The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific.

The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific.

Preamble

Bangladesh and the Asian Development Bank are related to each other since 1973. From the establishment of this relation the ADB is performing quite well in this country. Basically the ADB is providing help to its member countries to eradicate poverty and to improve the lifestyle of the inhabitants of those countries. To fulfill their objectives, the ADB provides financial helps through various types of loans to the member countries. But sometime the internal problems of the member countries make some hindrances toward the developing projects of the ADB. The target of this paper is to explore the contribution of the ADB to the economic development of Bangladesh and it will provide a guideline to what should the government do for the better performance of the ADB in Bangladesh. Here, chapter 1 will explain the all about of the ADB, in Chapter 2 the performance of the ADB will be showed, chapter 3 will provide the information about the economy of Bangladesh after the involvement with the ADB and the future of the ADB Bangladesh relation as a concluding remarks will be stated in chapter 4

Objectives:

The objective of this paper is to explore the activities of the ADB in Bangladesh and to explore that how Bangladesh tries to manage the economic condition of this country with the association of the ADB. To this purpose we will also try to explore that what should Bangladesh do for the betterment of the relation with the ADB.

Limitation:

The paper is written on the basis of the web based information as it was not possible to collect information from the primary sources. The local offices in Bangladesh could not provide us the necessary information regarding this topic. Even the officials he Bangladesh could not help us to get the correct the information.

Methodology

The information is collected from the secondary sources like local offices in Bangladesh like the World Bank, Bangladesh Bank. Maximum information is collected from internet The both qualitative and quantitative approaches are used here.

Chapter 1

The content of the Asian Development Bank From Wikipedia, the free encyclopedia

Preface of the ADB

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The Asian Development Bank (ADB) is a regional development bank established in 1966 to promote economic and social development in Asian and Pacific countries through loans and technical assistance. ADB’s vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens.

The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the world are poor.

The members of the ADB

It is a multilateral development financial institution owned by 67 members, 48 from the region and 19 from other parts of the globe. Holders of the ADB are Japan and USA, each holding 12.8% of the shares. At the time a country ceases to be a member, the Bank shall arrange for the repurchase of such country’s shares by the Bank as a part of the settlement of accounts with such country in accordance with the provisions of paragraphs 3 and 4 of this Article.

Taiwan initially joined as “Republic of China” as a founding member representing the whole of China. However, its share of Bank capital was based on the size of Taiwan’s capital, unlike the World Bank and IMF where the government in Taiwan had had a share representing the whole of China prior to the People’s Republic of China joining and taking Taiwan’s seat. In 1986, a compromise was affected when the People’s Republic of China joined the institution. Taiwan was allowed to retain its membership, but under the name of Taipei, China — a name it protests. Uniquely, this allows both sides of the Taiwan Straits to be represented at the institution.

The working body of the ADB

The highest policy-making body of the bank is the Board of Governors composed of one representative from each member state. The Board of Governors, in turn, elect among themselves the 12 members of the Board of Directors and their deputy. Eight of the 12 members come from regional (Asia-Pacific) members while the rest come from non-regional members.

The Board of Governors also elects the bank’s President who is the chairperson of the Board of Directors and manages ADB. The president has a term of office lasting five years, and may be reelected. Traditionally, and because Japan is one of the largest shareholders of the bank, the President has always been Japanese. The current President is Haruhiko Kuroda.

The headquarters of the bank is at 6 ADB Avenue, Mandaluyong City, Metro Manila, Philippines, and it has representative offices around the world. The bank employs approximately 2,400 people, coming from 53 of its 66 member countries, and with more than half of the staff being Filipino.

Annual lending project of the ADB

ADB’s annual project lending amounts to about US$7 billion per year with lending per project being in the $100 million range.

