bangladesh ecowork april13

Country Economic WorkDiagnostic Analysis of Bangladesh Economy:

Foundation for Member Country Partnership Strategy

Islamic Corporation for the Development of the Private Sector

Islamic Development Bank Group

Jumada-II 1434H (April 2013)

Islamic Development Bank

P.O. Box 5925, Jeddah 21432, Kingdom of Saudi ArabiaTelephone: +966 2 6361400, Fax: +966 2 6366871

e-mail: [email protected]

website: www.isdb.org


Country Economic Work Diagnostic Analysis of Bangladesh Economy: Foundation for Member Country Partnership Strategy

Rabi-II 1434H (March 2013)

Islamic Corporation for the Development of the Private Sector


Jumada-II 1434H (April 2013)

Acknowledgements Appreciation for Special Contribution

Mr. Iqbal Mahmood, Senior Secretary and IDB Executive Director; Mr. Kazi Shofiqul Azam, Additional Secretary; and Md. Shahriar Kader Siddiky, Deputy Secretary (ERD, Ministry of Finance); Mr. Moazzem Hossain (Editor, Financial Express); Mr. Matiul Islam (Chairman, IIDFC); Prof. Md. Salim Uddin; Prof. Mohammed Jamal Uddin; Mr. S. M. Mokaddes Ahmed Dipu (Chittagong University); Ms. Siban Shahana (BIDS); and Mr. Hasnat Karim Pintu (Consultant, BARCODE).

IDB Group Team Mr. Mohammad Jamal Al-Saati, Director; Country Programs Department

Dr. Muhammad Ahmed Zubair, Peer Reviewer, Country Programs Department Dr. Areef Suleman, Peer Reviewer, Economic Research and Policy Department

Mr. Muhammad Iqbal Karim and Mr. Abdul Momen Bhuiyan, IDB Field Representative, Bangladesh

Overall Coordinator Mr. Ahmed S. Hariri, Regional Manager, South & South East Asia Region and Surinam

Report Authors & Contributors Dr. Zafar Iqbal, Lead Economist (Task Team Leader), Country Programs Department

Mr. Muhammad Nassis Sulaiman, Country Programs Manager for Bangladesh Mr. Ahsanul Kibria, Alternate Country Programs Manager for Bangladesh Dr. Bandar Alhoweish, Young Professional, Country Programs Department

Team-I Core Engagement Areas

Mr. Tahir Akbar, Team Leader

Team-II Private Sector Development,

Investment and Trade Development, Insurance and

Risk Dr. Elvin Afandi,

Team Leader

Team-III Resources and Alignment

Mr. Wasim Ahmed Abdulwahab, Team Leader

Infrastructure Department Mr. Intikhab Alam Mr. Tahir Akbar Mr. Fida Rana

Islamic Corporation for the Development of the Private

Sector (ICD) Dr. Elvin Afandi

Mr. Ahmed A. Khalid

Islamic Financial Services Department

Mr. Wasim Ahmed Abdulwahab

Human Development Department Mr. Hisham Fakha Mr. Jawara Gaye

Islamic Corporation for the Insurance of Investment and

Export Credit (ICIEC) Mr. Irfan Arshad

Islamic Solidarity Fund for Development

Mr. Ahmad Maaty

Agriculture and Rural Development Department

Mr. Sohail Malik Dr. Umar Kamarah

Mr. Mustafa Uğur Alver, Consultant

International Islamic Trade Finance Corporation (ITFC)

Ms. Batoul Alam

Operations Policy and Services Department

Mr. Mohammad Faisal Siddik

Group Strategic Planning Department

Mr. Mehman Abbas

Islamic Research and Training Institute (IRTI)

Dr. Amir Raslan Abu Bakar

Treasury Department Mr. Mohammad Saeedullah

Khan

Economic Research and Policy Department

Dr. Ismaeel I. Naiya

Group Risk Management Department

Mr. Ariful Alam Choudhury

Legal Department Mr. Kayvon Khashayar

Contributions from Mr. Taha Hameduddin; Mr. Ali Alam; and Mr. Abdulrehman Ibrahim (all were Interns in Country Programs Department) are highly appreciated.

Abbreviations and Acronyms ADB : Asian Development Bank APIF : Awqaf Properties Investment Fund BDT : Bangladeshi Taka BERC : Bangladesh Energy Regulatory Commission BOI : Board of Investment BPBD : Bangladesh Power Development Board CAE : Country Assistance Evaluation CPA : Country Poverty Assessment CEW : Country Economic Work CPPR : Country Portfolio Performance Review DESC : Dhaka Electric Supply Company DESA : Dhaka Electric Supply Authority DPPs : Development Project Proposals EPB : Export Promotion Bureau ECGS : Export Credit Guarantee Schemes EFA : Education For All EGCB : Electricity Generation Company of Bangladesh EU : European Union ECA : Export Credit Agency ERD : Economic Relations Division FAO : Food and Agriculture Organization FDI : Foreign Direct Investment GDP : Gross Domestic Product GoB : Government of Bangladesh HPNSDP : Health, Population and Nutritional Sector Development Program ICD : Islamic Corporation for the Development of the Private Sector ICIEC : Islamic Corporation for Insurance of Investment and Export Credit ICT : Information, Communication, and Technology IDB : Islamic Development Bank IDB Group : IDB, ICIEC, IRTI, ICD, ITFC ICT : Information and Communication Technologies IIFC : Infrastructure Investment Facilitation Centre IPCC : International Panel on Climate Change IPFF : Investment Promotion and Financing Facility IPP : Independent Power Producer IRTI : Islamic Research and Training Institute ITFC : International Islamic Trade Finance Corporation ITAP : Investment Promotion Technical Assistance Program MC : Member Country M&E : Monitoring and Evaluation MCPS : Member Country Partnership Strategy MDBs : Multilateral Development Banks MDGs : Millennium Development Goals MOU : Memorandum of Understanding MPEMR : Ministry of Power, Energy, and Mineral Resources NGO : Non-Government Organization NSAPR : National Strategies for Accelerated Poverty Reduction OCR : Ordinary Capital Resources OIC : Organization of Islamic Cooperation PPP : Public Private Partnership PRSP : Poverty Reduction Strategy Paper R&D : Research and Development SFYP : Sixth Five Year Plan SHS : Solar Home System SMEs : Small and Medium Size Enterprises UIF : Unit Investment Fund WASA : Water Supply and Sewerage Authority

TABLE OF CONTENTS

EXECUTIVE SUMMARY……………………………………………………………………. 1

DIAGNOSTIC ANALYSIS OF BANGLADESH ECONOMY: SOCIO-ECONOMIC DEVELOPMENT AND PROSPECTS......…………………………………………………… 4

1.1 Introduction………………………………………………………………………… 4 1.2 Recent Socio-Economic Development and Prospects……………………………. 4 1.3 Binding Constraints to Sustainable Economic Growth...………………………... 12 1.4 Summary of Binding Constraints to Economic Growth ………………………... 27

POVERTY AND HUNGER…………………………………………………………………… 31 2.1 Poverty Trend …………………………………….……………………………….. 31 2.2 Hunger Situation …………………………………………….…………………….. 33 2.3 Progress in Achieving MDGs………………………………………………............ 34 2.4 Government Strategy for Reducing Poverty and Hunger ……………................ 35 2.5 Binding Constraints to Reducing Poverty and Hunger…………………………. 35 2.6 Summary of Binding Constraints to Reducing Poverty and Hunger................... 38

INFRASTRUCTURE DEVELOPMENT ……………….…………………............................ 39 3.1 Energy Sector……………………………………………………………………..... 39 3.2 Urban Development……………………………………………………................... 49 3.3 Summary of Binding Constraints to Infrastructure Development……………... 52

AGRICULTURE AND RURAL DEVELOPMENT ………………………………………... 53 4.1 Overview of Agriculture and Rural Development ......…………………............... 53 4.2 Government Strategy for the Agriculture and Rural Development………......... 57 4.3 Binding Constraints Facing Agricultural and Rural Development…………….. 4.4

58 4.4 Summary of Binding Constraints to Agriculture and Rural Development……. 67

HUMAN DEVELOPMENT…………………………………………………………………… 68 5.1 Health Sector……………………………………………………………………….. 68 5.2 Education Sector………………………………………………………………........ 74 5.3 Summary of Binding Constraints to Human Development……………………... 77

PRIVATE SECTOR DEVELOPMENT……………………………………………………… 78 6.1 Private Sector Development……………………………………………………….. 78 6.2 Small and Medium Enterprises…………………………………………………… 82 6.3 Foreign Trade Sector……………………………………………………………..... 85 6.4 Public Private Partnership………………………………………………………… 89 6.5 Summary of Binding Constraints to Private Sector Development……………… 92

ISLAMIC FINANCE AND REVERSE LINKAGES………………………………………... 93 7.1 Islamic Financial Services Industry ……………….…………………………...... 93 7.2 Reverse Linkage Opportunities………………………………………………...... 97

93 7.3 Summary of Binding Constraints to Islamic Finance and Reverse Linkages… 97

LIST OF FIGURES

Figure 1.1. Real GDP Growth and Per Capita Income..………………………………….. 5

Figure 1.2. Growth Rates by Major Sectors……………………………………………….. 6

Figure 1.3. Sectoral Shares in Gross Domestic Product, 2010………................................. 7

Figure 1.4. Sectoral Shares in Gross Domestic Product, 2015……..................................... 7

Figure 1.5. National Savings and Investment Rates………………..................................... 8

Figure 1.6. Inflation Rates…………………………………………………………………... 8 Figure 1.7. Total Revenue, Expenditure and Budget Deficit……………………………… 9

Figure 1.8. Trade and Current Account Balances………………………………………..... 10

Figure 1.9. Foreign Exchange Reserves and Exchange Rate.……………………………... 10

Figure 1.10. Headcount Poverty Ratio……………………………………………………….. 11

Figure 1.11. Growth Diagnostic Framework…………………………………........................ 14

Figure 1.12. Real GDP Growth and Private Investment…………………………………..... 16

Figure 1.13. Foreign Direct Investment in Bangladesh……………………………………... 17

Figure 1.14. Foreign Direct Investment in Selected Asian Countries……………………… 17

Figure 1.15. Domestic Banking Credit to Private Sector…………………………………… 17

Figure 1.16. Banking Sector Lending Interest Rates……………………………................... 17

Figure 1.17. Most Problematic Factors for Doing Business……………….………………... 21

Figure 1.18. Return to Investment in Selected Asian Countries……………......................... 22

Figure 1.19. Real GDP Growth and Public Investment Rates……..……………….............. 22

Figure 1.20. Fiscal Deficit and Public Investment Rates…….……………………………… 23

Figure 1.21. Quality of Institutions in Selected Asian Countries…………………………… 25

Figure 1.22. Ranking of Global Competitiveness of Selected Asian Countries…………..... 26

Figure 1.23. Indicators of Innovation………………………………………………………… 26

Figure 1.24. Indicators of Business Sophistication…………………………………………... 27

Figure 3.2. Population Growth Rate………………………………………………………... 49

Figure 3.3. Total Population and Urban Population……………………………………..... 50

Figure 3.4. Population of Large Cities……………………………………………………… 50

Figure 4.1. Arable Land in Selected Countries……………… …………………………….. 54

Figure 4.2. Arable Land per Person in Selected Countries………………………………... 55

Figure 4.3. Arable Land per Person in Bangladesh………………………………………... 55

Figure 4.4. Historical Crop Production…………………………………………………….. 56

Figure 4.5. Rice Production Per Capita…………………………………………………….. 59

Figure 6.1. Private and Public Investment Rates……….. ………………………………... .. 78

Figure 6.2. Business Sophistication………….……………………………………………… 80

Figure 6.3. Outages of Power and Water…………………………………………………… 81

Figure 6.4. Products-Wise Exports of Bangladesh, 2002-2003…………………………... .. 85

Figure 6.5. Product-Wise Exports of Bangladesh, 2010-2011……………………………... 85

Figure 6.6. Country-Wise Exports of Bangladesh, 2002-2003…………………………….. 86

Figure 6.7. Country-Wise Exports of Bangladesh, 2010-2011…………………………….. 86

Figure 6.8. Ease of Trading Across Borders………………………………………………... 89

Figure 7.1. Bangladesh Financial System…………………………………………………...

94

LIST OF TABLES

Table 1.1. Real GDP Growth in Selected Asian Economies……………………………... .. 13

Table 1.2. Human Development Index and Its Components……………………………... 18

Table 1.3. Quality of Infrastructure in Selected Asian Countries…………... …………… 19

Table 1.4. Doing Business Ranking in Selected Asian Countries………………….......... .. 20

Table 1.5. Governance Indicators of Selected Asian Economies………………………... .. 24

Table 1.6. Summary of Binding Constraints to Economic Growth.……………………... 28

Table 2.1. Number of Poor and Poverty Headcount Ratio……………………………….. 31

Table 2.2. Poverty Headcount Ratio at $1.25 a day (PPP)………………………………... 32

Table 2.3. Global Hunger Index in Selected Asian Countries…………………………... .. 34

Table 2.4. Governance Indicators in Bangladesh………………………………………... ... 37

Table 2.5. Summary of Binding Constraints to Reducing Poverty and Hunger………… 38

Table 3.1. Electricity Produced by Public and Private Sectors…………………………... 42

Table 3.2. Power Sector Indicators………………….. ……………………………………... 43

Table 3.3. Year-wise Power Generation During Sixth Five Year Plan…………………... 45

Table 3.4. Summary of Binding Constraints to Infrastructure Development…………… 52

Table 4.1. Bangladesh Land Area Statistics……………………………………………….. 54

Table 4.2. Summary of Binding Constraints to Agriculture and Rural Development….. 67

Table 5.1. Summary of Binding Constraints to Human Development…………………... 77

Table 6.1. Summary of Binding Constraints to Private Sector Development…………… 92

Table 7.1. Comparative Position of the Islamic Banking Sector………………………... .. 95

Table 7.2. Awqaf Properties by Division…………………………………………………… 96

Table 7.3. Summary of Binding Constraints to Islamic Financial Services Industry…... 97

APPENDICES

S

Annex Table 1.1. Bangladesh Socio-Economic Indicators………………………............... 29

Annex Table 1.2. Sixth Five Year Plan (SFYP) Targets…………………………………... 30

…………………………………………………………………… ………… 98

REFERENCE

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EXECUTIVE SUMMARY

Prior to designing the IDB Group Member Country Partnership (MCPS) for Bangladesh, the MCPS Team undertook a detailed diagnostic analysis of identifying binding constraints to achieving sustainable economic growth and critical constraints to key sectors of the economy, which are selected for the IDB Group interventions over the next four years (2013-2016). Therefore, this Country Economic Work (CEW) – a knowledge document – is prepared by the MCPS Team based on latest available information and data from reliable national and international sources, bilateral meetings with the line Ministries, key stakeholders, outcome of two Consultative Workshops held in Dhaka and Chittagong, which were attended by Senior Government officials, representatives of the private sector, academia, civil society and development partners. As a result, this CEW provides a sound basis for designing an implementable partnership strategy between the IDB Group, the Government of Bangladesh and the private sector entitled as “IDB Group Member Country Partnership Strategy: Partnering for Sustainable Growth and Reducing Poverty” (published separately).

Starting from economic development of the country, the growth story tells that Bangladesh achieved sustainable economic growth of 6% per annum during 2000-2011. This impressive growth performance was contributed by corresponding growths in agriculture, industry, and services sectors. The economy also remained more or less resilient to global financial and economic crisis of 2008/2009, mainly resulting from significant growth in remittances and exports of the textile sector. Further, Bangladesh’s per capita income has steadily increased from $380 in 2000 to $818 in 2011 and the country is classified as a low-income country.

Despite impressive growth, Bangladesh is still facing a number of socio-economic challenges. With the recovery of global economy, increase in domestic demand and food price escalation in international commodity markets created upward pressures on inflation in the country. Although, fiscal performance has improved overtime but the high level of fiscal deficit is a source of concern as its monetization and domestic financing are putting pressure on macroeconomic balances. The country showed good performance in increasing saving and investment rates, however, the overall investment rate remained below the national saving rate, resulting in significant internal resource surplus (saving – investment) to 4% of GDP in 2011. It was mainly due to rapid growth of workers’ remittances that have fueled a tremendous inflow of private transfers and raised the private savings as well as national saving rates, thus surpassing the investment rate. On the external trade front, the country recorded persistent external trade deficit but current account remained in surplus, mainly attributed to surge in remittance inflows since 2000, which reached $11.7 billion in 2011.

With regard to social development, Bangladesh has made noteworthy progress in the attainment of MDGs, however, the areas that need further attention are primary school completion rate, adult literacy rate, and maternal mortality rate. Although, the country has made substantial progress in reducing poverty, the headcount poverty rate is high and the gap between rural and urban poverty is quite substantial. Although, rapid economic growth has helped to reduce poverty in

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Bangladesh, there is evidence of growing income inequality and regional disparities. Youth unemployment is another major challenge, particularly providing decent jobs to youth.

Going forward, Bangladesh plans to achieve lower-middle income status by 2021, which requires the economy to grow by 8% to 10% during the Sixth Five Year Plan (2011-2015) and Seventh Five Year Plan (2016-2021). To this end, the country will have to raise current per capita income from $818 to $1,001 by 2015 and over $2,000 by 2021 through inclusive and sustainable growth. These targets seem to be ambitious keeping in view the current available resources both in terms of physical and human capital, and several binding constraints to achieving sustainable economic growth and critical constraints to key sectors of the economy.

Whether or not the country will be able to achieve 8% to 10% growth targets, it is essential to undertake the diagnostic analysis of achieving sustainable economic growth. Therefore, the key objective of this CEW is to identify binding constraints (i.e. the most critical factors inhibiting in achieving sustainable economic growth). With this objective, the MCPS Team undertook diagnostic analysis using a comprehensive Growth Diagnostic Framework developed by the MCPS Team (i.e. An Extended Version of Growth Diagnostic Framework of Hausmann, Rodrik, and Velasco (2005)). This Framework is used to identify binding constraints to economic growth as well as to key sectors selected for the MCPS namely Infrastructure Development; Human Development; Agriculture Development; and Private Sector Development.

The diagnostic analysis shows that country’s economic growth is constrained by low level of private investment, which needs to be increased from the current rate of 19.5% to 25% of GDP in order to achieve 8% economic growth by 2015. It is worth noting that total investment requirement under the Sixth Five Year Plan has been estimated at BDT 13.5 trillion (about $190 billion). Of the total Plan investment, private investment would be 77.2% and public investment 22.8%. However, the present private investment is constrained by weak access to finance and high cost of financing; climate change and natural disaster; low human capital; poor quality and quantity of infrastructure; macroeconomic risks (i.e. soaring inflation, higher fiscal and trade deficits); and microeconomic risks (i.e. weak business environment, although the rate of return on investment is high compared to all selected lower-middle income Asian countries (i.e. China, India, Indonesia, Malaysia, Philippines, Sri Lanka, Thailand, and Vietnam except Pakistan). Similarly, low level of public investment also appears to be binding constraint to achieving sustainable growth. Public investment in Bangladesh declined gradually from the maximum level of 7.4% of GDP in 2000 to 5.3% of GDP in 2011. In order to achieve 8% economic growth, the Government plans to increase it again to 7.4% of GDP by 2015. However, public investment is constrained by budgetary limitation, weak governance and institutional capacity. Further, economic growth is constrained by weak global competitiveness and weak software of growth (i.e. poor level of innovation, weak business sophistication, low R&D and poor quality of education). The country can also enhance its economic growth by exploiting Reverse Linkage opportunities (i.e. transferring knowledge and expertise of Bangladesh in Microfinance and Solar Home System Solar to other IDB member countries). In this way, both provider (i.e. Bangladesh) and recipient IDB member countries will be in a win-win situation, whereby the IDB Group will act as a facilitator in terms of Reverse Linkages.

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With regard to infrastructure development, the diagnostic analysis shows that power sector is constrained by inadequate public and private investment, absence of cost reflective tariff, and insufficient primary fuel supply chain. The public private partnership (PPP) is restricted by dearth of long-term financing in the local market and currency risk for market-exposed projects. Urban development is constrained by existing limited capacity of urban infrastructure and rapidly expanding urban slums in big cities. Major constraints to agriculture and rural development are identified as climate change and natural disasters and poor diversification of agricultural production, which are causing high rural poverty and food insecurity. With regard to human development, health sector development is constrained by low public spending on health; high maternal mortality ratio; lower life expectancy; high proportion of women early childbearing; and absence of skills and facilities. Similarly, binding constraints to education include low level of spending on education; poor quality of secondary education; lack of access to tertiary education; and low spending on research and development. Binding constraints to private sector development include poor access to finance; weak business sophistication; frequent outages of electricity and water; unfavorable regulatory and administrative procedures; lack of modern technology; weak innovation; high rate of interest on bank loans; and lack of skilled technicians and workers. Islamic Financial Services Industry (IFSI) is constrained by absence of requisite legal, regulatory, supervisory and Shariah frameworks.

In the next phase of its socio-economic development, Bangladesh needs to fix identified binding constraints to achieving sustainable economic growth and critical constraints to key sectors of the economy. It must embark on a more inclusive development as well as build on new sources of growth, which can drive the economy to achieving lower-middle income status by 2021. In particular, the private sector needs to be placed on the driving seat of the economy by improving business environment, facilitating banks loans on favourable mark up, providing attractive incentives to both local and foreign investors, and allocating higher public spending on R&D.

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1.1 Introduction

1. Before embarking on Member Country Partnership Strategy (MCPS) for Bangladesh, the IDB Group Team undertook diagnostic analysis of the overall economy as well as a number of key sectors. This Country Economic Work (CEW) entitled “Diagnostic Analysis of Bangladesh Economy: Foundation for Member Country Partnership Strategy” is aimed at providing in-depth analysis of recent socio-economic development and prospects, and major challenges facing the country. In particular, the CEW focuses on identifying binding constraints to achieving sustainable economic growth in Bangladesh. Further, through extensive consultations with the key stakeholders (i.e. public sector, private sector, business community, academia, civil society and donors), three main pillars namely (i) Improving Infrastructure Development (i.e. power sector, public private partnership, and urban development); (ii) Supporting Sustainable Agriculture and Rural Development; and (iii) Supporting Primary and Secondary Education and Vocational Training are identified for the IDB Group interventions over next 4 to 5 years. Further, two cross-cutting areas namely: (i) Private Sector Development; and (ii) Supporting Islamic Finance, Capacity Building and Reverse Linkages have also been identified for the IDB Group assistance. Therefore, diagnostics have been undertaken for these sectors in order to find out niche areas for IDB Group interventions in the next few years. This CEW uses the latest available information and data from reliable national and international sources.

2. The CEW document is structured as follows: Recent socio-economic developments and prospects, and the analysis of binding constraints to sustainable economic growth are given in Section I. Diagnostic analysis of poverty and hunger (sub-theme of the IDB Group MCPS) is given in Section II. Diagnostic analyses of key Pillars namely: (i) Infrastructure Development; (ii) Agriculture and Rural Development and (iii) Human Development (education and health) are presented in Sections III, IV, and V, respectively. Diagnostic analyses of two Cross-Cutting Areas namely Private Sector Development and Islamic Finance and Reverse Linkages are given in Sections VI and VII.

1.2 Recent Socio-Economic Development and Prospects

1.2.1 Macroeconomic Development and Prospects

3. The latest data on key socio-economic development indicators are given in Annex Table 1.1. However, the trends of major indicators are briefly described below:

I. DIAGNOSTIC ANALYSIS OF BANGLADESH ECONOMY: SOCIO-ECONOMIC DEVELOPMENT AND PROSPECTS

55

Source: Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

380 380 380 400 440 463 476 523 608 676 751 818

1001

2000

0

500

1000

1500

2000

2500

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2015 2021

Per

Cap

ita In

com

e (S

)

Rea

l GD

P G

row

th (%

p.a

.)

Figure 1.1. Bangladesh: Real GDP Growth (% per annum) and Per Capita Income ($), 2000-2021

Per Capita GNI GDP Growth

Real GDP Growth and Per Capita Income

4. Real economic growth in Bangladesh remained sustainable and the economy remained more or less resilient to global financial and economic crisis. During the last decade (2000-2011), Bangladesh’s real GDP growth rate was, on average, 6% per annum. It is worth noting that most of the global economies, including the Asian economies, were badly affected by the global financial and economic crisis and their growth rates were significantly decelerated or declined in 2009 but the real growth in Bangladesh was 5.7% in 2009 mainly contributed by significant growth in remittances and exports of textile sector. Notwithstanding this past progress, Bangladesh is classified as a low-income country1 and its per capita income has been steadily increased from $380 in 2000 to $818 in 2011 (Figure 1.1).

5. Bangladesh plans to achieve lower-middle income status by 2021, which requires the economy to grow by 8% to 10% per annum. In recognition of the long-term development challenges, the Government adopted Bangladesh Vision 2021. The Vision 2021 and the associated Perspective Plan 2010-2021 have set solid development targets for Bangladesh by the end of 2021. The Vision aims to transform the country from a low-income economy to a lower-middle income economy. It lays down a development scenario where people will have a higher standard of living, better education, better social justice, more equitable socio-economic environment, and sustainable development through better protection from climate change and 1 According to the World Bank (2011), using the Atlas Method, economies with per capita Gross National Income (GNI) of $1025 or less are classified as low-income countries; economies with per capita GNI between $1,026 - $4,035 as lower-middle income countries; economies with per capita GNI between $4,036 – $12,475 are upper-middle income countries; and economies with per capita GNI of $12,476 or more are high income countries.

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natural disasters. The Government of Bangladesh (GoB) plans to manage within the framework of a market economy with appropriate interventions to correct market distortions; ensure equality of opportunities; and guarantee equity and social justice for all. The implementation of Vision 2021 is being done through two medium-term development plans namely Sixth Five Year Plan (2011-2015) and Seventh Five Year Plan (2016-2021). These Plans translate into the course of achieving lower-middle income status. To this end, the country will have to raise current per capita gross national income (GNI) from $818 in 2011 to $1,001 by 2015 and to over $2,000 by 2021 through inclusive and sustainable growth.

6. The impressive growth performance was contributed by corresponding growths in agriculture, industry, and services sectors. During 2001-2011, industrial sector grew by, on average, 7.6% per annum followed by the services sector (6.1%) and agriculture sector (3.6%), indicating satisfactory performances of all the three broad sectors of the economy. During the Sixth Five Year Plan (SFYP) period, the Government plans to achieve average annual growth target of industry by 10.4%, services 7.3% and agriculture 4.4%. Both large and small enterprises need to contribute to this growth. The textile and clothing, machinery, and other industries will be the major drivers of overall industrial growth while the services sector is projected to experience steady growth. With regard to deceleration in agriculture sector growth, major fall is expected in cereal crops production (Figure 1.2).

