Chapter 3: Medium Term Macroeconomic Framework
The macroeconomic framework underpinning the SFYP is consistent with the objectives of Government’s Perspective Plan for 2021. In line with the Government’s objectives of achieving 10% GDP growth by 2021 and reduction of the percent of population living below the poverty line to 15%, the SFYP aims at increasing real GDP growth to 8% by FY15 and reduces the level of poverty by around 10 percentage points to 22%. These projections are based on a multi-sector Computable General Equilibrium (CGE) model to derive a broadly consistent macroeconomic framework covering broad sectoral composition of growth, strategy for savings and investment, medium-term fiscal strategy and projections of balance of payments consistent with external viability.
Projected Growth Path of the Sixth Five Year Plan
Chapter 2 provides a strategy for achieving the planned growth and employment targets for the SFYP along with the required structural transformation. It identifies a number of growth and employment constraints and the Plan’s approach to addressing those constraints. A key challenge is to raise the rate of investment from 24.4 percent of GDP to 32.5 percent by the end of the SFYP. Much of this investment will need to be deployed to augmenting the supply of infrastructure, especially power.
In this background, achieving the average growth target of 7.3 % for the SFYP period (FY11-FY15) would involve accelerating GDP growth from 6.1% in FY10, the base year for the purpose of the Plan, to 8% by the end of the Plan period. The target is certainly ambitious and would entail adopting bold strategies to break away from the recent moderate growth outcomes. If the planned growth target is achieved, it would mean that per capita GDP would grow at about 5.5% per annum during the SFYP, reaching a peak of 6.5% by the end of the Plan period. The main macroeconomic outcomes associated with this growth path are summarized in Table 3.1. Per capita consumption, growing by more than 5% per annum, will bring about a broad-based improvement in living standards.
|Growth: Real GDP (%)||6.1||6.7||7.0||7.2||7.6||8.0|
|CPI Inflation (%)||7.3||8.0||7.5||7.0||6.5||6.0|
|Gross Domestic Investment (% of GDP)||24.4||24.7||26.8||29.6||31.0||32.5|
|Private Investment (% of GDP)||19.4||19.5||22.2||22.7||23.8||25.0|
|Infrastructure Investment (% of GDP)||2.0||2.0||3.5||4.5||5.0||6.0|
|Public Investment (% of GDP)||5.0||5.3||6.6||6.9||7.2||7.5|
|National Savings (% of GDP)||30.0||28.4||26.7||29.4||30.7||32.1|
|Consumption (% of GDP)||83.2||85.0||83.7||80.5||78.9||76.5|
The higher growth rate in the SFYP is predicated upon a substantial increase in the investment rate in the economy from the current level of 24.4% of GDP to 32.5% by the end of the Plan, averaging 29.6% of GDP per year during the Plan period. Much of the increase in investment could be financed through national savings, with the current account surplus steadily declining to a small deficit by the end of the Plan. The incremental Capital Output Ratio (ICOR) is expected to improve due to increased competitiveness and productivity engendered through expected improvements in infrastructure and greater economic openness as well as through technological progress resulting from partnership with foreign investors in strategic areas and the implementation of the ICT strategy (digital Bangladesh).
Sectoral Composition of Growth
Although detailed sectoral targets are only indicative, it provides a broad picture of sectoral growth prospects consistent with the target of 8% growth for the economy as a whole by the end of the Plan. Agriculture sector, accounting for about 19 percent of the economy, will continue to play a very important role in the economy. Its growth rate is expected to average around 4.5% per year, which is an exceptionally good performance compared with the past (Table 3.1).
The projected agriculture sector growth is predicated around continued emphasis on agricultural productivity and diversification supported by public spending on input subsidies and rural infrastructure development. The projections also assume that programs to support farm credit will continue. The loss of arable land due to urbanization and industrialization would likely limit the availability of land for the ‘cereal’ crop sub-sector over the medium and the long term. Under this land constraint situation, much of the additional growth in agriculture must come from infusion of new technology and rise in factor productivity. In order to increase the food production, enhance access to food and ensure nutrition, the Government has formulated a Country Investment Plan (CIP) for food security and agriculture development based on the National Food Policy and its Plan of Action, to be implemented within the framework of the SFYP.
As envisaged in the growth strategy, in order to boost employment in the nonagricultural sector, the manufacturing sector along with construction and organized services will be the engines of high growth. Manufacturing sector performance has suffered in recent years due to domestic supply constraints and the global economic recession. Manufacturing growth decelerated to only 6.5% percent in FY10, from the peak of 9.7% recorded in FY06. This slowdown must end and a strong rebound must start beginning in the first year of this Plan and sustained throughout the Plan period if the GDP growth target envisaged under the Plan is to be realized.
A revival of manufacturing growth is a precondition of high quality employment generation in the non-agricultural sector. The SFYP aims at an average of 9.7% annual growth in manufacturing, rising from the depressed levels of 6.5% in FY10 to 11.7% by the end of the Plan. Already there is a turn-around in the manufacturing sector in FY11 with growth climbing to 9.5%. Among the manufacturing activities sectors such as ‘food processing’; ‘leather and footwear’, ‘textile and clothing’, ‘pharmaceutical’, ‘ship building’, toys, and furniture are likely to be the main growth drivers. These labor-intensive activities are expected to experience double digit growth rates toward the end of the plan period. Diversification of the manufacturing base will be promoted by keeping import channels open and facilitating Bangladeshi firms to vertically integrate within the global production chains. ‘Machinery’ and ‘other-manufacturing’ sectors are also projected to become more buoyant due to the expansion of the economy and gradual diversification of exports. One of the thrusts of the industrial policy during SYFP will be to create scope for emergence of new activities (in exports or domestic production) and expansion of SMEs to take advantage of scale economies.
