Document o f The World Bank

Report No. 25886-BD

MEMORANDUM OF THE PRESIDENT

OF

THE INTERNATIONAL DEVELOPMENT ASSOCIATION

AND THE

INTERNATIONAL FINANCE CORPORATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

FOR

THE PEOPLE’S REPUBLIC OF BANGLADESH

June 30,2003

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1 The last Country Assistance Strategy for Bangladesh was discussed on December 12,2000. I

ADB ADP AJM AML ASYCUDA AUSAID

BADC

BAMWSP

BANBEIS

BBOI BBS BE1 BEMP BIDS BNP BPDB BTRC

BTTB BSB BWDB CAOs CAS CBO CDD CFAA CFR

CFT CIDA CMR CPAR

GOVERNMENT FISCAL YEAR July 1 - June 30

CURRENT EQUIVALENTS Cur rency Unit = Bangladeshi Taka (Tk.)

US$1 = Tk. 57.9 (April 2003)

ACRONYMS AND ABBREVIATIONS

Asian Development Bank Annual Development Plan Adamjee Jute Mills Anti-Money Laundering Automated System for Customs Data Australian Agency for International Development Bangladesh Agriculture Development Corporation Bangladesh Arsenic Mi t igat ion Water Supply Project Bangladesh Bureau o f Educational Information and Statistics Bangladesh Board o f Investments Bangladesh Bureau o f Statistics Bangladesh Enterprise Institute Bangladesh Environment Management Project Bangladesh Institute o f Development Studies Bangladesh Nationalist Party Bangladesh Power Development Board Bangladesh Telecommunications Regulatory Commission Bangladesh Telegraph & Telephone Board Bangladesh Shipla Bank Bangladesh Water Development Board Chief Accounts Officers Country Assistance Strategy Community-Based Organization Community-Driven Development Country Financial Accountabil ity Assessment Country Framework Report for Private Provision o f Infrastructure Combating the Financing o f Terrorism Canadian International Development Agency Chi ld Mortal i ty Rate Country Procurement Assessment Review

DANIDA DOE DFID

DOTS DSC EFA EPI ESMAP

FA0 FCD FFE FIs FIAS FSAP FIU FSSAP I1

GDP GEF GTZ

HDI HDM HIES HPSP ICT

IDA IDB IDF IFC IFPRI ILO IMF

Danish International Development Assistance Department o f Environment Department for International Development

Di rect Observed Therapy-Short Course Development Support Credit Education for All Extended Program o f Immunization Energy Sector Management Assistance Program Food and Agriculture Organization Food Control and Drainage Food for Education Financial Institutions Foreign Investment Advisory Services Financial Sector Assessment Program Financial Intelligence Unit Female Secondary School Assistance Program I1 Gross Domestic Product Global Environment Faci l i ty German Corporation for International Cooperation Human Development Index H i g h Design M o d e l Household Income and Expenditure Survey Heal th & Population Sector Program Information and Communications Technology International Development Association Islamic Development Bank Institutional Development Fund International Finance Corporation International Food Policy Research Institute International Labor Organization International Monetary Fund

(W

FOR OFFICIAL, USE ONLY

I-PRSP JBIC JICA JSA KAFCO Kfw LCG LGED MDGs M&E MoEF MFA MFI MoHFW MIGA MTMF NARS NBFCs NCBs NGO NFPE NORAD

NWMP OED O&M PAC PBSs

PER PESP PPIAF

PRGF PRSC PSIA

In ter im Poverty Reduction Strategy Paper Japan Bank for International Cooperation Japan International Cooperation Agency Joint Staff Assessment Karnaphuli Fertilizer Company L im i ted German Development Bank Local Consultative Group Local Government Engineering Department M i l l enn ium Development Goals Monitoring and Evaluation Ministry o f Environment and Forests Mult i-Fiber Arrangement Micro-Finance Institutions Ministry o f Health and Fami ly Welfare Mult i lateral Investment Guarantee Agency Medium-Term Macroeconomic Framework National Agriculture Research System Non-Banking Finance Companies Nationalized Commercial Banks Non-Government Organization Non-Formal Primary Education Norwegian Agency for Development Cooperation National Water Management Plan Operations and Evaluation Department Operations and Maintenance Standing Committee o n Public Accounts Consumer-Owned Cooperatives (Palli Bidyut Samity) Public Expenditure Review Primary Education Stipend Program Public-Private Infrastructure Advisory

PSIDP

QAG REB RET RHD RIBEC

RMG ROSC

R&R RRMIMP I1

SDC SEDF SEMP

SIP SMEs SOE TLM TYRP UNAIDS

Private Sector Infrastructure Development Project Quality Assurance Group Rural Electrif ication Board Renewable Energy Technology Roads and Highways Department Reforms in Budgeting and Expenditure Control (DfID-assisted project) Ready-Made Garments Reports o n the Observance o f Standards and Codes Resettlement and Rehabil itation Second Rural Roads & Markets Improvement & Maintenance Project Swiss Development Cooperation South Asia Enterprise Development Faci l i ty Sustainable Environment Management Program Social Investment Program Small and M e d i u m Enterprises State-Own Enterprise Total Literacy Movement Three-Year Rol l ing Plan Joint Uni ted Nations Program o n H I V i A I D S

UNCTAD

UNDP Uni ted Nations Development Program UNFPA Uni ted Nations Population Fund UNICEF Uni ted Nations Children’s Fund USAID Uni ted States Agency for International

Development WARP0 Water Resource Planning Organization

Uni ted Nations Commission o n Trade and Development

Faci l i ty WB Wor ld Bank Poverty Reduction and Growth Faci l i ty WBI Wor ld Bank Institute Poverty Reduction Support Credit WFP Wor ld Food Program Poverty and Social Impact Assessment WHO Wor ld Health Organization

The World Bank Vice President : Ms . M i e k o Nish imizu Country Director : Mr. Frederick Thomas Temple Task Manager : Mr. Enrique Pantoja

Vice President : Mr. Assaad Jabre Director, South Asia Department : Mr. Dimitris Tsitsiragos Task Manager : Mr. N e i l Gregory

The International Finance Corporation

This document has a restricted distr ibution and m a y be used b y recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT FOR THE PEOPLE'S REPUBLIC OF BANGLADESH

TABLE OF CONTENTS

EXECUTIVE SUMMARY ......................................................................................................................... i

I . INTRODUCTION ................................................................................................................................ 1

A . Bangladesh 's Progress Toward the Millennium Development Goals ........................................ ..I B . Bangladesh 's Poverty Reduction Strategy .................................................................................... 4 C. Recent Political and Economic Developments ..................................................................

111 . PROGRESS IN CAS IMPLEMENTATrON ......................................................................................... 7 A . Accelerating Private Sector-Led Growth ..................................................................................... 8

I1 . COUNTRY CONTEXT ....................................................................................................................... 1

B . Supporting an Integrated Approach to Rural Development C . Consolidating Gains in Human Development .. D . Strengthening Governance and Building Instit

F Donor Coordination and Partnerships

............................................. 11 ...................................................................... 12 ons ................................................................ 15

E . Crosscutting Issues - Mainstreaming Social and Environmental Concerns ............. 17

G . Monitoring the Bank's Development Effectiveness ......................... ........................... 19

I V . BANK GROUP PORTFOLIO ........................................................................................................... 20 I D A Lending ..................................................... ................................................. 20 IDA Non-lending Services ......................... ..................................................................... FY04-05 County Program ............................................................................................................. 23 Lending Scenarios and Indicative Triggers for FY04.05 ................................................................ 25 IDA Portfolio Performance and Management ................................................................................ 26 I F C Portfolio and Program ............................................................................................................ 27

v . ISSUES AND ~ S K S .......................................................................................................................... 28

. .......................................................................................

MIGA Program ............................................................................................................................... 28

TABLES

Table 1 : Progress on Poverty Reduction and Human Development .................................................. 2 Table 2: Economic Trends at a Glance .............................................................................................. 7 Table 3 : Update on CAS Core Benchmarks .................................................................................... 19 Table 4: Development Progress in Bangladesh ............................................................................... 19 Table 5: Update o n CAS Intermediate Milestones .......................................................................... 20 Table 6: Update on CAS Base Case Triggers ................................................................................. 21 Table 7: FY04-05 Indicative Country Program - Non-Lending Services ........................................ 24 Table 8: FY04-05 Indicative Country Program - Lending Scenarios .............................................. 25

BOXES

BOX 1: Bangladesh I-PRSP -National Development Goals for 2015 ...................................... 4 BOX 2: Progress on Anti-Money Laundering/Combating the Financing o f Terrorism ..................... 8

FIGURES

Figure 1 : Lending Distribution by Major Themes and Sectors ........................................................ 22 Figure 2: Portfolio Performance ........................................................................................................ 26

APPENDICES

Appendix 1 : Bangladesh and the Mi l lennium Development Goals .................................................. 31 Appendix 2: Indicative FY04-05 Program Triggers .......................................................................... 32

A N N E X E S

Annex A l : K e y Economic and Program Indicators .......................................................................... 33 Annex A2: Bangladesh At a Glance .................................................................................................. 34 Annex B2: Selected Indicators o f Bank Portfolio Performance Management .................................. 36 Annex B3 : W o r l d Bank Group Program Summary for Bangladesh (IDA, IFC, MIGA) .................. 37 Annex B4: Summary o f Non-Lending Services ................................................................................ 39 Annex B6: K e y Economic Indicators ................................................................................................ 41 Annex B7 : K e y Exposure Indicators ................................................................................................. 43 Annex B8: Operations Portfolio (IDA, IFC) ..................................................................................... 44 Annex B9 : CAS Program Matrix-Change from Last CAS ............................................................. 46

EXECUTIVE SUMMARY

1. Bangladesh’s commendable progress on social and economic indicators and toward the Mi l lennium Development Goals (MDGs) has not received sufficient recognition because contentious politics and poor governance have prevented the country f rom achieving i t s full growth potential and poverty reduction objectives. Although Bangladesh’s achievements may seem modest in relation to the magnitude o f the remaining problems, they constitute important building blocks for future development and attest to the country’s potential and the determination o f i t s people. O n the other hand, these achievements run the r i s k o f slippage, and further gains may not be made, unless pol icy and structural reforms are successfully implemented.

2. Board Discussion. The following issues are suggested for Board discussion: . I s the composition o f the FY04-05 program - emphasizing growth, rural development and human development, with cross-cutting emphasis on governance and increasing attention to infrastructure - appropriate to support the implementation o f Bangladesh’s interim poverty reduction strategy? I s the planned shift toward a mix o f instruments, including programmatic lending as wel l as technical assistance, selected investment projects, and analytical and advisory services appropriate to reflect Bangladesh’s recent progress in stabilization and structural reforms? Are the triggers to move to the high case adequate to support the Government’s reform efforts?

. 3. Country Context. Growth has accelerated over the last decades, reaching a high 5.9 percent in FYOO. At the same time, the country’s volatility o f growth has declined, t o the lowest level in the world. Poverty was reduced steadily throughout the 1990s, and data show that even among the very poor there has been substantial income growth and improved nutrition. As a result o f a strong focus on education and enrolment o f girls, Bangladesh has met the MDG target o f eliminating gender disparity in basic education and made good progress towards the MDG o f providing universal education. Importantly, many o f the country’s achievements in education, health and population stand out in cross-country comparisons: Bangladesh i s ahead o f most South Asian countries in primary enrolment and the ratio o f female to male primary pupils; the population growth rate i s lower than in India and Pakistan; infant and under-five mortality rates have experienced the fastest reductions in the developing world, accompanied by considerable improvement in children’s nutritional status and immunization coverage. If present progress continues, Bangladesh and Maldives will be the only South Asian countries to achieve the infant and under-five mortality MDG targets by 2015. Good progress has also been made in improving disaster management capacity and social safety nets.

4. When the last Country Assistance Strategy (CAS) for Bangladesh was discussed by the Board in December 2000, lack o f progress o n reforms and deteriorating macroeconomic management were overshadowing the country’s progress. Decisive actions by the new Government that took office in October 2001 helped to improve the fragile economic situation that resulted fkom these factors and a protracted global economic slow down. The Government also prepared a medium-term reform program to build on the country’s development achievements and to ensure successful implementation o f the national poverty reduction strategy. Preparation o f the latter was revitalized by the Government, which organized nationwide consultations with major stakeholders that culminated in Bangladesh’s Interim Poverty Reduction Strategy Paper (I-PRSP) in March 2003. The Government’s reform commitment, reconfirmed during the Bangladesh Development Forum held recently in Dhaka, has been demonstrated through the progress made already in fiscal management, governance, manufacturing state owned enterprises (SOEs), banking, energy, telecommunications and reducing pollution in Dhaka.

5. One o f the major challenges faced by development partners, including the Bank, i s to support the country in promoting new sources o f growth. Business-as-usual i s insufficient for achieving faster, broad-based economic growth in Bangladesh, more so since key drivers such as agricultural growth (boosted by expansion o f rice production) and export growth (powered almost exclusively by ready- made garments sales) cannot be sustained. Increased analytical and financial support i s required in areas such as infrastructure and power - two o f the most critical constraints affecting the country’s investment climate. Whi le improving the quality o f education and health services remains a priority, other areas are also important: regional water issues, increased vulnerabilities due to climate change, natural resource management and growing urban problems.

6. CAS Implementation. T o help Bangladesh pursue i t s poverty reduction goal, during the last CAS period (FYO1-03), the Bank has supported efforts to accelerate private sector-led growth, promote integrated rural development and consolidate human development gains, whi le emphasizing governance improvement. During FYOl and FY02, IDA lending remained in the l o w level established in the CAS, contributing to Bangladesh’s core poverty program through selected interventions in health, education, rural development and governance improvement that protected and helped make further gains in these areas. Simultaneously, the Bank increased i t s analytical and advisory work, and intensified both i t s engagement with c iv i l society and i t s communication campaign. These efforts contributed to increased public awareness o f the country’s development issues and need for reforms, and helped to improve government’s policymaking and implementation capacity. Bank non-lending services particularly helped the Government to prepare the I-PRSP, articulate i t s reform program, define priority actions, and promote a supportive environment for reforms. In FY03, satisfactory progress on reforms and macroeconomic performance justif ied shifting IDA lending to the base case. Total lending for the CAS period i s expected to reach U S $ l . 15 bil l ion.

7. FY04-05 Country Program. This report outlines the Bank’s strategy until a new CAS i s finalized in tandem with Bangladesh’s PRSP in early FY05. The Bank’s strategy will be l inked to I- PRSP goals and reform program. During FY04-05 it i s envisaged that the country program will start shifting toward a mix of programmatic lending, including Poverty Reduction Support Credits (PRSCs) to be considered in the context o f the PRSP and next CAS, technical assistance, analytical and advisory services, and selective investment projects. The proposed Development Support Credit, the first adjustment operation in Bangladesh since the mid-1 990s, would initiate this shift, complementing a Poverty Reduction and Growth Facil ity (PRGF) arrangement to be considered by the IMF Board on June 20, 2003. In addition, the Bank will support Government efforts to maintain i t s dialogue with c iv i l society and disseminate the reform program to create and sustain public support.

8. Implementation o f the program wil l continue to be based o n partnerships, selectivity and country performance. The lending triggers for the base and high cases al low the Bank an opportunity to support the Government’s efforts in those areas where it i s able to demonstrate substantial progress and where synergies across reform actions can be best exploited. If the Government i s unable to sustain the reform momentum, lending assistance will be reduced to the l o w case, and the Bank’s knowledge business will focus o n deepening understanding o f Bangladesh’s development opportunities, building support for reforms, and supporting the core poverty program.

9. Risks. Implementation o f the CAS during FY04-05 faces several r isks: (i) adverse law and order situation, confrontational politics, and pervasive governance problems; (ii) weak policymalung and implementation capacity within the government; (iii) lack o f private sector confidence; and (iv) vulnerability to adverse economic external shocks and natural disasters. These risks, if not addressed adequately, would slow down progress on reforms and hinder economic growth and poverty reduction. As described in this report, the Bank will help promote feasible measures to mitigate these risks.

.. 11

THE PEOPLE’S REPUBLIC OF BANGLADESH COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

I. INTRODUCTION

1. When the Board discussed the last Country Assistance Strategy (CAS) for Bangladesh on December 12, 2000 - almost ten months before national elections - the country was facing a fiagile economic situation that reflected lack o f progress o n structural reforms, deteriorating macro- economic management, and a weak global economy. During the pre-election period, while lending remained in the l o w case, the Bank expanded i t s analytical work, intensified its engagement with c i v i l society, and implemented a more aggressive communication strategy. These non-lending services have helped to increase public awareness o f the country’s development issues, and to improve govemment’s policymalung and implementation capacity. Drawing extensively o n Bank’s analysis and advice, in particular, the new Government has taken decisive actions to help stabilize the macro-economy, initiate structural reforms, and finalize the country’s Inter im Poverty Reduction Strategy Paper (I-PRSP). I t s init ial reforms in fiscal management, governance, manufacturing state- owned enterprises (SOEs), banking, telecommunications and energy have shown encouraging results and are helping to create momentum for further reforms. Nevertheless, because polit ical and capacity constraints and weak governance make comprehensive reform difficult, overall progress has been uneven. Sustaining and deepening i t s reform effort i s one o f the Government’s major challenges.