7. With regard to sectoral shares in GDP, the share of services sector went up gradually from 48.7% in 2000 to 54% in 2010 and industrial share went up from 25.7% to 27.4%, while the share of agriculture declined from 25.6% to 18.6% during the same period. In the medium-term, the Government plans to increase the share of industry to 30.9% in GDP while keeping almost the same share of the services sector and reducing further the share of agriculture

Source: Ministry of Finance, Government of Bangladesh, Macroeconomic Review (2011) and Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.2. Bangladesh: Growth Rates by Major Sectors, 2001-2015 (% per annum)

Agriculture Industry Services

7

7

to 15.5%, mainly due to expected fall in cereal crops production by 2015. The most notable rise will be in the cases of textile and clothing, and machinery sectors (Figures 1.3 and 1.4).

Saving and Investment Rates

8. The Country showed satisfactory performance in increasing saving and investment rates. Since 2000, total investment relative to GDP has risen slowly from 23% in 2001 to 24.7% in 2011. However, the overall investment rate remained below the national saving rate, widening the internal resource surplus (saving – investment) of less than one percent in 2000 to maximum 6% of GDP in 2008 and about 4% of GDP in 2011. Since 2000, the rapid growth of workers’ remittances have fueled a tremendous inflow of private transfers and rapidly raised the private savings as well as national saving rates, thus surpassing the investment rate. In the medium-term, acceleration of the economic growth by 8% will require a substantial increase in the rate of investment, which is projected to increase from the present 24.4% to 32.5% of GDP by the end of the Plan period while a 10% economic growth will require 40% investment rate by 2021. Much of the higher investment will be deployed to fix binding constraints to infrastructure development (primarily power and transport) and human development. A large part of the financing will come from the domestic public resource mobilization and from higher private savings, including from remittances. The Government also plans to encourage public private partnerships (PPP) to finance these investments to fast-track the development requirement. Therefore, the Government plans to close the saving-investment gap to almost balance by 2015 (Figure 1.5).

Source: Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015) Bangladesh Bureau of Statistics website (www.bbs.gov.bd) Data Source: Ministry of Finance, Government of Bangladesh, Macroeconomic Review (2011)

Agriculture (18.6%)

Industry (27.4%)

Services (54%)

Figure 1.3. Bangladesh: Sectoral Shares, 2010 (% of total GDP)

Agriculture (15.5%)

Industry (30.9%)

Services (53.6%)

Figure 1.4. Bangladesh: Sectoral Shares, 2015 (% of total GDP)

8

8

Inflation

9. With the recovery of global economy, increase in domestic demand and food price escalation in international commodity markets created upward pressure on inflation. The overall inflation rate went up from 2.8% in 2000 to 8.8% in 2011, while the average inflation rate remained 5.9% during 2000-2011. Food inflation touched double digit to 11.3% in 2011, from 2.7% in 2000, contributing mainly to rise in overall inflation (Figure 1.6). Non-food inflation rose


20

22

24

26

28

30

32

34

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.5. Bangladesh: National Savings and Investment Rates, 2000-2015 (% of GDP)

National Savings Total Investment


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.6. Bangladesh: Inflation Rates, 2000-2015 (% p.a.)

Overall Food Non-food

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modestly from 3.1% to 4.2% during the same period. The average food and non-food inflation rates remained 6.6% and 4.9%, respectively, during 2000-2011. Expansionary monetary and fiscal policies have also contributed to a rise in inflation. During the SFYP, the Government projected that the inflationary pressure will be eased, reaching the overall inflation to 6% by 2015.

Fiscal Position

10. Although, fiscal performance has been improved overtime but still the high level of fiscal deficit is a source of concern as its monetization and domestic financing are putting pressure on macroeconomic balances. The country has been successful in reducing the overall budget deficit (excluding grants) from 6.1% in 2000 to 4.4% of GDP in 2011, attributing mainly to faster increase in total revenue as percentage of GDP from 8.5% to 12.1%, while total expenditure rose marginally from 14.5% to 16.5% of GDP during the same period. On the revenue side, the Government has taken various steps to rationalize direct and indirect taxes with an aim to mobilize adequate domestic resources for investing in infrastructure development, with the objectives of attaining higher growth to reduce poverty at a faster rate, achieve self-sufficiency in food production and ensure food security, expand export-oriented industries, develop domestic industries, enhance industrial productivity and create employment opportunities in the medium-term. On the expenditure front, the Government plans to encourage expenditure in the productive sector, exercise austerity in public expenditure and restrain unproductive outlays. Therefore, the revenues are projected to increase to 14.6% of GDP and expenditure 19.6% of GDP, maintaining the fiscal deficit target of 5% of GDP by 2015, which will require sizable new borrowing from the banking system. The Government may also seek additional external financing to avoid any crowding out of the private sector (Figure 1.7).


-10

-5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.7. Bangladesh: Total Revenue, Expenditure and Budget Deficit, 2000-2015 (% of GDP)

Budget Deficit Total Revenue Total Expenditure

1010

External Account Balance

11. During 2000-2011, the country recorded current account surplus but external trade deficit. On the external trade front, Bangladesh has been facing persistent trade deficit, which increased to the maximum level of 8.1% of GDP in 2007 but later declined to 6.6% of GDP in 2011. However, the country had been recording current account surplus since 2002 (except 2001 and 2005), which in percentage of GDP increased from 0.5% in 2002 to its highest-ever surplus of 3.7% in 2010 (Figure 1.8). This is attributable mainly to the surge in remittance inflows, which

reached at $11.7 billion in 2011. However, due to slowdown in job placements abroad, growth in remittances dropped from over average 23% per annum during 2002-2009 to 13.4% in 2010 and 6% in 2011 (Figure 1.9). However, foreign exchange reserves of the country increased


-10

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.8. Bangladesh: Trade and Current Account Balances, 2000-2015 (% of GDP)

Trade Account Balance Current Account Balance


0102030405060708090

0.02.04.06.08.0

10.012.014.016.018.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(BD

T Pe

r US$

)

(US$

bill

ion)

Figure 1.9. Bangladesh: Foreign Echange Reserves and Exchange Rate, 2000-2015

Foreign Exchnage Reserves Exchange Rate

1111

Source: Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

0

10

20

30

40

50

60

70

1992 1996 2000 2005 2010 2015

Figure 1.10. Bangladesh: Headcount Poverty Ratio (% of total population)

Rural Urban National

significantly from $2.5 billion in 2000 to $11.7 billion in 2011. In the medium-term, the country is projected to record trade deficit of over 8% of GDP, while current account is projected to turn into a marginal deficit during 2012-2015, mainly due to projected growing import demand associated with achieving higher economic growth of 8% by the end of the Plan. Foreign exchange reserves are estimated to reach $16.1 billion (3.3 in months of imports) and the exchange rate is projected to depreciate from BDT 71.5 in 2000 to BDT 82.2 per US dollar by 2015.

1.2.2 Social Development and Prospects

12. Bangladesh has made substantial progress in reducing national poverty. The country has been striving for a long time to reduce poverty and improve the standard of people. The percentage of population living below poverty line went down from more than 80% in early 1970s to 31.5% in 2010. Although, the country has made substantial progress in reducing poverty, the headcount poverty rate is still high. The decline in poverty stems in large part from strong economic growth over the past two decades. Moreover, the remarkable growth in the inflow of remittances helped reducing poverty by supporting the expansion of construction and services sectors and by providing strong safety net by the Government. Notwithstanding this past progress, Bangladesh is classified as low-income country with substantial poverty, inequality and deprivation. According to recent estimate, 47 million people are living below the poverty line with a significant proportion living in households which are female headed, in remote areas, and consisting of socially excluded and other vulnerable people. However, the Government plans to reduce to overall poverty to 22.5% by 2015 (Figure 1.10). The gap between rural and urban

1212

poverty remained quite substantial throughout the period under analysis. In 2010, rural poverty remained higher (35.2%) compared to urban poverty (21.3%). However, the Government plans to reduce rural poverty to 25.3% and urban poverty to 14.1% by 2015.

13. Although, rapid economic growth has helped to reduce poverty in Bangladesh, there is evidence of growing income inequality. Income inequality (as measured by the Gini-coefficient for the distribution of income) rose substantially during the 1980s and the 1990s. During 2000 and 2005, the Gini-coefficient increased further from 0.451 to 0.467 due to an increase in rural income inequality. Thus, the rural Gini-coefficient increased from 0.393 in 2000 to 0.428 in 2005. The urban Gini-coefficient remained unchanged at 0.497. However, the latest data show that Gini-coefficient at the national level declined slightly to 0.458 in 2010 though it was still higher than the level in 2000. The urban Gini-coefficient also declined to 0.452 and it was lower than the level in 2000. On the whole, income inequality is a serious problem in Bangladesh and reversing the trend in a sustainable manner will be a major challenge under the SFYP.

14. Bangladesh has also made noteworthy progress in the attainment of MDGs. A review of MDGs indicators progress shows that the country is on track in relation to most of the targets2.With regard to MDG targets such as expansion of primary and secondary education, infant and child mortality rate, containing the spread and fatality of malaria and tuberculosis, reforestation, access to safe drinking water and sanitation latrines especially in urban areas, Bangladesh has performed remarkably well and is expected to achieve several of these targets before the stipulated time. The country has already achieved gender parity in primary and secondary education (Annex Table 1.2).

15. Youth unemployment is another major problem, particularly providing decent jobs to youth: The current youth unemployment rate in Bangladesh is 13.4% compared to 11% in India and 5% in Vietnam, while under-employment in the country is 24.5%. Both high levels of poverty and unemployment are considered to be detrimental to sustainable economic growth in Bangladesh. Most of the labor force is engaged in informal sector with low productivity and low income jobs.

1.3 Binding Constraints to Sustainable Economic Growth

16. Bangladesh’s economy is projected to achieve strong economic growth of 8% by 2015, which is significantly higher than the growth rate achieved during 2000s. Bangladesh had achieved an annual average real GDP growth of 6% during 2000-2011, which was higher than some of the competing lower-middle income Asian countries (i.e. Indonesia, Pakistan, Philippines, and Sri Lanka) but lower than India and Vietnam. In the medium-term, Bangladesh has set average growth target of 7.5%, which is higher than all the selected lower-middle income Asian countries, even higher than some of upper-middle-income Asian countries like Malaysia (4.8%) and Thailand (5.5%) (Table 1.1).

2 Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

13

13

17. Keeping in view past performance of the Bangladesh economy, the question arises whether the country would be able to achieve growth rate of 8% by 2015 with the existing socio-economic situation and the available resources and what are/will be the binding constraints to achieving sustainable economic growth. The question needs in-depth analysis of the overall economy as well as its key economic sectors. Using the Growth Diagnostic Framework developed by the IDB Group MCPS Team (2012), the following section provides analysis of binding constraints to achieving sustainable economic growth in Bangladesh.

1.3.1 Growth Diagnostic Framework3

18. The widely used Growth Diagnostic Framework developed by Hausmann, Rodrik, and Velasco (2005), which considers low level of private investment as the only binding constraint to economic growth, while ignoring the role of public investment and software of growth in achieving sustainable economic development. In this CEW, Hausmann, Rodrik, and Velasco framework is extended by including all the possible sources of economic growth (i.e. public investment, private investment and software of growth). The IDB Group MCPS Team has developed the problem tree, which provides a complete framework for diagnosing critical constraints to sustainable economic growth (Figure 1.11).

19. The Growth Diagnostic Framework starts with private investment: First, it starts by asking what keeps the level of private investment low. Is private investment low due to low return on investment or high cost of financing? If it is low because of low social returns, is that due to poor geography (i.e. natural disasters) or poor human capital or physical infrastructure? If the problem is poor appropriately, is it due to government failures, market failures or both? If it is 3 This extended Growth Diagnostic Framework was used in case of Country Economic Work for Malaysia, “Diagnosing the Malaysia Economy: Basis for the IDB Group Member Country Partnership Strategy” (May 2012).

Table 1.1. Real GDP Growth in Selected Asian Economies

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000-2011

2012-2015

Bangladesh 5.9 5.3 4.4 5.3 6.3 6.0 6.6 6.4 6.2 5.7 6.1 6.7 5.9 7.5

Lower-Middle Income Countries

India 5.2 3.9 4.6 6.9 7.6 9.0 9.5 10.0 6.2 6.6 10.6 7.2 7.3 7.4

Indonesia 4.2 3.6 4.5 4.8 5.0 5.7 5.5 6.3 6.0 4.6 6.2 6.5 5.2 6.7

Pakistan 3.9 2.0 3.1 4.7 7.5 9.0 5.8 6.8 3.7 1.7 3.8 2.4 4.5 3.5

Philippines 4.4 2.9 3.6 5.0 6.7 4.8 5.2 6.6 4.2 1.1 7.6 3.7 4.7 4.7

Sri Lanka 6.0 -1.5 4.0 5.9 5.4 6.2 7.7 6.8 6.0 3.5 8.0 8.2 5.5 6.9

Vietnam 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8.5 6.3 5.3 6.8 5.9 7.1 6.5

Upper-Middle Income Countries

China 8.4 8.3 9.1 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.2 10.2 8.6

Malaysia 8.7 0.5 5.4 5.8 6.8 5.3 5.8 6.5 4.8 -1.6 7.2 5.1 5.0 4.8

Thailand 4.8 2.2 5.3 7.1 6.3 4.6 5.1 5.0 2.6 -2.3 7.8 0.1 4.0 5.5 Sources: International Monetary Fund, World Economic Outlook Database (April 2012)

For Bangladesh, Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015),

14

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government failure, is that due to micro risks (i.e. high cost of doing business), macro risks (i.e. financial, monetary and fiscal instability) or restriction on ownership for the foreign investors? If the impediment on private investment is due to high cost of financing, is that due to bad international finance (i.e. high interest rate and stringent conditionalities) or shortage of local finance. If the problem is of bad local finance, is that due to low private saving or poor intermediation of the banking system.4

20. Starting from the second part of the problem tree with regard to low level of public investment, it starts by asking what keeps the level of public investment low. Is public investment low because of budgetary constraints, leakages, or limited implementation capacity? If it is due to budgetary constraint, is it because of tight fiscal position, high borrowing cost or other development priorities? Are the leakages due to corruption or poor governance? Is limited implementation capacity due to weak institutions or poor human capital?

21. The final part of problem tree starts asking questions whether weak software of growth are due to weak business sophistication, low level of innovation, or poor Reverse Linkages. Is weak business sophistication due to poor quality of local supplier, weak state of cluster development, narrow value chain breadth, or weak production process sophistication? With regard to low level of innovation, is it due to low capacity for innovation, poor quality of scientific research institutions, lower company spending on research and development (R&D), lack of availability of scientists and engineers, or low government procurement of advanced technical products.

22. Final branch of problem tree is whether poor Reverse Linkages (RLs) are constraining to growth (i.e. country is not fully exploiting RLs opportunities through sharing its knowledge and expertise in Microfinance and Home Solar System with other IDB member countries).

1.3.2 Binding Constraints to Sustainable Economic Growth

23. Using the growth diagnostic framework, binding constraints to Bangladesh’s sustainable economic growth are identified in terms of private investment, public investment, and software of economic growth as follows:

i. Low Level of Private Investment as Binding Constraint to Economic Growth

24. Under the SFYP, a substantial increase in private investment rate will be required from the current rate of 19.5% to 25% of GDP by 2015 in order to achieve 8% economic growth by 2015. Total investment requirement under the SFYP has been estimated at BDT 13.5 trillion (about $190 billion). Of the total Plan investment, private investment would be 77.2% and public investment 22.8%. Domestic financing is projected to be 90.7% and external financing

4 For further detail on the Growth Diagnostic Framework, see Iqbal Z. and A. Suleman (July 2010), “Indonesia: Critical Constraints to Infrastructure Development”, and ADB-IDB-ILO (2010), Joint Country Diagnostic Study on “Indonesia: Critical Development Constraint”.

1616

9.3% (of which 31% is projected to come from FDI sources). The past performance showed that private investment rose steadily from 15.6% in 2000 to 19.5 % of GDP in 2011 (3.9 percentage points increase in 11 years). Now the Government has set an ambitious target of overall investment rate of 32.1% of GDP by 2015 in order to achieve 8% economic growth by 2015 while a 10% economic growth will require 40% investment rate by 2021. Therefore, the key challenge for the Government will be to stimulate both public and private investment over the SFYP period. Accelerating economic growth by 8% per annum will require a substantial increase in private investment (5.5 percentage points increase in the next five years). Therefore, the private sector must be placed in the driving seat of the economy through creating a more business-friendly environment for both local and foreign investors in the coming years (Figure 1.12).

25. Like local private investment, low level of foreign investment also appears to be binding constraint to achieving sustainable economic growth. Compared to all selected competing countries (except Sri Lanka) in the Asian region, Bangladesh is lagging behind in terms of attracting FDI inflows. The country received maximum FDI of $1.1 billion (1.3% of GDP) in 2008, which declined to $0.7 billion (0.7% of GDP) in 2009 and thereafter began to recover reaching $1.14 billion (1% of GDP) in 2011 (Figures 1.13 and 1.14).

26. There are a number of binding constraints that are constraining both local and foreign investment in the country. Some of them are identified below:


0

5

10

15

20

25

30

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Pr

ivat

e Inv

estm

ent (

% o

f GD

P)

Rea

l GD

P G

row

th (%

per

ann

um)

Figure 1.12. Bangladesh: Real GDP Growth (% per annum) and Private Investment (% of GDP), 2000-2015

Real GDP Growth Private Investment

17

17

Weak Access to Finance and High Cost of Financing

27. Compared to Asian countries, Bangladesh’s banking sector loans to the private sector are significantly low. During 2000-2011, average annual domestic credit to the private sector was reported 35.8% of GDP, which were lower than China (117.4%), Malaysia (115.7%), Thailand (108.1%), Vietnam (74.6%), and India (39.8%) (Figures 1.15 and 1.16). However, it

Source: World Bank, World Development Indicators website (www.worldbank.org (29 August 2012). Note: Domestic credit to the private sector refers to financial resources provided to the private sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. Lending interest rate is the rate charged by banks on loans to prime private customers.

25.0 25.2 29.6 31.7 35.8 39.9

74.6 108.1

115.7 117.4

0 50 100 150

PakistanIndonesiaSri Lanka

Philippines Bangladesh

IndiaVietnamThailandMalaysia

China

Figure 1.15. Domestic Banking Credit to Private Sector (% of GDP) 2000-2011

15.4 15.1 13.6

11.7 11.5 11.5 9.4

6.6 6.1 5.8

0.02.04.06.08.0

10.012.014.016.018.0

Figure 1.16. Banking Sector Lending Rate (average, % per annum) 2000-2011

Source: UNCTAD Database (29 August 2012)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

200

400

600

800

1000

1200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(% o

f GD

P)

(US$

mill

ion)

Figure 1.13. Foreign Direct Investment in Bangladesh (% of GDP), 2000-2011

FDI (% of GDP) 124.0

31.6 18.9 12.0 9.6 7.4 1.3 1.3 1.1 0.3

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Figure 1.14. Figure. Foreign Direct Investment in Selected Asian Countries

($ billion, 2011)

1818

was higher than Philippines (31.7%), Sri Lanka (29.6%), Indonesia (25.2%), and Pakistan (25%). The main reason for low level of domestic credit to the private sector seems to be the higher lending rate charged on loans to the prime private customers (average 15.1% per annum during 2000-2011), which was higher than all the competing countries (except Indonesia).

Poor Geography

28. Because of its geographical location, frequencies of hazards arising from drought, floods and other natural calamities are on the increase in Bangladesh. The country is recognized to be the worst sufferer of global warming and climate change impacts. Further, uncontrolled global warming and climate change are negatively affecting socio-economic condition of the country. Due to the changing global environment, the country is facing several threats due to various human activities such as industrialization, tremendous increase in the number of automobiles and indiscriminate cutting of trees. Further, CO2 emission growth in Bangladesh was 181.7% compared to South Asia growth of 134.1% during 1990-2007. It is predicted that for 45 cm rise of sea level may inundate 10-15% of the land by the year 2050 resulting over 35 million climate refugees from the coastal districts of Bangladesh5.

Weak Human Capital

29. Human development indicators in Bangladesh lag well behind compared to all selected lower-middle income Asian countries (Table 1.2). Low human capital is one of the

5 Climate Change Cell, DoE (2007) “Climate Change and Bangladesh” published by DFID, UNDP and Department of Environment, Bangladesh.

Table 1.2. Human Development Index and Its Components

Out of 169

Countries

Human Development Index (HDI)

Life Expectancy

at Birth

Mean Years of

Schooling

Per Capita GNI

Public Expenditure on Education (% of GDP)

Public Expenditure

on Health (% of GDP)

HDI rank Value (Year) (Year) (Constant 2005 PPP$)

2011 2011 2011 2011 2006-2009 2009 146 Bangladesh 0.500 68.9 4.8 1,529 2.4 3.4

Lower-Middle Income Countries 134 India 0.547 65.4 4.4 3,468 3.1 4.2 124 Indonesia 0.617 69.4 5.8 3,716 2.8 2.4 145 Pakistan 0.504 65.4 4.9 2,550 2.7 2.6 112 Philippines 0.644 68.7 8.9 3,478 2.8 3.8 97 Sri Lanka 0.691 74.9 8.2 4,943 .. 4.0 128 Viet Nam 0.593 75.2 5.5 2,805 5.3 7.2

Upper-Middle Income Countries 101 China 0.687 73.5 7.5 7,476 .. 4.6 61 Malaysia 0.761 74.2 9.5 13,685 4.1 4.8 103 Thailand 0.682 74.1 6.6 7,694 4.1 4.3

Source: UNDP Human Development Report 2011 - Sustainability and Equity: A Better Future for All

19

19

major binding constraints on economic growth in Bangladesh. The country has been struggling with low human development indicators, ranking 146 out of 169 countries in the Human Development Index 2011, which is the lowest ranking compared to all the selected Asian countries. Low levels of spending on the social services have mainly contributed to poor human development indicators, particularly Bangladesh spending on education (2.4% of GDP) and health (3.4% of GDP) is lower compared to selected Asian countries.

Poor Quality and Quantity of Infrastructure

30. Bangladesh has poor quality and quantity of infrastructure, especially roads, power, ports, and telecommunication. In comparison to a number of selected low-middle income countries in the Asian region, Bangladesh’s performance in terms of quality of infrastructure is classified as poor. According to Global Competitiveness Report 2011-2012, out of 142 countries, Bangladesh ranks 129th position, compared to Sri Lanka (48), Indonesia (82), India (86), Pakistan (109), Philippines (113) and Vietnam (123). Among various components of infrastructure, power is the most pressing need and supply of electricity is currently considered to be the most binding constraint to economic activities as Bangladesh ranks in terms of electricity supply 135 position out of 142 countries. Presently, only 48.5 % of the total population has access to electricity and per capita generation is only 200 kWh, which is very low compared to the developing countries. The maximum power generation was 4,606 MW in 2010, while according to the initial findings of Power System Master Plan, 2010 study, and the maximum demand including captive power in 2015, 2021 and 2030 will be about 12,000 MW, 20,000 MW and 36,000 MW, respectively (Table 1.3).

Table 1.3. Quality of Infrastructure in Selected Asian Countries, 2011-2012 (out of 142 countries)

Country/ Economy Overall Roads Railroad Port Air

Transport Electricity

Supply

Fixed Telephone

Lines

Mobile Telephone

Subscription

Bangladesh 129 111 73 113 117 135 135 127


India 86 85 24 82 67 112 113 117

Indonesia 82 83 52 103 80 98 79 82

Pakistan 109 79 59 72 85 126 120 119

Philippines 113 100 101 123 115 104 103 92

Sri Lanka 48 49 37 45 60 62 73 95

Vietnam 123 123 71 111 95 109 70 5


China 69 54 21 56 72 49 55 113

Malaysia 23 18 18 15 20 38 78 40

Thailand 47 37 63 47 32 50 94 70

Source: World Economic Forum | www.weforum.org/gcr (2011)

2020

Macroeconomic Risks

31. With regard to macro risks, currently Bangladesh is facing soaring inflation rate, significant trade account deficit and high level of fiscal deficit. The overall inflation rate continued to rise overtime as it rose to 8.8% in 2011. In particular, food inflation touched double digit to 11.3% in 2011. Similarly, the country has recorded high fiscal deficit of 4.4% of GDP in 2011 and plans to keep it at 5% of GDP during 2012-2015. On the external trade front, Bangladesh has also been facing persistent trade deficit, which increased to 6.6% of GDP in 2011 and is projected to remain between 8% - 9% of GDP during the SFYP period.

Microeconomic Risks

32. The Country is relatively weak in terms of providing business friendly environment to the private sector. According to the World Bank/IFC Doing Business 2011 Report, out of 183 countries, Bangladesh ranked 122 in terms of ease of doing business, which is weak compared to other lower-middle countries such as Sri Lanka (89), Vietnam (98), and Pakistan (105), while better than Indonesia (129), India (139), and Philippines (136). In particular, getting electricity is the most prominent constraint with ranking of 183, followed by enforcing contracts (180), registering property (173), trading across borders (115), resolving insolvency (107) and paying taxes (100). The relatively poor business climate also affects global competitiveness of the country (Table 1.4).

Table 1.4. Doing Business Ranking in Selected Asian Countries, 2011

(out of 183 countries)

Economy

Ease of Doing

Business Rank

Starting a

Business

Getting Electricity

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Enforcing Contracts

Resolving Insolvency

Bangladesh 122 86 182 173 78 24 100 180 107


India 132 166 98 97 40 46 147 182 128

Indonesia 129 155 161 99 126 46 131 156 146

Pakistan 105 90 166 125 67 29 158 154 74

Philippines 136 158 54 117 126 133 136 112 163

Sri Lanka 89 38 95 161 78 46 173 136 42

Vietnam 98 103 135 47 24 166 151 30 142


China 91 151 115 40 67 97 122 16 75

Malaysia 18 50 59 59 1 4 41 31 47

Thailand 17 78 9 28 67 13 100 24 51

Source: World Bank/ IFC (2011), http://www.doingbusiness.org/rankings Data Source: Ministry of Finance, Government of Bangladesh, Macroeconomic Review (2011)

21

21

33. According to Global Competitiveness Report 2012-2013, the top-5 problematic factors in doing business in Bangladesh include inadequate supply of infrastructure; corruption; access to financing; inefficient government bureaucracy; and high inflation rate. However, private firms are also concerned about policy instability, government instability, foreign currency regulations, inadequately educated workforce and tax rates, among others. These business constraints negatively affect returns to investment and lower the productivity of firms, thereby constraining private investment (Figure 1.17).