However, due to paucity of gas supplies as well as uncertainty with regard to the use of coal, the growth performance of ‘chemical-fertilizer’ and ‘petroleum’ sub-sectors would likely to remain moderate. Removal of critical infrastructure bottlenecks in power and transport sectors through massive new investments will be critical for planned acceleration of manufacturing sector expansion.
Growth performance of the construction sector during the Sixth Plan is likely to become stronger driven by demographic developments and strong demand for housing and infrastructure. Growth of construction sector is thus projected to rise from 6.5% in FY10 to 8.6% in FY15. Several factors will contribute to the growth of the construction sector. These are: (i) construction associated with real estate activities will surge due to increase in per capita income, growing work force and family formation, and continued investment of remittance inflows into this sector; and (ii) the non-real estate construction would also likely to grow rapidly due to the planned investments in mega infrastructure projects such as Padma Bridge, Elevated Expressways, dual carriage highways, etc.
The service sector has grown at a respectable pace of 7% per year in the recent 5-year period. However, despite huge potentials, IT sector performance has been a disappointment in terms of generating high-end services and employment. Nevertheless service sector performance has been fairly robust and still has the potential for opening up new and attractive employment opportunities for the educated youth. Experience with other economies generally suggests that growth in service sector usually follow the growth patterns of the manufacturing and primary activities. Accordingly, the Plan targets a further improvement in the performance of this sector, with emphasis on the expansion of modern services, such that this sector’s growth accelerates to 7.8% by the end of the SFYP. Rapid growth in IT related services along with expected expansion in tourism and hospitality sectors, as well as the projected expansion in health and education should provide additional jobs for doctors, health attendants and technicians, and teachers.
Job Creation and Rebalancing of Employment
With labor force growing by 3.2% per year and the very high level of underemployment in the farm and informal services sectors, creation of new jobs in the productive formal sectors of the economy will be a major challenge under the Plan. The growth strategy and the underlying sectoral shift projected in the Plan aim to address the employment issue by creating new jobs in the nonfarm sector and by a rebalancing of the composition of employment away from agriculture and into more productive sectors of the economy. This trend is already visible in the recent Bangladesh Bureau of Statistics (BBS) survey of farm and nonfarm employment, which shows that in the three-year period through 2009, more than 600,000 workers switched from agriculture to nonfarm sectors, in addition to another 3.6 million workers who joined various nonfarm activities during the same period (Table 3.4). The share of the farm sector in the labor force has accordingly dropped by 4.5 percentage points during the 3-year period to 43.6% by 2009.
|(As % of Change)|
|Share as % of Total GDP|
|(Annual growth rates)|
|Textile and Clothing||7.6||14.4||13.5||13.8||14.2||15.1|
|Share as % of Total GDP|
|of which Manufacturing||17.9||18.2||18.7||19.6||20.4||21.1|
|Textile and Clothing||6.6||6.8||7.0||7.4||7.8||8.2|
|Employment by Sector||(In Percent)|
Accelerated growth in manufacturing, construction and services sectors projected under the Plan should help the creation of 10.4 million new jobs in these sectors of the economy, which should be sufficient to absorb all new entrants in the job market (about 9.2 million) and also enable a sizable numbers of workers to find jobs away from the agriculture sector (about 1.2 million). The changing pattern of projected employment is shown in Figure 3.1 and Table 3.5
Figure 3.1:Comparison of Sectoral Employment
Source: Bangladesh Bureau of Statistics and Sixth Plan Projections
|Employment Growth (%)||4.0||3.2||3.1||3.3||3.2||3.2|
|Unemployment Rate (%)||4.0||4.1||4.0||4.0||4.0||3.7|
This is going to be a major challenge, but the recent BBS data provides comfort that, with the accelerated growth in the nonfarm sectors projected under the Plan, the economy should be able to create the targeted level of new jobs in the nonfarm sector. With the continued migration of labor force away from the agriculture sector and into more productive sectors of the economy, the problem of underemployment will diminish significantly. The recent migration of workers from the agriculture sector has already started to push up agricultural wages leading to higher income levels for the landless workers. If the Plan succeeds in its employment strategy outlined in Chapter 2 and incorporated in the projections above, there will be a visible reduction in the level of underemployment and a steady increase in real wages of the workers, which are essential outcomes for any successful poverty reduction strategy.
An additional comforting factor is the continued prospects for labor migration abroad in the range of 400-500 thousand workers per year that translates into permanent labor absorption of some 100 thousand workers.
Investment and Savings
One of the major problems Bangladesh economy is facing today is the stagnation of the overall level of investment in the domestic economy (Figures 3.2 and 3.3). Aggregate investment has stagnated in the 24%-25% of GDP range in recent years, despite a steady increase in the national savings rate. Although private sector investment has been increasing at a pace slightly above the rate of growth of GDP, a secular decline in public investment in relation to GDP largely offsets that, keeping total investment broadly stagnant in relation to GDP. This low level of investment significantly falls short of the investment rate needed to support the 8% GDP growth target set for the end of the Plan period.
Figure 3.2:Pattern of Private Investment Growth
Source: Bangladesh Bureau of Statistics
Figure 3.3:Public Investment and ADP in relation to GDP
Source: Ministry of Finance
Achieving the higher growth target will require total investment under the Plan to increase steadily by 8.1 percentage points in relation to GDP to 32.5% of GDP by FY15. In addition to the private sector, the public sector will play a catalytic role in raising the total investment rate to the required levels during the SFYP period. Public investments and policies would create the necessary investment climate and heighten investors’ (both national and foreign) confidence to undertake the required investments. Some key areas of improvement in this respect are: (i) energy supply including electricity and gas; (ii) infrastructure including roads, railways, bridges, embankments and dykes; (iii) telecommunications; (iv) ports; (v) legal and administrative systems including property rights issues; (vi) socioeconomic environment including law and order situation; and (vii) sound monetary policy and sustainable management of public finances.