2. This report, prepared by IDA and I F C in consultation with MIGA, analyzes the country context in terms o f progress toward achieving the Mi l lennium Development Goals (MDGs) and recent polit ical and economic developments, and reviews progress in CAS implementation. Although a new CAS will not be presented to the Board until early FY05, after the full PRSP has been finalized, the Government’s actions already provide justification in line with the last CAS for the Bank to shift fi-om the l o w to the base case lending scenario. Moreover, to support implementation o f the medium-term reform program articulated in Bangladesh’s I-PRSP, a shift toward programmatic lending to be initiated by the proposed Development Support Credit (DSC) i s envisaged.’ The D S C would complement a Poverty Reduction and Growth Facil ity (PRGF) arrangement to be considered by the IMF Board o n June 20,2003.

11. COUNTRY CONTEXT

A. Bangladesh’s Progress Toward the Millennium Development Goals

3, Bangladesh has made commendable progress on social and economic development indicators and towards the MDGs. During the 199Os, per capita income growth in Bangladesh exceeded the average for l o w and middle-income countries.2 The country’s volati l i ty o f growth was among the lowest in the world, and this, combined with a l o w inflation rate, resulted in a beneficial impact on poverty r e d ~ c t i o n . ~ As living conditions in the country improved, the incidence o f poverty fe l l by about 1 percentage point per year - a pace that compares favorably with i t s South Asian neighbors. By 2000, as Table 1 shows, the percentage o f the poor (those living below the upper

The documents for the Development Support Credit and the Joint Staff Assessment o f the I-PRSP have been distributed to the

Data for this section are derived primari ly from Poverty in Bangladesh: Building on Progress (2002), the latest poverty

Between 198 1 and 2000, Bangladesh had a volatility o f growth o f 1.1 (measured by the standard deviation o f annual GDP), the

Board together with th i s CAS Progress Report. An effort has been made to minimize repetition between these documents.

assessment for the country carried out by the Bank and ADB.

lowest in South Asia. Both India and Pakistan showed a volatility o f 2 and Sri Lanka o f 1.4.

poverty line) fe l l to 50 percent and o f the very poor (below the lower poverty line) to 34 percent4 Although the poverty rate remains high, data show that even among the very poor there has been significant income growth and improved nutrition over the decadeU5 N o t only was food security maintained even during major natural disasters such as the 1998 floods, but the response to the floods also indicated an increased resilience o f the poor to crisis and, in general, an enhanced disaster management capacity in the country.

Table 1 - Progress on Poverty Reduction and Human Development

National Poverty Rate % o f pop. below upper poverty line

Rural Poverty Rate % o f pop. below upper poverty line 61.2

lower oovertv line 46.0 37.4 Urban Poverty Rate % o f pop. below upper poverty line

) lower p overty line National Gini Coefficient 0.259 0.306 Prevalence o f Chi ld Malnutrition (% o f 65.8 47.7 children under 5 Net Primary Enrolment (“h relevant age

65

60

55

50

45 National

40

35

30 1963-84 1991-92 2000

Upper Poverty Line

group) 50

45

Youth Literacy Rate (%ages 15-24) 43.6 50.7 40

Net Secondary Enrolment (“h relevant age ... 42.7 group)

Ratio o f Girls to Boys in Primary and 72.5 95.2 35

45 - - - IC .

Youth group) Literacy Rate (%ages 15-24) 43.6 50.7 40 j r-\wai Ratio o f Girls to Boys in Primary and 72.5 95.2 35 Secondary Education (%) Ratio o f Youth Literate Females to Males (% 59.1 65.4 ages 15-24) Under 5 Mortal i ty Rate (per 1,000) 136.0 82.6 Infant Mortal i ty Rate (per 1,000 l ive births) 90.6 60.0 Source: Wor ld Bank, Poverty in Bangladesh: Bui lding on Progress, and MDG Website. (Data for poverty rates cover the period between 1991192 and 2000). Lower Poverty Line

4. Greater achievements in human development than in income poverty reduction characterize Bangladesh’s progress toward the MDGs. Despite extremely unfavorable starting conditions, the country’s Human Development Index (HDI), which reflects income and non-income dimensions o f poverty, increased from 0.234 in 1980 to 0.485 in 1998/99. In many respects, Bangladesh’s progress on human development stands out in cross-country comparisons, particularly at the regional level. Among other achievements, Bangladesh i s ahead o f most South Asian countries in primary enrollment and the ratio o f female to male primary pupils, and after Sr i Lanka, it has been the most successful in reducing infant mortality. Overall l i fe expectancy i s n o w around 61 years, which i s close to the regional average (62 years) and better than the average for l o w income countries (59 years). Bangladesh’s encouraging progress at relatively l o w levels o f per capita income i s attributable to the sustained investment - supported by development partners - to social sectors and the continuity o f efforts by both government and c iv i l society.

The incidence o f poverty is measured by the Bangladesh Bureau of Statistics (BBS) as the share o f the population with monthly per capita consumption (including food and non-food goods) below a predefined poverty line. The same allowance for basic food items is assumed for both the upper and lower poverty lines. However, the lower l ine incorporates a minimal allowance for non- food goods, while the upper l ine makes a somewhat more generous additional allowance.

Between 1991 and 2000, the per capita consumption o f fish increased b y 9 percent, meat by 49 percent, poultry b y 120 percent and milk b y 55 percent. Broadening o f the food basket occurred across al l income groups in both rural and urban areas.

2

5. As a result of a strong focus on education and enrolment o f girls, the country has met the MDG target of eliminating gender disparity in basic education and made good progress toward the MDG of providing universal education. Along with increased budgetary allocations, the implementation o f such special programs as food-for-education (FFE), non-formal primary education (NFPE), and total literacy movement (TLM), as wel l as partnerships with NGOs, significantly expanded access in the 1990s to basic and elementary education. Rapid expansion (47 percent in the last decade) in primary school enrollments underpins the advances made in basic education and in raising the participation o f the poor in education to 70 percent. Progress in girls’ education particularly stands out: the proportion o f girls enrolled at the primary level increased from 37 percent in 1980 to virtual parity with boys (49 percent) in 1999. Educational quality, however, i s a serious concern. Primary-school gross enrollments are close to 100 percent, but the primary cycle completion rate stands at 67 percent and competency levels o f school graduates remain low. At the secondary level, less than 40 percent o f tenth-grade students regularly finish high school.

6. Achievements related to health and population outcomes have been significant, although progress has slowed in certain areas. A successful family planning program helped to halve the population growth rate to 1.5 percent between the early 1970s and 2000. The reduction in the total ferti l i ty rate to 3.3 puts Bangladesh ahead o f Palustan, Nepal, and many other low-income countries in population growth control, but reducing the rate further has been diff icult due to both supply and demand-side factors. The current maternal mortality rate, estimated at 3.2 per 1,000 l ive births, while s t i l l high, represents a considerable improvement over the 5.4 level o f the early 1990s. Infant and under-five mortality rates have also shown significant declines over the last two decades, and at 60.0 and 82.6 per 1,000 births respectively, are lower than in India, Pakistan, and Nepal. Anthropometrical data show that the nutritional status o f women and children has also improved, a significant development considering that Bangladesh has one o f the highest rates o f maternal and chi ld protein energy malnutrition. Annual surveys o f immunization show a steady upward trend over the past decade, putting Bangladesh ahead o f India and Palustan. Progress in health outcomes i s in fact associated with effective immunization programs, substantial advances in preventing cholera and malaria, and near elimination o f pol io and leprosy. In addition, some progress has been made in dealing with tuberculosis, which affects the poor overwhelmingly, through the DOTS-based National Tuberculosis Program.6 Further progress could be made by extending treatment through a l l hospitals, private providers and community groups.

7. Alongside good progress in health, nutrition, and population indicators, however, large differences exist across income groups and between genders. In 2000, the poorest 40 percent o f households had an infant mortality rate o f about 92 per 1,000 l ive births, whi le the wealthiest 20 percent had a rate of 57 per 1,000. There were similar disparities in the under-five mortality rate (130 per 1,000 among the poorest 40 percent o f households versus 74 per 1,000 among the richest 20 percent), the percentage o f children severely underweight (1 7 percent versus 5 percent, respectively), the percentage o f mothers with l o w body mass index (54 percent versus 20 percent, respectively), and the total ferti l i ty rate (3.8 versus 2.5, respectively). Important gender disparities also skew health indicators to the point that Bangladesh i s one o f the few countries were the biological advantage o f women in survival has been reversed and i s among the highest in the wor ld in terms o f violence against women. More details about Bangladesh’s achievements and challenges with respect to the MDGs are provided in Appendix 1.

DOTS (Direct Observed Therapy-Short Course) is the modem approach to treating tuberculosis.

3

B. Bangladesh’s Poverty Reduction Strategy

8. Further progress on the MDGs will depend on the successful implementation o f Bangladesh’s strategy for reducing poverty substantially within the next generation. The I- PRSP was completed in March 2003 after several stages o f nationwide consultations with c iv i l society, NGOs, and central and local govemment officials; as wel l as discussions with development partners. The goals and targets o f the I-PRSP (see B o x 1) were selected talung into consideration the MDGs and country-specific aspirations.’ Recognizing that accelerated growth and further investments in human development are essential for poverty reduction, the I-PRSP calls for concerted efforts to identify new sources o f economic growth and social development, and establishes f ive interrelated pillars: (a) acceleration o f pro-poor growth; (b) improvements in governance; (c) investment in human development; (c) women’s advancement; and (d) ensuring social protection. From an operational perspective, the strategy paper will f o rm the core o f a Three- Year Rol l ing Plan (TYRP), itself the basis for the annual budget.

9. The I-PRSP recognizes that the proportion o f the poor cannot be halved by 2015 without accelerating and broadening economic growth. To meet the income-poverty reduction target, the national strategy aims at accelerating economic growth f rom 5 to 6-7 percent a year and distributing growth more broadly. T o achieve these goals, new approaches wil l be required, since the contributions o f some o f the factors underlying recent economic growth - especially agricultural and export growth - cannot be sustained. Expanding rice production has been the primary engine o f recent higher agricultural growth, but with the declining profitabil ity o f rice farming, reliance on the crop i s l ike ly to bring diminishing future dividends. Similarly, export growth has been powered almost exclusively by sales o f ready- made garments (RMG), but this sector will l ike ly suffer as the Multi-Fiber Agreement i s phased out.

Box 1: Bangladesh I-PRSP - National Development Goals for 2015

Eradicate hunger, chronic food insecurity, and extreme destitution . Reduce the number o f people l iv ing below the poverty line by 50 per cent . Attain universal primary education for al l girls and boys o f primary school age

m Eliminate gender disparity in primary and secondary education . Reduce infant and under f ive mortality rates by 65 per cent, and eliminate gender disparity in chi ld mortality . Reduce the proportion o f malnourished children under five by 50 per cent and eliminate gender disparity in chi ld malnutrition Reduce maternal mortality rate by 75 per cent . Ensure access o f reproductive health services to a l l . Reduce substantially, i f not eliminate totally, social violence against the poor and the disadvantaged groups, especially violence against women and children

1 Ensure comprehensive disaster risk management, environmental sustainability and mainstreaming o f these concerns in to the national development process.

10. An important issue for Bangladesh i s that the responsiveness o f poverty reduction to growth has fallen since the mid-l980s, due in part to rising inequality. Between 1984 and 2000, income/consumption distribution worsened in Bangladesh. The national Gini coefficient, for instance, increased from 0.26 in 1984 to 0.31 in 2000.* At the same time, further efforts to reduce population growth are required, particularly since the total ferti l i ty rate has plateaued at around 3.3. Under these circumstances, to meet the MDG poverty reduction target, the country will need to reduce poverty by another 20 percentage points during a period when the population i s projected to increase from the current 128 to more than 165 mi l l ion.

’ Government o f Bangladesh, A National Strategy for Economic Growth, Poverty Reduction and Social Development. See the Joint Staff Assessment of Bangladesh’s I-PRSP for more detailed discussion o n the strategy, goals and targets.

Despite this increase, it must be noted that Bangladesh has the lowest Gini coefficient in South Asia region.

4

11. T o meet the country's goals, the I-PRSP also recognizes the need to improve equity, efficiency, and the quality of services provided, particularly in health and education. The strategy paper acknowledges that past achievements run the risk o f slippage, whi le new public health concems and environmental damage pose new challenges. As noted earlier, socioeconomic and gender inequalities in several critical indicators such as mortality and malnutrit ion also demand urgent attention. A key issue hindering progress i s that poor govemance i s affecting the quality o f social service delivery, especially to the poor. In several recent surveys, education and health were perceived to be among the most corrupt sectors in Bang lade~h .~ The I-PRSP recognizes this problem and establishes good govemance, transparency and accountability as a precondition for overall success. I t also includes a mix o f pol icy instruments promoting a balance between private initiatives, public action and community mobilization.

12. According to the Joint Staff Assessment (JSA), the I-PRSP constitutes a cohesive policy framework for increasing growth and reducing poverty. The JSA highlights the poverty diagnostics and the medium-term macro-fi-amework (MTMF) as strong areas o f the I-PRSP, and notes the appropriate emphasis given to human development. The poverty diagnostic draws upon a r i ch information database, explores multiple dimensions o f poverty, and makes a good assessment o f progress over time. The MTMF incorporates principles o f fiscal prudence and sustained macroeconomic stability. The JSA also points out several areas to be strengthened during the preparation o f the PRSP: full articulation o f capacity constraints and resource needs for effective implementation of the national strategy; a more cohesive human development strategy with a rigorous prioritization o f public spending and a fuller articulation o f public-private partnership focused o n achieving MDG goals; and articulation o f a private sector development strategy. Additional broad-based consultations o n the revised national strategy, including, among others, parliament and opposition groups, are expected to take place, parallel to the init iation o f the poverty and social impact assessment (PSIA) o f reforms and the implementation o f monitoring mechanisms for social development.

13. Policy dialogue with the IMF and the Bank has assisted the Government in developing a medium-term reform program that seeks to create the enabling conditions for implementing the poverty reduction strategy. In carrying out i t s reform program, the Government's approach has been to launch an init ial set o f reforms for which there i s broad consensus, anticipating that quick returns will create momentum and public support for subsequent measures. Good in i t ia l progress has been achieved in several areas, including fiscal management, banking, manufacturing SOEs, telecommunications, and energy. lo An encouraging start has also been made toward improving govemance, but many challenges remain.

C. Recent Political and Economic Developments

Political Developments

14. A new Government, a four-party alliance led b y the Bangladesh Nationalist Party (BNP)," took office in October 2001 committed to reforms and with a two-thirds majority in parliament. After f ive years in opposition, the BNP i s n o w in power for the second time since the restoration o f parliamentary democracy in 199 1. During i t s previous term, the BNP initiated a series of reforms building upon the progress made in the 1980s and has n o w reasserted i t s commitment to

These include surveys conducted b y Transparency International and by development partners, including the Bank, and NGOs. lo Progress on reforms is discussed in Section 111. Further details are given in the Program Document o f the proposed Development Support Credit presented to the Board with this CAS Progress Report. I' B N P i s one o f the country's two main pol i t ical parties. The other parties in the BNP-led coalition are the Jamaat-e-Islam, Islamic Oikya Jote, and Jatiya Dal.

improving govemance and the investment climate, and to accelerating economic growth and poverty reduction.

15. The Government’s significant parliamentary majority increases its prospects of mobilizing support for structural reforms, although the overall political environment remains difficult. The Government’s large majority reflects the arithmetic o f coalition politics, rather than a significant shift in party shares o f the vote. Whi le reform champions continue to take advantage o f opportunities and to build consensus to deepen the reform effort, pockets o f resistance remain even within the government coalition. Confrontational politics continues, and the ma in parties tend not to cooperate with each other. The country’s complex bureaucratic structure and patron-client polit ical culture also make reform difficult. Importantly, law and order i s s t i l l cause for concern. Some recent Government measures have raised human rights concerns, and a sustainable, long-term solution to the law and order situation has yet to be defined.

Economic Developments”

16. Although Bangladesh experienced relatively strong economic growth o f around 5 percent during the late 1990s, macroeconomic balances deteriorated. As Table 2 indicates, the consolidated fiscal deficit increased from 4.4 percent in FY98 to 6.5 percent o f GDP in FYOO, and remained at around 6 percent in FYOl . At the same time, the central government deficit remained at 5.1 percent o f GDP. There was monetary accommodation, with credit to the central government as wel l as to SOEs growing at around 20 percent in FYOO and FYO1. As a ratio o f GDP, the government’s domestic debt increased from 10 percent in FY98 to 15 percent in FYO1. The high fiscal deficit, combined with an inefficient financial system, kept lending rates high. This pattern, together with a global economic slow-down and the continued high cost o f doing business, contributed to Bangladesh’s economic growth rate dropping f rom 5.9 percent in FYOO to 5.2 percent in FYOl and further to 4.4 percent in FY02. Inflation remained relatively low, but official foreign exchange reserves declined steadily, falling f rom US$2.3 b i l l ion in FYOO to close to US$1 bi l l ion in early FY02, as a result o f declining aid disbursements and the doubling o f the current account deficit f rom less than 1 percent o f GDP in FYOO to 2.2 percent in FYO 1. The latter trend reflected a surge in imports in FYOl due to fiscal pressures f rom an oversized public development program, a slow- down in export growth, and rising foreign exchange payments o n account o f power purchase agreements, production sharing contracts, and costly suppliers’ credits.