Returns to Investment

34. Despite all the above mentioned constraints to private investment, returns to investment in Bangladesh are higher compared to all selected Asian countries. Higher economic growth in Bangladesh can also be explained by high returns to economic activity. A comparison of returns to investment across selected Asian countries suggests that Bangladesh’s average annual returns to investment during 2000-2011 were 24.5%, which were higher than China (24.1%), India (23.2%), Malaysia (23.1%), Philippines (22.8%), Sri Lanka (21.5%), Vietnam (20%), Indonesia 20%), and Thailand (15.6%) but lower than Pakistan (25.1%). This can be attributed to cheap labor force and low input cost (Figure 1.18)6.

6 For detail on returns to investment, see “IDB Group MCPS for Malaysia” (May 2012) and ADB-IDB-ILO joint country diagnostic study “Indonesia: Critical Development Constraints” (2010).

Source: World Economic Forum, Global Competitiveness Report (2012-2013)

0

5

10

15

20

25

Figure 1.17. Most Problematic Factors for Doing Business in Bangladesh, 2012

22

22

ii. Low Level of Public Investment as Binding Constraint to Economic Growth

35. Public investment in Bangladesh declined gradually from the maximum level of 7.4% in 2000 to 5.3% of GDP in 2011. However, in order to achieve 8% economic growth by 2015, the Government plans to increase it again to 7.4% of GDP by 2015 (Figure 1.19). Therefore, the

Source: IMF World Economic Outlook (April 2012) and World Bank, World Development Indicators Note: Return to investment is estimated as the ratio of real GDP growth rate and gross capital formation as % of GDP.

25.1 24.5 24.1 23.2 23.1 22.8 21.5

20.0 20.0

15.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Figure 1.18. Return to Investment in Selected Asian Countries, 2000-2011 (average % per annum)


0

1

2

3

4

5

6

7

8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Publ

ic In

vest

men

t (%

of G

DP)

Rea

l GD

P G

row

th (%

per

ann

um)

Figure 1.19. Bangladesh: Real GDP Growth and Public Investment Rates, 2000-2015

Real GDP Growth Public Investment

23

23

diagnosis of public investment starts by examining why the level of public investment remained low in the past. Was this due to budgetary constraint or limited implementation capacity or was it due to corruption or poor governance? Will the similar budgetary constraint remain in the medium-term? The following sub sections attempts to answer to these questions.

Budgetary Constraint

36. Public investment in Bangladesh is constrained by Government’s tight budgetary position. Although, the Government succeeded to reduce its fiscal deficit from 6.1% of GDP in 2000 to 4.4% in 2011, while average annual fiscal deficit was 4.6% during 2000-2011 clearly shows that public investment was constrained by the budgetary limitation of the Government. Although, the Government set the public investment target of 7.5% of GDP by 2015 (from the current level of 5.3%), higher fiscal deficit target of around 5% under the SFYP period shows that public investment will be constrained by the budgetary limitation in the medium-term as well (Figure 1.20).

Poor Governance

37. Bangladesh’s other major issue is weak governance which is a critical constraint in achieving macroeconomic stability, sustaining economic growth and delivering public services. The World Bank’s worldwide governance indicators show that Bangladesh’s performance in all the six governance indicators (i.e. voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption) have been poor. Compared to other Asian countries, Bangladesh ranks poor in all six indicators (lower the value, poor the indicators: 100 value implies the best and 0 the worst). For example, voice and


-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1.20. Bangladesh: Fiscal Deficit and Public Investment Rates (% of GDP)

Budget Deficit Public Investment

2424

accountability (38), political stability (10), government effectiveness (22), regulatory quality (22), rule of law (27), and control of corruption (16). This extracts a significant price in terms of lost growth potential. Recent studies have established positive relationships between good governance and improved investments, better economic performance, and improved human welfare and development, while corruption hinders progressive development and therefore increases poverty7. Further, a strong positive correlation has been found between per capita income and the quality of governance across countries8 (Table 1.5).

Poor Quality of Institutions

38. Compared to selected Asian countries, quality of institutions in Bangladesh is poor. The Global Competitiveness Report (2012-2013) shows that Bangladesh stands at the lowest ranking of 127 out of 144 countries. The better quality of institutions appears to have positive impact on economic growth in an economy. Strong and fair institutions play a positive role in terms of investment decision making. The role of institutions goes beyond the legal and regulatory framework. In particular, the Government’s attitude toward markets and the efficiency of its operations are important in achieving sustainable high economic growth9 (Figure 1.21). 7 ODI (2006), “Governance, development and Aid Effectiveness: A Quick Guide to Complex Relationships”, Briefing Paper. 8 Ishrat Husain (2009), Economic Governance in Pakistan. 9 For further detail on this institution matter, see World Economic Forum, Global Competitiveness Report (2011-12).

Table 1.5. Governance Indicators of Selected Asian Economies, 2011

(percentile rank between 0 - 100, lower the values, worst the indicator)

Country Voice and Accountability

Political Stability and Absence of

Violence/Terrorism

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Bangladesh 38 10 22 22 27 16


India 59 11 55 39 55 36

Indonesia 48 19 48 40 31 27

Pakistan 27 0 26 30 26 12

Philippines 47 7 52 44 35 22

Sri Lanka 32 21 49 45 53 41

Vietnam 9 51 44 31 39 33


China 5 24 60 45 45 33

Malaysia 31 52 82 71 65 61

Thailand 30 13 58 56 50 47

Source: World Bank (2011), Governance Indicators (http://info.worldbank.org/governance/wgi/index.asp)

25

25


29

49 50

70 72 77

89 94

115

127

0

20

40

60

80

100

120

140

Malaysia Sri Lanka China India Indonesia Thailand Vietnam Philippines Pakistan Bangladesh

Figure 1.21. Quality of Institutions in Selected Asian Countries, 2012 (ranking out of 144 countries, higher the ranking, lower the quality)

iii. Weak Software of Growth as Binding Constraint to Economic Growth

39. Software of economic growth plays a key role in achieving sustainable economic growth in the medium- to long-term. Software of economic growth includes various components of global competitiveness such as innovation, business sophistication, quality of education, expenditure on R&D, and Reverse Linkages activities. In order to achieve sustained growth of 8% by 2015, Bangladesh needs to improve significantly software of economic growth. The following sub sections briefly describe the binding constraints to various components of software of growth.

Weak Global Competitiveness

40. Weak global competitiveness also remains a key challenge for the country’s economic growth. The scale of the challenge is manifested in Bangladesh’s global ranking of 118 (out of 144 countries) in the Global Competitiveness Index 2012-2013, compared to raking of all lower-income countries such as Indonesia (50), India (59), Philippines (65), Sri Lanka (68), Vietnam (75), but better than Pakistan (124). However, opening up trade has been considered one of the key pillars of future Bangladesh’s growth. Growth dividends from trade openness will depend upon investment climate reforms to boost competitiveness of domestic firms (Figure 1.22).

Poor Innovation

41. Bangladesh is relatively poor in terms of overall innovation with ranking of 131 out of 144 countries. Various indicators of innovation show that country is weak in terms of all indicators such as out of 144 countries, Bangladesh ranks 134 in terms of Government

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26


25 29 38

50 59

65 68 75

118 124

0

20

40

60

80

100

120

140

Malaysia China Thailand Indonesia India Philippines Sri Lanka Vietnam Bangladesh Pakistan

Figure 1.22. Ranking of Global Competitiveness of Selectecd Asian Countries (out of 144 countries)


134 131 131 130 127 115

81

020406080

100120140160

Figure 1.23. Bangladesh: Indicators of Innovation, 2012 (ranking out of 144 countries: higher the ranking, poor the indicators)

procurement of advanced technological products; followed by capacity for innovation (131); university-industry collaboration in R&D (131); company spending on R&D (130); quality of scientific research institutions (127); PCT patents, applications/million population (115); and availability of scientists and engineers (81) (Figure 1.23).

2727


138 138

119 119

99 93 81 77

57

0

20

40

60

80

100

120

140

160

Nature ofcompetitiveadvantage

Willingness todelegateauthority

Productionprocess

sophistication

Extent ofmarketing

Control ofinternationaldistribution

Value chainbreadth

Local supplierquality

Local supplierquantity

State of clusterdevelopment

Figure 1.24. Bangladesh: Indicators of Business Sophistication, 2012 (Ranking out of 144 countries: higher the ranking, poor the indicator)

Weak Business Sophistication

42. Similar to poor innovation, Bangladesh is also weak in terms of overall business sophistication with a ranking of 108 out of 144 countries. According to the Global Competitiveness Report (2012-2013), the country is quite weak in terms of nature of competitive advantage (138) and willingness to delegate authority (138) followed by production process sophistication (119), extent of marketing (119), control of international distribution (99), value chain breadth (93), local supplier quality (81), local supplier quantity (77), and state of cluster development (57) (Figure 1.24).

Poor Reverse Linkages

43. Bangladesh needs to transfer its expertise to other IDB member countries that can help to support high economic growth. With regard to technology transfer, Bangladesh can facilitate and support its experience in the areas of rural electrification through solar energy. For instance, Solar Home System (SHS) Program of Bangladesh is one of the most successful off-grid solar electrification programs in the world. The SHS program has been established as a viable model for increasing access to electricity in rural areas where the electric power grid is not presently economically feasible. More than 1.3 million SHSs have been installed to date. The Government has a goal of providing SHSs to 2.5 million households by 2014. Further, Jute manufacturing technology and microfinance expertise can also be replicated in other IDB member countries.

1.4 Summary of Binding Constraints to Economic Growth

44. The above diagnostic analysis identifies several binding constraints to sustainable economic growth. Keeping in view the existing socio-economic situation and the available physical and human capital and associated policies, it will be a challenging task for the

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Government to progressively achieve 8% economic growth by 2015 and 10% growth by 2021. These constraints (along with the constraints identified in the existing literature) are summarized in Table 1.6.

Table 1.6 Summary of Binding Constraints to Economic Growth in Bangladesh

Source of Information Binding Constraints to Sustainable Economic Growth

Islamic Development Bank (September 2012)

Low Level of Private Investment Weak Access to Finance and High Cost of Financing Poor Geography Weak Human Capital Poor Quality and Quantity of Infrastructure Macroeconomic Risks (i.e. soaring inflation, higher fiscal and trade

deficits) Microeconomic Risks (i.e. weak business environment )

Low Level of Public Investment Budgetary Constraint Poor Governance Poor Quality of Institutions

Weak Software of Growth Weak Global Competitiveness Poor Innovation Weak Business Sophistication Weak Reverse Linkages

World Bank (August 2010), Country Assistance Strategy 2011-2014

Energy Deficit Weak Business Environment Weak State-owned Banking Sector Existence of Anti-Export Bias Low Tax Collections Weak Governance

World Bank (July 2007), “Bangladesh: Strategy for Sustained Growth”

Inadequate Infrastructure, especially Power and Ports Weak Governance Rapid and Imbalanced Urbanization Weak Export Competitiveness Low Financial Depth Weak Quality of Education

ADB (October 2011), Country Partnership Strategy: 2011-2015

Stagnant Gross Domestic Saving and FDI Flows Narrow Economic Base Dominated by Garments and Remittances Insufficient government revenues Serious Constraints in Power, Gas, Ports, Railways, and Roads Insufficient Skills Base Poor Quality of Education Climate Change Impacts Governance Challenges

Ahmed Salman (2009), “Bangladesh’s Economy: Surrounded by Deadly Threats”, International Journal of Social Economics, Vol. 36)

High Corruption Rising Inflation Electricity Shortage Crisis Poor Performance of Financial Sector Limited Product Diversification Capacity

Jyoti Rahman and Asif Yusuf (2010), “Economic Growth in Bangladesh: Experience and Policy Priorities”

Low Level of Human Capital Poor Infrastructure Market Failures Specific to Individual Industries Low Levels of International Trade Corruption Cumbersome Regulations

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Annex Table 1.1: Bangladesh Socio-Economic Indicators*

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Per Capita GNI ($) 380 380 400 440 463 476 523 608 676 751 818

GDP Growth (%) 5.3 4.4 5.3 6.3 6.0 6.6 6.4 6.2 5.7 6.1 6.7

Agriculture 3.1 0.0 3.1 4.1 2.2 4.9 4.6 3.2 4.1 5.2 5.0

Industry 7.4 6.5 7.3 7.6 8.3 9.7 8.4 6.8 6.5 6.5 8.2

Services 5.5 5.4 5.4 5.7 6.4 6.4 6.9 6.5 6.3 6.5 6.6

Savings and Investment (% of GDP) 2/

Domestic Savings 18.0 18.2 18.6 19.5 20.0 20.3 20.3 20.3 20.1 20.1 19.6

National Savings 22.4 23.4 24.9 25.4 25.8 27.7 28.7 30.2 29.6 30.0 28.4

Total Investment 23.1 23.3 23.7 24.3 24.6 24.6 24.3 24.3 24.4 24.6 25.0

Public 7.2 6.4 6.2 6.2 6.2 6.0 5.5 4.9 4.7 5.0 5.3

Private 15.8 16.8 17.2 17.8 18.3 18.7 19.0 19.3 19.7 19.4 19.5

Inflation (% p.a.) 1/

Overall 1.9 2.8 4.4 5.8 6.5 7.2 7.2 9.9 6.7 7.3 8.8

Food 1.4 1.6 3.5 6.9 7.9 7.8 8.1 12.3 7.2 8.5 11.3

Non-food 3.0 4.6 5.7 4.4 4.3 6.4 5.9 6.3 5.9 5.5 4.2

Budget (% of GDP) 1/

Total Revenue 9.6 10.2 10.4 10.6 10.6 10.8 10.5 11.1 11.3 11.4 12.1

Tax Revenue 7.8 7.8 8.3 8.5 8.6 8.7 8.3 8.8 9.0 9.2 10.0

Non-Tax Revenue 1.8 2.4 2.1 2.1 2.0 2.1 2.2 2.3 2.2 2.2 2.0

Total Expenditure 14.8 14.9 14.6 14.8 15.0 14.7 14.1 17.3 15.3 15.9 16.5

Budget Balance (excluding grants) -5.1 -4.7 -4.2 -4.2 -4.4 -3.9 -3.7 -6.2 -4.1 -4.5 -4.4

Budget Balance (including grants) -4.1 -3.7 -3.4 3.4 -3.7 -3.3 -3.2 -5.4 -3.3 -3.9 -3.9

External Sector (% of GDP) 1/

Imports 19.9 18.0 18.6 19.3 21.8 21.5 28.5 24.5 22.7 21.3 27.4

Exports 13.7 12.6 12.6 13.5 14.4 16.8 20.4 17.8 17.4 16.2 20.8

Trade Balance -6.1 -5.4 -6.0 -5.8 -7.5 -4.7 -8.1 -6.7 -5.3 -5.1 -6.6

Current Account Balance -2.2 0.5 0.6 0.3 -0.9 1.3 1.4 0.9 2.7 3.7 0.9

Foreign Exchange Reserves (US$ million) 1,307 1,583 2,470 2,705 2,930 3,484 5,077 6,149 7,471 10,750 10,912

Banking Sector4/ Domestic credit to private sector (% of GDP) 27.8 30.1 30.2 32.1 33.8 36.2 37.3 39.2 41.5 47.1 49.4

Lending rate (% per annum) 15.8 16.0 16.0 14.8 14.0 15.3 16.0 16.4 14.6 13.0 13.3

Social Indicators

Population (million) 1/ 129.9 131.6 133.4 135.2 137.0 138.8 140.6 142.4 144.2 146.1 147.9

Overall Poverty (%, head count ratio) 2/ 48.9 40.0 31.5

Rural 52.3 43.8 35.2

Urban 35.2 28.4 21.3 1/ Bangladesh Economic Review (2011), Ministry of Finance, Government of Bangladesh

2/ Sixth Five Year Plan (2011-2015), Ministry of Planning, Government of Bangladesh

3/ World Bank, World Development Indicators (2012). * Fiscal Year starts on 1st July and ends on 30 June next year (e.g. 2001 is 2000-2001).

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Annex Table 1.2: Bangladesh: Sixth Five Year Plan (2011-2015) Targets

Targets

Current Situation

(2005-2010)

Vision 2021

SFYP

2015 MDGs

A. Production, Income Generation and Poverty

1. Real Income Growth (%) 6.1 10 8.0

2. Head Count Poverty (%) 31.5 14 22 29

3. Industrial Sector Employment Rate (%) 17 30 25

4. Contribution of Productivity to Economic Growth (%) 8 20 10

5. Overseas employment of skilled labour (%) 35 20 50

B. Human Resource Development (Education, Health and Population)

6. Net Enrolment at Primary Level (%) 91 100 100

7. Enrollment Rate in 12th Class (%) 100 60

8. Percentage of cohort reaching grade 5 (%) 55 100 100

9. Total Fertility Rate Reduction 2.7 1.8 2.2

10. Increase Contraceptive Prevalence Rate (%) 60 80 72

11. Under 5 Mortality Rate (per 1000) 62 50 50

12. Immunization, measles (% of children under 12 months) 87 100 100

13. Maternal Mortality Ratio (per 100,000 live births) 194 143 143

14. Births attended by skilled health staff (% of total) 24 50 50

C. Water and Sanitation

15. Proportion of urban population with access to safe drinking water 99.9 100 100 100

16. Proportion of rural population with access to safe drinking water 79 100 96.5 96.5

17. Proportion of urban population with access to sanitary latrines 88.0 100 100 85.5

18. Proportion of rural population with access to sanitary latrines 85.0 100 90 55.5

D. Energy and Infrastructure

19. Electricity Generation (MW) 5803 20000 15457

20. Electricity Coverage (%) 47 100 68

E. Gender Equality and Women Empowerment

21. Ratio of girls to boys in tertiary education (%) 32 60 100

22. Ratio of literate females to males (% of ages 20-24) 85 100 100

23. Female Overseas Employment Rate (%) 5% 20% 10%

F. Environment Sustainability

24. Productive Forest Coverage (%) (70 % tree density) 13 20 15 20

G. ICT

25. Research and Development Spending (% of GDP) 0.6 1.4 1.0

26. Compulsory ICT Education (education level-class) 5 12

27. Telecentre/Comm. e-centre with Inter-net facilities at unions (%) 100 100

28. Computer laboratory at the primary government school 20 5

29. Increase teledensity (%) 90 70

30. Expansion of Broad Band Coverage (%) 40 30

Source: Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015), Part-1

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2.1 Poverty Trend

45. Bangladesh has been struggling with poverty since its emergence as a sovereign nation in early 1970s. Although poverty, given its multidimensional nature, is a universal problem in all countries and regions of the world, many factors make Bangladesh a unique case in this regard. The geographical position of the country coupled with high population, acute shortage of land and natural resources as well as other social and political factors compound the problem of poverty in the country. Although, the country has recorded significant improvement in poverty alleviation during the last two decades, the problem of poverty still persists. As usual, the rural areas take the largest proportion of the incidence of poverty even though the rate of decrease in poverty is higher in the rural areas compared to urban areas.

46. Poverty headcount ratio (i.e. absolute poor living below $1.25 a day (PPP)) declined from 70% in 1992 to 43% in 2010 while the number of absolute poor also declined from 76 million to 64 million. The trend shows that the number of extremely poor people decreased from 76 million in 1992 to 72 million in 1996 but bounced back in 2000 to its 1992 position and then continued to decline reaching 64 million in 2010 (Table 2.1). However, when $2 a day poverty

Table 2.1. Bangladesh: Number of Poor and Poverty Headcount Ratio

Year

$1.25 a day $2 a day $2.5 a day

Number of Poor

(million, number)

Headcount Ratio (%)

Number of Poor (million,

number)

Headcount Ratio (%)

Number of Poor (million, number)

Headcount Ratio (%)

1992 76 70 100 93 104 97

1996 72 61 101 86 107 91

2000 76 59 109 84 118 91

2005 71 50 113 80 124 88

2010 64 43 114 77 128 86

Source: World Bank, World Development Indicators (WDI) (www.worldbank.org, accessed on May 19, 2012).

II.

DIAGNOSTIC ANALYSIS OF POVERTY AND HUNGER

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line is used, the number of people under this poverty line actually increased by 14 million from 100 million to 114 million despite a decline of headcount ratio by 16 percentage points during the same period. In terms of relative poverty (people living $2.5 a day), the situation has been similar to the case of the marginally poor, while the headcount ratio decreased from 97% in 1992 to 86% in 2010 and the number of people under this poverty line increased by 24 million people (i.e. from 104 million to 128 million).

47. Compared to 10 selected Asian countries in the region, poverty remained highest in Bangladesh. Poverty incidence had been 43% in Bangladesh in 2010, followed by India (33%), Pakistan (21%), Philippines (18.4%), Indonesia (18.1%), Vietnam (17%), while it remained below 15% in other remaining countries. The favorable impact of Bangladesh’s limited economic intervention aside, the pace of poverty reduction in the country remained much lower than in faster-growing Asian countries, which underscores the importance of higher growth for achieving even faster reduction in poverty (Table 2.2).

48. Using Household Income Expenditure Survey (HIES) 2010 data, Titumir and Rahman (2011)10 observed that the incidence of poverty had decreased at an annual average rate of 1.3% from 1991. This means that the rate of poverty will be higher (27.5%) in 2013 than the Government’s projected rate of 25% in 2013 and 17% in 2021. Similarly, the number of people below poverty line, which is increasing at an annual average growth of 0.3% nationally, will stand at about 57 million in 2013 and 60 million in 2021. Conversely, going at the current trend, the number of people below the poverty line in rural areas will decrease while poverty in 10 Titumir, R. A. M. and Rahman, K. M. M. (2011), Poverty and Inequality in Bangladesh. Umayan Onneshan – The Innovators.

Table 2.2: Poverty Headcount Ratio at $1.25 a day (PPP) (% of population) Country 1992 2000 2010

Bangladesh 70.22 58.59 43.25


India 49.4 41.64 32.67

Indonesia 54.4 47.7 18.06

Pakistan 64.71 29.05 21.04

Philippines 30.68 22.45 18.42

Sri Lanka 15.01 13.95 7.04

Vietnam 63.74 40.05 16.85


China 63.8 35.63 13.06

Malaysia 1.62 0.54 0

Thailand 8.6 3.04 0.37 Source: World Bank, World Development Indicators (WDI). Note figures are for the years specified or nearest available year

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urban areas will increase during the same periods. This means that urban poverty will be the future challenge of the country’s poverty reduction efforts. The slow rate of poverty reduction, despite the concerted efforts at reducing it, calls for revisiting the overall perception and approach to the problem.

49. Similarly, the slowing rates of the depth of poverty (poverty gap) and that of severity of poverty (squared poverty gap) in the second half of the last decade compared to the first half means that although there is improvement, however, the reduction has been impaired by rising inequality in the country (Titumir and Rahman, 2011). This situation is further compounded by the rising household general expenditure and expenditure on food in particular above the rise in income during the last decade with a rise in both income and expenditure higher in the second half of 2000s. The phenomenal increase in expenditure on food during the second half of the decade due to the combined effects of the food and financial crisis coupled with the Cyclone and Tsunami disasters left many people falling below the poverty line especially among the urban low income group and the rural landless.

2.2 Hunger Situation

50. Poverty and hunger are two sides of the same coin. They reinforce each other such that each causes the other in a vicious circle. Although hunger is mainly caused by extreme poverty, it has other causes such as conflicts, natural disasters like earthquake, drought, cyclones or Tsunami etc., leaving people with not sufficient food for their needs. The fact that the poor people devote greater proportion of their income to food than the rich means that the poor households are the hardest hit by general and food inflations due to the recent global food and financial crises.

51. The large number of poor people in Bangladesh and its geographical location which make it susceptible to frequent occurrences of natural disasters such as floods and cyclones perpetuate the problem of hunger and malnutrition in the country. The Global Hunger Index (GHI), 2011 shows that despite significant improvement in reducing hunger, the country is still at an alarming level of hunger (24.5 points), the highest among the selected countries in the region. Although there has been improvement over the years in all three components of the GHI, the rate of change especially of the prevalence of undernourished in the population, has not been impressive. Bangladesh has the highest rate (27 %) of the hungry people in the region.

52. According to the Food and Agricultural Organization (FAO)11, although both the number and proportion of undernourished persons in Bangladesh has sharply declined from 37 million people (34.6% of the population) in 1990-1992 to 24 million (18.4%) in 1999-2001, however, after reaching its lowest level at 15.1% in 2004-2006, the trend picked up since then reaching 16.8% in 2010-2012. This is in contrast with regional figures as the proportion of the undernourished persons in South Asian region including India, Pakistan, Sri Lanka, Maldives, Iran and Nepal have been declining since mid-2000s. These figures indicate that the number and proportion of the undernourished people in Bangladesh is on a rising trend despite the highly acclaimed economic growth during the period (Table 2.3).

11 Food and Agriculture Organization (February 2013), The State of Food Insecurity in the World.

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Table 2.3: Global Hunger Index in Selected Asian Countries (the lower the better)

Country 1990 1996 2001 2011

Bangladesh 38.1 36.3 27.6 24.5


India 30.4 22.9 24.1 23.7

Indonesia 18.5 15.5 14.3 12.2

Pakistan 25.7 22.0 21.9 20.7

Philippines 19.9 17.5 14.1 11.5

Sri Lanka 20.2 17.8 14.9 14.0


China 11.7 9.1 6.8 5.5

Malaysia 9.0 6.7 6.6 <5

Thailand 15.1 11.9 9.5 8.1

Source: The Global Hunger Index (2011) prepared by IFPRI, Welthungerhilfe, and Concern. Note: Extremely Alarming (>30); Alarming (20.0-29.9); Serious (10.0-19.9); Moderate (5.0-9.9); Low (<5)

2.3 Progress in Achieving MDGs

53. Bangladesh has made impressive progress towards attainment of Millennium Development Goals (MDGs) by 2015. In case of majority of the indicators, Bangladesh is on track with prospect for earlier attainment of targets of some of the indicators. Regarding the MDGs, the current trend indicates Bangladesh is well on track in achieving the MDG targets in the areas of hunger, net enrolment in primary education, gender parity in primary and secondary education, reducing child mortality and improving immunization coverage, rolling back malaria and controlling tuberculosis, and improved drinking water supply. The areas that remain in need of attention are poverty reduction and employment generation, increases in the primary school completion rate and adult literacy rate, creation of more wage employment for women, reduction of the maternal mortality ratio and increase in the presence of skilled health professionals at delivery, increase in correct and comprehensive knowledge of HIV/AIDS, increase in forest coverage, and coverage of information and communication technology.