As in the past, much of the additional increase in the growth of investment is projected to come from the private sector. The secular increase in the relative share of private investment in total investment is in part a reflection of reforms initiated in late 1980s and in 1990s by removing restrictions, initiating privatization of public enterprises, and creating a more favorable investment climate. The growing share of private sector investment reflects favorable private sector response to the improved investment climate. However, the rate of growth of private sector growth in investment has slowed down in recent years due to infrastructure constraints which tended to intensify on account of declining public investment and the inability of the public sector to undertake large infrastructure projects.
The declining trend in public investment in relation to GDP is a matter of concern. Past difficulties in ADP implementation (Table 3.6) prevented the government from investing in many critical areas such as infrastructure and agriculture. Over the years the infrastructure gap has been widening and has become a binding constraint by choking Bangladesh’s economic growth potential. It has also become clear that the past practice of relying solely on the Annual Development Program (ADP) for providing the required infrastructure must give way to the adoption of Public Private Partnership arrangements in delivering large infrastructure projects. Thus in addition to launching a bigger ADP in relation to GDP during the plan period, the Plan also envisages bigger public sector investment in infrastructure programs under the newly approved PPP framework. The Government has also announced a major initiative for boosting power generation and expand power distribution network to alleviate the ongoing energy crisis in the country.
|Fiscal Year||Budget||Actual||Actual as % of Budget||% Increase over|
the previous year
|(In billion taka)||(%)||(%)|
Efforts to reverse the declining trend in ADP was launched with the FY10 budget and intensified further in FY11 budget, the first year of SFYP. The Government established an ambitious target for ADP in FY10 by setting the ADP target at Tk. 305 billion, which was about 57% higher than the outturn of the preceding year. Although the actual increase was lower (31.8%), this was a major improvement over the ADP implementation rate recorded in recent years. After many years of steady decline, ADP spending in relation to GDP increased by 0.5% in FY10. Building on this gain, the target for ADP in FY11 has been set at 0.8 percentage points higher at 4.9% of GDP. The Plan’s objective is to sustain this momentum by increasing the ADP size by an additional 2.4 percentage points to 6.1 % of GDP. Special emphasis has also been given to infrastructure and power sectors in the FY11 ADP. Implementing this larger ADP, while maintaining the quality of spending, will certainly be a major challenge. To ensure the quality of spending and better project implementation, all ministries are being brought under the Medium Term Budget Framework (MTBF). The planning and budgeting processes are being strengthened to improve the quality of public investment.
As part of its strategy to allow the private sector a greater role, the Plan underscores the importance of Public Private Partnership (PPP) in infrastructure projects and other areas. Under the new PPP initiative and the associated investment guideline, the procedures for PPP investment has been streamlined and a new PPP Office established to promote PPP projects in Bangladesh based on transparent investment and approval criteria. PPP investment is now being allowed in a wide range of projects under streamlined approval criteria. The SYFP envisages a sizable increase in infrastructure investment under the PPP initiative during the Plan period. Although infrastructural bottlenecks are severe, it will take time for the PPP initiative to gain momentum and reach its full potential. A large number of infrastructure projects are already in the pipeline, the Plan targets about 2% of GDP in PPP related investment in the initial years, and reaching a peak of 6% of GDP by the end of the Plan (Figure 3.4). It is envisaged that public sector investment under PPP initiatives will amount to at least an additional one percent of GDP, increasing total public sector investment to 7.5 % of GDP by FY15.
Figure 3.4:Infrastructure and Total Investment in Bangladesh
Source: Ministry of Finance and Sixth Plan Projections
Power sector investment in electricity generation will be a central component of the PPP investment initiative. The additional gross generation target of 11,457 MW of electricity by 2015 (Table 3.7), will require about $9.5 billion of investment in this sector10. Sizable investment will also be made in the Rooppur Nuclear Power Project under a joint venture public sector cooperation arrangement. Investment in gas exploration, extraction and distribution is estimated to be around Taka 18,000 Crore ($2.6 billion) during the Plan period11.
|Electricity Generation Scenario||FY10||FY11||FY12||FY13||FY14||FY15|
|Target Electricity by FY15||11457|
|Incremental Target (FY10-FY15)||194||2166||1178||3176||2333||2410|
|Of Total Plants:||(Total up to 2013)|
|Electricity from Diesel/Furnace oil||1450||620||1800||400||4270|
In order to ensure financing of PPP projects by playing a catalyzing role, the Government has established the Bangladesh Infrastructure Financing Facility (BIFF). As designed, BIIF will help finance infrastructure projects by using its own resources, augmenting its resources by issuing infrastructure bonds, allowing other institutional investors of international and domestic origin to invest in BIIF as minority shareholders, and allowing the Government to increase the capital base of BIIF through budgetary subventions in future.
At its inception in 2010, BIIF was endowed with an initial capital of TK 16 billion (equivalent to $230 million). The ultimate objective of BIIF will be to help finance PPP infrastructure projects by taking direct equity participation in financially viable projects.
The sharp rise in investment projected in the SFYP will be largely supported by a significant increase in national savings. National savings, comprising domestic savings and inflow of workers’ remittances, have been on a rising trend owing to increased domestic saving but also because of rapid growth in the inflow of remittances (Figure 3.5). As the national savings rate increased the domestic investment effort did not expand commensurately causing the external current account balance to reach a record surplus of 3.7% of GDP in FY10.