17. Inheriting a fragile macroeconomic situation in an uncertain global environment, the new Government took early actions that helped contain the FY02 fiscal deficit and its domestic financing. The fiscal adjustments included cuts in both current and development expenditures, significant adjustments in administered utility prices, and intensified efforts to broaden the tax base and improve tax compliance. As Table 2 shows, these measures helped reduce the consolidated fiscal deficit to 5.3 percent o f GDP and the central government deficit to 4.7 percent in FY02. Moreover, domestic financing was cut, monetary accommodation o f the fiscal deficit was significantly contained, and the composition o f domestic financing shifted f rom monetary to non-monetary sources. Fiscal performance during FY03 has continued to be satisfactory. At the end o f FY03, the consolidated fiscal deficit i s projected to decline to 4.6, the central government deficit to 4.2 percent, and domestic financing to 1.9 percent o f GDP.

~~

The Program Document for the proposed Development Support Credit includes a comprehensive discussion o f recent economic 12

developments and actions taken by the Government, and the country’s economic medium-term outlook.

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Table 2: Economic Trends at a Glance Actual Projected

Real GDP Growth 5.4 5.2 4.9 5.9 5.2 4.4 Inflation (CPI) 2.5 7.0 8.9 3.5 1.6 2.4 Monetary Growth (M2) 11.0 10.0 12.8 18.6 16.6 13.1

Exports 12.0 13.3 13.2 14.0 15.4 14.3 Imports 18.1 18.3 18.7 19.2 21.5 19.3

Total Revenues 9.2 9.3 9.0 8.5 9.0 10.2 Total Expenditures 13.5 13.3 13.8 14.7 14.1 14.8

Percent o f GDP

Current Account Balance -2.1 -1.2 -1.4 -0.9 -2.2 0.6

Central Gov. Deficit -4.3 -4.1 -4.8 -6.2 -5.1 -4.7 Domestic Financing 1.5 1.6 2.4 3.7 3.1 2.6 Consolidated Fiscal Deficit .. -4.4 -5.7 -6.5 -5.9 -5.3

18. Government’s decisive actions also helped to maintain a reasonable balance-of- payments outlook, despite challenging circumstances during FY02 due to a global slow-down accentuated by the events o f September 11,2001. The Government managed to reduce the annual development p lan (ADP) - thus helping dampen import levels - and to improve the efficiency and speed o f workers’ remittance transfers, which increased by 3 3 percent. Notwithstanding a 7.6 percent decline in merchandise export earnings, Bangladesh achieved an extemal current account surplus equivalent to 0.6 percent o f GDP in FY02. Off ic ia l foreign exchange reserves grew to US$1.7 b i l l ion by the end of 2002 and have remained around this level, sufficient to finance about two months o f merchandise imports.

5.2 5.5 6.0 5.2 4.5 4.0

12.5 12.1 12.8

11.8 11.8 11.8 15.9 17.4 17.2

10.4 10.9 11.4 14.5 15.7 16.1 -4.2 -4.8 -4.7 1.9 2.0 1.9

-4.6 -5.1 -4.9

0.4 -1.3 -1.6

19. Medium-term economic prospects are relatively good, but Bangladesh faces several vulnerabilities. Driven by agricultural production and export growth, GDP growth in FY03 i s expected to rise to an estimated 5.2 percent (see Table 2). Although inflation could rise to more than 5 percent by the end o f FY03, this would reflect mainly the lagged effects o f energy price adjustments. Future growth, expected to reach 5.5 percent in FY04, will depend on how Bangladesh manages several challenges: the recent increase in reserves i s encouraging, but reserve levels are s t i l l insufficient given the country’s vulnerability to natural disasters, external shocks, and i ts excessive dependence on garment exports, coupled with the possibility o f losing market share fo l lowing the MFA phase-out in 2005. Whi le the situation in the Middle-East has not had significant economic repercussions in the country, the decline in export prices experienced during the last year and a hal f does not appear to have bottomed out, and the remittance boom which helped offset the decline in export earnings due to export price decreases i s unlikely to last.

111. PROGRESS IN CAS IMPLEMENTATION

20. T o help Bangladesh pursue its poverty reduction goal, the Bank has supported efforts to accelerate private sector-led growth, promote integrated rural development and consolidate human development gains, while emphasizing governance improvement. Progress toward longer-term outcomes in each area i s discussed below, and more details are presented in Annex B 9 (CAS Program Matrix). As anticipated in the CAS, progress o n governance, pol icy and structural reforms was limited during the general elections period. The Bank’s knowledge business was

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accordingly advanced by stepping up non-lending services, while lending remained at the l o w case level and focused on a core poverty program devoted primarily to health, education, and rural development. By increasing i t s analytical work and intensifying both i t s engagement with c iv i l society and i t s communication campaign, the Bank has contributed to greater popular awareness o f the need for reforms and to improved policymalung and implementation capacity. More specifically, as discussed in Section I V (paragraphs 62-65), non-lending assistance helped the new government to finalize the country’s I-PRSP; articulate a medium-term reform program; define priority actions for the program’s f i r s t phase in key areas such as fiscal management, banking, SOEs, energy and governance; and promote a supportive environment for reforms.

A. Accelerating Private Sector-Led Growth

21. The Bank’s assistance supported the Government’s goal of improving the investment climate and the related longer-term objectives of ensuring macroeconomic stability, strengthening the financial sector, and removing infrastructure constraints. Worlung closely with the Bank and the IMF, the Government made good progress in restoring and sustaining macroeconomic stability and in preparing a medium-term macroeconomic framework that provides adequately for the maintenance o f sustainable fiscal deficits and promotes economic gr0~th.l~ Bank analysis and advice, including pol icy briefs prepared in FYOl and a Public Expenditure Review (PER) completed in FY02, helped to in form the Government’s init ial actions. Technical assistance lending i s planned in FY04 to support further efforts to strengthen macroeconomic management.

22. With Bank and IMF assistance, the Government has made progress toward the longer- term objective of establishing an efficient financial sector. As part o f the Bank-Fund Financial Sector Assessment Program (FSAP), in late 2002 the two institutions assisted the Government in evaluating the

Box 2 - Progress on Anti-Money Laundering (AML)/Combating the Financing o f

Terrorism (CFT)

Bangladesh passed an Anti-Money Laundering L a w in April 2002, providing the legal basis for criminalization o f money laundering and the establishment o f a regime to address this problem. Based on the law, the Bangladesh Bank prescribed AML surveillance processes.

The law, however, is missing several AMLKFT essentials such as definition for CFT, protection of informants, and powers o f the financial intelligence unit (FIU) to disseminate information. Due to weaknesses in the l a w together with lack of institutional capacity, sk i l l and resources, the country falls short in meeting intemational AML/CFT requirements.

As recommended in the FSAP report, the Government should amend the l aw and start i t s implementation by issuing regulations and detailed guidelines, and setting up a FIU and appropriate systems to monitor AML/CFT and to design reports, among other things. The Government has recognized the urgent need for extemal assistance in addressing these issues.

strengths, potential vulnerabilities and key development opportunities in the country’s financial system. Drawing on the FSAP report and previous Bank analysis, as wel l as the recommendations o f the Banlung Reform Commission, the Govemment has taken in i t ia l steps to ensure that the Bangladesh Bank will be able to function effectively as the country’s monetary authority and bank regulator and to take the lead in implementing financial sector reform. The proposed Development Support Credit (DSC) supports some o f these actions, as wel l as others to initiate a program to deal with the problems faced by the Nationalized Commercial Banks (NCBs). IDA lending for technical assistance (FY03), complemented by WBI training support, will help the Government continue i t s efforts to strengthen Bangladesh Bank’s capacity.

23. Simultaneously, the Government has initiated reforms in the SOE sector to reduce public participation in manufacturing, SOE losses, and reliance on ADP financing. In March 2002 the Cabinet approved a new Privatization Policy, which the Bank helped review, clarifying the

l3 Details on the medium term macro-economic framework are provided in the JSNI-PRSP and the DSC documents.

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Government’s objectives and approach to privatization. An Industrial Policy to reinforce the privatization process i s also under discussion. In l ine with the Privatization Policy, the Government i s advancing i ts efforts to close or privatize a large number o f SOEs, which would be assisted by the Bank through the DSC. One o f the most critical steps taken thus far has been the closing o f Adamjee Jute Mills (AJM), the co~n t ry ’ s largest factory and reportedly also the world’s largest jute factory. The Government has also closed other public enterprises, reducing employment and aggregate losses in manufacturing SOEs by about 25 and 41 percent, re~pec t i ve l y . ’~ Further Bank support will be provided as the Government continues i t s effort to withdraw f rom the manufacturing sector and to restructure the entire SOE sector.

24. The social impact of SOE closures has so far been dealt with adequately. The Government engaged labor representatives in extensive discussions before initiating the SOE restructuring program, and negotiated successfully the terms o f closure o f AJM with the workers and their unions. Wh i le the legal minimum gratuity required under the labor code i s one month’s salary per year o f service, the negotiated severance package was more generous: two months salary for every year o f service, plus a redundancy payment ranging f rom 13 to 27 percent, depending on length o f ~ e r v i c e . ’ ~ The payment procedures established (issuing o f “accounts payee only” checks or direct deposit o f payment into worker’s bank accounts) have minimized corruption, including the payment o f bribes in exchange for receiving retrenchment benefits.

25. The reform agenda for the energy sector i s large, but the Government has undertaken several encouraging actions. These actions are aimed at strengthening sectoral policymalung and reform implementation capacity, restoring the sector’s financial viability, expanding access to energy services, and improving sector governance. Specifically, based o n an Energy Regulatory Commission A c t passed in March 2003, an independent Commission will be established soon to review compliance with pricing policies and monitor sector enterprises’ performance. With Bank analysis and advice, the Government i s also drafting an Energy Pricing Framework to set and adjust electricity, gas, and petroleum product prices in a transparent manner, and i s developing a three-year road map for the power sector to expand coverage and enhance service quality. The Government has also made progress in completing the transfer o f a l l transmission assets to the Power Grid Company o f Bangladesh (an independent entity established in 1996), continuing the unbundling o f the vertically integrated Bangladesh Power Development Board (BPDB) to improve governance and efficiency, and attracting several private power producers o n competitive terms. In addition, the Government adjusted power tariffs twice during 2002. Actions over the last two years have resulted in a measurable improvement in the reliability o f electricity supply, a sustained reduction in system losses from 35 to 30 percent (as a percent o f total generation), and improvement in revenue collection f rom 60 to 70 percent (as a percent o f generated electricity). By contrast, achievements in the o i l and gas sectors have been less pronounced. Reaching national consensus on a development strategy for the gas sector remains a critical challenge, especially given the sensitive polit ical issues surrounding gas exports.

26. The Government has demonstrated i t s willingness to implement reforms in the telecommunications sector, opening the way for Bank Group assistance. After several years o f engagement with the Bank and other development partners, the Government has taken several steps to advance sector reform. In particular, the Government made the Bangladesh Telecommunications Regulatory Commission (BTRC) operational in January 2002, in accordance with the 2001 Telecommunications Act, and announced a National Information and Communication Technology

l4 About 40,000 workers have been laid off, o f which close to 25,000 worked in AJM. The average severance pay received by blue collar workers i s about Tk.100,OOO-125,000 (US$1,750-2,200), equivalent to about

3 years’ earnings for an unskilled worker in the informal sector. A survey o f laid-off AJM workers and their fami l ies i s being carried out to assess the effects o f SOE restructuring and further refine mitigation measures.

9

(ICT) Policy in September 2002. Building o n this progress, the Government, with IDA-financed technical assistance (FY03), will further strengthen BTRC’s capacity to promote fair competition in the sector, initiate the restructuring o f Bangladesh Telegraph and Telephone Board (BTTB) to separate the Government’s policy and operational roles, and open the sector to greater private sector participation. Bank support complements assistance being provided by other development partners such as CIDA, DFID and PPIAF.

27. Good progress has been made in improving transport infrastructure, particularly in the road sector. With substantial assistance from development partners, including the Bank and ADB, the country’s main road network has been substantially improved f rom 29 percent o f roads in good condition in 1990 to 69 percent in 2000. As a result, travel time and vehicle operating costs have seen large declines. The improvements consisted largely o f rehabilitating existing roads that had been inadequately maintained. T o break the road deterioration and rehabilitation cycle, the Government i s preparing, with assistance from the Bank and DFID, a sequenced reform program to establish a sustainable financing arrangement for road maintenance, improve the efficiency o f public sector investments, and redirect the focus o f the Roads and Highways Department (RHD) from construction to maintenance and operation o f the main road network. Since transport investment i s the country’s largest capital expenditure, resolution o f these issues has added significance.

28. Inefficiencies in port operations and lack of modern multimodal transport operations continue to be a major impediment to Bangladesh’s competitiveness and private sector-led growth. The Patenga Container Terminal project was proposed as a public-private development partnership but experienced many delays due to various factors, including opposition by the Chittagong port labor union and other vested interests, and has recently been blocked by the courts. Some recent actions by the Ministry o f Shipping aimed at involv ing the private sector in financing and management of port and inland water transport sub-sectors are nevertheless encouraging, and the Bank has been conducting pol icy dialogue with the Ministry o n ways to move the reform process forward. One o f the most critical issues i s the adoption o f a clear pol icy to address labor issues. As i t s results are disseminated during FY04, the Country Framework Report for Private Participation in Infrastructure’6 will help advance dialogue o n ways to address constraints in port services, in addition to options to expand the quality and quantity o f other infrastructure services in Bangladesh.

29. Efforts to diversify Bangladesh’s export base and to promote trade integration have complemented progress in improving the investment climate. The Government has made progress regarding overall tar i f f and customs reforms, supported by Bank lending and non-lending services. Through the Export Diversification Project, the Bank i s assisting in product and market development, protection analysis and trade cooperation, export competitiveness, and modernization o f customs administration. Under the same operation, the Government i s developing a strategy to help Bangladesh’s garment and textile industry remain competitive in the post-MFA context. With regard to non-lending services, the Investment Climate Assessment carried out in FY03 helped to identify key areas affecting investment and the cost o f doing business in the country; and to establish international benchmarks for key processing times, costs, and productivity measures. The Government will apply the study’s findings and pol icy recommendations in F Y 0 4 in designing an IDA-financed operation to promote export development and competitiveness. At the same time, the Bank will help carry out a major study on trade, building o n a recently completed regional initiative.

30. Support to small and medium enterprises (SMEs) has been strengthened by the establishment in Dhaka of an IFC-sponsored and managed regional facility in 2002. Technical assistance i s focusing o n access to finance and business development services and o n improving the

l6 The report was completed by the Bank in FY03, with support from the Public-Private Infrastructure Advisory Facility (PPIAF).

10

business environment, linkages, and sustainability. The facility, funded also by DFID and the Netherlands,” i s supporting other IFC activities, such as technical assistance to banks participating in the Bangladesh Trade Enhancement Facility, and i s pursuing SME linkage programs in connection with IFC investments (e.g., Lafarge Surma Cement and RAK Ceramics). To complement the facility’s technical assistance activities, IFC plans to work with the financial sector to expand financing for SMEs.

B. Supporting an Integrated Approach to Rural Development

3 1. The Bank has supported an integrated approach to rural development to help increase rural employment and incomes by making opportunities and assets available to poor households and improving access to rural infrastructure and social services. T o sustain progress in these areas, the Bank has promoted effective water resource management and disaster- vulnerability reduction, and brought attention to increasing vulnerability due to climate change. In addition to lending, the Bank along with DFID i s assisting the Government’s efforts to spur rural growth, and stimulate the private sector in rural areas, through major analytical work o n critical issues such as constraints to agricultural growth, options to promote the rural non-farm sector, and linkages between agriculture and rural non-farm activities. The f i rst phase o f this work, focusing on the poverty impact o f agriculture sector growth was completed in early FY03. The assessment o f the rural non-farm sector i s underway.

32. The Government has sought to promote social capital and household asset formation, often through innovative community-driven development (CDD) approaches. Among efforts supported by the Bank and other development partners to help increase incomes and assets, the first IDA-financed Microfinance Project exceeded i t s target o f total borrowers by 75 percent, reaching 2.1 mi l l ion people, 90 percent o f whom were women.” Building o n this success, the Bank i s supporting a second Microfinance Project, as wel l as a small project testing alternative delivery models to extend microfinance services to the poorest, hardest-to-reach households. Income-generating opportunities for the rural poor have also resulted f rom Bank and DFID support to fisheries sector development (currently the most dynamic sub-sector in agriculture), silk development efforts, and export promotion for high-value horticulture produce. The Bank has also been assisting the Government in implementing community-driven development initiatives aimed at delivering social assistance and infrastructure assets to the poor. Under the pi lot Social Investment Program (FY03) in particular, direct financing will be provided to community groups to implement technically feasible, simple, labor-intensive infrastructure projects that communities can easily maintain and operate. Based o n the experience o f the pilot, the Government, with continued Bank support, plans to scale up the CDD approach.

