April, 2010 

Bangladesh Economic Update

Power cuts are affecting production at garment

factories

An image of staggered load-shedding A 51 megawatt private power plant goes into operation
 
 
 
 
Economic Policy and Poverty Team 
South Asia Region 
  

The World Bank
Bangladesh Economic Update1  April 2010 
 

Summary
Real GDP is projected to grow at 5.5 percent in FY10, from 5.9 percent in FY09, driven by
consumption and public development expenditure. Private consumption expenditure held up well
because of strong growth in remittances and the non-rice agricultural sector. Public consumption
expenditure rose because of increased public sector pay and an additional stimulus package for the
export-oriented sectors. Public investment also picked up slightly in FY10. However, sluggish private
investment is largely responsible for the projected decline in growth in FY10.

Inflation rose to 9 percent in February 2010, from 2.2 percent in June 2009. This sharp increase was
driven by food inflation arising from a shortfall in domestic rice production, rising world food prices, and
high food inflation in India. Non-food inflation also rose, from 3.7 percent in July 2009 to 6.1 percent in
February 2010. While domestic agriculture output and world food prices are likely to have a strong
bearing on inflation in the next few months, an incremental tightening of monetary policy, as announced
in the Monetary Policy Statement for the second half of FY10, can also help dampen inflationary
pressures.

Reserves have increased due to strong remittance and foreign aid inflows. Despite a decline in
exports, the current account surplus rose in the first seven months of FY10 to US$2.2 billion, compared
with US$0.38 billion in FY09. Compressed import demand and strong remittance inflows in the first half
of FY10 led to this surplus. This was complemented by a surplus of US$418 million in the capital and
financial accounts, leading to a US$2.1 billion-plus surplus in the overall balance of payments. Reserves
rose correspondingly to exceed $10 billion (5.7 months of imports) in January 2010. In the face of these
inflows, Bangladesh Bank was forced to accumulate net additional reserves of US$2.1 billion in the first
seven months of FY10 in order to prevent the nominal taka value from appreciating.

The fiscal deficit remains sustainable, underpinned by good revenue performance. It is projected to be
contained at around 4 percent of GDP in FY10, well within the sustainable threshold. This is slightly
higher than last year’s fiscal deficit of 3.7 percent of GDP - and derives from the implementation,
retrospectively, of the public sector wage increase, higher safety net expenditures, a likely further boost to
the Annual Development Program (ADP) this year, and a potential increase in energy and fertilizer
subsidies because of rising international prices.

FY11 growth outlook is dependent on the easing of domestic supply constraints, particularly energy.
Global recovery is off to a stronger start than initially anticipated. Currently, supply issues are more
problematic than those of demand; Energy shortages will continue to stifle Bangladesh’s recovery. The
estimated demand-supply gap is currently one-third of demand (2,000 MW)) in peak hours. Gas
shortages account for nearly half of this gap. Maintaining growth at its recent 6 percent average over the
medium term will thus be a challenge for Bangladesh, given the current infrastructure and energy deficit.
Redressing this will require domestic reforms and increasing trade integration with countries in the region
and the rest of the world. The Bangladesh Prime Minister’s visit to Delhi earlier this year helped to
promote Indo-Bangla cooperation in security, power, trade, connectivity, water sharing, and resolution of
other long-standing bilateral concerns. If fully implemented, these will lay the basis for higher
investment and growth by improving energy security and connectivity.
                                                            
1
This report was prepared by Zahid Hussain and Lalita Moorty with inputs from Sanjana Zaman, Nadeem Rizwan,
M. Iqbal, Diepak Elmer, and Mehar Akhter Khan and was done under the guidance of Sanjay Kathuria. The cover
photos are taken from Jugantar and The Daily Star websites.

    
1 
   
Recent Developments
GDP growth in FY10 is driven by growth in consumption and public development expenditure. In fact,
growth throughout FY07-09 in Bangladesh was driven mainly by consumption, to the extent of over 60
percent of growth in GDP during this period (Figure 1). In FY10, private consumption growth is likely to
be sustained by remittances, which grew by 17.4 percent in the first nine months. In addition, growth in
non-rice agriculture2 appears to have sustained growth in rural incomes and hence private consumption.
Public consumption expenditure received a boost from the 52 percent average increase in public sector
pay and an additional stimulus package for the export-oriented sectors.3

GDP growth is projected to decline slightly in FY10 Figure 1: Contribution to Growth 

compared to 5.9 percent in FY09 because of sluggish (percentage points)
growth in private investment. The sluggishness is
evident in the relatively low 4.3 percent increase in 6.4 6.2 5.9 5.5
6.5 5.0
imports of capital machinery, in nominal dollars, in 5.0
4.3 3.9 4.1
the first half of FY10. Foreign direct investment 3.5 2.32.5
1.5
2.5
1.5
dropped to $228 million in the first seven months of 2.0 0.6 0.5 0.5 0.9 1.00.9
0.1
0.5
FY10 compared with $662 million in the first seven ‐1.0 ‐0.1
months of FY09. The probable decline in private ‐2.5 ‐1.6
investment in the first seven months of the year was ‐4.0
‐3.3 ‐3.2
partly offset by an increase in public investment, FY07 FY08 FY09  FY10 (P)
which is projected to be higher this year due to the
GDP Growth Consumption Investment
larger size and improved implementation of
development expenditures. The ADP implementation Export Import Stat. Discrepancy