§ Afghan Diaspora Project

§ Funding Utah State University led projects to bring labor skills in Thailand

§ Earthquake and Tsunami Emergency Support Project in Indonesia

§ Greater Mekong Sub regional Program

§ PRC Ping Hu Offshore Oil and Gas Development

§ Solar energy development funds in India

§ Strategic Private Sector Partnerships for Urban Poverty Reduction in the Philippines

§ Trans-Afghanistan Gas Pipeline Feasibility Assessment

Project evaluation of the ADB

All projects funded by the Asian Development Bank are evaluated to assess their development effectiveness. There are two levels of evaluation—self evaluation and independent evaluation. All projects are self-evaluated by the relevant ADB operations department in a project completion report. ADB’s project completion reports are publicly disclosed and are available on ADB’s Internet site. Client governments are also required to prepare their own project completion reports. A proportion of completed projects are also evaluated by ADB’s Operations Evaluation Department (OED). This department reports directly to the Development Effectiveness Committee of ADB’s Board of Directors. It does not report to ADB Management and so its reports are considered to be independent. All OED reports are publicly disclosed (some evaluations of private sector operations are redacted to protect commercially confidential information). The reports are available on OED’s website. Evaluation is carried out to facilitate learning from past successes and failures, and for reasons of accountability.

Increasingly, OED evaluates ongoing operations (particularly in country and sector program evaluations) and conducts a range of special studies on thematic topics and ADB policies. Evaluations are conducted in accordance with guidelines and a conflict of interest policy. Independent Evaluation atADB (2007) presents the evolving role of evaluation in ADB from the beginnings in 1978. Learning Lessons in ADB (2007) sets the strategic framework for knowledge management in operations evaluation.

Of the 1,062 ADB-funded projects evaluated and rated by OED (as of December 2006), 65% were assessed as being successful, 27% partly successful and 8% as unsuccessful.

The bank was founded as a regionally focused clone of the IBRD (World Bank), with the primary impetus coming from the US, Japan and Western European (especially Nordic and Germanic) governments. The bank has traditionally funded its lending activities by issuing supranational-rated bonds in the Euromarkets. For many years the bank was the only Asia-ex Japan issuer of Eurobonds. Although recent economic growth in many member countries have led to a change in emphasis to some degree, throughout most of its history the bank has operated on a project basis, specifically in the areas of infrastructure investment, agricultural development and loans to basic industries in member countries. Although by definition the bank is a lender to governments and government entities, it has also participated as a liquidity enhancer and best practice enabler in the private sectors of regional member countries. The primary human capital asset of the bank is its staff of professionals, encompassing academic and/or practical experts in the areas of agriculture, civil engineering, economics, public policy and finance. These professionals are drawn from all across the globe and given various incentives to relocate to Manila, including diplomatic status and tax-free incomes. It is conceivable that once all of Asia-Pacific reaches a certain level of living standard the bank will be wound down or reconfigured to operate as a commercial enterprise.

Chapter 2

ADB and the Economy of Bangladesh

Bangladesh joined the Asian Development Bank (ADB) in 1973 and, as of 31 December2008; cumulative public sector lending amounted to about $9.86 billion for 192 loans, with$183.16 million for technical assistance (TA) grants for 331 projects. The country is one of the largest borrowers of concessionary Asian Development Fund resources. The loans and TAs have supported all key sectors, including energy, transport, social infrastructure, agriculture, and natural resources. ADB has also supported eight private sector projects worth $242.18 million, including the Meghnaghat Power Project—the first build-ownoperat power project in the country—and Grameen Phone, which substantially expanded rural access to mobile phone services. In the late 1980s, ADB was primarily a lender for growth-promoting investment projects.

· GDP growth for BANGLADESH in current Fiscal Year from the perspective of the ADB

Bangladesh’s economy is expected to grow at a slower pace of 5.6 per cent in the current fiscal year as the global financial crisis starts to weigh on exports, remittances and government revenues, the Asian Development Bank (ADB) said in its latest forecast.

The prognosis came in the donor agency’s Asian Development Outlook 2009 (ADO 2009) released Tuesday where the ADB projected a further decline in GDP growth to 5.2 per cent in the next fiscal year as the effects of the global slowdown continue to weigh on the economy.