33. Progress in social and economic rural development has been facilitated by increased access to basic infrastructure for the rural poor. The Government, with IDA financing, has implemented two consecutive rural road and market improvement projects, which have been positively evaluated by the Operations and Evaluation Department (OED). Recent studies by the Bangladesh Institute o f Development Studies (BIDS) show that these projects have helped increase the marketing o f agricultural products and the revenues o f farmers with improved access. In addition, the employment rate, particularly among women, has increased in project areas. Beyond the immediate employment impact o n agriculture, the B I D S study indicates that land-poor workers have diversified their employment to nonagricultural activities such as transport, trade, and service^.'^

In addition, EC, CIDA, NORAD and ADB are expected to come in shortly as donors. Implementation Completion Report for a Poverty Alleviation Microfinance Project (World Bank, 2001). Implementation Completion Report for the Second Rural Roads & Markets Improvement Project (World Bank, 2002)

11

Moreover, rural roads projects have promoted labor-intensive technology that has generated employment fo r destitute women, and helped to make infrastructure maintenance more affordable and sustainable. To enhance the impact o f rural infrastructure investments, the Government plans to address crit ical sector policy issues with Bank support. These include, improving resource allocation at the central level; improving resource mobilization, tertiary road planning, and management capacity at the local level; and eliminating the duplication o f responsibilities among central and local government agencies for feeder and local roads.

34. I n addition to roads and markets, the Government has expanded access to electricity in rural areas. Over the next f ive years, with IDA financing, at least 700,000 rural households will be provided with electricity by independent consumer-owned cooperatives (PaZZi Bidyut Samity, or PBSs) that have been managing the rural electricity system and successfully providing services. Bank assistance i s also helping the Government rationalize the country’s distribution systems, enabling the transfer o f a considerable portion o f the rural service areas f rom the less efficient Bangladesh Power Development Board (BPDB) to the Rural Electrification Board (REB) - the apex organization o f the PBSs. Simultaneously, the Bank and the Global Environment Facil ity (GEF) are also helping Bangladesh develop renewable energy options with the involvement o f NGOs and private sector operators.

35. The Government has also initiated an integrated, multi-sector water management approach based on institutional reform, enhanced community participation and close attention to the environmental and social dimensions of flood control and drainage schemes. T h e National Water Management Plan prepared under the IDA-financed River Bank Protection Project has identified broad institutional and policy issues. Together with the Guidelines for Participatory Water Management and the revised Bangladesh Water Development Board (BWDB) Act, the plan provides an appropriate pol icy framework for reform over the next f ive to eight years. Within this framework, the Bank and the Government o f the Netherlands have been helping sector institutions, especially the BWDB and the Water Resources Planning Organization (WARPO), to develop restructuring plans to improve their operational and organizational capacity. These plans include key actions related to organizational leadership, human resources, procurement, financial management, and operation and maintenance. BWDB, in particular, has begun to change f rom a centrally controlled infrastructure development organization into a decentralized service agency, managing the country’s water resources in partnership with water management groups. Provided that BWDB continues to implement i t s institutional reform program satisfactorily, the Bank expects to provide financial support to the water management reform efforts in the near future. To complement efforts to improve water sector management, the Bank plans to provide lending and non-lending assistance, in coordination with development partners, to promote integrated coastal resource management in the country.

C. Consolidating Gains in Human Development

36. The Bank has helped Bangladesh to consolidate gains and make further progress in human development outcomes, focusing on existing challenges and new public health concerns such as HIV/AIDS and arsenic poisoning. Substantial analytical work has been carried out on the systemic problems affecting the quality o f service delivery and equity o f access in education and health - areas where polit ical will i s required to implement fundamental governance reforms. Analytical work also includes a major report o n health service financing (FYO1) and benefit incidence analysis o f public expenditures in health and education carried out as part o f the Poverty Assessment (FY02). Results f rom the Bank’s efforts helped to shape the human development agenda o f the I-PRSP. During FY03, analytical work i s helping to identify pol icy options for public-private partnerships to expand and improve provision o f health services. With regard to the arsenic-related

12

public health challenge, a major report was completed in FYOl to assist the Government in developing policies and strategies, and development partners in determining the extent and nature o f external support required in this respect.

37. The Government has been developing a medium-term reform framework for the education sector, informed in part by the Bank’s analytical work and advice. IDA lending will help the Government implement i t s reform program, which i s centered o n improving governance and has three key strategic objectives: increasing the accountability o f schools to both the government and communities, improving teacher quality, and increasing the quality and availability o f textbooks. A proposed FY04 sector adjustment operation (Education Sector Development Support Credit) will support reforms to improve equity o f access and raise the quality and cost-effectiveness o f service delivery. By changing incentives for the financing and provision o f education, these reforms wil l reduce rent-seeking opportunities, which have resulted in the proliferation o f poor ly performing private schools and colleges, while limiting access to education in poor and remote areas. At the same time, the Bank expects to participate in a large multi-donor supported second national primary education program, which building o n experience with the f irst phase, will adopt a more programmatic approach and focus more directly on improving the quality o f education. Importantly, development partners supporting the program are attempting to fo l low a harmonized approach based o n government rather than on their own procedures. Through this program, Bangladesh could thus offer to the international community a best practice example o f ways to harmonize government and donor procedures to scale up an intervention critical to growth and poverty reduction.

38. Overall, the Government’s efforts, with support from the Bank and other development partners, have shown good results in basic education, gender parity in schools, and literacy. Sustained investment in basic education has helped to ensure progress o n the MDGs and has reinforced the country’s commitment to Education for All. Through i t s reform dialogue with the Bank, the Government has identified ways to enhance the impact o f these investments. For example, the Government recently replaced the Food for Education program with an expanded Primary Education Stipend Program (PESP) which provides cash stipends to primary school students. At the same time, post-literacy and continuing education efforts involv ing the private sector and communities are being advanced with financial assistance f rom the Bank and the SDC. The Government’s stipend and tuit ion grant program for secondary education, implemented with the help o f two consecutive IDA-financed operations, has resulted in substantial increases in female enrollments and reduced drop-out rates. The f i rs t IDA-financed phase increased enrollment o f girls in project schools by more than 50 percent in five years and also reached i t s target o f recruiting 800 new teachers, 40 percent o f them female.” Building on this success, the second operation aims to provide stipends to 1.45 mi l l ion girls. As part o f i t s continuing commitment to girls’ secondary education, the Govemment recently extended the female stipend program to Class 12, and plans to introduce a nationwide targeted stipend and tuit ion program based o n the results o f the ongoing efforts. Implementation o f the reforms mentioned above wil l help to ensure that girls have more opportunities to go to school, and a better-quality education.

39. Through a sector-wide program supported by a Bank-led donor consortium, some progress has been made in providing a structured response to the country’s complex health, nutrition and population issues. The program, initiated in 1998, has helped to prioritize sector and targeted expenditures, especially o n programs that benefit children, women and the poor. In addition, i t has improved coordination o f development assistance to the sector and enhanced development impact. The January 2003 jo in t Annual Program Review confirmed a continuous positive trend in many o f the country’s health indicators, although the improvement rate o f some o f these seems to

Implementation Completion Report for the Female Secondary Assistance Project (World Bank, 2002). 20

13

have been faltering due in part to the slow implementation o f the program and i t s reform agenda. Program implementation has experienced difficulties due to unforeseen events such as the 1998 floods and unrealistic expectations - particularly with regard to major institutional reforms - as well as insufficient attention to building capacity within the Government and the Bank to respond adequately to the procurement and financial management demands o f a program o f this scale. In the conceptual framework for the next phase o f the program, the new Government confirmed i t s intention to continue the sector-wide approach. Nevertheless, the Government’s tendency to reject previously agreed service models has delayed both implementation o f the ongoing sector-wide program and preparation o f the next phase. More recently, progress toward achieving the program’s health outcomes has been threatened by the decision o f the Ministry o f Health and Family Welfare (MOHFW) to reverse a key reform action, namely the unification o f health and fami ly welfare services, currently completed up to the Thana level.” Future financing and evolution o f the sector- wide approach has thus become a critical issue in the recent pol icy dialogue between the Govemment and the Bank-led donor consortium.

40. A pilot nutrition program produced impressive outcomes among targeted communities, but its scaling up has been delayed. Bangladesh implemented, with IDA financing, a successful community-based nutrit ion intervention in 59 upazillas. The attempt at scaling up such intervention through a larger National Nutr i t ion Project, however, suffered from serious delays because, inter alia, disagreements between the Bank and the Government o n operational details slowed project clearance by the latter until December 2002. Although implementation has picked up since then, success in reducing malnutrition will depend o n effective and expeditious execution o f activities during the remaining project period and on adequate measures to continue and expand the interventions beyond 2004.

41, Initial responses to the emerging public health challenges of HIV/AIDS and arserticosis, supported through two IDA-financed operations, have not produced the expected results thus far. The Govemment prepared the IDA-financed H IV /A IDS Prevention Project rapidly to take advantage o f the narrow window o f opportunity provided by the l o w incidence o f HIV infections prevalent in Bangladesh. Furthermore, the project was prepared within the sector-wide program framework to complement prevention activities underway and to supplement NGO efforts. Due to the decision to accelerate project preparation, critical aspects o f project implementation arrangements, such as staffing requirements for the Program Off ice and engagement o f U N A I D S as a single-responsibility agency to provide technical assistance, were lef t to be defined during project implementation. After Board approval, however, progress in establishing adequate implementation capacity has been slow, and consequently, the project has remained almost at a standstill. Recently, a new action plan and the decision to restructure the project in June 2003 were agreed to ensure that effective results are achieved during the time lef t for i t s implementation.

42. Implementation of the IDA-financed Bangladesh Arsenic Mitigation Water Supply Project (BAMWSP) - the single, largest effort o f this kind so far in the country - has faced many challenges. Project design was constrained because the size and extent o f the health problem was, and s t i l l is, not known, and n o credible treatment i s available that i s safe and efficacious against arsenicosis per se. Moreover, project implementation has been affected by inadequate implementation arrangements and lack o f capacity to deal with the problem at the local and national levels. Nevertheless, some progress has been made in screening tubewells and in emergency provision o f arsenic-safe water supply, increasing knowledge o n the source, impacts and mitigation

’’ At the bottom of the administrative tiers of government in Bangladesh are about 4,500 Unions, which include about 10 villages each. Above the Unions are 460 Thanas (upazillas), each comprised of about 10 unions, with an average population of 250,000 people and an area of about 300 square kilometers. Thanas correspond to the rural areas whi le urban areas (secondary towns) are administered by municipalities or pourashavas. Above the Thanas are 64 Districts (zillas), and above them are six divisions.

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issues, and creating awareness o f the problem among vulnerable communities. The Govemment, together with the Bank, NGOs and other development partners will continue to explore options to find an effective, comprehensive long-term solution to the challenge o f arsenic contamination. W h i l e the f i rst round of emergency screening and mitigation under B A M W S P has necessarily been a publicly funded, government-led exercise, the longer-term response must be programmatic, with local govemment institutions and the private sector playing an increasingly important role. Innovative, community-based piped water schemes are among the many alternatives to be explored, and the Bank i s supporting the piloting o f these schemes through the Social Investment Program.

D. Strengthening Governance and Building Institutions

43. Bank assistance has been structured to support both systemic and sector-specific efforts to improve governance, while promoting initial actions that can encourage further reforms by changing the system of incentives and prevalent behavior. Recognizing the nature and magnitude o f the governance problem in Bangladesh and the long term engagement required to address it, the C A S aimed at generating and sustaining the momentum for change based o n close collaboration with Govemment, c iv i l society and development partners. Pol icy and analytical work described in Section IV, including the Country Financial Accountability Assessment (CFAA), prepared with UNDP, and the Country Procurement Assessment Review (CPAR), helped to deepen the pol icy dialogue, build consensus on govemance reforms, and enhance the impact o f Bank lending. Whi le this section focuses on systemic efforts, govemance reform i s also an integral part o f sector-specific pol icy and strategic dialogue and lending assistance, as discussed in earlier sections.

44. The Government has made an encouraging start in tackling systemic governance problems in the areas o f financial management, procurement and legal and judicial reform. With the support o f the Bank and development partners such as DFID and the Government o f Netherlands, the govemment has made good progress toward carrying out several o f the CFAA’s recommendations. The auditing and accounting functions are being separated, positions o f Chief Accounts Officers (CAOs) were created in each Ministry, and intemal audit teams are being piloted in selected ministries. Moreover, consistent with the Act ion Plan prepared o n the basis o f CFAA recommendations, the Government i s implementing an IDF grant to enhance financial management capacity. To implement the CPAR’s recommendations, the Government has initiated a public procurement reform program supported by IDA-financed technical assistance. Since project commencement, a Central Procurement Technical Unit has been established to manage the reform process, and good progress made toward reforming procurement rules and preparing standard bid documents. In the medium term the program will help cut procurement delays, ensure transparency in the procurement process, build capacity to track public sector entities’ procurement performance, and as a result, restore public confidence. A critical element o f Bank support for broad-based structural and govemance reforms i s the proposed Development Support Credit (DSC), which includes actions aimed at improving govemance o f the financial system, developing a pro-active public administration, enhancing overall accountability and transparency, and reducing corruption. Establishment o f an Anti-Corruption Commission, improvements in financial management and procurement, and completion o f the separation o f the judiciary f rom the executive are some o f the most critical actions supported under this adjustment operation.

45. Increasing access to justice, particularly for women and the poor, while improving the efficiency, productivity and accountability o f Bangladesh’s civi l justice system, has been a matter of concern for the Government. Although s t i l l at an early stage, a judic ia l reform program has been initiated with IDA, DANIDA and CIDA support. As part o f i t s strategy, the Government has decided to undertake reforms in the Supreme Court and courts in 21 o f the country’s 64 districts. The project i s helping build judic ia l and legal reform capacity and improve access to justice. To

15

achieve the latter, the project includes measures to close the gender gap and enhance gender sensitivity in the judiciary, strengthen both existing formal and informal dispute resolution mechanisms, and promote NGO-supported traditional community structures for settlement o f disputes (salish). Good progress has already been made in judicial training, whi le preparatory activities to promote legal literacy and public awareness are underway.

46. A critical area where more progress i s needed i s the empowerment of local governments through decentralization. Historically, commitment to decentralization has been weak in Bangladesh. Although the new government pledged in i t s election manifesto to establish strong local government at various levels, it has not taken significant steps in this direction. It has not yet conducted upazilla elections, while efforts to improve the financial and management capacity o f union parishads, a stable form o f local government for more than 100 years, have been minimal.” More generally, the Government has made l i t t l e progress in preparing a decentralization strategy, despite support f rom several development partners including the Bank, DFID, SDC and UNDP.

47. Local urban governments, seriously short o f fiscal and other resources, suffer in particular from pervasive governance problems. Experience in other countries shows that investments to improve urban infrastructure and services can be implemented successfully even in non-decentralized environments. Bangladesh, however, lacks a central authority committed to assist municipalities and select and implement viable urban projects. Moreover, the absence o f a national urban pol icy has led to lack o f direction and coordination in the sector. Inadequate institutional framework and poor governance have l imi ted the development impact o f Bank assistance to the urban sector. IDA-financed projects aimed at alleviating infrastructure bottlenecks in Dhaka have been especially affected. A long with dialogue o n decentralization, the Bank will continue to pay close attention to the urban sector, given the growing problems faced by Dhaka and other large cities in the country. In-depth analytical work o n urban poverty will be carried as part o f the process to prepare the next Poverty Assessment.

E. Crosscutting Issues - Mainstreaming Social and Environmental Concerns

48. In addition to support provided to empower women through education and income generation opportunities, the Bank i s planning to intensify analytical and advisory activities to continue mainstreaming gender issues. The Bank has been implementing an action plan for mainstreaming gender into i t s activities based on a gender review conducted in FYOO. A Country Gender Assessment will be initiated next fiscal year, focusing on gender disaggregated public expenditure analysis and targeted interventions for promoting women’s economic opportunities and equal access to productive resources; and o n basic social, educational and health needs o f women. A regional initiative o n women’s health issues will be conducted in parallel. These efforts respond to the concerns that, although gender-sensitive targeted public expenditure has helped narrow gender gaps in human development, inequalities persist in accessing and controlling resources and in tahng full advantage o f economic opportunities. Moreover, discrimination s t i l l exists against women as demonstrated in high female chi ld mortality and maternal mortality, and lower household expenditure o n health care for women and girls. The Bank and other development partners provided technical assistance that helped to mainstream gender in the I-PRSP. Currently, also with their help, a gender analysis o f the I-PRSP i s being conducted to ensure that the overarching and sectoral priorities set in the 1998 National Act ion Plan for Women’s Advancement are integrated during the completion o f the PRSP.

” See footnote 21 for a description o f the administrative tiers o f government in Bangladesh.