rate has increased from 34.4 percent in the first eight

months of FY09 to 39 percent in the first eight months Source: BBS
of FY10.4

Net exports will continue to drive down GDP growth, as they did in FY09. In Bangladesh, the net impact
of trade on GDP growth is usually negative. In FY10, the contribution of export growth (in terms of
national accounts) to GDP growth is likely to decline from 2.5 percentage points in FY09 to 0.9
percentage points in FY10. At the same time, the negative contribution of import growth is also likely to
decline (from -3.2 to -1.6 percentage points of GDP between FY09 and FY10), as expected, so that the
overall contribution of net exports to GDP growth will probably remain at around -0.7 percentage points
of GDP.

                                                            
2
BIDS Field Survey 2009 cited in BIDS, Recent Performance of the Bangladesh Economy, 23 February, 2010.
3
Public recurrent expenditure increased by 12.2 percent in the first half and the government released Tk18 billion cash support as
part of the fiscal stimulus package.
4
Since the ADP budget for FY10 is 19 percent higher than for FY09, the 4.6 percentage point increase in rate of implementation
translates into an increase of almost Tk32 billion (equivalent to 0.5 percent of GDP). The monitoring and supervision of the top
10 ministries, with 78 percent of total ADP allocation, has been strengthened in accordance with the Finance Minister’s budget
announcement, and this might largely explain the improving implementation rate.

    
2 
   
 Figure 2: Trends in Load Shedding Figure 3: Gas Sales to Power Sector as % of 
2.0 Total Gas Production
1.5 45.0
1.0
40.0
0.5

0.0
35.0
Feb‐08

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Dec‐08

Feb‐09

Apr‐09

Jun‐09

Aug‐09

Oct‐09

Dec‐09
30.0
Constant Load Shedding Line
Jul‐09 Aug‐09 Sep‐09 Oct‐09 Nov‐09 Dec‐09
Year‐on‐Year Load Shedding Ratio

Note: The vertical axis represents the ratio of load shedding Source: Based on Petrobangla data
in a particular month to that of the previous year.
Source: Bangladesh Power Development Board 
Domestic supply-side constraints have contributed to sluggishness in private investment and exports.
Lack of reliable power and gas supply remains a major constraint on businesses in Bangladesh. While
total gas production has declined by 2.4 percent from July to December 2009, gas sales to the power
sector have declined by 20.3 percent during the same period,5 resulting in frequent power cuts (Figures-2
and 3). Even factories within EPZs experienced power cuts. Many large RMG (garment) factories have
their own power plants, but have had operations disrupted because of gas shortages. Production in the
knitwear sector is especially hard-hit because spinning, dyeing and finishing factories need uninterrupted
gas supply for full production.6 Power and gas shortages have also adversely affected capacity utilization
and investment in the services as well as domestic market oriented small and medium-scale
manufacturing. Industrial production in apparel, ceramics, fabrics, steel and particles are particularly hard
hit. Many factories in industrial areas in Dhaka and Chittagong7 are unable to use more than 50 percent
of their capacity, while small industries, that cannot afford diesel generators, are on the brink of closure.

Inflation rose sharply to 9 percent in February 2010, from 2.2 percent in June 2009

The sharp rise in inflation was driven mainly by increases in food inflation from 0.3 percent in June
2009 to 10.9 percent in February 2010 (Figure-4). Prices of food, particularly rice, wheat, and pulses
reached a recent high in December 2009.8 The price of coarse rice in Dhaka in March 2010 was 17.8
percent higher relative to March 2009. Aman production is reported to be one million tons (8.6 percent)
lower than last year.9 The market may be factoring in the possibility that the boro (largest rice crop) yield
may suffer stunted saplings because of a cold winter. In addition, rice traders may be betting on likely
shortfalls and holding on to current stock. Rising world food prices and high food inflation in India

                                                            
5
Petrobangla MIS Report December 2009.
6
The Bangladesh Textile Mills Association claims that irregular gas supply caused a 50 percent decline in textile production, and
the Bangladesh Knitwear Manufacturers and Exporters’ Association asserts that orders can no longer be fulfilled due to gas
shortages. Moreover, gas rationing in RMG and textiles units started end of January 2010 in different Dhaka metropolitan areas:
Savar, Gazipur, Tongi, Mymenshing, Manikganj, Narsingdi, Ghorashal, Jinjira, Sonargaon, Fatulla and Narayanganj. Under the
gas rationing system, factories will have to remain shut one day a week.
7
Note that most of the manufacturing production comes from these industrial belts.
8
Changes are year-on-year unless otherwise stated.
9
Ahsan H. Mansur, “Don’t shoot the messenger,” The Daily Star, March 11, 2010. A New Age report on March 15 quoted a
WFP estimate of 11.5 million tonnes of aman production, which is 12.2 percent less than the target and 1 percent less than last
year’s actual aman harvest.