54. Hence, it is crucial for the Government to tackle poverty as one spectrum of engagement which has direct spill-off effects towards better education and healthcare services by employing a proper but relevant mechanism while effective on current scenarios facing the poor both in rural and urban areas. In other words, active community participation is key for all implementable projects to kick-offs smoothly and it is the Government to ensure the assistance received from development partners (DPs) and Non-Government Organization (NGOs) are fully triggered down to the needy by cutting unnecessary bureaucratic procedures along the delivery cycles.

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2.4 Government Strategy for Reducing Poverty and Hunger

55. Poverty reduction trend is attributed to the pro-poor strategy of the Government over the years - focusing on growth, human development and social safety nets; NGO activities and broad-based micro credit operations; strong expatriates remittances; and growth process led by an expanding the private sector. Since 2002, the GoB initiated the PRSP to pursue development objectives. The first full PRSP, titled ‘Unlocking the Potential’ was implemented during 2005-08, while the second PRSP ‘Moving Ahead: National Strategies for Accelerated Poverty Reduction (NSAPR II) FY 2009-11’ was approved by the Government in October 2008. As a result of vastly improved transport and communication networks, rural labor has become more mobile; farming has become more market-oriented; and the poor are now able to draw their livelihoods from a continuum of farm, off-farm, rural, and urban activities. The Government plans to speed up economic growth and poverty reduction while adapting to the impacts of climate change to transform Bangladesh into a lower-middle income country by 2021. In this regard, the Government’s policy framework under NSAPR II puts poverty reduction as the central issue of its development agenda as it prepared a long-term Perspective Plan for 2010-2021 to reduce poverty to a "tolerable level" propelled by high growth and social justice. This Vision is to be implemented initially through the NSAPR II, followed by two successive Five Year Plans. The five priority areas of the revised NSAPR II include maintaining macroeconomic stability and stabilising commodity prices, continuing effective actions against corruption; ensuring adequacy of power and energy; achieving significant reduction of poverty and inequality; and establishing good governance.

2.5 Binding Constraints to Reducing Poverty and Hunger

Slow Pro-Poor and Inclusive Growth Process

56. The experience of Bangladesh suggests that the benefits of economic growth did not trickle down, meaning that the process had not been efficient in realizing the goal of reducing poverty and hunger. The paradox of high growth with slow rate of poverty reduction calls for revisiting the conventional paradigm which postulates that higher growth generates benefits to both the rich and the poor through the so-called ‘trickle down’ effect. The growth performance in Bangladesh has masked many aspects that are detrimental to the poor such as high rates of unemployment, underemployment, and inflation. Moreover, many people work at very low wages which do not move them out of poverty but yet are classified as employed. Therefore, to understand the true picture of the growth performance in Bangladesh there is needed to examine the nature and components of economic growth in the country. Bangladesh’s economic growth in the past decade has been driven mainly by exports of the textile sector and the inflows of remittances by workers abroad. The activities of the textile sector involve engaging cheap labor mostly women in the production process working under very tight working conditions with low wages and poor employment conditions. Under such conditions, many people work but remain in poverty. Moreover, the structural transformation of the economy from agriculture to services – dominated by the informal activities instead of via manufacturing, is another challenge to the country. The

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implication of this is that the informal sector offers low wage and in most cases temporary employment keeping many people at the fringe of poverty. There is, therefore, need of strong private sector support and empowerment of the poor people with essential finance to enable them to leapfrog to a safety zone away from poverty. In other words, there is need to strongly support sustainable and inclusive growth in the country.

Weak Consideration of Social and Political Dimensions into Growth Strategies

57. Due to the evidences of rising poverty despite sustained economic growth, it is suggested that social and political dimensions need to be taken into consideration. For instance, people should be given equal opportunities to make use of their capabilities and be socially included in the economic, political and social decision making. In this context, Titumir and Rahman (2011)12 concluded that the major reasons for the persistence of poverty in Bangladesh are: “absence of adequate state intervention for the expansion of production, deficiency of equalizing income augmenting employment system, shortfalls in public expenditure for capabilities enhancements, inadequacies in regulatory regimes, lack of complementary policy structure, and non-existence of enforceability of constitutional rights.

Poor Governance for Reducing Poverty and Hunger

58. Poor governance is another binding constraint to reducing poverty and hunger. There is need for improving governance indicators to reduce poverty and hunger. Numerous studies have established positive relationships between good governance and improved investments, better economic performance, welfare and development; while corruption hinders development and therefore increases poverty (Overseas Development Institute (2006).13 Kaufmann and Aart (2002)14 and Haq and Zia (2009)15 established that there is a strong positive correlation between per capita income and the quality of governance across countries.

59. The World Bank’s Worldwide Governance indicators show that Bangladesh’s performance in all the six governance indicators (voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption), have been decimal over the years. The rising growth rate, despite low governance indicators, during the last decade in Bangladesh has been viewed as a paradox by many researchers and development analysts. For example, Mahmud, et al (2009)16 established, based on cross-country growth regressions, that Bangladesh is an outlier having an exceptionally high

12 Titumir, R.M. and Rahman, K.M.M. (2011), “Poverty and Inequality in Bangladesh”, Unnayan Onneshan-The Innovators. 13 Overseas Development Institute (2006), Governance, development and Aid Effectiveness: A Quick Guide to Complex Relationships. Briefing Paper. 14 Kaufmann, K. and Aart, K. (2002), “Growth Without Governance”, The World Bank. 15 Haq, R. and Zia, M. (2009), “Does Governance Contribute to Pro-poor Growth? Evidence from Pakistan” PIDE Working Paper 52. 16 Mahmud, W., Asadullah M.N., and Savoia, A. (2009), “Governance and Growth: Is Bangladesh and Outlier?” IGC Bangladesh Growth Research Programme, Economic Research Group.

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growth despite poor governance indicators. The study, however, concluded that there is need to take into account the country-specific circumstances for understanding the growth-governance nexus. The World Bank (2008)17 is of the opinion that although many people view the growth-governance nexus in Bangladesh as a paradox, unbundling the overall governance environment reveals six areas where Bangladesh demonstrated capacity on governance which makes the relationship not surprising. Despite that, there is consensus among researchers on the fact that although the existing governance environment of Bangladesh has barely enabled the country to break the barriers of stagnation and extreme poverty, improved governance environment is key to sustain high growth and eliminate extreme poverty in Bangladesh. Good governance would enable the country achieve its goal of lower-middle income status while any deterioration in governance indicators will be detrimental to the sustainable economic development of the country (Table 2.4).

17 World Bank Report (2008), “Bangladesh Growth Paradox, Does Governance Matters?”

Table 2.4: Governance Indicators in Bangladesh

Indicators Year Percentile Rank Governance Score

(0-100) (0 is worst and 100 is best)

(-2.5 to +2.5) (from worst to best)

Voice and Accountability

2010 38.4 -0.28

2005 30.3 -0.57

2000 39.4 -0.28

Political Stability/Absence of Violence

2010 9.9 -1.42

2005 4.8 -1.8

2000 23.6 -0.74

Government Effectiveness

2010 21.5 -0.84

2005 19.5 -0.89

2000 32.2 -0.56

Regulatory Quality

2010 21.5 -0.86

2005 16.7 -1.03

2000 18.6 -0.87

Rule of Law

2010 26.5 -0.77

2005 17.7 -0.96

2000 22.0 -0.9

Control of Corruption

2010 16.3 -0.99

2005 4.9 -1.42

2000 12.7 -0.96

Source: World Bank (2010), Governance Indicators

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Weak Public-Private-NGO Partnerships

60. Forging robust public-private-NGO partnerships is essential to ensure that capacities to serve the poor are in place. Bangladesh has a flourishing civil society, including some of the world’s most innovative NGOs and community-based organizations. Strong partnerships with NGOs to deliver grassroots public services are clearly critical in filling the gaps in the existing poverty reduction agenda.

Capacity Constraint

61. Binding constraints to poverty reduction in Bangladesh span a number of key sectors and include major productive capacity and support needs. Various constraints in donor priorities, comparative advantages and financing modes exist among the numerous aid partners in Bangladesh. Among areas identified that receive relatively less concentration of donor funds and existing assistance programs, despite local needs, are nutrition programs to counter malnutrition problems and lost labor productivity; access to basic needs and food security; rural electrification; sanitation; social safety net reform; capacity building; vocational skills and training to enhance labor productivity and income; poverty assessment in slums (where Census seldom reaches); and Local Government capacity building for efficient distribution of assistance.

Climate-Induced Disasters

62. Climate-induced disasters are endemic in Bangladesh, suffering the lives and livelihoods of millions of people, damaging infrastructure, and harming the physical environment. Climate change multiplies these inherent risks, undermining development prospects and eroding the gains in poverty reduction. Major efforts with innovative strategies need to be mounted for mobilizing funds for adaptation measures, putting in place the right policy frameworks, and building institutional capacity.

2.6 Summary of Binding Constraints to Reducing Poverty and Hunger

63. The summary of binding constraints to reducing poverty and hunger is given in Table 2.5.

Table 2.5 Summary of Binding Constraints to Reducing Poverty and Hunger Binding Constraints to Reducing Poverty and Hunger

Slow Pro-Poor and Inclusive Growth Process

Weak Consideration of Social and Political Dimensions into Growth Strategies

Poor Governance for Reducing Poverty and Hunger

Weak Public-Private-NGO Partnerships

Capacity Constraint

Climate-Induced Disasters

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64. This section covers two components of infrastructure namely energy sector and urban development which are selected for the “IDB Group Member Country Partnership Strategy for Bangladesh, 2013-2016: Partnering for Sustainable Growth and Reducing Poverty” (published separately).

3.1 Energy Sector

3.1.1 Overview of Energy Sector

65. The per capita consumption of energy in Bangladesh is significantly low compared to comparator countries. Per capita electricity consumption in Bangladesh is much lower than the BRICS countries (Brazil, Russia, India, China, and South Africa) as well as that in Pakistan and Sri Lanka. It is about 160 kilogram oil equivalent (kgoe) while it is 530 kgoe in India, 510 kgoe in Pakistan, 470 kgoe in Sri Lanka, and 340 kgoe in Nepal. The average consumption in Asia is 640 kgoe. At present, Bangladesh’s per capita electricity production is only 200 kw/hour. Only 48.5% of the total population of Bangladesh has access to electricity.

66. Bangladesh's energy sector is greatly reliant on natural gas, which is the main source of primary energy, contributing over 61% of the commercial energy supply in 1994 and increasing to over 70% in 2008. Currently, it is the primary energy source (between 85% - 90%) used in power generation. Close to 57% (i.e. inclusive of captive power generation) of the country's natural gas production is used in power generation. Given the importance of natural gas as primary energy supply and electricity in final energy consumption, the energy sector in Bangladesh is dominated by the natural gas and power as sub-sectors.

67. Currently, Ministry of Power, Energy and Mineral Resources (MPEMR) is responsible for overall sector policy formulation, investment decisions and regulation of the energy sector in Bangladesh. Bangladesh Power Development Board (BPDB) established in 1972 as a public sector organization to develop the power sector, is responsible for planning, construction and operation of power generation throughout the country and for distribution in urban areas (except Dhaka). In addition to its own generation, BPDB purchases power from other generating companies and sells to its consumers and other distribution companies. Bangladesh Oil, Gas & Minerals Corporation (Petrobangla) was established in 1972 to consolidate the state-owned natural gas sector operations. The mission of Petrobangla is to (i) expedite exploration and exploitation of oil, gas, coal, and mineral resources; (ii) ensure conservation of energy through judicious use; (iii) carry research and development in the field of exploration and exploitation of

III. DIAGNOSTIC ANALYSIS OF

INFRASTRUCTURE DEVELOPMENT

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energy and mineral resources; (iv) promote compressed natural gas (CNG) and liquefied petroleum gas (LPG) for protection of environment; (v) encourage foreign and local private investment in oil, gas and mineral sector; and (vi) build institutional capacity. The Bangladesh Energy Regulatory Commission (BERC) was established in 2003 through a legislative Act of the Government of Bangladesh to regulate gas, electricity and petroleum products in country with a mandate of providing energy at just and reasonable cost, and protection of consumers’ interest and satisfaction through fair practice. Currently, eleven companies operate under the umbrella of Petrobangla. These companies are dealing in activities related to exploration, production, transmission, distribution, conservation of oil and gas resources and development of coal and hard rock mines, marketing of the mined products and alternative use of oil and gas resources.

3.1.2 Overview of the Power Sector

68. Bangladesh is one of the world's most populous and poorest nations. To reduce poverty, the Government has placed highest priority towards power sector development and is committed to make electricity available to all by 2021. Although, power sector development has been positive, there is still a long way to go to achieve the 2021 target. Bangladesh accomplished an electrification rate of 50% in 2011, as compared to 14% in 2001. Despite significant improvements in electrification over the years, Bangladesh continues to face chronic power shortages. There is a need for increased private sector participation in the power sector to enable the Government to meet its targets. Therefore, private participation is expected to play a major role in all future power sector development interventions.

Institutional Reforms in the Power Sector

69. To alleviate acute power shortage, Bangladesh has developed favourable policies aimed at liberalizing and privatizing the power sector, increasing private sector participation in Independent Power Producers (IPPs) and improving corporate governance within the sector. Notably, the Private Sector Power Generation Policy (1996) offers IPPs fiscal incentives which include corporate tax holidays of 15 years, stamp duties and unrestricted repatriation of equity along with dividends. During 1996–2000, several changes were made to the institutional arrangements in the power sector. The Power Grid Company of Bangladesh (PGCB) was established to gradually take over the operation of the high-voltage power transmission network (230 kilovolts [kV] and 132 kV) from BPDB. The Dhaka Electric Supply Company (DESCO) was established to take over power distribution in parts of Dhaka from Dhaka Electric Supply Authority (DESA). The PGCB and DESCO were established on a commercial basis as Government-owned companies under the Companies Act. Several privately-owned power generation projects were also established during this period, as IPPs selling electricity to BPDB. Some distribution areas were transferred from BPDB and DESA to co-operatives called Palli Bidyuit Samity (PBS).

70. Further institutional reforms were undertaken during 2001–2008. More distribution zones in Dhaka were transferred to DESCO from DESA, the West Zone Power Distribution Company (WZPDC) was established in 2001 to take over power distribution from BPDB in the western part

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of the country, and the Dhaka Power Distribution Company (DPDC) was established in 2006 to take over the remaining operations of DESA. The WZPDC and DPDC were also established under the Companies Act as Government-owned companies. In the generation sector, the Ashunganj Power Station Company Limited (APSCL) was created to take over the power station at Ashunganj, and the Electricity Generation Company of Bangladesh (EGCB) and North West Power Generation Company (NWPGC) were established to implement several power generation plants financed by the ADB and the World Bank.

71. Other recent reforms and policies include the following:

Implementation of National Energy Policy (1996) which promotes the rational use of energy sources to achieve sustainable economic growth through private sector participation.

Implementation of Private Sector Power Generation Policy (1996) which encourages private sector involvement and specifies the role of Power Cell as well as the general framework for private power sector IPP bid process.

Implementation of Small Power Plant Policy (1998) which allows private sector investors to establish small power plants and generate electricity for their own consumption. Surplus power from such projects can be sold to other users

Implementation of guidelines for power purchase from Captive Power Plants (2007), which permits electricity utilities to purchase surplus power from these plants to reduce power supply deficit.

Implementation of Policy Guidelines for Enhancement of Private Participation in the Power Sector (2008), which encourages the private sector involvement to develop new power plants. The policy also permits the refurbishment of existing power plants that are inefficient through the formation of PPP.

Implementation of PPP Policy (2010), which outlines the procedures for the GoB to identify, formulate, appraise and approve PPP projects through an institutional framework. The policy mentions power related PPP projects as a key initiative going forward.

Power Sector Structure

72. The MPEMR is responsible for policy formulation and investment decisions, and is main authority governing the energy sector. The Power Division was established by MPEMR in 1998 to implement, manage and carry forward Government initiatives to develop Bangladesh power sector. It is responsible for formulating policies and overseeing development activities in the power sector. In 1995, the MPEMR set up an administrative Power Cell to reform and privatize the power sector. The Power Cell is responsible for establishing regulatory commissions, promoting IPP participation and other private sector generation activities such as tariff evaluations.

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Power Generation

73. The Government remains the dominant shareholder in the power sector owning 56% of the installed generation capacity. The Bangladesh Power Development Board (BPDB), Ashuganj Power Station Company Limited (APSCL) and Electricity Generation Company of Bangladesh (EGCB) are producing electricity in the public sector. On the other hand, through IPPs and Small IPPs (SIPPs) and through Rental Power, electricity is produced in the private sector which is purchased by the Government at a fixed rate. Additionally, big industrial plants produce 1,200 MW electricity for their own use from which additional 88 MW is supplied to the national grid. By June 2011, the power sector grew by 14% to reach an installed generation capacity of 6,639 MW, but the maximum available power generation is expected to remain between 4,800 - 5,000 MW due to the shutdowns for maintenance. Owing to sustained economic growth, the demand for electricity in 2011 is expected to reach 7,500 MW. As a result the country may experience power shortage in excess of 1,500 MW at peak times, thus constraining future economic growth of the country (Table 3.1).

Power Transmission

74. State-owned Power Grid Company of Bangladesh (PGCB) is responsible for planning, developing, operating and maintaining the power transmission system network in Bangladesh. The PGCB was established in 1996 under the restructuring process of Power Sector as a fully BPDB owned company. The Government has decided to offload PGCB shares in Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) in 2006 in order to bring public participation and more accountability on the company’s activities and to strengthen the capital market of the country. At present, 76.3% of PGCB ownership is with BPDB and 23.8% with the general public. Generated power of different power plants all over the country is evacuated and transmitted through PGCB's integrated grid system by 230 kV and 132 kV transmission lines and substations. In 1996, when PGCB was formed, the total length of 230 kV and 132 kV line were 838 circuit km and 4,755 circuit km, respectively, which increased to 1,144 circuit km and 4,962

Table 3.1. Bangladesh: Electricity Produced by Public and Private Sectors, December 2010

Public (MW) Private (MW)

BPDB APSCL EGCB SIPP/Rental IPPs REB

Production Capacity 2,642 606 255 1,679 1,231 226

Sub Total 3,503 3,136

Total 6,639

Source: Bangladesh Power Development Board, December 2010.

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circuit km, respectively, in 2000-01. At present, there are 2,647 circuit km of 230 kV line and 5,788 circuit km of 132 kV line throughout Bangladesh under PGCB. The PGCB has also implemented a SCADA system by running optical fiber network parallel to its overhead transmission lines to improve the control and monitoring of the transmission system. The PGCB is operating thirteen 230/132 kV substations and seventy eight 132/33 kV substations in the country. The transmission losses during 2008-09 were 3.1% vs. 4.9% in 1999-2000, while as of September 2010 these losses stood at 2.5%.

Power Distribution

75. The BPDB and its associated entities sell the majority of Bangladesh’s power supply either directly to consumers or to distribution companies. Power is sold directly to consumers who reside in urban areas and some rural areas under Rural Electrification Board (REB). State-owned Dhaka Power Distribution Company Ltd (DPDC) and Dhaka Electric Supply Company Ltd (DESCO) are the distribution companies, which purchase power for distribution in the Dhaka region. State-owned REB is responsible for the construction, operation and maintenance of its distribution facilities in rural areas beyond the Dhaka region. The REB has 70 operating rural electricity cooperatives “Palli Bidyuit Samity” that provide power for approximately 7.9 million connections. Each cooperative owns, operates and manages a rural distribution system in its jurisdiction.

Power Sector Performance

76. The power sector in Bangladesh is characterised by: (a) high system losses; (b) poor collection efficiency; (c) heavy subsidies; and (d) high cost of power generation. Encouragingly, the aforementioned issues have mostly improved in recent times and are reflected in BPDB’s financial performance. The BPDB’s operating income has been trending positively during this period, thereby alleviating its solvency risk. The 2011 operating loss is due to high cost of electricity purchased from IPP and SIPP, but the loss is 8% lower than the budgeted number (Table 3.2).

Table 3.2. Bangladesh: Power Sector Indicators, 2007-2011 Financial Year 2007 2008 2009 2010 2011

Installed Capacity (MW) 5,202 5,307 5,719 5,823 6,639

Available Capacity (MW) 3,718 4,130 4,162 4,606 4,890

System Losses (%) 16.58 14.43 13.57 13.1 13.06

Operating Revenue ($ million) 720 816 926 1,030 1,181

Operating Income ($ million) (99) (96) (95) (57) (592)

Source: Power Cell and Bangladesh Power Development Board (2012)

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System Losses: The Bangladesh power sector experienced high system losses in the past. Prior to 2000, transmission & distribution (T&D) losses were close to 30%. However, system losses have improved over the years; from 23% in 2005 to 13% in 2011. Foreign investment and assistance, particularly from the ADB, have contributed to this improvement.

Collection Efficiency: In 1995, the BPDB was losing approximately 10% of its billed revenue due to inefficient collection. The collection efficiency has improved substantially over the past 15 years. Today, most agencies utilize computerized systems for billing and collection.

Subsidies: Tariffs, regulated by the Bangladesh Energy Regulatory Commission (BERC), are heavily subsidized. However, there have been recent initiatives for increases in bulk tariff prices to reduce the burden of subsidies on BPDB and GoB. The BPDB implemented a two stage bulk tariff increase from BDT 2.80/kWh to BDT 3.27/kWh on 24 November 2011, followed by a BDT 0.47/kWh increase to BDT 3.74/kWh effective 1st February 2012. In the near future, further bulk tariff increases are expected. The BPDB has sought permission to increase bulk tariffs by 15% every quarter until July 2012, and 14% in January 2013.

High cost of Power generation: Efforts to reduce BPDB’s deficit by increasing bulk tariff have been hampered by increases in generation costs. As of February 2012, BPDB’s average cost of power generation is BDT 5.09/kWh, as compared to BDT 4.15/kWh in September 2011. The rising generation cost is attributable to short‐term measures taken by BPDB to alleviate its power shortage crisis by implementing high‐cost diesel and furnace‐oil fired rental power plants.

Future Power Demand and Supply

77. Bangladesh, having experienced an average GDP growth of 6% in the last 5 years, is expected to have significantly higher power demand in the coming years. Growth in power demand is forecasted to increase from 6.8 GW to 11.4 GW from 2011 to 2016. Dependable capacity is set to increase from 5.1 GW to 13.6 GW in the same period.18 The GoB recognizes the need for capacity additions and has plans to aggressively increase generation capacity. The private sector is poised to lead growth in capacity additions as public participation in the power sector has been restricted due to the shortage in Government resources. The GoB will continue to develop policies to encourage further private participation in the power sector.

3.1.3 Government Strategy for the Power Sector

78. The Bangladesh power sector is facing numerous challenges. The frequency of power and gas outages is threatening citizen welfare and development prospects. The annual loss to

18 Bangladesh Power Development Board (2011), An Overview of Power Sector of Bangladesh.

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production and income from power outages could well exceed 0.5% of GDP per year. The availability of domestic primary fuel supply is getting so scarce that it is forcing severe measures like shutting down fertilizer factories, rationing gas supplies for household and transport uses, and keeping idle installed power units. Due to the severity of the power crisis, the Government has been forced to enter into contractual agreements for high-cost, temporary solutions, such as rental power and small IPPs, on an emergency basis. This has imposed tremendous fiscal pressure, as budgetary transfers are routinely made to the power sector in order to enable it to stay current on payments to power suppliers. To address energy crisis and increase energy supply to support Bangladesh’s development, the Government has adopted a comprehensive energy development strategy in its SFYP. The strategy provides a balanced approach that looks at both supply increases and demand management aspects of the energy market.

79. The power generation target in the SFYP emerges from the Perspective Plan 2010-2021 of the Government, which calls for “Power for All” by 2021. The main driving force for the power sector strategy would be the PPP initiative. The power and basic energy needs of Bangladesh require huge investments that well-exceed the ability of the public sector. On the other hand, there are ample untapped resources for the domestic and foreign private sector for financing power investments in Bangladesh. To address these concerns, the IPPs policy was formulated in 1996. Private sector has been drawn in to the power generation through IPPs, SIPPs, Rental, Quick Rental and Joint Venture policies under the PPP framework. Under the yearly power generation plan, the Government has taken various initiatives to produce additional 11,263 MW during the SFYP. The Plan also envisages 2,450 MW coal-based power generation in addition to 12 MW of solar and 100 MW of wind power generation (Table 3.3).

80. In addition to power generation, it is also important to develop a dependable and quality power transmission and distribution network to ensure quality and uninterrupted power supply to the consumers. To transmit the newly produced power to the doorsteps of the

Table 3.3. Bangladesh: Year-Wise Power Generation During Sixth Five Year Plan (MW)

Fiscal Year Public Sector Private Sector Total

Within 2011 413 1,753 2,166

Within 2012 1,106 72 1,178

Within 2013 865 2,311 3,176

Within 2014 1,510 823 2,333

Within 2015 810 1,600 2,410

Total Additional Generation 4,704 6,559 11,263

Source: Power Division, Ministry of Power, Energy & Mineral Resources (2012)

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consumers, it is urgently needed to build new transmission and distribution infrastructure in addition to renovation and preservation of old distribution networks. Initiatives have also been taken to import electricity from the neighboring countries and export (in future) through the sub-regional cooperation. Works have already been started to build a 400 kV transmission line and High Voltage Double Circuit (HVDC) substations through Regional Grid Interconnection with India, which has committed to supply 250 MW of electricity to Bangladesh. For resolving the electricity crisis, the Government has also plans for increasing electricity generation and at the same time has undertaken massive development plans for efficient and uninterrupted transmission and distribution system. At present total length of 230 kV electric line is 2647 circuit-kilometers and for 132 kV electric lines, the length is 5,818 circuit-kilometers. For strengthening the electricity transmission system and for meeting up the gradual increasing future demand for electricity, the Government has chalked out a plan for additional 3,000 km of transmission lines to be built by PGCB by 2015.

81. According to the SFYP, high dependency on gas-based power generation will be reduced in the short- and medium-term and the new built plants will be designed to be dual-fuel based. In addition, emphasis will be given to various power saving efforts so that the saved power can be transmitted to the other thrust areas. The Compact Fluorescent Lamp (CCF) Distribution Program’ is expected to save 200-350 MW electricity per month. There is also a continued effort to produce and buy captive power from renewable and non-renewable sources. So far, contracts have been signed to purchase 88 MW of electricity from captive generation sources.