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49. The Bank i s also supporting efforts to improve social protection. Analyses o f effectiveness o f social safety nets and o f benefit-incidence o f public spending on targeted food assistance programs were carried out as part o f the Poverty Assessment (FY02). During the FY04-05 period, the Bank will help conduct a major study on vulnerability and adaptation in Bangladesh and a review o f social protection. Currently, the Government i s implementing two IDA-financed operations, the Social Investment Program and Financial Services for the Poorest, that are helping to test innovative support services and to develop a social protection strategy for sustainable poverty reduction among vulnerable groups.

50. As emphasized in the I-PRSP, systematic monitoring and evaluation (M&E) and comprehensive poverty monitoring are still needed in the country. T h i s need has been further intensified by the initiation o f the reform program and the Bank’s plan to support i t s implementation through programmatic lending. The Bank has long collaborated with the Bangladesh Bureau o f Statistics (BBS), providing extensive technical assistance for the last two Household Income and Expenditure Surveys (HIES). B B S now has the capacity to carry out large and sophisticated surveys, while other government agencies also maintain an extensive database o f sector-specific indicators. Capacity building i s needed, however, to help coordinate data collection and analysis and data sharing. As a f i rs t step, an IDF grant proposal was prepared to support the next HIES, as wel l as to reinforce and expand earlier initiatives to improve in-country capacity for poverty monitoring and analysis. At the same time, starting on FY04, the Bank will help the Government carry out a Poverty and Social Impact Assessment (PSIA) o f the reforms.

51. Bangladesh needs to increase its environmental management capacity to meet the MDG targets for environmental sustainability. Development partners have provided extensive grant support for environmental management to Bangladesh v ia two major efforts, the UNDP- supported Sustainable Environment Management Program (SEMP) and the CIDA-financed Bangladesh Environmental Management Project (BEMP). In 2002 the Bank withdrew as an implementing agency for the pol icy component o f SEMP because o f management disagreements between the Ministry o f Environment and Forest (MoEF) and UNDP, compounded by the Bank’s concem over governance issues within MoEF. Given the availability o f the above funds, the Bank, working with MoEF, the Department o f Environment (DOE), and industrial chambers o f commerce, has supported institutional strengthening pr imari ly through close pol icy dialogue and initiatives financed mainly by t rus t funds. In addition, IDA financing i s helping the Government to build capacity within the DOE and take init ial actions to deal with urban air pol lut ion in Dhaka. Progress in this direction resulted f rom the Government’s decision to ban buses more than 20 years old, trucks over 25 years old, and al l two-stroke three wheelers registered pr ior to 1993 f rom circulating in the capital. This ban has had a positive impact by reducing traffic congestion and increasing traffic speed, which in turn has helped reduce vehicular air pollution.

52. To provide an environmental foundation for PRSP implementation and the Bank’s future adjustment support, the Bank i s helping the Government conduct a Country Environmental Assessment. After the assessment i s completed in FY04, the Bank wil l provide non- lending technical assistance to help build institutional and implementation capacity. The Bank will also continue to promote better environmental assessment procedures across l ine agencies through the provision o f assistance for the application o f safeguard policies.

F. Donor Coordination and Partnerships

53. Successful partnerships with NGOs and other civil society organizations have helped strengthen local ownership and the impact of IDA-financed projects. Project design and implementation in social and infrastructure sectors have continued to tap into the innovative poverty

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reduction and social development capabilities o f the country’s NGOs. Development outcomes have been enhanced by supporting NGOs in their efforts to reach the poor, especially the poorest and more vulnerable groups, through microfinance and non-formal education programs. NGOs have been increasingly engaged in mobilizing communities and delivering health services, including family planning, nutr i t ion interventions, and prevention and treatment o f communicable diseases, and in the provision of alternative infrastructure services such as off-grid options in rural electricity and sustainable safe-water supply. NGOs have facilitated stakeholder involvement, resulting in greater empowerment and increased accountability on the part o f government agencies. The Bank has also supported efforts not only to build NGO capacity to provide social services and extend financial services to the poorest o f the poor, but also to help Community-based Organizations (CBOs) design, implement, and maintain their own small-scale infrastructure projects. To increase NGO accountability, the Bank i s helping to pi lot performance-based contracts to deliver social services, linlung payments to achievement o f specified results.

54. The Bangladesh Local Consultative Group (LCG), chaired b y the Bank, has been an effective coordinating mechanism for development partners. The creation o f an Executive Committee has broadened ownership and helped change the perception that the Wor ld Bank dominates the L C G agenda. The L C G presently includes 16 bilateral and 7 multilateral donor institutions which participate in plenary meetings as wel l as in sub-groups dealing with different sectors. Joint action o f L C G members proved to be effective in supporting Bangladesh’s completion of i t s I-PRSP. Government’s relationship with the LCG has been strengthened through regular meetings between some sub-groups and their official counterparts and periodic meetings organized by the Finance Minister between the LCG and senior officials. Recently, within the global harmonization fi-amework, three jo in t government-donor working groups have been launched to review aid governance issues related to procurement, financial reporting and auditing, and training needs. The objective o f the jo in t work i s to agree on the main problems in each area, identify best practices and facilitate their adoption by the government and as widely as possible among donors. In addition, several LCG members have proposed a multi-donor resource pool to finance studies on issues o f interest to the donor community or to help the government address issues of common interest. Further adaptations o f the L C G may be proposed to support the Government’s work under the PRSP.

55. The Bank has continued to work closely with development partners to ensure coordination o f efforts and enhance aid effectiveness across sectors. Close partnership with the IMF has been essential to monitor the country’s macroeconomic situation, finalize the JSA o f the I- PRSP, carry out the FSAP Report, and coordinate the provision o f adjustment support. A substantial amount o f analytical work has been carried out with development partners, including, among others, ADB, UNDP, USAID, AUSAID, DFID, Canada and the Netherlands. The collaboration has been and will continue to be strategically important in encouraging the Government to implement structural reforms whi le maintaining a consistent approach to sector-specific reform. Significant progress has also been made in joining forces to enhance the impact o f development assistance to specific sectors. Some o f these fi-uitful partnerships include work with DFID and FA0 in rural development, with the Netherlands in the water sector, with DANIDA and C I D A in legal and judicial capacity building, with the various members o f the Bank-led donor consortium in health, and with the group o f donors led by ADB that are assisting the Government in developing a comprehensive program for primary education. The Bank i s also an active member of the Financial Management Reform Workmg Group chaired by DFID. Finally, access to technical assistance for project preparation and implementation has been ensured by partnering with specialized agencies such as UNAIDS, WHO, UNICEF and UNFPA.

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G. Monitoring the Bank’s Development Effectiveness

Indicator Actuals Estimates (1995/96) in CAS

(1999/2000)

56. The last CAS included two sets of indicators - core benchmarks and intermediate milestones - to facilitate monitoring of the effectiveness of the Bank’s development as~istance.~~ The CAS core benchmarks (Table 3) were related to expected country outcomes to which the Bank and other development partners contribute by supporting government and c i v i l society efforts. Direct attribution o f the Bank’s development assistance to these outcomes is, however, diff icult to ascertain. T o strengthen Bank’s monitoring o f aid effectiveness further, the next CAS will be outcomes-based and aligned with the outcomes and targets set in Bangladesh’s PRSP.

Actuals Projected (Last Available) in CAS for

2003

57. Bangladesh has continued to make relatively good progress during the CAS period in most of the selected economic and human development indicators. As shown in Table 3, in some areas, such as ch i ld malnutrition, maternal mortality, and net primary enrollment, the country already in 2000-2001 surpassed the levels projected for 2003 in the last CAS. Progress in human development indicators i s particularly highlighted when Bangladesh’s performance i s seen in relation to countries o f a similar income level. Indeed, based on statistical analysis considering available data for 163 countries, Table 4 shows that Bangladesh’s actual achievements in human development outperform the achievements that would be predicted for a country at i t s income level.

GDP per capita (USS) Manufacturing Growth (YO annual) Tax Revenue (% o f GDP) Poverty Headcount Ratio (% below upper poverty line) Prevalence o f Child Malnutrition (% of children under 5)

Ne t primary enrollment (%) Matemal Mortality Rate (per 1,000 live births)

Year 333 355 370 (1) 2001 400 6.4 3.2 6.7 (1) 2001 7.0 7.2 7.2 7.7(2) 2001 8.2 53 43-47(*) 50 (2) 2001 n.a. ... 47.8 34.8 (3) 2002 36

... 82 88.9 (1) 2001 87

... 4.3 3.2 (3) 2002 3.5

Indicator Predicted Values 2.45

Total Fertility Rate (Births per Women) 4.68 Contraceptive Prevalence Rate (% o f women aged 15-49) 23.16 Crude Birth Rate 35.26 Crude Death Rate 11.49 Infant Mortality Rate 70.78 L i f e Expectancy at Birth, female (years) 59.50 L i f e Expectancy at Birth, male (years) 56.19

Population Growth Rate (annual %) Actual Values

1.59 3.20 53.00 23.40 8.40

66.00 60.80 60.40

23 See pages 28 and 29 o f 2001 CAS, section E, Monitoring and Effectiveness.

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58. Intermediate milestones are the second tier of indicators set in the CAS. These were directly related to the Bank’s dialogue with the Government and expected to contribute to the achievement o f the desired outcomes under the main CAS themes discussed above. These milestones, described in Table 5, are a subset o f the indicators discussed in the Country Program Mat r i x (Annex B9) and were intended to be indicative.

Table 5 - Update on CAS Intermediate Indicators

Area M a c r o economic Management

Governance and Public Sector

Power Sector

Financial Sector

Education Sector

Health Sector

Milestones . Identify a core and non-core ADP and limit the number o f new projects included annually . Release quarterly estimates o f key macroeconomic data, including fiscal, monetary and balance o f payments accounts . Publish annual reports o f Ministries within 6 months from each financial year’s end . Appointment o f an Ombudsman and establishment o f an independent Ombudsman’s off ice . Open parliamentary committee meeting to the medidpublic 1 Increase collectiodgeneration ratio o f BPDB (to about 70 percent by 2003) 1 Increase percentage o f power sector generation by private sector (to about 28% by 2003) 1 Pursue legal reforms to strengthen Bangladesh Bank’s regulatory powers 1 Strengthen money loan courts to pursue difficult cases 1 Prepare strategy for restructuring and privatizing NCBs 1 Adopt policy linking salaries o f registered non-government primary school teachers to training received 1 Complete revision o f the Certificate- in-Education curriculum 1 Complete unification at all levels o f l ine services and directorates

Progress . Good progress made toward rationalization o f ADP. Government has started to implement recommendations given by the Public Expenditure Review Commission, including criteria to reduce number o f unapproved projects and termination o f l o w quality projects. As a result, over 200 l o w priority projects dropped form the ADP in FY03. 1 Less progress made in releasing quarterly estimates, but the Government is committed to increase technical capacity in this area. . Moderate progress in releasing reports. Ministries wil l be required to publish annual reports by the end o f FY04. 1 Cabinet has approved draft legislation establishing an independent Anti-Corruption Commission. A gazette notification giving effect to the 1980 law that provides for the institution o f the Ombudsman was approved by the Prime Minister a few months ago. . Parliamentary committee meetings are not yet open to medidpublic.

1 Good progress reflected in a noticeable improvement in the reliability o f electricity supply, a sustained reduction on system losses and improvement in revenue collection. Increases in collections (as a percentage o f generated electricity) reached 70 percent in FY03.

Good progress. Amendments passed granting operational autonomy to Bangladesh Bank and strengthening its supervisory power over the sector 1 Process to strengthen money courts initiated 1 Strategy to deal with NCB problems agreed and initial actions undertaken. Offers for an external management contract are being invited

Power generation by private sector has reached about 25 percent.

for one NCB, while a second NCB i s being offered for sale. Moderate uromess made on these two areas. Government i s ureparine . . -

for parliamentary approval legislation to establish a Teacher Recruitment Authority for primary teacher recruitment. It i s also completing a medium term policy framework for the sector emphasizing quality.

Government i s reconsidering this policy. Dialogue i s focusing now on identifying different policy options to improve services in health sector.

IV. BANK GROUP PORTFOLIO

IDA Lending

59. By the end of the FYO1-FY03 period, Bangladesh will have received a total of US$1.15 billion in IDA commitment^.'^ The C A S set out three lending scenarios for FYO1-03 linked to triggers related to macroeconomic stability, progress in structural reforms and improvements in portfolio performance. They were (i) a l o w case o f about US$SOO mi l l i on (average o f US$250-300 million); (ii) a base case o f about US$1.4 b i l l ion (average o f US$450-500 million); and (iii) a high case o f about US$2.0 b i l l ion (average o f US$600-700 million). The l o w case scenario prevailed during FYOl and FY02, as assumed in the CAS, given that l i tt le progress o n reforms or improvement

24 T h i s total assumes that in addition to the Social Investment Program, three projects (BD Telecommunications TA, Central Bank Strengthening TA and Rural Transport Improvement) and one adjustment operation (Development Support Credit) would be approved in FY03.

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in portfolio management occurred before the elections, and macroeconomic performance slipped. However, Bangladesh s t i l l ranked among the top ten IDA borrowers and disbursement recipients (out of 80 eligible countries.) Satisfactory progress in the CAS triggers, shown in Table 6, justified shifting IDA lending assistance to the base case in FY03. Additionally, the I-PRSP has been completed and assessed by the Bank and the Fund, and the Government i s committed to finalize the PRSP in early FY05.

Progress in Macro-economic Performance . Domestic borrowing below 3.5% o f GDP . Improvement in the composition o f public spending . Stable ratios o f external commercial debt to GDP

Foreign exchange reserve levels (over 8 weeks o f imports) Progress in Governance g Actions to strengthen public procurement initiated

Actions to improve financial management initiated Reform Progress on K e y Sectors:

Energy Sector: Passage o f legislation creating an independent power sector regulator . Financemanking: Actions taken to strengthen Bangladesh Bank’s regulatory function and to rationalize i t s staffing

Water Sector: Formulation o f a satisfactory National Water Management Plan and steps taken to reorganize and reform BWDB Improvement in Portfolio

Satisfactory portfol io performance, wi th less than 15% o f problem projects

Source: Bangladesh CAS, 2001, Page 27

Table 6 - Update on CAS Base Case Triggers

Trigger I Progress I Comments

Met Overall macroeconomic situation has improved Met satisfactorily; effective init ial actions have reduced domestic Me t financing o f debt; off icial foreign exchange reserves have Me t stabilized at about U S $ I .7 b i l l ion (although st i l l below a

safe level for Bangladesh)

Me t Government i s satisfactorily implementing public Me t procurement reform program with IDA financing and has

made good progress on financial management (see paragraph 44)

Legislation creating an independent energy sector regulator was passed; there has been sustained reduction in electricity theft and improvement in bill collection, and init ial steps to improve power sector governance by continuing functional separation o f the vertically integrated power utility (see paragraph 25). A satisfactory National Water Management Plan has been formulated, and steps taken to reorganize and reform BWDB (see paragraph 35)

M e t

Me t

Me t

Expected Portfolio performance has improved (actual problem projects were 17 percent o f the portfolio at the end o f 43). I t i s anticipated that at the end o f FY03, th is proportion wil l be at the level required under the base case

60. CAS period commitments were concentrated on supporting growth, social and human development, and governance. While the l o w case prevailed in FYOl and FY02, IDA lending contributed to Bangladesh’s core poverty program through selected interventions in health, education, rural development, and governance improvement that helped to protect and make further gains in these areas. Figure 1 shows IDA commitments by theme and sector. The major theme supported during the l o w case was rural development (mainly rural infrastructure and microfinance), followed by social development and gender, finance and private sector development, and human development. With respect to commitments by sector, IDA support to the energy sector i s primarily represented by the Rural Electrification Project (FY02, US$191 million); the financial sector by the Second Microfinance Project (FYO 1, US$15 1 million); and the education sector by the Post-Literacy and Continuing Education (FYO1, US$53.3 mill ion) and the Second Female Secondary School Assistance (FY02, US$120.9 mill ion) projects. As o f April 2003, these projects represented about 80 percent o f IDA lending during the CAS period. In addition, the Haripur IDA partial risk guarantee (FYO1, US$60.9 mill ion) contributed to private sector development, helping to lock in a competitive power price with significant international competition.

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Figure 1: Lending Distribution by Major Themes and Sectors

Major Themes (as percentage o f total portfolio)

Soc Rot & Env &Natural Res 9 3%

bsk L 7 4 % /

‘1 :] Fin &RIV Sec Dw F . .