    
3 
   
(around 18-19 percent)10 contributed to the surge in food inflation. International food markets suffered
adverse supply shocks due to drought in India and successive cyclones in the Philippines.

Figure 4: Inflation(%) Y-o-Y Figure 5: Money and Credit Growth (%)

16.0 25.0
14.0
12.0 20.0
10.0
8.0
6.0 15.0
4.0
2.0 10.0
0.0

FY10 (Jul-Feb)
FY00

FY01

FY02

FY05

FY06

FY07

FY08
FY03

FY04

FY09
Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10
General Food Non‐Food 
M2 Private Sector Credit

Source: Bangladesh Bureau of Statistics. Source: Bangladesh Bank.

General inflationary pressures also emerged in asset and goods markets. Non-food inflation increased
from 3.7 percent in July 2009 to 7 percent in December before declining to 6.1 percent in February 2010.
Stock prices have risen by more than 78 percent since June. The Bangladesh Bank (BB) has been
pursuing an accommodative monetary policy to guard against the downside risks to growth (Figure-5).
BB promises stronger vigilance over the price situation and has indicated that it would like to reduce
broad money growth to 15.5 percent for FY10 against the 21.9 percent growth through February. While
domestic agriculture output and world food prices are likely to have a strong bearing on inflation in the
next few months, an incremental tightening of monetary policy, as announced in the Monetary Policy
Statement for the second half of FY10, can also help dampen inflationary pressures.11 Like other central
banks, the dilemma for the BB is whether to tighten monetary policy and risk choking growth, or keep
things as they are and risk higher inflation. The BB has come out in favor of the latter to hedge against
the downside risks to growth, but it will be important to bring monetary growth back in line with the
growth of nominal GDP.

Exports faltered in FY10, but reserves increased due to strong remittance and foreign aid inflows.

Merchandise exports have declined by 3.2 percent in the first eight months of FY10 relative to the same
period last year, driven by a 5.6 percent decline in RMG exports (Figure-6).12 Export price and volume
declined by 2.6 percent and 0.6 percent respectively in the first eight months of FY10. The BGMEA
(garment association) has reported a drop in garment prices of up to 20 percent compared to the previous
year. The BKMEA (knitwear association) reported a decline in prices of 5-7 percent. Weak demand in
US and Europe accounts for a significant part of the decline.13 The non-RMG exports have recovered,
growing by 5.7 percent in the first eight months of FY10 after a 0.6 percent decline during the same
                                                            
10
Bangladesh food prices are sensitive to prices of food in India, including rice, despite bans on the export of coarse rice by both
sides, because of the porous border. Bangladesh’s food imports from India constitute around 40 percent of its total food imports.
11
The BB’s Monetary Policy Statement for the second half of FY10 has kept the inflation target unchanged, the reserve money
growth target has been raised from 3.5 percent to 7 percent and the broad money growth target has been raised from 15 percent to
15.5 percent. Given the 20.5 percent broad money growth and 20.2 percent reserve money growth through January 2009,
achieving the revised broad money and reserve money growth targets for the year would require considerable monetary
tightening for the rest of the year.
12
RMG exports had been growing at an impressive 24.2 percent in the first half of FY09, but the rate slowed to 8.1 percent in the
second half of the year before turning negative in FY10.
13
Bangladesh’s main export markets are the US and EU. The share of total exports to the US was 25.5 percent and to the EU
44.1 percent in FY09. The US and EU absorbed 30 percent and 59 percent of RMG exports respectively in FY09. The reliance
on these markets has added to the external sector’s vulnerability to downturns in external demand.

    
4 
   
period last year. The comparatively strong performance can be attributed to the rising global demand for
raw jute and jute goods. Export of raw jute and jute goods increased by 46.5 and 52.6 percent
respectively during the first eight months of FY10. Pharmaceutical exports grew by 15.9 percent. Frozen
food exports declined by 17.2 percent, but are expected to increase in the coming months as the self-
imposed ban on exporting shrimps has been lifted.

Foreign exchange reserves have remained above

US$10 billion (equivalent to 5.7 months of Figure 6: Export Growth (%)
imports) since November (Figure-7). 80.0
Notwithstanding the decline in exports, the
current account surplus in the first seven months 60.0
of FY10 amounted to US$2.2 billion, compared 40.0
to US$0.38 billion in the first seven months of the
previous year. A 6.5 percent decline in imports 20.0
narrowed the trade deficit which, together with
strong 20.9 percent growth in remittance inflows 0.0

Feb-06

Nov-06
Feb-07

Feb-08

Aug-08
Nov-08
Feb-09

Nov-09
Feb-10
May-06
Aug-06

May-07

Nov-07
Aug-07

May-08

May-09
Aug-09
in the first seven months of FY10, led to such a -20.0
sizable current account surplus. This was
complemented by a US$418 million surplus in the -40.0

capital and financial account, thus leading to over Source: Export Promotion Bureau
US$2.1 billion in surplus in the overall balance of
payments. The Bangladesh Bank intervened in the foreign exchange market and purchased (net) US$2.34
billion in the first three quarters of FY10 to keep the nominal exchange rate from appreciating (Figure-8).