82. Proper pricing of primary fuel and electricity is important to conserve energy as well as to generate resources for future investments. Proper energy pricing is also critical to attract foreign and domestic private investment in the energy sector. Accordingly, setting of proper pricing is a key element of the energy strategy described in the SFYP. The per unit production cost of electricity is expected to rise (50 to 60%) in the upcoming 2-3 years due to the installation of high cost liquid fuel based plants. Accordingly, the Energy Regulatory Commission may increase the tariff of power step by step. However, power tariff will likely come down after 2014 as the implementation of gas and coal based power plants will be completed that is expected to reduce generation costs.

3.1.4 Major Challenges and Binding Constraints Facing the Power Sector

Major Challenges

Rising Demand-Supply Gap for Electricity

83. One of the aspects to high demand for electricity in Bangladesh is the rise in the intensity of electricity use with the pace of economic development. Based on current income elasticity, with an average economic growth of 6% the capacity for electricity generation would need to double every six years. The demand for electricity is increasing rapidly with the improvement of living standard, increase of agricultural production, development of industries as well as overall

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development of the country. Due to failure in the last few years to increase electricity generation capacity proportionately to the demand, a serious supply shortage has emerged. Presently, the shortage is estimated to be in excess of 1,500 MW. Additionally, due to the crisis of gas supply and lack of necessary maintenance and rehabilitation of old power plants, it is not possible to utilize the total installed capacity. Consequently, the shortage of electricity reaches up to 2,000 MW during the peak demand of summer causing acute load-shedding.

Single Source of Natural Gas-Based Electricity

84. The power sector is almost totally dependent on natural gas-fired generation (89.2% of power comes from gas-fired generators), and the country is confronting a simultaneous shortage of natural gas and electricity. Other fuels for generating low-cost, base-load energy, such as coal, liquid fuel, or a renewable resource like hydropower, are not readily available, and any policies put in place to access them are likely to have a 3-5 years lead time. Gas supply is dwindling, and the absence of obvious choices for alternative fuels implies that there are no readily identifiable and immediately available options for alternative and new generation sources to meet power requirements.

Inadequate Access to Electricity

85. Despite its noteworthy economic progress, only 48.5% of the total population has access to electricity. The Government’s Vision envisages “electricity for all” by 2021, which will require substantial investments in power generation, transmission and distribution. Regional differences leave the western part of the country traditionally underserved because power generation and transmission are concentrated in the east.

Insufficient Exploration Activities for Energy Resources

86. Current estimates suggest that Bangladesh has enough gas and coal reserves to meet its commercial energy demand for the foreseeable future. According to available information, Bangladesh has natural gas reserve of 20 trillion cubic feet (tcf) in the proven and possible categories. Some estimates put the figure at 63 tcf. However, until the middle of 2011, only 9.5 tcf of gas has been extracted. Similarly, the five coal fields in Bangladesh possess 3 billion tons of good quality coal, which is equivalent to 37 tcf equivalent of gas, which puts the existing coal reserve at almost double the size of existing gas reserve in the country. Therefore, exploration of domestically available natural resources, such as coal, oil and gas from onshore and offshore drilling needs to be intensified.19

Limited Role of Coal

87. Although there are enough reserves of coal in the country, exploitation is constrained by concerns over extraction methods, the technological security and the possible adverse social

19 Independent Power Producers Association of India (IPPAI) http://www.ippai.org

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consequences. The Government is taking steps to resolve the problems in the coal sector with a view to making it a major source of primary energy supply in the future. The Government will need to finalize its coal policy and formulate a coal extraction plan consistent with social and environmental safeguards, in addition to building up mass awareness regarding coal extraction procedures, particularly for the open pit extraction method.

Binding Constraints

Inadequate Public and Private Investment

88. The Government has insufficient funds for power sector as electricity generation, transmission and distribution require large financial investment. Additionally, shortage of Government funds for power infrastructure maintenance has also contributed to creating power shortage in the country. The SFYP foresees 11,263 MW of new power generation capacity installed by 2015, which will require $15 billion investment out of which $10 billion is expected to be provided by the private sector. In addition, significant investment is required in building an additional 3000 km of transmission lines by 2015, as outlined in the SFYP. Moreover, development of primary energy resources like gas and coal will also require further public and private investment.

Absence of Cost Reflective Tariff20

89. The Bangladesh Energy Regulatory Commission, established in 2004, has the legislated mandate to set electricity and gas tariffs. In March 2010, the regulator increased retail tariffs by 4–6%. However, carrying out politically sensitive tariff reform remains a challenge. The Government announced a 5-year road map for the power sector retail tariff in May 2010. However, potential investors consider the regulatory environment for the power and energy sector to be weak. The regulator needs to be engaged with broader energy sector planning and coordination, including reviews of generation and transmission expansion plans. Existing electricity tariffs are inadequate, especially as the use of imported fuels such as liquefied natural gas, heavy fuel oil, high-speed diesel, and imported coal is expected to increase significantly. An increasingly active regulatory commission and the newly published draft tariff regulations are expected to provide a better regulatory environment, particularly in tariff setting policy.

Insufficient Primary Fuel Supply Chain

90. The primary energy supply of Bangladesh is dominated by gas. As a result, the current fuel supply chain (i.e. exploration, production, transmission, and distribution) is not conducive to other forms of primary energy resources like coal and oil. Though the SFYP includes 2,450 MW coal-based power generation (using imported coal) by 2015, the needed supply chain links (i.e. port facilities, transportation and storage) are absent.

20 ADB Power System Efficiency Improvement Project (2009).

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3.2 Urban Development

3.2.1 Overview of Urbanization

91. Urban areas are the engine of economic growth in Bangladesh. The contribution of the urban sector to GDP has increased rapidly, from 26% in 1972 to more than 50% by 2005.21 Urban based economic growth has played a positive role in reducing poverty in Bangladesh. Growth in the urban based services and industries allowed transfer of a large number of workers engaged in low productive employment in agriculture and informal services sector of the economy to higher income jobs. Urban based job opportunities have fueled urbanization in Bangladesh and the trend is expected to continue as the SFYP envisions high productivity and high income jobs to come from a labor intensive manufacturing sector based on domestic and export markets, and from organized services. These sectors are generally urban-based, making urban areas the key catalyst for economic growth and poverty reduction in the coming years.

92. Urbanization in Bangladesh is growing fast. Currently, 46 million people (28% of the total population of Bangladesh) lives in urban areas.22 Urban population growth in Bangladesh has been significantly higher than total population growth rates in the past. Current urban population growth rate of 2.8% is more than twice the overall population growth rate of 1.1%23. Rural to urban migration for better employment and urbanization of peri-urban areas are the major source for growing urbanization in Bangladesh (Figure 3.2).

21 UNICEF Bangladesh (February 2010), Tavares-Goodman, Nadia, Review of UNICEF Interventions in the Urban Sector and Potential Future Interventions. 22 UN Population Division Estimates (2011). 23 World Bank: World Development Indicators (WDI) (www.worldbank.org).

Source: UN Population Division (2011)

0

1

2

3

4

5

6

7

Figure 3.2. Bangladesh: Population Growth Rate (% per annum)

Urban Total Rural

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93. Between 2010-2020 Bangladesh is also expected to be 37% urban population with about 17 million additional urban dwellers24. It is predicted that more than 50% of the population will be living in Bangladesh’s cities and towns by 2050 (Figure 3.3).

94. Urbanization in Bangladesh is concentrated in large cities. Top four cities (by population) hosts 50% of the total urban population. Dhaka, the capital, alone hosts 35% of the urban population of the country. The unbalanced growth of Dhaka shows both a large concentration of wealth and income as well as unsustainable pressure on Dhaka’s already fragile infrastructure (Figure 3.4).

24 Estimates from UN Population Division Data (2011).

Data Source: World Development Indicators(WDI)

Data Source: UN Population Division Estimates (2011)

0

50

100

150

200

250

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Figure 3.3. Bangladesh: Total Population and Urban Population (million in number)

Total Population Urban Population

Source: UN Population Division Estimates (2011)

—

5

10

15

20

Dhaka Chittagong Khulna Rajshahi

Figure 3.4. Bangladesh: Population of Large Cities (million in number)

2010 2020

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3.2.2 Government Strategy for Urban Development

95. A more balanced growth. The SFYP emphasizes a more balanced growth of urban centers across the entire country through proper institutional reforms that involve the establishment of locally elected and accountable municipalities and city corporations. Regarding regional disparities, the Plan strives to address the lagging regions problems, especially focused on Khulna, Rajshahi, and Barisal Divisions, through a strategy that involves increasing public expenditure in infrastructure and human development; improving the access to financial services; promoting international labor migration from these divisions, and facilitating more trade and investment in the border districts with neighbors.

96. Responding to the emerging challenge: The SFYP allocates 19% of the total resources to urban sector, the highest allocation for any single sector. The strategy emphasizing a more balanced growth of urban centers across the country to reduce pressure on congested urban areas has the key targets with respect to urban municipal services such as safe drinking water to be made available for all urban population; proportion of urban population with access to sanitary latrines to be increased to 100%; treat all urban waste water by 2015 to clean river waters; land zoning for sustainable land/water use completed; and canals and natural water flows of Dhaka and other major cities restored.

3.2.3 Binding Constraints to Urbanization

Lack of Funds for Operation and Maintenance of Existing Infrastructure and Services

97. Although, Bangladesh has made steady progress towards MDGs, the influx of population in urban areas has resulted in the rapid deterioration in the services quality and the environment. Infrastructure investments are not keeping pace with the growth of the urban population, and the Government lacks funds and arrangements for operation and maintenance of existing infrastructure and services. Pipe networked water supply is available in the main cities and in about 100 towns. Only 39% of the population with access to safe water has access to piped water supply25. In spite of the higher sanitation coverage in urban areas as compared to rural ones, the urban sanitation situation is worse due to high population density. In major cities, raw sewage in open drainage is a common sight. Solid waste collection is inadequate and cities lack arrangements for the safe disposal of municipal waste.

Unsustainable Pressure in Dhaka’s Already Fragile Infrastructure

98. Due to extensive pumping out of ground water, the risk of subsidence is grave in Dhaka city. Along with ground water surface, water resources from wet lands and flood planes are also depleting rapidly. Sewerage network is inadequate and the city with more than 15 million inhabitants has only one sewerage treatment plant. Urban mobility is another big challenge in Dhaka where traffic congestion is a common sight. 25 World Bank (2010), Sector Analysis – Chittagong Water Supply Improvement and Sanitation Project.

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Rapidly Expanding Urban Slums

99. An estimated 15% of the urban population in Bangladesh lived in slums in 2008.26 The rapidly expanding slum population and rising land prices in urban areas is posing challenges for providing people with proper shelter and services. The population density in urban slums is in excess of 200 times the average population density of Bangladesh27. In most cases, slums lack even the most basic amenities associated with urban life, such as running water, sewage systems, latrines, waste disposal services and electricity. Only 12% of households in slums use an improved sanitation facility in conformity with the Government standard, with a large proportion of households sharing a toilet due to lack of space.28

Unsustainable Pressure on Already Fragile Ecosystem

100. Due to unplanned urbanization, rampant encroachment and earth filling of wetlands and flood planes are taking place, which is creating unsustainable pressure on already fragile ecosystem.

Grave Risk of Earthquake and Natural Disasters

101. Dhaka city is recognized as one of the most vulnerable cities to earthquake in the world. Any earthquake of the magnitude 7 or above may pose grave danger to the lives and properties of its inhabitants.

3.3 Summary of Binding Constraints to Infrastructure Development

102. Summary of binding constraints to energy, public private partnership and urban development is reported in Table 3.4.

26 UNICEF (2010), Understanding Urban Inequalities in Bangladesh: A prerequisite for achieving Vision 2021. 27 Slums of Urban Bangladesh: Mapping and Census (2005) 28 Bangladesh MDG Progress Report (2009)

Table 3.4 Summary of Binding Constraints to Infrastructure Development

Infrastructure Sector Binding Constraints to Infrastructure Development

Energy Sector

Inadequate Public and Private Investment

Absence of Cost Reflective Tariff

Insufficient Primary Fuel Supply Chain

Urbanization

Lack of Funds for Operations and Maintenance of Existing Infrastructure

Unsustainable Pressure in Dhaka’s Already Fragile Infrastructure

Unsustainable Pressure on Already Fragile Ecosystem

Grave Risk of Earthquake and Natural Disasters

Rapidly Expanding Urban Slums

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4.1 Overview of Agriculture and Rural Development29

103. About 80% of the landmass is made up of fertile alluvial lowland in Bangladesh; however, this fertility is threatened by natural disasters and environmental drawbacks. The elevation of the country is mostly less than 10 meter above the sea level, especially in the southern part. With such low elevations, concomitant flooding is usual, particularly in monsoon season. Bangladesh is estimated to be one of the most severely negative impacted countries from the climate change. The increase in sea levels and rain drop will cause more lands to be under water in the monsoon seasons, yielding significant salinity problem.

104. Despite the prevailing threats, agriculture is still the single most and the largest sector of Bangladesh's economy which accounts for 20% of the GDP and 45% of the labor force as of 201130. Although the share of agriculture in GDP has declined from over half at the time of independence to around one fifth, it remains the predominant sector in terms of employment and livelihood, with more than half of Bangladesh’s workforce engaged in it as the principal occupation. Agriculture also contributes significantly to export earnings of Bangladesh and agricultural output is used as an important source of raw materials for many industries. Therefore, the importance of agriculture sector in generating employment, alleviating poverty, and fostering growth is needless to mention.

105. Despite a steady historical growth in agriculture as well as in food production, Bangladesh has been facing persistent challenges in achieving food security. This is mainly due to natural disasters and fluctuations in food prices from the influence of volatile international market for basic food items. Agriculture is the principal source of food and nutrition. Therefore the level of farm production and prices are the key determinants of poverty and human welfare.

106. Availability of arable land is a distinct advantage for the country; hence, Bangladesh has the highest arable land percentage (58%) than any other country in the world. The total country area of Bangladesh is around 144,000 km2, 130,000 km2 of which is land area while the rest is inland water. Over 75,000 km2 of this area is currently used for agricultural purposes; however area of total arable land is declining gradually due to natural and human originated factors. A decade ago, total arable land area was estimated to be 83,000 km2, which clearly

29 This section is sourced from Country Note Series No. 1-1432H on “Agriculture and Rural Development in Bangladesh” published by the Agriculture and Rural Development Department of the IDB. 30 Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

IV. DIAGNOSTIC ANALYSIS OF

AGRICULTURE AND RURAL DEVELOPMENT

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Source: World Bank World Development Indicators (www.worldbank.org)

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Figure 4.1 Arable Land in Selected Countries, 2009 (% of total land)

indicates that loss of arable land is a continuous threat for Bangladesh agriculture that needs to be addressed timely (Figure 4.1).

107. Availability of arable land is a distinct advantage for the country; hence, Bangladesh has the highest arable land (58%) than any other country in the world. Over 75,000 km2 of this area is currently used for agricultural purposes; however area of total arable land is declining gradually due to natural and human originated factors (Table 4.1). A decade ago, total arable land

Table 4.1. Bangladesh: Land Area Statistics (km2)

2002 2003 2004 2005 2006 2007 2008 2009

Country area 144,000 144,000 144,000 144,000 144,000 144,000 144,000 144,000

Land area 130,170 130,170 130,170 130,170 130,170 130,170 130,170 130,170

Agricultural area 93,530 93,280 93,230 93,110 92,800 92,680 89,820 91,490

(% of agriculture area) 71.9% 71.7% 71.6% 71.5% 71.3% 71.2% 69.0% 70.3%

Arable land 82,930 82,580 82,230 79,310 79,100 78,380 75,320 75,690


Forest area 14,628 14,602 14,576 14,550 14,524 14,498 14,472 14,446


Inland water 13,830 13,830 13,830 13,830 13,830 13,830 13,830 13,830

Source: FAOStat website (URL: http://faostat.fao.org/)

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area was estimated to be 83,000 km2, which clearly indicates that loss of arable land is a continuous threat for Bangladesh agriculture that needs to be addressed timely.

108. The availability of arable land per capita is extremely low given the huge population and small country land size. Although having the highest arable land percentage, Bangladesh ranks well below the world average with only 0.05 hectares arable land per person almost same as Japan. Moreover, the joint impact of population growth and reduction in arable lands continue to hold pressure on the agriculture and food security while putting more pressure on increasing land productivity (Figures 4.2 and 4.3 ).


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Figure 4.2. Arable Land Per Person in Selected Countries, 2009 (hectares)


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109. The joint impact of reduced arable land and increased demand for food forced the country to accelerate its transition to high value added agricultural practices. Bangladesh made a steady progress in the post-independence period and increased the cropping intensity from 148% to 181%31. Following the introduction of high yielding varieties and application of modern inputs such as fertilizers and pesticides, the agricultural production tends to increase gradually. However, the weather dependent structure is still a major barrier for ensuring stable annual growth. Therefore, Bangladesh also started to promote non-crop agricultural practices such as fisheries and livestock sector in order to remove high dependence to cropping sub-sector and to ease the land dependency.

110. Currently, crops and horticulture sub-sector accounts for 60% of agricultural GDP, while the contributions of fisheries, livestock and forestry are 20%, 13%, and 7% respectively. In spite of gradual decline of relative importance of cropping sub-sector, it has still remained the most important sector in agriculture. Non-crop agricultural sub-sectors started to gain importance in last decades; in particular, they are crucial for rural employment generation. Livestock sector, though contributing only 3% of total GDP, employs 20% of rural population; whereas fisheries sector employs 13% of rural population with 5% share in total GDP. The relative importance of fisheries and livestock sectors will continue to increase, along with the increase in total production and productivity (Figure 4.4).



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4.2 Government Strategy for Agriculture and Rural Development

111. The Government of Bangladesh accurately recognizes the importance of the agriculture sector as a backbone of the economy given its unique role in employment generation, poverty alleviation and growth. The Government’s recognition on the sector is not new; a special emphasis on the sector was already introduced in all the Five Year Plans. In particular, the Fifth Five Year Plan targeted raising the GDP growth rate; increasing food production; and initiating agricultural diversification.

112. The SFYP identifies agriculture and rural development as the key priority sector. The Government defined various strategic targets to be focused on during the implementation period of SFYP. Among the set strategic targets, acceleration of economic growth and employment, ensuring food security, addressing land constraint, and ensuring environmental sustainability are directly linked with the agriculture sector. Besides, reducing income inequality and ensuring social protection for the under-privileged population are the strategies directly linked to rural development, which are briefly described below.

113. Accelerating Growth: According to the SFYP, the Government foresees more employment generation opportunities in the manufacturing and organized service sectors, thereby a gradual shift from agricultural employment to industry and services sectors are expected. Therefore, the role of small and medium enterprises will be particularly important to provide employment base. In this respect, the promotion of small enterprises in rural areas will emerge as a major strategic element for creating higher income and employment in the rural economy, which will be the key for sustained poverty reduction.

114. Ensuring Food Security: Past progress in crop production, particularly in rice, suggested that food security can be achieved by domestic production if agricultural productivity can be further enhanced. The achievements of goals in three dimensions of food security, availability, and access and affordability will be facilitated by the implementation of National Food Plan (NFP). In line with the NFP, promoting climate change adaptation and supporting farmers with effective incentives will be instrumental to achieve the set-targets.

115. Addressing Land Constraint: Land is probably the most binding constraint for Bangladesh, which is accurately recognized by the GoB and necessary steps would be undertaken to tackle the scarcity of land in the SFYP. Given Bangladesh is the most densely populated country in the world, subsequently land became the scarcest factor in production. Reducing the population growth was a helpful tool recently, but the GoB will further tackle the land scarcity problem by introducing and improving sustainable land use strategy. The main goal of the Government land use policy and management would be to ensure the best possible use of land resources and delivery of land related services to the people through modernized and efficient land administration for sustainable development with accelerated poverty reduction. A heavy agenda for improvement of the system including computerized record keeping, simplifying the land-laws and improvement of land acquisition legislation is waiting to be implemented in the forthcoming years.

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116. Ensuring Environmental Sustainability: A key element of the strategy of the SFYP is the firm commitment of ensuring environmental sustainability in the development process. Bangladesh is a clear victim of climate change because of its possible vulnerability to the melting Himalayan glaciers, global warming and sea level rise, intensified natural calamities, and greater water scarcity. These drawbacks will be detrimental to livelihood and welfare of its citizens. The ultimate need of addressing environmental drawbacks, particularly climate change related ones, is precisely recognized by the GoB and the SFYP environmental strategy is tailored to conserve and maintain natural resources, reducing air and water pollution, and liberating encroached rivers, water bodies and forest areas.

117. Reducing Income Inequality: The income inequality in Bangladesh mainly derives from improper distribution of assets as well as human capital. The GoB proposes to reduce income inequality through two-fold strategy. First, it will include efforts to increase the access of the poor to assets and means of production; and second, it will strengthen the delivery of human development services to the poor.

118. Improving Access to Financing: In order to improve access to financing, the Government’s strategy includes provisions of loan with low interest rate to the agriculture and rural development sector.

4.3 Binding Constraints Facing Agricultural and Rural Development

Facing Distress of Food Insecurity

119. Although, significant improvements have been made so far, particularly in rice productivity and production increases, yet large segments of the population remain highly vulnerable and continuously face the distress of food insecurity. This is compounded with the widespread under nutrition of the population as almost 31.5% of the population survives with less than 2,122 calorie intake per day.32 In addition, Bangladesh has an extremely negative record in malnutrition among under 5 year old children with 41%, which is more serious than many other countries facing the child malnutrition problem.

120. The three dimensions - availability, access and affordability - of food security need to be simultaneously tackled in order to set up a robust and sustainable long-term food security in Bangladesh. However, each dimension needs a dedicated focus with a different set of policy options and investment agenda. Thus, a comprehensive food security action plan, in close coordination with many other efforts in agricultural, rural, economic and human development plans, has to be prepared while addressing the major binding constraints.

121. On the availability side, agricultural productivity enhancement and agricultural diversification will be instrumental to secure food supply in the medium- and long-term. Recent progress in the rice sector has been impressive with a tripling of production over the past four decades although the area harvested remained the same. The enhanced use of agricultural

32 Bangladesh Bureau of Statistics, Household Expenditure and Income Survey (2010).

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inputs mainly high-yielding quality seed varieties, fertilizer, and irrigation equipment were key to the increase of yields and cropping intensity. Over three-fourths of the rice area is now cropped with improved varieties developed by Bangladesh Rice Research Institute (BRRI) and Bangladesh Institute of Nuclear Agriculture (BINA) in collaboration with international agricultural research centers. However, despite this production boost, the level of food security has not significantly improved because of high population growth, which kept the per capita production almost in the same level (Figure 4.5).

122. Rice and vegetables production and consumption have increased over time and helped to improve the population’s nutritional standards. However, intake of essential animal and vegetable proteins and lipids from livestock, fish, oil and pulse has not improved, thus creating a huge gap between in the nutritional balance between current and recommended standards. The reality is that this gap is gradually widening because of recurrent problem of availability and affordability factors. The GoB is planning to address this problem by promoting non-crop agricultural sectors in the SFYP.

123. The key structural constraint that prevents food security in Bangladesh is the scarcity of arable land. This problem is getting worse over the time. According to official statistics, the cultivated area is decreasing by 1% every year because of encroachments due to urban development, industrialization and economic development, and erosion and intrusion of saline sea water into coastal arable lands. These increased pressures on already limited land resources leave little room for agricultural land expansion, and therefore, calls for greater intensity use of the available arable lands. Currently, Bangladesh competes favorably in terms of cropping intensity (1.81) with India (1.78) and Pakistan (1.25) though lower than Vietnam. Maintaining the current

Source: FAOstat website (URL: http://faostat.fao.org/)

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Figure 4.5. Bangladesh: Rice Production Per Capita, 1970-2010 (kg/person)

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high attention given to cropping intensity and productivity increase would greatly help to narrow the grain production and consumption gap in the short-term. Livestock and fisheries sectors (which are less dependent on the availability of physical land area) appear to have more untapped potential for growth and contribution to the country’s food security agenda.

124. Access and efficient use of water resources constitutes another major challenge to agricultural activity and improvement of the livelihood of rural population particularly when it comes to safety of drinking water. Bangladesh was able to expand total area of irrigated lands considerably in recent three decades. Unfortunately, this shiny achievement is shaded with the unsustainability of the current irrigation practice which is mainly dominated (75% of the area) by ground water irrigation. This type of irrigation is mostly carried out by privately installed shallow tubewells, which is even blamed to be the main reason for rise of arsenic levels in the drinking water due to the exploitation of ground water levels. For the sake of developing a sustainable irrigation scheme, dependency on ground water irrigation has to be reduced. On the other hand, due to increased irrigation, the cropping intensity was raised considerably. However, the increase in irrigation levels was not reinforced by efficient use of fertilizers and organic matter; therefore dramatic soil fertility losses were experienced in many regions of Bangladesh.

125. Due to high population growth in recent decades, the number of farm households increased dramatically and as a consequence the average farm size shrank despite steady urban migration. Thereby, the scale of average farm size is diminished and farmers became more marginalized. Moreover, the rapid urban migration led many landowners to lease their lands to agricultural laborers. Therefore, the possibility of private agricultural investments was marginalized and generated a tiny scale farm structure. According to the official statistics, the number of farms holding more than 3 hectares of land was 300,000 in 1996 (out of 11.8 million farms); their number are further declined to 171,000 by 2005.33 This, as an adverse effect, further deteriorated the agricultural markets and helped market intermediaries and large farms to mobilize subsistence farmer’s surpluses within very low farm gate prices. Consequently, the system leads agricultural laborers and marginal farmers to become poorer. Further, with the increase of population, natural resource extraction also increases, which ultimately affects the nature. Therefore, population growth rate needs to be curtailed to negative figure or at least zero. Otherwise poverty reduction strategy, food security and other related programs will not sustain.

Climate Change and Natural Disasters

126. Bangladesh is one of the most natural-disaster prone countries in the world with their huge record of annual floods, frequent coastal cyclones, lack of water in dry seasons, storm surges, and exploitation of ground water aquifers. Although adequate adaptation investment programs were undertaken by the Government with the help of international donors, the changing climate keeps putting additional pressures on the country. Agricultural sector, far more than any other, is the most vulnerable sector in case of environmental and climate change related disasters.