Figure 3.5:Gross National Saving Rebound and its Key Drivers
Source: Bangladesh Bureau of Statistics and the Bangladesh Bank
Building on the recent positive performance on the national savings front, the Plan aims to increase national savings rate by 2.1 percentage points to 32.1% of GDP. The pace of increase is about the same as recorded in recent years. The fall in the savings rate in FY11 was primarily attributable to the slowdown in remittances and a marked increase in imports associated with the global commodity price increase. The savings rate should revert back to the level of the base year by FY13 as global prices stabilize and growth in the inflow of remittances reverts back to its projected normal level. Unlike the recent past when the increase in the savings rate was solely attributable to private savings, during the Plan period one third of the projected increase should come from public sector savings. The projected increase in the public sector savings, despite a sizable increase in recurrent outlays of the government, is predicated upon the success in government’s revenue mobilization efforts. Inflow of workers’ remittance has been playing a very important role in the growth of national savings in Bangladesh in recent years. Increased number of migration of workers abroad to traditional Gulf countries and to newer destinations in East Asia, and Europe and North America has contributed to this sustained growth. New initiatives to make transfers through the formal banking channels have also contributed to the buoyancy in remittance growth.
The increase in national savings projected under the Plan will depend on the continued growth in remittances, albeit at a slower pace, as discussed in the balance of payments section below. Improved investment climate and more attractive rates of return on domestic investment, in part augmented by increased demand for investment, would also encourage transfer of savings held by expatriate Bangladeshi workers abroad. A part of the increased national savings would come from the public sector through increased revenue mobilization efforts.
Balance of Payments and Exchange Rate Management
A comfortable balance of payments (BOP) situation, ensuring comfortable external reserve position and buoyant growth in import payments and export receipts, is a precondition for the success of the Plan. The favorable BOP situation enjoyed by Bangladesh in recent years with record current account surplus (3.7 % of GDP) and a rapid buildup of foreign exchange reserves in FY10 is certainly reassuring in this regard. Sound macroeconomic management over the years has contributed to the strengthening of the BOP in such a manner that Bangladesh is the only country in South Asia with consistent surplus in the external current account position.
Merchandise exports have been growing at a respectable rate of 14.5% during the five-year period preceding the global economic crisis (Table 3.8). Much of the export growth was driven by the knitwear and garment sectors, which gained further momentum in the post-MFA period (Table 3.9). Some nontraditional exports also showed promising signs, although their export base still remains narrow. Bangladesh’s exports suffered significantly during the global economic crisis although Bangladesh fared better than many of its global competitors. Exports have rebounded very strongly in FY11 due to stronger demand from both traditional (European Union and the USA) and non-traditional markets for Bangladeshi textile products. Particularly notable is the surge in demand for raw jute and jute goods following years of steep decline. However, the rebound in exports following global recovery would be sustainable only if the government succeeds in alleviating domestic constraints like power crisis and reduces trade logistic costs especially relating to domestic transport.
|(Annual Growth Rate)|
|(As % of Total Exports)|
Based on the recent performance, export sector under the Plan is projected to grow by 19.4% per annum in US dollar terms, which is higher than usual because of the sharp increase in exports recorded in FY11. Excluding the strong performance of FY11, export growth during the remainder of the Plan is projected to be about the same as in recent pre-global crisis years (Annex Table 3). The projection entails an increase in the share of exports in relation to GDP to rise by 7.7 percentage points to 23.9% of GDP by the end of the SFYP reflecting a leading role that export sector is envisaged to play in increasing domestic activity. While clothing exports would continue to dominate the export outlook, some important non-traditional exports like footwear, other leather products and light engineering products (bicycle and electronic products), pharmaceuticals, and ship building are likely to grow at a much faster rate.
Import payments are also likely to grow at a buoyant pace of 20.4% on average during the Plan period on account of an unusually strong growth in the first year of the Plan. Following a marked slowdown in import payments in FY10 due to the global recession induced decline in global commodity prices and lower intermediate imports associated with much slower textile exports, there has been a very strong rebound in imports in FY11. Imports are however projected to come down to a more sustainable pace of 14.3% over the rest of the Plan period. The projected high import growth will address critical capacity constraints in the power and other infrastructure sectors along with capital machineries and raw materials for the industrial sector expansion.
Trade account deficit will increase significantly due to higher imports associated with increased domestic and export activity. Services and income account deficits are also projected to grow wider over the years in line with their recent trends. However, the wider trade account, services account and income account deficits will continue to be largely offset by the surplus position on current transfers (mainly on account of workers’ remittances). The widening of the trade account deficit is not a matter of concern since this is associated with increased demand for imports related to the targeted increase in investment and exports and will be largely financed through growing inflows of export earnings and remittances. The external current account deficits hovering at less than one percent of GDP would be sustainable and justifiable for a developing country like Bangladesh given the growing import demand associated with the higher real economic growth objectives.
The overall balance of the balance of payments should also continue to remain in surplus during much of the plan period except FY11, thereby helping Bangladesh Bank to maintain its foreign exchange reserve at levels commensurate with the growing level of imports. The surplus position in the overall balance despite moderate deficits in the external current account balances would call for surpluses in the capital and financial accounts during FY12-15. In addition to continued reliance official bilateral and multilateral assistance to finance development projects, there will be need for foreign direct investment (FDI) and the government may also consider non-concessional borrowing from private sources. Bangladesh’s strong growth performance and favorable macroeconomic outlook envisaged under the SFYP should help attract FDI in larger amounts envisaged under the Plan. Recent reaffirmation of Bangladesh’s favorable sovereign credit rating with stable outlook would also help in issuing sovereign bonds in international markets if the government decides to do so. Gross official reserves is projected to increase to about US$16.1 billion by the end of the Plan, which would be equivalent to 3.3 months of projected import payments.