Figure 7: Foreign Exchange Reserves (US$m) Figure 8: Exchange Rate (Tk per US$)
12000 75
10000 70
8000 65
6000 60
4000 55
2000 50
0 45
Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10
 Source: Bangladesh Bank Source: Bangladesh Bank

The fiscal deficit remains sustainable, underpinned by good revenue performance so far.

The fiscal deficit will likely be contained at around 4 percent of GDP, well within the sustainable
threshold (Figure-9). The deficit target in the original FY10 budget was 5 percent of GDP. The realized
budget deficit in first half was Tk.39.97 billion only. Although this is Tk. 46.7 billion less than the deficit
in first half of FY09, the budget deficit in FY10 is likely to exceed last year’s 3.7 percent of GDP because
of the implementation of the public sector wage increase with retrospective effect, increase in safety net
expenditures, and a further boost in ADP implementation (as is typically the case) in the second half of
FY10. There is positive news on the revenue front, with the National Board of Revenue (NBR) achieving
almost 99 percent of the revenue collection target it set for the first eight months of FY10. Revenue

    
5 
   
collection during this period increased by 17.1 percent relative to the same period last fiscal year, driven
by 26.1 percent growth in domestic indirect tax and 19.3 percent growth in income tax collections.

The impressive growth in domestic-based taxes

Figure 9: Govt. Revenue and Expenditure (%
is due largely to improved ADP implementation, of GDP)
increase in tax rates, broadening of tax base,
18
and improved compliance: Total
16 Expenditure
14
 Increased ADP implementation resulted in 12
37.4 percent growth in VAT collection from 10
construction, and 69.3 percent growth from 8 Total
Revenue
cement till November 2009. Meeting the 6
VAT target of Tk207.35 billion at the year- 4
end is realistic if 90 percent of the revised 2
ADP is implemented. 0
 The mandatory use of Electronic Cash

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY10
FY09

(B)
Register (ECR), though not fully
implemented yet, may have also contributed
to high VAT collection. New VAT Source: Ministry of Finance
registration during the first 8 months of
FY10 stood at around 9,000.
 The increased Advance Trade VAT (ATV) rate from 1.5 percent to 2.25 percent resulted in 56.1
percent growth in ATV collection to November 2009.
 The price slab for cigarettes and tariff value for domestic production of tobacco products were raised
and a 10 percent supplementary duty on tobacco products was imposed in FY10. As a result, VAT
collection from tobacco, which constitutes 30 percent of total domestic taxes, grew by 24 percent by
November 2009.
 Better monitoring and compliance have contributed to income tax growth. The NBR is carrying out
awareness campaigns and surveys to identify new taxpayers. Around 0.12 million new taxpayers had
been identified by February 2010 compared to a 0.4 million target for FY10 and the NBR hopes to
achieve the target by June 2010. The amnesty for legalizing undisclosed income has not had the
desired revenue impact so far.

Notwithstanding these improvements, mobilization of public revenues will remain a major challenge in
the immediate future (see the note on fiscal management in the second part of this report).
The interest payment burden is increasing. The composition of deficit financing this year is likely to
deviate significantly from the original FY10 budget target. Higher interest rates on national savings
certificates relative to deposit rates boosted NSC sales, resulting in Tk52 billion non-bank borrowing,
compared to the Tk38 billion target for the year as a whole. Net foreign financing in the first half was 36
percent higher relative to last year, boosted by the US$730 million budget support from the ADB. Flush
with cash, the government repaid over Tk107 billion debts to the banking system by end-March, thus
creating space for growth of bank credit to the private sector without hurting the monetary program
targets. However, the rise in the share of non-bank domestic borrowing means an impending increase in
interest payment on domestic debt.14
Despite the recent increase in power prices at the retail level, energy and fertilizer subsidies are likely
to rise again. Losses by state-owned enterprises (SoEs), which for the most part have been brought on
                                                            
14
Average interest on bank borrowing is 7.75 percent and on non-bank borrowing is 11.75 percent. Interest payments constitute
13.9 percent of total expenditure in the FY10 original budget, of which 91.5 percent is interest on domestic debt.

    
6 
   
the budget, arise mainly from administered prices that do not cover input costs. The rapid decline in
international oil prices helped contain energy sector SoE losses in FY09. International oil prices have
been rising in recent months. Consequently, domestic prices for petroleum products are again below the
levels needed to cover the costs of the relevant SoEs. This remains true for electricity as well despite a
recent 6 to 7 percent increase in power prices at the retail level.

FY11 growth hinges on the easing of energy constraints and pursuit of structural reforms.