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Future, climate change risks can be listed as changing patterns and levels of rain, increased precipitation, and sea level rise due to global warming, which altogether might be additional to the disasters the country already faced.

127. Country is a hydraulic civilization situated in the low altitude plain at the confluence of three great rivers – Brahmaputra, Ganges, and Meghna. The timing of the peaks of the three rivers, particularly in monsoon season, determines the occurrence of heavy floods. In addition, discharge from the Himalayan glaciers is also another determinant on the seasonality and magnitude of the floods. Despite the high occurrence of flooding, Bangladesh was able to maintain a significant agricultural performance in the past, even somewhat learnt to benefit from the floods in rice production. Adaptation to annual floods, particularly since 1970s, has been improved and agricultural damage due to floods has been decreased. For example, Boro rice, which can be harvested before the monsoon season beginning, replaced Aman rice which is highly vulnerable to floods. However, low frequency but high magnitude floods still have severe adverse impacts on the agriculture and rural livelihood.

128. Bangladesh has also a distinct dry season, particularly the northwestern side of the country experiences drought season from November to May. According to the official estimates conducted by Bangladesh Agricultural Research Council (BARC), 2.7 million hectares of the land are vulnerable to droughts and occurrence of a drought affecting 40% of the Bangladesh agricultural lands has the probability of 0.10. The drought season impacts the agricultural yields particularly in the rice production. Bangladesh advanced its agricultural practices in dry season cultivation recently and the biggest growth in crop production was achieved by the dry season cultivation advancement. However, this improvement is expected to be constrained shortly, since the success was mainly achieved by the extensive use of ground water resources. Currently, under the threat of ground water depletion, Bangladesh has to improve dam and reservoir infrastructure to balance the water usage.

129. Climate change originated sea level rise is one of the most severe impacts for coastal countries. Having most of its lands less than 10 meters above the sea level, Bangladesh is one of the victims of global sea level rise. According to a study by Nicholls and Leatherman (1995)34 one meter rise of sea level will affect 13 million people in Bangladesh. On the other hand, sea level rise also alters the ground and surface water quality as well as soil quality due to the increased salinity. Moreover, increased sea level may further reduce the drainage gradient, thereby the salinity may move further inland. Bangladesh was able to adapt the current situation by increasing shrimp production, which is good in fresh and salty water, but further increase in sea level and salinity might deteriorate additional areas and reduce agricultural production.

High Rural Poverty

130. Notwithstanding with its successful past progress, Bangladesh is still a low income country with substantial poverty, inequality and deprivation. According to official estimates,

34 Nicholls R.J., and Leatherman S.P. (1995), “Global Sea-Level Rise”

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the national poverty head count ratio (upper level) decreased to 31.5% in 201035 from 40.0% in 2005. Similar to the case in most low income countries, rural poverty ratio (35.2%) in Bangladesh is higher than the urban poverty ratio (25.3%). The rural population ratio in Bangladesh is significantly high (75%), thereby 80% of poor people lives in rural Bangladesh.

131. Employment provides the key link between the growth and poverty alleviation making it the most important instrument to focus on. Despite having 20% share in overall GDP, agricultural sector is the biggest employer almost covering half of the total employment in Bangladesh. However, the income level generated by agriculture is not favorable due to small land size, low labor productivity, low wage levels and lack of developed agricultural markets. The Household Expenditure and Income Survey (HIES) 2005 demonstrated that occupation and poverty has a strong correlation where the highest incidence of poverty is measured among the agricultural laborers.

132. According to the HIES (2005) results, the biggest poverty shares are recorded in the agricultural laborer employment group, followed by non-agricultural laborers. Therefore, poverty map of Bangladesh is mostly coincided with the agricultural labor wage rate map. Rural poverty rates for each employment group are higher than the urban poverty rate. There are many reasons behind the low income generation by the agricultural and rural activities, but the most prevailing ones are low agricultural labor productivity, lack of developed agricultural markets, and the scale of the production.

133. Improving efficiency of agricultural market will be the key to combat rural poverty in Bangladesh. However, it is not easy to implement, since lack of well-developed rural infrastructure is the main barrier in front of agricultural market development. Bangladeshi farmers and agricultural laborers face higher costs in production but lower prices in the sales, mainly because of the market distortions. Since many farmers are small scale producers, they have to sell their products in the nearby rural locations, where the farmers produce at the same time. Therefore, there is a chronic demand-supply mismatch; consequently middle man or large farms purchase most of the surpluses within very low price levels. In the small scale farmer’s side, storing their products to balance the supply is not an option due to lack of cold storage facilities in rural Bangladesh. Transportation is another major problem increasing the magnitude of the market distortions. Rural transportation network is poor and transportation is very costly, thereby the small scale farmers are locked in their tiny neighborhood to sell their products.

134. Rural infrastructure improvement and development would be the starting point to remove the barriers hindering agricultural market development. Construction of cold storage facilities and improvement of rural transportation network will help small scale farmers to sell their products within more favorable price ranges and will alleviate rural poverty to some extent. However, in order to secure more income for farmers, market intermediaries need to be replaced by the farmer cooperatives. Finally, poorly developed agro-processing sector is another binding constraint for agricultural market development. Therefore, processing the agricultural products is

35 Bangladesh Bureau of Statistics, Household Income and Expenditure Survey 2010

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a rare option due to the lack of well-developed agro-processing sector, which would be beneficial to combat with demand-supply timing mismatch if it would have developed sufficiently.

Poor Diversifying of Agricultural Production

135. Diversification in agricultural production, both in crop and non-crop sub-sectors, is considered the key to overcome persistent constraints and bottlenecks in Bangladesh economy. The unavoidable land scarcity bottleneck and chronic poverty problem can be best tackled by acquiring a widely diversified agricultural structure. Since, high value agriculture has direct and indirect pathways to reduce poverty; enhanced agricultural diversification can help to cure Bangladesh rural economy in a sustainable way. So far, major achievements have been recorded in transition to high yielding varieties, but there is still a long way to tap the full potential. Each sub-sector has distinct opportunities to attend high yield varieties, and comprehensive policies need to be defined to expedite the transition to high yield agriculture in each sub-sector.

136. Fisheries sub-sector has demonstrated higher growth than any other agricultural sub-sector in the last two decades, and it still has a wide room for further growth if appropriate measures are undertaken timely. The greatest advantage of the sector is the high and continuous domestic demand from the public and the constantly increasing export market opportunities. According to the official statistics36, more than 60% of the animal protein intake comes from the fish consumption. Besides, particularly for the poor, fish is the sole source of the animal protein. Fisheries sector has three broad areas in Bangladesh namely, inland capture, inland culture and marine fishing. Inland captured fisheries dominate the whole sector and constitutes more than 40% of the total fish production with an average annual rate of growth of 5.6%. Inland cultured fisheries contribute about 39% of total production with an average annual growth of 6%. Remaining 20% is contributed by the marine fisheries with an annual growth rate of 5.4%37. Most of the marine fish captures comes from the surface fishing (92%) conducted by the poorest and landless citizens to earn their living. Despite its domination in marine sector, surface marine fishing has many constraints, especially in terms of safety of the fisherman due to lack of tracking systems and type of the wooden boats. On the other hand, deep sea fishing is, although not very common, has a huge untapped potential which needs to be unlocked. However, in order to promote deep sea fishing, a comprehensive research on the richness of the deep sea resources in Bangladesh coastal waters needs to be conducted timely. Despite its prevailing recent growth, fisheries sector is constrained by many persistent challenges which need immediate attention to sustain medium- and long-term growth trend of the sector. The major challenges are (i) overfishing; (ii) fishing of undersized; (iii) incidence of fish diseases; (iv) construction of flood embankments and roads; (v) siltation; and (vi) conflict between paddy cultivation and fish production.

36 Bangladesh Bureau of Statistics, Household Income Expenditure Survey (2005) 37 Bangladesh Sixth Five Year Plan (2011-2015)

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137. Although contributing only 3% to overall GDP, livestock sector has a unique position in Bangladesh rural employment. This locates livestock as a key sector to generate income for rural people. On the other hand, the sector gets higher importance due to increased demand to livestock sector products such as eggs, milk, and meat, because of the rise in the income levels. However, Bangladesh is not self-sufficient in livestock sector and the existing gap is widening gradually. There is a wide room for further improvement in livestock sector productivities, because current structure is relying on low per animal production. The sector is mainly constrained by the animal diseases, poor genetic stock, insufficient feed sources and limited availability of pasturelands. Besides, the livestock sector is mainly practiced by many small scale farmers who do not have sufficient know-how to efficiently and profitably maintain the production. Eventually the constraints are intertwined; particularly shortage of good quality feed and limited availability of pasture lands hinder animals to get enough nutrition and therefore they are much prone to animal diseases, which increase mortality and make animal production less profitable than it would otherwise be. In addition, the utilization of the feed by the cattle or the chicken is very low due to poor genetic quality of the animal; thereby increasing need for the feed. Despite the existing constraints, livestock sector kept growing constantly over the last decade, particularly the growth was pulled by the poultry sector. Since 2002, the number of chicken increased more than 50% while number of cattle almost remained same. The number of sheep and goats also doubled in the last decade. The difference between increase in chicken and cattle is mainly explained by the scarcity of the pasture lands. Since cattle/buffalo farming necessitates availability of grazing, it has been constrained by the scarcity of land; however the poultry sector, less dependent on the land, has demonstrated a strong growth performance in the recent decade.

138. Despite its great potential, horticultural production has enjoyed development trends similar to rice. The biggest challenge in this sub-sector is the high level of fluctuations prices, mainly due to the lack of storage facilities as well as the non-existence of agro-processing industry. It will be difficult for Bangladesh to stimulate and sustain a healthy growth in this sub-sector unless infrastructural investments are materialized. Moreover, many market distortions need to be corrected if Bangladesh aspires to be a major regional and global market player. Attention needs to be given to improving the productivity and competitiveness of the horticulture sub-sector, stabilizing market prices, and developing effective export channels. Increase in trade would be only being achieved if the country develops sound food safety standards and establishes internationally accredited reference laboratories.

139. Future growth and further productivity increase in crop sector can be catalyzed by three measures, namely use of additional and high quality inputs, introduction of better agricultural techniques, and transiting to high value agricultural crops. However, sustained growth through the use of additional inputs seems to have reached its limits, such as cropping intensity levels. Over use of the land will cause further land degradation due to fertility loss. Only fertilizers and quality seeds are the remaining inputs that can be used for further improvement of the productivity. All in all, for cropping sub-sector the major purpose should be to preserve the products, and then comes the productivity increase.

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Poor Quality of Seeds

140. Quality seed is amongst the most important inputs needed to achieve the much desired increased agricultural production. The use of good quality seed is important to increase food production and agricultural productivity. It would be the major priority for agricultural development in the coming years. Therefore, proper emphasis has to be given to seed multiplication programme to produce large quantity of quality seeds, and marketing and distribution to the user farmers. National seed sector need to be supported with capacity building. There is need to establish Tissue Culture Laboratory at different regions of the country for virus-free planting material production through micro-propagation method. Farmer’s access to foundation seed along with appropriate training on `Modern Seed Technology` including attention on varietal maintenance, roughing, fertilizer and irrigation management, pest control, seed processing and storage are needed. This would help to sufficiently improve the quality status of homegrown seeds. Demand of quality seeds of different crops are increasing day by day and currently Bangladesh Agricultural Development Corporation (BADC) cannot provide the sufficient amount of quality seeds as per farmers’ demand. Therefore, the seed production capacity of BADC should be strengthened through proper planning. Besides, the private sector should be facilitated to produce and market quality seeds.

Poor Water Management

141. Ground water utilization has reached its peak and this has an adverse impact on climate condition. Improvements need to be made with regard to development and optimum usage of surface water. Flood is a regular phenomenon which brings havoc to the country by destroying crops, homestead etc. and at the same time the silt that it carries raises the river and cannel beds. This, in turn, creates water logging situation and diminishes the surface water. The only way out of this quagmire is re-excavation of bodies including rivers, cannels etc. for bringing an improvement in the water drainage system which would help in controlling floods and at the same time increases surface water availability for irrigation. This is gigantic task which requires substantial financial assistance from donors.

Scarcity of Farm Mechanization

142. There is scarcity of farm mechanization at all levels. In particular, there is a seasonal scarcity of labour for transplanting and harvesting of Boro and Aman rice. Necessary steps are needed to introduce mechanized transplanting and harvesting (cutting) system for Boro and Aman rice. Rice Transplanter and small- to medium-size Combine Harvester are scarce in the country. Introduction of these machineries in agriculture sector will also decrease the contribution of farm labour force.

Inadequate Research and Development

143. Research and development (R&D) is key for the development of the agriculture sector. Strengthening institutional capacity of research organizations through deployment of adequate manpower is essential. Human resources are the main assets of any scientific institute.

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Developing scientific and professional human resources is an important factor for achieving the benefit from technological innovations. Higher study leading to Ph.D. is the basic requirement of conducting frontier agricultural research in the country. For example, over 1600 agricultural scientists are working in the National Agriculture Research System (NARS), of which only 19% scientists of having Ph.D. degree. Moreover, the experienced scientists are retiring continuously, thereby reducing the capacity of NARS institutes. Capacity enhancement is, therefore, required for the scientists of NARS institutes. This should be an on-going process whereby the staffs should be provided regular periodic training for improving their capability. They, in turn, would be able to develop improved varieties of seeds for stressful condition like salinity, drought, water logging etc. Varieties of drought-tolerant, submergence-tolerant, salinity-tolerant, shorter maturity, resistance to arsenic uptake, resistance to lodging in moderate storms, and suitable for cultivation in deep water areas need to be developed.

Weak Agro Business

144. There is great need of strong linkages between production and marketing for the overall development of the agricultural sector. Growth of agriculture and rural economy as a whole largely depends on the commercialization of agriculture. Several problems like inadequate transport facility, high transportation cost, preservation problem or lack of sufficient storage facility, lack of feeder roads, lack of sheds in the market, low price at peak harvesting period, unstable prices, poor market information, weak institutions, and large numbers of small traders are affecting market operations and market development. Market infrastructure development like road communication and transport is essential to decrease marketing cost and increase marketing efficiency. Adequate transportation facilities are needed for agricultural products from farmyards to markets and to millers or processes and from them to ultimate uses. By expanding and developing communication network, markets would be more integrated and spatial price variation would be reduced. For the development of export-oriented marketing chain with the cooperation and coordination of public and private sectors has to be given emphasis. Establishing export-oriented production zone through introducing contract farming, where quality and standard have to be ensured according to importers need.

145. Contract farming arrangements do allow small farmers to achieve higher yields, diversify into new crops, and increase incomes, and can deliver wider benefits. In Bangladesh, contract farming is in the nascent stage, but is likely to emerge as an important form of vertical coordination with unfolding of market liberalization and globalization. Contract farming is expected to enable farmers to access better quality inputs such as seeds, fertilizers, pesticides, extension services, and credits. Contract farming has also potential to eliminate and/or reduce market and price risks, which farmers face. Further, information and communications technologies (ICT) have the potential to enhance the levels of both innovation and productivity across the economy. Increasingly globalized economy is rapidly moving towards knowledge-based economic structures and information systems. ICT is also one of the key determinants of competitiveness and growth of firms and countries. The recent advances in information technology are becoming central to the process of socio-economic development.

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Lack of Supervised Agricultural Credit Program

146. Regular supervision of utilizing credit with the technical support would be an effective way of reducing poverty and capacity building of the poor and improving access to productive resources and advanced technology. Special facilities or benefits are needed for cooperative farms. Provision of short-term loans for storing agricultural products at farm level is essential. Loan recovery system also needs to be developed. Agribusiness, handicrafts, small scale cottage industry, and small processing units in rural areas can be strengthened through effective micro credit system.

4.4 Summary of Binding Constraints to Agriculture and Rural Development

147. Summary of binding constraints to agriculture and rural development is given in Table 4.2.

Table 4.2 Summary of Binding Constraints to Agriculture and Rural Development

Binding Constraints

Facing Distress of Food Insecurity

Climate Change and Natural Disasters

High Rural Poverty

Poor Diversification of Agricultural Production

Poor Quality of Seeds

Poor Water Management

Scarcity of Farm Mechanization

Inadequate Research & Development

Weak Agro Business

Lack of Supervised Agricultural Credit Program

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5.1 Health Sector

5.1.1 Overview of the Health Sector

148. Over the past decade, Bangladesh has witnessed significant improvement in health indicators. In particular, country witnessed significant decline in infant and child mortality. Control and prevention of diseases, such as measles, poliomyelitis, and diphtheria along with the widespread control of diarrhea diseases have greatly reduced childhood mortality and morbidity. Bangladesh is also on the verge of polio eradication, and has already achieved the elimination goal for leprosy at the national level. People are living longer as the average life expectancy at birth in Bangladesh had increased to over 69 years in 2010. According to Bangladesh Demographic and Health Survey (BDHS) 2011, total fertility rate declined to 2.3 in 2011 (from 4.3 in 1991 and 3.3 in 2000). However, the maternal death ratio is high at over 320 per 100,000 live births.

149. While there has been substantial progress in disease prevention and control and a decline in childhood communicable diseases, new and old infectious diseases, such as malaria, tuberculosis and Acquired Immunodeficiency Syndrome (AIDS) are important threats to health for the years ahead. Projections are uncertain because of the potential of travel and trade, urbanization, migration and microbial evolution to amplify these diseases. The emergence of drug resistant malaria and tuberculosis further increases the risk. Non-communicable diseases are a heterogeneous group that includes major causes of death, such as heart diseases, diabetes and cancer, and disability, such as mental disorders. These are also on the rise in Bangladesh. Malnutrition is a major cause of death and disability in children in the country. Micro-nutrient deficiency is quite common; nearly 75% of children's life is spent in illness mostly due to malnutrition related debility and infections. Poor nutrition deters physical, cognitive and mental development. Low birth weight and malnourished children are susceptible to infections; roughly two-thirds of under-five deaths are attributed to malnutrition, 75% of it being associated with mild and moderate malnutrition. About 25% of maternal deaths are associated with anemia and hemorrhage. Women and adolescent girls mostly suffer from anemia owing to iron deficiency.

150. The BDHS (2011) revealed that 41% of children under 5 are stunted (short for their age), 16% wasted (low: weight-for height) and 36% are underweight (low: weight-for-age). Chronic energy deficiency, low-birth weight, micronutrient deficiency, protein-energy deficiency

V. DIAGNOSTIC ANALYSIS OF

HUMAN DEVELOPMENT

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are rampant, posing serious problems in Bangladesh. Vitamin-A deficiency is a leading cause of childhood blindness and night blindness among women is also high at 2.2%, and among pregnant and breast-feeding women it is even higher at 2.7% and 2.4%, respectively.

151. However, there has been some improvement in child nutritional status over the past four years. The level of stunting had declined from 51% in 2004 and 43% in 2007 to 41% of children under five in 2011. The pattern and change in wasting had been small and inconsistent. It increased from 15% in 2004 to 17% in 2007, and declined to 16% of children in 2011. The level of underweight had also been declining from 43% in 2004, 41% in 2007, and 36% in 2011.

152. In 1988, the Government adopted the Primary Healthcare (PHC) approach as a guiding principle to the health systems development in Bangladesh. Given the country's resource limitations, it was prudent and more pragmatic approach to the introduction of PHC. The later commenced with the introduction of selective PHC in some districts to ensure a broader understanding of the concept. Pursuant to popular demand in 1988, comprehensive PHC was introduced in Gazipur and Tangail Districts. The PHC has to-date expanded to cover 12 districts, namely Tangail and Gazipur in the Dhaka Division; Chittagong and Feni in Chittagong Division; Rajshahi, Sirajganj and Gaibandha in the Rajshahi Division; Barisal and Bhola Districts in Barisal Division; Maulvibazar district in Sylhet Division and Bagerhat district in Khulna Division. In 2004/2005 plan of action, the Ministry of Health and Family Welfare (MOHFW) requested the inclusion of 8 new districts in the PHC intensification scheme. Namely: Comilla, Chandpur, Jessore, Jehnaidah, Joipurhat, Bogra, Sylhet and Kishorganj. The PHC covers 109 Upazillas. Interventions of operationalizing PHC in Bangladesh were based on 3 prolonged strategies i.e. training/ retraining of staff on the elements and principles of PHC; provision of basic essential equipment; and supplies to facilitate effective preventive, curative, promotive and rehabilitative services to the vulnerable, the disadvantaged and the poor. Regular monitoring through supportive supervision to ensure acceptable quality of care while simultaneously guaranteeing beneficiary community participation and inter-sectoral collaboration. Generally, the health and family welfare facilities under the MOHFW are distributed in four different administrative levels; National; District; Union; and Upzillas. The facilities at the National and District levels constitute the secondary and tertiary health care facilities and Union and Upzillas levels constitute the primary health care facilities, which are briefly described below:

National Level

153. At the national level, the Directorate of Primary Health Care is responsible for the planning and implementation of PHC activities assisted by a deputy director and three assistant directors of PHC. At national level, Medical College Hospitals (MCHs) are tertiary level hospitals rendering treatment to patients (both outdoor and indoor) coming from different parts of the country with complicated diseases. The MCHs provide facilities for multifarious major operations as well. Further family planning and welfare services are also rendered to all those who come to these hospitals for availing the same. There are thirteen MCH's in the country with bed facilities varying from 250 to 1000 beds. In addition, there are eleven Specialized Institutes/Hospitals at the national level providing sophisticated treatment facilities in the respective fields.

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District Level

154. The Civil Surgeon and the District Teams provide technical and administrative support by way of periodic supervision to the Upazila Health and Family Planning Offices. They also coordinate management of referrals from Upazila level and below. This administrative unit covers a population of 5 million and above and makes it the most important administrative unit for the basic services to the people in almost every sector. The District Hospital is capable of providing sophisticated curative, diagnostic and laboratory services. It is also the secondary level referral unit. Besides, some of the districts that have Sarkari Karmachari Hospitals and School Health Clinics (SHC), the urban population of the district is served by the Urban Primary Health Centers (UPHC), which is functioning only in the Metropolitan cities. For family planning facilities, the district hospitals can provide almost all types of such services to the clients. Separately, in some districts, it is the Maternal and Child Welfare Centers (MCWC), which provide maternal and child health services to both indoor and outdoor patients. For providing curative, laboratory and diagnostic services and effective management of communicable diseases, Tuberculosis Hospitals (TBH), Tuberculosis Clinics (TBC), Leprosy Hospitals (LPH) and Infectious Diseases Hospitals (IDH) are being run at the district level. Medical Assistant Training Schools (MATS) at the district level offer training to different functionaries to help them in providing medical assistance skillfully. Another important activity related to human resources development (HRD) for health personnel constitutes the basic and in-service training of nurses. Thirty-eight Nursing Institutes (NI) at the district level are providing such training. The health service functions are facilitated by a number of support services at the district level, which constitutes the Warehouses (DWH) and Medical Stores (MS). There are 317 district facilities. One District Hospital (DH) operates at each of the district headquarters other than at Dhaka, Mymensingh, Rajshahi, Rangpur, Dinajpur and Bogra. The district Narayanganj has one Specialized Hospital in addition to a General Hospital.

Upazila Level

155. By sheer reason of population density, Upazila in Bangladesh is the equivalent of district elsewhere. It constitutes the first level of referral in the PHC system. Curative care is provided by specialists in obstetrics and gynecology, medicine, surgery, medical officers, and supportive laboratory and supplies personnel. Primitive and preventive services are supported by Health Inspectors, Sanitary Inspectors and Assistant Health Inspectors. It is an administrative unit covering the population of 300,000 to almost one million people. Upzillas health and family welfare facility caters the basic health need of the population of that particular Upzillas. It provides comprehensive health care services and serves the focal point of primary health care activity. The health and family welfare services are provided through Upzillas Health Complexes (THC, 31 bedded), Other Upzillas Hospital Centers (OTHC), Rural Health Centers (RHC, 10 bedded) and Maternal and Child Welfare Centers (MCWC). The THC provides the first level referral services. It usually has inpatient and outpatient departments, which together provide preventive and limited curative services to the patients. In addition to the THC, there are also Regional Training Centers (RTC) located at Upzillas headquarters to cater training needs of field

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workers, especially the Family Welfare Assistant (FWA), Family Welfare Inspectors (FWI) and Family Welfare Visitors (FWV). These centers provide basic training as well as in service training ranging from two to eight weeks to FWAs, FWls and FWV’s. Some special training programs are also offered to managers, trainers and field staff. There are 470 Upzillas facilities. One THC is operating in each of the Upzillass other than in the Sadar Upzillas of the respective Districts, where District Hospital and Medical College Hospital operate. The exception is Syeedpur Upazilla, where there is no THC; instead there is a 50 bed hospital (Sarkari Karmachari Hospital).

Union and Ward Levels

156. The Upazila Health and Family Planning Officer is the overall administrative and technical head of the Upazila Health Complex, as well as all health services up to the community level through the Union level facilities run by field level health and family welfare workers. The Union is the lowest administrative unit covering between 15,000 to 200,000 people. At Union level, the health and family welfare services are provided through Union Health and Family Welfare Centers (UHFWC), Union Sub Centers (USCs) and Rural Dispensaries (RDs). All these three facilities provide only outdoor services. The patients needing hospital admission or higher level of medical consultation are usually referred to the immediate first referral units. The UHCs also provide maternal, child health and family planning services, apart from outdoor services. Several USCs are also involved in similar activities, while RDs provide only outdoor services. Total number of union facilities available in Bangladesh is 4,213. The facilities cover 3,609 Unions from the total of 4,453 Unions. The reason of such discrepancies is that some Unions have more than one facility.

Community Participation

157. Community participation being one of the pillars of PHC development is established through Village Health Volunteers (VHVs) nominated by the community people and trained under the intensification project. Eight VHCPs were established for providing health services. With the recent reforms under HPSP and providing health care through ESP strategy, 15 of the first community clinics were refurbished in 6 Upazilas using own funds.

5.1.2 Government Health Strategy

158. The goals of Government’s Vision 2021 were set to eliminate all kinds of contagious diseases, reduce infant mortality from 54 at present to 15 per thousand, and reduce maternal death rate from 3.8% to 1.5% by 2021. In addition, the Health, Nutrition and Population Sector Program (HNPSP) for 2011–2016 has set out several objectives to improve the health services including: (i) scaling up services for the achievement of the targets of MDG 1, 4, 5 and 6 by 2015; (ii) expanding access to health services for priority communicable and non-communicable diseases; (iii) revitalizing the Community Clinic based services as part of a functional Upazila Health System; (iv) strengthening overall health system and governance

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including establishing a sustainable monitoring and evaluation system; and (v) improving health equity for the poor and geographically marginalized population.

