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Bangladesh
is one of the world's poorest, most densely populated,
and least developed countries; its per capita income for
1997 is estimated at $263. Most of its population of
approximately 127 million is tied directly or indirectly
to agriculture, which accounts for 35 percent of Gross
Domestic Product (GDP) and about 70 percent of the
labour force. While economic growth in fiscal year (FY)
1998 dropped 0.3 percentage points to 5.6 percent,
primarily due to lower agricultural production, it
remained above the historical average annual growth rate
of 4.0 to 4.5 percent over the last ten years. The
historical growth rate, though positive on a per capita
basis, is inadequate to relieve the poverty faced by
over half the population.
GDP growth has been dampened over the years by a number
of factors: low productivity growth in the agricultural
sector, political and policy instability, poor
infrastructure, corruption, and low domestic savings and
investment. The state's presence in the economy
continues to be large, and money-losing state
enterprises have been a chronic drain on the treasury.
Nonetheless, during the 1990's Bangladesh has steadily
liberalized its economy, and increasingly the private
sector has assumed a more prominent role as the climate
for free markets and trade has improved. The Awami
League government, which came to power in June 1996,
largely continued the market-based policies of its
predecessor, the Bangladesh National Party. It placed a
high priority on increasing foreign investment in the
economy, and has made some regulatory and policy changes
toward that end. However, implementation of new policy
directives by the bureaucracy has been slow and uneven.
Bangladesh suffered its worst flood in history during
the summer and fall of 1998. The economic damage is
still being assessed, but preliminary estimates suggest
a loss of $4.3 billion, or 10 percent of GDP. A large
proportion of the winter rice crop could not be planted,
which increased the food import bill dramatically
despite the assistance of donor nations. The United
States has pledged a donation of 700,000 metric tons of
wheat. As of the end of October 1998, Bangladesh's
foreign exchange reserves stood at about $1.7 billion,
or less than three months of import cover. These
reserves are expected to decrease in the coming months
due to imports of food grain and the capital equipment
needed to repair flood-damaged infrastructure. The World
Bank and the International Monetary Fund (IMF) will
provide emergency balance of payment relief of over $300
million, and in turn, Bangladesh has signaled a
willingness to negotiate an Enhanced Structural
Adjustment Facility (ESAF) with the IMF. Such an ESAF is
likely to be conditional on government revenue
enhancement measures, financial sector reform and public
sector reform, including privatization.
Inflation
surged to 7 percent in FY98 from 2.6 percent in FY97,
reflecting food price hikes, public sector wage
increases, and robust money growth towards the end of
the fiscal year. Inflation is expected to rise to 8
percent in FY 99. Since Bangladesh has limited trade and
investment links overseas, the economy has not been
greatly affected by the Asian financial crisis. However,
to maintain its export competitiveness, the taka was
devalued a total of 6.1 percent during FY98 and an
additional 2.97 percent in October 1998. Bangladesh's
export performance, heavily concentrated in garments,
has continued to be strong, with a trade surplus of $1.4
billion with the United States in calendar year 1997.
The FY98 government deficit narrowed to 4.2 percent of
GDP, compared to 4.4 percent of GDP in FY97, as
shortfalls in revenues were matched by lower Annual
Development Plan (ADP) spending. (Note: The deficit is
projected to widen to 4.7 percent of GDP in FY 99 due to
the temporary decline in revenue collections and higher
food imports.) Revenue shortfalls were the result of
lower than expected VAT and customs duty collection due
to weak customs administration, lower than forecast
dutiable items, litigation relating to customs duty, and
lower gas production. ADP spending was well below budget
due to slow project implementation and conscious efforts
by the government to control spending. The deficit was
financed primarily by high-interest national savings
certificates, which account for a growing domestic debt
service component in government expenditures. Net
foreign financing accounted for 2.6 percent of GDP in
FY98. Tax revenues are estimated at $3.02 billion in
FY98, or about 7.6 percent of GDP. This ratio has
increased only marginally in the last five years.
In
its FY99 budget, the government announced several
incremental fiscal reforms, including expansion of VAT
coverage and reduction in the number of personal income
tax rate bands from 5 to 4, which should have a positive
impact on the fiscal health of the economy over the
medium term. The government's primary monetary policy
tools are the discount rate and the sale of Bangladesh
Bank bills, though central bank influence over bank
lending practices also plays an important role. Broad
money growth (M2) has been restrained in FY98, falling
to 10.1 percent, as the central bank increased the
rediscount rate to 8 percent and also applied pressure
on banks to improve their capital adequacy requirements.
Although
some liberal investment measures have been taken by the
government to foster private sector involvement in the
energy, power, and telecommunications sectors, poor
infrastructure (e.g., power shortages, port
bottlenecks), bureaucratic inertia, corruption, labour
militancy, a weak financial system which keeps the cost
of capital high, political unrest, and a deteriorating
law and order situation continued to discourage some
domestic and foreign investors in FY98. Gross
investment, which stagnated at 12 to 13 percent of GDP
in the 1985-1992 period, increased marginally from 20.9
percent in FY97 to 21.0 percent in FY98, although some
of this increase may be attributable to a change in
calculation methodology. If one subscribes to the view
of some economists that an economy can begin to
alleviate poverty on a large scale if it can achieve a
threshold of a 20-22 percent investment/GDP ratio and a
7 percent GDP growth rate, then Bangladesh needs only a
moderate acceleration in its growth rate to begin a
meaningful assault on poverty. 
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