Global recovery is off to a stronger start than many observers anticipated. In 2010, global growth is
expected to rise by 2.7 - 4 percent. In advanced economies, the recovery is expected to remain sluggish
by past standards, whereas in many emerging and developing economies, activity is expected to be
relatively vigorous because of buoyant internal demand. Exports of developing countries as a group rose
38 percent in December. Despite robust growth, levels of trade and production in December 2009 were
below pre-crisis levels in 2007 by 27and 18 percent respectively, highlighting the toll taken on world
economic activity by the financial crisis. World trade volume is expected to grow by 4.3 percent in 2010.
Among Bangladesh’s main export markets, the US economy is expected to grow by 2.5 percent, the Euro
zone by 1 percent, and the Middle East by 3.7 percent in 2010.15

Energy shortages pose perhaps the biggest threat to Bangladesh’s growth recovery. The present
demand for electricity varies between 4,200 MW and 5,500 MW and it is expected to rise to 6,850 MW
within the next two years.16 Maximum generation available is between 3,800 MW and 4200 MW. The
estimated demand supply gap currently is 2,000 MW in peak hours. Gas shortages account for at least
half of this gap. Power and gas shortages have undermined external competitiveness. According to
garment industry leaders, garment orders cannot be fulfilled because of energy constraints. Frequent
power cuts and low gas pressure add to shipment time, forcing exporters to airfreight the merchandise at
their own cost.17 Power cuts and gas shortages have reportedly rendered a significant part of the
country’s garment capacity idle.18

Progress in expanding power generation remains slow. To combat the acute power shortages, the
government plans to increase power generation to around 7,000 MW by 2013. However, power plants
continue to suffer from gas shortages, despite some recent ad-hoc measures to increase gas supplies for
power production. Short-term solutions being floated include diesel- and furnace oil-based rental power
plants which can start generation within a short period of time, but these are higher cost routes and will
reduce competitiveness of firms. In 2009 and 2010 so far, 586 MW of power were added to the national
grid. Many approvals for new power plants have been given by the Cabinet committee on purchases, and
prequalification bids for eight large independent power producing plants have been floated which, if
contracted, could be on stream by 2013. Despite this, it is difficult to see as to how the power demand-
supply gap will be bridged in 2011.

There have been positive developments on energy cooperation between India and Bangladesh in the
last six months, culminating in a Memorandum of Understanding on Power Cooperation, signed January
2010. Specific areas of cooperation include: (i) India’s agreement to supply–on a fast track basis– at least
250 MW of power to Bangladesh; (ii) joint development of thermal power generation facilities in
Bangladesh (including for institutional capacity building within Bangladesh), and (iii) technical assistance
from India’s National Thermal Power Corporation, Power Grid Corporation of India Ltd., and Indian
training centers. Proceeding on a fast-track is an electricity transmission interconnection project to link
                                                            
15
World Bank, Global Economic Prospects 2010.
16
Power Division, Three-Year Road Map For Power Sector Reform, June 2009.
17
According to The Financial Express of April 9, 2010, about 35,000 tons of garments have been airlifted between November
2009 and February 2010, increasing per kg transport costs from 14-25 cents to $4-4.5.
18
Inam Ahmed and Arun Devnath, Power cut, gas crunch hit RMG sector hard, The Daily Star, March 16, 2010. The authors
state that 30 percent of garment capacity is idle because of energy constraints.

    
7 
   
the electricity grids of India and Bangladesh, with an initial agreement for India to sell 250 MW to
Bangladesh as soon as possible (with construction expected to start in the coming summer season).

The FY11 growth outlook is mixed, depending on the government’s ability to address energy
shortages.
There are some positive signals on private investment. LC opening of capital machinery and import of
capital machinery has picked up sharply since May and July 2009 respectively. LC opening of steel has
picked up since November and import of steel has also rebounded in December 2009, indicating a pick-up
in construction. Capacity utilization is also increasing as evidenced by strong growth in LC opening of
industrial raw materials since June and intermediate goods since August 2009. The real commercial bank
lending rate declined to 4.3 percent in December 2009 after peaking at 11.2 percent in June 2009. Private
sector credit growth picked up in the second quarter of FY10, reaching 19.3 percent through January.
According to a recent IFC-BICF survey, business confidence and investment improved since the second
quarter of FY10.19 The overall performance of the surveyed firms has been better in Q2 of FY10
compared to Q1, with the services sector performing better than the manufacturing sector and expected to
improve further in Q3.
However, the possible optimism on private investment indicated by these signals could easily be
negated by the energy situation. Unless there is significant easing of the energy bottleneck, firms will be
disposed to maximize production based on their existing capital stock rather than go in for fresh
investment.
Public investment is likely to rise. The government’s medium-term macroeconomic framework targets a
15.7 percent increase in the size of the ADP in FY11 relative to the original FY10 ADP size.20
Consumption growth outlook is worsening due to a possible slowdown in remittance growth.
Migration continued its downward trend with 43.5 percent fewer workers finding employment abroad in
FY10 (July-Dec) compared to FY09. Moreover, a reported 72,000 migrant workers have returned home
in calendar year 2009, which is one third more than in 2008. This does not bode well for sustaining
private consumption growth. However, growth in public consumption is likely to remain robust because
of fuller implementation of the public sector pay increase package, possible rise in energy and fertilizer
subsidies, and further expansion of safety net programs.
Table 1 shows two scenarios for GDP growth in FY11. The 6 percent growth scenario is built around real
investment growth of 7.5 percent, compared with this year’s 3.8 percent, with public consumption growth
sustaining at the current year’s 6.5 percent and private consumption growth declining from 7 percent this
year to 6 percent. However, if energy constraints remain tight, a slowdown in investment growth is likely
to influence FY11 GDP growth more than other components of demand - leading to GDP growth that
may end up at around the same level of 5.5 percent growth projected for FY10.
Table 1: Projected GDP Growth for FY10 and FY11
Actual Projection
Growth in constant prices (Percent)
2007 2008 2009 2010 2011
GDP 6.4 6.2 5.9 5.5 5.5—6.1
Private Consumption 5.9 5.5 6.0 7.0 6.0
Government Consumption 6.4 3.6 4.0 6.5 6.5
Gross Fixed Investment 8.7 -0.7 9.3 3.8 5.9—7.5
Exports, GNFS 13.0 7.0 12.2 4.0 6.0—8.0
                                                            