159. The Government is committed to improving health of women as evident from the national plans and strategies. One of the main aims of the National Health Policy is to improve the health of mothers and children at the union level and to ensure the provisions of facilities for the safe and clean delivery of children at the village level. The national reproductive health strategy includes maternal health as a priority component and recommends support for development of a cadre of community/nurse midwives. One of the objectives enumerated in the Sixth Five Year Plan is to ensure universal access to essential health care services of acceptable quality to reduce maternal mortality and morbidity, improve nutritional status and reduce fertility so as to reach the replacement level of fertility by the year 2020.

160. The National Maternal Health Strategy has a ten-year perspective with specified aims and objectives to be achieved by 2020. The strategy focuses on service delivery mechanism and management, human resource development/ mobilization plan, quality assurance, advocacy, community participation, research and evaluation. The Government’s millennium goal of the maternal health strategy is to reduce maternal mortality to 240/1000 by the year 2020. The strategies for reducing maternal mortality and the prioritized elements of reproductive health in the Health, Nutrition and Population Sector Program (HNPSP) 2012 include:

Safe motherhood will be ensured through ANC, delivery by skilled birth attendants (SBA), EmOC, prenatal and postnatal care, essential newborn care and maternal nutrition.

The ongoing pilot program of training of SBAs with WHO/UNFPA support will be expanded to cover at least 30 districts by the end of the program.

Local area specific mechanisms of community involvement in transporting pregnant women to facilities, and information campaigns targeting family and community members will be developed.

35% increase in deliveries by skilled birth attendants, including Family Welfare Assistants (FWAs) and Female Health Assistants (FeHAs) who have had six months of training in the conduction of normal deliveries and referral of complicated deliveries.

Increase in coverage of antenatal care to 60%.

Comprehensive EmOC, available at 30 UHCs, will be made available at other selected UHCs based on population needs. UHFWC services will be strengthened to provide safe delivery as well as Obstetric First Aid with a provision for facilitated referrals.

161. Based on the experience of the SBA Training in 6 pilot projects undertaken by WHO and UNFPA, the GoB has taken decision to train FWAs and FeHAs as Skilled Birth Attendants. It aims that this intervention along with the strengthening of EmOC will contribute to reducing maternal mortality.

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5.1.3 Binding Constraints to Health Sector

High Maternal Mortality Ratio

162. Bangladesh, a country with an annual birth of close to 4 million, still has a high maternal mortality ratio with at 320 women dying per 100,000 live births. Over 80% of the maternal deaths happen at home because more than 85% of deliveries occur at home attended by traditional birth attendants (75.6%) and relatives (10.8%). Deliveries by a medical trained person are 11.6%, (6.5% doctors and 5.3% by nurse/midwives/family welfare visitors/others). About 47.5% of pregnant women avail one or more antenatal care check (ANC). The infant mortality rate was 38 per 1000 live births in 2010, with the neonatal mortality rate of 27 per 1000 live births. The total fertility rate is estimated at 2.6, with the contraceptive prevalence rate 58%, of which 47% are modern and 11% traditional methods.

Low Life Expectancy

163. Life expectancy at birth has increased over the years; however, Bangladesh still remains as one of the few countries where life expectancy at birth is lower for females than males. The progress has not been satisfactory with respect to reduction in maternal mortality and morbidity. Bangladesh has one of the highest maternal mortality rates (MMR) in the world, i.e. 3.2 - 4 per1000 live births (estimated annual maternal deaths per year are around 11,000-12,000). Consequence of these deaths is that about 75% of the babies born to these women also die within the first week of their lives, thus contributing to high neonatal mortality.

Early Childbearing

164. Bangladesh is one of the countries with a high proportion of women less than 20 years of age who have begun childbearing. About 31% of teenage girls (13-19 years) are mothers and 5% are pregnant with their first child, thus 36% of the teenage girls have already begun childbearing. Early childbearing, particularly among teenagers, has negative demographic, socio-economic and socio-cultural consequences. Although, the Government health facilities are available down to the Union level, due to existing cultural beliefs and social practices, more than 85% of deliveries are still occurring at home, assisted by either trained (12%) or untrained Traditional Birth Attendants (TBAs). A review of the performance of trained TBAs showed that they continued several harmful practices. Around 12% of births are assisted by medically trained persons (doctors 6.5%), or nurses, midwives, family welfare visitors, sub-assistant community medical officers and medical assistants (5.3%). Assistance during delivery by doctors/trained medical professionals is substantially higher in the case of lower-order-births, mothers with secondary education, wealthy households and those with four or more ANC visits.

High Rate of Maternal Deaths

165. A study on safe motherhood programs in Bangladesh found that women’s low status in society, poor quality of maternity care services, lack of trained providers, low utilization

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of services by women and infrastructure and interdepartmental problems contribute to the high rate of maternal deaths. The major causes of maternal death are postpartum hemorrhage, eclampsia, and complications of unsafe abortions, concomitant medical causes, obstructed labor, postpartum sepsis and violence/injuries. About 14% of deaths of pregnant women are associated with injury and violence, which is reported to be on the rise. Most population based studies show that complications of abortions are responsible for the death of nearly 25% of mothers. These complications arise during antepartum (37%), intrapartum (12%) and postpartum (51%). These reproductive morbidities diminish women’s fertility, productivity and quality of life, as well as the health and survival of the next generation.

Low Skills and Facilities to cope with Obstetric Emergencies

166. The high maternal mortality represents the end point in a lifetime experience of gender discrimination, neglect and deprivation of women in Bangladesh. The near absence of skills and facilities to cope with obstetric emergencies is noticeable. Improvement of Bangladeshi women’s health is not just a social and moral necessity; it is also an economic imperative. The national estimate reflects that nearly 8.8 million women have been suffering from chronic morbidities. The highest prevalence of chronic morbidities has been reported in the Chittagong Division.

5.2 Education Sector

5.2.1 Overview of the Education Sector

167. The Government emphasized in its program for human capital development providing quality of education and ensuring equal access to affordable education. The Government is committed to achieve Education for All (EFA) by 2015 and attaches highest priority to education sector. The GoB intends to utilize internal resources as well as other development partners to develop comprehensive education facilities.

168. Bangladesh efforts to boost economic growth and reduce poverty must encompass a well-defined education strategy that engenders a knowledge-base society in which the education system comprising primary, secondary, tertiary, informal education, and vocation and technical education produces knowledgeable and skilled individuals. It must focus on ensuring the provision of quality education and labour market oriented skills for both domestic and foreign needs. The education system in Bangladesh is characterized by the co-existence of three separate streams. The mainstream is a vernacular based secular education carried over from the colonial past. There also exists a parallel system of religious education (Islamic) is offered through Madrassas. Based on use of English as the medium of instruction, the third stream of education, modeled after the British education system, has rapidly grown in the metropolitan cities. The primary education spans for five years (Grades 1 - 5). Although most children are enrolled in public government schools or government assisted schools.

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5.2.2 Government Education Strategy

169. The right to education is constitutionally guaranteed in Bangladesh and the Government is committed to the global initiatives of meeting the MDGs and EFA goal. For Bangladesh, progressive social and human developments are the subset of good standard of living and instrumental to economic development. Access to affordable, high quality health care and education are not only essential to increase stock of human capital, but form an integral part of key performance indicators of the Government policies towards country’s poverty dynamics. There is general agreement that the number of institutions and enrolments have grown at all levels and the quality of education has improved gradually but it needs to be improved further, especially in institutions attended by the children of poor families. The declining quality of education reduces the employability of the learners creating a disincentive for the poor people to send their children to school. The commitment of the Government is to achieve 100% literacy by 2014.

170. The Government has taken multi-faceted actions in accelerating the pace of providing primary and mass education. The compulsory primary education programme now covers the whole country. The Government has moved to improve the quality of education through the introduction of primary school quality level standards, increased access, participation and completion of the primary education cycle. One of the key objectives of the Government is to enroll all children of 6-10 years age by 2011. The Government also started a school feeding program under which a child is provided with 75 grams of fortified biscuits in eight poverty-stricken Upazilas of three selected districts. According to education policy, primary education has to be upgraded to grade 8 (from grade 5) by 2018. Currently, the Government is also implementing school feeding and stipend activities for the school students in order to achieve 100% enrolment of all eligible children.

171. Secondary education is provided through collaboration between the Government and non-government providers within a regulatory framework. Poverty is a deterrent to secondary school access because, in addition to the tuition fees, there are high additional costs for transportation, uniforms, books and materials and private tutoring. Retention of the students in secondary education is one of the major challenges. A positive development has been the closing of the gender gap in secondary school enrolment rate with 53% female net enrolment at secondary level while male net enrolment rate was 47% in 2011. The overall net enrolment rate was 55.7% in 2011. In particular, stipends and exemption of tuition fees for girls in rural areas have made a difference.

172. The technical and vocational education and training (TVET) programmes offer courses of one to four years duration after the junior secondary level (grade 8). Vocational training institutes, polytechnics, commercial institutes, technical training centres and specialised institutes offer such courses. Stated Government policies and goals are to increase the proportion of participants in TVET to 20% of the students enrolled in the secondary stage by 2020 from the present proportion of around 3%. The objectives of TVET are to expand it for the poor, particularly for adolescents, young adults, adults, males and females and make provision for TVET after grades 6, 7 and equivalent grades.

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5.2.3 Binding Constraints to the Education Sector

Poor Quality of Secondary Education

173. The quality of secondary education remains a major challenge. The curriculum does not relate to prospects of employment, entrepreneurship and practical skills. Examinations mostly test ability to recall information and do not test the ability to reason, or apply, analyze and synthesize information. Expansion in enrolment has not been matched by increase in physical capacity and human resources. Students both per class and per teacher are around 60. Almost half of the teachers do not have any professional training. Academic supervision of secondary schools is weak and almost non-functional.

Gender Disparity

174. The main issues regarding access to tertiary education are two-fold: (a) equity of access to universities and prestigious institutions leading to potentially high private return from higher education, and (b) the balance of enrolment in different fields. Gender disparity in higher education persists, despite progress at the primary and the secondary levels. In tertiary education, increase of enrolment of male and female students in professional degree education may be improved in accordance with the domestic needs and also according to the needs of the countries importing human resources.

175. In various consultative meetings, stakeholders also mentioned the following additional constraints:

Low level of spending on education

Poor access to secondary education (transition from primary to secondary for both the general education and madrassa)

Inadequate infrastructure especially in low land flood prone areas

Internal inefficiencies such as high dropout, repetition rates and low completion rates at both primary and secondary levels (both general education and madrassa)

Inadequate teaching and learning materials and high student textbook ratio

Inadequate teachers with skewed teacher deployment

Inadequate teacher training opportunities for madrassa teachers (only one madrassa teacher training institute)

176. In order to overcome above constraints, the Government is implementing a number of projects with local funds as well as assistance from the development partners.

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5.3 Summary of Binding Constraints to Human Development

177. Summary of binding constraints to education and health is presented in Table 5.1.

Table 5.1 Summary of Binding Constraints to Human Development

Binding Constraints

Health Low Public Spending

High Maternal Mortality Ratio

Lower Life Expectancy

Early Childbearing

Low Skills and Facilities to cope with Obstetric Emergencies

Education Low Public Spending

Poor Quality of Secondary Education

Gender Disparity

Inadequate Infrastructure

Lack of Access to Tertiary Education

Low Level of Spending on R&D

Inadequate Teacher Training

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6.1 Private Sector Development

6.1.1 Overview of Private Sector Development

178. Privatization and liberalization over the last two decades have reduced the direct ownership role of the state and the private sector has gained remarkable importance in the economy. The private sector in Bangladesh has developed from a modest base since its independence in 1971. Along with large infusions of external aid and a growing middle class, the country began to turn its attention to developing new industrial capacity and privatizing its economy. As a result, private investment had increased from 15.6% in 2000 to 19.5% of GDP in 2011 while public investment had declined from 7.4% to 5.3% of GDP during the same period (Figure 6.1). With increased market liberalization and privatization, the private sector has taken

the lead role, which was traditionally reserved for the public sector. Today, over two-third (77%) of Bangladesh economy is relying on private sector activities. With regard to sector-wise, agriculture and services sectors (i.e. garments, ICT and business services) are growing at a solid pace, which appear to be the main sectors where the private enterprises are largely involved.

VI. DIAGNOSTIC ANALYSIS OF

PRIVATE SECTOR DEVELOPMENT

Source: Ministry of Finance, Government of Bangladesh, Bangladesh Macroeconomic Review (2011)

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8

10

12

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 6.1. Bangladesh: Private and Public Investment Rates, 2000-2011 (% of GDP)

Public Investment Private Investment

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Despite the various pro-market reforms, including tax and regulatory reforms to allow investments in the gas and power sectors, the pattern of the private sector investment in the economy was slow in general.

179. Although, recently foreign direct investment inflows increased in absolute term but declined in terms of GDP. The country received foreign direct investment (FDI) of $579 million in 2000, which increased to $1,136 million in 2011 while in percent of GDP, FDI declined from 1.2% to 1% during the same period. The FDI in Bangladesh also remained low compared with other competing economies (except Sri Lanka) of the region. The United Nations Conference on Trade and Development (UNCTAD) has ranked Bangladesh low both in its FDI Potential Index and FDI Attraction Index.38 One of main reasons cited for Bangladesh’s low ranking is the low level of regional integration. The region is heavily constrained by restrictions such as prohibitive trade barriers, one of the highest in the world.

180. Today, in Bangladesh, Special Economic Zones (SEZ) play a crucial role in the development of the private sector especially in the growth-related to agriculture and textile. The majority of companies operating in SEZs are garment manufacturers making products for world class brands. Since these companies benefit from tax holidays and business regulations, FDI inflows channeled by those enterprises also contribute to investment pool of the economy.

6.1.2 Government Strategy for Private Sector Development

181. One of the unique features of the SFYP is that it has been developed as a strategic and indicative plan where private sector contribution appears to be a dominant (i.e. 77%). Recognizing that development is a long-term and challenging process, recently the Government has embarked on a Perspective Plan (2010-2021) aimed at implementing Vision 2021, which aspires for Bangladesh to attain lower-middle income country status by 2021. The Government recognizes that the economy is gradually becoming dominated by the private sector, therefore, the new strategy is clearly declaring the plan as private sector-led development strategy. For this objective, Bangladesh would need 32-40% investment rate to achieve 8% to 10% GDP growth by 2021, which is projected to originate from the private sector.

6.1.3 Binding Constraints to Private Sector Development

Poor Access to Finance

182. Bangladesh firms tend to have poor access to formal finance compared to other Asian countries of the region. Private sector growth continues to slow down by a less conducive financial system. In 2011, credit to private sector amounted to 49% of GDP in Bangladesh which is lower than Thailand (132%), China (127%), Malaysia (116%), Vietnam (112%) and India (51%) but higher than Philippines (32%), Indonesia (32%), Sri Lanka (31%), and Pakistan (18%). Furthermore, according to the Enterprise Surveys data of the World Bank, firms in Bangladesh reported that around 80% of their investment, on average, came from internal sources, while bank 38 United Nations Conference on Trade and Development (UNCTAD), World Investment Report (2012)

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37 32

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Bangladesh Vietnam Pakistan Philippines Thailand Indonesia India China Sri Lanka Malaysia

Figure 6.2 Bangladesh: Business Sophistication, 2011-2012 (out of 142 countries)

financing accounts for about 17% of their investment capital. According to the same survey, about 42% of enterprises in Bangladesh identified access to finance as a major constraint while only 25% of firms in South Asia think that financial exclusion is a main obstacle for their businesses. Overall, there are serious weaknesses and looming problems in the financial sector that can hurt long-term growth of the private sector. Bangladesh has a relatively shallow financial sector. State-owned banks control about three-fourths of deposits and loans and carry significant amount of non-performing loans. High interest rates, low level of market capitalization, poor insurance coverage, weak risk management and poor protection of creditor rights are among other elements of the insufficiently developed financial system.

Weak Business Sophistication

183. According to the Global Competitiveness Report 2011-2012, Bangladesh ranks poorly on business sophistication. Out of 142 countries, Bangladesh stands at 98 ranking in terms of business sophistication, which is poor compared to all the selected countries in the Asian region. Enhanced business sophistication is going to be critical for operating domestically as well as globally. To become competitive is important not only for export-oriented private firms, but also enterprises that largely operate in the domestic market as these firms are found to face significant competition from foreign enterprises. Traditionally, firms in Bangladesh have pursued price- based competitive strategies, taking advantage of low labor cost. However, Bangladesh’s ability to compete on a price basis is being threatened by the growing strength of other low-cost producers globally. At the same time, non-price factors, such as quality and adherence to ethical standards, are becoming important sourcing criteria in global markets. In general, issues related to enhancing business sophistication can be broken down into a number of specific challenges. These include improving product quality, achieving cost-efficiency, ensuring rapid and consistent delivery to consumers, adhering to social and environmental standards, identifying new markets and developing new products (Figure 6.2).

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Source: World Bank Enterprise Surveys (2007), (http://www.enterprisesurveys.org)

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7.0 4.8 2.8 1.4

Bangladesh South Asia World

Figure 6.3. Bangladesh: Outages of Power and Water, 2007

Number of electrical outages in a typical month

Number of water insufficiencies in a typical month

Frequent Outages of Electricity and Water

184. The quality and quantity of infrastructure appear to be relatively poor in Bangladesh. The economy ranks lower on most of the dimensions of the infrastructure than other countries of the region. For example, on average, every month electrical outages happen at least 100 times in Bangladesh which is three times more frequent than the region average and far behind the world average. Water insufficiencies are also found to be a binding constraint in Bangladesh as it becomes insufficient about five times in a month in Bangladesh. Further, lack of access to adequate infrastructure is significantly more constraining rural enterprises. Some surveys show that rural firms have far less access to electricity compared to the enterprises in urban areas. In addition, road conditions are also poor, particularly due to poor construction and lack of maintenance of roads and bridges (Figure 6.3).

Unfavourable Regulatory and Administrative Procedures

185. A fundamental element of favorable business environment is that the economic activity is supported with good regulatory and administrative procedures. The private sector of Bangladesh also suffers from the favorable business regulations that establish and clarify property rights and reduce the cost of resolving disputes, and rules that increase the predictability of economic interactions and provide contractual partners with certainty and protection against abuse. According to the World Bank, Doing Business Report (2012), Bangladesh ranks 122th out of 183 economies of the world in terms of the overall business climate.

186. For private sector development, various stakeholders suggested that Bangladesh needs to adopt effective policy changes that aim to relax the above mentioned binding

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constraints, particularly boosting incentives for both the local and foreign private investors in the coming years. These include the following:

Further business deregulation is required through enhancing the enabling environment, in particular, making business-friendly regulatory and administrative procedures. Further, the Government also needs to develop a comprehensive PPP investment strategy. The administrative and legal framework is essential to improving the investment climate and is often overlooked.

Curtailing the growth of speculative investments by initiating effective tax reforms Improving access to long-term financing by improving efficiency of the financial sector

6.2 Small and Medium Enterprises (SMEs)39

6.2.1 Overview of SMEs

187. SMEs in Bangladesh are playing a substantial role in providing the impetus to the development of a modern manufacturing sector and in job creation in the country. An overwhelming majority (i.e. 98% of establishments) are micro units having less than 10 workers. Only 13% are in manufacturing and the remaining 87% are involved in trade and services. Within manufacturing, 58% of the enterprises are in the category of SMEs (less than 50 workers) employing about 20% of total manufacturing labor force.

188. The target of achieving double digit economic growth hinges largely on the performance of the small and micro enterprises. So far, SMEs have contributed about 5.2% to total GDP in 2008-09 and this share has not increased much over the last decade. In terms of value addition, the performance is also not satisfactory as the growth of value addition declined in 1995-2000 from the period 1989-1995. Over the period 1989-2000, value addition of SMEs had grown at an annual rate of 6.6% while in the later five years it grew at 5.5% per annum.

6.2.2 Government Strategy for the SME Development

189. All the successive Governments have emphasized the importance of developing the SMEs. Some of the recent policy initiatives include the following:

190. National Taskforce on Small Enterprise Development: The Government constituted a National Taskforce on Small Enterprise Development to formulate a comprehensive strategy for promoting rapid growth and vigorous competitiveness among these enterprises. The Taskforce has submitted its report including a comprehensive set of recommendations that, if implemented, will mount a coherent strategy to promote the development of small enterprises in Bangladesh in three phases: short-, medium- and long-term. The Government has accepted most of the recommendations and some of them are under implementation.

191. Small Enterprise Cell and Small Enterprise Foundation: Considering the importance of small enterprise financing, a Small and Medium Enterprise Cell was created in 2003 in the 39 Planning Commission, Government of Bangladesh, Sixth Five Year Plan (2011-2015)

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Ministry of Industries. The Cell has announced that 80% of total resources available for SMEs would be allocated specially for small enterprises. The SME Cell also decided that BASIC Bank and BRAC Bank will be working together as lead banks and will be responsible for distribution of credit and venture capital fund in the short-run.

192. Creation of Special Funding Arrangements: A number of funds namely Bangladesh Bank Fund, EGBMP/IDA Fund, and ADB Fund are now in operations in Bangladesh governed by different entities like the Bangladesh Bank, the SME Foundation and the Ministry of Finance.

193. SME Objectives, Strategies and Policies in the Sixth Five Year Plan: In order to achieve double digit economic growth, the contribution of small and micro enterprises to GDP also needs to be increased to double digit. Through the SFYP, the Government aims to develop SMEs sector through three major ways: (i) by increasing the number of micro and small enterprises through proper monetary and non-monetary incentives so that people with entrepreneurial capabilities are more willing to start small businesses; (ii) by scaling up the size of the existing micro and small enterprises; and (iii) by enhancing the productivity of the existing micro and small enterprises.

6.2.3 Binding Constraints to SMEs Development

Inability to Market Products

194. The present and future growth prospect of SMEs depends upon marketing their activities. This requires having a well-planned marketing strategy including advertisement campaign as well as resources for implementing that strategy. Unfortunately, most SME entrepreneurs are heavily constrained in this respect as they cannot make adequate investments in marketing and also lack necessary marketing skills.

Ability to Maintain Product Quality

195. A major constraint to the sustainability of SME growth in Bangladesh is the inability to maintain the quality of SME products. At present, Bangladesh produces mostly common consumer goods which are labor-intensive and require relatively simple technology. But due to poor quality these products cannot stand competition from imported products. The challenge for Bangladesh today is not in competing with high-tech products of developed countries but to make its SME sector survive competition from its rivals.

Lack of Investment and Working Capital

196. Lack of access to finance particularly working capital finance and investment finance to enable them to expand their business is a prime constraint facing the SMEs. Banks in general do not consider SME financing as profitable activity. SMEs are also regarded as high risk borrowers because of their low capitalization, insufficient assets and high mortality rates, and consequently banks are not keen to offer them credit at comparable interest rates. SMEs in the export sector also face problems of access to working capital.

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Lack of Skilled Technicians and Workers

197. Lack of skilled manpower is a perennial problem in Bangladesh. This problem is particularly acute for small and medium scale export-oriented 115 enterprises. Bangladesh has made large inroads in the world’s apparel market through commendable performance of readymade garments. However, the value addition of the products is low. Despite high demand, Bangladesh cannot make much entry into high value fashion wear exports due to dearth of trained workers. Supply capacity is thus constrained by non-availability of skilled workers.

Poor Management Skills of Entrepreneurs

198. Managerial skills for undertaking planning, marketing, and cash-flow management are vital for survival of the SMEs. The SME entrepreneurs in Bangladesh are very much lacking in managerial skills and are not used to strategic planning. It is natural that they are unable to survive market failures. The concept of managerial training for SME entrepreneurs is yet to take root in country.

Lack of Information

199. In a competitive world, market information regarding demand and supply situation for a product at a particular period, changing consumer tastes, etc. are crucial elements for the success of SMEs. In Bangladesh, although some financial institutions and a few trade bodies like Dhaka Chamber of Commerce have introduced help desk and knowledge centers with internet facilities but such services are too limited to the SME entrepreneurs on the whole. Therefore, lack of market information is a serious constraint to the SME development.

Non-Tariff Barriers and Changes in World Trade Regimes

200. Liberalization of industrial and trade regimes in the wake of globalization are likely to have significant effects on Bangladesh’s SMEs. Over the past decade, there has been a significant change in the world trade regime with new regulations coming into effect. WTO agreements such as Application of Sanitary and Phytosanitary Measures (WTO SPS Agreement) to trade in agriculture products raise the barrier for SME exports to developed markets. WTO agreements not only cover the traditional goods sector, but also new sectors like services. Lack of knowledge about the current status and essential components of WTO Agreements hampers trade and business. The need for product standardization and compliance with health and hygiene requirements is an unavoidable part of international trade in farm and non-farm products catered by SMEs. Long-run economic prosperity of SMEs will critically hinge upon turning the challenges of globalization into opportunities.

Enabling Environment for Trade and Business

201. Although trade and business activities are carried out by the private sector (independent of the Government control), existence of enabling environment like supportive regulatory

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framework, congenial tax regime, developed transport and communications infrastructure is vital for SME development. Bangladesh has made some progress in this direction but it still falls short of present day needs.

202. Existing literature (i.e. Sardar Jahangir 2001)40 have also identified a number of specific constraints facing the SMEs sector such as lack of modern technology; inadequate investments; irregular/inadequate supply of power; high rate of interest on bank loans; inadequate availability of raw materials; absence of clear cut government policies; fierce competition; lack of skilled technicians and workers; and low spending on research and development.

6.3 Foreign Trade Sector

6.3.1 Overview of Foreign Trade

203. External trade is one of the vital components for Bangladesh’s socio-economic development as it provides capital, managerial expertise, technology, and employment generation. Consistent with the trends of free market economy and globalization, Bangladesh has made solid progress in liberalizing its foreign trade by pursuing a liberal trade policy since 1990s. Bangladesh has also made significant progress over the years in reducing tariff levels - the highest tariff is now 25%, as opposed to 300% ten years ago - and the number of bands has also been reduced. A large number of trade barriers were either dismantled or significantly decreased such as customs duty rates (Figures 6.4 - 6.5). Policies were deployed towards this including tariff liberalization, flexible exchange rate, opening up of most sectors for private and FDI and

40 Sardar Jahangir (2001): An Assessment of Operational Conditions of Cottage, Small Medium Enterprises (CSME) in Bangladesh, Report Prepared for FBCCI, Dhaka.