ADB country director Paul J Heytens at a press briefing on the occasion said Bangladesh was largely unaffected by the first-round fallout of the global economic crisis, mainly because of the limited exposure of the financial system to international markets.

However, the country is vulnerable to the second round of impacts of the global slowdown that could come through reduced export earnings, remittances, which are the main drivers of economic growth in Bangladesh according to him. Migrant workers are now returning from abroad in larger numbers and recent data suggest a sloth in the number of workers leaving Bangladesh for jobs overseas. The funding agency’s country chief also finds a growing nervousness among the country’s leading export industries as overseas shipments have also begun to slow.

These developments will have immediate implications for the country’s economic growth, employment and poverty situation, and will pose a major challenge for macroeconomic management, Heytens said, as his agency released the latest state of major indicators of Bangladesh’s economic health along with a pack of prescriptions.

In its economic outlook, the ADB said improved crop harvests will boost agricultural growth from 3.6 per cent in FY 2008 to 4.0 per cent in FY 2009 and to 4.1 per cent in FY 2010, but this upturn will be offset by slower export growth which will see industry output fall to 6.6 per cent in the current fiscal year and 6.0 per cent in FY 2010, down from 6.9 percent in FY 2008.

A further decline to 5.5 per cent is forecast for next year. Export growth alone is projected to fall from 15.7 per cent in FY 2008 to 14.0 per cent in FY 2009 and 13.0 per cent the next year.

With the global financial crisis spreading beyond the credit markets to the real economy, a slowdown in remittances is inevitable, the ADB report said. This year remittances are expected to grow 20.0 percent after a 32.4 per cent rise in FY 2008. In FY 2010, growth will slip further to 15.0 per cent.

The report notes that government revenues have begun to ease in recent months, and a crisis-induced slowdown in private-sector activity could further impact on the revenue collection. In addition, cuts in customs duties agreed for the FY 2009 budget, and lower international commodity prices, will weigh on import receipts. At the same time, the downward trend in global commodity prices will result in an easing of import payment growth from 25.6 per cent in FY 2008 to 18.0 per cent this year and 17.0 percent in FY 2010.

The upside of the slump in commodity prices is that inflation for FY 2009 is now projected at 7.0 per cent, significantly lower than the earlier estimate of 9.0 per cent. A favorable domestic supply environment will also ease price pressures this year, the report says. Next year, the inflation rate is expected to fall further to 6.5 per cent.

The donor agency suggests that new government should raise infrastructure investment and improve the enabling environment for private-sector activity, in order to enhance prospects for rapid growth and job creation. This, in turn, will require improved implementation of the annual development program (ADP) as well as strengthened revenue mobilization.

Bangladesh will need to address power and gas shortages to boost its growth prospects, and that must include steps to encourage more private investment, the ADB said in recommending the remedial measures.

The current global financial turmoil means fresh foreign investment in the sector will be more difficult to mobilize and so the Government must provide more from its own resources and tap external donor assistance. It will need significant new investment in roads, ports, and urban infrastructure and services, which will require improved implementation of its development-spending program and strengthened revenue mobilization. In its report, the ADB noted that in 2008 food security emerged as a major development challenge, and there is a clear need to boost agricultural productivity to both maintain affordable food prices and provide fiscally sustainable incentives to farmers. The ADO says Bangladesh needs to substantially raise investment, which has followed a downtrend in recent years, in order to enhance growth and job creation and thereby reduce poverty. Public investment must be raised, primarily by accelerating ADP implementation, but efforts to raise private-sector participation in infrastructure investment should also be made.

In a special advice for the new regime it says the government needs to pay attention to improving institutional capacities in its various agencies, both to implement reforms and strengthen development administration. Over the medium term, with climate change posing a major threat to growth, tackling such concerns needs to be integrated into economic development plans and activities.

The emerging shortages in gas and power supplies (over four fifths of power is generated from gas) need to be urgently addressed. Unless early remedial measures are adopted, power cuts and irregular electricity supplies will hamper domestic production and hold back medium-term growth prospects.