19
According to the Board of Investment (BOI), in July-December 2009, a total of 686 investment proposals amounting to
Tk95.849 billion were registered. This is an increase of 8.7 percent compared to the same period of FY09.
20
GoB, Medium-Term Budgetary Framework 2009-10 to 2011-12.

    
8 
   
 Imports, GNFS 16.0 -2.1 15.2 7.0 8.0—9.0
Source: BBS Data and WB Staff Estimates

Faster progress on the structural reform agenda will be critical for unleashing Bangladesh’s latent
growth potential. A major challenge is to improve tax policy and administration, and the level and
quality of public investment and expenditure will need to improve (see special focus in next section on
some of the major concerns in this regard). Well-designed public-private partnerships can help partially
alleviate the infrastructure and energy deficits. Major investments in electricity generation and
transmission, along with sector reforms, especially in pricing of electricity and gas, are needed. In
addition, the cost of doing business must improve in order to encourage greater private investment. Also,
trade policy reforms and better trade logistics are necessary to improve prospects for export
diversification. Finally, implementing recent agreements with India has the potential to help raise
sustainable growth.21

                                                            
21
Recent agreements signed with India are important for cooperation in a range of fields such as security, power,
trade, connectivity, water sharing, and resolution of other long-standing bilateral issues and concerns. As regards
trade, it was agreed that Bangladesh would allow use of Mongla and Chittagong sea ports for movement of goods to
and from India by road and rail. If fully implemented, these would lay the basis for higher investment and growth
by improving energy security and connectivity.

    
9 
   
 Special Focus: An Overview of Fiscal Management in Bangladesh22

Bangladesh has maintained aggregate fiscal discipline. This has been achieved despite recurring
external economic shocks, natural disasters, and widespread poverty and social needs. Given a highly
constrained revenue capacity, Bangladesh has allocated spending well to meet strategic priorities. Modest
improvements in revenue performance (Figure 2) and declining overall public expenditures have
stabilized the central government’s fiscal deficit at less than 4 percent of GDP in recent years. Strong
growth and improving fiscal balances have reversed the increase in government debt, which had fallen to
45.3 percent of GDP by the end of FY09. External debt indicators are well within sustainable thresholds
(Table 1). Spending in the social sectors has been sustained, financing for rural development and
especially rural infrastructure has increased, and support for targeted poverty reduction programs,
including social safety nets for the poor, has continued.

State-owned enterprises continue to drain Table 1: External Debt Indicators 

fiscal resources. Bangladesh’s public sector
extends beyond the central government, Indicator  Threshold  2005  2009 
comprising a large state-owned enterprise PV of Debt as a Share of:        
(SoE) sector and a dominant public financial      GDP 40  17  19.3
sector. SoEs operating in traditional utilities,       Exports 150  92  99
infrastructure, and the manufacturing sector       Revenues 250  166  185.3
account for more than 20 percent of public
Debt Service as a Share     
sector employment. In addition to being a
of:  
drain on public resources through a range of
      Exports 20  5  4.5
subsidies and contingent liabilities, they also       Revenues 30  10  7.9
exert considerable influence on the economy
through the supply of vital inputs and services Source: Joint Bank-Fund DSA 2009
and their pricing policies. As such, the Figure 1: Social Sectors Remain in the Lead 
sustainability of Bangladesh’s fiscal stance (% of Total Expenditure) 
depends not only on the fiscal position of the
central government, but also on the performance 4.0

of the broader public sector. While the recent 3.5

fiscal stance of the central government is 3.0

sustainable at the primary deficit levels of 1.5 2.5
percent of GDP, the fiscal stance of the 2.0
consolidated public sector remains a lingering 1.5
concern. 1.0

0.5
Large problems exist in revenue mobilization
0.0
and public investments. Mobilization of public Gener al Social Ser vices Economic Inf r ast r uct ur e Int er est

revenues remains one of the lowest in the world. Administ r at ion Ser vices Ser vices

FY98-FY02 Average FY03-FY07 A verage

Wrapped in old policies and outdated Source: Based on Ministry of Finance data.
administrative practices, the tax system has not
been able to bring new income-generating activities within the tax net. Revenue generation relies heavily
on trade taxes. Weaknesses in tax administration continue to result in revenue leakages, evasion and
inefficient revenue mobilization. In this environment, fiscal adjustment has been driven by a decline in
investment spending, which reached 4.6 percent of GDP in FY09 after peaking at 7.4 percent in FY00

                                                            
22
This note is based on the World Bank’s forthcoming Bangladesh Public Expenditure and Institutional Review.

    
10 
   
(Figure 3). Significant structural rigidities and implementation problems continue to hamper the
implementation of the development budget which has been constantly underspent (by around 20-25
percent). Public consumption expenditures on the other hand have risen from 4.5 percent of GDP in
FY01 to 5.2 percent in FY09.

