policy to a more prudent stance in FY12. Bangladesh Bank’s Monetary Policy Statement (MPS) of January 2012, made an explicit departure from its past policy stance by stating to “pursue a restrained monetary growth path consistent with curbing inflationary and external sector pressures, while ensuring adequate private sector credit to stimulate inclusive growth.” Following several years of significant deviations between the announced MPS targets and their implementation, due to an “accommodative” monetary policy, BB started effective implementation of monetary tightening measures beginning January 2012 and broadly achieved the monetary targets for FY12 and FY13. The MPS of July 2013 and January 2014 essentially maintained the monetary policy stance of the preceding years and aimed to bring the average inflation down to 7% using the 1995/96 base or 6-6.5% using the 2005/06 base.

Table 3.14:

Monetary Policy and Outcome

(Growth rates %)

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Source: Bangladesh Bank

The shift to a tighter monetary stance and strong efforts in adhering to the quantitative monetary targets were clearly visible in terms of Bangladesh Bank’s success in achieving all major quantitative monetary targets. Bangladesh Bank even had to resort to sterilization operations to absorb the excess liquidity injected due to a much faster buildup of net foreign assets (NFA). Inflation rate started to come down in response to this tighter monetary stance along with marked strengthening of the balance of payments, which is also reflected in the rapid buildup of NFA.

Figure 3.14:
Figure 3.14:

Recent Monetary Policy Targets Vs Actual

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: Bangladesh Bank

In recent months, inflation has been moving in a relatively narrow range of 7%-7.5%, somewhat higher than the 7% established by the government and Bangladesh Bank. At its recent best, inflation came down to 4.96% in September 2012 supported by subdued domestic demand, stable global prices of basic commodities like petroleum and cereals (rice and wheat in particular), relatively cheaper imports from India due to the recent depreciation of Indian rupee, and prudent management of monetary policy have contributed to this outcome. In more recent months domestic inflation however has shown an upward trend driven by an acceleration of food inflation. At the moment the increased food price inflation appears to be primarily the result of supply disruptions caused by political unrest, although the increase in rice prices may be there to stay. In particular, rice prices have gone up by [6%-16%], according to data reported by the Trading Corporation of Bangladesh (TCB). Volatility in the prices of some other food products like onions, vegetables and imported food items because of supply disruptions also helped fuel food price inflation in recent months.

Non-food inflation however has been decelerating steadily and dropped to its recent low of 4.9% in December. Restricted movement and store openings, a sense of insecurity, and concerns about the near-term outlook have dampened demand for non-essential products, thereby helping the reduction of non-food inflation. The stance of monetary policy and the continued exchange rate stability have also played important supporting roles in this regard (see below).

Figure 3.15:
Figure 3.15:

Point to Point Inflation

(Base Year 2005/06)

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: BBS

Looking forward, the near-term outlook for inflation will be influenced by the prospects for the boro crop and the inflationary environment in India which is a major commodity sourcing country for Bangladesh. This concern notwithstanding, the mitigating factors are that: (i) global supply situation for rice and wheat is very comfortable; (ii) following a very good monsoon, India has recorded bumper rice and wheat crops; (iii) the price of rice in Bangladesh is already above that of India allowing importers to make profit by importing rice from India; and (iv) the exchange rate of Bangladesh taka against the US dollar is expected to remain stable in the near term.

Looking forward, there is no scope as well as need for easing BB’s monetary policy stance because of the upward pressure in the inflation rate in most recent months and the expected emergence of wage push inflationary pressures in the coming months. There is enough liquidity in the money market to support a pickup in the post-election economic rebound if that really happens. The monetary policy stance should at the same time guard against potential inflationary pressures which may arise from the large wage increases across the public sector, the RMG sector, the EPZ enterprises, and their impact on all other sectors of the economy. Monetary policy will not accommodate such potential inflationary pressures, rather the stance should be to offset their inflationary impact and strive for lowering the rate of inflation to 6-6.5% range set in the MPS. In its most recent MPS of January 29, 2014 Bangladesh Bank has essentially announced such a monetary policy stance with renewed emphasis on inflation fighting.

Chapter 4

Sectoral Growth Performance

A. Introduction

As noted in Chapter 2, the Sixth Plan growth and employment strategy was based on supporting a major transformation of the structure of GDP away from an agriculture-based and informal services dominated economy towards a more modern manufacturing and formal services based economy. The Chapter showed that some significant progress has been made in increasing the GDP and employment shares of manufacturing, but the progress falls short of the target in the Sixth Plan. This Chapter looks at the evolution of the sectoral growth performances in some detail. It highlights related policy progress and identifies areas where further efforts are needed.