4 9%

Major Sectors (as percentage o f total portfolio)

Law &Public

H e a i ~ & Social

1 2 %

6 1. In addition to the expected, election-related slowdown, several unforeseen factors affected I D A lending. Lending activities advanced slowly in FYOl and early F Y 0 2 due to pre- election considerations, the caretaker government’s transitional role, travel disruption after the September 11 events, and the time needed to form a new government. As detailed in Section 111, at the operational level, challenging pol icy and reform issues in water, health and urban sectors made project preparation more complex.25

I D A Non-lending Services

62. The Bank’s substantial investment in analytical and advisory activities has contributed to the formulation of both the national poverty strategy and the new Government’s reform agenda, and resulted in increased public awareness of Bangladesh’s development issues. 26 A total o f 18 briefs were prepared during the election period, covering macro-issues such as governance, SOE performance, financial sector, globalization and trade, and sector priorities in health, education, agriculture, environment, and infrastructure. In addition to the pol icy briefs, used to initiate relations with the new ministers and secretaries when the government took office, several pol icy notes were subsequently produced to respond promptly to govemment requests and to help in form the setting o f the reform agenda in different sectors, including SOE performance, privatization options, energy and banlung. The Public Expenditure Review (PER) and Poverty Assessment prepared with ADB, together with a Review o f Public Enterprises prepared at the Government’s request, contributed significantly to the formulation o f Bangladesh’s poverty reduction strategy and will provide useful inputs in the preparation o f future adjustment operations. The Poverty Assessment provided useful analysis o n poverty and inequality trends, effectiveness o f social safety nets, and determinants o f chi ld nutritional status, and included benefit-incidence o f public spending o n education, health, and targeted food assistance programs. The Development Policy Review will provide useful inputs as the Government advances the process to complete the full PRSP. Simultaneously, an aggressive media campaign helped to increase support for reforms and provide a public forum for debating national development issues.

25 See Section I11 for details: water (paragraph 35); health (paragraph 39); urban (paragraphs 46 and 47). 26 Annex B 4 provides more specific details o f non-lending services provided since FYO1, and planned for the FY04-05 period.

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63. Non-lending services have also helped advance knowledge and national debate on critical governance issues. The Bank completed, in collaboration with other donors, major reports related to governance, including the Institutional and Governance Review, the CPAR, the C F A A prepared with UNDP, as we l l as the PER and Poverty Assessment mentioned above. The CFAA was rated as highly satisfactory by the Quality Assurance Group (QAG) for i t s thorough discussion o f existing bottlenecks and focused recommendations. In addition, under the Bangladesh Initiative for Good Governance, the Bank collaborated with development partners and NGOs to carry out a national Governance and Institutional Quality Survey and to prepare governance score cards to promote c iv i l society support for governance reform. The main issues and recommendations given in these reports have been disseminated widely through national workshops and the media as part o f the Bank’s communication strategy.

64. Other important reports finalized during the CAS period have facilitated dialogue and helped the Government identify actions for financial sector reform and private sector development. These include the FSAP Report, Investment Climate Assessment, and Country Framework Report (CFR) for Private Provision o f Infrastructure, the results o f which are being shared with relevant stakeholders. The Investment Climate Assessment was conducted by the Bank and the Bangladesh Enterprise Institute (BEI) with the active participation o f stakeholders, including Chambers o f Commerce, Industry Associations and other business groups, and support f rom DFID. The study has provided a unique opportunity to build local capacity for future implementation o f similar analytical and pol icy exercises. The CFR has helped identify areas for private sector involvement in infrastructure to improve i t s quality.

65. As detailed earlier, major analytical work to help advance policy and strategic dialogue on rural development i s underway in coordination with DFID. At the same time, the Bank has been involved in the fisheries sector review funded by DFID, U S A I D and DANIDA. Recognizing the relevance o f natural hazards such as floods and cyclones to the future o f the country, as wel l as the increasing vulnerability due to climate change, the Bank assisted in the preparation o f several critical reports: a Climate Change Study - which discusses possible scenarios and adaptation alternatives - an initiative o n community-based disaster mitigation, and an assessment o f disaster impacts on fiscal and financial expenditures.

FY04-05 Country Program

66. During FY04-05, as the new CAS i s being prepared, the Bank’s program will provide initial support to the national poverty reduction strategy articulated in the I-PRSP, while assisting the Government with the completion o f the PRSP. Specifically, the Bank’s program will help build government policymaking and implementation capacity and public awareness o f the medium-term reform program underpinning the I-PRSP, whi le supporting implementation o f reforms in priority areas consistent with the I-PRSP’s pillars described in Section B. These areas include improving governance, promoting broad-based economic growth and improving the investment climate, enhancing human development, and reducing vulnerability.

67. In line with the above objectives, i t i s envisaged that the country program will emphasize programmatic lending and capacity building. Init iated by the proposed Development Support Credit (FY03), the f i rs t adjustment operation in Bangladesh since the mid-l990s, a shift in the country program would result in a mix o f broad-based programmatic lending (including PRSCs to be considered in the context o f the PRSP and next CAS), complementary lending and non-lending technical assistance and analytical and advisory services, and selective investment projects - where

23

these best serve to support sector-specific needs (see Tables 7 and 8).27 Programmatic lending would support improvements in governance, fiscal management, quality o f health and education, and the investment climate and growth agenda. The latter would also be supported through proposed projects focused o n SOE and banking reform, export development and competitiveness, tax and customs administration, power and transport. The proposed water management and agriculture projects would support efforts related to vulnerability reduction.

FY04

68. Broad-based programmatic support will be advanced through careful coordination and consultation with development partners with whom IDA i s currently engaged in joint efforts to support Bangladesh, including sector-wide approaches in education and health. The Bank plans to support education reform programmatically via the proposed Education Sector Development Support Credit (FY04). In primary education, the Bank expects to participate with other donors, under ADB’s leadership, in programmatic support under a harmonized approach based on government rather than donor procedures. At the same time, the Bank plans to continue working with other donors to support the sector-wide approach in health. However, the Govemment needs to make progress in preparing a satisfactory program consistent with the health section o f the I-PRSP.

FY05

69. Several instruments will be used to help build Government capacity, including technical assistance and analytical and advisory services. In addition to IDA technical assistance lending to strengthen economic management and to develop and implement the energy reform program, Bank non-lending TA support and analytical and advisory services will also intend (i) to help build Government capacity to design and implement reforms; (ii) to ensure that the poverty and social impacts o f reforms are properly identified, mitigated, and monitored and evaluated; (iii) to conduct environmental assessments; and (iv) to monitor progress toward the localized MDGs. Respectively, during FY04, among other efforts, the Bank will help conduct a country environmental assessment, and a study o n MDG achievements to identify priorities and cross-sectoral interventions. In FY05, in addition to supporting completion o f the Poverty and Social Impact Assessment (PSIA), the Bank wil l help the Govemment in deepening knowledge in pr ior i ty areas related to human development and vulnerability reduction. Finally, throughout the FY04-05 period, the Bank will continue to support Government efforts to maintain i t s dialogue with c i v i l society and disseminate the reform program to create and sustain public support.

M a j o r Reports . Country Procurement Assessment Update

= Promoting Rural Non-farm Growth . Trade Study . ROSC - Creditors’ Rightsibsolvency Policy Notes

MDG Assessment

Improving Quality o f Teachinseducing Teacher Absenteeism . Evaluation of NGO Contracting . Agricultural Technology Review . Country Environmental Assessment . Administrative Barriers Study (FIAS)

M a j o r Reports . Country Financial Assessment Update . Country Gender Assessment . Vulnerability & Adaptation . Social Protection Review Fertilizer Review

Policy Notes Poverty and Social Impact Assessment (PSIA) . Links between Vocational Education and Labor Markets Improving Quality of Education (Curriculum / Textbooks) . Rural Water and Arsenic Issues . Integrated Coastal Resource Management . Rural Finance / Service Delivery

’’ Annex B3 provides additional details on the proposed IDA base case lending program, and Annex B4 o f the non-lending services for FY04-05.

24

Table 8 - FY04-05 Indicative Country Program: Lending Scenarios

2004

Fiscal Year I Project I BaseCase I Adjustment from Base Case to: 1 Low Case 1 HighCase

US$ Millions . Export Development & Competitiveness 20.0 20.0 20.0 . Water Sector Management Improvement 80.0 80.0 80.0 1 Strengthening Economic Management TA 20.0 20.0 20.0

1 Education Sector Development Support Credit 100.0 _ _ _ 100.0 . Education Project _ _ _ 150.0 ---

SOE and Banking Reform 180.0 --- 180.0

a Development Support Credit I1 150.0 _ _ _ 350.0

I Tota lFY04 550.0 I 270.0 I 750.0

1 Tadcustoms Administration . Road Sector Reform . Power Sector Reform . PRSCI(*)

2005 I Agricultural Technology 40.0

180.0 90.0

200.0

40.0 I 40.0 I 40.0 40.0

200.0 120.0 500.0

1 Health Sector Program Total FY05 Total FY04-05

150.0 150.0 --- 700.0 350.0 900.0

1,250.0 620.0 1,650.0

ifollowing up on ESDSC’s reform program) and for continuing the reforms agreed under the DSC I and II.’Altkmatively, the third Development Support Credit and second ESDSC would be considered. Notes: There are two FY04 stand by projects: Infrastructure/Energy Reform TA and Primary Education Development Project 11.

Lending Scenarios and Indicative Triggers for FY04-05

70. I n the interim period before the next CAS, Bangladesh i s expected to remain in the base case, although there i s some possibility that it could move into the high case. Base case lending, designed to support init ial implementation stage o f the I-PRSP, would consist o f about 5-6 projects per year. As detailed in Appendix 2, Bangladesh would remain eligible for base case support i f i t maintains macroeconomic stability, as evidenced by satisfactory implementation o f the PRGF program; makes satisfactory progress toward completion o f the full PRSP; maintains pol icy reform stance on key sectors initiated in FY02 and FY03; and continues to advance reforms in at least one o f the key areas listed under the high case. Finally, portfolio performance should be satisfactory, with less than 15 percent o f problem projects. The proposed base case lending program for FY04-05 would total US$1.25 billion, which i s within the margin o f the country’s performance-based norm allocation (see Table 8 for lending scenarios).28 I t should be noted that Bangladesh will be eligible for IDA 13 grants in FY04 under the poorest country category (per capita income o f US$360 or below), Allocation o f the grant funds will be made once F Y 0 4 implementation guidelines are made available, taking into consideration projects where the development impact o f grants would be the highest.

71. The high case scenario assumes that Bangladesh will continue to make steady progress on reform according to the Government’s medium term program laid out in the I-PRSP. The high case triggers have thus been selected to al low the Bank an opportunity to increase development effectiveness by supporting Government’s efforts in crit ical areas where it i s able to demonstrate substantial progress. Accordingly, in addition to the base case triggers, moving into the high case would require deepening and broadening o f reforms in economic governance and at least two o f the priority sectors listed in Appendix 2, including financial sector, energy and infrastructure, SOEs and social sectors. In addition, in the event o f slippage in some o f these sectors, implementation o f

** Under the current IDA 13 period (FY03-Os), the performance-based allocation for Bangladesh i s SDR1.12 billion (about US$1.6 billion) in the base case. Total lending for FY03 i s expected to be USS554.4 million, which would bring the total FY03- 05 base case lending to US1.8 billion.

25

actions specified in the reform program for other key sectors, such as decentralization, civi l service reform, and water resource management, will be taken into account to move to the high case. If the high case scenario materializes, IDA lending could be increased up to US1.65 bil l ion for FY04-05.

Portfolio Trends I

72. The low case scenario would be triggered by significant reversal of macroeconomic and fiscal policy and key sector reforms, worsening governance problems, and major deterioration in portfolio quality. Under this scenario, Bank support would be limited to the country’s core poverty program and capacity building. Total lending under the low case would be about US$620 mil l ion in FY04-05.

Disbursement Ratio (%) I

IDA Portfolio Performance and Management

73. At the end of April 2003, the Bangladesh portfolio included 24 active projects with a net commitment o f US$1.9 billion and an undisbursed balance of US$1.2 billion. There were in addition two GEF-funded projects (US$11.9 million) and one partial risk guarantee (US60.9 million). As indicated in Figure 2, portfolio performance improved between FYOl and FY03. The disbursement ratio2’ has stayed at or near the 20 percent target3’ The proportion o f projects-at-risk has decreased since reaching 19.2 percent in FYOl and it i s projected that it could fal l even further to about 12-14 percent at the end o f FY03. Commitments-at-risk are also expected to fall to about 11- 12 percent.31

F Y O O N O 1 FYOZ FY03

OProjects-at-bk (9’0) H Commihnents-at-Risk (“A)

FYOO FYOl FYOZ FY03 1

Note: FY03 ratio i s a projection.

74. Of 14 projects closed between FYOl and FY03, two had unsatisfactory outcomes according to their last PSR.32 Analysis o f the 13 ICRs completed during the CAS period show that while 3 8 percent o f the evaluated projects had a substantial institutional development impact, 46 percent had a modest effect, and 16 percent, a negligible impact. However, overall sustainability o f

29 As per Bank norms, disbursement ratio does not include adjustment lending. 30 At the same time, disbursement per capita has remained at around US$2.5. 3 1 At the end o f April 2003, percentage o f projects-at-risk was 17.4 and o f commitments-at-risk was 13.7. End o f FY03 projections assume: (i) that at least four new projects will enter the portfol io while two projects (Arsenic and Si lk Development) will exit by the end o f the fiscal year. As such (ii) that by June 30,2003, IDA active portfolio will have at least 23 active projects (and 2 GEF plojects), Finally, (iii) that at least three problem projects remain.

These figures assume that BAMWSP will not be extended after June 2003, and that it wil l exit with Unsatisfactory D O rating.

26

project development outcomes was likely for 80 percent o f the evaluated projects. Projects in education, microfinance and transport appear to have had better overall impacts.

75. Portfolio performance has been maintained through a sustained effort on two fronts: enhancing portfolio supervision focus, effectiveness and monitoring, and ensuring project quality at entry. Taking full advantage o f the co-location o f work, the Country Director, Operations Advisor, and country office sectoral staff have taken key initiatives in addressing systemic issues affecting port fo l io implementation at country and project levels, including weak implementation capacity, high turnover o f project counterpart staff, shortage o f counterpart funding and poor procurement and financial management. The decentralization o f the procurement and disbursement functions to the country office and the establishment o f the regional procurement hub in N e w Delh i have enhanced the Bank’s effectiveness in carrying out i t s fiduciary responsibilities and protecting IDA-funded projects f rom corruption, To reduce commitments at risk, action to address actual and potential project problems has been given particular emphasis in portfolio management, and 100 percent pro-activity has been maintained during the CAS period. Initiatives have recently been taken to involve the networks in identifying remedial solutions for the restructuring o f diff icult operations such as the H I V / A I D S Prevention and National Nutrit ion projects.

76. In addition to the effort to enhance fiduciary oversight, the Bank engaged in active dialogue with the Government on the need to undertake necessary reforms to adopt international principles, standards and good practices in order to improve public sector accountability. As part o f i t s public procurement reform program, supported by IDA technical assistance lending, the Government i s developing new procurement rules, procedures and standard bid documents for mandatory use by a l l ministries, departments and public agencies, commencing in July 2003, regardless o f funding source. With help f rom the International Training Center o f the International Labor Organization (LO), the Government has started to run regular, comprehensive procurement training programs in Dhaka, with the goal o f training 1,600 professionals by December 2004. Simultaneously, in addition to building financial management capacity through specific components or activities under IDA-financed operations, the Bank helped to prepare an Act ion Plan summarizing CFAA recommendations, and an IDF grant proposal will be implemented to build capacity in identified areas. Finally, to provide specific pol icy recommendations to improve Bangladesh’s accounting and auditing practices, the Bank and the IMF have been carrying out the accounting and auditing standards module o f the Reports o n the Observance o f Standards and Codes (ROSC) initiative.

IFC Portfolio and Program

77. The 10 projects in IFC’s current portfolio, including US$97 million in loans, US$13 million in equity and US$37 million in B-loans, span a range of sectors including power, cement, gas, telecommunications, and financial markets. Portfolio quality i s generally good. As o f December 3 1, 2002, one project representing 1.5 percent o f the portfolio i s in non-accrual. IFC’s ability to make investments was constrained by a slow down in private investment activity in advance o f the October 200 1 elections, as uncertainty shadowed economic policies. IFC committed one investment in FY02. Investment prospects have improved slightly, but regulatory obstacles, uncertain economic prospects and the unimproved business environment continue to deter investors and keep their confidence low.

78. IFC has committed one investment in FY03 to support expansion of a competitive ceramic-tile project sponsored by a foreign investor and has reached advanced stages of preparation for investments in four additional projects. These include potential investments in a leasing company, a commercial bank, a business hotel and a power generation project. If the

27

Govemment takes decisive action to reform the banking sector, privatize infrastructure (especially ports, telecommunications and power) and allow gas exports, IFC i s ready to play a major role in mobilizing private investment in these sectors. Opportunities for successful investments in other sectors are l ike ly to remain l imited pending more fundamental improvements in the business environment, but IFC wil l seek to invest in intemationally competitive manufacturing enterprises. IFC will also work with the financial sector to expand financing for SMEs to complement the technical assistance activities o f SEDF.