In the longer term, the lack of gas supplies would severely limit power generation and, therefore, new investment in manufacturing activities, the ADB said.

· ADB Assisting Bangladesh in Improving Irrigation Systems

MANILA, PHILIPPINES – A US$750,000 grant from the Asian Development Bank (ADB) will assist Bangladesh in implementing a planned multi-million loan project in 2010 that will improve irrigation services and further enhance the country’s water sector as a whole.

The grant, which was approved by ADB’s Board of Directors, will assess existing irrigation systems’ operations and maintenance planning, as well as their financing and implementation procedures, policy framework, institutional setup, and capacities.

Following the assessment, proposals will be made on new service agreements and alternative management models, including private-public partnerships and independent service providers that would manage and operate the systems.

The grant will address constraints uncovered by an ADB-supported technical assistance in 2005 meant to prepare the groundwork for a proposed $50 million loan project that will enhance the performance of major water management systems in Bangladesh. The loan is scheduled for approval in 2010.

The constraints identified in the previous ADB grant included the limited experience and skills of the government’s Bangladesh Water Development Board and local stakeholders in effectively operating and maintaining large-scale irrigation projects.

Another constraint is the inadequate operations and maintenance planning and funding that lead to the deterioration of irrigation systems.

Efficient and sustainable irrigation systems are central to boosting agricultural productivity and improving rural livelihoods. The majority, or 44%, of Bangladesh’s poor live in rural areas, which face low agricultural productivity and unreliable food supplies. Promoting agricultural growth is a crucial part of the government’s strategy aimed at food security and poverty reduction. Only around 4.5 million hectares out of the 8 million hectares of farmable land in Bangladesh is irrigated. The irrigated area contributes around 13 million tons of cereals, mainly rice. The total cost of the ADB-backed technical assistance is $880,000. The Government of Bangladesh will provide $130,000 to complete funding requirement for the project.

Chapter 3

Economic performance of Bangladesh after being involved with ADB

Growth prospects of Bangladesh are dimmed by the global economic slowdown, but inflation has eased with falling global commodity prices. The new Government should raise infrastructure investment and improve the enabling environment for private sector activity, in order to enhance prospects for rapid growth and job creation. This in turn will require improved implementation of the development expenditure program as well as strengthened revenue mobilization. Addressing power and gas shortages will be particularly important for enhancing longer-term growth prospects, especially in terms of encouraging private investment.

Present economic condition of Bangladesh

GDP growth at 6.2% was slightly lower in FY2008 (ended June 2008) than in the previous year, because of weaker growth in industry and agriculture. Industrial growth was pulled back by a dip in garment production in the first half of the fiscal year, as well as by higher raw material import costs and growing energy shortages. Natural disasters in the first half affected agricultural output. Growth in services was supported by expansion of transport and storage and of wholesale and retail trade.

On the demand side, growth continued to be driven by private consumption aided by an ongoing surge in remittances. Total fixed investment fell to 24.2% of GDP, reflecting a cut in the Government’s annual development program (ADP), and slower growth in private investment, caused partly by the uncertainty created by the Government’s anticorruption drive. While private investment rose marginally to 19.2% of GDP in FY2008 from 19.0% in FY2007, public investment fell from 5.5% of GDP to 5.0%. The fall in investment over the past 2 years is manifesting itself as surpluses in the current account, signaling the need to rebalance growth by boosting investment, while keeping the current account balance at manageable levels. The deficit in net exports of goods and services widened, slowing growth more than in FY2007. Average inflation accelerated from 7.2% to 9.9% in FY2008, on higher global food prices and shortfalls in domestic production. Higher public spending, rapid credit growth, and stronger demand boosted by remittances also contributed to inflation pressures. Inflation moderated in more recent months, declining to 6.1% year on year in January 2009 from 10.2% in September as food price rises steadily eased. Bangladesh Bank stepped up monetary expansion and private sector credit growth as the fiscal year progressed to sustain the growth momentum. The year-on-year expansion in money supply rose from 14.7% in December 2007 to 17.6% in June 2008, exceeding the central bank’s annual program target of 16%. Private sector credit growth accelerated from 16.8% to 24.9% in the same period, also overshooting the program target. Although stoking inflation pressures, the accommodative monetary stance helped improve goods availability by boosting imports and raising domestic supply. In conducting monetary policy, the central bank kept reserve requirements, liquidity ratios, and the main policy rate (reverse repo) unchanged in FY2008, relying more on open-market operations to constrain liquidity. The weighted average yield on 28-day Treasury bills was 7.5% in June 2008, marginally higher than the 7.3% in June 2007. The reverse repo and repo rates (1–2 day maturity) were unchanged at 6.5% and 8.5%, respectively, from December 2007 through June 2008. The weighted average lending rate declined from 12.8% in June 2007 to 12.3% in June 2008, and the weighted average deposit rate of 7.0% remained negative in real terms during this period. The spread between lending and deposit rates remained high at 5.3 percentage points, reflecting banking sector inefficiencies, particularly high administrative costs and still sizable nonperforming loans. The sector allocation of bank advances to the private sector was broadly unchanged.