Figure 2: Govt. Revenue (% of GDP) Figure 3: Public Expenditure (% of GDP)

12
15.0

10 10.0 Consumption 
Expenditure
8 5.0
Investment 
Expenditure
6 0.0
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Ministry of Finance. Source: BBS national accounts.

Planning and implementation problems continue to affect the quality of the investment portfolio.
Time and cost overruns, deferral of project benefits long into the future and declining returns on
investment have historically been associated with the management of the development budget in
Bangladesh. A review of the investment projects/programs in the ADP23 for FY03-07 reveals that on
average, only about one-third of their cost was covered by the development budget. Consequently, the
ADP each year has carried over a significant backlog of incomplete projects/programs. New
projects/programs entering the portfolio grew by 2.7 percent per year, while the development budget grew
by 3.5 percent. The continuing suboptimal allocation (Table 2) suggests that the trend of implementation
delays will persist and lower the overall effectiveness of the ADP.

Efficiency of expenditures at the operational level can be improved.24 A review of expenditure

policies and programs in five key sectors – education, health, transport, energy and agriculture –
highlights a number of deficiencies and structural issues that need to be addressed. Failure to do so risks
the sustainability of the social and development outcomes that have been achieved so far. While sectoral
policy frameworks are in place and appear to be appropriately formulated, intra-sectoral expenditure
allocations and use do not always reflect the sector’s policy.

Operational efficiency is very closely linked to the functioning of the public administration, whose
reform has stalled. The two most striking weaknesses are low salaries of civil servants and the limited
resources available to line agencies for their day-to-day operations. Bangladesh’s performance in this
respect is much weaker than other developing countries. There are many forces that work against the
forces of reform. Civil service reform is a risky undertaking with a time horizon that goes beyond the
tenure of a single government. Moreover, much of the change has to be implemented by units and people
who most likely will be affected by the change.

Expenditure distribution remains skewed towards the non-poor people and areas. In education, the
poor represent 40 percent of the total population of school-age children but benefit from only 32 percent
of the total recurrent education expenditure. Even the primary stipend program, a conditional cash
transfer program designed for the poorest 40 percent of students, is only marginally pro-poor. In the
                                                            
23
Excluding technical assistance projects/programs.
24
Operational efficiency has two dimensions: (i) minimizing cost per unit of output or achieving more value for the money spent; and (ii)
achieving the outcome for which the output is intended. This chapter deals more extensively with (ii) although makes references to (i) as
appropriate. A full coverage of (i) is beyond the scope of this document.

    
11 
   
health sector, the share of recurrent spending on the 16 poorest districts is less than the share going to the
16 richest districts. Since energy consumption is progressive, with higher income groups consuming
more, general public subsidies going to the sector are, in many ways, largely inequitable and benefit the
more affluent disproportionately.

Table 2: Resource Allocation vs. Cost of ADP Projects/Programs (FY07)

Note: YTC = (TPC –CE)/AA; YAC = YTC – IPC; IPC = TPC/AA.

Source: World Bank Staff Estimates

Government spending across Bangladesh’s 64 districts is fairly equalized, but the allocation of
development spending to poor districts is lower. Coefficients of variation are below 1 for both per
capita development and recurrent expenditures at the district level, which is low in comparison to other
developing countries. Of some concern is that per capita allocations under the development budget are
inversely related to poverty levels in districts (if the three Chittagong districts are excluded). The largely
discretionary ADP allocation system, at least at an aggregate level, does not seem to accommodate pro-
poor spending considerations (Figure 4).

Bangladesh’s Public Financial Management structure has served well the purposes of maintaining
aggregate fiscal discipline and allocating resources to broad strategic priorities. The management of
public finances in Bangladesh is concentrated in the hands of the Ministry of Finance (MoF) and the
Planning Commission (PC). These institutions play a leading role in planning, allocating, managing and
monitoring of public finances. The delegation of powers with decision-making authority over fiscal
aggregates is given to a few key members of the Budget Monitoring and Resource Committee,25
insulating decision makers from diverse interests and views at the preparation stage. The cabinet has
authority to accept or reject fiscal aggregates, which are presented to parliament early June for approval
by end-June. The dominant role of the MoF and PC also helps in the strategic allocation of resources.
Complemented by the development of a national strategy and to some extent, the introduction of a budget
strategy (through the Medium-Term Budget Framework (MTBF)), these agencies help maintain strategic
priorities. These effective institutional arrangements at the preparation stage suffer from weaknesses at
                                                            
25
The resource committee consists of the following members, chairman of NBR, the Governor of the Bangladesh Bank, Secretary of Finance,
and the Planning Secretary.