M I G A Program

79. MIGA’s outstanding portfolio in Bangladesh consists of five contracts of guarantee in the manufacturing and infrastructure sectors with a gross exposure o f US$61.2 million. The total amount o f foreign direct investment facilitated to date i s US$579.4 mill ion. MIGA insured the Kamaphuli Fertilizer Company Limited (KAFCO) in Bangladesh for a gross exposure o f US$9.9 mi l l ion. T h i s project has had a substantial development impact as demonstrated in MIGA’s evaluation development impact o f 1998. In the area o f technical assistance and capacity building, and in conjunction with FIAS, MIGA has also assisted the Bangladesh Board o f Investment (BBOI) with i t s strategy-development process.

v. ISSUES AND R I S K S

80. The encouraging reform progress made by the Government provides a good starting point to develop a new CAS aligned with the country’s PRSP. The challenge will be to devise a strategy that responds adequately to the priorities identified in the PRSP and thus maximizes the Bank’s development effectiveness in Bangladesh. In this respect, i t wil l be necessary to revisit both the choice and mix o f instruments, as wel l as the way the Bank works with development partners. As a priority, during FY04, intensive CAS-related strategy work wil l be conducted, focusing o n sectors such as water, rural development, energy and infrastructure. One o f the major challenges will be to support Bangladesh in promoting new sources o f growth. Analytical work by the Bank, other development partners, and the Govemment itself, indicates that business-as-usual i s insufficient for broad-based economic growth. Past contributors to growth, such as exports o f ready-made garments and expansion o f rice production, will not be as relevant in the near future. Increased analytical and financial support i s required in areas such as infrastructure and power, which are among the most critical constraints affecting the country’s investment climate. Whi le improving quality o f education and health services remains a priority, other areas are also important: regional water issues, increased vulnerabilities due to climate change, natural resource management, and growing urban problems. As discussed below, many o f the r isks identified in the last CAS did not take place, and if progress o n reforms continue, Bangladesh should be able to make further and perhaps faster social and economic gains.

8 1. The last CAS identified two political risks that did not materialize: the twin possibilities o f a weak coalition emerging from the October 2001 election and of a new government unwilling to invest political capital in reforms. Instead, the BNP-led coalition w o n a sizeable parliamentary majority, and, as described earlier, has made encouraging progress in init iating reforms in key areas. The reforms initiated thus far have not met with significant opposition, partially due to strengthened public demand for reforms resulting f rom the numerous consultations with c iv i l society groups held throughout the country during the preparation o f the I-PRSP and integration o f labor leaders’ and workers’ concerns in the design o f the SOE retrenchment program.

28

82. Nevertheless, a variety of political pressures and weak capacity within the Government could slow the momentum of reforms. The confrontational nature o f politics in Bangladesh, resistance to reforms imbedded in the country’s political economy, and the dynamics o f the election cycle could blunt the reform process. Vested interests, including within the c i v i l service, will continue to resist reforms that could affect them adversely. After the Government has been in office for a few years, pressures might mount to take populist measures or actions that benefit important support groups, in anticipation o f the next election. If the Government fails to improve the l aw and order situation and to maintain polit ical stability, economic activity and overall growth as wel l as the well-being o f the population will suffer, and support for reforms wil l decrease. Support could also be undermined if the social impact o f reforms i s not mitigated adequately. Furthermore, lack o f policymaking and implementation capacity i s a systemic issue constraining the development o f a sound reform program in many areas. Civil service rules, politicization o f the bureaucracy, short tenures o f senior bureaucrats, and reluctance to hire experts f rom the market limit both the Government’s capacity to design and implement reforms and the impact o f the Bank’s analytical and advisory services.

83. The Government i s endeavoring to maintain the pace of reforms despite these pressures. Popular support for the init ial reforms, especially closure o f the Adamjee Jute Mill, has provided impetus for further actions. The FY04 budget speech and budget are being planned to expand the initiatives already undertaken, and the medium-term framework in the I-PRSP provides an agenda for the next several years. T o fol low up the measures taken thus far, more detailed programs are being prepared in areas including fiscal management, SOE restructuring, banlung, energy, governance, education and water resource management. Recently the Government has also decided to formulate a strategy for police and criminal justice reform and seek donor support for i t s implementation. In the health sector, the Government needs to progress further in shaping a strategy that could provide a basis for continuing support by the Bank and other development partners.

84. The Bank and other donors are providing support to help maintain the momentum of reforms. The proposed Development Support Credit provides recognition and financial support for the measures already undertaken and i s expected to be the f i rs t o f a series o f IDA-financed programmatic operations to support implementation o f the reform strategy outlined in the I-PRSP. Under the PRGF arrangement, the Fund i s expected to continue to work closely with the Government to maintain macroeconomic stability and improve the governance o f economic management. Complementary lending and non-lending technical assistance by the Bank and development partners will help build capacity to design and implement reforms; and to ensure that the social impacts o f reform are properly identified, mitigated, and monitored and evaluated. Furthermore, the Bank will support Government efforts to maintain continuous dialogue with c iv i l society and disseminate the reform program to create and sustain public support. Importantly, the Bank’s operational strategy in Bangladesh will continue to be responsive and performance-based, If the Government i s unable to sustain the momentum o f reforms, lending assistance will decline again to the l o w case, and analytical activities will be aimed at building support for reforms.

85. Although the major risk of macroeconomic slippage noted in the CAS did materialize, the new Government has managed to improve the situation. However, Bangladesh remains vulnerable to the uncertainties of the global economy. The external environment may remain depressed for an extended period, preventing acceleration in exports and economic growth and increasing pressures o n the balance o f payments. In the short term, remittance flows and export earnings could diminish. If the situation worsens, an external economic shock could impact Bangladesh in the near future. The country’s vulnerability to external shocks i s magnified by the concentration o f Bangladesh’s export base in ready-made garments (76 percent o f exports in 2000) and the country’s slow progress in taking steps to increase the competitiveness o f i t s exports in the

29

post-MFA world. Adjustment support f rom IDA, accompanied by progress in reforms, would help the Government maintain a reasonable balance o f payment outlook. Increased levels o f external financing support are planned to help shield the country against external risks, provided that progress o n reforms remains satisfactory. Improvements in the investment climate as a result o f reforms are expected to encourage economic diversification and increase the f low o f foreign direct investment.

86. Finally, as noted in the CAS and despite significantly improved disaster management capacity, natural disaster remains one of the biggest threats to Bangladesh’s economy and the well-being o f the poor in particular. Moreover, as the South Asia Region’s strategy emphasizes, natural hazards such as flood and droughts might intensify due to climate change. Although n o major catastrophe has occurred since the 1998 floods, IDA must be prepared to consider additional assistance for disaster recovery through existing operations and new emergency ones. In the meantime, greater efforts will be undertaken to continue to assist Bangladesh build i t s disaster management capacity and deal with climate change, linking these to better environmental and natural resources management, emphasizing national and regional water issues and community-driven development initiatives.

B y :

Shengman Zhang

James D. Wolfensohn President

Peter Woicke

Washington, D.C. M a y 23,2003

30

Appendix I Page 1 of 1

Appendix 1 - Bangladesh and the Millennium Development Goals

MDG

ERADICATE EXTREME

HUNGER POVERTY AND

A c H I E v E UNIVERSAL

EDUCATION PRIMARY

PROMOTE GENDER

EMPOWER WOMEN EQUALITY AKD

REDUCE CHILD MORTALITY

IMPROVE MATERNAL HEALTH

COMBAT HIV/AIDS,

MALARIA AND OTHER MAJOR

DISEASES

ENSURE ENVIRONMENTAL SUSTAIN ABILITY

Source: Adapted from 1

COUNTRY ACHIEVEMENTS AND CHALLENGES Good progress, with poverty rates declining f rom 59% t o 50% over the last decade. Poverty rates and absolute numbers are s t i l l very high; considerable urban- rural and regional disparities; GDP growth at 6-7% needed to cut incidence significantly. Progress in reducing ch i ld malnutrition, with prevalence o f stunting, wasting and underweight reduced by 20-25% over decade. Significant challenges remain: close to ha l f the children stunted o r underweight. Integrated approach across sectors needed to maintain rate o f progress. This should include creating knowledge o f health practices. Large increase in enrollment rates in the 1980s and 1990s. Gross primary enrollment i s currently over 97 percent. Survey-based estimates show stagnation in enrollment during second h a l f o f the 1990s. Need to improve quality o f education; problems o f governance continue to plague the system. 12.5 percentage points improvement in literacy over the last decade, but the literacy rate continues to b e extremely l o w (45% among 7+ years). Universal coverage o f primary education important too l to boost rates; adult literacy programs need better delivery system. Ratio o f girls to boys in primary and secondary school close to o r above parity. Decline in boys’ (aged 6 - 15 years) enrollment indicated by recent surveys i s cause for concem. Progress in increasing women’s participation in public l i f e and in the formal labor market, but female labor force participation continues to b e quite low. Drop in IMR f r o m 90.6 in 1990 to 60.0 in 2000. Decline in under-five MR f r o m 136 to 82.6 over same period. Large disparities, however, persist across income groups. Reduction o f matemal mortal i ty i s o n track. However, at 3.2 per 1,000 l i ve births, MMR remains among the highest outside Sub-Saharan Afr ica. A cross-sectoral approach i s needed (including behavioral change and massive training o f midwives, given that 95% deliveries occur at home) to lower mortal i ty rates. Births attended by skdled staff extremely low, around 12% in 1999-00. 2002 HIV surveillance shows continued l o w prevalence among high risk groups. Prevalence has recently increased, however, among drug users. The Government needs to step up i t s efforts to prevent an epidemic, complementing efforts o f NGOs which have accumulated considerable experience in HIV prevention activities. Bangladesh has made substantial advances in prevention o f cholera and malaria, and near elimination o f po l io and leprosy.

Arsenic contamination o f about 30 percent o f shallow tubewells has significantly reduced earlier progress in improv ing access to safe water sources. Only 44 percent o f rural population has access to reasonable sanitation facilities. Rapid urbanization poses new challenges. Environmental management i s in need o f substantial strenghtening. Energy use i s the lowest among South Asian countries. Only 30% o f the population has access to electricity. Structural reforms in the energy sector are needed to place power sector o n a sound financial footing to accelerate coverage and improve service quality. )erg in Bangladesh; Building on Progress, 2002

31

Appendix 2 Page 1 of 1

Appendix 2 - Indicative FYO4-05 Program Triggers

Base Case Indicative Triggers

Continuing in the base case lending scenario will be based on:

(a) Satisfactory implementation o f the agreed macroeconomic and budget framework under the PRGF arrangement.

(b) Continued satisfactory progress toward completion o f the full PRSP. (c) Maintenance o f policy reform stance with regard to key sector reforms initiated in FY02 and FY03,

including, inter alia, fiscal management, economic govemance, trade, financial sector, SOE restructuring, energy, and telecommunications.

(d) Continued progress on reforms in one o f the priority sectors listed below. (e) Satisfactory portfolio performance (less than 15 percent o f problem projects).

High Case Indicative Triggers

In addition to the base case triggers, moving into the high case would require deepening and broadening of reforms, as demonstrated by substantial progress in economic governance and at least two of the priority sectors listed below.

(a) Economic governance. Indicative actions to assess satisfactory progress include, e.g., (i) progress in making the independent Anti-Cormption Commission operational as per legislation approved by Cabinet, such as establishment o f the relevant parliamentary committees; (ii) completing the separation o f audit and accounting functions; and (iii) continuing satisfactory implementation of public procurement reform program (including adopting new standardized bidding documents and revised procurement rules).

Prioritv Sectors

Financial Sector. Indicative actions to assess satisfactory progress include, e.g., (i) bringing at least one N C B under management contract; (ii) completing audits o f the NCBs; (iii) progress in bringing one N C B to the point o f sale; (iv) issuing prudential regulations on capital adequacy, interest income recognition, loan classification and provisioning and exposure l imi ts .

Energy and Infrastructure. Indicative actions to assess satisfactory progress include, e.g., (i) approval o f the National Water Management Plan; (ii) creation o f the Energy Regulatory Commission (ERC); (iii) Corporatizing BTTB; and (iv) implementing power, gas and petroleum pricing framework adopted in FY03.

State Owned Enterprises (SOEs). Indicative actions to assess satisfactory progress include, e.g., (i) maintaining hard budget constraint on al l SOEs; (ii) completing transfer to the private sector o f SOEs whose privatization has been processed by the Privatization Commission; (iii) completing preparatory activities to privatize, rationalize staffing or restructure one or more o f the major SOEs.

Social Sectors. Indicative actions to assess satisfactory progress include, e.g., (i) integrating medium-term education policy framework into the country's poverty reduction strategy; (ii) completing plan to establish Teacher Recruitment Authority/Commission and/or a Teacher Accreditation and Certification Authority; (iii) completing adequate medium-term Health Sector Strategy; (iv) agreement on a defined role for NGOs as health service providers, as an adjunct to government provision o f health services.

32

m m

CAS Annex A2 Page I of 2

Bangladesh at a dance 6130103

POVERTY and SOCIAL Bangladesh

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1995-01

Population (%) Labor force (%)

Most recent estimate (latest year available, 199541) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) infant mortality (per 1,000 live births) Chiid malnutrition ph of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (77 ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981

GDP (US$ billions) Gross domestic investmentlGDP Exports of goods and services/GDP Gross domestic savings/GDP Gross national savings/GDP

Current account balancdGDP Interest payments/GDP Total debtlGDP Total debt service/exports Present value of debtlGDP Present value of debtlexports

19.8 17.6 5.3

12.5 17.8

4 . 3 0.3

21.9 2.6

1981-91 199141 (average annual growth) GDP 3.7 5.0 GDP per capita 1.1 3.2 Exports of goods and services 5.0 13.2

133.4 360 48.6

1.7 2.9

34 26 61 60 48 97 58

106 108 105

I991

31 .O 16.9 6.7

14.6 19.7

-3.1 0.5

42.4 20.7

2000

5.9 4.1 8.6

South Asia

1,355 460 617

1.9 2.4

28 63 74 47 87 45

100 110 90

2000

47.2 23.0 14.0 17.9 23.1

-0.6 0.4 0.0 9.1

20.3 110.6

2001

5.3 3.4

22.8

Low- income

2,459 420

1,030

1.9 2.4

32 59 77

76 38 96

102 86

2001

47.0 23.1 15.4 18.0 22.4

-2.2 0.3 0.0 7.4

200145

5.3 3.7

-2.2

~ Development diamond'

I Life expectancy

I per GNI

I I capita

1

Access to improved water source

~ -Bangladesh __ Low-income group

1 Economic ratlor'

Trade

Investment Domestic savings

1 Indebtedness

-Bangladesh ~ Low-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

I981

30.9 20.3 13.4 48.8

87.1 4.5

14.5

1981-91

2.1 6.0 5.4 3.8

3.0 2.5 6.7 2.9

1991

29.5 21.1 13.0 49.4

84.5 4.1

12.2

199141

3.3 7.3 6.9 4.8

3.9 4.4 9.6

10.8

2000

24.6 24.4 14.7 51.0

77.7 4.6

19.2

2000

7.4 6.2 4.8 5.2

5.3 0.9 7.3 5.7

2001

23.3 25.1 15.1 51.6

78.5 4.5

21.5

2001

3.1 7.4 6.7 5.3

6.2 4.5 5.8

23.5

Growth of investment and GDP (Oh)

115 10

5

Growth of exports and Imports (%) I ;:i 30

'-10 96 $ 98 99 00 01

-Exports -Imparts

Note: 2001 data are preliminary estimates * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomplete.

34

CAS Annex A2 Page 2 of 2

Bangladesh

PRICES and GOVERNMENT FINANCE

Domestic prices @ change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surolusideficit

TRADE

(US$ millions) Total exports (fob)

Raw jute Leather and leather products Manufactures

Total imports (cifl Food Fuel and energy Capital goods

Export price index (7995-100) Import price index (1995=100) Terms of trade (1995=700)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including goid (US$ miiiions) Conversion rate (DEC, iocaVUS$j

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

IBRD IDA

Total debt service

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Porffolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1981

10.5

1981

1981

933 2,718 -1,785

-23 963

-844

445 399

16.3

1981

4,326 55

1,085

36 4 7

543 10 -4 0 0

212 159

0 159

11 149

1991

8.3 6.6

7.2 0.7

-5.4

1991

1,698 120 138

3,510 297 204

1,231

85 89 96

I ,278

1991

2,113 3,829

-1,717

-102 846

-973

1,354 -381

880 35.7

1991

13,141 65

4,360

610 5

47

1,153 485

34 1 0

451 255

18 238 34

203

2000

3.5 1.9

8.5 0.7

-6.2

2000

5,752 72

195 5,123 8,403

381 684

2,133

127 136 94

2000

6,611 9,060

-2,449

-221 2,392

-278

357 -79

1,599 50.3

2000

15,613 24

6,431

789 7

129

561 336

13 194

3

233 357 87

270 49

221

2001

1.6 1.6

9.0 0.7

-5.1

2001

6,467 67

254 5,761 9,363

349 905

2,515

118 134 88

2001

7,178 10,103 -2,925

-264 2,171

-1,018

71 6 302

1,307 54.0

2001

15,294 17

6,439

678 7

143

432 401 270 174

0

280 312 99

213 50

163

I I

96 97 98 99 00

-GDP deflator - 0 - W

I Export and Import levels (US$ mill.)

10,000

I I 95 96 97 98 99 00 01

Exports Imports

1 Current account balance to GDP (%)

4 -

’ Composltlon of 2001 debt (US$ mill.)