The nominal exchange rate remained stable in FY2008, with the taka appreciating only by about 0.5% against the United States (US) dollar, aided by periodic interventions in the foreign exchange market by Bangladesh Bank. The real effective exchange rate depreciated by 0.6% over the year, but appreciated by 3.6% in the first half of FY2009, implying erosion of competitiveness in the international market. Revenue collection jumped to 11.2% of GDP in FY2008 from 10.2% in the previous year (Figure 3.15.5). Despite the cut in the ADP, public spending rose to 15.9% of GDP, from 13.4% in FY2007, because of higher spending on relief and reconstruction, expanded safety net programs to combat the rise in food prices, and higher subsidies for fuel and fertilizer. Consequently, the fiscal deficit widened to 4.7% of GDP from 3.2% in FY2007. Measures such as expanding taxpayer registration, modernizing the National Board of Revenue along functional lines, and strengthening its audit functions need to be accelerated so as to further improve revenue performance. Lists of tax exemptions, exclusions, and incentives will also need to be reviewed by the Government and pared down, and income tax and value-added tax laws updated, in order to expand the tax base and raise tax collections. Exports grew by 15.7% in FY2008, driven by strong performance in knitwear in the second half. The share of woven garments and knitwear, at 75.8% of total exports, was slightly higher than in the previous year. Imports rose by 25.6%, with imports of food, fuel, and fertilizer rising sharply. The higher trade deficit was offset by continued strength in workers’ remittances, leading to a small current account surplus of $0.7 billion or 0.9% of GDP. A smaller surplus in the capital and financial account lowered the overall balance-of-payments surplus to just over $600 million in FY2008 from about $1.5 billion in the previous year. Foreign exchange reserves rose by $1.1 billion, to $6.1 billion at end-June 2008 (import cover of about 3 months), partly reflecting a rise in central bank liabilities. Although the financial soundness of private banks strengthened along with their rapid growth in FY2008, the state-owned commercial banks (accounting for about 30% of assets and deposits of the banking system)remained weak, with negative capital and a nonperforming loan ratio of 33% (Figure 3.15.8), thus undermining the overall efficiency of the banking system. While operational autonomy and accountability of the state banks rose after their corporatization in 2007, greater attention to credit quality, recovery of nonperforming loans, and intensified monitoring by Bangladesh Bank are needed for improving their financial position. Bangladesh Bank is advising financial institutions to provide more credit to activities that generate domestic value added and create jobs in the

country, and to more carefully assess borrowers’ creditworthiness, in order to improve the credit quality of these institutions. The Dhaka Stock Exchange price index dropped by 7.4% in the year to end-2008. Since the share of foreign portfolio investment in the stock market is very small and the risk of contagion from international markets is minimal, the downward movement in share prices stems from nervous domestic investors. In the same period, market capitalization rose by 40.5%, reflecting some large initial public offerings. Inefficiencies in the pricing mechanism for such offerings, weaknesses in corporate governance and market surveillance, and the high costs of listing need to be addressed if market capitalization is to rise further in line with other South Asian markets.