B. Manufacturing Sector Performance

Manufacturing in a Changing Global Landscape

Both historical and cross-country evidences show that the prospects of rapid GDP growth with extensive job creation require a high-performing and diversified manufacturing sector at the early stages of the take-off period. Bangladesh faces an ever changing global landscape in which manufacturing sector development takes place. Four distinct phenomenon characterizes the global setting: (a) globalization and greater trade openness, which has resulted in the greater integration of the Bangladesh economy with the global economy, an integration that has yielded many benefits but also poses many challenges; (b) to be globally competitive, a high performing manufacturing sector must have reached a high level of industrial sophistication meeting internationally recognized standards of product quality within a compliant production environment; (c) technology has emerged as the key resource and input for industrial growth and development; and (d) fragmentation of production and vertical integration across countries through trade in intermediate goods is fast becoming the dominant trading pattern. It is in this backdrop that Bangladesh would need to transform its manufacturing sector into a more vibrant, dynamic, and competitive industry ready to seize opportunities in the global marketplace and cope with emerging challenges. For this purpose, addressing institutional and policy challenges has come a national imperative if the long-term goal of attaining middle income status is to be reached.

The manufacturing sector strategy under the SFYP took these global phenomenon and challenges into account in setting the course for rapid expansion of a globally competitive export-oriented sector. Relative to targets, manufacturing sector performance in the first three years of the

Plan was the best among sub-sectors, despite heavy odds stemming from sluggish global economic recovery and headwinds posed by disruptive politics domestically.

Past Trends in Industrial and Manufacturing Sector GDP Growth

Although the vestiges of state-owned enterprises in manufacturing still remained at the turn of the century, primarily in jute and cotton textiles, the leading role of the private sector as the driver of economic activities came to be firmly recognized in the formulation of policies. This has yielded good results for the manufacturing sector in the arena of exports, domestic production, and job creation (Table 4.1)

Table 4.1:

Average Decadal Sectoral Growth Rates

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Source: National Accounts, BBS

Growth acceleration that occurred since the 1990s revealed that the economy had inherent strength to grow faster if policies and institutions were set right. It also revealed that the manufacturing sector was the driver of higher growth, because the Agricultural Sector was still unable to come out of the “low productivity” syndrome with growth typically averaging well below GDP growth (Table 4.1, Fig. 4.1).. Furthermore, keeping in step with the stylized facts of structural transformation in the course of development, industry – in which manufacturing is predominant - traditionally grew faster than GDP and is expected to continue to lead growth acceleration for many years to come, or until such time as the two most dynamic components of the service sector - ICT and telecom - are large enough to determine growth outcome.

Figure 4.1:
Figure 4.1:

Sectoral Growth Trends

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: National Accounts, BBS

The stylized facts of development predict structural transformation in which the share of industry in GDP rises to compensate for the decline in the size of agriculture. Bangladesh has experienced essentially this pattern of structural change (Fig.4.2).

Figure 4.2:
Figure 4.2:

Trends in Sectoral Share of GDP FY80-13

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: National Accounts, BBS

Manufacturing, which accounts for 70% of industry, has been driving structural transformation. It is notable that Bangladesh has some way to go in its industrial expansion stage while many developed or newly industrialized countries (e.g. China, Malaysia, South Korea) have reached the phase of what economists describe as “deindustrialization” that is characterized by the share of manufacturing in GDP declining or remaining stagnant (Table 4. 2).

Table 4.2:

Cross-Country Comparison of Manufacturing Performance

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Source: World Development Indicators, World Bank & BBS National Accounts
GDP Growth Targets for Industrial and Manufacturing Sector in the Sixth Plan

The Sixth Plan targeted an increase in the industrial sector’s GDP share from 28.5% in FY10, to 32 % in FY15, and to 40% by FY21, with the share of manufacturing in GDP, rising from 17.9% in FY10, to 21.1% in FY15, and 30% in FY21. The share of manufacturing employment was to expand from 12% to 16% and 25% percent over the same periods4.