Readymade garments

50%

Knitwear 25%

Frozen food 5%

Jute goods 4%

Leather 3%

Chemical products

1%

Raw Jute 1%

Shoe 1%

Others 10%

Figure 6.4. Bangladesh: Product-Wise Exports, 2002-2003

Knitwear 42%

Readymade garments

37%

Jute goods 3%

Frozen food 3%

Raw Jute 2%

Engineering products

1%

Leather 1% Shoe

1%

Others 10%

Figure 6.5 Bangladesh: Product-Wise Exports, 2010-2011

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privatization of public sector enterprises. This has induced export-led industrialization in Bangladesh thus leading to both higher exports and trade-openness which reached 57% of GDP in 2011. However, external trade depends on a narrow export basket with more than 80% of export earnings derived from clothing exported mainly to US and EU markets (Figures 6.6. and 6.7).

204. Moreover, the country is rated for the first time in its history in April 2010 and earned Ba3 (Moody's) and BB- (Standard & Poor's) sovereign rating with stable outlook for three consecutive years namely 2010, 2011 and 2012. This rating has positioned Bangladesh in the global financial arena thus boosting foreign investors' confidence to invest in the country and facilitating smooth operations of the country's foreign trade. Furthermore, Chittagong Export Processing Zone is ranked 3rd in the Best Cost Competitiveness and is in 4th position in Best Economic Potential for 2010/2011 in a Global Competition of Economic Zones conducted by FDI magazine of The Financial Times, London (March 2010). Bangladesh has also a system of duty-free (i.e. bonded) imports of certain raw materials to be used for producing finished goods for exports. A few items, mostly manufacturing inputs, are subject to rates ranging from 0-3%; basic raw materials are subject to 0-5%; intermediate products 12%; and finished products up to a rate of 25% as of fiscal 2009/10. Ready-made garment manufacturers that are 100% export-oriented can import duty-free through bonded warehouses. Other export-oriented industries and indirect exporters can claim duty-drawbacks at stated rates.

205. At present, intra-South Asian trade accounts for less than 5% of the total trade of South Asian Association for Regional Cooperation (SAARC) member nations whereas trade between Association of Southeast Asian Nation (ASEAN) countries accounts for more than 60% of Southeast Asia’s trade. The SAARC was formed in 1980, with a view to increasing mutually beneficial trade among its member countries: Bangladesh, Bhutan, India, the Maldives, Nepal,


USA 33%

Others 19%

Germany 13%

UK 12%

France 6%

Belgium 4%

Netherlands 4%

Italy 4%

Canada 3% Japan

2%

Figure 6.6. Bangladesh: Country-Wise Exports, 2002-2003

USA 22%

UK 9%

Germany 15%

France 7%

Belgium 3%

Italy 4%

Netherlands 5%

Canada 4%

Japan 2%

Others 29%

Figure 6.7. Bangladesh: Country-Wise Exports, 2010-2011

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Pakistan and Sri Lanka. The South Asian Free-Trade Area (SAFTA) was established in 2006, with the first tariff reductions implemented in July 2006. Full liberalization among members, including a maximum 1-5% tariff band for the non-negative list, will apply in due course.

6.3.2 Government Strategy to Boost Foreign Trade

206. Annual GDP growth at the end of 2015 is targeted to reach 8% which will require raising the trade-GDP ratio from the existing level of 57% of GDP to 66.4% by 2015. Bangladesh is striving to achieve the status of a lower middle-income country over the next decade. The SFYP and Ten Year Perspective Plan (2011-2021) are the two major policy documents articulating the long-term economic strategies and targets related to exports and imports during 2011-2021. Bangladesh’s external trade is regulated by a number of policies, orders and acts which are structured under a broader liberalisation framework. The Import Policy Order 2009-2012 and Export Policy 2009-2012 are the two major policies governing Bangladesh’s international trade. They outline export and import targets, priority sectors requiring special assistance, strategies to promote import-substituting, domestic market-oriented and labour-intensive industries. The main objective of Bangladesh’s export policy is to strengthen export-led industrialisation through enhancing exports, increasing productive capacity of export-oriented industries and facilitating overall export sector through capacity building of local industries. The import policy, on the other hand, aims to make the import regime compatible to the World Trade Organization (WTO), simplify the procedure to import capital machineries and raw materials, provide facilities for technological innovation and allow import of essential commodities on emergency basis.

6.3.3 Binding Constraints to Foreign Trade Sector

More Aid Dependent Economy

207. Bangladesh needs to move successfully from aid dependence towards a trade-based economy with an emphasis on securing investment. Bangladesh economy has persevered so far in the face of global recession, but the domestic challenges are manifold with respect to soaring inflation, import-export imbalances, devaluation of the currency, slow growth of remittances, increasing budget deficit and higher Government borrowing. Likewise, trade, remittances and aid flows are the three most important channels through which growth and external balances in Bangladesh can be affected if global growth weakens. Bangladesh’s import needs are substantial; hence the urgency is to rapidly increase exports. Trade orientation is moderately high at import stage mainly with regard to sourcing of raw materials, intermediate products and capital machineries for different economic activities. In order to finance imports and also to reduce the country’s dependence on foreign aid, the Government has been trying to enhance foreign exchange earnings through planned and increased exports. However, the global trade scenario has exposed structural limitations of the economy, posing a variety of challenges for the country that has underdeveloped technology and a low capital base.

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Serious Trade-Related Infrastructure Bottlenecks

208. The country’s trade is facing serious infrastructure bottlenecks in the delivery of power, gas and telecommunications. The inefficient country’s land and sea ports, excessive customs procedures and a weak banking system add to the existing policy constraints. Together with weak governance and infrastructure inadequacies and cost of borrowing represent a significant obstacle to stronger exports performance.

Lack of Focused Trade-Related Policies

209. Trade-related policies in Bangladesh lack focus as well as trade-related instruments and institutions fail to function with due efficiency. Continuing lack of transparency, inconsistency and unclarity in trade regulation and policy changes are amongst the major weaknesses of trade-related policies which result in poor implementation and outcomes. The difficulties in implementing relevant policies mostly stem from their non-binding nature (e.g. export and industrial policy); poor linkage between relevant policies related to exports and imports, inadequate use of trade policy tools for the development of domestic market-orientated and import-substituting industries; and lack of institutional capacity building initiatives in the areas of trade diplomacy; and trade promoting bodies. In addition, current customs procedures leave significant scope for corruption, which not only increases uncertainty and the cost of trading with Bangladesh, but also ensures inefficient allocation of resources, preventing the country from benefiting fully from trade liberalization.

Less Focus on International Trade in Services

210. Although, service sector is the major contributor to country’s GDP (54% in 2010), its share in international trade in services is rather small. Given the growing importance of trade in service, there is need for policy directions to enhance competitiveness of trade related service activities.

Weak Ease of Trading Across Borders

211. With regard to the ease of trading across borders, Bangladesh stands at 115th ranking (out of 183 economies) and lowest compared to all comparator Asian economies. However, Bangladesh’s regional commerce is increasing gradually and the country is expected to be the Asia-Pacific’s second fastest-growing trade partner after Vietnam (Figure 6.8).

Under-developed Export Credit Insurance Industry

212. The export credit insurance industry in Bangladesh is under-developed. Presently, Export Credit Insurance (ECI) services are being offered by Sadharan Bima Corporation (SBC), a state owned general insurance enterprise established in 1973, which operates more as a “general insurance company” with “export credit insurance” seen as an ancillary function. The SBC’s role is limited to “The Export Credit Guarantee Scheme”, a program which was launched in 1978. The Scheme provides cover against risks undertaken by the country's exporters. The principal risks

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covered include insolvency of the buyers and political restrictions delaying payment. The Scheme was undertaken at the initiative of the Export Promotion Bureau and the Ministries of Commerce, Industry and Finance. However, the exporters and commercial banks do not have adequate orientations. Proper functioning of the Scheme is hampered by concerns about product quality and promptness of service delivery. Bangladesh presently does not have an independent ECA, nor has Sadharan Bima’s program been successful in addressing the needs of the exporters and sufficient resources have not been allocated to fulfill the objectives of the program.

6.4 Public Private Partnership (PPP)

6.4.1 Overview of PPP

213. Bangladesh is one of the few countries in South Asia that adopted Public Private Partnerships (PPPs) as one of the approaches for delivering public goods and services since 1990s. One of the earliest PPP projects in the country was automation of railway reservation and ticketing system. In 1993, Bangladesh Railways awarded the national reservation and ticketing system to private entity on Build-Operate-Transfer (BOT) basis. The private firm built the system during 1994-95, operated it 2002 before transferring to Bangladesh Railways. During this period, Bangladesh Railway's intercity passenger revenue increased substantially while reducing ticketing staff from 400 to less than 200 due to the centralized automated ticketing system. Towards mid-1990s, the Government introduced “Private Sector Power Generation Policy” – the first policy to encourage PPP investments in power generation sector. Since formulation of the policy, over 1,500 MW of large, medium and small Independent Power Plants (IPPs) have been developed and connected to national grid. By far, majority of the PPP projects are concentrated in upstream power sector generation. There have also been some PPP projects in other sectors, such as transportation and ICT.

Source: World Bank/IFC Doing Business (2012)

17 29

39 51 53

60 68

75

109 115

0

20

40

60

80

100

120

140

Thailand Malaysia Indonesia Philippines Sri Lanka China Vietnam Pakistan India Bangladesh

Figure 6.8 Ease of Trading Across Borders: Bangladesh and Comparator Economies, 2011 (out of 183 countries)

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6.4.2 Government Strategy for the PPP

214. Comprehensive Regulatory Framework: Following the launch of “Private Sector Power Generation Policy” in 1996 and to augment the PPP model in broader infrastructure sector, the Government in 2004 issued “Bangladesh Private Sector Infrastructure Guidelines (PSIG)”. To facilitate the implementation of PPP in infrastructure projects, the Government also enacted the “Public Procurement Act (PPA)” in 2006, followed by “Public Procurement Rules (PPR)” in 2008. The PPA and PPR specifically incorporate various procurement issues related to PPP models. In order to further consolidate various policies issued to facilitate PPP projects and bring the entire procedure under the purview of a comprehensive PPP framework, the Government in 2010 issued “Policy and Strategy for Public Private Partnership (PPP)”. The GoB also established “PPP Advisory Council (PPPAC)”, Chaired by the Prime Minister, which makes periodic review of the overall PPP policy and give broad guidance on PPP affairs. With the adoption of “Policy and Strategy for Public Private Partnership”, the GoB has placed a comprehensive regulatory framework to support PPP projects. For the first time in the country, the Government through its national budget 2009-2010 introduced the concept of PPP budget. This shows strong commitment for the development of PPP in the country.

215. Effective Institutional Support: In tandem with the development of regulatory framework, the Government has also set up various institutions to develop and finance PPP projects. Three institutions, set up by the Government, have been working to materialize various PPP projects. So far direct assistance of these organizations has enabled implementation of 27 PPP projects of which 18 projects are in the power and energy sector; six projects in telecommunication sector; two projects in the port infrastructure sector; and one project in the information technology sector. Activities of these three organizations are summarized below:

216. Office for Public Private Partnership: The Office for PPP (PPP-O) works directly under the supervision of Prime Minister’s Office. The PPP-O has been formed as an autonomous unit having significant autonomy on administrative and financial matters in discharging its mandated functions. It acts as the central point of promoting the PPP concept. It supports line Ministries in identifying, formulating, selecting, contracting and monitoring implementation of PPP projects. The PPP-O also coordinates among various Government and private agencies for fast tracking PPP projects. The PPP-O is headed by a Chief Executive Officer (CEO) and reports directly to the Prime Minister.

217. Infrastructure Development Company Ltd (IDCOL): In 1997, with the financial assistance of the World Bank, the Government established IDCOL with a mandate to finance PPP infrastructure projects. The IDCOL is playing a major role in bridging the financing gap for developing medium- and large-scale infrastructure and renewable energy projects in Bangladesh. The company now stands as the market leader in private sector energy and infrastructure financing in the country. The IDCOL is managed by a seven-member independent Board of Directors comprising four senior government officials, three prominent entrepreneurs from the private sector and a full time Executive Director and Chief Executive Officer. Till date, IDCOL has financed 22 projects worth of BDT 13 billion under PPP.

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218. Infrastructure Investment Facilitation Center (IIFC): It is an advisory body of the Government under the Ministry of Finance. Operational since January 2000, IIFC's objective is to promote and facilitate infrastructure projects in the country through PPP. The IIFC maintains a pool of staff and experts in PPP. It has employee strength of above 30 and operates by engaging local and expatriate consultants. Both the payroll staff and retainers are renowned professionals in their respective areas of specialization and a large number of them have experience of working overseas in multinational and multicultural teams. The company has seven members Board of Directors. Three directors are from the Government; three from the private sector and the Chief Executive Officer is an ex-officio member of the Board. Secretary, Economic Relations Division, Ministry of Finance, is the Chairman of the Board. The IIFC undertook a large number of infrastructure projects for private investment. As a result of IIFC efforts, the telecom sector has become an active private investment area. It is also advancing well in a number of other infrastructure sectors such as ports, power, bridges, economic zones and energy. Till now, the IIFC has been under contract to design 30 projects, provide technical support to 8 projects and consultancy support to 16 PPP projects. 219. Investment Promotion and Financing Facility (IPFF): In 2007, the World Bank and the Government jointly established a five-year term IPFF. Endowed $60 million and administered by Bangladesh Bank, IPFF’s mandate is to finance Government approved PPP based infrastructure development projects. The Bangladesh Bank has been the implementing agency of this facility on behalf of the Government and the World Bank. Under the IPFF, the Government approved private infrastructure development projects which are developed through PPP basis and are being financed through selected participating banks / financial institutions (PFIs). One of the main features of this facility is that at least 30% cost of any approved project should be borne by the entrepreneurs' own source and maximum 70% is to be provided as debt financing; out of which 20% is to be provided by the participating financial institutions (PFIs) and the rest 80% from IPFF. The PFIs are supposed to bear all commercial risks associated with debt financing. The IPFF started with a 5-year term (January 2007 – December 2011). About 97% of the facility has been utilized up to June 2010 for financing seven small power plants, having a capacity of 178 MW. All the power plants are contributing electricity to the national grid. The banks and financial institutions which have participated in financing the above are NCC Bank Limited, Eastern Bank Limited, Dhaka Bank Limited, Dutch Bangla Bank Limited, IIDFC, Uttara Finance Limited and IDLC Finance Limited. The World Bank has come forward with another $257 million for financing PPP projects. Now IPFF project period have been extended up to 2014. So far, BDT 286.8 million has been disbursed under additional financing, of which BDT 100 million has been disbursed to a Water Treatment Plant with the capacity of three million gallon per day in Chittagong Export Processing Zone.

220. In addition to the high level objectives set by the Perspective Plan, the SFYP emphasizes the role of private sector/PPP in infrastructure and agriculture. According to the Plan, the Government is supporting agriculture diversification in both crop and non-crop sectors with the aim of promoting privatization and boosting income generation. Accordingly, the Government has put emphasis on PPP to ensure expeditious development of infrastructure and utility services by attracting local and foreign investment and improving the expertise and

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Table 6.1 Summary of Binding Constraints to Private Sector Development

Binding Constraints

Private Sector

Poor Access to Finance Weak Business Sophistication Frequent Outages of Electricity and Water Unfavorable Regulatory and Administrative Procedures

SMEs

Inability to Market Products Ability to Maintain Product Quality Lack of Investment and Working Capital Lack of Skilled Technicians and Workers Poor Management Skills of Entrepreneurs Lack of Information Non-Tariff Barriers and Changes in World Trade Regimes Enabling Environment for Trade and Business

Public Private Partnership Dearth of Long-term Financing in the Local Market Currency Risk for Market Exposed Projects

Foreign Trade

More Aid Dependent Economy Serious Trade-Related Infrastructure Bottlenecks Lack of Focused Trade-Related Policies Weak Ease of Trading Across Borders Less Focus on International Trade in Services Under-Developed Credit Insurance Industry

technology. The Sixth Five Year Plan aims for 2% of GDP to be spent on PPP related projects. As far as the Annual Development Program goes, the Government has allocated 19.3% of its budget on general services, of which 4.9% will go toward PPP projects. It shows upward trend in Government allocations toward PPP projects over the years. The current budget allocated nearly 5% of the total budget towards PPP project spending. The Government has not limited PPP activity in infrastructure and power sectors and has recognized that PPP financing can also be utilized in improving governance. To this effect, it has launched a Digital Land Management System that will be considered under PPP mode.

6.4.3 Binding Constraints Facing PPPs

Dearth of Long-Term Financing in the Local Market

221. The typical maximum tenor that local commercial banks can extend for six to seven years. While the PPP projects generally require longer tenor to match the cash flow, the tenor constraint among local banks makes this difficult to raise finance for several PPP projects without the help of cross border financing.

Currency Risk for Market Exposed Projects

222. Projects that intend to raise hard currency financing face currency devaluation risks. The problem is further exacerbated for lack of hedging products among local banks.

6.4 Summary of Binding Constraints to Private Sector Development

223. Summary of binding constraints to private sector development, SMEs and foreign trade is presented in Table 6.1.

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7.1 Islamic Financial Services Industry (IFSI)

7.1.1 Structure of Financial System

224. The Islamic financial services industry in Bangladesh consists of various components such as Banks; Takaful Companies; Microfinance Institutions/Windows; Zakat Institutions; and Awqaf Institutions. Further, the Islamic financial services industry (IFSI) falls into all three categories of the financial system of the country i.e. Formal, Semi-formal and Informal sectors. These sectors have categorized in accordance with their degree of regulations. The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks; and Microfinance Institutions (MFIs). The semi-formal sector includes those institutions which are regulated otherwise but do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. This sector is mainly represented by Specialized Financial Institutions like House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank, Non-Governmental Organizations (NGOs and discrete government programs. The informal sector includes private intermediaries which are completely unregulated (Figure 7.1).

7.1.2 Islamic Banking

225. Total deposits of the Islamic banks and Islamic banking branches of the conventional banks stood at BDT 675.6 billion at end December 2010. This was 17.5% of deposits of the total banking system. Total credit of the Islamic banks and the Islamic banking branches of the conventional banks stood at BDT 628.7 billion during the same period. This was 19.1% of the credit of the total banking system of the country.

226. One of the important developments in Islamic banking in last few years has been the entry of some conventional banks in the market and their use of Islamic modes of financing through their Islamic branches, windows or units. It necessitates and encourages the globalization of Islamic banking, which includes some of the giants in the banking and finance industry. Presently, 10 conventional banks have opened 21 Islamic banking branches along with their interest based branches. These conventional banks should focus on the safeguards that ensure the Islamic nature of these branches such as separation and compliance with Shariah. Separation of Islamic banking branches includes separation of capital, accounts, staff employed and office. However, the most important thing is compliance with Shariah (Table 7.1).

VII. DIAGNOSTIC ANALYSIS OF

ISLAMIC FINANCE AND REVERSE LINKAGES

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227. Though there is no complete Islamic banking act for controlling, guiding and supervising the Islamic banks in Bangladesh, some Islamic banking provisions have been incorporated in the amended Banking Companies Act, 1991 (Act No. 14 of 1991). The Bangladesh Bank has not yet set up any separate department at its head office to control, guide and supervise the operation of the Islamic banks. Inspection and supervision of the Islamic

Source: Bangladesh Bank (www.bb.org.bd)

Figure 7.1. Bangladesh Financial System

Financial Market

Money Market (Banks, NBFIs,

Primary Dealers)

Capital Market (Investment Banks, Stock Exchanges,

Credit Rating Companies etc.)

Foreign Exchange Market

(Authorized Dealers)

Formal Sector

Regulators & Institutions

Bangladesh Bank - 47 Scheduled Banks and 4 Non-Scheduled Banks - 31 Non-Bank Financial Institutions

Securities and Exchange Commission

Stock Exchanges, Stock Dealers & Brokers, Merchants Banks,

AMCs, Credit Rating Agencies etc.

Insurance Development and

Regulatory Authority - 18 Life and 44 Non-Life Insurance Cos.

Microcredit Regulatory Authority - 599 Microfinance Institutions

Semi Formal Sector

Specialized Financial Institutions: 1. House Building Financial Corporation(HBFC) 2. Palli Karma Sahayak Foundation(PKSF) 3. Samabay Bank 4. Grameen Bank

Informal Sector

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banking operations are conducted by the Bangladesh Bank as per the general guidelines framed for the conventional banks.

Takaful

228. Takaful sector is relatively well developed in the country with 7 companies (3 Life and 4 Non-Life companies) operating to provide various types of insurance including micro insurance.

Islamic Capital Market

229. In October 2004, Bangladesh Bank issued a Mudaraba bond named “Bangladesh Government Islamic Investment Bond” on behalf of the Government as a first ever Islamic financial instrument in Bangladesh to facilitate the Islamic banks and financial institutions to invest their funds. The Government Islamic Investment Bond has been playing an important role in developing the Islamic financial instruments in Bangladesh. Islamic banks and financial institutions are actively participating to park their cash surpluses and enhance their return on their investments.

Zakat

230. Bangladesh does not have a Government organization responsible for Zakat. Most persons pay their Zakat individually to needy persons whom they deem fit to receive Zakat. This is one area which needs to be developed further in coordination with various public and private sector entities jointly with the assistance of countries where Zakat sector is well-developed.

Awqaf

231. Waqf properties are controlled by the “Waqf Administrator” under the Ministry of Religious Affairs. Currently the Waqf Administrator controls 11,545 public and 2,262 private Awqaf assets. The total number of mosques under the Administrator’s control is 9,395. In

Table 7.1 Comparative Position of the Islamic Banking Sector

Particulars Islamic Banks Islamic Banking

Branches Total Islamic

Banking Sector Total Banking Sector

2010 2009 2010 2009 2010 2009 2010 2009

No. of Banks 7 7 16 9 23 23 47 47

Deposits 627.6 470.2 48.0 62.4 675.6 532.6 3,383.9 3,037.8

Credits 587.2 456.0 41.6 36.9 628.7 492.9 3297.5 2,439.8

Credits Deposits Ratio 93.6 96.98 86.7 59.1 93.1 92.5 85.5 80.3

Liquidity: Excess(+) / Shortfall(-) 25.5 33.8 0.5 - 26.0 - 211.8 335.0

Note: Conventional banks having Islamic banking branches do not maintain SLR individually. The Head offices of these banks maintain a combined SLR and liquidity position. (Source: Bangladesh Bank)

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addition to the Waqf properties under the control of the Waqf Administrator, there are private Waqf properties which are operating in the private sector (Table 7.2).

232. In Bangladesh, financial resource mobilization through issuance of Islamic financial instruments is at a nascent stage. No Islamic bank or financial institution other than Islami Bank Bangladesh Limited (IBBL) has issued any Islamic financial instruments like bonds, debentures, or mutual funds in the primary or secondary market for mobilizing financial resources. The IBBL’s Perpetual Mudaraba Bond is the only private sector Islamic capital market instrument which is also listed on the stock exchange. All other Islamic financial institutions are fully dependent on the deposit funds.

233. In the public sector, the Government has introduced a Mudaraba Bond named “Bangladesh Government Islamic Investment Bond (Islamic Bond)” in October 2004 with a view to mitigating the long-felt need for a Shariah-based monetary instrument which can be used as an approved security for the purpose of maintaining the statutory liquidity reserve (SLR) as well as providing an outlet for investment or procurement of funds by the Islamic banks. This bond is also open for investment by the private individuals, companies or corporations. The total cumulative sale of this instrument was approximately BDT 25 billion upto the end of 2011.

7.1.3 Government Strategy for Islamic Financial Services Industry

234. Bangladesh, despite being a secular country, has majority Muslim population and its Government has undertaken many efforts to allow the Islamic financial services industry to operate with ease. As can be observed from the above description of the financial system of the country, there are many types of Islamic financial institutions operating successfully. However, currently there is no specific legal framework or strategy for Islamic Banking, Sukuk, Takaful or Zakat.

Table 7.2. Bangladesh: Awqaf Properties by Division

Name of the Division No. of Waqf Estates

Classes of Waqf No of Mosques Total Land

(acre) Public Private

Dhaka 3,058 2,735 323 2,099 32,572

Chittagong 4,505 4,040 464 3,818 146,663

Rajshahi 3,287 2,830 457 2,135 123,677

Khulna 386 305 81 149 4,240

Sylhet 571 449 122 515 237,015

Barisal 2,001 1,186 815 679 61,940

Total 13,807 11,545 2,262 9,395 606,107

Source: Office of the Bangladesh Waqf Administrator, Dhaka (www.waqf.gov.bd), (25 February 2013)

9797

7.1.4 Constraints to Islamic Financial Services Industry

235. The major challenge to the growth of Islamic finance in the country is the absence of the requisite legal, regulatory, supervisory and Shariah frameworks. Once these frameworks are in place for each component of the IFSI, Bangladesh can look forward to a flourishing alternate financial industry which may be able to boost the country’s growth through influx of additional foreign direct investments and employment generation.

7.2 Reverse Linkage Opportunities

7.2.1 Solar Energy Usage

236. One of the major areas where Bangladesh can provide expertise to IDB member countries is the Rural Electrification and Renewable Energy Development Program, also known as Solar Home System (SHS) Program for rural electrification. The SHS Program is one of the most successful off-grid solar electrification programs in the world. This Program has been established as a viable model for increasing access to electricity in rural areas where the electric power grid is not presently economically feasible or available. More than 1.3 million SHSs have been installed to date. The Government has a goal of providing SHSs to 2.5 million households by 2014 with the financial support from the World Bank, Global Environment Facility (GEF), KfW, GTZ, Asian Development Bank and Islamic Development Bank. The SHS Program can be replicated in IDB member countries.

7.2.2 Microfinance

237. Bangladesh is known as the birth place of modern microfinance. As per the Microfinance Regulatory Authority, there are 599 Microfinance Institutions (MFIs) in the country excluding Grameen Bank, which has its own legislation. The expertise developed by the country in this field is already being exported and the IDB Group can assist in this process by introducing Bangladeshi expertise to other MFIs in its member countries.

7.3 Summary of Binding Constraints to Islamic Finance and Reverse Linkages

238. Based on the above analysis, summary of binding constraints to Islamic Financial Services Industry and Reverse Linkages is given in Table 7.3.

Table 7.3 Summary of Binding Constraints to Islamic Financial Services Industry

Binding Constraints

Islamic Financial Services Industry

Absence of Requisite Legal, Regulatory, Supervisory and Shariah Frameworks

Reverse Linkages Transferring Knowledge and Expertise of Solar Energy to Other IDB MCs

Transferring Knowledge and Expertise of Microfinance to Other IDB MCs

98

98

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