Exchange Rate Policy
Bangladesh Bank has been following a flexible market-based exchange rate policy since the adoption of the floating exchange rate regime in 2003. This policy has generally served the economy very well by allowing the rate to be determined in the interbank foreign exchange market with some interventions from Bangladesh Bank to minimize the exchange market volatility. This policy has enabled Bangladesh Bank to ensure stability in the exchange rate, primarily against the US dollar, while at the same time enabling it to build up foreign exchange reserves to a very comfortable level (above $10 billion; see Figure 3.6). Bangladesh Bank, as an active participant in the foreign exchange market, has been both buying and selling in the market, with a view to smooth out unnecessary and avoidable volatility/fluctuations in the exchange rate through injection or withdrawal of liquidity. In FY10, Bangladesh Bank was a net buyer in the market in order to prevent a sharp appreciation of the exchange rate which could have eroded the competitiveness of Bangladeshi exporters. This policy supported the Bangladeshi exporters at a time exports had suffered greatly due to the global economic crisis, while at the same time still allowing the taka to appreciate in real effective terms through the inflation differential.
Figure 3.6:Developments in the Exchange Rate and External Reserves
Source: Bangladesh Bank
As the balance of payments situation changed markedly in FY11, with the current account turning from a large surplus ($3.7 billion) in FY10 to a small deficit ($0.2 billion), Bangladesh Bank allowed the exchange rate to depreciate in the interbank market and also allowed the interest rates to be largely determined by market forces to contain import growth. This policy has helped restore balance of payments stability and protect reserves by containing import payments and promoting export competitiveness.
The policy of exchange rate flexibility with limited interventions to ensure market stability will be continued during the Plan period. While maintaining the exchange market stability, the rate will be allowed to be determined by economic fundamentals and taking into account the objective of maintaining comfortable reserve levels throughout the Plan period. Given the balance payments outlook, characterized by moderate external current account deficits and surpluses in the overall balance, there should not be any major instability in the exchange market. The current comfortable reserve position of Bangladesh Bank should help fending off any speculative pressure in the exchange market. The comfortable external position will also allow Bangladesh Bank to consider easing some of the capital accounts restrictions in a phased manner. Such a phased liberalization of the capital account, in a stable macroeconomic and strong external environment, would help boost investor confidence in the economy and promote inflow of FDI.
Monetary management will play a central role in ensuring macroeconomic stability and allocating adequate levels of credit for private sector economic activity/expansion. Despite the recent increase in the size of the stock market and a surge in turnover, borrowing from the banking system continues to dominate financing of private sector investment and other economic activity. Monetary growth over the past two years has been generally supportive of growth. However, to contain inflationary pressures in recent months mostly due to global food and fuel price increases, the Government has taken steps to increase domestic production and reduce the growth of money supply (Box 3.1).
Box 3.1:Explaining Inflation in Bangladesh
Inflation has become a major concern in Bangladesh. During the last two years the general price level in Bangladesh has gone up due mainly to the exorbitant rise in food and fuel prices in the world markets and accommodating monetary expansion.
Government has decided to tackle the inflation issue comprehensively both from the supply side and the demand side. In order to raise food production, appropriate policies in the form of price support, input support and credit support have been adopted. The impact of such measures has already been manifested in bumper harvests leading to 5 percent growth in crop production during the last two fiscal years. As a result, there has been a reduction in rice prices in recent months.
Demand side measures primarily relate to reducing the growth of money supply through a range of monetary policy instruments. The measures include removing the cap on interest rate, lowering of credit expansion ratio (i.e. credit/deposit ratio), and increasing CRR and LRR.
These measures are expected to reduce the growth of money supply and thereby lower inflationary pressures. Lower rate of monetary expansion will also reduce the demand pressure on the balance of payments. The Government intends to keep money supply growth broadly aligned to the Sixth Plan’s inflation targets and support this through prudent fiscal management to avoid a credit crunch for the private sector.
Thus the key objective of the monetary policy during the Plan period will be to allow monetary aggregates to expand in a manner consistent with the growth and inflation targets envisaged under the Plan. Consistent with this strategy, broad money (M2) in nominal terms is projected to increase on average at 16.8% percent per annum to Tk. 7.9 trillion by the end of the Plan (Figure 3.7 and Annex Table 3.7). Demand for broad money will however vary over the Plan period in line with GDP growth rates and inflation targets.
Figure 3.7:Selected Monetary Aggregates
Source: Bangladesh Bank and SFYP Projections
Ensuring adequate levels of domestic credit for the private sector over the Plan period, within the aggregate limits of the targeted broad money expansion will require containing credit to the government (net) and other public entities within reasonable limits. The fiscal deficit targets under the Plan, while sustainable will however require sizable new borrowing from the banking system. If needed, the Government may have to seek additional external financing to avoid any crowding out of the private sector. Particularly important in this respect will be to limit credit to the loss making public enterprises which would potentially crowd out private sector credit and at the same time lead to the accumulation of nonperforming assets of the state-owned commercial banks.
A more effective reform program for public sector enterprises with a view to improving performance and minimizing losses will be important for limiting pressures for credit expansion to this sector. Interest rate policy will continue to remain an important policy instrument in the overall monetary management. While the interest rate structure will continue to be market determined, efforts will be made to reduce the spread between the lending and deposit rates by creating a more competitive environment in financial intermediation. Persistence of a wide spread between average borrowing and lending rates is a sign of inefficiency in financial intermediation, which negatively impacts both savings and investment. The spread needs to come down to a more acceptable range within the Plan period.
The progress with banking sector reforms and related agenda moving forward was discussed in Chapter 2. The Government has initiated related reforms in the financial sector. For example, in order to improve the efficiency of the banking system, strengthen the financial position of banks and ensure effectiveness of monetary policy, Bangladesh Bank has adopted a Strategic Action Plans (SAP) for 2010-14. The SAP identifies 16 Major Strategic areas with specific objectives and action plans under each one of them for implementation over the SAP period. The key areas include: reviewing of the monetary policy framework to enhance effectiveness of monetary policy; strengthening of the regulatory and supervisory framework; further deepening of financial markets; full automation of the Credit Information Bureau; and strengthening the risk-based internal audit system. A complete list of the key strategies is provided in Box 3.2.