At the aggregate level the industrial and manufacturing sectors have both performed well during the first three years (Table 4.3). During the first three years of the Sixth Plan the industrial sector expanded by 8.7% per year while the manufacturing sector grew by 9.4% per year. In order to support the SME activities, Bangladesh Bank has established a refinancing window which includes Tk 600 crores coming from BB, $125 million equivalent from the ADB, and Yen 5000 million by JICA. So far, out of this fund Tk. 3,456 crore has been disbursed as long term loans, and a total of 41,951 entrepreneurs (including 9,612 women entrepreneurs) have received funding from this refinancing facility. Apart from that, different financial institutions are also specifically focusing on cluster based SME programs.

Table 4.3:

Performance of Industrial and Manufacturing Activities Relative to SFYP Targets

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Source: Sixth Five Year Plan and BBS

These are solid performance compared to the past and are broadly in line with the Sixth Plan strategy.

Within the industrial sector, manufacturing performed best (Table 4.4). The construction sector grew at slightly higher pace than GDP, but fell short of the Sixth Plan target. Overall, the picture that emerges is a solidly performing industrial and manufacturing sector, but somewhat below the planned rates of growth.

Table 4.4:

Industrial Sector Performance, FY10-13

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Source: BBS

A detailed review of manufacturing sector performance shows that large and medium scale manufacturing along with RMG exports have dominated the performance of this sector (Table 4.5). The growth performance of small scale manufacturing enterprises remains lack luster. As well, RMG exports continue to dominate manufactured exports. The RMG sector has also been supported by the contribution of the Primary Textile Sector (PTS), which provides strong backward linkage for the RMG sector. Its share has grown further, reaching almost 80% in FY13. While the expansion of large scale manufacturing and RMG exports are welcome development, the sluggish performance of small scale manufacturing enterprises and the lack of export diversification are worrisome and need serious policy attention. International evidence shows that small manufacturing enterprises can be a major source of employment outside agriculture and can provide the bridge between agriculture and modern manufacturing.

Table 4.5:

Manufacturing Sector Performance, FY91-FY13

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Source: BBS and Bangladesh Bank.
Issues and Challenges for the Manufacturing Sector

A whole host of factors affect the performance of the manufacturing sector including external sector developments, the domestic political environment and policy and institutional issues. These factors are briefly reviewed below.

Challenges from global economic developments

Bangladesh economy now is much more integrated with the global economy than in the past. Although financial sector linkage with the global financial system was minimal (under 1% of GDP during FY11-13), linkage through trade has been rising significantly, from 19% of GDP in FY90 to about 50% in FY12. Exports picked up pace from 1990 onward with Export-GDP ratio rising from a mere 6.5% in FY90 to 12% in FY00, and averaging 20% in FY11-13. Exports are a function of global income; hence, fluctuations in global economic fortunes now tend to have a significant impact on Bangladesh’s economic performance via commodity trade.

Thus, in the context of evolving interconnectedness with the global economy, global economic trends and outlook are of relevance in evaluating progress in Bangladesh’s Plan implementation, particularly with regard to the manufacturing sector which contributes 95% of exports. During the first three years of the SFYP, the global economy appeared to be on a roller-coaster ride following the financial crisis and the Great Recession of 2007-09. Table 4.6 presents these trends and outlook for the near future captured by two key economic indicators of great relevance to the Bangladesh economy: World Output Growth and World Trade Growth. These trends show that Bangladesh faced a global economy that was generally slowing down, both in terms of output and trade.

Table 4.6:

Global Economic Trends and Outlook

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Source: IMF, World Economic Outlook, October 2013

The following are significant developments in the global economy that have implications for manufacturing sector performance during SFYP and, in the ultimate analysis, impinge on Bangladesh’s economic performance as well as future outlook:

  • Global economic recovery from the Great Recession has been sluggish as at end 2013 but apparently recovering up again.

  • Europe came under the spell of a Eurozone Crisis stemming from unsustainable debt burdens of countries like Greece, Spain, Portugal, and Italy. With the exception of Germany, economies of the EU showed anemic recovery at best, while some economies faced unemployment rates well over 10%.

  • The US economy has been showing signs of a decent pick up with annual GDP growth hovering between 2-3% after 2010 and unemployment declining from over 8% to under 7% in 2013.

  • After a heady pace, growth momentum has slowed in various emerging market economies, notably Brazil, China, and India. China, in particular, is looking at below historical double digit growth rates and rebalancing of demand from external to domestic sources.

  • Bangladesh is now recognized as a major global player in the RMG export market. After China, Bangladesh has become the second largest exporter of readymade garments in the world. Roughly 90% of its garment exports are destined for US and EU markets though Bangladesh exporters are breaking into new markets like Australia, China, India, etc.