Economic scenario

Prospects for FY2009 and FY2010 will hinge critically on the way in which the democratically elected government (which assumed office in January 2009) continues and deepens the economic reforms initiated during the caretaker Government’s 2-year tenure. Prudent macroeconomic management, in particular prompt action to address the downside risks to growth from the global slowdown, will also be required. The Government will need to adopt measures to accelerate ADP implementation, including addressing deficiencies in institutional capacities in key line ministries, raising revenues, and encouraging greater private participation in infrastructure investment. Economic

prospects will also depend on the continued availability of adequate external assistance—despite the economic downturn—for supporting public spending on infrastructure, especially for rolling back growing power shortages. Against this background, GDP growth is forecast to decline to 5.6% in the current fiscal year (FY2009), because of the effects of the global slowdown on exports and remittances and, as anxious consumers’ trim their spending, of lower domestic demand. GDP growth is forecast to slide further to 5.2% in FY2010 as the global economic slowdown persists, with continued moderation in external and domestic demand. Agricultural output will rise briskly in the forecast period, if normal weather conditions prevail and if farmers can access credit and inputs. Industrial growth is expected to moderate in FY2009, as export production begins to slow in the second half of the fiscal year, reflecting cooling global demand. The export sector got off to a robust start in the first quarter, when total shipments surged by 42.4%. In the second quarter, though, they declined by 1.2%, resulting in still-robust, cumulative export growth for the first 7 months of 18.2%.

Deceleration in demand for low-end garment exports from the People’s Republic of China (PRC) due to the appreciating Yuan and the PRC’s graduation from this market segment has provided opportunities for export growth for Bangladesh, where low-end products predominate. International buyers of Bangladesh products have also been encouraged by the large improvements in ports, customs, and safety and labor standards in the past couple of years. Nevertheless, slower growth in export earnings for the rest of FY2009 is foreseen because of the global slowdown and lower prices. Export vulnerability is accentuated by the lack of diversification both in terms of products and destinations—about 75% of exports are concentrated in textiles and over 90% of those exports are destined for US and European markets. Exports that are income elastic, such as frozen foods and leather products have already shown considerable vulnerability to the global slowdown. Slower export growth will take down that of industry to 6.6% in the current fiscal year. Next year will see 6.0% industrial expansion as the slump in external and domestic demand continues. Services sector growth will also slow to 6.0%, down from the 6.7% in FY2008, because of slower activity in the export sector and an easing in consumer spending induced by moderation in incomes and remittance growth. Services sector growth will fall to 5.5% in FY2010 due to industry’s slowdown. Agricultural growth is expected to edge up to 4.0% in FY2009 and further to 4.1% in FY2010, on the basis of improved crop harvests. Inflation slowed during the course of the fiscal year. The decline in food inflation was steeper than that of nonfood inflation by end-January.

The rapid decline in international commodity prices and good domestic crop harvests are pulling inflation lower. The cut in the domestic administered price of petroleum in October and December, after an increase in July, also eased inflation pressures, as has the modest monetary tightening in the second quarter of FY2009, and the further cut in domestic petroleum prices in January 2009. Inflation is projected at 7.0% for FY2009 and is expected to fall further to 6.5% in FY2010. The Monetary Policy Statement (MPS) announced by Bangladesh Bank in January 2009 envisages no shift in the broadly accommodative policy stance. The central bank continues to support the flow of credit to increase production of goods and services, and provide refinancing against lending in employment-intensive sectors such as agriculture and small and medium-sized enterprises, which are underserved by the market. The year-on-year growth in broad money (17.9%) in December 2008 is in line with Bangladesh Bank’s end-June 2009 annual program target of 17.5%. While the year-on-year growth in private sector credit in December 2008 was 21.8%, the adjustments in the repo and reverse repo rates are expected to guide credit growth back toward the annual program target of 18.5%. The MPS inflation projection of 8.5% for FY2009 appears overly pessimistic, considering the pace at which price pressures are dissipating. However, Bangladesh Bank cut the repo rate in March 2009 (from 8.75% to 8.5%) to encourage banks to lower their lending rates.