Risks and Uncertainties
The macroeconomic outlook presented above has significant downside risks of domestic and external origins, which could have significant negative impact on performance. On the domestic front the main challenge is the implementation of policies for realizing the projected investment targets and mobilizing the target for NBR tax revenues through modernization of tax administration and broadening of the tax base. Continued governance problems may prevent realization of the efficiency gains in public expenditure and investment under the ADP and PPP arrangements. There are also risks of significant exogenous domestic shocks like cyclone and flood or political unrest, which may undermine the sectoral and overall macroeconomic outlook.
The external environment facing the economy also presents several risks and uncertainties which may have significant impact on performance. Some of these are:
- The pace of economic recovery in the industrial world, the primary destination of Bangladeshi exports, in the aftermath of the global economic meltdown.
- The emerging debt crisis in several of the EU economies and the fallout of that for the global economy and the EU economies in particular is a matter of concern.
- The unresolved issue of global macroeconomic and trade imbalances among several major economies (in particular between the USA and China and Japan) and the tensions that may create in the areas of international trade and global financial system.
- Uncertainties about global commodity prices and the price of oil and cereals in particular
Box 3.2:Bangladesh Bank’s Strategic Action Plans, 2010-2014
Strategy 1: Revisit the current monetary policy framework to ensure continuing effectiveness of monetary policies by strengthening and widening the consultative process in formulation of monetary policy; and by upgrading in house capacity on monetary and macroeconomic issues.
Strategy 2: Strengthen regulatory and supervisory framework to enhance financial sector resilience and stability by: revisiting the regulatory regime to identify needs for changes; strengthening supervisory methodology and enforcement; developing readily accessible database on Key Performance Indicator: overseeing the implementation of Basel-II capital requirements in banks.
Strategy 3: Further deepen financial markets in Bangladesh by promoting and facilitating issuance of trade in corporate securities backed by mortgage and other financial assets.
Strategy 4: Financial inclusion and broadening of access by increasing emphasis on financing needs of agriculture and SMEs.
Strategy 5: Develop more efficient currency management and payment systems by comprising of automated cherub processing system & electronic fund transfer; establishing framework for efficient payment system; promoting on-line banking, shared ATMs etc; reducing waiting times of banking services; campaigning; promoting clean currency notes in circulation.
Strategy 6: Strengthen reserve management capabilities by optimizing returns from investments of resources, with due attention to liquidity and risks of losses.
Strategy 7: Enhance regulatory and supervisory framework against money laundering by meeting the international standard for AML &CFT; strengthening of Financial Intelligence Unit (FIU); enhancing of regional and international cooperation; coordinating among law enforcement and related agencies; taking membership of EGMONT group.
Strategy 8: Introduce separate and comprehensive guideline and supervision for Islamic banking by developing separate regulation and supervision for Islamic shariah based banks
Strategy 9: Develop more efficient management of government domestic debt by ascertaining exact debt position in government accounts with BB offices and Sonali Bank treasury branches; optimizing borrowing costs; strengthening preventive measures against forgeries; deepening government securities market for market based debt management.
Strategy 10: Streamline and transform data reporting, processing and dissemination through proper ICT framework; by reassessing usefulness of data contents of BB publication; implementing Enterprise Resource Planning (ERP), Core Banking Solutions (CBS) and Enterprise Data Warehouse (EDW); and developing web based data collection from banks and financial institutions.
Strategy 11: Full automation of credit information bureau (CIB) by providing online checking, data submission and report generation for the financial institution.
Strategy 12: Enhance the legal empowerment of BB in different functional areas by treating publicly and privately owned banks for supervision and regulatory purposes; developing framework to offer better employee attraction and retention package.
Strategy 13: Attract, retain and develop people by ensuring that skilled people are recruited and retained; encouraging performance based work culture and discipline; considering of relative merits specialization in central banking functions and staff deployment decision; strengthening organizational structure; conducting working environment.
Strategy 14: Strengthen risk-based internal audit to add value to the Risk Management Process in BB by complying with ISA; conducting required investigation; providing objective assurance to the effectiveness of risk management; providing Internal Audit Department (IAD’s) employees with local and international professional training; strengthening internal controls; adopting aspects of BAS, IFRS etc; modernizing of Financial Management System.
Strategy 15: Develop effective channels for communicating central banks policies and initiatives to stakeholders by coordinating interactions between internal stakeholders; communicating with external stakeholders; building stronger and positive image of BB.
Strategy 16: Create a ‘Strategic Planning Unit’ as a process owner of BB strategic plan by setting up ‘Strategic Planning Unit’ and resource planning.Source: Bangladesh Bank
In view of these risks and uncertainties, the SFYP will pursue prudent macroeconomic management. The Government also stands ready to take corrective actions to offset the adverse effects of any unforeseen developments
Bangladesh economy has the potential to realize the Plan objectives. The government strategy supported by comprehensive reforms in many areas gives credibility to the Plan. The major macroeconomic focus areas are the alleviation of bottlenecks for economic growth through much higher investment in the power and other infrastructure and by implementing a much larger ADP in an effective manner. Mobilization of resources to finance the Plan will also be critical in ensuring macroeconomic stability. There are risks and uncertainties but those can be managed over the medium term. Overall, the growth target of 8% by the end of the Plan is feasible, provided necessary supportive policies are put in place to alleviate the prevailing constraints. These issues are discussed in detail in the individual chapters of Part II of the Plan document.