All this reflects a weaker external environment for the globally inter-connected Bangladesh economy. In the face of these anemic trends in the global economy, the World Bank and other international agencies described Bangladesh’s recent growth performance resilient in the face of global shocks and above the average growth rates in South Asia, East Asia and the Pacific, though still below potential.

While the Recession of 2007-09 had strong negative effects on Bangladesh’s export performance, recent experience shows that even a slow recovery in the US-EU economies is enough to push up Bangladesh exports.

Challenges stemming from domestic political environment

Since the return to pluralistic democracy in 1991, economic performance has been relatively better than in the previous two decades, proving that democracy is not inimical to economic progress. Yet, political uncertainties tend to heighten as election approaches. While political difficulties and work stoppages have an adverse effect on economic activities, especially those located in urban areas (manufacturing, construction, trade and transport, primarily), the impact of this was not felt substantially in FY12-FY13. They could, however, likely cause difficulties for growth results in FY14.

Institutional and policy constraints

The SFYP target of reaching 8 percent annual GDP growth in the outer years was premised on a prolific manufacturing sector growing at double digits on a sustained basis. A strong and competitive manufacturing sector was especially important for creating productive high income jobs in the formal sector of the economy. This clearly required addressing several institutional and policy constraints that were identified in the SFYP document:

Quite apart from the global economic scenario and domestic political developments, the success of SFYP, at its mid-point as well as beyond, in achieving performance targets for the manufacturing sector depends on how well certain institutional and policy constraints are addressed. Below is a brief review of their status.

1. Weak Investment Climate

Chapter 2 pointed out the shortfalls in public and private investment rates in the first three years of the SFYP. It showed that a primary reason for the lower-than-expected increase in private investment is the continued weakness in the investment climate. The inability to attract adequate foreign private investment and the better performance of FDI in neighboring countries is a reflection of this. The Government needs to address this challenge much more comprehensively in order to further spur the growth of manufacturing to reach double digit rate.

2. Anti-export Bias of the Trade Regime

Manufacturing development requires the support of the right industrial and trade policies. This was recognized in the analytics of the SFYP. Industrial Policy 2010 guided the first year implementation of the SFYP strategy for deepening of industrialization in Bangladesh and laid the foundations for a dynamic manufacturing sector and robust export growth by providing a policy and institutional framework to create and sustain the momentum of accelerated industrial growth and employment generation. Special emphasis was placed on rejuvenation of small and medium enterprises (SMEs), in addition to the traditional highlight on a list of thrust sectors, which was formulated on the basis of past performance.

With regard to trade policy, the SFYP did recognize the imperative of reducing anti-export bias. But so far there has been little or no progress in reducing anti-export bias during FY11-13. Indeed, if anything, there was further deepening of the bias as becomes clear from the analysis of trends in nominal (Table 4.7) and effective protection (Table 4.8). Apart from pharmaceuticals whose domestic price is controlled in lieu of the fully protected domestic market, effective rates of protection (ERP) average more than 200% for most import-competing domestic industries when ERP for export products is zero or modestly negative. During FY11-13, while average NPRs increased, those for intermediate inputs and capital goods declined further, thus raising ERPs (Figure 4.3).

Table 4.7:

Nominal Protection Trends

(FY 10-FY 13)

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Source: Based on NBR Asycuda database
Table 4.8:

Range of ERPs and Average ERPs 2012

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Source: GED Estimates based on industry survey
Figure 4.3:
Figure 4.3:

Average Tariff on Import Categories FY10-13

Citation: IMF Staff Country Reports 2015, 305; 10.5089/9781513530451.002.A001

Source: NBR Tariff database

The policy question is that if such asymmetrical incentives persist, it is difficult to understand how non-RMG exports could expect to reach the kind of heights that was attained by RMG in the global market. As the study of both nominal and effective rates of protection reveal, the current trade policy stance, while allowing a free trade regime to the RMG sector, essentially perpetuates the high degree of protection support to domestic (import substituting) industries, at the expense of emerging and potential export industries which are driven to import substitute production due to their relatively higher profitability. Continuation of this stance might prop up current profitability of import substituting firms, including that of many that might be uncompetitive or inefficient. But import substitute production catering to the domestic market cannot alone create jobs for the two million people added to the workforce each year.

High ERPs typically indicate latent inefficiency in firms which tend to perpetuate over time. It is then economically efficient to switch resources away from high ERP (processing margin) activities to lower ERP activities