The external current account is expected to show a tiny surplus in FY2009 (0.2% of GDP) and a small deficit in FY2010 (0.5%). Overseas workers’ remittances remain a source of strength for Bangladesh, with 27.0% growth in the year to February. Nearly two thirds of remittances originate in the Middle East, with another one third from the US and Europe. A large majority of overseas workers are unskilled and involved in low-end jobs, which were relatively unaffected, especially in the Middle East, at the beginning of the economic slowdown. But a deceleration in remittance growth is inevitable as the downturn has now deepened, to 20% in FY2009 and to 15% in FY2010. Similarly, export growth is projected to decelerate, to 14.0% and 13.0% over these two years. Import payments during the first half of FY2009 rose by 23.2% relative to the same period of FY2008. However, the opening of import letters of credit—a leading indicator for annual imports— declined by 2.2% in the first 7 months of FY2009, mainly because of the difficulties for international negotiating banks in supporting import activities in the face of liquidity shortages. With a further fall in international commodity prices, growth in import payments is expected to moderate and settle at 18.0% in FY2009 and 17.0% in FY2010. Government revenues are showing signs of deceleration, with growth falling from 20.5% in the first quarter of FY2009 to 12.4% in the first 7 months of the fiscal year, compared with the corresponding periods of FY2008. Slower private sector activity, as the impact of the global economic slowdown takes hold, could further affect revenue collections. Import-based receipts will be hit by the cuts in customs duties made in the FY2009 budget and by the erosion in import values resulting from lower international commodity prices. Although the Government has transferred some of the benefits of lower international petroleum prices to consumers through successive cuts in domestic prices, the sharp decline in international prices also allowed it to eliminate petroleum subsidies and permitted a small profit for Bangladesh Petroleum Corporation. The lower operating costs for the Power Development Board and Petrobangla will contain their losses and reduce budgetary subsidies. A cut in non-urea fertilizer prices by about 50% in January 2009 will raise the budgetary cost of fertilizer subsidies, but the fiscal strain is likely to be minimal due to the savings on petroleum subsidies, likely ADP underutilization, and lower spending on food subsidies compared with budget targets. Aided by the Public Resources and Budget Management Ordinance of 2008, which set a cap on domestic government borrowing, current spending is also likely to remain in check. The budget deficit in FY2009 is therefore expected to be 4.7%, within the budgeted level of 4.9%, despite the weaker revenue performance. Several risks to the economic outlook could materialize from the global economic slowdown. Revenue collections may come under further pressure if economic activity declines more than expected, which would constrain the Government’s ability to spend on essential infrastructure and social sector programs. ADP implementation could be delayed as the new Government takes time to address institutional capacity and personnel management issues. In addition, reversal of economic and sector reforms initiated by the caretaker Government could weaken the business environment and dent business confidence. Finally, a return to confrontational politics could also disrupt economic activity, as could natural disasters.

Bangladesh, with 27.0% growth in the year to February. Nearly two thirds of remittances originate in the Middle East, with another one third from the US and Europe. A large majority of overseas workers are unskilled and involved in low-end jobs, which were relatively unaffected, especially in the Middle East, at the beginning of the economic slowdown. But a deceleration in remittance growth is inevitable as the downturn has now

deepened, to 20% in FY2009 and to 15% in FY2010. Similarly, export growth is projected to decelerate, to 14.0% and 13.0% over these two years. Import payments during the first half of FY2009 rose by 23.2% relative to the same period of FY2008. However, the opening of import letters of credit—a leading indicator for annual imports— declined by 2.2% in the first 7 months of FY2009, mainly because of the difficulties for international negotiating banks in supporting import activities in the face of liquidity shortages. With a further fall in international commodity prices, growth in import payments is expected to moderate and settle at 18.0% in FY2009 and 17.0% in FY2010. Government revenues are showing signs of deceleration, with growth falling from 20.5% in the first quarter of FY2009 to 12.4% in the first 7 months of the fiscal year, compared with the corresponding periods of FY2008. Slower private sector activity, as the impact of the global economic slowdown takes hold, could further affect revenue collections. Import-based receipts will be hit by the cuts in customs duties made in