|Real GDP Growth||6.1||6.7||7.0||7.2||7.6||8.0||7.3|
|Nominal GDP Growth||12.9||13.4||14.3||13.8||14.1||14.3||14.0|
|CPI Inflation (average)||7.3||8.0||7.5||7.0||6.5||6.0||7.0|
|Total Revenue and Grants (% of GDP)|
|ADP (PPP + Public entities)||3.7||4.5||5.1||5.3||5.7||6.1||5.3|
|Overall balance (including grants)||−3.1||−3.9||−4.5||−4.4||−4.5||−4.5||4.4|
|Overall balance (Excluding grants)||−3.7||−4.4||−5.0||−5.0||−5.0||−5.0||−4.9|
|Money and Credit (End of fiscal year in billion TK), percentage change)|
|Net foreign assets||671||655||722||822||950||1085||846.9|
|Credit to private sector||2708||3439||4126||4869||5746||6780||4991.9|
|Balance of payments|
|Exports (In billions US$)||16.2||22.4||25.7||29.4||33.8||38.8||30.0|
|(annual percentage change)||4.2||38.0||14.5||14.5||14.5||15.0||19.4|
|Import (In billions US$)||21.4||31.0||35.4||40.3||46.1||52.8||41.1|
|(annual percentage change)||5.4||45.0||14.0||14.0||14.5||14.5||20.4|
|Current Account Balance(in billions US$)||3.7||−0.3||−0.2||−0.2||−0.5||−0.7||−0.4|
|(percent of GDP)||3.7||−0.3||−0.2||−0.2||−0.3||−0.4||−0.3|
|Capital Account Balance(In billions US$)||−0.9||0.2||1.1||1.5||2.1||2.3||1.4|
|Gross official reserves in billion US$)||10.7||10.7||11.6||12.9||14.5||16.1||13.2|
|In months of imports||5.1||3.6||3.4||3.4||3.4||3.3||3.5|
|Nominal GDP (In billions taka)||6943||7875||8999||10245||11685||13351||10430.8|
|Gross investments(in billion taka)||1694||1945||2592||3032||3622||4339||3106.1|
|Gross national savings(In billion Taka)||1953||1918||2577||3015||3587||4286||3076.7|
|(In billions of taka)|
|Total revenue and grants||797||991||1237||1428||1690||2015||1472|
|Pay and allowances||161||204||234||277||316||374||281|
|Goods and services||87||108||118||143||164||200||147|
|Subsidies and transfers||267||310||352||410||479||561||422|
|ADP(PPP+ Public entities)||257||345||460||545||669||808||566|
|Non-ADP capital spending||87||87||146||184||210||227||171|
|Overall balance (including grants)||−217||−301||−402||−454||−527||−602||−457|
|(In Percent of GDP)|
|Total revenue and grants||11.5||12.6||13.7||13.9||14.5||15.1||14.0|
|Pay and allowances||2.3||2.6||2.6||2.7||2.7||2.8||2.7|
|Goods and services||1.3||1.4||1.3||1.4||1.4||1.5||1.4|
|Subsidies and transfers||3.8||3.9||3.9||4.0||4.1||4.2||4.0|
|Non-ADP capital & Net lending||1.4||2.0||3.2||2.8||2.8||2.7||2.7|
|Overall balance (excluding grants)||−3.7||−4.4||−5.0||−5.0||−5.0||−5.0||4.9|
|Nominal GDP(in billion of taka)||6943||7875||8999||10245||11685||13351||10431|
|Items||FY 10||FY 11||FY 12||FY 13||FY 14||FY 15|
|Export f.o.b.(including EPZ)||16236.0||22405.7||25654.5||29374.4||33780.6||38847.7|
|Import f.o.b (including EPZ)||−21388.0||−31012.6||−35354.4||−40304.0||−46148.1||−52839.5|
|Of which : Workers’ remittances||10987.0||11536.4||12690.0||14212.8||15918.3||17828.5|
|Current Account Balance||3734.0||−374.9||−192.1||−229.4||−438.5||−648.5|
|Financial and Capital Account||−869.0||160.6||1094.4||1519.1||2051.0||2286.0|
|Foreign Direct Investment||636.0||950.0||1050.0||1250.0||1350.0||1590.0|
|Foreign Portfolio Investment||−117.0||−80.0||−50.0||−50.0||−50.0||−50.0|
|Net Aid Loans||914.0||788.1||1802.6||1989.1||2378.7||2681.0|
|Other Long term Loans (net)||−156.0||−200.0||−200.0||−50.0||−120.0||−170.0|
|Other Short term Loans (net)||231.0||412.0||347.6||407.0||513.3||520.0|
|Trade Credits (net)||−1045.0||−1105.0||−1250.0||−1250.0||−1350.0||−1450.0|
|Commercial Banks (net)||−315.0||−160.0||−240.0||−370.0||−400.0||−350.0|
|Errors and Omissions||−556||0.0||0.0||0.0||0.0||0.0|
|Exchange rate (%)||69.29||71.51||74.29||76.97||79.60||82.17|
|Inflation(Trading Partners) %||3.3||3.0||2.8||2.5||2.5||2.5|
|Export as (%) of GDP||16.2||20.3||21.2||22.1||23.0||23.9|
|Import as (%) of GDP||21.3||28.2||29.2||30.3||31.4||32.5|
|Remittance as (%) of GDP||10.9||10.5||10.5||10.3||10.2||10.0|
|Current Account Balance as (%) of GDP||3.7||−0.3||−0.2||−0.2||−0.3||−0.4|
|FDI as (%) of GDP||0.6||0.9||0.9||0.9||0.9||1.1|
|MLT as (%) of GDP||1.6||1.4||2.1||2.2||2.3||2.4|