I A - I B R D E - Bilateral ’ B - IDA D - Other multilateral F - Pnvate I C - I M F G -Short-term

DeVelODment Economics 6130/03

35

CAS Annex B2 Page I of I

Bangladesh Selected Indicators* of Bank Portfolio Performance and Management

As o f 5/6/2003

Indicator 2000 2001 2002 2003 Portfolio Assessment Number o f Projects Under Implementation a 25 26 25 24 Average Implementation Period (years) 3.0 3 .O 2.8 3.2 Percent o f Problem Projects by Number " 16.0 15.4 16.0 17.4 Percent o f Problem Projects by Amount " 17.5 5.8 15.6 13.7 Percent o f Projects at Risk by Number " 16.0 19.2 16.0 17.4 Percent o f Projects at Risk by Amount " 17.5 7.1 15.6 13.7

Portfolio Management CPPR during the year (yesino) N o N o N o N o Supervision Resources (total US$'OOO) $2,621 $1,715 $1,913 $1,606 Average Supervision (US$'OOO/proj ect) $90 $59 $66 $64

Disbursement Ratio (%) e 20.4 20.8 22.6 12.2

Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 126 15 Proj Eval by OED by Amt (US$ mill ions) 6,216.5 1,457.1 % o f OED Projects Rated U or HU by Number 28.6 13.3

24.7 7.9 % o f OED Projects Rated U or HU by Amt

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age o f projects in the Bank's country portfolio. c. Percent o f projects rated U o r HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio o f disbursements during the year to the undisbursed balance o f the Bank's portfol io at the

f. The Wor ld Bank and the Govemment o f Bangladesh conduct periodic reviews during the fiscal year to address

* Al l indicators are for projects active in the Portfolio, with the exception o f Disbursement Ratio,

beginning o f the year: Investment projects only.

emerging implementation issues.

which includes a l l active projects as wel l as projects which exited during the fiscal year.

36

CAS Annex B3 Page I of 2

Bangladesh Bank Group Program Summary

As o f 5/06/2003

Proposed IDA Base-Case Lending Programa Strategic Implementation

US$(') Rewards R ish (H/M/LI (H/M/LI

Fiscal year

Project Name

2003 Social Investment Program Project" Central Bank Strengthening Project Rural Transport Improvement Project Telecommunications Technical Assistance Development Support Credit Total

2004d Export Development & Competitiveness Water Management Improvement Project Strengthening Economic Management TA SOE & Banking Reform Education Sector Dev. Support Credit Development Support Credit II Total

2005 Agricultural Technology Project Tax/Customs Administration Road Sector Reform Power Sector Reform Poverty Reduction Support Credit I (PRSC) Health Sector Program Total

TOTAL FY03-05

18.2 37.0

190.0 9.1

300.0 554.4

20.0 80.0 20.0

180.0 100.0 150.0 550.0

40.0 40.0

180.0 90.0

200.0 150.0 700.0

1,804.4

H H H H H

H H H H H H

H H H H H H

M M L M M

L M L H M M

L M H H H M

a. This table presents the lending program for FY03 and the proposed program for the next two fiscal years. b. Indicates whether Strategic Rewards and Implementation Risks are expected to be High (H), Moderate (M), or Low (L). c. The operation has already been approved in FY03. d. In addition to the projects shown in the FY04 program, two other standby operations -- InfrastructureiEnergy Reform TA

and Primary Education Development Project I1 -- could be considered for IDA support. They are candidates for replacing any other operations in the regular program that may be delayed due to unforeseen constraints.

37

CAS Annex B3 Page2 of2

Bangladesh IFC and MIGA Program, FY 2000-2003

As of 5/06/03

2000 2001 2002 2003

IFC approvals (US$m) 107.75 37.75

Sector (YO) ACCOMMODATION/TOURIST FINANCE & INSURANCE NONMETALLIC MINERAL OIL, GAS AND MINING UTILITIES MANUFACTURING Total

Investment instrument(%) Loans Equity Quasi-Equity Other Total

MIGA Outstanding Gross Guarantees (US$m)

23 5 77 9

37 49

100 100

79 23 3 8

13 5 69

100 100

0 12

12 0 12

12

0 12

79.5 79.5 79.5 61.2"

*As o f March 3 1,2003

38

CAS Annex B4 Page 1 of 2

Bangladesh Summary of Nonlending Services

As of 5/06/2003

Completion Cost FY (us~ooo) Audience a Objective

Product

RECENT COMPLETIONS Major Reports Financial Accountability Assessment Health Financing Study Institutional and Governance Review Country Procurement Assessment Public Expenditure Review Poverty Assessment Country Framework Report: Private Provision o f Infrastructure Investment Climate Assessment Financial Sector Assessment Paper

Policy Notes Review o f Public Enterprise Performance Governance & Inst. Quality Survey Energy Pricing Study Improving Textbook Quality Agricultural Growth and Rural Poverty Access o f Poor to Education

Worksh ops/Con feren cesflechn ical Assistance Poverty Workshop Public Expenditure Review Workshop State-Owned Enterprises Workshop

UNDERWAY Major Reports Development Policy Review Private Sector Assess. o f Health, Nutrition & Population Sector ROSC: Accounting & Auditing Assessment Promoting Rural Non-Farm Growth MDG Assessment

Policy Notes Export Development

PLANNED Major Reports Country Procurement Assessment Update Trade Study ROSC: Creditors' RightsIInsolvency Country Financial Assessment Update Country Gender Assessment Vulnerability & Adaptation Social Protection Review Fertilizer Review (gas, SOE, agriculture)

FYOl FYOl FYOl FY02 FY02 FY02 FY03 FY03 FY03

FY02 FY 02 FY02 FY02 FY03 FY03

FY03 FY03 FY03

FY03 FY03 FY03 FY04 FY04

FY03

FY 04 FY04 FY 04 FY05 FY05 FY05 FY05 FY05

a. Government (G), Donor (D), Bank @), Public Dissemination (P). b. Knowledge Generation (KG), Public Debate (PD), Problem-Solving (PS).

Actual Cost

Planned Cost

Planned Cost

KG,PS,PD KG,PS,PD

PD,PS KG,PS

KG,PS,PD KG,PS,PD

KG,PS KG,PS,PD

KG,PS

KG,PS,PD KG,PS,PD KG,PS,PD

KG,PS KG,PS,PD

KG,PS

KG,PD KG,PS PD,PS

KG,PS,PD KG,PS,PD KG,PD,PS KG,PS,PD

KG,PS

KG,PS,PD

KG,PS KG,PS KG,PS KG,PS KG,PD

KG,PD,PS KG,PD,PS

KG,PS

39

CAS Annex B4 Page 2 of 2

Bangladesh Summary of Nonlending Services

As of 5/06/2003

cost Audience a Objective (US$ 000)

Completion Product FY

Policy Notes Improving Quality o f TeachingiReducing Teacher Absenteeism Evaluation o f NGO Contracting Agricultural Technology Review Country Environmental Assessment Administrative Barriers Study (FIAS) Poverty & Social Impact Assessment Links bin Vocational Education & Labor Markets Improving Quality o f Education (Curriculum, Textbooks) Rural Water & Arsenic Issues Integrated Coastal Resource Management Rural Finance/Service Delivery

Workshops/Con ferencesflechnical Assistance Dissemination o f Country Framework ReportiInv. C1. Assess.

Country Environment Assessment TA Strategy for Civil Society Engaging Small Grants

FSAP Follow-up

FY04 FY04 FY04 FY04 FY04 FY05 FY05 FYO5 FY05 FY05 FY05

FY04 FY04 FY05 FY05

60 100 80 120 200 100 120 100 100 100 100

60 100 40 45

KG,PS PS

KG,PS KG,PS,PD

PS KG,PS,PD

KG,PS KG,PS KG,PS

PS KG,PS

KG,PD PS,PD KG,PS PD,PS

a. Government (G), Donor (D), Bank (B), Public Dissemination (P). b. Knowledge Generation (KG), Public Debate (PD), Problem-Solving (PS).

40

CAS Annex B6 Page I of 2

Bangladesh - Key Economic Indicators

Estimate Projected Indicator 1998 1999 2000 2001 2002 2003 2004 2005

National accounts (as YO of GDP) Gross domestic product

Agriculture Industry Services

Total Consumption Gross domestic f ixed investment

Government investment Private investment

~ x p o r t s (GNFS~ Imports (GNFS)

Gross domestic savings Gross national savings'

Memorandum items Gross domestic product (US$ million at current prices) GNI per capita (US$, Atlas method)

100.0 24.5 24.8 50.7

83.3 21.6 6.4

15.3

13.3 18.3

16.7 21.0

44092

340

100.0 25.3 24.3 50.5

83.3 22.2 6.7

15.5

13.2 18.7

16.7 21.3

45962

350

Real annual growth rates (%, calculated from 1990 prices) Gross domestic product at market prices 5.2 4.9 Gross Domestic Income 5.4 4.5

Real annual per capita growth rates (%, calculated from 1990 prices) Gross domestic product at market prices

Private consumption 0.0

3.4 Total consumption 0.6

Balance of Payments (US$ millions) E X P O ~ ~ S (GNFS~ 5879

Merchandise FOB 5172 Imports (GNFS~ 8049

Merchandise FOB 7524

Net current transfers 2017 Resource balance -2 170

Current account balance -253

Net private foreign direct investment 249

Official 368 Private 25

-375 Change in reserve& -14

-4.9

Merchandise exports (FOB) 6.5

Long-term loans (net) 393

Other capital (net, incl. errors & ommissions)

Memorandum items

Real annual growth rates ( YR90 prices) Resource balance (% o f GDP)

Merchandise imports (CIF) -3.4

3.1 1.6 1.7

603 1 5324 8527 8018

-2496 2237 -394

198 496 3 84 112

-505 205

-5.4

-3.1 -2.7

100.0 24.6 24.4 51.0

82.2 23.0

7.4 15.6

14.0 19.2

17.8 23.0

47181

370

5.9 5.9

4.1 3.3 3.5

6611 5762 9060 8403

-2449 2670

0

194 557 335 222

-672 -79

-5.2

2.8 -0.4

100.0 23.3 25.1 51.6

83.0 23.1 7.2

15.8

15.4 21.5

17.0 21.4

46997

360

5.2 5.0

3.4 4.2 4.3

7178 6419

10103 8430

2171 -2925

-1018

174 548 400 148

3 02 -6

-6.2

17.4 15.0

100.0 22.3 25.6 52.1

80.6 24.0

6.3 17.7

14.5 19.1

19.4 29.9

47328

360

4.4 7.5

4.4 6.6 6.4

6850 5986 906 1 7697

-221 1 2570

294

65 517 403 114

-517 -358

-4.7

-9.1 -0.4

100.0 21.8 25.9 52.3

80.3 25.3

6.2 19.1

13.5 19.1

19.7 31.6

50906

370

5.2 5.9

3.3 4.1 4.0

6890 61 10 9736 8224

3062 226

32 -1 1 219

-230 334

-582

-2846

-5.6

-4.2 7.1

100.0 21.3 26.3 52.4

80.9 26.6

6.9 19.7

13.5 20.9

19.1 31.2

54492

390

5.5 4.7

3.5 3.0 2.9

7337 6512

11398 9600

3326 -406 1

-71 1

50 72 1 133 588 403

-463

-7.5

1.4 4.9

100.0 20.7 26.5 52.8

79.0 28.3 7.3

21.1

13.5 20.8

21.0 32.3

58606

410

6.0 6.4

4.0 2.2 2.1

7923 7061

12202 10284 -4279 3312 -917

52 99 1 143 848 349

-475

-7.3

3.1 5.9

(Continued)

41

CAS Annex B6 Page 2 of 2

Bangladesh - Key Economic Indicators (Continued)

Estimate Proiected ~ - -a

Indicator 1998 1999 2000 2001 2002 2003 2004 2005

Public finance (as % of GDP at market prices)' Current revenues 9.3 Current expenditures 7.1

2.1 Capital expenditure 6.2 Current account surplus (+) or deficit (-)

Foreign financing 2.2

Monetary indicators M2IGDP Growth o f M2 (%) Private sector credit growth / total credit growth (YO)

27.9 10.4 71.7

Price indices( YR90 =loo) Merchandise export price index 110.6 Merchandise import price index 114.6 Merchandise terms o f trade index 96.5 Real exchange rate (US$ /LCv f 104.8

Real interest rates Consumer price index (% change) 7.0 GDP deflator (YO change) 5.3

9.0 7.6 1.4 6.2 2.6

28.7 12.8 75.9

117.5 125.5 93.6

103.3

8.9 4.7

8.5 7.8 0.7 6.9 2.5

31.5 18.6 57.2

123.8 132.1 93.7

101.6

3.5 1.9

9.0 8.4 0.7 5.7 2.0

34.4 16.6 67.6

118.5 127.9 92.7 99.5

1.6 1.6

10.2 8.6 1.6 6.3 2.1

36.4 13.4 72.0

120.6 105.6 114.2

2.4 2.7

10.4 8.4 2.0 6.2 2.3

37.0 12.1 62.2

128.6 104.8 122.7

5.2 4.8

10.9 8.8 2.1 6.9 2.8

37.2 10.5 56.0

135.2 116.6 115.9

4.5 4.0

11.4 8.8 2.6 7.3 2.8

37.5 11.0

152.5

142.2 118.0 120.5

4.0 4.0

~

a. GDP at market prices b. "GNFS" denotes "goods and nonhctor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$iLCU denotes appreciation.

42

CAS Annex B7 Page 1 of 1

Bangladesh - Key Exposure Indicators

Estimate Projected Indicator 1998 1999 2000 2001 2002 2003 2004 2005

Total debt outstanding and disbursed (TDO) (US%m)”

Net disbursements (US$m)a

Total debt service (TDS) (US$m)a

Debt and debt service indicators (%) TDOIXGS~ TDO/GDP TDSiXGS Concessional/TDO

IBRD exposure indicators (%) IBRD DSipublic D S Preferred creditor DSipublic D S (%) IBRD DSiXGS IBRD TDO (US$mld

IDA TDO (US$m)d Share o f IBRD portfolio (%)

IFC (US$m) Loans Equity and quasi-equity l e

MIGA

15669

1247

658

209.1 35.5

8.8 94.9

1.0 50.3

0.1 36 0.0

6168

17 2

59

16527

858

737

211.1 36.0

9.4 95.1

1 .o 49.4

0.1 31 0.0

6428

0 0

6X

15613

-914

752

180.3 33.1

8.7 95.2

0.9 45.9

0.1 24 0.0

643 1

0 0

64

15294

-318

726

167.0 32.5

7.9 93.8

1 .o 52.0

0.1 17 0.0

6439

91 13

64

15624

329

775

166.2 33.0

8.2

0.8 50.2

0.1 12 0.0

6629

88 13

64

15793 16528

169 735

773 76 1

159.0 155.2 31.0 30.3

7.8 7.1

0.8 0.8 49.2 45.3

0.1 0.1 6 0

0.0 0.0 6792 6954

95 13

61

17568

1040

878

155.7 30.0

7.8

0.0 44.3

0.0 0

0.0 7119

MIGA guarantees (US$m) .. .. ..

a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short-

b. “XGS” denotes exports o f goods and services, including workers’ remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

term capital.

Bank for International Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types o f both loan and equity instruments.

43

n

E v1 c,

E U a E m

d d

r

e,

CAS Annex B8 Page 2 of 2

Bangladesh Statement of IFC's Held and Disbursed Portfolio

(In U S Dollars Millions) As of 2/28/03

Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 DBH 2.35 0.65 0.00 0.00 2.35 0.65 0.00 0.00 1991 Dynamic Textile 1998 Grameen Phone 1985/95 IDLC 1980198 IPDC 1998/99 Khulna 199812000 Lafarge Surma 2003 RAK Ceramics 199712000 Scancem

1.86 0.00 0.00 1.48 1.86 11.67 1.58 0.00 0.00 11.67 0.00 0.15 0.00 0.00 0.00 7.50 1.05 0.00 0.00 7.50

16.47 0.00 0.00 20.39 16.47 35.00 0.00 0.00 15.00 0.00 12.00 0.00 0.00 0.00 5.00 10.00 0.00 0.00 0.00 10.00

0.00 0.00 1.48 1.58 0.00 0.00 0.15 0.00 0.00 1.05 0.00 0.00 0.00 0.00 20.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 96.85 3.43 0.00 36.87 54.85 3.43 0.00 21.87

Approvals Pending Commitment Loan Equity Quasi Partic

1999 Khulna Swap 0.00 3.30 0.00 0.00 2000 USPCL 0.00 3.00 0.00 0.00 2000 LTLC - Banglade! 5.00 0.00 0.00 0.00 2001 Dhaka Westin 8.75 0.00 0.00 0.00 2001 BRACBank 0.00 3.00 0.00 0.00

Total Pending Commitment 13.75 9.30 0.00 0.00

45

S .-

00 d

Q 9

e- m

0 v,

s s

VI

4

r

I

r

0 *

P a m C -

2 % f

% Y

h 8 B 8 4

.- I

E E 2 M

a z m o w 3 3 4 2