the FY2009 budget and by the erosion in import values resulting from lower international commodity prices. Although the Government has transferred some of the benefits of lower international petroleum prices to consumers through successive cuts in domestic prices, the sharp decline in international prices also allowed it to eliminate petroleum subsidies and permitted a small profit for Bangladesh Petroleum Corporation. The lower operating costs for the Power Development Board and Petrobangla will contain their losses and reduce budgetary subsidies. A cut in non-urea fertilizer prices by about 50% in January 2009 will raise the budgetary cost of fertilizer subsidies, but the fiscal strain is likely to be minimal due to the savings on petroleum subsidies, likely ADP underutilization, and lower spending on food subsidies compared with budget targets.

Aided by the Public Resources and Budget Management Ordinance of 2008, which set a cap on domestic government borrowing, current spending is also likely to remain in check. The budget deficit in FY2009 is therefore expected to be 4.7%, within the budgeted level of 4.9%, despite the weaker revenue performance. Several risks to the economic outlook could materialize from the global economic slowdown. Revenue collections may come under further pressure if economic activity declines more than expected, which would constrain the Government’s ability to spend on essential infrastructure and social sector programs. ADP implementation could be delayed as the new Government takes time to address institutional capacity and personnel management issues. In addition, reversal of economic and sector reforms initiated by the caretaker Government could weaken the business environment and dent business confidence. Finally, a return to confrontational politics could also disrupt economic activity, as could natural disasters

Chapter 4

Concluding Remarks:

Bangladesh needs to substantially raise investment, which has followed a declining trend in recent years, in order to enhance growth and job creation and thereby reduce poverty. Public investment must be raised, primarily by accelerating ADP implementation, but efforts to raise private sector participation in infrastructure investment should also be made. The new Government needs to pay attention to improving institutional capacities in its various agencies, both to implement reforms and strengthen development administration. Over the medium term, with climate change posing a major threat to growth, tackling such concerns needs to be integrated into economic development plans and activities. The emerging shortages in gas and power supplies (over four fifths of power is generated from gas) need to be urgently addressed. Unless early remedial measures are adopted, power cuts and irregular electricity supplies will hamper domestic production and hold back medium-term growth prospects. In the longer term, the lack of gas supplies wills severely limit power generation and, therefore, new investment in manufacturing activities. Large and rapid investments in gas and power are essential to ensure their continued availability. As foreign direct investment flows in gas and power are unlikely to materialize soon because of the global financial market turmoil, the Government must mobilize its own resources and tap external donor assistance. Investments in other infrastructure, such as roads, ports, and urban infrastructure and services, are also essential. Food security surfaced as a major development challenge in 2008. The sharp rise in global food prices and domestic crop losses due to natural disasters led to a surge in domestic food prices. Although quick action by the Government, through higher imports and public distribution of food supplies as well as expanded social safety net programs helped mitigate the hardship on the poor before prices eased, this episode signals the need to develop a preemptive strategy to deal with similar shocks in the future. To maintain affordable food prices while providing fiscally sustainable incentives to farmers, agricultural productivity needs to be raised. Dissemination of new technologies, improved research and extension, and investments in rural infrastructure (including roads, water, and power), will help achieve greater productivity. The sustainability of safety net programs could be enhanced by linking such programs to rural infrastructure investments and other job-creating activities, thus more directly contributing to longer-term economic growth and poverty reduction. The caretaker Government is credited with introducing core governance reforms to combat corruption and improve access to justice, and with implementing key institutional and sector reforms. Such progress, which was helped by the apolitical nature of the caretaker administration, will have to be sustained. The new Government will need to undertake further reforms in local governance, particularly decentralization of administration and finance, and build local government capacity, both to deliver services more effectively and to improve infrastructure.

Bibliography

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