|Net Foreign Assets||479.3||670.7||655.4||722.4||821.7||950.1||1084.6|
|Net Domestic Assets||2485.7||2959.7||3800.2||4331.1||5040.4||5850.0||6803.4|
|Domestic Credit (a+b+c)||2885.1||3401.8||4356.3||5265.3||6256.9||7413.1||8761.6|
|Claims on Public Sector (a+b)||705.8||694.2||917.7||1138.9||1387.8||1667.6||1981.8|
|a. Claims on Govt. (net)||581.9||543.9||717.2||918.4||1147.3||1407.6||1706.3|
|b. Claims on Other Public||123.9||150.2||200.5||220.5||240.5||260.0||275.5|
|c. Claims on Private Sector||2179.3||2707.6||3438.7||4126.4||4869.1||5745.6||6779.8|
|Net Other Assets||−399.4||−442.1||−556.1||−934.2||−1216.5||−1563.2||−1958.1|
|Monetary Survey (Flow) (Taka billion)|
|Net Foreign Assets||102.6||191.4||−15.3||67.0||99.3||128.4||134.5|
|Net Domestic Assets||369.6||474.0||840.6||530.9||709.3||809.6||953.5|
|Domestic Credit (a+b+c)||409.7||516.7||954.6||909.0||991.6||1156.2||1348.4|
|Claims on Public Sector (a+b)||117.4||−11.6||223.5||221.2||248.9||279.8||314.2|
|a. Claims on Govt. (net)||111.9||−37.9||173.3||201.2||228.9||260.3||298.7|
|b. Claims on Other Public||5.5||26.3||50.3||20.0||20.0||19.5||15.5|
|c. Claims on Private Sector||292.3||528.3||731.1||687.7||742.7||876.4||1034.2|
|Net Other Assets||−40.2||−42.7||−114.0||−378.1||−282.3||−346.7||−395.0|
|Monetary Survey (Growth based On initial Broad money) (% change)|
|Net Foreign Assets||4.1||6.5||−0.4||1.5||2.0||2.2||2.0|
|Net Domestic Assets||14.8||16.0||23.2||12.2||14.0||13.8||14.0|
|Domestic Credit (a+b+c)||16.4||17.4||26.3||20.9||19.6||19.7||19.8|
|Claims on Public Sector (a+b)||4.7||−0.4||6.2||5.1||4.9||4.8||4.6|
|a. Claims on Govt. (net)||4.5||−1.3||4.8||4.6||4.5||4.4||4.4|
|b. Claims on Other Public||0.2||0.9||1.4||0.5||0.4||0.3||0.2|
|c. Claims on Private Sector||11.7||17.8||20.1||15.8||14.7||15.0||15.2|
|Net Other Assets||−1.6||−1.4||−3.1||−8.7||−5.6||−5.9||−5.8|
|Monetary Survey (% change)|
|Net Foreign Assets||27.2||39.9||−2.3||10.2||13.7||15.6||14.2|
|Net Domestic Assets||17.8||18.8||23.8||16.4||16.6||16.6||16.7|
|Domestic Credit (a+b+c)||15.9||17.6||28.3||21.1||19.3||18.9||18.7|
|Claims on Public Sector (a+b)||20.0||−1.6||32.2||24.1||21.9||20.2||18.8|
|a. Claims on Govt. (net)||23.8||−6.5||31.9||28.1||24.9||22.7||21.2|
|b. Claims on Other Public||4.7||21.2||33.4||10.0||9.1||8.1||6.0|
|c. Claims on Private Sector||14.6||24.2||27.0||20.0||18.0||18.0||18.0|
|Net Other Assets||11.2||10.7||25.8||68.0||30.2||28.5||25.3|
|GDP Growth (real)||6.1||6.7||7.0||7.2||7.6||8.0||7.3|
|GDP Growth (nominal)||12.9||13.4||14.3||13.8||14.1||14.3||14.0|
|Fiscal accounts||(In billion taka)|
|Govt Budget Deficit, in billion taka||217.2||301.1||401.5||453.9||526.8||602.5||457.2|
|Govt Budget Deficit, as % of GDP (including grant)||3.1||3.8||4.5||4.5||4.5||4.5||4.4|
|(In billion USD)|
|Interest payment on foreign debt||0.2||0.2||0.3||0.3||0.3||0.4||0.3|
|interest rate on foreign debt||1.0||1.1||1.1||1.2||1.2||1.3||1.2|
|(In billion Taka)|
|Interest payment on foreign debt||13.7||16.0||18.7||22.8||25.7||31.3||22.9|
|Interest rate on foreign debt||1.0||1.1||1.2||1.2||1.2||1.3||1.2|
|(In billion Taka)|
|Interest Payment on domestic debt||134.8||134.0||160.9||173.1||208.5||235.6||182.4|
|Average interest rate on domestic debt||9.9||8.3||8.5||7.9||8.2||8.0||8.2|
|Total Govt Debt Outstanding||2777.6||3140.6||3596.2||4049.0||4577.7||5182.1||4168.0|
|Total Debt Services (in billion taka)||198.7||201.2||233.3||267.7||312.2||356.5||274.2|
|(% of GDP)|
|Total Debt outstanding||40.0||39.9||40.0||39.5||39.2||38.8||39.2|
|Total Debt Services||2.9||2.6||2.6||2.6||2.7||2.7||2.6|
|External debt as% export & remittance||74.7||62.2||59.7||56.7||54.1||51.8||56.9|
|Debt service, in percent of export & remittance||3.4||2.8||2.5||2.8||2.6||2.6||2.7|
|Nominal GDP (In billion Tk)||6943||7875||8999||10245||11685||13352||10431.4|
|Exports & Remittances(in billion taka)||1886||2427||2849||3355||3956||4657||3448.8|
|Inflation Rate (Trading Partners), %||3.3||3.0||2.8||2.5||2.5||2.5||2.7|
|Exchange rate (Taka per us$)||69.3||71.5||74.3||77.0||79.6||82.2||76.9|