    
12 
   
the implementation stage. The main weaknesses are in ex-post accountability and lack of budget
comprehensiveness. Weak accountability is primarily related to the role of the Comptroller and Auditor-
General. While a lot of progress has been made in improving and modernizing the external audit
function, there is still work to be done to make it independent of the executive and a key instrument of
accountability.

Figure 4: Per‐capita development spending varies across districts. Those with higher poverty rates spend less
10 4
y = ‐1.833x + 2.318
R² = 0.176
9
3.5

8
Per Capita Spending in Thousand Taka

7 3

Per Capita Spending in Thousand Taka
6
2.5

2
4

3
1.5

1
1

0
0.5
GOPALGANJ
KISHORGONJ
THAKURGAON

NAOGAON

JHALOKATI
LALMONIRHAT

SHARIATPUR

FARIDPUR

PIROJPUR

KHAGRACHHARI
CHITTAGONG
GAIBANDHA

SATKHIRA

KUSHTIA
JAMALPUR

PANCHAGARH

MAULVIBAZAR

LAKSHMIPUR
NOAKHALI

JHENAIDAH
PATUAKHALI
JOYPURHAT
CHUADANGA

KURIGRAM
SHERPUR

DINAJPUR

DHAKA
NILPHAMARI

BARISAL

RAJSHAHI

NARSINGDI
SIRAJGANJ

MADARIPUR

CHANDPUR

MANIKGANJ

MEHERPUR

SYLHET
BHOLA
MYMENSINGH

BANDARBAN
RANGAMATI
NAWABGANJ
JESSORE

NATORE
BAGERHAT

NARAYANGANJ

MUNSHIGANJ
MAGURA

NETRAKONA

BARGUNA

BOGRA

GAZIPUR
TANGAIL

COMILLA
SUNAMGANJ
RANGPUR

HABIGANJ
BRAHMANBARIA

KHULNA

COX'S BAZAR
PABNA

NARAIL
RAJBARI

FENI

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

District Poverty Headcount

Note: Scatter Graph excludes districts with Chittagong Hill Tribes: Rangamati, Bandarban, Khagrachhari which represent outliers
in terms of development spending.
Source: FY 2006/07. MoF, World Bank staff estimates.

The introduction of the MTBF marked a new era in Bangladesh’s PFM reforms. Recognizing the
limitations of an annual, input-oriented and fragmented process, the government introduced a three-year
MTBF with the FY05-06 budget in four pilot line ministries.26 The MTBF was subsequently rolled out to
20 key line ministries (in FY09-10) covering over 53 percent of total budget expenditure and 86 percent
of the ADP.27 However, it is still too early for the MTBF to have had a measurable impact on budget
outcomes.

Strengthening the management role and flexibility of the line ministries in budgeting remains a
priority to improve budget performance. The MTBF approach is encouraging ministries to plan their
programs for the medium term, thus giving them a greater voice and decision making power in how
resources are allocated. At the same time it has placed new demands on them with regard to budget
planning and management. It will be important to ensure that the necessary institutional framework and
incentives are in place to sustain the engagement of the line ministries in the MTBF process. Some of the
key reforms in this context include the need to remedy inconsistencies between the procurement cycle and
the budget cycle, computerize Treasury and Accounting transactions and, in the longer-term, delegate
additional financial powers to the line ministries that meet benchmark PFM standards (with the aim of
moving from ex-ante controls towards accountability backed up by strengthened ex-post inspection and
audit).

Bangladesh lags other countries of its size and per capita income in aggregate expenditure and
revenue measures of fiscal decentralization. Sub-national expenditures as a percentage of total
consolidated government expenditures are estimated to be in the range of 3-4 percent. On the revenue
                                                            
26
The first pilot covered the ministries of Agriculture, Education, Social Welfare and Women Affairs.
27
Finance Minister, Budget 2009-10, Budget Speech, p.23.

    
13 
   
side, most major tax bases remain under the control of the central government and while own-source
revenue potential varies vertically across the different levels as well as horizontally across different
entities at each level, less than 2 percent of total government revenue is collected at sub-national levels,
again placing Bangladesh at the lowest end internationally. Besides the restricted revenue base, revenue
collection is undermined by weak municipal and local government tax administration. Consequently,
transfers from the central government are the main source of financing for many local governments.

Reforms of local government institutions and intergovernmental fiscal relations can be critical to
supporting more effective and efficient public spending in Bangladesh. The government has
maintained fiscal prudence and expanded services in a number of sectors, including education and health
and more recently rural roads. The challenge now is to improve quality and efficiency in service
provision, which is more difficult to achieve in the centralized framework. Greater devolution of
government would offer significant advantages by enhancing the quality of local public service delivery,
encouraging local resource mobilization, and allowing greater local voice in public service decisions. ■
 

    
14